NewRiver Retail: 7% Yield Underpinned By Growth Outlook

NewRiver Retail (NRR.L) raised £67m via an equity issue at 205p/share in July. This has provided it with cash to accelerate acquisitions and fund planned asset improvements, including low-risk pre-let development. It has so far committed £24.7m to its 50% share of a £49.4m acquisition of a shopping centre in Middlesbrough by its joint venture (JV) with PIMCO Bravo. Management expects to secure sufficient new acquisitions, including debt, on terms that will generate cover for the FY15 dividend over the next 12 months. We have revised our forecasts for the new shares and cash, the initial acquisition and portfolio growth to grow EPS to cover forecast distributions. Details are set out in page 2 of this note.

Continued strengthening of the LVS joint venture
NRR expects to have substantially invested the funds raised over the next 12 months via its JV with LVS, a subsidiary of the PIMCO Bravo Fund. The first purchase, made shortly after completing the fund raising, was the Hillstreet Shopping Centre in Middlesbrough. Initial net rents are equivalent to a 9.6% yield on costs, secured by tenants including Primark, Debenhams, Marks & Spencer and Sports Direct. The mall is 98% let and, in line with NRR’s preferred acquisition strategy, provides a number of opportunities to improve income and capital values via asset upgrades. These include enhanced entrances and reconfiguration of existing space to attract new tenants at higher rents.

Valuation: 7% yield underpinned by growth outlook
The core attraction of the shares is the 7% prospective yield, appropriate for a UK REIT that manages its assets to maximise revenues. We expect any shortfall in cover following the equity raising to be temporary, remedied by EPS-accretive acquisitions over the next 12 months. Our forecasts include additions so far, a further £120m by the JV before end FY15, modest growth in rent from reviews and lettings, and initial contributions from new pre-let space on improvements to existing assets due to get underway over the next six months. The share issue reflects NRR’s view of the potential acquisition pipeline. Its latest purchase illustrates that it can still secure assets at attractive terms, net rent comfortably covering finance and other costs. Assuming purchases are made within the joint venture, NRR will also benefit from management and performance fees and the immediate boost to EPS will be enhanced as its gets to grip with potential to ratchet up returns from active management of assets acquired over the first few years of ownership.

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