U.S. Markets open in 1 hr 2 mins

Edited Transcript of NRRT.L earnings conference call or presentation 21-Nov-19 10:30am GMT

Half Year 2020 Newriver Reit PLC Earnings Call

London Dec 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Newriver Reit PLC earnings conference call or presentation Thursday, November 21, 2019 at 10:30:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Allan Lockhart

NewRiver REIT plc - Founder, CEO & Director

* Mark Davies

NewRiver REIT plc - CFO & Director

================================================================================

Conference Call Participants

================================================================================

* Clive W. Black

Shore Capital Group Ltd., Research Division - Head of Research

* James Carswell

Peel Hunt LLP, Research Division - Analyst

* Mark Porter;NatWest;Relationship Director, Leisure Team

* Matthew Saperia

Peel Hunt LLP, Research Division - Analyst

* Sander Bunck

Barclays Bank PLC, Research Division - VP of Real Estate Equity Research

* Tom Musson

Liberum Capital Limited, Research Division - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Allan Lockhart, NewRiver REIT plc - Founder, CEO & Director [1]

--------------------------------------------------------------------------------

Are we good to go? Well, good morning, everybody, and welcome to NewRiver's Half Year Results Presentation. September marked NewRiver's 10th year anniversary. And from a small beginning back in 2009, NewRiver has grown to become the best retail real estate platform, operating in the U.K. and also the 7th largest pub tenanted company. We're very proud that over the last 10 years we've delivered for all of our key stakeholders. For our people, we've created a great culture. Our communities have benefited from the great work that we do on the ground, as have our occupiers, and our shareholders have received almost GBP 300 million of dividends. Today, we're delighted to be reporting a solid set of results, which is a result of our portfolio positioning, our best-in-class asset management platform and the affordability of our rents.

For today's presentation, I'm going to start with a brief overview of our highlights and the progress we've made on our strategies. I'll then hand over to Mark, who will review the financials and provide an operating update on Hawthorn Leisure. I'll then review the operational performance of the retail portfolio, and then we'll end with our outlook.

Our key priority is to deliver earnings growth to reestablish dividend cover. And we have made great progress in capital recycling and expanding our best-in-class asset management platform and our pub business, Hawthorn Leisure. It's also through our diversified and differentiated portfolio that our asset valuations have significantly outperformed the wider retail real estate market.

Everybody knows that the retail sector is undergoing structural change. But we are in a uniquely position in this context because there are very, very few platforms that have the deep understanding and the skills required to navigate this environment, which is actually showing some great opportunities. It's for these reasons that we've made good progress in the first half and why we are optimistic on our long-term prospects.

So moving on to the highlights. We've made good progress with our key strategies, and I'll talk about those in a moment. Our underlying funds from operations increased from GBP 25.6 million to GBP 26.4 million, delivering an underlying FFO per share of 8.6p. Our dividend was maintained at 10.8p for the first half, and it's 80% covered by underlying FFO, up from 78% in the prior period.

Our EPRA NAV decreased from 261p in March to 244p at period end, which was mainly due to a modest 3.3% decline in our portfolio valuation.

Turning now to our resilient operational metrics. Retail occupancy remains high at 95.6%, and our average rent remains affordable at GBP 12.49. The period saw us complete almost 340,000 square feet of leasing activity, with deals 2.5% ahead of previous passing and 0.5% ahead of ERV.

Although our portfolio is better positioned than most in the face of CVAs and admins, we were not immune. And these accounted for the majority of the 3.5% decline in our like-for-like net rental income in the first half, which is still a significant outperformance amongst our peer group.

And finally, on to Hawthorn Leisure. Our portfolio delivered like-for-like EBITDA growth of 5.5% as it benefited from the scale-based synergies that we secured in the last financial year. Our pub occupancy remains high at 96.7%, and we're continuing to extract further value from our pub sites, which Mark will touch on later.

Now this slide will be familiar to many of you from our full year presentation in May. It outlines our key strategies for reestablishing our dividend cover through delivering underlying FFO growth, whilst maintaining a conservative balance sheet. And I'll now update you on the significant progress we've made to date.

So starting with disposals. In May, we set ourselves a target to dispose of a minimum of 5% of our portfolio during this financial year, and that represents around GBP 64 million of assets. So far, we've made great progress against that target completing over GBP 35 million of disposals, with a further GBP 24 million in progress. That's just under GBP 60 million of transactions in total at an average yield of 5.4% on terms close to book.

To us, this highlights 2 key features of our assets: First, liquidity. Our assets have a average lower lot size. Our shopping centers average around GBP 23 million, retail parks around GBP 11 million, c-stores GBP 1 million, and our pubs around GBP 400,000 each, which means that we have a more active pool of buyers than, say, for larger lot sized assets; secondly, sensible valuations. We have consistently sold assets in line with or ahead of our book value. So we're pleased with the progress we've made to date, and our priorities are to complete those transactions underway and to accelerate our disposal program through the second half.

