With a 13% yield and a 36% discount to NAV, NewRiver (LON:NRR) is about as unloved as you can get. But the sell-off looks like it has been overdone, especially after the recent bid for fellow pub operator Greene King.
Fears of the impact of a potential hard Brexit on the domestic economy have led to many UK-focused shares experiencing a sharp de-rating. The decline has been particularly severe for consumer facing businesses and property companies, so a retail-oriented real-estate investment trust (REIT) such as NewRiver REIThas suffered more than most.
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The company specialises in buying, managing, developing and recycling convenience-led, community-focused retail and leisure assets throughout the UK. It owns a portfolio of 34 shopping centres and 19 retail parks, as well as 665 community pubs.
In order to protect themselves from the threat of online shopping, the managers look for retail tenants that can offer their customers convenience, value or service. Their top ten occupiers include the likes of: Wilko, Superdrug, Primark and the Co-op. The company currently has around a 96% occupancy level.
NewRiver’s shopping centres are typically situated in town centres, while the retail parks are mostly located on the outskirts and have a diverse line-up of retail and leisure operators. The pubs are all within walking distance of residential areas.
Retail assets are now incredibly cheap and well below the cost of rebuilding, which is why new investors are being drawn into the sector. NewRiver offers a third-party management service to cater for these inexperienced owners. It has also identified the potential to deliver up to 2,400 residential units across its portfolio over the next five to ten years that could result in up to £140m of development profit.
The company is amazingly cheap. At the end of March it had a net asset value based upon an independent valuation of the properties of £2.61 per share. This was after an £88m write-down in the value of the £1.2bn portfolio, which was equivalent to a 6.4% reduction. At time of writing the shares are trading at 167 pence, which represents a discount of 36%.
Profit from Woodford’s woes
Most of the poor sentiment is due to the risk of what a hard Brexit could do to UK assets and to retail property in particular, but there is also another more transitory factor. NewRiver was until recently a major holding in the troubled Woodford Equity Income fund. This is currently suspended and has been raising liquidity ahead of when it re-opens. At one stage Woodford owned 22% of the issued share capital, but gradually over the course of June and July he has sold it down to less than five percent (possibly zero).
The company has paid a first quarterly interim dividend of 5.4 pence per share, which if maintained throughout the 2020 financial year would give NewRiver a prospective yield of 13% (not a misprint). Last year’s dividend was only 84% covered by earnings, but the board has identified a route to re-establishing full cover and then growing the dividend in the future. Gearing is a manageable 37% with the cost of interest covered four times over by the company’s earnings.
A lot could happen as we approach the end of October Brexit deadline and NewRiver is bound to be buffeted around by the volatility, but for long-term investors it already looks cheap and it wouldn’t take much for the shares to rebound. The bounce last week was due to an overseas bid for fellow pub operator Greene King and we could easily see a predatory buyer coming in at these levels.