NewRiver REIT plc (NRR) Earnings Call Transcript & Summary

Okay. Good morning, everyone, and welcome to our Half Year Results Presentation. I'd like to start with how we view our current position. Today, we believe that our occupational market is in the best position it has been for at least 5 years. Our portfolio is performing well, delivering another period of positive leasing, our highest occupancy since 2009 and a very high tenant retention rate. Capital markets do remain disrupted from high interest rates, but retail is one of commercial real estate's top performers and NewRiver has once again outperformed the wider retail real estate market. Our balance sheet is arguably one of the strongest in the listed real estate sector with one of the lowest LTVs and net debt-to-EBITDA ratios. And we have one of the best interest cover ratios and one of the highest portfolio yield spreads to the 10-year gilt. All of this means we are in the strongest position we have been for 5 years. That said, we are not complacent as we have much more to achieve. We saw active demand for space in our portfolio, leading to excellent leasing performance with our highest ever occupancy. These operational metrics delivered underlying funds from operations of GBP 12.3 million and a half year dividend of 3.4p per share, 118% covered. As it has consistently done over the last 5 years, our portfolio has outperformed its MSCI benchmark on a total return, partly due to its inherent high income component. The like-for-like valuation movement of minus 2% was concentrated in just one asset in our Regeneration portfolio. Our LTV improved further to 29.5%, supported by a strong operational performance, resulting in excellent cash generation as we ended the year with GBP 138 million of cash, up from GBP 111 million in March. And this means our balance sheet is in great shape as we have no drawn debt maturity until 2028 and all of our interest costs are fixed. Finally, we are committed to delivering our ESG strategy and are making good progress, especially relating to a reduction in energy consumption. Taking all of this into account, we believe we are well positioned to deliver consistent growth. And now we'll move to a review of our marketplace. Despite high inflation and interest rates, the U.K. consumer continues to be more resilient than many had feared and continues to spend. The value of retail sales has increased and is significantly above prepandemic levels. And this is largely to be expected due to inflation. But encouragingly, the volume of retail sales has also recovered. This is supported by very low rates of unemployment, excess consumer savings and rising wages, which have led to an increase in consumer confidence. Now clearly, consumers are not immune to the cost of living squeeze, and so consumers have been adapting some of their behavior. We have seen a trend of consumers focusing on value by shopping around and down trading to lower-priced grocery. And our portfolio is ideally positioned in that regard. Looking ahead, living standards are set to rise with wages growing faster than inflation, and this should underpin consumer spending into 2024. We believe that our occupational market is in the best position it has been for at least 5 years. And there are 4 key reasons for this. Firstly, as we highlighted on the previous slide, the consumer has proven to be resilient, leading to good spending, which retailers are benefiting from. Secondly, so much corporate restructuring in retail has already taken place, removing the weakest retailers and excess competition from the marketplace. Thirdly, over the last 10 years, most retailers have focused on profit and delivering operational efficiencies, not just volume growth, including extensive work in portfolio repositioning. And a great example of that is what M&S are doing. And finally, omnichannel retailers are winning further market share of online sales from pure-play retailers through fully integrating their online channel with their last mile store network. And this demonstrates the true value of the physical store, and we expect that trend to continue. The real estate markets continue to be impacted by high interest rates, albeit market data suggest value declines are moderating, but it's also the case that transactional volumes are at historically low levels. Retail real estate continues to be more insulated, given the significant yield premium to the 10-year gilt, and NewRiver portfolio even more so as our portfolio yield premium is 450 basis points higher than the 10-year gilt. And as you can see on the slide, we continue to significantly outperform MSCI All Property and All Retail indices over the last 6 months and 12 months. We believe this is due to our long-held view of the importance of income, our portfolio positioning, better liquidity and the quality of our asset management. Transactional activity in the commercial real estate sector is at historic lows. And therefore, it's important to have a portfolio aligned to the available liquidity. For Shopping Centers, year-to-date, the average transaction size was GBP 24 million versus the 10-year average of GBP 50 million. Indeed, there's been only one true open market shopping center transacted this year at above GBP 100 million. Our portfolio is more aligned to the market liquidity as our average portfolio size is GBP 18 million. Retail Park liquidity is better than Shopping Centers, albeit transactional volumes are down this year following 2 strong years. Again, size matters as transactions are concentrated between GBP 15 million to GBP 25 million. And for context, the average lot size of our Retail Park portfolio is GBP 15 million. Given that our portfolio is more aligned to available liquidity, we've been able to complete GBP 31 million of sales in the period. We consistently expressed our confidence in our portfolio and the last 6 months was no exception with an increase in occupancy, tenant retention and a strong leasing performance. As an example, from April 2020 to September 2023, long-term leasing transactions secured GBP 17.9 million of annual rent, equating to a 10-year annual compound growth rate of just minus 0.2%. Now given the disruption within the retail sector over the last 10 years from the growth of online and COVID, our leasing performance over the last 3.5 years really demonstrates the underlying resilience in our rental cash flows. Of course, it also helps that we have a market-leading asset management platform, which you need in the highly operational sector that retail real estate has become. Moving now to our valuations. The performance, which again outperformed the MSCI experienced a like-for-like movement of minus 2%. Our Core Shopping Centers and Retail Parks delivered positive capital returns. We've now had 5 financial reporting periods of broadly stable valuations in our Core Shopping Centers and Retail Parks. Our Regeneration portfolio experienced minus 7.9% valuation movement as a result of inflation impacting development costs and the recent slowdown in the housing market. Our Work Out portfolio, which only accounts for a modest part of our total portfolio was broadly stable and a significant improvement from the last 12 months. We've always held the view that income returns over the long-term are the key driver of total returns. And given our high portfolio yield, you can see the importance of that income return in our long-term total return outperformance relative to MSCI. We take our role as the custodian of assets within the community very seriously, and we believe that we are on track with our pathway to Net Zero and are fully compliant with current MEES legislation. Highlights in the first half include a significant reduction in gas and electricity which has been driven by several factors, including our ongoing installation program of LED lighting. Our progress continues to be recognized with an improved GRESB score and by retaining our Gold assessment by EPRA. What is particularly pleasing is that GRESB rated NewRiver first out of 1,013 European real estate companies for management, which means that we are performing particularly well for implementing comprehensive risk management, stakeholder engagement and governance. The energy our occupiers consume accounts for almost 90% of our total carbon emissions. These are emissions over which we have limited control, but we continue to develop our engagement to support alignment between our climate ambitions and those of our occupiers. And so we're pleased to report that 60% of our total lettable floor space is occupied by retailers that have already publicly set emission reduction targets, and we expect that to increase over the coming years. And with that, I'm now going to hand over to Will, who will take you through the financial results.

