Newriver REIT (LSE:NRR) — Investor Presentation

0:01 Good morning, and welcome to the NEWRIVER REIT PLC Investor Presentation. In the front of this recorded presentation, investors will be in listen only mode. Questions are encouraged and could be submitted any time by the Q and A tab situated on the right hand corner of your screen. Click Q and A, simply scroll to the bottom, type your question and press send. The company may not be in a position to answer every question received during the meeting itself. However, the company review all questions submitted today, we'll publish responses where it's appropriate to do so. Before we begin, we'd like to submit the following poll.

0:27 And then I'd like to hand you over to Alan Lockhart, CEO, Will Hopham, CFO. Good morning. Thank you, Paul, and good morning, everybody, and welcome to our half year results presentation and for taking the time to listen in. We're here in London. It's a very cold morning, but we're we're absolutely delighted to be with you. Before we get started, for those of you that don't really know us, NEWRIVER is a REIT. We specialize in The UK retail and leisure real estate sector. We have a portfolio of approximately £643,000,000, which comprises around 30 shopping centers and 15 retail parks. And we have investments in pretty much most regions of The UK.

1:13 So let's get started with an overview. I'll just move on to the yeah. Thank you, Lucy. So we've had actually a very resilient operational performance in the first half of our financial year. Across all of our metrics, that sort of resilience has really come through whether it is maintaining very high occupancy, high retention rate. In other words, when tenants come to lease expiry or break, the vast majority choose to stay within us to own our estate because they're trading profitably. We've had a very good leasing performance now with both elevated volumes, but also we've been transacting our leasing terms at above values, ERVs, and indeed above the passing rent.

2:01 And our rent collection has also now normalized to a pre COVID level. And we think our operational performance is really as a result of three things. Firstly, our portfolio positioning. Majority of our rental cash flows are derived from tenants that are focused on essential goods and services. And, you know, that's a good place to be, particularly with the current economic environment. Secondly, we're able to offer space at rents that our tenants can afford leading to good underlying profitability for our tenants within our portfolio. And thirdly, it's just the quality of our asset management platform. We have a team that has a lot of experience and a deep knowledge of UK retail and real estate, and our team have consistently executed very well, not just in the in the first half, but in the the last sort of two to three years.

3:01 And that that quality of our platform was recently validated by NEWRIVER's appointment by M and G, a global real estate investor to asset manager pool, a very large retail portfolio comprising around 16 retail parks and one shopping center. Now the good operating performance that we had in the first half and indeed really for the the last two or three reporting periods has fed into some good financial resilience numbers as well. From our retail portfolio, the underlying funds from operation was up 77% compared to the comparative period last year to £13,600,000.

3:47 And indeed, our underlying funds from operation was higher than the second half of last financial year, and that's led to NEWRIVER declaring an interim dividend of 3.5p per share, fully covered, and represents a 6% increase on the last declared dividend. Our balance sheet is in great shape. We posted an LTV of just under 34%. We have no debt maturity on finance until 2028. All of our interest costs, which is currently at 3.5% is fully fixed again to 2028. And we ended the period with around about $95,000,000 of cash in the bank. So operationally, it's been a very resilient period. And financially, we're in really good shape as we move ahead into the second half.

4:43 Thanks, Lucy. So just quickly on our market backdrop, high inflation and rising interest rates have been impacting consumer spending, and we'll continue to do so as we move into 2023. Notwithstanding that, for at NEWRIVER, we feel that we'll see reasons to be reassured about our market positioning. Recent tax increases and reductions in public spending meaning means that consumers will have difficult spending choices to make. But you can see on this chart on the data where the growth rate of nonessential spending is now increasing ahead of nonessential spending.

5:32 And our portfolio, which is focused more on essential goods and services, clearly puts us in a better position to withstand some of the economic challenges that The UK is facing. And when evaluating The UK consumer, I think it's important that you can one considers that UK consumer savings are elevated. There is wide rising wage rates in the system, low unemployment, and, of course, the government's energy support package plus inflation rate decreases to pensions and universal credit are helpful. Retailers are facing similar pressures, and you can see the impact of high inflation in the retail sales data where sales by value is increasing, but volume is down.

6:24 The significant increase in retail sales to the online channel during COVID has been unwinding as shoppers return to physical stores. We believe that really in a high cost environment, omnichannel retailers are well placed to control online costs by utilizing their physical store network, which is why click and collect has been rapidly increasing and will continue to do so. By contrast, we're seeing that online retailers who are perhaps more vulnerable are struggling to cope with rising costs, especially given their lower operating margins. And I think it's also important to remember that when evaluating retailers over the last three to four years, we have seen significant restructuring in the occupational base with elevated retailer failure.

