Retail assets becoming hot properties. Institutional investors are accumulating grocery stores, pharmacies, convenience stores and other recession-resistant retail properties, which benefit from hybrid work arrangements, says UOB Kay Hian Research analyst Jonathan Koh.
Here, US strip centre owner United Hampshire US REIT ODBU (UHREIT) offers “attractive and irresistible” 2024 distribution yield of 9.2%, 5.3% above the 10-year US government bond yield of 3.9%, notes Koh.
UHREIT invests in income-producing real estate used primarily for grocery-anchored & necessity-based retail and self-storage purposes in the US.
In a Jan 8 note, Koh says UHREIT’s strip centres are benefitting from continued growth of domestic consumption, population migration to suburban locations, overcoming of e-commerce disruption through adoption of omnichannel strategies and limited new supply and record low vacancy of 6.6%.
“There is renewed interest from institutional investors, who are rediscovering the merits of retail assets and strip centres. UHREIT trades at P/NAV of 0.68x,” adds Koh.
Koh stays “buy” on UHREIT with a target price of 64 US cents (85.07 cents).
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The industry outlook has turned positive, says Koh. “Personal consumption continues to power growth in the US economy and expanded by 2.4% in 3Q2023, supported by low unemployment rate of 3.7% and growth in average hourly earnings of 4.0% y-o-y.”
According to Coresight Research, retailers are planning to open 4,500 new locations compared with 3,500 closures, resulting in net new stores of 1,000. Retailers are now able to more accurately pinpoint locations for successful stores utilising data analytics, add Koh.
Strip centres are also recovering after years of minimal construction, says Koh. “Supply of new retail space has been limited over the past decade since the Global Financial Crisis and continues to be crimped by high construction costs.”
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According to Green Street, strip centres have the least new supply coming onstream over the next five years due to elevated construction costs and supply barriers, especially in dense affluent residential suburbs.
According to CBRE, availability for neighbourhood and community strip centres saw the largest drop of 0.5 percentage points (ppts) y-o-y to a record low of 6.6% in 3Q2023.
UHREIT’s industry peers are starting to outperform, says Koh. Share prices for industry peers listed in the US have rallied. Brixmor Property, Kimco Realty, Regency Centers and RPT Realty gained 12.0%, 21.7%, 12.7% and 22.0% respectively in 4Q2023.
The industry is consolidating, Koh adds. Regency Centers completed the acquisition of Urstadt Biddle Properties in August 2023 to expand in premier suburban areas. Kimco Realty will acquire RPT Realty to expand its presence in coastal and Sun Belt markets.
UHREIT’s operational numbers
As of September 2023, 63.6% of UHREIT’s base rental income was derived from tenants providing essential services.
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Its triple net leases require tenants to reimburse the landlord for property taxes, insurance and maintenance for common areas, which shelter UHREIT from the negative impact of inflation, says Koh.
Leases for anchor tenants typically have built-in rental escalation of 5%-10% for every five to 10 years. Tenants typically do not have early termination rights, he adds.
UHREIT has invested US$12 million to develop a new 63,000 sq ft store on excess land within its St Lucie West property in Florida.
Academy Sports + Outdoors, a Fortune 500 sporting goods retailer, has leased the new store for 15 years.
Construction was completed ahead of schedule and Academy Sports has commenced interior build-out. The new store opened in November 2023, ahead of the festive season, and provides “high-single-digit ROI”, says Koh.
UHREIT has successfully completed refinancing for 2024. Aggregate leverage improved 0.3ppt q-o-q to 41.7% as of September 2023 due to the divestment of Big Pine Center.
UHREIT’s key bankers are Canadian Imperial Bank of Commerce and M&T Bank. It has successfully completed the refinancing of its term loans due in 2024.
It only has a “small” mortgage loan of US$21.1 million maturing in March, says Koh, and there is no significant refinancing requirement until November 2026. The weighted average debt maturity is 3.2 years.
As at 3.31pm, units in United Hampshire US REIT are trading flat at 50 US cents.
