UNITED HAMPSHIRE US REIT (SGX:ODBU)
United Hampshire US REIT - 1Q22 Physical Stores Making A Comeback
- United Hampshire US REIT (SGX:ODBU) benefitted from strong leasing momentum and occupancy for grocery & necessity retail properties improved 1.1ppt q-o-q to 96.4% in 1Q22, the highest since its IPO.
- Self-storage properties have registered an uptrend in occupancies. Management is on the lookout for yield-accretive acquisitions of strip centres along the East Coast.
- United Hampshire US REIT provides 2022 distribution yield of 10.2% and yield spread of 7.3%. United Hampshire US REIT's share price trades at a 19% discount to NAV per share of US$0.75. Maintain BUY. Target price: US$0.92.
United Hampshire US REIT's 1Q22 Results
- United Hampshire US REIT reported growth in gross revenue and net property income (NPI) of 20% and 13.1% y-o-y respectively for 1Q22 with contributions from its inaugural acquisitions of Colonial Square and Penrose Plaza, which were completed in Nov 21. Distributable income increased 7.9% y-o-y to US$8.1m.
- Grocery & necessity retail properties: Benefitting from strong leasing momentum. Occupancy of Grocery & Necessity Retail Properties improved 1.1ppt q-o-q to 96.4% in 1Q22, the highest since its IPO. Occupancy at Towne Crossing in the state of New Jersey improved by 25.5ppt q-o-q to 93.4%.
- United Hampshire US REIT has backfilled the final 2,788sf of retail space at Fairheaven Plaza in the state of Massachusetts, which is currently 100% leased. United Hampshire US REIT executed a total of 10 new and renewal leases covering 79,928sf of retail space in 1Q22. New tenants were from the food & beverage (two tenants), fitness (one tenant), discounter/outlet (one tenant) and consumer services (one tenant) sectors.
- Self-storage properties: Occupancies on an upward trend. Occupancy at Carteret self-storage property improved 4.4ppt q-o-q to 92.5% in 1Q22. Similarly, occupancy at Millburn self-storage property improved 1.4ppt q-o-q to 96.2%. United Hampshire US REIT has entered into an agreement for the sale of Elizabeth and Perth Amboy Self Storage Properties to Storage Post for US$45.5m. The selling price is 17.7% above purchase price (excluding top-ups) and 2.5% above appraised valuation. The divestment is expected to complete in 2Q22.
- Resiliency from long WALE. United Hampshire US REIT’s grocery & necessity retail properties provide long weighted average lease to expiry (WALE) of 7.8 years and income stability.
- Sheltered from rising cost of utilities. Majority of its leases for grocery & necessity retail properties are triple net, whereby tenants are responsible for their pro-rata share of operating expenses. Thus, United Hampshire US REIT is not unduly affected by higher cost of utilities.
Prudent capital management.
- United Hampshire US REIT has conservative aggregate leverage of 38.9% as of Mar 22. Its weighted average debt maturity is 2.3 years and does not have any bank loans due for refinancing till Mar 23. 79.6% of United Hampshire US REIT's borrowings are hedged with fixed interest rates. Management estimated that every 50bp increase in London Interbank Offered Rate/Secured Overnight Financing Rate has a negative impact on DPU of 0.051 Ucents.
- Cost of debt was 2.9% in 1Q22. Assuming that the fed funds rate averages 2.5% in 2023, we estimate that average cost of debt will increase to 3.3%.
Consumers prioritising consumption of necessities.
- Consumers are expected to pullback from discretionary spending but will devote a larger share of their wallets on purchases of day-to-day necessities at strip centres in their neighbourhood. According to US Census Bureau, grocery sales increased 8.6% y-o-y in Feb 22 and accelerated to a growth of 9.5% y-o-y in Mar 22. Spending on essentials is expected to be maintained despite uncertainties caused by heightened geopolitical tension and higher inflation.
Shoppers heading back to physical stores.
- Foot traffic at United Hampshire US REIT’s open-air strip centres have rebounded since COVID-19 vaccines became widely available. Americans are eager to get back to shopping and dining out due to pent-up demand. Growth in e-commerce sales was 39.3% y-o-y in 1Q21 but subsequently slowed to an average of 8.3% y-o-y during 2Q- 4Q21. E-commerce sales peaked at 15.7% of total retail sales in 2Q20 and have since slipped to 12.9% in 4Q21.
- According to Mastercard SpendingPulse, sales at physical stores increased 11.2% y-o-y compared with a drop of 3.3% y-o-y for online spending in Mar 22.
Supporting tenants’ omni-channel strategy.
- Retailers realised that omni-channel consumers who shop both online and at physical stores tend to spend more. United Hampshire US REIT will support tenants’ omni-channel strategy to provide a seamless online and offline shopping experience by providing multiple methods for shoppers to pick up their online purchases, including curbside pick-up for online orders, buy online pick-up in store (BOPIS) and micro-fulfilment of online orders.
- Physical stores are back in focus. Physical stores have evolved into key nodes for last mile delivery. Supermarkets and grocery stores are allocating larger parking areas to facilitate curb-side pickup. More retailers will set up in-store micro fulfilment centres with automated picking processes of about 10,000sf. Walmart plans to add 100 automated fulfilment centres attached to their existing physical stores. Amazon has experimented with small department stores to showcase its line of private labels and exclusive third-party products.
- Maintain focus on the East Coast. According to management, cap rates for grocery-anchored neighbourhoods and community strip centres were stable at 5.5-6.0%. Management is on the lookout for acquisitions of grocery & necessity retail properties strategically located in neighbourhoods with limited competition. United Hampshire US REIT will continue to focus on expansion along the East Coast.
United Hampshire US REIT - Earnings forecast and recommendation
- We trim our 2022 DPU forecast for United Hampshire US REIT by 5% due to higher interest rates and cost of debt.
- Enticing and irresistible yield spread. United Hampshire US REIT's share price trades at 2022 distribution yield of 10.2%, which represents an attractive yield spread of 7.3% above the 10-year US government bond yield of 2.9%. It trades at P/NAV of 0.81x.
- Maintain BUY. Our target price of US$0.92 for United Hampshire US REIT is based on the dividend discount model (DDM) (cost of equity: 7.0%, terminal growth: 0.5%).
- See
- Share price catalysts:
- Stability of spending on necessity products and essential services.
- Yield-accretive acquisitions of grocery & necessity retail properties.
Jonathan KOH CFA
UOB Kay Hian Research
|
https://research.uobkayhian.com/
2022-05-17
SGX Stock
Analyst Report
0.92
DOWN
0.97
