Retail property investment

A REIT is a business set up to make money from property that will yield rental income. As a rule, REITs must return 90% of profits to shareholders as dividend payments.

NewRiver is a REIT that specialises in buying, developing, and managing retail and leisure spaces throughout the UK. These usually consist of shopping centres and retail parks that provide essential goods to local communities.

So what’s happening with NewRiver shares currently? Well, as I write, they’re trading for 86p. At this time last year, the stock was trading for 74p, which is a 16% increase over a 12-month period.

A REIT with risks

As with any dividend stock, dividends are never guaranteed. They can be cancelled at the discretion of the business at any time. This can be for a few reasons. A few that spring to mind are poor performance or an external event such as a pandemic or financial crash. Usually, when events like these occur, many businesses cancel dividends to conserve cash.

Specifically in regards to NewRiver, the changing face of retail does pose a threat to its business and investment case. The rise of online shopping, along with the technology-driven world we live in, has meant more traditional retail businesses have suffered. A lack of footfall and customers turning to online alternatives has meant many retailers have fallen by the wayside. With this in mind, NewRiver may find it struggles to fill its sites in the longer term.

The bull case and what I’m doing now

So to the positives then. I note that NewRiver has had a new lease of life under new CEO Allan Lockhart. He has managed to navigate the business away from potential disaster by streamlining operations, paying down surging debt levels, and restoring its dividend. He decided to streamline by selling some of its unprofitable locations. My research indicated that NewRiver’s occupancy rate is over 95% and rental rates continue to rise.

A Q1 trading update released by NewRiver at the end of July covering the period ending 30 June made for excellent reading. It confirmed that occupancy and rental collection had both increased to over 96%. Furthermore, it boosted cash flow and now has £93m at its disposal. Crucially, it also managed to secure a fixed interest rate on debt until March 2028. This means that despite interest rates rising, servicing the debt won’t become tougher for it due to its fixed rate.

NewRiver’s ongoing turnaround currently makes it seem an attractive stock to buy to boost my passive income stream. The shares’ current dividend yield stands at over 8%! This easily surpasses the FTSE 100 average of 3%-4%.

Overall, I think NewRiver could be an excellent REIT to add to my holdings. I would add some shares to my holdings and expect dividends to continue boosting my passive income for the foreseeable future.

Of course, dividends are never guaranteed and stocks are no substitute for cash savings. But the income available from good quality dividend shares is generally much higher than from savings accounts. For me, that makes shares an attractive investment at the moment.

A defensive 6.8% yield

My first choice is British American Tobacco (LSE: BATS). This FTSE 100 tobacco group carries some ethical and regulatory risks, but I think that BATS’ increasing focus on lower-risk products such as vapes goes some way to reducing these concerns.

For now, the reality is that this business is one of the largest in the tobacco sector and enjoys stable profits and strong cash generation. British American generated £7.2bn of surplus cash in 2021, of which £4.9bn was returned to shareholders.

Fortunately, British American was also able to reduce its debt levels by around 10% last year. The group’s leverage has been a concern for me in the past, but I’m increasingly comfortable with the situation.

The BATS share price has risen by nearly 25% so far in 2022, but the stock still offers a generous 6.8% dividend yield. With the shares trading on less than 10 times forecast earnings, I’d be happy to add British Americanto my portfolio at current levels.

Dividend shares: a property pick

I’m a fan of using real estate investment trusts (REITs) to generate a property income from my share portfolio. One UK REIT I’ve been following for a while is NewRiver REIT (LSE: NRR).

NewRiver owns regional retail property around the UK. The company’s sites are typically local or regional retail parks, and shopping centres in small and mid-sized towns.

It’s been a difficult few years for the group. Even before the pandemic, conditions were tough for retail landlords. To add to NewRiver’s problems, it had too much debt, in my view.