Thanks, Allan, and good morning, everyone. It's my pleasure to be taking you through our half year results today, starting with our key balance sheet and debt metrics. And you can see from this slide that our financial position has improved further from the already strong position we reported 6 months ago. With our key debt metrics, net debt-to-EBITDA, LTV and interest cover all improved during the first half, and all at or close to the best levels we've ever reported. Cash has increased again to GBP 138 million, which improved to GBP 238 million when you include our undrawn revolving credit facility. And I'll have more on that in a moment. This position is supported by our low and attractive cost of drawn debt, which is fixed at 3.5%. And because we have no maturity on drawn debt until 2028, that will remain the case for a number of years to come. Next, our revolving credit facility, which as we were pleased to announce separately last week, we've recently extended from August 2024 to November 2026 and further to November 2028 if we're successful in securing bank consent on our 2 plus 1 options. At the same time, we've reduced the facility size from GBP 125 million to GBP 100 million while also reducing the margin and so to the annual cost. Although not currently drawn, having the RCF available to us gives valuable access to additional liquidity. So we currently have access to up to GBP 238 million of cash and liquidity, and subject to bank consent, an additional GBP 50 million of accordion [ too ]. It also demonstrates the support for NewRiver in the credit markets and ensures that we've maintained continued access to multiple sources of funding. Lastly, I'd like to thank Barclays, HSBC, NatWest and Santander for their long-term and continued support of our business, which we see as a great endorsement of the strength of our operations and financial position, our best-in-class asset management platform and our well-positioned portfolio. I'll now spend a moment covering our financial policies, which form a key component of our approach to financial risk management. On the left of the slide, you can see our reported position versus our policy, which shows that we're comfortably in compliance across the board. I'll pick up dividend separately later on. But the charts on the right of the slide show that the position across our 4 debt-related financial policies is the strongest it's been since 2018 and even further back than that in most cases, which we believe is a great place to be in the current market and a great position from which to grow. Moving on to look at loan to value in a bit more detail and starting with the key drivers of the movement this time. You can see that the disposal of Napier, the joint venture we established with BRAVO back in 2019 is the key driver of the reduction from 33.9% 6 months ago to 29.5% now, offset slightly by the modest 2% valuation decline seen in the first half, which was concentrated on our Regeneration portfolio. Importantly, our Core Shopping Centers and Retail Parks delivered another period of stability. And we continue to outperform the MSCI benchmark. And then lastly, the final driver of the first half reduction was UFFO retained after paying the full year dividend. Next, LTV guidance from here. Over the last 18 months, we've consistently said that we would not rush to redeploy to our 40% guidance level. And in the near term, we intended to keep some headroom to that level and to operate with higher cash holdings given the uncertain macro outlook. Looking back, we believe that this was the right call and has been a key contributor to the position of strength we're able to report today. The difference now is that with an LTV of just under 30%, we're currently in a position to allocate capital whilst also keeping headroom to the 40% LTV level. In recent months, we've certainly seen an increase in the number of acquisition opportunities that could offer the types of compelling returns we've targeted delivering to shareholders. And these opportunities have often been linked to liquidity events, be they market refinancings or fund redemptions as we highlighted would be the case 6 months ago. And in addition, we've recently begun the search for a new capital partner where we can boost our asset level returns with management fees. And pending deployment with the base rate of 5.25%, we're currently earning just over a 5% return on the majority of our cash. So it still made a meaningful contribution to UFFO in the first half. And we've made the decision to pass this contribution straight through to shareholders by topping up the dividend, which I'll cover in more detail shortly. But before that, UFFO which has reduced from GBP 13.6 million in the first half of last year to GBP 12.3 million this year. The key drivers of this movement, including disposals as shown clearly in the bridge on the left-hand side of the slide. But in summary, once one-off COVID-related credits in the prior period are factored in, principally the final collection of COVID rental arrears and the settlement of a COVID insurance claim, the businesses continued to deliver positive operational performance. I'll have more on net property income in a moment, but regarding the other UFFO line items. Admin costs have reduced by 12% over the last 2 years and are down by GBP 0.2 million or 4% half-on-half despite inflation, reflecting the positive impact of our ongoing cost savings initiatives. Other income relates to COVID income disruption insurance settlements and has reduced by GBP 1 million half-on-half because as I've just mentioned, last year, we received GBP 1.4 million relating to our car park income. And during the first half of this year, we received GBP 0.4 million relating to commercialization income. Lastly, net finance costs, which have benefited from the income we're currently generating on our cash balances, now over 5% on the majority of our holdings. Next, more on net property income. And you can see that after adjusting for the GBP 54 million of