7:23 But also, many retailers have been over the last five years or so focusing have focused on rightsizing their portfolio and reducing costs. So as we move into 2023, which is very likely to be a challenging year given the forecast of a of a lengthy recession. You know, we believe that store based and omnichannel retailers are generally fitter leaders and more agile to navigate through what will be a difficult year. Now one of the tailwinds to for retailers next year is reduced business rates. So we were really pleased that the government once again froze the the UBR rate.

8:08 And for those ratepayers that will be receiving a reduction in their business rates, the government also announced that they will pass on that benefit immediately unlike the old system when when it was spread over a period of time. This is gonna be really helpful for retailers next year given the elevated cost that they're seeing elsewhere in their businesses. In addition, the government announced new rateable values for all non domestic properties, and you can see the real estate the real estate sector results on the slide. For NEWRIVER, our current estimated reduction is around 19%, which will be great news for our occupiers and will support the sustainability of our future rental cash flows.

9:01 Next slide, please. Thank you. So I mentioned that we've had a very strong operational performance in the first half of our financial year, and we haven't seen any disruption in our leasing activities. However, we we have seen wider disruption in the capital markets, And there's been overall within the real estate sector that has been a decline in capital values. And this has been driven predominantly by the recalibration of property yields to the increase in gilt rates. From retail where capital values have have already been rebased over the last three to four years, the impact of yield expansion has been less pronounced as as currently retail yields provide a premium to the ten year guild.

10:00 On the chart on the right hand side, you can see clearly see the higher the rates of inflation and the impact that is having on the MSCI capital returns over the last three months compared to the last twelve months. So the sectors with the largest decline in capital values from June to September are those sectors where the property yield relative to the ten year gilt did not provide a sufficient capital return. Now for NEWRIVER, our valuations have been, you know, more resilient this year. And given that our current portfolio equivalent yield is around 8.7%, that represents something like about 550 basis points higher than the ten year gilt. So we've been a lot more insulated in 2022, and we believe that our yield spread to the ten year gilt will provide insulation as we move into 2023.

11:06 So moving on to our operating performance, we have consistently for some time now expressed our confidence in the underlying resilience of our portfolio. And even though even through the significant disruption of COVID across all operating metrics, our portfolio has been remarkably resilient, and the first half of this financial year has been no exception. As an example of our resilience from April 2020 through to September 2022, we have undertaken long term leasing transactions that total around £13,000,000 of annual rent, and that equates to just minus 0.2% compound annual growth rate over the weighted average lease term for those previous leases of nine point eight years.

11:59 And given the level of disruption within the retail sector over the last five years from the growth of online retailing and COVID, our leasing performance over the last two and a half years really demonstrates the underlying resilience in our rental cash flows. And we believe, as I said earlier, that our portfolio position focused on essential goods and services where a physical store is vital to our occupiers is the reason that we have delivered consistently high occupancy, high retention, and strong leasing performance over the last two and a half years. Now moving to our valuation performance. Thank you, Lucy. Overall, it's been broadly stable at just under minus 1.3%.

12:52 Our core shopping centers and retail parks delivered capital growth of 0.20.5% respectively, reflecting stable like for like movements in both equivalent yield and ERVs. And reassuringly, we have now had three financial reporting periods of stable valuations in our core shopping centers and also our retail parks. The only part of our portfolio that has been impacted by high inflation and high interest rates was in our regeneration portfolio, which accounted for around about 80% of the modest £8,000,000 of total portfolio decline. And this was really as a result of higher estimated construction costs, an increase in the assumed development finance costs, and a pullback in the residential forward funding market.

13:46 Our workout portfolio, which only accounts for around about 14% of our gross assets recorded minus 2.5% of capital decline, but that represents a material improvement from the first half of our previous financial year and indeed in the second half of last financial year. Now 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 of 8.7%, you can see the importance of that income return in our total return outperformance relative to the MSCI. Over the last five years, our retail parks have delivered a total return outperformance of 380 basis points and our shopping centers a massive 740 basis points.

14:41 And this consistent outperformance is due to our portfolio positioning and our laser focus on income returns. Now moving on to ESG. We normally publish a full report on ESG at the end of our financial year. But in the first half, we were pleased that our progress was recognized by GRESP with an improvement in our overall rating, which included a maximum score for social and governance. The quality of our governance was also recognized by EPRA where we retained our gold award status, which means that EPRA recognizes the excellence in the transparency and comparability of our environmental, social, and governance disclosures.