So turning to the use of proceeds from these disposals. To date, we've acquired 5 retail parks in our joint venture with BRAVO. The capital recycling that we've completed so far has been absolutely in line with our strategy. We've acquired assets with high and sustainable yields and sold mature and low-yielding assets, completing acquisitions at a blended net initial yield of 9% compared to the completed disposals at a net initial yield of 5.7%. And we're leveraging our operating platform. All of our acquisitions have been completed in the joint venture, meaning we receive asset management fees and promotes in addition to our share of the rental income.

Now you can see the impact of this from the chart on the right of this slide. The yield arbitrage between what we sold and what we bought along with the asset management fees generated is highly accretive to underlying FFO on an annualized basis. And we continue to review the market for exciting opportunities across our core sectors as we implement our disposal program.

We believe there is inherent value in the asset management platform that we've created over the last decade. For us, it's about using our market expertise and relationships to manage assets on behalf of partners and third-party owners. We've accelerated our marketing program during the period, targeting local authorities as we recognize a growing trend of local authorities acquiring retail assets, so they can take back control of their town centers and deliver for their communities. And we know that we are uniquely placed to provide that right combination of expertise, relationships and governance to help them do this. And we've just been appointed by Knowsley Council to manage Kirkby Town Centre. Under that agreement, NewRiver will provide strategic asset management and business planning advice to the council as well as ongoing asset management services. There's also the potential for us to provide develop -- monitoring services when the council brings forward plans to build a Morrisons superstore at the site.

This demonstrates the breadth of services that NewRiver can provide to asset owners, and brings our total asset management fees to GBP 1.2 million on an annualized basis, that's almost double our position just 12 months ago. Now we expect the trend of local authority intervention to continue, and we are in discussions with a number of other councils, who are taking those positive steps to transform their town centers.

So that was a brief update on our strategies, and I now would like to hand you over to Mark, who will take you through the financials.

--------------------------------------------------------------------------------

Mark Davies, NewRiver REIT plc - CFO & Director [2]

--------------------------------------------------------------------------------

Thank you, Allan, and good morning, everybody. I'm very pleased to be reporting another resilient financial performance in the first half of the year, and I'd now like to start talking you through the financial highlights.

Underlying FFO, which measures our recurring cash earnings, has increased from GBP 25.6 million in the prior period to GBP 26.4 million. Our admin costs have increased to GBP 9.7 million, and this is driven by 2 factors: Firstly, the recognition of a full half year of costs relating to Hawthorn Leisure, having only recognized 4 months in the comparative period of last year; and secondly, the fact that the entire pub portfolio has now moved on to the Hawthorn Leisure platform where before it was externally managed, and the associated costs of that were previously recognized in property operating expenses.

The increase in net finance costs was entirely related to the implementation of IFRS 16, which requires the recognition of an interest expense relating to ground rent payments. Previously, these payments were recognized in property operating expenses.

Our dividend per share was maintained at 10.8p, which is 80% covered by underlying funds from operations. This is an improved position from the comparative period of 78%. And we did announce this morning, our third quarter dividend for FY '20 will also be maintained at 5.4p per share, whilst we reestablish our dividend cover.

To conclude, we remain a very profitable company, generating robust cash flows from our diversified portfolio.

Now turning on to our net property income in our retail portfolio, which has increased from GBP 32.5 million in the first half of FY '19 to GBP 33.3 million. Our like-for-like income reduced, as Allan touched on earlier, by GBP 1.1 million or 3.5%. Now GBP 0.6 million of this related to CVAs, the impact of which we've continued to mitigate through our actions, which marks a significant outperformance relative to our peers.

Our asset management fees, both from our joint venture and from third-party asset management mandates, have added GBP 0.2 million to our earnings. And the completion of Canvey Island Retail Park in November of 2018 has added a further GBP 0.2 million.

Now our acquisitions, which included 4 retail parks in our BRAVO JV during the period and the Grays Shopping Center and the Retail Park in Barrow acquired in the prior year have increased net property income by a total of GBP 1.6 million. Our disposal program has reduced net property income by GBP 1.7 million. And finally, the implementation of IFRS 16, which means ground rent payments from property operating expenses to finance costs, added GBP 1.5 million.

Now on to our net property income bridge for our pub portfolio, which has increased from GBP 10.7 million to GBP 13.6 million. Firstly, and really pleasing to report, we've seen an increase in our like-for-like income in our pub portfolio. This has been mainly driven by the supply chain synergies unlocked by the integration of Hawthorn Leisure, which we completed in January of this year. This has added GBP 0.8 million to our earnings. The acquisition of Hawthorn in May of 2018 and the effect of 2 additional months in the first half of this year has increased income by GBP 2.2 million and the acquisition of further portfolio from Star Pubs & Bars in December 2018 has added a further GBP 0.4 million. Finally, disposals reduced income by GBP 0.7 million, while the income from the completion of further convenience store developments led to the Co-op added a further GBP 0.2 million.

Now turning to our dividend. The management team are very aware of the importance placed on our dividend by shareholders and a key priority is to improve our dividend cover. Important to note that we maintained our dividend at 10.8p during the period, our dividend is currently 80% covered by underlying funds from operations, an improved position from 78% cover in the comparative period. We do expect this cover to improve as we continue to execute the strategies Allan highlighted earlier in the presentation. And finally, to demonstrate our focus on dividends, we have paid out almost GBP 300 million of dividends in the last 10 years.