CEO Allan Lockhart now seems to have pulled off a difficult turnaround. He’s sold a number of properties, cut debt, and restored the dividend. Occupancy in NewRiver’s remaining portfolio is over 95%, and new rental rates are rising.

NewRiver still has a few problem sites. But the shares offer a forecast yield of 7% and I believe the business is now on a sound footing. I’d be happy to buy this dividend share for extra income.

A safe 8% yield?

Insurer Chesnara (LSE: CSN) buys life insurance and pension policies from other companies, and runs them to maturity.

This specialist business model generates plenty of cash, most of which Chesnara returns to its shareholders. As a result, this insurer is currently one of the highest-yielding stocks on the London market, with a forecast yield of 8%.

One risk I can see is that Chesnara could gradually run out of new acquisition opportunities. The business might then go into decline unless management pursued a new strategy.

However, there’s no sign of this yet, and a 17-year track record of dividend growth gives me confidence in Chesnara’s experienced management. I own plenty of insurance stocks already, but if I was buying an insurer today, Chesnara would definitely be on my shortlist.

These three REITs have an average dividend yield of 6.7%. I’m considering buying them to boost the passive income from my share portfolio, although I always have to bear in mind that the yields aren’t guaranteed.

The best retail opportunities?

Shopping centres were struggling even before Covid hit the sector. However, out-of-town retail parks and community shops such as mini supermarkets have recovered quicker and now appear to be performing quite well. NewRiver REIT (LSE: NRR) has a £700m property portfolio that’s built around these types of location.

This business isn’t without risk. Debt levels reached uncomfortable levels last year, leading to property sales to fund repayments. NewRiver’s dividend was also cut during the pandemic.

However, I’d argue that NewRiver’s current share price is low enough to reflect these concerns. The stock currently trades at a 30% discount to its book value of 131p and offers a forecast dividend yield of 7.4%. For these reasons, this UK REIT is a stock I’m considering for a passive income.

Healthcare properties with long-term incomes

My next selection is Target Healthcare REIT (LSE: THRL). This £730m business owns a portfolio of 79 care homes across the UK. The average remaining lease on these properties is 28 years, giving Target great long-term visibility of cash flows.

This REIT is continuing to expand too. Target Healthcare spent £173m on new investments during the final quarter of last year, acquiring 18 care homes and a new-build site.

The company’s properties look pretty safe to me. They generally have long leases and inflation-linked rents. The main risk I can see is that some UK care home operators have struggled to make money in recent years. If Target Healthcare’s tenants run into problems, rental rates might fall.

On balance, I’m attracted to Target Healthcare’s long-term business model. The stock also offers a forecast dividend yield of 5.8% for the current year, making it one of the highest yielders in the property sector.

A UK REIT for industrial property

My first two choices cover retail and healthcare. The other part of the economy where I’d like to own property is the industrial sector. My final pick, AEW UK REIT (LSE: AEWU), owns a mix of UK commercial properties with a bias towards industry.

Around 55% of AEW’s portfolio is made up of industrial units in regional locations. The remainder is made up of office and retail property. Although there’s a small overlap here with NewRiver, I’d be happy to own both of these REITs to gain greater exposure to the industrial sector.

My main concern here is that AEW’s average unexpired lease length is just four years. Its strategy is to buy properties with short leases and then target higher rental rates. This has worked well in recent years, when demand has been strong. However, I think it could be tougher to raise rents during a recession.

For now, the economic outlook still seems healthy. AEW recently reported stable half-year profits and confirmed it plans to pay a dividend of 8p per year. That gives it a tempting 7.1% dividend yield at current levels.

As such, here are three penny stocks I would buy as growth investments today in a diversified portfolio. 

Growth stocks to buy

Online travel agent Hostelworld (LSE: HSW) suffered a 76% decline in revenues for the first half of its 2021 financial year. Like almost every company in the travel sector, the group has been winded by the pandemic. 

