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Real estate investment trusts (REITs) can be outstanding sources of passive income. And shares in NewRiver REIT (LSE:NRR) are trading at a 31% discount to the firm’s net asset value (NAV).
At today’s prices, the stock comes with a 9.25% dividend yield. So should I take the opportunity to add it to my Stocks and Shares ISA?
Overview
NewRiver REIT leases a portfolio of 47 shopping centres and 30 retail parks around the UK. Some of these it owns outright and others it manages on behalf of other partners.
High street retail has been struggling recently with consumers under pressure and the rise of e-commerce. And that’s something to pay attention to over the long term with the company.
What matters most for NewRiver REIT, though, is that it can find tenants and get them to pay rent. And both its occupancy levels (96%) and rent collection metrics (98%) are solid.
The firm’s tenant base is also reasonably well-diversified, including the likes of Boots, Superdrug, and Aldi. In other words, a focus on convenience helps protect it from online competition.
Valuation
The stock currently trades at around 70p, which is a 31% discount to the £1.02 value of its net tangible assets. This isn’t uncommon for UK REITs, but it’s particularly important in this case.
Unless a company is about to do something about it, a valuation gap doesn’t usually matter much for investors. But NewRiver REIT has recently repurchased around 48m shares at around 75p.
Buying back stock when it trades at a discount increases the NAV per share of the remaining shares. In other words, it creates value for shareholders.
In my view, the move is a very positive one for investors. It shows management is willing to take advantage of opportunities when they present themselves and this is very positive.
Dividend cover
The 9% dividend yield NewRiver shares come with is eye-catching to say the least and this can often be a sign of risk. And there’s one obvious one that stands out.
In terms of debt, the firm’s loan-to-value ratio is now 43%. That’s almost double the 22% level of a year ago as a result of the recent acquisition of Capital & Regional and this warrants a closer look.
A higher debt level is always a risk. But it’s worth noting that NewRiver doesn’t have any loans due to mature until 2027 and this means the prospect of falling interest rates could be a big boost.
The firm distributes 80% of its underlying funds from operations. And with leases having over eight years to run on average, I think the dividend looks solid for the foreseeable future.
A passive income opportunity?
NewRiver REIT has been seeing strong consumer footfall in its properties, which goes against the recent weakness on the UK high street. And I can’t help but think that’s the big risk with the stock.
A number of retail stocks have been struggling recently due to disappointing sales growth. But to some extent, this doesn’t matter to the landlord as long as the rent gets paid each month.
Given this, I think NewRiver is worth considering as part of a diversified portfolio. I’m adding it to my list of REITs that I’m keeping a close eye on.
