NewRiver Retail: Continued Growth In Difficult Markets

NewRiver Retail (NRR.L) represents a way to capitalise upon a weak UK retail backdrop. It acquires high yielding (c 9-10% net initial yields) town centre retail assets in better performing UK locations, with a defensive tenant weighting in less discretionary areas of consumer spending such as food, value and health & beauty. Despite media coverage of the challenges facing UK retail, none of the recent high-profile retailer failures (Game, Clintons, HMV or Jessops) operated in any the group’s 23 retail centres. Dividends are covered by earnings from affordable rents (and an assumed £0.8m cash disposal gain in FY13) and growth predicated only on asset management initiatives, with no increase in underlying market rental values. NRR confirms a pipeline of suitable acquisitions and its recent JV with PIMCO reveals a commitment to take advantage of this and continued demand for new stores from food and value retailers to support plans for refurbishment and pre-let development over the next few years. Interim results were stable compared to the second half of FY12, with modest acquisitions in the period.


Growth reignited by new JV with PIMCO subsidiary
In December, NRR.L entered a new joint venture with a subsidiary fund of PIMCO, the world’s largest bond investor, which we regard as an endorsement for the investment strategy. JV’s first acquisition is an £85m portfolio of six UK shopping centres at a 9.7% net initial yield, which we estimate will add £0.4m to NRR.L’s annual asset management fees, and a c £0.6m pa share in the JV’s net income after finance costs. There will be a small contribution in FY13 but overall our forecast is lower, in a tough retail and general economic environment, with some increase in our interest cost assumption and lower income from the earlier Morgan Stanley joint venture, post asset sales. The new PIMCO JV shows ambitions to grow its portfolio in the next few years and NRR.L is well into phase two of its strategy to upgrade existing assets.

Valuation & sensitivities: Covered 8.0% prospective yield
We have reduced our dividend forecasts to 16p for both FY13 and FY14 (previously 16.5p and 17.5p), a covered 8% prospective yield, supported in FY14 by a full year contribution from the new joint venture. We have assumed a £0.8m profit from asset sales in FY13. The high yield and discount to NAV reflects concern over the UK retail focus. However cash flows remain resilient, and the new JV provides a platform for further acquisition growth, subject to access to capital, assets at high net initial yields and low-cost fixed-rate debt. Our 240p/share FY13 NAV forecast assumes no benefit from asset management in H2, and includes c 2.5% dilution from the share issue to fund the JV investment. We continue to expect NRR.L to create additional value from £400m of assets under management.

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