When it comes to real-estate investment trusts (REITs), most of the attention goes to the trusts in the FTSE 100 and FTSE 250. However, there are smaller REITs outside these indexes that can offer equally attractive investment options. Here’s one that I just came across!
Targeting a reliable sector
I’m talking about NewRiver (LSE:NRR). The REIT owns and manages UK retail property, with a focus on community shopping centres and retail parks. The income from tenant rents provides the main source of revenue for the business.
For me, the positive outlook starts with the nature of the tenants that NewRiver has. It isn’t trying to bet on premium fashion or aspirational spending. Its portfolio is tilted towards affordable, needs-based retail. Given that we could be in for another tough year in the UK for economic growth, consumers are likely to focus their spending on shops that offer essentials. The Q3 trading update from January showed an occupancy rate of 96%, with a 91% retention rate, backing up the thinking that the REIT could perform well even during a tough period ahead.
With a market cap of £309m, it’s true that the company isn’t anywhere as large as some FTSE 250 peers. However, assets under management sit at £2.3bn. Therefore, it’s certainly a firm that I believe should be on a lot more investors’ watchlists.
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Dividend potential
The dividend is another big attraction, and it looks sustainable to me. NewRiver’s stated policy is to pay dividends equal to 80% of underlying funds from operations, declared twice a year. That’s important because it ties the payout to recurring cash earnings rather than wishful thinking. In the latest trading update, the dividend was 125% covered. This means that the current earnings per share easily cover the income being paid out. That’s a green flag and highlights the sustainability of it.
It’s worth noting that the current dividend yield is 9.3%, with the stock down 1% in the last year. Sometimes, when I see yields above 9%, it’s because the share price has fallen sharply. This pushes up yield in the short run, but the dividend is usually cut due to problems. Yet for NewRiver, the share price has been stable. This could indicate that the yield can remain above 9% and isn’t flashing warning signs.
Debt worries
Still, there are risks. It has a loan-to-value (LTV) of 42.3%. This means that, on average, each £1 of project funding has 42p of debt contributing to it. Therefore, if high energy prices cause inflation to spike in the UK and interest rates rise, it could increase the financing costs for the firm. This would then act to lower profits, even though the company hasn’t done anything wrong.
Even with this concern, I still believe the REIT looks in good shape for income payments. I think it’s a stock for investors to consider.
