United Hampshire US REIT - UOB Kay Hian 2020-12-16: Defensive Yield From Necessity Consumption Of Groceries & Self-Storage

UNITED HAMPSHIRE US REIT (SGX:ODBU)

United Hampshire US REIT - Defensive Yield From Necessity Consumption Of Groceries & Self-Storage

United Hampshire US REIT’s grocery-anchored and necessity-based retail properties cater to essential basic necessities, which are e-commerce resistant due to prohibitive last-mile logistic costs. Its defensive strength is further reinforced by blue-chip tenants and a long WALE of 8.4 years.
Demand for self-storage space is growing, due to an outflow of population from New York City to suburban areas in New Jersey and residents have to declutter their homes to create space for their home offices.
Initiate coverage on United Hampshire US REIT with BUY.

United Hampshire US REIT (SGX:ODBU) invests in income-producing real estate used primarily for grocery and necessity-based retail and self-storage purposes in the US. Its initial portfolio consisted of 18 grocery and necessity retail properties (85.8% of portfolio valuation) and four self-storage properties (14.2%), with an aggregate NLA of 3.2m sf spread across the East Coast with an appraised value of US$599.2m.

United Hampshire US REIT’s neighbourhood and community strip centres are often anchored by a supermarket that primarily caters to necessity consumption (non-discretionary), which is less sensitive to economic cycles. Delivery costs are prohibitive, particularly in suburban residential areas. This problem is especially acute for the grocery industry due to low offline grocery margins of 5-7%, which leave little room for delivery costs to be absorbed. Thus, online penetration for grocery sales remained at below 2% in 2019, vs online penetration for retail sales of 15%.

More than 70% of United Hampshire US REIT’s base rental income is derived from tenants engaged in businesses deemed essential, such as grocery stores, wholesale clubs, pharmacies and convenience stores. Its strip centres stayed open during the recent lockdown and all tenants have been open for business since Sep 20. Rental collection was healthy at 97% for Sep 20 (Jun 20: 84.6%).

United Hampshire US REIT’s Top 10 tenants include some of the largest grocers, wholesalers, home improvement retailers and discounters in the US, including Walmart, BJ’s Wholesale Club, Ahold Delhaize, Lowe’s and Home Depot. Its grocery & necessity retail properties have a long WALE of 8.4 years based on base rental income in Sep 20, which provides income stability.

United Hampshire US REIT’s self-storage facilities benefit from an outflow of population from New York City to suburban areas in New Jersey. Demand for self-storage space has increased as residents declutter their homes to create space for their home offices. According to Green Street Advisors, the move-in rental growth for the self-storage sector has reversed sharply from a decline in 2Q20 to +12% y-o-y in Oct 20.

United Hampshire US REIT’s grocery-anchored & necessity-based retail properties cater to essential basic necessities, which are e-commerce resistant due to prohibitive last-mile logistic costs. Its defensive strength is further reinforced by blue-chip tenants and a long WALE of 8.4 years.
Demand for self-storage space is growing, due to an outflow of population from New York City to suburban areas in New Jersey and residents have to declutter their homes to create space for their home offices.

United Hampshire US REIT’s forecasts for income available for distribution to unitholders are US$23.8m for 2020 (10-month period from 12 Mar 20 to 31 Dec 20) and US$30.7m for 2021.
We forecast distribution of US$0.048/unit for 2020 and US$0.061/unit for 2021.

United Hampshire US REIT trades at annualised yield of 10.5% for 2020F and 10.7% for 2021F, which is much higher than the average distribution yield for US REITs (across various sub-sectors) of 8.6%. This represents an attractive yield spread of 9.6% and 9.8% respectively above the 10-year US government bond yield of 0.9%.
United Hampshire US REIT trades at a significant 24% discount below 2020F NAV per unit of US$0.75. Other US REITs, such as Keppel Pacific Oak US REIT (SGX:CMOU), Manulife US REIT (SGX:BTOU) and Prime US REIT (SGX:OXMU), are trading at an average discount of 7% to NAV per unit.

See United Hampshire US REIT Share Price; United Hampshire US REIT Target Price; United Hampshire US REIT Analyst Reports; United Hampshire US REIT Dividend History; United Hampshire US REIT Announcements; United Hampshire US REIT Latest News.
Our target price for United Hampshire US REIT is based on the dividend discount model (COE: 7.0%, terminal growth: 0.5%).
Share price catalyst:
- Recovery and normalisation of domestic consumption in the US.
- Increase in occupancies for United Hampshire US REIT’s four self-storage facilities.
See the attached 22-page PDF report for complete analysis on United Hampshire US REIT (SGX:ODBU).

Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2020-12-16

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