Now turning on to our balance sheet. We are uniquely positioned in the listed real estate space and having a fully unsecured balance sheet. We consider that to be very important, given the current market conditions. It means that all of our assets are unencumbered. It means we have absolute flexibility when creating value through asset management development and further flexibility on acquisitions and disposals.

During the first half, our investment properties decreased to GBP 1.26 billion, probably due to the 3.3% decline in our portfolio valuation, which Allan will talk about in detail shortly. Our EPRA NAV per share is 244p versus 261p in March, principally for the same reasons. And our LTV increase by only 1 percentage point to 38% remains well within our policy of being less than 50% and within our current guidance of less than 40%. Our strong balance sheet and timeliness of moving to unsecured debt structure puts the company in a very strong position in this market.

Next I'd like to spend a bit more detail just looking at our unsecured debt structure in more detail. Our cost of debt is low at 3.2%, and this compares very favorably to our portfolio yield of 7.9%, which, of course, is a very healthy arbitrage. We have a debt maturity of over 6 years. No refinancing events now expected until 2024 and beyond. We have included some sensitivity analysis on the slide, which shows our available headroom. And as you can see from the slide, we would have to face substantial reductions in our valuations and net property income in order to come anywhere near close to breaching any of those covenants.

So if I may conclude, our debt structure is straightforward, it's efficient, it's covenant-light, it has significant headroom and operational flexibility.

Okay. So to provide a review on our Hawthorn Leisure business. As many of you will know, I've been operationally responsible now for our pub business for some time. And during the period, we have integrated Hawthorn Leisure into the business, unlocking significant synergies. We now have a very strong platform from which we can grow our exposure to this very attractive cash-generating asset class.

During the period, we've experienced a revival in transactional activity in the U.K. pub sector into which we were early movers, with our first investment in 2013. This positive market backdrop has been highly supportive of our pub valuations during this period. It's also provided us as a major pub operating platform with a number of attractive acquisition opportunities, as pub companies look to degear and reshape their portfolios.

You can see from the right-hand side of the slide, an overview of recent deal activity in this space. This just demonstrates how attractive an asset class U.K. pubs have become to a wide range of domestic and overseas investors. The past 6 months alone, we've seen our 2 largest listed pub companies change hands, including Greene King recently acquired by CK Asset Holdings for a 51% premium to its share price. Confidence in the U.K. Pub sector is now strong, with traditional wet-led community pubs trading well, and our Hawthorn Leisure business is, therefore, extremely well placed to benefit from this in the future.

Looking at the shape of the Hawthorn Leisure portfolio today, which is now the U.K.'s 7th largest tenanted pub company, we have 660 freehold predominantly wet-led community pubs accounting for 22% of the NewRiver portfolio by value. Our pubs are located in community and neighborhood locations, much like the Neville Arms that you can see here on the slide. Our pubs offer diversification, good roadside visibility, often have excess land, through which we are able to create value through development.

Pleasingly, the performance of our pub portfolio has remained strong, with like-for-like EBITDA growth of 5.5% in the first half of FY '20, driven by the supply chain synergies secured from the acquisition of Hawthorn Leisure and the integration in January of this year. And valuations of our pubs have remained robust with a modest growth in like-for-like valuation in the first half, driven by earnings growth and a stronger investment market. This does, of course, follow a strong comparative period.

We do anticipate there will be further pub transactions over the coming months. And given recent evidence of portfolios trading between 10x to 13x EBITDA, this is likely to support and enhance our pub portfolio valuations in the future.

A key priority for us is to extract further growth from our pubs. And our 18 business development managers on the ground, day-in, day-out, are working with our pub partners to find new ways to grow income, reduce costs and create thriving pubs that serve their local communities. You can see on the slide just some of the asset management initiatives that we have been working on. First, we continued our program of targeted capital investment projects aimed at enhancing the customer experience, further improving trade and, of course, increasing capital values. We did complete 26 such projects at a total cost of GBP 1.4 million during the period with an aggregate delivered return on investment of 24%.

Our online toolkit was launched, providing our partners' access to marketing materials, and how-to guides to better promote their businesses. And we had a very positive response so far. Our loyalty scheme has been rolled out across our operator managed pub estate. We now have over 6,000 loyalty cards in operation and is clear evidence that this is driving repeat visits to our pubs, gives us a better customer insight that can enhance our business planning. And finally, staff training is crucial to ensuring our pubs provide great customer service and sustainable income streams. We recently set up a training center in Macclesfield to induct all of our pub partners into Hawthorn Leisure, provide a grounding on areas such as business planning, financial control, social media and marketing.

Another way we extract value from our pubs is through development. You'll all be familiar with our successful convenience store development program, which has seen us now deliver 25 convenience stores for the Co-op group over the last 3 years alone. We're currently on site with number 26, the site of the former Sea View Inn in Poole. This is scheduled to complete in January 2020. Development includes a convenience store on the ground floor with 10 residential units, which we intend to sell to a residential developer in advance of completing the project next year. Once delivered, this project will deliver a GBP 275,000 performance receipt from the Co-op, and our development of the Sea View is projected to deliver in excess of GBP 1 million of profit on an original purchase price of only GBP 300,000. This is just another great example of how we create value from development in our pub portfolio.

