NewRiver REIT plc (NRR) Earnings Call Transcript & Summary

Good morning, everybody, and thank you for your time. We were pleased this morning to submit a firm proposal for the combination of NewRiver and Capital & Regional. This follows on from our very successful equity raise last week to partly fund the combination. The transaction comprises of 31.25p of cash and 0.41946 NewRiver shares per Capital & Regional share with an implied offer value of circa GBP 147 million or 62.5p per Capital & Regional share based on NewRiver's undisturbed share price. Circa GBP 50 million of the cash consideration will be funded with the proceeds from our equity raise last week. On completion, Capital & Regional's shareholders will own circa 21% of the combined group with NewRiver shareholders owning the remaining 79%. The transaction is fully supported by the Capital & Regional Board and Capital & Regional's largest shareholder Growthpoint with total irrevocables representing circa 69% of Capital & Regional's issued share capital. Furthermore, Growthpoint have entered into a lockup agreement where they will not sell any shares for a period of 5 months and are required to give written notice of any sales for 4 months after the initial period. The transaction is expected to complete in early 2025, subject to receipt of approvals from the FCA to the proposed change of control of certain regulated entities within the Capital & Regional Group. This transaction with Capital & Regional, a company that we know well and have tracked for several years is an excellent strategic fit that we believe will deliver significant financial and operational benefits. We're very excited with this transaction as our assets are highly complementary with our own portfolio with a low-risk and well-diversified tenant base, offering excellent prospects to deliver future rental and capital growth. Given the attractive entry point and the strength of the underlying rental cash flows, this transaction is estimated to deliver attractive returns. The transaction is also expected to be highly earnings per share accretive due to the high rental income return and the material cost savings of GBP 6.2 million that we can unlock utilizing our existing market-leading platform, which was recently enhanced through our acquisition of Ellandi Asset Management. The transaction delivers increased scale with a combined portfolio of GBP 890 million, and improved market profile, greater share liquidity and robust capital structure with enhanced financial flexibility and a diversified debt maturity profile. As such, we are confident in the strong strategic, operational and financial rationale for this transaction, presenting a unique opportunity to deliver significant mid- to high-teens earnings per share accretion. Capital & Regional will have over recent years, improved the quality of their portfolio through disposals of noncore assets and the acquisition of a high-quality asset in Edinburgh. Today, their portfolio comprises 6 community-focused shopping centers with 88% of their assets by value located in London and the Southeast of England. As you would expect, we've undertaken extensive diligence on Capital & Regional's assets with a laser focus on the underlying rental cash flows further supported by the high-quality customer spending data we received from Lloyds Bank. Knight Frank’, NewRiver's independent valuer has valued Capital & Regional's portfolio at GBP 350 million based on an annualized gross rent of GBP 38 million per annum, providing an attractive equivalent yield of 8.4%, this compares to Capital & Regional's last published valuation of GBP 375 million. One of the key outcomes of our diligence is that their assets benefit from highly affordable occupational cost ratios of only 9%, a great foundation for future rental growth potential. Just in case you are not aware, occupational cost ratio is the ratio of tenants annual turnover to their occupational costs being rent, business rates, service charge and insurance. This slide demonstrates why Capital & Regional's assets are highly compatible with NewRiver's portfolio in terms of customer profile and also tenant profile. Like NewRiver's portfolio, 71% of customers spending their money in Capital & Regional's assets travel less than 5 miles to do so. And over 50% of their customers have an above-average net income. As you would expect with community shopping centers, 87% of Capital & Regional's annual rent is secured against tenants that are focused on value and essential goods and services. With diversified and low concentration in their rental cash flows, Capital & Regional's tenants have a low probability of failure rate over the next 5 years, very similar to NewRiver and below the average for U.K. retail and industrial assets, notwithstanding a 160 to 230 basis point yield premium versus MSCI retail and industrial indices. Both NewRiver and Capital & Regional's portfolios have occupational cost ratios comfortably below 10%, which demonstrates the rents that our combined tenants pay are highly affordable and, therefore, sustainable. This is further supported by both portfolios, delivering year-on-year tenant sales growth well in excess of the national average, which demonstrates that we have the right assets in the right locations with the right tenants for the customers that shop in our assets. At our full year results, we talked about our marketplace being in its best position for 5 years, and that is reflective of resilient U.K. retail sales, falling vacancies and tenant failures underpinned by market rents having been rebased by 23%. Liquidity in the retail real estate capital markets has also improved, reflective of capital values having been rebased by 53%. With an improving occupational market underpinned by a stable consumer and stability in capital markets, we believe that this is an attractive entry point for this transaction. The extensive diligence that we have undertaken has resulted in our assessment that their assets offer deliverable value-add opportunities to enhance both income and capital returns. We already know that their portfolio has highly favorable occupational cost ratios, which should enhance the prospects of rental growth. We believe that their portfolio performance will be further improved as part of NewRiver's market-leading platform that has a strong track record of high occupancy, strong leasing performance and efficient gross to net ratios. Income growth should result in capital growth, but their assets offer further prospects in Walthamstow, Ilford and Edinburgh through the implementation of consented development opportunities and ongoing repositioning. The combination of an attractive entry point, the day 1 high income returns supported by highly affordable and sustainable rents and the value-add opportunities underpinned by operational synergies are set to deliver highly attractive returns. This transaction will result in a combined portfolio valued at GBP 890 million based on a well-diversified annual gross rent of GBP 90 million per annum at an attractive equivalent yield of 8.5%. Importantly, the combined convenience-focused portfolio will continue to be let to tenants who have been delivering sales outperformance because they are focused on value and essential goods and services. I'm now going to hand over to Will, who will walk you through the material cost savings that we will unlock and the robust capital structure post transaction.