disposals completed this and last year, NPI has reduced modestly from GBP 23.8 million to GBP 23 million. And that the key driver of this reduction is the release of rent provisions in the first half of the prior year. This is because over the last 2 years, we've been successful in continuing to collect COVID rent arrears. These arrears were significantly provided against during the pandemic. And due to the success we've had in collecting the arrears subsequently, we've been able to release the provisions resulting in credits to the income statement, including in the first half of the prior year, by which time, rent collections for COVID arrears were finalized. So we saw no further benefit from these provision releases in the second half of last year, and we've seen no further benefit in the first half of this year, which is why you can see a reduction on the slide. Next, like-for-like income, which is broadly flat and importantly, was modestly positive across all subsectors other than Work Out, which we've targeted exiting by the end of this financial year. Lastly, asset management fees from our capital partnerships, which have increased by GBP 0.5 million or over 70% from the first half of the prior year, underpinned by the new M&G asset management mandate, which started in the final quarter of the prior year. Asset management fee income is currently on track to reach an annualized GBP 2.5 million in the current financial year. And as we've already communicated, capital partnerships is a part of the business we've targeted growing further from here. Next, the dividend. As you'll be aware, we paid dividends twice per annum announced within our half and full year results and based on 80% of the UFFO reported for the most recently completed 6-month period, with the ability to top up the dividend payout from the 80% base level at the full year. At the moment, and as I explained in my earlier balance sheet slides, we recognize that we're in a very strong financial position with significant cash and liquidity, LTV within headroom to guidance and a low cost of debt that's fixed until 2028. We're now starting to see compelling capital allocation opportunities emerge. And the strength of our position means we'll be able to move quickly to access these opportunities. But we also believe that our shareholders' patience should be rewarded while we wait to deploy. So we've decided to temporarily flex our half year dividend payout upwards by paying out 100% of the interest income earned on our cash holdings during the first half. Number one, on the left-hand side of the slide shows that interest income contributed 0.8p per share to UFFO in H1. And as highlighted by numbers 2 and 3 on the slide, the entire 0.8p per share is being paid out as dividend this time. This increases the H1 dividend from 3.2p per share per our policy to 3.4p per share and increases the payout ratio for H1 to 85% from our 80% base level. By doing this, we're able to reward our shareholders with an enhanced dividend yield as we await the compelling investment opportunities we expect to materialize in the near term with a dividend that remains comfortably covered by UFFO. And subject to deployment progress in H2, our intention would be to top up again at the full year. Lastly for me, I'd like to expand on the key areas we expect to contribute to UFFO growth from here. On the left-hand side of the slide, we start with the 4p per share of H1 UFFO we've reported today. We then annualize this, removing the impact of items that benefited the first half of FY '24, but will not benefit the second half, being completed disposals principally Napier, and one-off stating back to COVID, such as the income disruption insurance proceeds received during the first half, and to add in items that will benefit the second half of FY '24 more than the first half, mainly a full year of income earned on our current levels of surplus cash, which gives a 7.7p per share as a start point. We then add in the returns we expect as we complete our Work Out disposal and turnaround strategy, highlighted as #1 on the slide. Through the disposal of 4 Work Out assets and recycling the capital from those disposals into repositioning the remaining 5 Work Out assets, which will then join our core portfolio with a net contribution of a further 0.2p per share of additional and importantly, sustainable income. Next, our capital partnerships. Our revenue stream we're actively expanding at the moment and which generates recurring asset management fee income, highlighted as #2 on the slide. We had success in the final quarter of last year, signing a key new mandate with M&G Real Estate, which has already been expanded twice during the current year with the addition of 2 further assets, and which alongside our other mandates, means we're on track to achieve annualized fee income of GBP 2.5 million by the end of FY '24. That's the lower end of the medium-term target range, which we announced back in 2019. And we're confident that we have the capacity to leverage our market-leading asset management platform further to deliver on the second GBP 2.5 million of our target, which is the 0.8p shown on the slide. Next, #3, capital deployment. We're very focused on deploying into the right opportunities with sufficiently attractive returns. And we've included an illustrative 1.1p per share as an indication of the incremental benefit over and above the returns we're currently generating on our cash as we deploy. We're confident we can grow UFFO from these building blocks and more besides. And you can see some examples of further growth drivers as #4 on the slide, such as like-for-like rental income growth, which we saw in FY '23 and again in the first half in our core portfolio, which in the future could feed into valuation growth, which would in turn increase our deployment capacity. And we also have the potential for further capital recycling out of lower-yielding assets and into higher-yielding assets. Thank you all for listening. I'll now hand you back to Allan.