And with that, I'd like to hand you back to Allan.

--------------------------------------------------------------------------------

Allan Lockhart, NewRiver REIT plc - Founder, CEO & Director [3]

--------------------------------------------------------------------------------

Well, thank you, Mark. Looking at the market backdrop, consumers are actually in a reasonable shape with wage growth higher than inflation, and we have record levels of employment, but they are spending cautiously. And that is why those retailers that are price-competitive are doing well. Over the last 10 years, we have handpicked our assets to align ourselves with occupiers providing convenience, value and services, and this has proved to be the right call.

Retailers face intense competition from the pound in that consumer's pocket, which is exacerbated by the growth of online retailing. The consequence of this is that retailer profitability is under pressure and, therefore, rental affordability has become increasingly important. Again, we foresaw this trend because it's always been our belief that with affordability you get sustainability, which is why our portfolio has favorable rent-to-sales ratios, less than half of some of our peers, underpinning the strength of our cash flows. And these trends can be seen in the vacancy rates with the U.K.'s largest shopping centers having the largest increase in vacancy since 2013. Indeed, the top 20 shopping centers in the U.K. by size have experienced the greatest vacancy, reflecting the higher entry barrier to independent retailers, greater exposure to mid-market fashion, contraction in the casual dining sector and, of course, CVAs and admins. And we have deliberately limited our exposure to casual dining, to department stores and to fashion. And that is why we are better positioned than most in the face of CVAs and admins.

And you can see from the right-hand side of this slide, that our top 10 occupiers comprise growing and resilient retailers that offer convenience and value to consumers on everyday essentials.

During the last 6 months, we've seen significant valuation decline across the wider market. Our portfolio, although down 3.3%, has significantly outperformed the index, as you can see on this slide. The key reasons for our valuation outperformance were that our net income was broadly the same in September as it was in March, and that almost 1/4 of our gross assets are invested in the pub sector, which has not been impacted by negative sentiment, like retail. Where we have seen valuation declines, these have been mainly due to sentiment-driven reductions in ERVs and some yield expansion. But it is worth noting that during the period, we signed leasing deals ahead of ERVs, and we sold assets in line with book values.

Shopping centers, which account for 55% of our portfolio, saw the largest downward valuation movement at minus 5%, driven by a like-for-like ERV reduction of 2.8% and yield expansion of 24 basis points. On to our retail parks, which now represent 15% of our portfolio following the recent acquisitions that we've done in our joint venture, retail parks saw a 4.4% decline over the period, mainly due to reductions in ERVs, but also the costs incurred on those acquisitions. Pub and c-stores remain resilient, once again delivering positive valuation movement, with strong operating performance underpinned by a significant amount of capital entering the market in recent months.

To the right, we've provided the latest alternative use valuation analysis of our portfolio. As owners of retail assets in the heart of communities, it is unsurprising to see that most of our alternative use potential relates to residential. In our opinion, this analysis does provide a useful underpin coming out at only 13% below current valuations.

So turning to our acquisitions in the period. These have all been in retail parks, which we consider to be a highly attractive asset class. In June, our joint venture with BRAVO purchased 4 retail parks from an institutional investor. The acquisition price was GBP 60.5 million and comprises 4 retail parks, 3 in Scotland and 1 on the Isle of Wight. These parks are highly complementary to our existing portfolio and display the key characteristics that we look for; a low entry price, robust cash flows and alternative use potential. The entry price was very attractive at a yield of close to 10% with a capital value per square foot of less than GBP 60.

The cash flows are robust, underpinned by a low rent per square foot with excellent trading performance of the retailers at those assets. In fact, the average rent-to-sales ratio is only 6.5%. And based on analysis of retailers' performance, we believe that this is very affordable for them. Given the low entry price and the sustainable cash flows, our base case underwriting supports an IRR to NewRiver of 17%.

And moving on to our most recent acquisition in the joint venture. We completed the acquisition of the Poole Retail Park last month with NewRiver taking a 10% stake. This retail park is located between the town centers of Poole and Bournemouth within a large and affluent residential catchment. It is now the largest retail park in our portfolio but importantly, it displays the key characteristics that we look for. It has our diverse occupier lineup that includes many of the retailers that we have existing strong relationships with, such as Boots, Next, and Home Bargains and some new entrants to our portfolio, such as John Lewis. As well as generating a high-income return on equity, the park offers a very significant development opportunity on the Homebase site where we have a landlord's break due to their CVA. In 2016, this park was valued at GBP 71 million. And the fact that it has been acquired by our joint venture for just under GBP 45 million just shows what great opportunities there are for us in this market.