Thanks, Allan, and good morning, everyone. It's my pleasure to be taking you through the financial impact and benefits of this transaction. Starting with synergies, which were a key driver of the mid- to high-teens UFFO per share accretion weeks to achieve, principally by removing duplicate costs. As part of this work stream, we undertook a detailed review of Capital & Regional's P&L line items. And while there may be opportunities for cost savings at an asset level in the future, our focus has been on Capital & Regional's admin costs, which, as you can see, highlighted as #1 on the slide, were GBP 8 million in the year to December '23. Offsetting this cost was GBP 1.1 million of property management income received by Capital & Regional for providing property management services across their portfolio. This will not be received by NewRiver post combination because we intend to outsource these services to third-party specialists, consistent with the approach adopted across our existing portfolio, which as you can see from #2 on this slide, leaves GBP 6.9 million of net admin cost, against which we expect GBP 6.2 million of annual synergies highlighted as #3 on the slide. By removing duplicate costs, as noted earlier, principally through the consolidation of Board and other costs related to Capital & Regional status as a plc. The consolidation of the asset operating platform, head office and other operating infrastructure into our well-established and market-leading retail asset management platform. The strength of which was bolstered further by the acquisition of the Ellandi Asset Management business in July. We expect that these synergies will cost GBP 2.9 million to access and that they will be fully unlocked within 12 months of the combination on an annualized basis. And as I mentioned earlier, the unlocking of these synergies is expected to generate mid- to high teens UFFO per share accretion. Enhancing the combined group's ability to pay a higher covered dividend whilst continuing to pursue NewRiver's dividend policy of paying dividends equivalent to 80% of UFFO. Next, debt structure. The combination has no impact on our existing debt. So our 3.5% unsecured bond and undrawn RCF remain in place. We intend to repay the 3 smaller generally shorter dated and more expensive Capital & Regional facilities at completion, totaling GBP 59 million of its total GBP 199 million of gross debt, with a blended cost of over 6% and to retain The Mall facility, which is the largest of the Capital & Regional facilities at GBP 140 million and has the lowest cost at 3.5% with no porting costs and a maturity in January '27. This means the combined cost of debt remains at the current level of 3.5% compared to a combined portfolio net initial yield of 7.4% or equivalent yield of 8.5%. And that post combination, the debt structure remains predominantly unsecured, with a more diversified debt maturity profile, enhanced financial flexibility and increased scale for future financing, which was recognized by Fitch last week when they reaffirmed NewRiver's investment-grade credit rating following our successful equity raise at BBB with a stable outlook and BBB+ on the bond itself. We achieved all of this while maintaining the strength of our key balance sheet and debt metrics, with interest cover and net debt to EBITDA, both remaining strong in the context of our financial policies and our real estate peers and with LTV remaining close to guidance. As you can see on this slide, which shows that we expect LTV post combination to be between 42% and 43% once factoring in the combined LTVs of NewRiver and Capital & Regional, and the impact of the transaction, which is well below our policy of less than 50% and only marginally higher than our guidance of less than 40%. We've demonstrated significant capital discipline in recent years, keeping headroom to our 40% guidance level with LTV in the low to mid-30s since March '22, which has been the right call because it's ensured that we're in a position to contemplate the transaction we're discussing now. We remain committed to our existing guidance. And as the slide shows, to return to 40% from the expected post combination level would require a modest GBP 30 million to GBP 40 million of disposals. To put this in context, over the 3 financial years ended March '24, we completed an average of GBP 46 million of disposals per annum. So we're confident we can return to the 40% level through a realistically achievable level of disposals. And in the meantime, as noted on the previous slide, considering LTV alongside our interest cover and net debt-to-EBITDA ratios, we're comfortable with the strength of our expected post combination position. Thank you for listening. I'll now hand back to Allan for final comments.

Let me wrap up by saying that both Will and I participated in the equity raise, along with other board members. As we believe that this transaction is perfectly aligned to our strategy, is well timed given that our marketplace is in its best position for 5 years, the price we are paying is attractive, and the corporate benefits of significant earnings per share accretion, increased scale, improved share liquidity and a more flexible capital structure are compelling. Now we're going to move over to Q&A. Thank you. Well, I don't think we have any questions. So I'd just like to take the opportunity to thank everyone for taking the time to listen to our presentation. As we said, we are excited with this transaction due to the strong strategic, financial and operational benefits that we believe will deliver attractive returns for our shareholders. We're also grateful to our shareholders for their support in last week's equity raise, which we believe is a strong endorsement of NewRiver, the transaction and our marketplace. Thank you, everybody.