Newriver REIT (LSE:NRR) — Investor Update

0:01 Good morning, ladies and gentlemen, and welcome to the NEWRIVER REIT PLC Investor Update. Throughout this recorded meeting, investors will be in listen only mode. Questions are encouraged. They can be submitted at any time using the Q and A tab situated on the right hand corner of your screen. Just please simply type in your questions at any time and press send. The company may not be in a position to answer every question received during the meeting itself. However, the company review all questions submitted today and publish responses where it's appropriate to do so. Before we begin, we would like to submit the following poll, and your participation, I'm

0:31 sure, will be greatly valued by the company. I'd now like to hand over to CEO, Alan Lockhart. Good morning, sir. Thanks, Mark, and good morning, everybody, and thank you for taking the time to meet with us this morning. I'd really like to cover three things on on our call this morning. I know that we may have some NEWRIVER shareholders on the call, but there will be others that are not so familiar with the business. So I'm gonna start with providing a sort of bit of a background on NEWRIVER. Secondly, I'll I'll provide a summary of our q one trading update, which we announced to the market yesterday. And then I'll close by sharing a few thoughts on the wider market, you know, given the current challenging economic backdrop.

1:21 And then we can move to q and a. We we will do our best to answer everybody's questions. So just to start with an overview of NEWRIVER. NEWRIVER started in 2009, so we've been going for about thirteen years or so. We have a team of 45 people predominantly based in London, small team in Manchester, small team in Edinburgh. We're a REIT, so we focus on the retail real estate market here in The UK. We're strong believers in sector specialization because we believe that over the long term, that should lead to outperformance.

2:07 And as a business, we've always been very focused on income and income returns because, again, we believe that over the long run, income returns are the major driver of total returns. Currently, we have a portfolio valued of around £650,000,000, and our portfolio is predominantly invested in three core areas for us. Firstly is our core shopping centers, our retail parks, and then our regeneration portfolio. For our core shopping centers and and and retail parks, they are very much conveniently located in the heart of communities, and they do provide a range of essential goods and services to local people.

2:59 And for us, these type of assets provide very attractive income led returns. And so we'll form a key part of our portfolio in the future. And in particular, we think that retail parks will be a part of our portfolio that should grow in size over the next five years. And and our core shopping centers and core retail parks are performing very well. We benefit from very high occupancy well into the high nineties. We have very high retention rates. So when our tenants come to lease expiry or when they have an option to exercise a break option, again, well into the 90% of our tenants choose to remain within our assets.

3:53 And these assets are also very efficient from a cost perspective. We benefit from a very high gross to to net ratio. And over the last twelve months, these assets have been performing very well. Within our core shopping centers, they delivered a total return last year of, just over 14%. And for our retail parks, the total return was, around about 23, percent. So, very resilient, assets, providing very attractive long term, returns. Our our regeneration portfolio is really all about, redeveloping surplus retail space principally, for residential.

4:38 And it's a part of our portfolio which is more focused on capital growth, rather than, income returns. And that's that's part of our portfolio. We have three assets at different stages. And in total, I think we're we're we're planning to provide something like about 1,200 residential units by redeveloping the the surplus space. So so that gives you a little bit of an overview of our portfolio. Moving on to the balance sheet. We have a very strong balance sheet. Our LTV is currently around about 34%. We ended our financial year at the end of March with £88,000,000 of cash in the bank, and we have no drawn debt that matures in the short term. In fact, our the only drawn debt that we have is our corporate bond, and that does not mature till 2028.

5:38 And that comes with a fixed coupon of three and a half percent. And what that means is that notwithstanding that we're seeing rising interest rates in the market, our our interest costs are now fixed for just over six years. And, of course, as an issuer of a corporate bond, we're subject to review by the rating agency. Fitch undertake a a sort of review on us every six months. And, you know, we are investment grade rating and have been able to maintain our triple b plus rating for the since we issued our our our first corporate bond back in 2017. So really strong balance sheet, which is really important, particularly given the sort of deteriorating economic outlook.