15:35 Now for us to achieve net zero, we'll very much rely upon mutual action by ourselves and our occupiers. The energy our occupiers consumes in our assets accounts for almost 90% of our total carbon emissions. And these are emissions that we we have limited control. We continue to develop our engagement with our occupiers to support alignment between our own climate ambitions and those of our occupiers. What was really pleasing is is that more of our occupiers are committing themselves to reducing health emissions. And currently, 57% of our lettable floor space is occupied by retailers that have set emission reduction targets.

16:26 I'm So now gonna hand over to Will who's going to take you through the financials. Thanks, Alan, and good morning, everyone. I'm Will Ogden, and it's my pleasure to be taking you through our financials this morning starting with the key highlights. And we've made a strong start to the year delivering continued improvement in the UFFO, which increased to £13,600,000 during the first half from £12,800,000 in the second half of the prior year and 7,700,000 in the first half of the prior year, which is the retail comp stripping out the contribution from Hawthorne prior to its disposal. Because our dividend policy is linked to UFFO, this has led to an improvement in our fully covered dividend, which has increased to 3.5p per share, up from 3.3p per share in the second half of last year.

17:18 We've seen resilient valuation performance despite disruption in the investment and credit markets, leading to a stable NTA per share of a 132p, which compares to a 134p at the full year and a 131p a year ago. This valuation performance, together with our fully covered dividend, means LTV now stands at 33.8%, down from 34.1% at the full year and 39.4% a year ago. Interest coverage is another key debt metric, has also improved to 3.9 times, trending upwards from 2.7 times a year ago and 3.5 times at full year, benefiting from continued income recovery and a reduction in gross debt on which costs are fixed, which along with the fact that we have no refinance requirement until 2028 and access to 220,000,000 of total liquidity, including £95,000,000 in the bank, means that we ended the half as we started it in a strong financial position.

18:30 I'll have more on the balance sheet later on, but first, let's take a look at UFFO. This time, alongside the usual UFFO statement, I've included a bridge from the first half of last year, which shows clearly that once adjusting for the contribution from pubs in the prior year, retail UFFO has improved significantly half on half from £7,700,000 last year to £13,600,000 this year. And all component parts of UFFO have contributed to the increase. I'll have more on net property income, which has improved despite the disposals we completed in the second half of last year in a moment. But before that, I'd like to walk you through the other drivers of the UFFO improvement, Starting with other income, which you can see added 1,400,000.

19:23 This relates entirely to the settlement of an income disruption insurance claim relating to our car park income during the first COVID lockdown between March and June 2020. You can see that our work on cost reduction, both admin and finance costs added 4,000,000. With admin costs reflecting the impact of our cost saving initiatives, not not least the relocation of our head office, which we completed during the first half, and with finance costs benefiting from the debt restructuring exercise we completed last year.

19:56 Next, NPI, which has increased from £25,200,000 in the first half of last year to 25,700,000 this half. And that's despite a £2,200,000 reduction due to the 70,000,000 of disposals we completed in the second half of last year. Like for like income was up by naught 600,000, a modest increase, but significant in representing return to growth after the declines we've seen in recent years. And, importantly, like for like growth was strongest in our core shopping center and retail park assets, which we see as forming the backbone of our portfolio in the long term. Rent collection rates have improved, and we've continued to collect historical rental arrears, which means we've seen a period on period reduction in rent and service charge provisions for a second successive year post COVID, adding 1,000,000 during the half.

20:58 Lastly, car park and commercialization income, which improved half on half last year and again in the first half of this year, recovering a further £1,100,000 of income and now back up to 80% of pre pandemic levels. Next, I'd like to present a new bridge which compares our retail NPI immediately prior to the pandemic. So the half year ended September 2019 with the half we're reporting today. I've included this slide because I think it's useful to look at how our income has improved, but has been impacted over the last few years, not least by COVID, and to highlight the resilience of our income and show how much of that disruption we've recovered. You can see that after adjusting for retail disposals over the last three years, we start in September 2019 with £30,300,000 of retail NPI.

21:55 Next, the buckets we've labeled is h y 21 reduction. That's pre COVID like for like decline of £2,200,000 and COVID NPI impact, principally on rent collection and car park and commercialization income. Then recovery and regrowth in the two years that have followed, which encapsulates NPI recovery, I e, the progress we've made in recovering the impact shown in the previous two bars, the gradual return to normalized levels of rent and service charge provisioning versus the elevated levels seen during the pandemic, the gradual return of car park and commercialization income, and like for like NRR, which is stable taking h y twenty two and h y twenty three together, but as you saw in the previous slide, trended positively in h y twenty three.

