United Hampshire US REIT - UOB Kay Hian 2022-11-10: 3Q22 Strip Centres At The Forefront Of Retail Recovery

United Hampshire US REIT - 3Q22 Strip Centres At The Forefront Of Retail Recovery

  • Strip centres are leading the recovery in retail real estate with strong net absorption for eight consecutive quarters. United Hampshire US REIT’s strip centres are also benefitting with occupancy improving 0.5ppt q-o-q to 96.7% in 3Q22 and shopper traffic trending higher during summer. Its strip centres cater to necessity spending and have WALE of 7.6 years.
  • United Hampshire US REIT provides resiliency and lucrative yields. United Hampshire US REIT's Share Price trades at 2023 distribution yield of 10.8% and P/NAV of 0.66x. Maintain BUY. Target price: US$0.68.

United Hampshire US REIT (UHU) reported its 3Q22 operational updates.

  • Continuing to grow via acquisition. United Hampshire US REIT (SGX:ODBU)'s gross revenue and NPI grew 24.7% and 15.2% y-o-y respectively for 3Q22, driven by its third and largest acquisition of Upland Square, which was completed on 28 Jul 22 (about two months of contributions).
  • Grocery & necessity retail properties: occupancy enhanced with new leases. Occupancy of grocery & necessity retail properties improved 0.5ppt q-o-q to 96.7% in 3Q22. Newly-acquired Upland Square has full occupancy of 100%. United Hampshire US REIT executed a total of 11 leases (new leases: 4 and renewal leases: 7) covering 67,139sf of retail space in 3Q22. It has maintained weighted average lease expiry (WALE) of 7.6 years.
  • Self-storage properties: Rents on an upward trajectory. Occupancies at self-storage properties Carteret and Millburn were both 93.9% as of Sep 22. Average quarterly net rent rate for Carteret and Millburn increased 26% and 32% y-o-y respectively to US$23.00 and US$25.50 psf. Increases in rents for existing customers will keep rents elevated.
  • Sheltered from rising cost of utilities. Majority of United Hampshire US REIT’s leases for grocery & necessity retail properties are triple net, whereby tenants have to reimburse United Hampshire US REIT for their pro-rata share of operating expenses, such as property taxes, insurance and common area maintenance. Thus, United Hampshire US REIT is not unduly affected by higher cost of utilities.
  • Prudent capital management. Aggregate leverage has increased 4.1ppt q-o-q to 42.1% in 3Q22 due to the acquisition of Upland Square. Its weighted average debt maturity is 2.1 years. Cost of debt was stable at 3.05% in 9M22. Interest coverage ratio is healthy at 5.6x. 82% of United Hampshire US REIT's borrowings are hedged to fixed rates.
  • Management estimated that every 50bp increase in LIBOR/SOFR reduces United Hampshire US REIT's DPU by 0.053 Ucents, which is equivalent to 0.89% of trailing 12-month DPU.
  • Negative impact from refinancing. United Hampshire US REIT has borrowings of US$100m due for refinancing in Mar 23. Management has been negotiating with existing and potential new lenders. We estimate that weighted cost of debts would increase to 4.55% assuming the loans are refinanced at an interest rate of 5.7%.

Strip centres at the forefront of retail recovery.

  • Retail real estate is recovering after many years of minimal construction. Shoppers have also returned to physical stores as the economy reopens.
    • According to Coresight Research, store openings are flat but store closures are down 55% y-o-y in 9M22.
    • According to CBRE, neighbourhood and community strip centres topped all retail formats for the eight consecutive quarters with net absorption of 6.4m sf in 3Q22.
  • Availability for neighbourhood and community strip centres both dropped 1.2ppt y-o-y to 7.1% and 5.4% respectively. Many retailers are renewing their leases due to high construction costs and a tight construction labour market.
  • Supporting tenants’ omni-channel strategy. United Hampshire US REIT will support tenants’ omni-channel strategy 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.
  • Having integrated online and in-person services, many retailers are allowing customers to pick up or return online purchases at physical stores. The role of physical stores is greatly enhanced.
  • Caters to defensive day-to-day necessity spending at strip centres. Consumers will devote a larger share of their wallets on day-to-day necessities at strip centres as their purchasing power is eroded by inflation.
  • For the month of September, grocery sales increased by 6.8% y-o-y compared to 1.0% y-o-y for discretionary sales (electronic appliances, sporting goods, musical instruments, books, clothing and etc). Tenants providing essential services, such as supermarkets, grocery stores, convenience stores, pharmacies, medical supplies, home improvement stores, bank branches and pet stores, accounted for 64% of United Hampshire US REIT’s base rental income as of Sep 22. Shopper traffic at United Hampshire US REIT’s open-air strip centres have trended higher during summer.

Building scale brick by brick.

  • United Hampshire US REIT has completed the acquisition of Upland Square Shopping Center in Pottstown, Montgomery County (third highest populous county), Pennsylvania for US$85.7m on 28 Jul 22. The acquisition increased the size of United Hampshire US REIT's portfolio by 6% and expanded United Hampshire US REIT's exposure to the state of Pennsylvania from 7.3% to 17.7% of base rental income. The anchor tenant is Giant by Ahold Delhaize and three dominant national off-price retailers, namely Burlington, Ross and TJ Maxx. Upland Square provides NPI yield of 6.5%. The acquisition is accretive to pro forma 2021 DPU by 2.1%.

United Hampshire US REIT – Earnings forecast revision & recommendation

  • We maintain our existing DPU forecast for United Hampshire US REIT.
  • Enticing and irresistible yield spread.
  • Maintain BUY recommendation on United Hampshire US REIT. Our target price of US$0.68 is based on the dividend discount model (DDM) (cost of equity: 9.0%, terminal growth: 1.5%).
  • Catalyst:
    • 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/ 2022-11-10

Previous report by UOB:
2022-08-15 United Hampshire US REIT - 1H22 Resiliency & Stability From Provisions Of Essential Services.

Price targets by other brokers at United Hampshire US REIT Target Prices.
Listing of research reports at United Hampshire US REIT Analyst Reports.

Relevant links:
United Hampshire US REIT Share Price History,
United Hampshire US REIT Announcements,
United Hampshire US REIT Dividends & Corporate Actions,
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