As I said, during the period, we signed almost 340,000 square feet of new lettings and renewals, which does demonstrate the truly active approach that we apply across our entire retail portfolio. And 1 great example of this over the last 12 months has been our shopping center in Hastings. First, in leasing activity. In December of last year, we upsized JD Sports; in March, we opened a 40,000 square foot Primark store in the former BHS; and during the first half, we signed renewals with Superdrug, HMV and Amazon Locker; and in August, we signed a deal with Muffin Break to enter the former JD Sports unit, providing the mall with a food and beverage offer.

In addition to this, over the last 12 months, we've invested to improve the center facilities, such as toilets and baby changing. We secured planning permission for a gym to take the first floor above the new look unit and we've worked hard on reducing service charges, which is a major focus of ours across our entire retail portfolio. And this active asset management has seen a number of benefits, as shown on the right-hand side, of this slide.

And finally, on to risk-controlled development pipeline, which now totals 2.3 million square feet. In addition to our major projects at Burgess Hill and in Cowley, Oxford, the first half saw significant progress in smaller developments across our portfolio. In Romford, we exchanged on a forward funding agreement to deliver a Premier Inn. In Witham, we received positive feedback on our planning application to deliver 72 residential units and a health care center. And in Hull, we have planning approved to build 58 residential units above the shopping center.

We also entered into a preplanning phase on our mixed-use redevelopment of Grays Shopping Center, which we acquired in June 2018, and I'll talk about that in a moment. The development pipeline does provide us with flexibility as to how we proceed with developments. And for the vast majority of our pipeline, we expect to develop projects in joint ventures or sell the sites with a benefit of planning to release capital earlier and in a more efficient way.

So looking at Grays in a bit more detail, which actually is a great example of alternative use value in our portfolio. We acquired the center in June 2018, as we recognized a significant development opportunity at this site, which is located only 35 minutes from Central London by train. The center was built in the 1960s, and it has served its community well. But given the changing nature of retail in the town and the surrounding borough, there is significant scope to reduce the retail footprint and provide much needed residential units to revitalize the town center.

And we are currently working in close partnership with Thurrock Council to bring forward a redevelopment plan that will reduce the existing retail floor space and increase public open areas as well as providing up to 900 residential units. And we've entered the preplanning phase during the period, and our next step is to submit a joint outline planning application, which we expect to do so by the middle of next year.

Now I just want to talk -- touch on the progress we've made in the area of sustainability. As an owner of assets located in communities across the U.K., we are very committed to enhancing the lives of the people we serve, whilst minimizing the impact we have on the environment. And we have an advantage here as our assets are highly accessible with an average journey time of less than 12 minutes, and the majority of our customers traveling to our centers on foot or by public transport means that our assets have a lower environmental impact. At the same time, we aim to be good neighbors by supporting local causes and actively managing our assets to address the needs of communities. We were, therefore, delighted to have our efforts recognized with the receipt of a GRESB Green Star award in September for the second consecutive year, with a 13% improvement on the score from the previous year and a 94% improvement from our first entry to the benchmark in 2016.

So to finish, I just wanted to look ahead to the rest of the financial year. We will continue to sell assets. We are confident of sourcing some great acquisition opportunities, and we will continue to expand our asset management platform, all of which will drive earnings growth and improve our dividend cover position.

And now Mark and I'd be very happy to take your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Tom Musson, Liberum Capital Limited, Research Division - Research Analyst [1]

--------------------------------------------------------------------------------

It's Tom Musson from Liberum. Just two questions, if I can. Firstly, in the retail portfolio, can you give us any color on the occupancy by assets? So I'm sort of thinking regional shopping centers versus London shopping centers versus retail parks, just to get an idea of the occupant, like the range there. And secondly, on the development pipeline, I just noticed the opportunity from additional residential potential sort of 5 to 10 years out has decreased since the full year. Is that because some of that has moved into the near term pipeline or has there been a reappraisal there?

--------------------------------------------------------------------------------

Allan Lockhart, NewRiver REIT plc - Founder, CEO & Director [2]

--------------------------------------------------------------------------------

Okay. So first of all, just in terms of our occupancy, we're not seeing any trends relating to occupancy levels between our regional shopping centers and our London-based shopping centers. Generally, across our entire portfolio, most of our shopping centers operate with high occupancy. Where we have slightly lower occupancy is really in centers that we are advancing development projects like Burgess Hill, et cetera.

Your second question was in relation to residential projects. Well, I mean, our overall residential development pipeline has actually increased over the last 12 months from around 1.9 million square feet to now 2.3 million square feet, and that's largely as a result of the introduction of Grays into our portfolio, where we have a very significant residential development opportunity. Was that -- does that answer your question, Tom?

--------------------------------------------------------------------------------

Tom Musson, Liberum Capital Limited, Research Division - Research Analyst [3]

--------------------------------------------------------------------------------

It was actually just specifically -- I think you've identified previously sort of 900,000 square feet of additional residential potential from sort of building up above assets sort of 5 to 10 years out. I saw this morning that, that number is now around 600,000. So I just wanted to know what the moving part there was.