22:49 And lastly, the increase in our AM fees, which doesn't reflect the operating partner mandate we announced a few weeks ago, which means that our asset management fee income will increase going forward. So in summary, our income was disrupted during FY '21. We've made good progress in recovering that impact over the last two years, and we feel that underlying income is not only resilient at this point, but growing as we look forward. Lastly, before we move on to dividend, I'd like to break UFFO per share down into its constituent elements to look at the status and direction of travel of each, starting with income, which, as I've just shown, was rebased during COVID and is now recovering.

23:37 Then admin costs, which have already reduced and where we've targeted further savings. And finally, finance costs, which have also reduced and very importantly in this environment are fixed for the next five and a half years, all of which means our UFFO is rebuilding, which flows directly into our dividend.

24:02 Under our dividend policy, we pay dividends twice per annum announced with our half and full year results and based on 80% of the UFFA reported for the most recently completed six month period. So today, we've declared a first half so sorry. So a few weeks ago, we declared a first half dividend of 3.5p per share, which compares to the 4.1p declared in the first half of the prior year, half of which related to the pub business prior to its disposal. And more recently, 3.3p declared at the full year, which was our first dividend as a retail only business. Moving on to the balance sheet and starting with an overview of key balance sheet and debt metrics.

24:48 I'll have more detail on individual metrics in the coming slides, but this slide shows clearly the strength of our position today and how that position has improved over the last six and twelve months following the sale of the pub business and subsequent debt reduction completed last year. This position is supported by our cost of debt, which is fixed at 3.5%. And given we have no maturity on drawn debt until 2028, that will remain the case for the next five and a half years. All this, and very importantly, our balance sheet remains fully unsecured. Next, net assets. And you can see from the slide that NTA per share reduced modestly from a 134p to a 132p during the first half, but remains ahead of the position a year ago of a 131p, which is shown on the left hand side of the slide.

25:50 The key reasons for the movement in the first half were the UFFO we we retained after the payment of dividends, which added 1.1p, offset by the modest 1.3 percent portfolio valuation decline. This translates to a total accounting return in the first half of 1% and a total accounting return of 6.4% since September 2021, I. In our first twelve months as a retail only business. I've also included a memo below the NTA bridge, which shows how LTV has changed during the half. And you can see it's reduced slightly from 34.1% to 33.8%, and the drivers are the same as NTA with a reduction due to retained UFFO offset by the impact of the modest valuation decline.

26:47 Next, onto our financial policies, which form a key part of our approach to financial risk management. You can see clearly we have material headroom across all of our policies, and our position has improved during the first half, particularly interest cover, which increased from 2.7 times a year ago to 3.9 times today. The key drivers of this improvement are the actions we completed during FY '22, which can be seen on the slide, being the disposal of the pups and the subsequent debt reduction alongside the continued recovery of our retail income. It's worth noting that our policy is set at two times, and the covenant on our drawn debt is 1.5 times, meaning we have substantial and growing headroom against both of these benchmarks.

27:42 And if we look at the two components of interest cover, we see this will continue to be an area of strength for us. With our income still recovering post COVID and our low interest cost fixed until 2028.

27:58 Next, on to capital allocation. To remind you, at the full year, with LTV at 34%, we said that we would not rush to redeploy to our 40% guidance level. But in the near term, we intended to keep some headroom and to operate with higher higher cash holdings given the uncertain macroeconomic outlook. Looking back at the events of the last six months, we believe that this was the right call. We're visiting this position now with LTV at a similar level to the full year, while we feel confident in the strength of NEWRIVER's position and the resilience of our underlying cash flows in this environment, given the macro outlook is arguably even more uncertain today, we do not believe that now is the time to reduce headroom, and we see no reason to change the near term guidance we issued at the full year.

28:51 We will continue to review this position as we make progress on our planned disposal program, which has been challenging in the first half due to the income income due to the impact of disruption in the capital markets on liquidity and as we learn more about the potential impact of market disruption on valuations.

29:11 But right now, we want to keep maximum optionality and flexibility, so we intend to keep headroom to the 40% level in the near term. Lastly from me, I'd like to expand on the key areas we expect to contribute to UFFO growth looking ahead. You can see on the left hand side of this slide that we take the 13,600,000 of UFFA we've reported for the first half and adjust it to remove the 1,400,000 of COVID disruption insurance received in the first half, which related to FY '21. We then annualized this, giving us 24,400,000 as a start point, which compares to the annualized start point when we presented this slide six months ago of 17,600,000,

30:05 with the increase because we've been successful in crystallizing the growth from the right hand side of the slide into our annualized start point. As you can see from the dash box in the middle of the slide, which shows the progress we've made in capturing this growth in the first half. We then add in the savings we identified at our capital markets event in September 2021, which we've not yet unlocked, highlighted as number one on the slide. That's principally the further admin cost savings we targeted on top of the 1,000,000 of savings unlocked over the last year, which will be more challenging given the inflationary environment when it we're still in, but which which will remain a key area of focus for us.

