Overwhelming support ensures steady start for United Hampshire US REIT

At the IPO price, the initial yield for this year is projected at 7.4%. The DPU for FY2020 is projected at 4.93 cents including top-ups, and in FY2021, forecast DPU is 6.09 cents includ­ing top-ups, giving a yield of 7.6% on the IPO price. The top-ups are income support for a couple of properties which have not yet stabi­lised. Gearing as at listing date will be 38%. The IPO price is at a small premium of 1.07 times net asset value of 75 US cents. The offer closes on March 10, and the REIT starts trad­ing on March 12.

Sponsors Hampshire and UOB have worked together for 10 years, and jointly formed three funds with combined assets under manage­ment of US$1.1 billion.

Institutional investors such as Kasikorn As­set Management and Bangkok Life Assurance rank among the cornerstones. Members of Sin­gapore’s high net worth billionaires and mil­lionaires are also cornerstones, including an investment holding company owned by Phil­ip Ng and his family, and Helen Chow, a direc­tor of Wing Tai Holdings and wife of its chair­man and managing director Cheng Wai Keung. Investors include clients of UOB, UOB-Kay Hian, UBS, HSBC and Credit Suisse.

The placement portion is likely to be more than 3.5 times subscribed which should en­sure a steady start. Investors are likely to be attracted not just by the yield, but by the port­folio and its relatively long weighted average lease expiries (WALE) of 8.4 years based on base rental income, with only 8.6% of BRI ex­piring between 2020 and 2021.

The mainly freehold properties comprise 18 grocery- and necessity-anchored shopping centres, and four self-storage properties with an appraised value of US$599.2 million. Geo­graphically, the REIT will own seven grocery-led properties in upstate New York accounting for 30.7% of the portfolio by valuation. New Jer­sey where four grocery led properties and four self-storage properties are located, accounts for 29.7% of the portfolio. This is followed by Flor­ida with two properties accounting for 14.4% of portfolio, Maryland with two properties ac­counting for 12.3% of portfolio, Massachusetts with two properties accounting for 8.7% and North Carolina with one property.

The occupancy of the portfolio is 95.2%, and the tenant retention rate based on net leasa­ble area of the grocery and necessity properties is 97.6% for the 12 months to Sept 30, 2019, which is very high by Singapore standards. The grocery- and necessity-anchored properties are mainly on long triple net leases where tenants are responsible for their pro-rata share of all real estate taxes, building insurance, property expenses, and common area operating expenses

E-commerce- and recession-resistant

Robert Schmitt, CEO of United Hampshire US REIT’s manager, says that the portfolio is (eco­nomic) cycle-agnostic and recession-resistant.

“If certain events occur which result in a downturn in the economy, our assets can deal with it because of the long WALE. They can withstand the recessionary factors because people are eating whether times are good or bad,” Schmitt says.

The REIT’s prospectus points out that suc­cessful traditional retailers are investing heavily in omni-channel strategies and winning mar­ket share. Wholesale grocery stores such as Sam’s Club and BJ’s Wholesale are well suit­ed for conversions of their existing space to suit both physical and online store models. For in­stance, space can be converted to facilitate cus­tomer pick-ups or deliveries. Ahold Delhaize has committed capital expenditure to roll out “click and collect” to more than 600 stores in the US by 2019 — up from about 250 stores in 2018, and is also investing in new “micro-ful­filment” in existing stores, with a view to pro­viding same day pick-up and delivery to 65% of its customers by 2020.

Conversely, many online retailers includ­ing Amazon, Bonobos, Allbirds, Casper and eBay have all abandoned their online-only models and are increasing their physical store footprints. In 2017, Amazon expanded their grocery business by acquiring Whole Foods Market, including about 500 physical stores across the US, which was probably in recog­nition of the fact that grocery sales require a physical presence.

The tenants targeted by United Hampshire US REIT are tenants resilient to the impact of e-commerce, including but not limited to res­taurants, home improvement stores, fitness centres, warehouse clubs and other uses with strong omni-channel platforms.

“The retail apocalypse does not apply to gro­cery-anchored retail, which has a 2% penetra­tion in e-commerce compared to a 15% pene­tration for retail [in general],” Schmitt points out. The retail apocalypse is a phenomenon in the US that refers to the closing of numer­ous US brick-and-mortar retail stores, espe­cially those of large chains such as Sears, Ma­cy’s, Gap and so on, starting around 2010. In 2019, US retailers announced 9,302 store clos­ings, up 59% y-o-y.