6:35 Moving on to the dividend. As I mentioned earlier, we're strong believers in in income returns, and so the dividend for us is is very, very important. Our dividend policy is to pay out 80% of our underlying funds from operations, which means that we're always gonna be fully covered, and we pay our dividend out twice a year. Last year, total dividends that we paid out were were 7.4p. So based on our share price, I think, which is around about 90p, it sort of demonstrates that we do offer a very attractive dividend yield to our shareholders. Moving now on to our strategy.

7:20 So our strategy is simply to deliver attractive returns for our shareholders, and we're looking to, at that, at the corporate level, deliver a 10% total accounting return. So that is the combination of our net asset value per share movement plus dividends paid. So we're targeting, 10% plus, and we're on track to to deliver that. And our strategy is sort of focused on three areas. Firstly firstly, what we call capital recycling. So that is looking to sell assets where we completed our asset management strategies. Then if we were to continue to own those assets, we we if we were to continue earning those assets, the the sort of forward looking returns, we look at very, very carefully. And if we feel that we can recycle that capital into new assets that are gonna deliver superior returns and also with a lower risk profile, that's a way that we can drive our our earnings and and our asset value. So capital recycling is an important part of our our business. Last year, we we sold about 77,000,000 of of retail assets. This year, we're planning to sell around about £55,000,000 of our our retail assets.

8:49 Secondly is our capital partnerships. So we have a very successful partnership with the private equity arm of PIMCO. And the reason we like to invest in in capital partnerships, it it allows us to enhance our returns because we receive asset management fees, development management fees. We can receive fees on acquisition, but we also have the right to receive a financial promote, depending on on the underlying performance of the joint venture. And that's been a successful joint venture with PIMCO over the last sort of couple of years, and we do see that capital partnerships will form an important and growing part of our business going forward.

9:39 And then finally is regeneration, as I touched on earlier. So regeneration for us is all about, you know, delivering capital growth. So it's a pretty simple strategy designed to deliver an attractive total accounting return for our shareholders. And our strategy is working, and we're making good progress on that. And we believe we're we're firmly on track to deliver a consistent total accounting return of around 10% underpinned by resilient recurring income returns. And then finally, just moving on to the the the investment case. You know, why why should you consider buying shares in in the Europa? Well, I think it's it's, again, quite a simple investment case. We offer a very attractive dividend and dividend yield.

10:34 We have capital growth prospects through narrowing the the discount. Our share price term is roughly around about 90p a share. Our net asset value is about 134p a share. So we're trading at quite a wide discount to net asset value. And we believe that through continuing to deliver good operational and financial performance, we will see that discount narrow over the over the medium term, and that will provide attractive capital growth for our shareholders sitting alongside the the attractive dividend yield that we we already pay out. So I think the total shareholder return potential for us of that that NEWRIVER offers is is pretty compelling. And, of course, it's all underpinned by a very strong, you know, balance sheet, which we're absolutely committed to, maintaining.

11:38 I'll now move on just to our q one, trading up date. You know, we've been able to maintain good momentum within the business. We've now had four consecutive quarters of positive leasing spreads to our ERVs, and that's just reflecting the fact that, you know, we have really good demand for the space in our portfolio from retailers that are looking to either commit to existing space or indeed acquire new space. And and achieving positive leasing spreads to your ERVs is also influential in your evaluations. ERV movements plus yield movements is really the two key determinants of valuations. So being able to undertake your leasing transactions above ERV is is clearly gonna be supportive around valuations going forward.

12:36 And because we've had, strong, demand and and and high retention rate, we've been able to maintain, very high, occupancy. In fact, our occupancy has increased from 95.6% at the end of March, to 96.5% at the end of, June, 2022. Rent collection has been a big feature of, the retail real estate markets over the last couple of years as a consequence of the pandemic. Many of you will know that the government, in their wisdom, decided to impose a moratorium on landlords' ability to take the normal legal action for nonpayment of of rent.

13:22 We've been highly successful during the pandemic period in being able to maintain very high collection rates, notwithstanding that moratorium has been in place. And as we've moved into, the new financial year, we've seen, you know, significant, improvement, in terms of our our rent collection, and we're sort of pretty much back to a more normalized, position as you can see, in q four f y twenty two, which currently stands, at a success rate of 90, 8%. In terms of our portfolio, we have a small part of our portfolio where we're looking to exit this year.