30:51 Next, COVID impact, which is a measure of our success in recovering the income disruption we experienced during f y twenty one. We made good progress during FY twenty two, and this has continued in the first half of FY twenty three, which means that the remaining impact to recover now stands at four point two million, down from six point six million at the full year. And we're confident we can make further inroads as we look ahead. But where we can't recover all of the lost income, we're actively expanding other revenue streams such as our capital partnerships. We have had sex success very recently in signing new and exciting operational management agreement with a leading real estate investor, M and G.

31:39 Finally, number three, surplus capital deployment.

31:44 As I've just communicated, we will not rush to redeploy to the 40% LTV level in the near term. We've included an illustrative 64,000,000 of acquisitions here at a 7% yield to give an indication of the optionality we have available to us. And in the meantime, we're making a return on our surplus capital by placing it on deposit, and we're currently generating a blended interest rate of around 3%. Thanks, everyone, and I'll now hand back to Alan. Great. Thank you, Will. And I'm just gonna take you through the progress we've made on our key components of our of our portfolio. Starting with our core shopping centers, which represents about 34% of our total portfolio.

32:29 And and these are assets that are located in the heart or in the heart of their talent centers, and they continue to play a really important role in providing essential goods and services to their local communities.

32:43 Our core shopping centers have been highly resilient, and that's really demonstrated in the operating metrics. And that's been the case even during the highly disruptive COVID period. Over the last two and a half years, our occupancy has been consistently high and retention rate for leases that are subject to expiry or break has also been high and leasing terms versus our ERV have been consistently positive. And this resilience is also reflected in our retail part portfolio, which represents about 27% of our total portfolio and which has had another good period of delivering strong operating metrics across our 15 conveniently located retail park assets.

33:35 We continue to see strong occupational demand for our retail parks, which really demonstrates the attraction of these assets in terms of location, rental affordability, catchment, click and collect hubs, and in turn, retailer profitability. As a result, we're nearly fully let at 97%. And reassuringly, our retention rate is very high, reflecting the strong occupational demand that has been increasing over the last few years. Moving on to our regeneration portfolio. This is where we're seeking to deliver capital growth through redeveloping surplus retail space principally for residential.

34:21 Across our three projects, we are working on the delivery of over 1,700 residential units providing a mix of built to sell, built to rent, and affordable units.

34:34 Our regeneration portfolio valuation has been impacted by a combination of assumed higher construction costs and increase in development cost financing and a recent pullback in the residential forward funding market. But these are not projects that we would ever develop out ourselves. Instead, we can create value by securing planning concerns, and then we have a number of options, including selling to specialist residential developers as we successfully did with two of our regeneration projects last year in Oxford and South London. Now whilst we continue to progress our development plans for our regeneration assets, we do receive an ongoing income return of around 6%.

35:25 Now moving to our workout portfolio, which represents only 40% of our total portfolio and where we're seeking to exit through a combination of disposals and implementation of turnaround strategies to deliver long term rental and capital sustainability. Now whilst the recent disruption in the capital markets has impacted liquidity levels, we are currently under offer on £20,000,000 of assets with the remaining £21,500,000 to be sold in our next financial year. We're well advanced with completing the turnaround strategies for three of our assets by the end of FY twenty three with the remaining two assets to be completed in the following financial year.

36:14 And so our current estimate is that our workout portfolio will equate to around 8% of our total portfolio by the end of this financial year, and and we should complete a full exit in the following financial year. And in the meantime, you know, we benefit from an attractive income return and capital values that have really moved to a broadly stabilized position. So now moving on to capital partnerships, which is a key component of our business and one where we think we can really grow over the medium term. Capital partnerships really allows us to leverage our market leading asset management platform and enhance our returns in a capital light way through asset management fee income as well as the potential to receive financial promotes.

37:06 Post period end, we were appointed by M and G to manage a large retail portfolio comprising 16 retail parks and one shopping center for a term of three years, and we believe that that is a really strong endorsement of the quality of the NEWRIVER asset management platform. Our capital partnership with Brave, which is the private equity arm of PIMCO is PIMCO is performing well. And given the recent disruption in the capital markets, this joint venture is very well placed to capitalize on attractive opportunities that are likely to rise next year. We have a great relationship with Canterbury City Council, and we were pleased that our asset management mandate was extended to include their new leisure development in the city center and our appointment as development manager for their planned city center office development.