The reason that online penetration for gro­cery sales remains as low as 2% is due to the prohibitively high “last mile” logistics and de­livery costs, particularly in the suburban US markets with low population densities. In ad­dition, grocery stores are usually in convenient “last mile” locations, which reduces the con­venience advantage of online shopping.

And, as with consumers in Asia, deep-rooted consumer attitudes globally toward fresh food shopping, in particular a preference for pick­ing their own produce, are likely to keep gro­cery shopping on the radar.

According to Schmitt, the home improve­ment and the grocery industry is a US$750 bil­lion industry, the majority of which is invested in brick-and-mortar stores.

“The biggest reason is grocery and [food] are very low margin and there is no price ap­preciation in food, so operators are finding ways to improve margins, including [having] prepared food [delivered]. It’s very difficult to add the delivery component to the cost struc­ture of grocery. In the US, delivery gets cost­ly because we’re very dispersed. Only 25% of the population live in the urban core. If you compared population density psm versus Asia and Europe we’re at the low end of the list so to deliver goods becomes more expensive,” Schmitt explains.

The REIT’s top 10 tenants include BJ’s Whole­sale Club, Wakefern Food Corp/ Inserra Super­markets, Ahold Delhaize, Lowe’s Companies, Walmart/Sam’s Club, LA Fitness, Home Depot, Price Chopper Supermarkets, PetSmart and Burlington Stores. They contributed 66.7% to base rental income for September 2019.

Supply growth limited in northeast US

The IPO portfolio is primarily concentrated in the northeast markets of US, which have a 24% higher spending power psf of retail space than the US Top 50 average (which are in turn also more affluent than the US generally), with a 28% lower retail sf per capita and 38% low­er supply growth than the US Top 50 average (see chart 1).

Although the US has a plentiful supply of retail real estate, this supply is not evenly dis­tributed across the US and individual markets can be appropriately served, or even under­served. The northeast region has lower retail space per capita than the US Top 50 average. This is driven in part by structural barriers to new supply, including the scarcity of land and difficulty in obtaining planning permission. Supply growth is therefore also expected to be muted relative to other markets.

“One of the reasons our focus is in the northeast in the US is because it is the oldest and most dense part of the US where there has been very little retail real estate development and overall supply of 25 sf per capita is low­er than the US Top 50 average,” Schmitt says. “In the northeast, buying power is 24% high­er than the US Top 50 average, and there is 28% less supply.”

However, some properties may encounter competition. For instance, Garden City Square in New York’s grocer market has more than 10 competitors in the same area. Elsewhere, the REIT’s ShopRite in Albany, New York, fac­es competition with four other supermarkets within a mile.

In Glen Burnie Maryland, Arundel Plaza faces modest competition from nearby ALDI, Walmart and Target. However, Arundel Plaza is newly renovated, with a good location, just outside Baltimore and in a major retail corri­dor with a strong demographic profile for gro­cery shopping.

Schmitt says the assets need competition. “Competition to your anchor retailer is unique in groceries. You should want your competitor to be in [your] market place.”

Lease structures

The long WALE is comforting, and according to Schmitt, none of the leases have break claus­es. Instead, the leases are accompanied by es­calation clauses.

With an increasing number of foreign REIT listings with long WALE, investors are realis­ing that there is downside to long WALEs with escalation clauses. In the Oct-Dec quarter last year, at least three S-REITs with overseas prop­erties recorded negative rental reversions after long leases accompanied by rental escalations expired and were renewed. Market rents – in some cases - turned out to be lower than ex­piring rents, causing negative rental reversions.

“It’s a rare situation where we are backing up rent. We don’t assume tenants are going to automatically renew but there’s a mix. For any-thing coming due in the two years (for fore­cast NPI and DPU) we [assume we] renew at the rate that is the market rate or in the lease extension for our projection,” Schmitt says.

The Hampshire Companies do not develop grocery assets which make up the largest por­tion of the portfolio, but they have access to deals as it has been sourcing them for a num­ber of decades. It develops self-storage assets which currently comprise 14% of the portfo­lio currently make up about 14% of the total equity value of the portfolio, and the REIT has plans to raise this.

Market watchers believe United Hampshire US REIT should get off to a good start because of heightened investor interest and its defen­sive portfolio.