However, I am attracted to this organisation because it has fantastic recovery potential. At the end of June, the group reported a cash position of €33.7m. Administrative expenses for the period were around €13.5m, implying the business has the funding for at least 18 months before it runs into problems. 

As an asset-light technology company, Hostelworld has a high level of operational gearing. This will produce high gross profit margins when revenues begin to tick higher. This gives the business headroom to weather the current uncertainty and prepare for growth in summer next year. 

Of course, there is no guarantee the travel and tourism market will rebound in 2022. A lot depends on the course of the pandemic. Nevertheless, coronavirus cases have declined enough for governments to open international borders for the past two summers. 

Recovery penny stocks

FirstGroup (LSE: FGP) and NewRiver REIT (LSE: NRR) are two other penny stocks with attractive outlooks. 

These companies are facing severe headwinds. Therefore, there is a high level of uncertainty surrounding their recovery potential. As a retail landlord, NewRiver’s fortunes are tied to those of the retail sector. With brick-and-mortar retailers struggling to draw consumers back into stores, the outlook for this sector is highly uncertain. 

At the same time, further coronavirus restrictions could limit public transport activity, which would only hold back FirstGroup’s recovery. 

Having said all of the above, there are reasons to be positive. After slumping last year, commercial property values are rising as investors return to the sector. These properties are also attracting different types of tenants, helping landlords like NewRiver diversify. 

What’s more, the government wants to encourage more consumers to use public transport in the long term, to reduce emissions and the number of cars on the road. This implies that while the near-term outlook for public transport operators like FirstGroup is highly uncertain, demand may increase in the years ahead. 

Considering these potential tailwinds, I would be happy to add these companies to my portfolio of penny stocks. They may be facing plenty of risks in the near term, but the potential for growth over the next five-to-10 years seems attractive. 

But is the sudden jump a sign that the worst is finally over for this business? And should I be considering it for my portfolio?

The rising NewRiver share price

NewRiver is a real estate investment trust that owns and operates a diverse portfolio of shopping centres and retail parks spanning eight million square feet. The business model is quite straightforward: buy a property, then rent it out. And in a world before Covid-19, this strategy was working relatively well.

But as lockdown restrictions were brought into effect and non-essential stores closed their doors, the firm’s rental income took quite a hit. So, it’s not surprising to see that NewRiver’s share price collapsed in early 2020.

Since then, the situation has improved. And looking at the half-year earnings report, it seems the company is getting itself back on track. Over the last six months, the underlying funds from operations came in 67% higher than a year ago, reaching £15.5m. That’s still below the £26.4m achieved in 2019, but it’s moving in the right direction.

The firm is still sitting in the red. However, thanks to the improved cash flows, losses were almost cut in half from £92.3m in 2020 to £49.9m today. Meanwhile, the net debt position has also fallen from £493.3m to £276.4m, which is actually better than pre-pandemic levels.

Needless to say, falling losses combined with a reinforced balance sheet are positive signs of progress. So, I’m not surprised to see the NewRiver share price jump on this report.

Taking a step back

As encouraging as this performance is, there remains a long road ahead before the stock can return to its former glory. Even before the pandemic entered the picture, NewRiver was encountering problems with its profitability. While rent collection remained relatively high and occupancy sat above 95%, the value of its properties started to fall rapidly. Consequently, management began selling off some of its real-estate assets at a loss.

The remaining assets in its portfolio may continue to decline in value due to the headwinds being created by the rise of e-commerce. In September, online sales represented 28.1% of total retail in the UK. That’s up from 18.1% in 2019. And since NewRiver’s portfolio consists of physical retail locations, the demand for renting such properties may fall over the long term. If that’s the case, the NewRiver share price may struggle to climb.

The bottom line

Overall, this business looks like it’s in a far stronger position than a year ago. And I wouldn’t be surprised to see the NewRiver share price make a comeback over the long term. But personally, I’m not interested in investing in a REIT that doesn’t generate a profit. Dividends are still being paid, but without a positive net income, these payments are ultimately unsustainable. Therefore, I’m putting this REIT on my watchlist for now.