14:12 In in many ways, it's our noncore portfolio, and we've made very good progress in the first quarter already where 90% of our planned disposals are currently under offer in legals, at pricing that is pretty consistent with the, March, valuations. As I mentioned, we have a very strong balance sheet. That's been absolutely maintained through the first quarter. Our cash position actually has increased from 88,000,000, to, 93, million pounds. Now I should just point out that, our, our normal, financial guidance on our on our LTV is to be operating at or just below 40%.

14:58 We're currently just under 34%. So we do have available capital to to invest. What we told our shareholders at the end of the financial year is that, you know, we're not gonna be rushing to deploy that capital because the economic uncertainty means that, you know, we just wanna be very cautious and prudent in terms of our approach to capital allocation. But it's fair to say that, you know, at some point during the course of this financial year, we will start to deploy capital, and that's obviously gonna be very positive in terms of future, earnings growth. And, as it stands at the moment, we we we will have about £60,000,000 to invest during the course of, this financial year. And we do have a number of options when it comes to capital allocation.

15:55 First option is to invest in our existing portfolio, and we are gonna be doing that this year. We we have an investment program of up to £14,000,000 to invest in our portfolio, which we believe will be accretive to both earnings and and valuation. Of course, we can, deploy capital into the direct real estate market, and, you know, we are constantly reviewing and and and monitoring the market to identify, opportunities that are going to deliver the risk adjusted returns that we we are targeting. And then finally, we, you know, we do have an option, to invest in our own shares through a, buyback. And and what we tend to do is to look at capital allocation on based on, you know, what is going to deliver the sort of best risk adjusted returns and is supportive of our long term strategy.

16:53 And just finally, going back to the q one trading update, we very recently completed our move from our existing office into a new building in London, and that's going to unlock about £500,000 of admin cost savings because we're very, committed to, ensuring that we operate, with maximum cost efficiency. And, currently, we're targeting to deliver about, just over £1,500,000 of, cost savings, by the end of, this financial year on an annualized basis, and and we're very much on on on track, to, achieve that. So that's, quickly, onto the, q one, trading, update.

17:45 I'll probably just maybe just touch on, you know, what we're seeing in in in the market, and then we can sort of move on to,

17:55 yeah, q and a. So, obviously, the market dynamics of are are changing very much reflecting the high inflation environment that we're in. And as a consequence of the high inflation, we're seeing central banks starting to increase interest rates. And there's no doubt that consumers are gonna have very difficult choices to make around how they they spend their money. And, you know, I think it's really important to understand, you know, in terms of real estate companies, you know, how how do you sort of fit into the sort of wider context? So we believe that we have a number of advantages in the high inflation environment. First of all, our portfolio positioning, which is a portfolio that is really focused on with tenants that are focused on providing essential goods and services. So our portfolio is more focused around nondiscretionary spend rather than out and out discretionary spend.

19:01 Of course, that is a better place to be

19:04 in a high inflation environment because consumers tend to prioritize their spending, on, essential, goods and and and and items. Secondly, our core shopping centers and retail parks are highly accessible. So we have very short journey times within our core shopping centers. The average journey time is around about thirteen minutes for for our consumers, and many of our consumers can actually walk in or come in by public transport. And, of course, you know, in a in a period where you have very, very high fuel costs, having shorter journey times means that the costs for consumers accessing our assets is much lower than, say, going to a major regional destination shopping center or a or a city center location. So we are really benefiting from having assets that are really positioned in the heart of communities.

20:09 Hybrid working and and what happened during the pandemic and lockdown, again, there has been a a shift in consumer spend to some degree away from, city center locations to, closer to the areas where people, live. And given our portfolio, positioning, you know, we've been a beneficiary of that. And and, you know, we've seen that ourselves at at NEWRIVER. You know, I mentioned that we we moved office. You know, we've gone to a hybrid working model. We're fully hot desking. It's very popular with our team, and, you know, we believe that, hybrid working is a is going to be a, you know, permanent, change in the in the landscape.

20:55 Now retailers are, obviously facing greater challenges. You know, they operate in a very competitive market. It's not easy for them just to simply be able to pass on all their cost inflation to consumers. But we do believe that it it's really the multichannel retailers and and retailers that that operate physical store channel channels are much better placed to operate in a high inflation environment. Yes. Their margins are are are going to be lower, and many of the major retailers have already been indicating that, lower margins for for for this year and and and into next year. But what what I think is really interesting that we're seeing in the market is the real pressure that the pure play online retailers are under.