--------------------------------------------------------------------------------

Allan Lockhart, NewRiver REIT plc - Founder, CEO & Director [4]

--------------------------------------------------------------------------------

That's partly reflective of some of the disposals that we made during the period. We sold a small shopping center that had long-term residential development opportunity, but we made the decision that it was in our interest to recycle our capital. So it's probably partly reflecting that. But as I said, we do see this as a major trend going forward around the market dynamics where we operate in a market with too much space. And to get back to a more healthier market, a lot of that excess retail space does need to be repositioned and much of that will be for residential, but other uses like leisure, arts, culture, education and so on. And we believe that we're in a great position to participate in that change because there are very, very few platforms that have got the capability to manage multi-tenant retail assets in an intelligent way and also have the development skills to reposition assets and we combine both, and that's why we're very optimistic around our long-term prospects. And another reason why we are targeting local authorities, in particular, who we believe have to intervene more in their town centers, after all local authorities have a much longer investment horizon and have access to a lower cost of capital. And we think this could be a real good growth area for NewRiver going forward.

--------------------------------------------------------------------------------

James Carswell, Peel Hunt LLP, Research Division - Analyst [5]

--------------------------------------------------------------------------------

I'm James from Peel Hunt. Just in terms of capital allocation, the majority of the capital invested in the last couple of years has been in retail parks and also in the pubs portfolios, given what shopping center valuation is, I'm just wondering, are we close now to the point where you're starting to see value in shopping centers in the market? And is that something we should expect to see happening, I guess, particularly in the BRAVO JV? Or is it still the focus is more on pubs and retail parks at the moment?

--------------------------------------------------------------------------------

Allan Lockhart, NewRiver REIT plc - Founder, CEO & Director [6]

--------------------------------------------------------------------------------

Well, I think the first point I would make is that we're always opportunistic, but we do look at everything on a risk-adjusted return basis. But if Land Securities was to come to me and say, "Look, would you buy new Bluewater for GBP 1?" Clearly, we would acquire Bluewater for GBP 1. But our own view over the next of the 5 years is that we do see better risk-adjusted returns in retail parks and, of course, in pubs, but we always remain opportunistic.

--------------------------------------------------------------------------------

Sander Bunck, Barclays Bank PLC, Research Division - VP of Real Estate Equity Research [7]

--------------------------------------------------------------------------------

Sander Bunck, Barclays. Two questions, and I'll just go through them one by one. First one is on the cost side. I'm aware that you are targeting underlying FFO improvement of GBP 1 million to GBP 3 million based on sharper asset management and operational efficiencies. Now in the first half of this year, those costs came up quite a bit for various reasons. So just kind of wondering the GBP 1 million to GBP 3 million target, is that based on this new higher cost base or is it compared to the full year?

--------------------------------------------------------------------------------

Allan Lockhart, NewRiver REIT plc - Founder, CEO & Director [8]

--------------------------------------------------------------------------------

Do you want to take that question, Mark?

--------------------------------------------------------------------------------

Mark Davies, NewRiver REIT plc - CFO & Director [9]

--------------------------------------------------------------------------------

Yes. I think this reporting period, we've not made it very easy for you. It hasn't been easy for me actually because we've got IFRS 16 coming through, the internalization of the pub platform, so it makes the comparisons quite difficult. I showed on one of the earlier slides, as you know, the admin costs had gone up as a consequence of that and property operating expenses had come down. When we talk about efficiencies, particularly in asset management, I think we're talking about 2 things; driving more income and taking cost out of the business. When we talk about cost, Allan, I think, alluded on one of the earlier slides to driving down service charges particularly, because if we have any vacancy, obviously, those costs become ours. So it's granular, it's accumulation of marginal gains. There's lots of different initiatives that stand behind that. I guess, the -- much of your question is in terms of basing that strategy going forward, you should base it on the higher cost base, which includes the internalization of the management.

--------------------------------------------------------------------------------

Allan Lockhart, NewRiver REIT plc - Founder, CEO & Director [10]

--------------------------------------------------------------------------------

I think the other point to make there is that over the next 5 years, it is likely that we are reshaping our portfolio. Our waiting in shopping centers has been coming down, will probably continue to come down. Our waiting in pubs will increase and our waiting in retail parks will increase. Of course, as we increase our waiting in pubs, we will get better cost efficiencies. And in terms of our retail parks, there's no doubt that managing retail parks on a cost basis is more efficient than managing shopping centers because within shopping centers, a lot more services and skill sets are required. And so we do see over the medium term that we'll be able to deliver those cost efficiencies.

--------------------------------------------------------------------------------

Sander Bunck, Barclays Bank PLC, Research Division - VP of Real Estate Equity Research [11]

--------------------------------------------------------------------------------

Sure. Just kind of a small follow-up on that. I think you disclosed an EPRA cost ratio of around 43% this morning. What kind of number are you targeting in that respect? I think it was around 20% in the full year, and you must have changed the definition somehow, so it's now around 43% according to your disclosure. So what kind of ratio are you targeting there going forward?