38:05 Our strategic partnerships are a clear validation of our strong asset management capability and are likely to be an important source of new capital light revenue in the coming years ahead. So given the economic backdrop and that both the Bank of England and the OBR are forecasting a lengthy recession in 2023, albeit a shallow one, We've undertaken over the last sort of two to three months some stress testing of our portfolio to to really try and understand what is the likely financial impact to New New River from a recessionary environment. So, know, we regard that the resilience of our rental cash flows is is very much underpinned by the affordable rents and low occupational costs.

39:01 And given the downward pressure on retailers' margins as a result of the increased costs and revenue pressures that they are facing, we have spent quite a bit of time assessing the rental affordability over the next three years. So we've worked with independent retail research consultants. And effectively, what we've done is created a store p and l for everyone well, about 98 of our tenants, and that's allowed us to forecast a range of outcomes based on revenue and costs. And when we talk about costs, we mean cost of good sales, staffing costs, utility costs, and, of course, obviously, the the business rates revaluation.

39:49 And then by assuming that the the our tenants want to maintain their net margin, we are then able to look at the relationship between what they can afford to pay versus, you know, what they are actually paying. And today, we we've also been enjoying a a a very good position that tenants can actually afford to pay more because they're profitable versus what they're currently paying us under the terms of their lease. As we move into next year, we can see that relationship slightly changes because tenants are facing increased cost pressure as well as sort of pressures around top line revenue.

40:34 And that relationship slightly changes, but it equates to only £600,000 of rent. And actually, when we match up our forecast leasing events next year, in other words, tenants that have a lease expiring 2023 or a break, that group of tenants still has good affordability metrics. In other words, what our rental affordability analysis is telling us next year is that our tenants can still afford to pay the rents that they're contracted to pay, notwithstanding that cost pressures have increased and and revenue pressures are are there for next year. And then by 2024, that position would revert.

41:20 And when we get to 2025, we're back into very positive position, higher than we're currently today, and part of that difference between 2025 and today is the impact of the reduction in business rates. But not all tenants have the opportunity to renegotiate their lease terms next year. So we've looked at underlying income security. How secure are our rental cash flows? Again, so we've done some stress testing here. We've worked with an external firm called Income Analytics that provide a projected probability of tenant failure looking ahead from a one year out to a ten year period.

42:09 And as you can see in the left hand dotted box over the next two years, which is gonna be, you know, challenging year in 2023, you can see that the projected probability of failure rate for our portfolio is by tenants is only 0.9% weighted by rent. And we're able to then translate that into a financial number, and the result of that financial number is that it's not material. Now this is quite new stuff we've done here. So we we we we thought it would be useful just to put it into context with the wider market. Income analytics is partly owned by the MSCI. So you can see NEWRIVER's portfolio failure rate relative to the MSCI industrial sector and the MSCI office sector.

43:05 And we you can see on the dotted rectangle at the five year period, you can see how industrial and offices have a marginally better failure rate than our own portfolio. But you can see that in terms of the equipment yield spread, our investors are more than compensated by having that significant yield spread. So what this stress testing is really telling us is that we think that our rental cash flows are going to be resilient into 2023, which we know is going to be a challenging year. So just to conclude, we've had a very resilient operating period in the first half, and that's really been a continuation of a really good recovery out of COVID.

44:04 Our balance sheet is in really good shape with low leverage, long term debt maturities, all of our interest costs are fully hedged. But we also have a lot of optionality because we have around 95,000,000 of cash in our bank accounts as well as having further liquidity beyond that. So we're in a really good place. We know that next year is gonna be a relatively tough environment, but all of our stress testing and analysis is suggesting that we should be pretty resilient into next year. And as Will covered off that, you know, in one of his slides, you know, we've got clear levers to generate future earnings growth from deploying capital in next year as well as significant potential of growing our capital partnership business over the coming years.

45:01 So I think we shall probably finish there and move now to Q and a. Q and a. That's fantastic. Thank you very much indeed, Alan. And thank you for the presentation to you both. Ladies and gentlemen, do please continue to submit your questions using the Q and A tab situated on the right hand corner of your screen. Just for the team to take a few moments to review those questions submitted today, I'd like to remind you the recording presentation along with a copy of the slides and the published Q and A can be accessed via investor dashboard. As you can see, we have had a number of questions that have come through today's presentation. So if I may just hand back to you just to read out the question where appropriate to do so and give you a response, and I'll pick up from you at the end. Yes. Thank you. Well, let's go to the first question from Paul B. There have been media reports of four sellers in The UK property market, including UK pension funds and open ended property funds.