21:49 And many of them are reporting, you know, warnings around profitability and having to do capital raises to improve their balance sheets. And the reasons are, you know, quite straightforward. Pure play operators have tended to operate with much lower margins in the first place. So as their costs have been increasing, you know, deliveries, returns, etcetera, their margins are getting eroded even further. And they they're finding it incredibly difficult to mitigate their costs because they don't have a store based network where you can incentivize your customers to that do want to order online, but encourage them to use the click and clicks service that many of the multichannel retailers

22:42 can offer. And that's one of the reasons why we've been investing more in retail parks. We started investing in retail parks in 2014 because we believe that retail parks are very compatible with online fulfillment in terms of click and collect because retail parks are very accessible. All the car parking is at surface level. It's all free, and the retail units are all big big big box space, which allows retailers to be able to show show room and also handle click and collect orders. So, you know, we're finding it's really interesting. There definitely has been a a a change of of narrative, which for maybe the last sort of four years, the market was saying that everything was going online. We never held that view at all, and things are are are changing. And as I said earlier, you know, the multichannel retailers are are, I think, have clearly emerged out of the pandemic as as as as the winners.

23:49 And then in terms of the capital markets, you know, you can look at the the the current economic situation. It's fair to say that the probability of a recession has increased. We've looked at, you know, what's happened in in previous recessions in terms of The UK real estate market. Obviously, we've excluded the pandemic recession because that was not a normal recession. But if you looked at the recession in the in the in the late two thousands around the financial crisis and and the and the recession in the early nineties, what normally happens in a recession is that the commercial real estate markets, retail, office, and industrial tends to go down in value roughly at the same time, roughly the same rate of decline and tends to level off together and come out together.

24:40 What's interesting when you look at the two previous recessions is that the commercial real estate market usually, has had a period preceding those recessions with strong capital growth. This time, it's slightly different. During the pandemic, retail values were, marked down very significantly. So if you look at the MSCI index, UK shopping centers fell in value by 38% and whereas industrial went up by 48%. So this period, which potentially could proceed a recession, we've seen industrial have very, very strong capital growth, whereas retail has had significant capital declines.

25:33 And we're we're as a consequence of the inflation, we're seeing the the rising interest rates coming through, and, of course, bond rates have increased as well. And I think retail is actually in many ways better insulated because the the the spread on the on the MSCI net initial yield in in retail versus the ten year guild is, you know, very, very significant. I think in

25:58 shopping centers, it's something like 450 basis points, whereas industrial is 70 basis points. NEWRIVER's core shopping center portfolio has a spread to the ten year guild of something like 700 basis points. So you wanna be in a in an area of the market where you've got a really widespread to rising bond yields, and and we have that in retail and within our NEWRIVER portfolio. So based on our current valuations, that spread is even wide, and that will provide, you know, real cushion to rising interest rates. I think that's probably I think that's probably everything I'm gonna sort of talk through for the moment. I'm very happy to go to questions.

26:49 Maybe Mark or Lisa That that's great, Alan. Thank you very much indeed for for updating investors on today's call. Ladies and gentlemen, please please do continue to submit your questions using the Q and A tab situated on the right hand corner of your screen. Just while Alan takes a few moments to review the questions submitted already, I'd like to remind you that a recording of this meeting, along with the published Q and A, can be accessed via your Investor Meet company dashboard.

27:11 Alan, we have received a number of questions from investors throughout today's call. So firstly, you to everybody for their engagement this morning. Perhaps if I may just start off with the first call, first question here, Alan, which reads as follows, which is how important are capital partnerships to the group, and what issues do you experience when jointly managing assets with third parties? Yeah. As I mentioned earlier, capital partnership is really important. We started our our latest joint venture with with PIMCO back in 2019, and we've grown that over, you know, two two two years to just over 200,000,000 of gross assets. We receive, you know, asset management fees. So currently, our total asset management fees we're receiving from from PIMCO and one other mandate that we we manage, We're currently getting annualized fees of around about 1,900,000.