Thanks, Will. Moving now to a review of our portfolio. Our Core Shopping Centers are long-term holds for us due to their reliable cash flows. We've seen active demand for space reflected in an occupancy of 98% and a tenant retention rate of 99% and 3.5 years of leasing transactions exceeding ERVs. Our Core Shopping Centers are valued off a net initial yield of 9.5%. And given the security and quality of the underlying cash flows, it is no surprise that they have significantly outperformed MSCI on a 1-year, 3-year and 5-year period. On a total return, the last 6 months outperformance was 440 basis points. Our Retail Park portfolio has had another year of delivering strong operating metrics with occupancy at 98% and a tenant retention rate of 100%. We continue to see strong occupational demand for our Retail Parks, which are highly compatible with omnichannel retailing, and so the tight supply in our portfolio means that we expect to deliver consistent rental growth. Our Retail Park portfolio significantly outperformed MSCI on a total return by 150 basis points, reflecting our consistently higher income return and more stable valuation performance. We're seeking to deliver capital growth in our Regeneration portfolio by securing planning consents on the redevelopment of surplus retail space, principally for residential, then selling to residential developers as we have done previously in Cowley and Penge. Our 3 projects are at different stages in the development cycle with planning consent secured at Burgess Hill and where the asset is currently under offer to a residential developer. At Grays, we have just submitted a formal planning application for 850 residential units, and we hope to receive a planning consent early summer 2024, following which the asset can be sold to a residential developer. Finally, in Bexleyheath in London, which comprises a stand-alone shopping center anchored by Marks & Spencer and a retail park anchored by Sainsbury's, we are making good progress with our master plan, working with the council who are supportive to deliver up to 700 residential units on the surface car park adjacent to the shopping center. Moving now to Work Out, which represents 11% of our total portfolio comprises 9 assets with an average value of just GBP 7 million. Our strategy is to exit from Work Out, which we're seeking to achieve through a combination of disposals and implementation of turnaround strategies to deliver long-term rental and capital sustainability. This year, we are targeting 4 disposals with values ranging from GBP 2 million to GBP 6 million and completion of 5 turnaround strategies, for which we are making excellent progress. So far, we've exchanged contracts on one of our targeted disposals and a further center is under offer. The 2 remaining centers will be sold in Q4. The largest asset in our Work Out portfolio is in Cardiff City Center, which accounts for 31% of Work Out. We've been making good progress and are close to signing a major letting to a multi entertainment operator for over 100,000 square feet, which will transform this asset and importantly, be accretive to both income and value. Given the progress in the first half, we remain on track to exit our Work Out portfolio. Our capital partnership activities are expanding with fee income up 71% since this time last year and are focused on 3 areas. Firstly, in the institutional sector, where we were appointed by M&G Real Estate to asset manage retail portfolio, comprising 16 Retail Parks and 1 Shopping Center. That was then extended in April to include an additional Shopping Center. And more recently, the mandate has been extended again to include a large Southeast Retail Park. Secondly, in the private equity sector with BRAVO in which we coinvest. Currently, this joint venture comprises 1 Retail Park and 1 Shopping Center. In the first half, we successfully completed the sale of 2 Retail Parks in Scotland. Importantly, we're on track to receive a financial performance promote once the final 2 assets are sold. And finally, in the public sector with Canterbury City Council, where we asset managed 2 Shopping Centers and were recently appointed as their development manager to relocate the council's offices to their Shopping Center. We now manage more than GBP 750 million of assets and over GBP 60 million of annual rent on behalf of our partners. And the potential for us to increase our capital partnership activities is significant, given our unique position in the marketplace and our strong track record of outperformance. We're actively pursuing a new partner to operate in the Retail Park sector, the investment case for which we believe is significant. And more recently, private equity and public sector investors have expressed an interest in partnering with NewRiver to focus on U.K. Shopping Centers. Through the decisive actions that we have taken over the last 2 years, including deliberately building up our cash reserves, today, we find ourselves in the best position for 5 years. That said, we have much more to achieve. Our operating results over the last 2 years demonstrate the underlying resilience in our portfolio and platform, and we expect that to continue as we move through next year. Whilst being alert to the wider macro risks, we are confident of our prospects driven by a laser focus on delivering growth in our portfolio, expanding our capital partnerships and spending our available capital wisely. Our clear growth potential is underpinned by a highly experienced and motivated team and a balance sheet that is arguably one of the strongest in the listed real estate sector. Thank you. I think we're going to move to Q&A, and we'll start with questions from the floor, followed by webcast questions. We should have some roving microphones in the room. And for the benefit of those that are dialing in, could you please introduce yourself before asking your question. Let's start with John.