One is NewRiver REIT (LSE: NRR). First-half results released Thursday sent the share price climbing 15% in early trading. Chief executive Allan Lockhart kicked things off, saying: “We are pleased to report that in the first half of FY22 our operational and financial metrics have improved significantly.”

Underlying funds from operations climbed 67%, to £15.5m. And retail net property income is up 6.8%, to £25.2m. The trust did post IFRA losses. But with rent cash collection in the half averaging 90%, this looks like the start of a sustainable turnaround to me.

The period included plenty of asset disposals, with the Hawthorn pub business offloaded for £224m. Retail disposals progressed according to plan too. Net debt, as a result, fell 44% in the period to £276.4m. I’m steering clear of companies carrying high debt, but this looks fine to me.

A year ago, it might have seemed like madness to consider investing in a retail real estate investment trust. But I’m seeing a leaner and fitter outfit here.

Healthy REIT

The Primary Health Properties (LSE: PHP) share price remained steady through the stock market crash. At the time of writing it’s up 5.3% over the past 12 months, and has gained a respectable 35% over the past five years.

On top of that, this real estate investment trust has been paying dividends yielding around 4%. All in all, I find a steady performance like that comforting in these scary volatile days. Why has it been performing so solidly?

Primary Health Properties invests in healthcare real estate in the UK and Ireland. Its properties are let on long-term leases, to GPs and to government health bodies. And that, I think, provides security. I see a nice safety barrier there, with clients who are not going to go away. It also makes for predictable income, which helps underpin the trust’s progressive dividends.

I surely won’t get rich quick if I invest in PHP. But I do think it could provide a steady income stream.

Online sales revolution

I can’t ignore Tritax Big Box (LSE: BBOX). During the retail crunch, online sales have been soaring. And that has been pushing up the demand for warehouses and logistics infrastructure, in which Tritax invests.

As a result, the Tritax share price has gained 45% over the past 12 months. And it’s up 84% in five years. The downside, though, is valuation. While the shares have soared, the underlying assets have not kept up.

Tritax shares are now trading at a premium of around 29% to net asset value per share (NAV). But that measure doesn’t tell the whole story, as it does not account for the income side of the investment. Dividend yields have been running at around 4%, which does not suggest overvaluation to me. And I reckon that helps offset concerns about the premium share price.

The risks of REITs? Covid-19 is on the rise again across Europe, and economies are still fragile. I reckon there’s a good chance of a 2022 stock market slump, and that could hit the REIT business. But these three are on my 2022 candidates list.

Penny stocks to buy

As a recovery investment, Marston’s (LSE: MARS) looks to me to offer numerous attractive qualities. The pub operator has experienced a rebound in sales since the lifting of restrictions over the summer. According to its latest trading update, sales in the three months to 2 October had risen 2% across its managed and franchised pubs, compared to 2019 levels.

That is quite impressive when considering many consumers are not yet comfortable going out and about. The company’s sales are coming to about 94% of 2019 levels for the full year, which is quite a substantial number. 

Unfortunately, even though the company’s sales have recovered, profits are still nowhere to be seen. High costs and financing charges are eating away at profit margins. This suggests the corporation is in a fragile position and could be highly susceptible to further coronavirus restrictions. 

As such, the company may not be suitable for all investors. However, I would acquire it for my portfolio of penny stocks as a speculative recovery play. As the economy continues to rebound, I think Marston’s should continue to reap the rewards. 

Commercial property values

Another recovery stock I would buy is NewRiver REIT (LSE: NRR). It has been a tough time to be a commercial landlord over the past 18 months. Commercial property values have collapsed, and so have rates of rent collection. 

NewRiver has not been able to escape the pain. As a real estate investment trust, the group has to return the majority of its rental income to investors via dividends to qualify for special tax treatment.

