NewRiver is a specialist real estate investment trust (REIT) that focuses on convenience-led and value-oriented areas of retail, where consumer spending trends tend to be more stable. It is an active owner and manager of its property estate, investing to redevelop its assets in order to improve their long-term earnings potential.
The company’s portfolio has limited exposure to structurally challenged retail sub-sectors and extends to more than nine million square feet of leasable space, including more than 30 community shopping centres, over 20 retail parks and more than 650 pubs.
Investment case summary
The travails of the UK high street have weighed on the share price of many retail and property stocks in recent years, including NewRiver. The company’s property portfolio has delivered a consistently robust performance, however, which we believe should continue. Its retail assets are in areas where footfall has been consistently above the national average and rental incomes have been much more resilient because of the convenience-led offerings (frequent spend on everyday essentials) of its tenants. Meanwhile, the cost of rent is low as a proportion of its tenant’s revenues, resulting in very high occupancy and retention rates.
We hold NewRiver’s management team in high regard and have been impressed by their disciplined portfolio management: buying property at an attractive price, deploying capital in redevelopment projects that deliver an excellent long-term return and engaging in profitable capital recycling. For example, following the Hawthorne Leisure acquisition, the company has an opportunity to further expand and develop its pub portfolio.
With more than 2,000 leases with over 800 different occupiers, NewRiver has a very diverse customer base and is not reliant on the fortunes of any one retailer. Meanwhile, it has a conservative, flexible, well-funded balance sheet and is very cash generative. The business is very well-positioned to deliver attractive, sustainably growing cash returns in the years ahead. Furthermore, with a management team that is aligned with shareholders in the pursuit of value and returns, we believe there is an opportunity for considerable future capital growth as the gap between the share price and net asset value narrows.
|Income Focus Fund||4.74%|
|Equity Income Fund||2.75%|
As at 31 December 2018
|Themes||UK domestic exposure|
This morning saw NewRiver REIT release a decent set of interim results, illustrating a good performance despite continued headwinds in a challenging sector.
The net asset value of NewRiver’s portfolio declined by 1.9% year on year. A reduction in the value of the portfolio is not encouraging at face value. However, continued active management, risk-controlled development and residential initiatives should continue to counteract this trend. Whilst the main detractor has been shopping centres it is worth noting that occupancy rates in retail have been resilient, despite decreased footfall. NewRiver remains a very defensive asset in this challenging sector, and its diversification into pubs should provide further protection from retail headwinds.
The dividend is a key attraction to the stock – with a yield of 9.3% and modest but sustainable growth prospects, the dividend alone should provide shareholders with a low double-digit total return. However, the share price remains at a significant discount to the company’s net asset value and we believe, the prospect of even more attractive returns awaits us, as this discount ultimately narrows. Challenges in the sector may continue but we believe the business is very well positioned, with a strong management team that will continue to deliver solid cash returns moving forward.
21 November 2018