John Mozley, Liberum. So I've got 3 questions, if that's okay. The first one is around the balance sheet and the LTV guidance and the targets, the second one is on capital partners and the third on admin costs. So in terms of the balance sheet, you set very clear metrics as far as the market is concerned to understand that. Obviously, those numbers were set when the world was a slightly different place and interest rates were a lot lower than they currently are. So I just wondered if you have thought about those in that context. And from what you've said, it sounds as if you're looking more on the acquisition front, which will obviously increase those LTVs. So that was my first question. The second one on capital partners would be is the existing capital partnership platform enough to cope with another capital partner or would you need to add some more costs to that? And then my final question on admin cost is obviously, you set a big reduction cost 2.5 years ago, which I think the bulk has now come through. Is there any further to come from that?

Well, let's just touch on the balance sheet. I might just sort of kick off first, Will, and then you can come in on that. We're confident around the strength of our balance sheet. It's not just about LTV notwithstanding. We probably have one of the lowest LTVs in the listed real estate sector. But our net debt-to-EBITDA ratio is the lowest. Our interest cover ratio is over 5x. And we've seen our valuation -- portfolio valuation performance has actually, I think on a relative basis has been very good. Importantly, the majority of our portfolio in our Core Shopping Center, Retail Parks delivered capital returns over the last period. So we feel confident that we're approaching the time where we can really consider deploying capital into opportunities that are going to deliver very compelling returns, and we're starting to see those opportunities emerge. Anything to add there, Will? In terms of expanding capital partnerships, as we grow that business, we will obviously have to bring some resource in to support the growth of capital partnerships, but we'll do that in the right way. We, as a business, would be very, very confident of being able to attract high-quality talent to support our growth ambitions in capital partnerships. And you may, John, have seen that earlier on in the summer, NewRiver was voted by The Sunday Times to be one of the top 100 companies to work for. So it's an organization where we will always be able to attract the right type of talent to support the future growth of the business. Do you want to add anything on that, Will, and costs? Maybe...

