8.5% dividend yield! Time to buy this out-of-favour passive income stock?

NewRiver Reit (LSE:NRR) is a real estate investment trust (REIT) that owns retail properties. The stock has an 8.5% dividend yield, which should catch the eye of investors looking for passive income.

The company’s portfolio is 98% occupied, it collects 99% of its scheduled rent, and its debt is fixed at an average of 3.5% for the next four years. At the very least, I reckon this makes it worth a closer look.

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Discount retail

Retail properties have been unpopular with investors recently. Since the Covid-19 pandemic, the rise of e-commerce has caused concerns over the long-term demand picture. 

To some extent, this is reflected in NewRiver’s rent collection. While its portfolio is fully occupied and it collects virtually all of the rent it is due, it leases its properties at low prices to entice tenants.

Average rent per square foot declined over the last year from £11.98 to £11.82. And underlying funds from operations (UFFO) — a key measure of REIT profitability — fell from 8.3p per share to 7.4p. 

This illustrates the biggest risk with NewRiver. It suggests that the company doesn’t have meaningful pricing power and demand for its properties is weaker than its occupancy metrics might indicate.

Portfolio strategy

Investors should look more closely, though. NewRiver divides its properties into three categories – the ones it wants to keep, the ones it’s selling now, and the ones it plans to sell in future.

The most important assets are the ones the company plans on keeping. And within this part of the portfolio, average rent per square foot is between £12 and £12.81 – above the overall average.

Importantly, the business is also attracting some good prices on these properties. The shopping centres it intends to retain are currently leased at a 6% premium to their estimated value. 

It’s therefore important not to be too hasty with a look at NewRiver. The headline numbers might not look positive, but this is a company in transition and it might well have some valuable assets.

Dividends

Ultimately, dividends are the most important thing when it comes to passive income. At the end of the day, the big question for investors is whether NewRiver can sustain its distributions.

The company has a policy of paying out 80% of its UFFO to shareholders. But during the last year, it also decided to distribute the interest it received on the excess cash on its balance sheet. 

That took the total dividend for shareholders to 85% of UFFO. Management made clear, though, that this isn’t a permanent change in policy, so I wouldn’t bank on it being maintained if interest rates fall.

Even without this, though, the dividend would still have yielded a return of around 8% based on today’s share prices. That’s still an attractive return, especially with the core portfolio growing.

A stock to consider buying

At first sight, NewRiver Reit looks unpromising. The company operates in an unpopular sector and seems to lack meaningful pricing power.

This is why it’s important to look past the surface, though. I think the stock could be a good addition to a diversified passive income portfolio, so I’m considering buying it for my own.