--------------------------------------------------------------------------------

Mark Davies, NewRiver REIT plc - CFO & Director [12]

--------------------------------------------------------------------------------

Yes. We've -- if you go through our principal policies and guidelines, our principal cost ratio has always been our admin cost ratio to keep that below 15%. I know that's not answering the question, but I will come to that. It was low at 12.5%, I think, gone up to 14.9% in the period, so still in line with guidance. The EPRA cost ratio, we do disclose it because we're, obviously, required to do that. It's not a ratio that we've given guidance on in the past. It's not a ratio that we have given too much emphasis on in the past, partly because of the nature of our portfolio, particularly the leasehold nature of the portfolio, ground rent payments coming through and the pub portfolio as well. So I don't think we've given any target, any guidance. Happy to just talk you through where we are and where that -- we think that's going in the future, but we could pick that outside later, if that's okay, Sandy.

--------------------------------------------------------------------------------

Sander Bunck, Barclays Bank PLC, Research Division - VP of Real Estate Equity Research [13]

--------------------------------------------------------------------------------

That's right. And second question was -- is on the dividend cover. And I appreciate that, that cover has improved year-over-year, but it is down, I think, in the full year, it was 84%, it's now 80%. So how are you looking at a trajectory going forward? And within what time frame do you expect to get on a P&L basis dividend cover? And basically, would you consider doing something about the dividend just to get yourself in an easier position to get that?

--------------------------------------------------------------------------------

Allan Lockhart, NewRiver REIT plc - Founder, CEO & Director [14]

--------------------------------------------------------------------------------

No. We are maintaining the current dividend as we have in the first half. We're very confident that we will get ourselves back to a fully covered dividend. We've made progress from the prior period, growing from 78% to 80%. Yes, you're right, we're behind where we were in our March year-end, but you obviously need to take account of the annualized earnings from the acquisitions that we have made. So ultimately, on an annualized basis, our dividend cover is actually going to be higher than 80%.

And as we continue to focus on our key strategies to reestablish dividend cover, which is capital recycling, we're confident of achieving that for the reasons I outlined earlier and as we grow our asset management platform in terms of fee income. We're confident we will be able to reestablish dividend cover. And that's why we've maintained the dividend for the last 6 months, and we've announced our third quarter dividend at the same level.

--------------------------------------------------------------------------------

Sander Bunck, Barclays Bank PLC, Research Division - VP of Real Estate Equity Research [15]

--------------------------------------------------------------------------------

Have you set a target in terms of time line?

--------------------------------------------------------------------------------

Allan Lockhart, NewRiver REIT plc - Founder, CEO & Director [16]

--------------------------------------------------------------------------------

Well, we -- our target around this is over the next sort of 18 months to 2 years in terms of getting our dividend cover. But that could happen a lot quicker depending around our capital recycling program.

--------------------------------------------------------------------------------

Mark Davies, NewRiver REIT plc - CFO & Director [17]

--------------------------------------------------------------------------------

I think you have just emphasized the importance the management place on dividend and dividend coverage. It's very important to our shareholders when you got to look through our shareholder register and the types of investors that backed us over many, many years. We mentioned it twice in our presentation that we paid out nearly GBP 300 million in dividends in the last 10 years, and we did that for a reason because we're very proud of that. But it is a key priority. We're very aware of that. It's come up on many of the calls I've already done this morning. I think it's really important that we maintain the dividend. I think that demonstrates the confidence that we've got in the business. And I think if you look forward, Allan has dealt with short and medium term, but I think if you look at the next 12 months, there will be improvement in the cover by the time we sit here in 6 months' time, and we're moving towards the 90% level, and we'd like to be there at the end of the financial year and look forward to demonstrate with more confidence about getting to full cover in due course.

--------------------------------------------------------------------------------

Matthew Saperia, Peel Hunt LLP, Research Division - Analyst [18]

--------------------------------------------------------------------------------

It's Matt Saperia from Peel Hunt. I guess, following on from Sander's question about cover, thinking about the asset management platform, I think you said you've signed 4 mandates, you've got several others under negotiation. What capacity do you have to take on additional ones and, therefore, how lucrative could the income stream that comes from that be ultimately?

--------------------------------------------------------------------------------

Allan Lockhart, NewRiver REIT plc - Founder, CEO & Director [19]

--------------------------------------------------------------------------------

Well, we do have capacity. We've grown it quite substantially over the last 12 months, as I mentioned. We're now, on an annualized basis, generating GBP 1.2 million of asset management fees, which is double the position 12 months ago, and we've been able to achieve that without putting any additional costs into the P&L. I think the potential is very, very significant going forward. We really believe that we are -- have the best asset management platform operating in the U.K. retail real estate market. Many, many town centers and small centers are going to require change and investment, and we think local authorities are going to be at the forefront of that. And we are uniquely placed in that regard because of our expertise and relationships that we have with the retailers, the skill sets we can offer local authorities a huge amount. But on top of that, we've got great corporate governance. We're a FTSE 250, we have diversity targets at board and [execute] , which we fully comply that. And local authorities really like that. It's important to them because they're all subject to the same governance points. And there are very, very few competitors for us. And this is why we think it's a great opportunity, and this is why we've invested in this strategy, not only through our marketing material, but also we've reallocated some internal resources to really pursue and -- this key strategy of ours.