[ I assume I should ] pick up the admin cost question, John. So you're absolutely right. 2 years ago, we set an ambitious reduction target. I'm pleased to say that our costs are down 12% over the last 2 years, 4% year-on-year. We've made some big cost savings, moving offices, for example. We've made some savings in professional services, et cetera. Obviously, the inflationary environment at the moment is elevated. So it's more challenging now to make further cost reductions from this point. But we've identified further savings that we would like to target and some ambitious savings. So I would like to think that we can maintain our costs at this level and perhaps even make some further reductions from here. But we're really pleased with that 12% reduction over the last 2 years.

Can you [ give that ] mic. We've got a question from Andrew. Andrew, yes.

Andrew Saunders from Shore Capital. And just looking at your level of service charge recovery, it looks like you've had a big win in the first half, obviously helped by occupancy improving. I just wondered to what extent can that improve further given, I suppose at record occupancy. You're probably not going to see a huge amount of upside in that moving forward.

Do you want to pick up that question, Will?

Yes, I think we've -- I mean we've targeted service charge just general void costs as an area for us to make some savings. You're absolutely right. The fact that the occupancy is at a record level now 98% has really helped us. But over and above that, we've been looking at our service charge budgets, et cetera, over a number of years and making savings where we can. So we're pleased with the reductions to date. And again, like admin costs, we will challenge ourselves going forward to make further reductions where we can.

Question here.

Clive Black from Shore Capital. You both talked about the macro environment. And clearly, your prudence has worked out well. How do you foresee that macro in terms of your attitude of deploying capital? And in terms of that deployment, the competitive environment for assets that you're experiencing at the moment?