28:11 So in the space of sort of two and a half years or so, we've gone from annualized fees of around 300,000 to around about 1,900,000. And we think we've got the potential to continue to grow that to anywhere between 3 to 5,000,000 of annualized fees. And, of course, as I mentioned earlier, we we have the opportunity to receive a financial promote, and that's linked to the underlying performance. And and the joint venture we have with Pimco is performing incredibly well from a financial perspective. We're now starting to move into sell down stage. So we'll we'll be selling a couple of the the assets this year and and then the remaining assets in in in our next financial year. And based on what we've achieved so far and based what what we expect to achieve, then, the prospects of us receiving an attractive financial promote payment has has, increased.

29:14 In terms of how our experience, it it works very well. We, you know, we're very selective in terms of who we wanna operate with. What we're looking for in a partner is a partner that has the the the financial firepower to to build up a joint venture portfolio, a partner that we can get on well with, a partner that we can learn from. And within that, you know, offer all of those aspects. But, you know, we believe that there'll be opportunities for us to work with with other partners over the next couple of years. And and and what the I think one of the interesting thing about retail is that retail real estate today is very operational.

30:03 You really need to have, the skill set and the experience and the expertise if you're gonna deploy capital into the market wisely and, safely. And and therefore, a platform is critically important, and, there is a lot of capital that wants to invest into retail real estate, but, most of the capital, needs to invest it through our platform. And there are very few platforms in The UK that have real credibility. We're one of them. And so we think this is a this is a a real growth opportunity for us going forward. That's great. Thanks, Alan. If I may turn to the next question, I guess, around asset disposals, and it reads as follows. When do you think you'll complete the sale of the workout portfolio?

30:56 Yeah. So within our workout portfolio, we do have a program of planned disposals. We're gonna get those completed during the course of this financial year. So in other words, before March 2023, and we're we're very much on track on that as as we announced in our q one trading update. We do have a few workout assets where we're actually investing this year to support a a asset management strategy that will ensure that those assets will deliver the sort of sustainable risk adjusted returns that that we're looking for. So, you know, for example, we we, you know, we own a a shopping center small shopping center in Whiz Beach, And there, we're looking to redevelop the back section of the center to bring in one of the major German food discounters together with, you know, quality surface car park, and that will transform that asset by generating higher footfall, and that will lead into better better rental growth prospects, better occupancy.

32:10 So that's a sort of good example, the type of asset management strategies that we're deploying on some of those workout assets. And we're we're we're we're anticipating having all of that completed by the end of this financial year so that beyond March 2023, you know, we won't have a workout portfolio either being sold or will have invested and to support our our asset management strategies. That's great. Thanks, Alan. I think you did touch on the next area around share buybacks, but the question reads as follow. What's your opinion on share buybacks versus further investment into the portfolio? Yeah. Well, look. I mean, we you know, we do a lot of we've done a lot of analysis on this, and, you know, it it forms share buybacks do form a part of our capital allocation strategy.

33:09 And and, naturally, so particularly where our share price is currently trading at a significant discount to to our net asset value. But there are other things that one needs to take into account. Shared buybacks increase increases your leverage at a higher rate than investing in the direct real estate market. Share buybacks provide a, you know, basically a one off benefit. We know that base currently, it would be very earnings per share enhancing a very enhancing of our NAV per share, but it's a it's a it's a one off. Whereas, you know, investing in the direct real estate market, you get the opportunity for future rental growth and and and valuation growth.

33:55 And, of course, you know, we need to take account of of of liquidity. And, you know, buy back shares, you know, naturally, you know, can reduce, you know, your liquidity. And providing liquidity for for shareholders is something that, you know, we're, you know, very focused on because, you know, better liquidity should lead to a better rating as well. That's great. Thank you. Next question. Interesting question. What what does the pipeline of new opportunities look like, and how are you finding, you know, the valuation and the competitive landscape, I guess, around those assets? Yeah. Well, last year, we did a lot of research into The UK retail real estate market with our research partners CACI.

34:41 And what we were looking to do was to really identify assets that have an underlying resilient rental cash flow today, but that rental cash flow still to be resilient in ten years' time. Because in our marketplace, there are ongoing things that influence the supply and demand, and and real estate is all about supply and demand. So these are things like population growth, economic growth, infrastructure investment, online penetration, demographic, changes. And we created our proprietary database with CACI, which effectively, allowed us to analyze up to around two and a half thousand, retail real estate assets, in The UK to really identify which assets have long can offer long term resilient rental cash flows.

