At the time of writing, NewRiver REIT (LSE: NRR) supports the second-highest dividend in the FTSE 250. According to figures published by City analysts, the real estate investment trust will give investors a yield of 12% for its current financial year.
On top of this market-leading dividend yield, shares in the business also look dirt cheap. The stock is currently dealing at a forward P/E of just 9 and a price-to-book ratio of 0.7.
These metrics look highly attractive, but does NewRiver deserve this low valuation? Today I’m going to try to find out.
Shares in NewRiver have taken a hammering over the past 12 months. With its portfolio of 50 retail parks and shopping centres, the company has quite a lot of exposure to the struggling retail sector. It’s clear that investors don’t want too much exposure to this unfavourable asset class.
However, despite these concerns, NewRiver seems to be coping well in the environment. At the beginning of September, the firm announced that asset sales were going to plan. So far in fiscal 2020, disposals of £57.9m have been agreed at a blended initial yield of 5.4% on terms “1.2% above book value.“
Completed disposals comprise a food store and petrol filling station, one shopping centre, seven convenience stores as well as a handful of the company’s pubs and some surplus land.
These metrics seem to suggest that the market’s view of the company is too pessimistic.
Indeed, the stock’s current valuation suggests that investors believe the company’s property is worth less than management is reporting. But based on recent sales, that just does seem to be the case. NewRiver is selling assets above book value on average. On this basis, I think the stock is undervalued and should be worth at least tangible book value.
As well as selling off non-core assets, NewRiver is expanding its portfolio, using its scale and skill to sign advantageous deals in the current market.
Today, the firm announced that its joint venture with BRAVO Strategies III LLC has acquired Poole Retail Park in Dorset for £44.7m. NewRiver will hold 10% of the joint venture as well as being appointed as asset manager, in return for a “management fee calculated with reference to the gross rental income of the asset.” Poole Retail Park has a net initial yield of 8%.
Buying new assets when there’s so much uncertainty in the commercial property market might appear to be a silly strategy, but as I’ve highlighted above, NewRiver’s assets are weathering the storm really quite well. On top of this, the income received from managing the property will go straight to the bottom line.
Considering all of the above, I am interested in NewRiver at the current price. It appears to me as if the stock is trading at a discount to book value for no good reason and that 12% is too good to pass up. I’ll be adding this firm to my watchlist today.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.