Well, I mean you're probably more of an expert on the macro environment than we are, Clive. But from the data that we look at, it's clear that the consumer has held -- the consumer position has held up well, supported by low levels of unemployment, quite high job vacancies, excess consumer savings. And now wages are growing faster than inflation, which should lead to a rise in living standards, which we hope will be a useful underpin for the consumer into next year. And that's very important because we're reliant on our shop and spending the money in the shops, that benefits the retailers and ultimately, what's good for retailers, our retail tenants will be good for us. In terms of the capital real estate markets, it does feel like many commentators are saying that the interest rate may have reached at sort of peak and that may start to moderate. Who knows when, but maybe at some point next year. We've seen some swap rates come down. We're seeing mortgage rates come down a bit. So I think that's positive. That said, in -- when it comes to opportunities, transaction volumes are really low. What that I think partly indicates there is a difference between what sellers are expecting, what buyers are prepared. So that sort of spread, I think will continue to narrow into next year. And we're just so ideally positioned to capitalize on that, find the right opportunities to deliver double-digit annual returns with a sensible risk profile. And of course, it was to be expected. Every year, real estate loans get refinanced, but they're being refinanced into a much higher interest rate environment, and that creates liquidity events, and we're positioned with a lot of liquidity to take advantage of that. Equally, higher interest rates has impacted some institutional funds, particularly through redemptions. And again, we're ideally positioned to take advantage of that. So we believe we've been right to be patient, take our time, build up our cash reserves. We do have that position now where we can actively take advantage of that. And the key for us is making sure that we spend our capital super wisely, and we're determined to do that.

[ Yusuf Samad ], Private Investor. Allan, could you comment on what your valuation outlook might be? We've seen a slide, there's been a big drop in that Regeneration portfolio. So you've taken that, yields are maybe peaking, coming down, cap rates coming down. So -- and the macro environment seems healthy enough. What would you -- would you expect to continue to slide downwards or steady, especially in that Regeneration or Work Out portfolio? Do you think the inflation impacts will continue?

Yes, it's a really good question. It's always difficult to predict the future, especially when it comes to valuations because there are so many external infancies that are very, very difficult to forecast things like wars, massive geopolitical tensions. I mean all of that type of thing can have an impact on capital markets. But really, what we're seeing, we've now had a couple of periods where our core portfolio, our Core Shopping Centers and Retail Parks are providing real stability in our valuations, and we're taking a lot of confidence in that. That's partly reflected that our portfolio yield spread to the 10-year gilt is one of the highest in the commercial real estate market, and that provides us with real insulation. And we're confident that should continue, particularly as we can move through into next year and deliver some rental growth on a consistent basis. The valuation decline in Regen was really to be expected. Inflation has impacted development costs. So construction costs have increased, materials have increased, labor costs for construction workers have increased, and of course, development finance costs have gone up. But we're seeing inflation starting to moderate and come down. I think that is going to be supportive around our Regeneration portfolio. We're seeing that the commentary in the market is that interest rates may have peaked. I think that will be supportive around our Regeneration portfolio. And although the housing market has sort of slowed down in the last 6 months, at the end of the day, the U.K. has a structural issue around the supply of new houses nowhere near matching the demand for new houses. So it's still going to be a growth sector. So we feel confident, ultimately, that our Regeneration portfolio will deliver for the business. I think that's all the questions from the floor, Lucy. Do we have any questions from the webcast?

Great. We've got 2 questions that have been submitted from the webcast. So the first one is from [ Matty Allan ] at [ Paradise ] Capital. What yield projection do you see for your capital deployment? And do you have any negotiations on the table just now?

Matty, yes, we tend to look at everything on a sort of IRR basis, which obviously, the yield is a component, but it's all about what that rental cash flow is going to deliver in the future and whether an asset can deliver capital growth. So we look at everything on an IRR basis, and we're looking to deploy our capital to deliver attractive double-digit annualized returns with a high income component, but also capital growth. And that's how we tend to sort of look at that. And we then weigh that up across all the other options we have in terms of capital allocation.

Great. Second question is from [ John Wright ], who asks, what are the key variables, either macroeconomic or otherwise, that will serve as a trigger for NewRiver to deploy capital more aggressively?

It's really determined on the opportunity. As we stand today, do we have the confidence to deploy capital? Yes, we do. But we want to ensure that we are deploying our capital into opportunities that are going to deliver very compelling returns with a low risk profile. And as and when we find those opportunities, which are starting to emerge, we're confident enough to deploy our capital into that type of opportunity.

Great. Thank you. There's no more questions on the webcast. So that concludes the Q&A. So I hand back to Allan to close.

Okay. Well, thank you, Lucy, and thank you all for joining us this morning. Will and I will be around for a short while. So if you'd like to have any further conversations, please come in and have a [ chatters ]. Thank you.

This presentation has now ended.