35:38 And, from that analysis, it told us that the greater number of opportunities are within the retail park sector that so that out of town retailing, format. And so we do expect that over the next five years, retail parks as a percentage of our gross assets will increase to at least, 50%. And so we we know we've already identified which these assets that we want to, acquire, and, you know, we're monitoring that very, carefully. The retail park sector had very strong capital growth last year. Liquidity, surged into the market over the last sort of twelve months. I think last year from, you know, 04/01/2022 to the end of March twenty three. I think it was about 4,200,000,000 of of transactions within the retail park sector, making it one of the most active years since, 2010.

36:39 But, actually, what maybe most market participants may not be aware of is that a lot of that liquidity was concentrated in around seven buyers. And, we believe that by just, you know, waiting a bit longer, I think, you know, there'll be some better buying opportunities. So that's where more of our activity is gonna be focused on is within the retail park sector. That's not to say there won't be some opportunities within shopping centers, but we believe that those are actually more limited because, you know, going back to the research that we we we undertook last year, we, you know, we do see the greater opportunity within the retail park sector to deliver the type of risk adjusted returns that we we need to we need to deliver in order for us to achieve our our strategic aim of delivering a 10% plus total accounting return.

37:40 Thanks so much, Alan. And perhaps if I turn to the next question, which reads as follows. In your opinion, how does the potential upside New River REIT compare to that of other REITs operating in the same space? And how would you really differentiate yourself from the others in the area? Well, you know, we we I mean, within the within the REIT sector, there are very few, pure play, retail, REITs. And, you know, we don't really focus too much time on them. You know, we're we're we're very much focusing on on what what what, what we can deliver. And, you know, I do believe that, humbly speaking, that, you know, we're probably, we're regarded as being one of the best retail real estate platforms in in The UK market.

38:37 We got a we got probably one of the strongest balance sheets within the retail real estate sector. We have a very clear strategy that is working. And and I think the, you know, the the aim for us is to deliver that 10% plus total accounting return. We feel confident we're on track to achieve that. And and I think by achieving that, that will set us apart from everyone else within within within our sector. So hopefully, that answers the questions. Great, Alan. That's absolutely brilliant. And that takes care of all the questions from investors. So, Alan, thank you for your time in giving your responses to those. And thank you once again to everybody that has submitted questions during today's presentation.

39:27 Alan, I know investor feedback is important to you and to the company, and I'll shortly redirect the investors on the call to give you their thoughts and expectations. But I wonder before doing so, if I may, Alan, just ask you for a few closing comments just to wrap up, and then investors will be able to give you their feedback. Yeah. Sure. Well, look, you know, as I mentioned earlier that, you know, the the economic outlook, you know, is pretty uncertain. But, you know, I think our team, together with our strong balance sheet, debt maturity profile, and our resilient portfolio, you know, means that, you know, we are well positioned for this sort of current environment. And, indeed, we look to the future with with with genuine confidence because in our experience, and I've been operating in in retail real estate markets since the late nineteen eighties, I know that, you know, periods of uncertainty often brings opportunities.

40:26 And, you know, whilst in the short term, we're gonna operate with a higher cash holding than we would normally do, and and and I think we're right to do that, you know, we're we're very much primed and and ready to take advantage of advantages of opportunities that, I'm sure will arise, from the sort of market disruption that, you know, that the economic conditions are likely to bring. And I think this is why, as I mentioned, you know, we're very confident of our ability to deliver a very attractive total accounting return, and I'm I'm confident that will feed into delivering very attractive total shareholder returns for for our shareholders.

41:11 That's great, Alan. Thank you once again for your time, this morning and for updating investors. Could I please ask investors not to close this session as we'll now automatically redirect you for the opportunity to provide your feedback in order the management team can better understand your views and expectations. This will only take a few moments to complete, but I'm sure will be greatly valued by the company. On behalf of the management team of NEWRIVER REIT PLC, we'd like to thank you for attending today's meeting, and may wish you all a very pleasant morning. Thank you. Thank you.