Retail Recovery And Omnichannel Demand Will Drive Stronger Rental Income Ahead

Catalysts

About NewRiver REIT

NewRiver REIT is a specialist owner and operator of convenience led retail and leisure assets across the U.K.

What are the underlying business or industry changes driving this perspective?

• Recovery in the U.K. retail sector, with resilient consumer spending, a broadly stable labor market and rising in store sales, is supporting higher occupier demand for NewRiver’s convenience focused assets and is expected to underpin sustained rental growth and higher revenue.
• Physical stores are regaining share from online only retailers as brands prioritize omnichannel strategies. This positions NewRiver’s portfolio of retail parks and shopping centers as essential infrastructure for retailers and supports stronger leasing spreads and net operating income.
• Falling vacancy rates and tightening supply of quality retail space are creating a landlord friendly environment. This enables NewRiver to relet at double digit uplifts to previous rents and above ERV, which should drive higher like for like rents and expanding net margins.
• Capital and Regional integration synergies, scalable platform benefits and a growing pipeline of value accretive transactions and capital partnerships support operating leverage. This allows incremental income to flow disproportionately to earnings and UFFO per share.
• Improving investor appetite for retail assets, rising capital values and NewRiver’s ability to recycle assets at or above book value support disciplined capital allocation, potential multiple re rating and accretive growth in NTA and earnings.

Assumptions

This narrative explores a more optimistic perspective on NewRiver REIT compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming NewRiver REIT's revenue will decrease by 13.0% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 24.7% today to 71.0% in 3 years time.
• The bullish analysts expect earnings to reach £56.5 million (and earnings per share of £0.14) by about December 2028, up from £29.9 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as £48.2 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 10.4x on those 2028 earnings, up from 9.7x today. This future PE is lower than the current PE for the GB Retail REITs industry at 15.8x.
• The bullish analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.8%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Refinancing the GBP 140 million Mall facility and the GBP 300 million bond in a structurally higher interest rate environment could lift the company’s long term cost of debt above current levels, compressing net interest cover and putting pressure on earnings and dividend growth over time. This would weigh on net margins and UFFO per share.
• The strategy relies on ongoing disposals of retail assets to manage loan to value back within guidance. A turn in the retail property cycle or weakening investor appetite for shopping centers and retail parks could force sales at discounts to book value, eroding EPRA NTA per share and constraining future revenue growth.
• While management highlights resilient consumer demand and physical stores gaining share from online, any renewed structural shift toward e commerce, weaker real wage growth or a softer U.K. labor market could reverse these trends. This could lead to lower tenant sales, weaker leasing spreads and ultimately slower rental growth and lower net operating income.
• The portfolio’s income is exposed to retailer restructurings and company voluntary arrangements, as seen with Poundland, Bodycare, Homebase and River Island. If retailer failures become more frequent in a competitive retail landscape, NewRiver may face higher voids, incentives and reletting costs, undermining occupancy levels, rental income and net margins.
• The growth strategy depends on continued expansion of capital partnerships and the scaling of operating businesses like Snozone. Long term shifts in leisure spending patterns, rising operating costs or weaker partner demand for retail real estate exposure could limit fee income and ancillary profits, reducing diversification benefits and damping overall earnings growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for NewRiver REIT is £1.26, which represents up to two standard deviations above the consensus price target of £0.99. This valuation is based on what can be assumed as the expectations of NewRiver REIT's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £1.28, and the most bearish reporting a price target of just £0.85.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be £79.6 million, earnings will come to £56.5 million, and it would be trading on a PE ratio of 10.4x, assuming you use a discount rate of 10.8%.
  
• Given the current share price of £0.68, the analyst price target of £1.26 is 46.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.