Its dividend shows just how much of an impact the pandemic has had on the group. The payout dropped from 21.6p for the financial year ending March 2019 to 3p for the year ending March 2021, a decline of 86%. 

But now NewRiver’s outlook is improving. For the first quarter of its current financial year, the group collected 87% of rent due. It has also raised more than £200m from asset disposals, reducing debt significantly below 40% of property value. 

Even though the company remains at risk from further pandemic restrictions, which could destabilise its recovery, I think its outlook is improving. Despite this fact, the stock is cheaper today than it was at the beginning of March this year. 

That is why I think this is one of the best penny stocks to buy right now. NewRiver’s balance sheet is getting stronger and rent collection improving, but the market seems to be ignoring these positive changes. 

Therefore, I would buy the stock for my portfolio as a recovery play.

A portfolio of dividend shares

A great example is GlaxoSmithKline (LSE: GSK). The international pharmaceuticals group is currently trading at a forward price-to-earnings ratio of 13.8. That looks cheap compared to the global pharmaceuticals sector. It also offers a dividend yield of 4.4% at the time of writing.

These metrics alone look attractive. However, the company is also planning to spin off its consumer healthcare business in the near term. Management has said the firm will cut its dividend after the spin-off, which is disappointing, but I think the two organisations will be worth more separately than they are together. 

That is the main reason why I would buy the stock for my portfolio of dividend shares today. Unfortunately, there is no guarantee the spin-off will create value. Glaxo has also struggled to achieve earnings growth in recent years, weighing on the firm’s equity. So, there are plenty of challenges the group may have to overcome. 

Steady income 

Considering the uncertainties outlined above, I appreciate Glaxo might not be suitable for all investors. Another company I would buy for my portfolio of dividend shares is the insurance group Direct Line (LSE: DLG). 

The best income stocks have predictable profits. Companies that sell products or services on a subscription basis are fantastic examples. Direct Line has similar qualities. Consumers tend to renew their insurance policies every year, and car insurance is a legal requirement. 

These qualities suggest to me that the company’s profits are predictable. That is why I would buy the stock and its 7.9% dividend yield for my portfolio today. The shares are also selling at an inexpensive looking price-to-earnings (P/E) multiple of 11.5. 

One challenge the company may face as we advance is climate change. This could lead to a higher volume of extreme weather-related claims. If claims costs begin to increase rapidly, Direct Line may have no choice but to reduce its distributions to investors. 

Undervalued 

The final company I would buy for my portfolio of cheap dividend shares is real estate investment trust (REIT) NewRiver (LSE: NRR). 

The company, which owns a portfolio of properties in the retail and leisure sectors across the UK, is a recovery play. Commercial property values have plunged over the past 18 months, as landlords have struggled to collect rents. NewRiver’s share price performance since March last year reflects this uncertain environment. 

While uncertainty could persist for some time, it is clear that as the UK economy recovers, consumers are returning to the high street. This should have a positive impact on commercial property values.

Despite the improving outlook, shares in NewRiver are still selling at a 50% discount to the firm’s book value. I think this is too cheap. The stock also yields 9%. Considering this level of income and the company’s valuation, I would buy the stock for my portfolio of dividend shares. 

UK shares on offer

The first company is Imperial Brands (LSE: IMB). As a tobacco business, this enterprise might not be suitable for all investors. Further, over the past few years, the group has really failed to live up to both expectations and sales as profits stagnated. There’s a chance this trend could continue as we advance. 

This uncertainty has pushed investors away from the business. However, I think it could be an opportunity. At the time of writing, the stock offers a dividend yield of just over 9%. It also trades at a mid-single-digit price-to-earnings (P/E) ratio. In fact, it’s one of the cheapest stocks in the FTSE 100 on this metric.

As such, I think the company’s valuation more than offsets the risk of owning the stock. This is why I’d buy the investment for my portfolio of cheap UK shares today. 