--------------------------------------------------------------------------------

Mark Davies, NewRiver REIT plc - CFO & Director [20]

--------------------------------------------------------------------------------

Matt, I think, just picking up on Allan's point, we're actually going to -- yes, I would add to that, that there could well be opportunities in our pub business as well because we've got a really good platform team of 50 people in Birmingham, who are more than capable and able to asset manage as well as own and invest in portfolios. So I think it's quite likely with all the sort of increased transaction activity we've seen in the pub sector that we'll continue to get approaches with a view to managing portfolios on behalf of third parties, and we're quite capable and able to do that. So that's something I could see happening over the next 12 months.

--------------------------------------------------------------------------------

Clive W. Black, Shore Capital Group Ltd., Research Division - Head of Research [21]

--------------------------------------------------------------------------------

Clive Black from Shore Capital. Following on from the pub point you make there, what scope is there for self improvement in the operation of your pubs? You had very good growth in EBITDA from supply chain factors you talked about, but what is the self improvement potential? And what sort of range from an operating perspective is there within your stay at the moment?

--------------------------------------------------------------------------------

Mark Davies, NewRiver REIT plc - CFO & Director [22]

--------------------------------------------------------------------------------

Yes. So there's probably a couple of answers within that question. I think the most identifiable improvement is the ability to deploy CapEx on the projects that we did in the first half year. We did about GBP 1.6 million of investments, got 24% return on investment, which is very high. It's very, very difficult to get that in other asset classes, including retail. In terms of the sector as a whole, if you look at not just our portfolio but wet-led pubs as a sector, delivering about 1.8% growth in terms of where that's coming from, volumes are pretty stable, in some cases, slightly down, but you can get that back through price. But you can only deliver that performance if you manage your assets skillfully, intensively, get the right people in the right proposition. You can drive down your cost base, and I've talked about some of those things in the slides earlier. And one of the great things about investing in the pub sector right now is the demand-supply economics are really favorable, where they haven't been for a long, long time. So it just makes the market more competitive. And as a consequence, you can increase your prices, which clearly drives your revenue.

--------------------------------------------------------------------------------

Clive W. Black, Shore Capital Group Ltd., Research Division - Head of Research [23]

--------------------------------------------------------------------------------

But within the estate, is there a lot of variable performance to the extent you can benchmark yourself best-class pub, worst-class pub that can drive the whole average operating performance higher?

--------------------------------------------------------------------------------

Mark Davies, NewRiver REIT plc - CFO & Director [24]

--------------------------------------------------------------------------------

Yes, you'd be surprised, actually, Clive. I mean, I think the -- it's quite a wide range. We'd have some pubs that are probably delivering an EBITDA as low as GBP 20,000 a year. And we'd have some that were delivering close to GBP 140,000, GBP 150,000. So it's a really wide range. There's challenges and opportunities in that, of course. I think the opportunity is to take a pub that's doing GBP 20,000 to GBP 40,000 EBITDA in previous ownerships that we've acquired these assets in the last couple of years and often, we can double those EBITDAs. Sometimes it requires capital investment; very often, it's just these assets have been under-managed, sometimes neglected, and we can get better performance because of the platform that we've got and the capability within the business.

--------------------------------------------------------------------------------

Allan Lockhart, NewRiver REIT plc - Founder, CEO & Director [25]

--------------------------------------------------------------------------------

I mean, as you know, Clive, we're not -- we're never emotionally attached to our assets. And we can still benefit from earnings growth through capital recycling within our pub estates. And we'll have an active program of selling pubs and then releasing that capital and reinvesting that into new pub acquisitions where the earnings growth is going to be higher and the potential is going to be better.

--------------------------------------------------------------------------------

Mark Porter;NatWest;Relationship Director, Leisure Team, [26]

--------------------------------------------------------------------------------

Mark Porter from NatWest. In previous presentations, you've given guidance on where you'd like to take the pub portfolio to. I notice today, you're at 22%, I think, of the portfolio. Have you intentionally removed a cap to give yourself unlimited runway in the pub sector?

--------------------------------------------------------------------------------

Allan Lockhart, NewRiver REIT plc - Founder, CEO & Director [27]

--------------------------------------------------------------------------------

No. We originally set ourselves a sort of 20% limit, but that was reflective of the time that our pub estate was externally managed. And we knew in that structure, it was going to limit our ability to deploy capital into the pub sector wisely in terms of growing our pub estate. And that's why we wanted to have a fully internalized management capability in the pub sector in order for us to deploy more capital. And we have achieved that. We achieved that last year when Mark and the team led the acquisition of Hawthorn Leisure, where they're a fantastic pub management business. We now got that. So we are now in a position where we can consider deploying capital into the pub sector, and there will be opportunities for us going forward. But as I said earlier, we look at everything on a risk-adjusted return basis. Our core markets are obviously shopping centers, retail parks and pubs. And so we will allocate capital depending upon where we can get that best risk-adjusted return, sometimes it will be pubs, sometimes it will be retail parks, and it may be shopping centers in the future. But that's our approach.

Okay. I think we're finished with questions. But I just wanted to say a big thank you for taking the time to come along and hear our half year results presentation. Thank you, everybody.