Investment summary for NewRiver Retail (NRR.L):
Building base for growth
Strong 2012 results illustrated how the strategy can build sustainable revenue growth, despite a challenging UK retail environment. At the core is NRR’s focus on high yielding retail property let to a tenant base weighted towards food and value retail, with returns enhanced by intensive asset management and. It completed £93m (net) of acquisitions in FY12 at average 8.5% pa initial yields, and grew assets under management to £275m (2011: £166m). It intends to continue to invest selectively in its chosen niche. The food and value retail focus, relatively resilient sub-sectors kept retailer administrations to just 1.6% of gross rents in 2012 and two small disposals generated average IRRs of 27%, well ahead of NRR’s (15%) target.
Full benefit of acquisitions to be seen in current year
The group issued £42.5m of equity in 2012 and secured £47m of new senior debt, which it has since deployed in portfolio acquisitions. We have adjusted the current, FY13 PBT forecast to reflect the full year impact of a £68m portfolio purchase in August 2011. Asset management drives potential dividend growth in 2013/2014.
Growth model well placed in challenging UK retail market
Opportunities remain for NRR to acquire retail assets at average yields of c 8.5% pa, funded by debt at an all-in cost of c 4% pa, and carry out asset management and risk-controlled development to build sustainable cashflow. Its ability to do this in a difficult UK retail sector reflects a strategy that expects negligible help from the underlying market. Returns during 2012 were derived from 70 positive ‘leasing events’ (new lettings, lease renewals and re-gears), 92% of which were at or ahead of business plan and achieved on average, rents 1% ahead of market rates.
Valuation: 9% fully covered forward yield, NAV cover
The group is managed as a traditional UK REIT and focuses on growing sustainable revenues to support progressive dividends. A doubled final payment brought the full year distribution to a fully-covered 15p per share, a 8.0% yield (8.8% for 2012) and we see potential for further growth over the next two years. EPRA NAV per share fell 5.5% to 258p (2011:+4.5%), but it would actually have been 7.5% ahead without 33.5p of one-off costs relating to equity fund raising and purchase expenses.
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