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NewRiver REIT is ‘cheap and cheerful’ says Jefferies as it starts coverage with ‘buy’

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NewRiver REIT plc (LON:NRR), the convenience store-led shopping centres and retail parks owner, is a “cheap and cheerful” share worth buying after the 75% crash in its share price over the past year, analysts at Jefferies reckon.

The broker began coverage of the real estate investment trust with a note on Friday setting a ‘buy’ recommendation and an initial share price target of 80p.

NewRiver REIT’s £1.3bn portfolio is made up of 33 community shopping centres, 25 retail parks and almost 700 community pubs, plus a joint venture with Pimco.

The Jefferies’ analysts noted that as of the end of March, occupancy was 95.6% with low 3.5% CVA rental losses and low average passing rents of £12.49 per square foot, “which is affordable” at an average occupancy cost ratio at 13.1% compared to peers at 20.4%.

Rent collection for the second quarter was relatively high at 60%, with 32% of occupiers by rent remaining open and trading compared with 23% at Capital & Regional (LON:CAL) and 4% at Hammerson (LON:HMSO). 

The shopping centres were last valued at a yield of 7.9% and are fully depreciated, with a weighted average unexpired lease term of 5.5 years. 

“Anchored by major food and grocery brands, they serve everyday shopping needs without the issues of flagship shopping centres laden with declining department stores, excess mid-range fashion and over-costed casual dining being hit by falling rents, contracting space and unsustainably low valuation yields,” the analysts said.

Jefferies forecasts that NewRiver REIT’s dividend will be 16.2p for the year to end-September, exactly covered by earnings per share.

For the next year, “greater Covid-19 forecasting uncertainty” is acknowledged and with the mostly tenanted pubs estate, which make up almost a quarter of the portfolio, shut for an estimated six months with deferred rentals offered to tenants with repayment terms stretching 12-18 months, the analysts said their base case forecast is that the resulting loss of rental income will mean there is a further 50% reduction in the dividend to 8.1p.

The company is wholly unsecured with gearing at 41% and a £300mln publicly listed corporate bond to 2028 at 3.5%. 

Management has identified 2.1mln square foot of mostly residential conversion potential over 5-10 years, which the analysts said “largely underwrites the balance sheet by alternative use”.

NewRiver REIT shares, which had recently fallen below 50p, were up more than 9% to 56.7p on Friday morning.

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