45:49 Have you seen evidence of this, and is this something NEWRIVER can take advantage of? Yeah. There there there are definitely some UK open ended property funds that have come under some recent pressure and are looking to provide greater liquidity in their funds, which is leading to them looking to dispose of certain assets. We're monitoring the market very carefully. The good news is that we put ourselves into a position where we have that flexibility in our balance sheet that to take advantage where we see opportunities. We also have the joint venture with our friends at PIMCO to provide, you know, further liquidity, and and that's a great vehicle for us because we we have a lot of flexibility as to, you know, the level of co investment that we have to put in. But as Will said, you know, right now, you know, we think that balance sheet strength and optionality is important to maintain.

46:51 And although we believe that our rental cash flow should be really resilient to next year, we think it will be important for us to have a little bit more visibility on on valuations as we move into 2023 and make more progress on some of the disposals that we are undertaking. Yes. Next question. How much and this is from Matthew R. How much of the available liquidity do you expect to deploy in the next year and what return profile? Do you wanna take that question, Bob? I think I think it's linked to what you've just said, which is basically, you know, the guidance that we gave out when we present presented our results a few weeks ago was that we we wanna keep some headroom to our LTV guidance in the near term.

47:37 I think really what that means is that future deployment will be funded from kind of disposals that we have underway at the moment. So I could see if you just move up slightly, so we see the question. I could see us holding a higher level of cash and liquidity in the near term. And, actually so I think we'll be keeping quite a lot of that available liquidity. And in terms of return profile, Alan? Well, we're we're in the business of delivering the best risk adjusted returns. And we we I've said that our capital market spend in September last year when we've undertaken a very detailed assessment on UK re retail real estate to really find the assets in in in The UK market that today's rental cash flows are really resilient and will still be resilient in ten years' time. We feel that greater number of opportunities of assets that will deliver that is within the retail park sector. So over the the medium term, we do expect that the our composition of our portfolio will change and that in four or five years' time, retail parks will probably represent around about 50% of our of our portfolio composition.

48:59 Okay. So we're gonna move on to hopefully, answers Matthew's question. We're we're moving on to Mark A's question. I'm interested to understand the potential with the capital partnerships and the associated fees. How much of this type of business can you manage? Well, as I mentioned, Mark, we see a lot of great potential in our capital partnership business. At the moment, we we have three sort of key mandates and sort of what we would regard as three different types of investors. We've got a public sector mandate with Canterbury City Council. We think we can grow our activities within the public sector. We have our private equity mandate with PIMCO, and we believe that that can grow in the coming years.

49:51 We're not exclusive to PIMCO, so we have the ability to operate with other private equity partners. And now we have a major institutional mandate through M and G. And you may recall, I think it was back in 2019, we we were talking about capital partnerships. Now we felt that over the sort of five year period, we we should be able to grow that business to somewhere between 3 to 5,000,000 of recurring earnings. As it stands today, we're we're close to the bottom end of that range. So we're we're achieving our targets, but probably in a faster time frame. And we we believe that this is an area of our business that we can grow in the coming years. So I think it's gonna be an increasingly important part of our business.

50:45 So our next question is Vivek. As the company is trading at a material discount to NAV with a lot of liquidity and healthy balance sheet, with the board considerate tender offer, share buyback to return capital, the discount would indicate a near double digit equivalent yield on own shares versus its investments. Do wanna take that off, Will? Yeah. And I think the short answer, Vivek, is yes. So on slide 19 in the pack, what we said was when we're talking about capital allocation was that at the moment, we're gonna keep some headroom to our LTV guidance in the near term. But as and when we decide to deploy capital in the future, we have a, you know, a flexible approach. We have really three key areas that we can deploy our capital.

51:33 We can deploy it into our existing portfolio. For example, we spent around £2,000,000 during the first half on kind of accretive CapEx across the portfolio. We can buy assets in a direct market. Alan's talked about, you know, our preference probably for retail parks looking ahead, or we can buy our own shares. So the answer is, Vivint, as and when we decide to deploy capital, yes, we can deploy capital into a share buyback. In terms of which of those three places we will deploy our capital, what we'll do is we will look at the risk adjusted returns attached to each of those three options, and we will make a decision based on the best return we can get. Thanks, Will. So next question is from Nick S. Are you fitting energy saving devices such as solar panels?

52:21 Well, Nick, I mean, we we started putting in solar panels probably about ten years ago, and, you know, we're we're looking to add to that as well as installing a lot of EV charging points or any all the energy that we supply to the common areas within our portfolio. In other words, the miles, the car parks in terms of sort of, you know, lighting energy and and heating, etcetera, is all from is all from renewable energy. And all of the energy we apply provide our common areas, importantly, was it it's fully hedged out till spring twenty twenty four. So we're not being impacted by the the significant increases in utility costs.

