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An investment trust I’d pick as a contrarian buy today

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I’m a big fan of investment trusts, and I think a number of them now look like solid buys. There are some that are still seriously depressed by the 2020 stock market crash, and I’m looking for contrarian picks among them.

Real estate investment trust

But invest in a real estate investment trust in 2020 when retail tenants have been through the mill? Am I mad? I don’t think I am. Let me explain why I’m eyeing up NewRiver REIT (LSE: NRR).

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NewRiver has just reported first-half results and, as I write, its shares are up 4% on the day. Chief executive Allan Lockhart said: “The first half of the year was a period of unprecedented disruption and yet our operational performance has proved to be resilient.

He added: “We negotiated almost 300 revised payment agreements with our retail tenants, leading to overall rent collected or moved to alternative payments at 90% of that due.

If the retail property business is dead, I’m not seeing it. In fact, it sounds like things have been going a lot better than expected. The investment trust is big in pubs, mind, and that business is suffering under the renewed lockdown. But if these Covid-19 vaccines live up to hopes, I’d expect to see an upturn there before too long.

Healthy balance sheet

Underlying funds from operations (UFFO) are down, with UFFO per share falling to 3p from 8.6p in the first half of last year. The trust recorded a loss after tax of £92.3m, but said that was “mainly due to non-cash reduction in portfolio valuation.”

Other than that, the more I read the more positive I become. NewRiver has actually seen an increase in letting activity, leading to a retail occupancy of 96%. It stood at 95% at March. In its pubs business, the trust recorded a 98% occupancy, up from 97% in March.

On the liquidity front, I see no problems. The value of disposals reached £50.2m. And closing cash of £140m represents a £60m increase over the period. There’s total accessible liquidity of £235m. Coupled with a loan-to-value rate of 48%, and no bank refinancing events before August 2023, I reckon that’s a well-funded investment trust with no cash flow problems.

Share price and valuation

So what about valuation? Even with the day’s gain, the NewRiver share price is down 59% year-to-date. That’s much better than it was at its lowest, when it stood at a 78% loss. But I think it still represents tempting value. The shares are currently trading at around 82p, less than half the reported net tangible asset value of 171p.

Investment trusts typically trade at a discount to assets when they’re in a tough patch. But NewRiver shares can be had for a discount of 52% now. I reckon that’s far too pessimistic a valuation.

In addition, the board intends to reinstate a covered dividend for the full year. We didn’t hear how much it might be, but analysts are forecasting a yield of about 6.5%. NewRiver REIT is firmly on my shortlist.

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Alan Oscroft has no position in any of the shares 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.

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