Recovery investment

Imperial Brands is one of the largest listed companies in the country. At the other end of the spectrum, Pendragon (LSE: PDG) has a market capitalisation of just £233m. 

Shares in this automotive retailer have been under pressure for several years. It’s easy to understand why. The company’s revenue has declined from £4.5bn in 2015 to £2.8bn for 2020. However, it’s projected to recover to around £3.5bn by 2022. 

I think investors are worried that the business may continue to shrink. That’s why the stock’s been under pressure. Of course, while there’s a good chance this will be the case, past performance should never be used to guide future potential. 

And right now, I think the company’s valuation more than makes up for this uncertainty. The stock is trading at a forward P/E of 6.5. Despite the company’s challenges, I think this valuation is attractive. This is why I’d buy Pendragon for my basket of UK shares. 

Discounted property 

As rising demand for residential property has sent prices skyrocketing, the market for commercial property is entirely different. Commercial property values remain depressed. That’s why shares in Newriver REIT (LSE: NRR) continue to trade around 55% below their year-end 2019 level. 

As there’s a strong possibility commercial property values may never recover to their pre-crisis highs, shares in Newriver may remain depressed for some time. 

However, although the stock is currently selling at a discount to book value at 40%, it’s been selling properties at their book value. This suggests the market is far too pessimistic about the company’s prospects. I think there could be an opportunity here as a result. 

That said, like other UK shares, the company may suffer significantly if there’s another lockdown. This would once again inflict yet more pain on the commercial property market. 

Still, even after considering this risk, I think Newriver’s valuation is too good to pass up. That’s why this is another stock I’d buy. 

Transport companies were hit hard by the pandemic, and that includes Stagecoach (LSE: SGC). Stagecoach shares are down 32% over two years. But the price has more than doubled since the market comeback started in November. In April, the price broke above the 100p level, but it’s since retreated to today’s 86p.

I don’t want to downplay the risk. Stagecoach carries a lot of debt, though it has slimmed down its operations. And the stock was out of favour with investors even before Covid-19. I also think this penny share could be in for a bit more volatility in the next year or two.

But as the country opens up further, I can see business improving and the share price strengthening. Initiatives to promote public transport, to help with the climate crisis, can’t do any harm either. I don’t see Stagecoach as a quick-profit investment, but I am looking at it with a five-year horizon.

Back to penny share status

I also have my eye on Card Factory (LSE: CARD), down 66% over two years. And though the price did start to pick up early in 2021, it’s turned south again since the beginning of May. The stock almost reached 100p, before falling firmly back down to penny share status at the current 59p.

It’s been another Covid-19 crash story, with Card Factory’s shops having to close during lockdown and sales suffering as a result. But I think we could be seeing an opening-up possibility here, as we head towards zero pandemic restrictions. There is plenty of competition, especially online, though the company is expanding its Internet channels. And we still don’t know how high street retail will recover, so there’s risk there too.

Card Factory is another company that managed to reduced its net debt during the year, by £35m. I would like to see debt coming down further. But I’m adding Card Factory to my list of potential penny share buys.

Another REIT

I already have a real estate investment trust (REIT) on my list of favourite penny shares. Today I’m adding another, NewRiver REIT (LSE: NRR). Now, I want to get the bad stuff out first. NRR’s latest full-year results were dreadful. The company reported a loss of £150.5m after tax. And a 13.6% like-for-like asset value decline contributed to a drop in portfolio valuation from £1.2bn to £974m. Still, some of that drop was down to disposals.

And things are starting to turn. Retail occupancy at the end of March nudged 96%, and rent collection is growing again. The liquidity situation looks fine to me too, with no refinancing needed until August 2023.

So, yes, commercial property is risky, even at the best of times. But I rate investment trusts as the best form of pooled investment, and a REIT as the way to benefit from any future upturn. I’m watching this sector closely.