53:13 So, Youssef s. Hi, Youssef. What is the magnitude of AMVs you project for FY 2324? Can you give some idea of the scale of fees? Rob, do you wanna take that question? Well, I think I think the way I'd answer that is when we stood at FY '22 so so when we're reporting the year results for the year ended March 22. We have 1,900,000 of AM fees. And, really, what we said about three or four years ago now was that our target was to get to 3 point 3 to 5,000,000 of recurring AM fees. And I can see us kind of yeah. As Alan said, we're getting towards the bottom end of that range. So, you know, I would say really that the level of AM fees looking ahead is gonna be somewhere between into f y twenty three and f y twenty four.

54:02 It will just be trending up towards the bottom end of that of that range, really, 3,000,000,000 to 5,000,000,000 range. Okay. Thanks, Will. I've got a question from Marcus. Can I see it? Let see. What effect has the property fund closures of the likes of Aviva, M and G, and LNG had on your share price? Also, the recent disposal disposals caused by the collateral call caused by the forced collateral calls on the LVI disposals. I wouldn't say there's necessarily, you know, correlation on our share price, know, relative to the property fund closures mark. I think what's really impacted share prices in the real estate sector has been rising gilt rates. And you may recall we had that earlier slide where, yeah, we were showing the capital return performance over the last three months versus the last twelve months.

54:59 And it's really the sectors that have been hit the hardest, which is long dated income and the industrial sector where their yields relative to the ten year yields were not providing sufficient risk premium. And because of those yields being expanded out, this is why you've seen in the overall real estate sector a very significant sort of downgrade in in share prices. The reality is NEWRIVER this year has probably been one of the top performing share price relative to others in the sector. And I think that reflects maybe a few things. One, the fact that retail sector and and indeed NEWRIVER, we've not been immune to, but the retail sector has already had very significant valuation rebasing and indeed rents rebasing over the last three to four years.

55:58 So their yields have expanded out quite considerably, and we're offering a sufficient risk premium even whilst guilt rates were increasing. So, you know, I think that's been a factor for why NEWRIVER has, you know, performed, you know, performed well relative to to others. Is there anything else you wanna add to that one? Nope. I didn't see it. No. That's that's great. Okay. Any other questions? Just one more question from Youssef, actually. I think you had two two questions. So he says, are you seeing a reduction in cap rates as yield stabilized and declined post the mini budget turmoil? I think what we're seeing is a little bit more liquidity coming coming back into the market. There was no doubt that really liquidity within the real estate markets and and retail sector wasn't immune to this really started to to withdraw around about August coinciding with the political instability and then, you know, the sort of the the the the fiscal event in September.

57:04 As things have started to stabilize and and a little bit more confidence in the new chancellor and and and the budget, then we're starting to see that liquidity coming back into the market, which I think will be helpful as we move into 2023. Fantastic. Alan, well, we've actually covered off every single question. So thank you very much indeed. And of course, any further questions do come through, the team will have the ability to review those. And we'll publish responses where appropriate to do so on the investor meet company platform. Alan, if I may, just before redirecting investors to provide you with their feedback, know it's particularly important to you. If I could ask you just for a few closing comments, please. Well, thank you, everybody, for taking the time.

57:50 Hopefully, what came across to you is a business that, you know, many ways has been sort of transformed over the last three years, particularly through the sale of our hub business that's allowed us to significantly, you know, strengthen our balance sheet. The business is in very good financial shape with a lot of optionality. We believe that we're one of the leading asset management teams in The UK retail real estate market. We have a lot of growth potential in our capital partnerships underpinned by a portfolio that has been proven to be very operational operationally resilient over the last two and a half years. We know next year is gonna be a tough year, but it's not the first time, you know, our businesses face has had to face up to challenges. You know, we, as I said, you know, we're a very battle hardened team.

58:46 And, you know, all of our stress testing, all of our scenario testing is suggesting, you know, that we should be pretty resilient as we move into 2023 with but with a lot of optionality as to how we can really grow the business going forward. I think that's it. But thank you very much, everybody. Fantastic. Alan Will, thank you again for updating investors today. Can Please ask investors not to close the session as we automatically redirect it to provide your feedback in order the team can better understand your views and expectations. This will only take a few moments to complete and is greatly valued by the company. On behalf of the management team of NEWRIVER REIT PLC, we'd like to thank you for attending today's presentation. That concludes today's session. Thank you, and good morning to you all.