SINGAPORE (June 19): 1. Why has United Hampshire US REIT (UHU REIT) focused on the grocery & necessity and self-storage assets?
These are two recession-resistant, cycle-agnostic sectors that produce stable cash flow over time due to long weighted average lease expiry (WALE) and consistent consumer demand for essential products and services. Both sectors provide basic goods and services directly to the US consumer, which is one of the primary drivers of the US economy.
We believe that these sectors are relatively e-commerce resistant as well. Deep-rooted consumer preferences for fresh food shopping and high delivery costs which erode margins, particularly in the suburban US markets with higher dispersed populations. Efficient online reservation system but physical storage service cannot be provided digitally.
2. Describe the mix of assets between grocery & necessity properties and self-storage properties in the REIT’s portfolio. Do you intend to change the composition of these assets and why?
The IPO portfolio had an appraised value of US$599.2 million ($833.7 million) as of Sept 30, 2019, with 86% in grocery & necessity properties and 14% in self-storage properties. This mix offers a unique balance of yield and appreciation. Over time, the specific composition of portfolio allocation between grocery & necessity properties and self-storage properties may vary modestly to provide the most favourable risk-adjusted reward from yield and growth.
3. Describe the REIT’s retail tenant mix. What would you maintain or change in terms of this mix?
Our retail portfolio tenancy mix broadly offers three categories of products and services:
- Necessity and essential goods (e.g. grocery, warehouse clubs and home improvement stores)
- Experiential businesses (e.g. fitness centres, restaurants and off-price apparel stores)
- Service providers (e.g. banks, cell phone stores and hair salons)
Going forward, we will be closely monitoring changes in consumer behaviour coming out of the Covid-19 pandemic, particularly for fitness centres and restaurants as demand for these businesses has been severely impacted by the lockdown.
We do expect these tenants to see a gradual uptick in consumer traffic through the course of 2021 as the recovery process from the pandemic accelerates.
4. How will United Hampshire US REIT sustain its operating metrics, such as occupancy and rental rates, to maintain a stable DPU amid a slowing economy and global uncertainty?
The majority of our rental income is backed by tenants that are essential businesses, including some of the largest retailers in the US. As most of these anchor tenants have long term leases, they have the largest impact on the portfolio’s WALE. Moreover, rental rates are fixed by the contractual lease agreements and are not based on turnover which ensures the stability of cash flow over time.
Due to the impact of Covid-19, we have engaged individual tenants and are providing short-term rental relief on a case-by-case basis. As part of the rental relief discussions, the manager is also in talks with certain retail tenants on potential lease extensions which would be accretive to the overall WALE. We have also deferred all non-essential capital expenditures and are seeking opportunities to reduce operating expenses, maintaining liquidity as we work our way towards a recovery.
5. How has Covid-19 affected the REIT’s operating conditions in the US?
Due to high demand for essential goods and services, the operations of our anchor tenants in essential business have not been materially impacted. Notably, the REIT’s shopping centres are located in suburban areas away from core urban locations. Unlike enclosed shopping malls, the “open-air” quality of our centres are more conducive for social distancing. Our expansive carpark and common areas also facilitate the ease of curbside pickup for consumers. The simple and functional layouts provided retailers with sidewalk space to form queues for customers before entering.
6. What notable developments can shareholders expect from the REIT in 2020 and beyond?
Approximately 50% of retail tenants that were previously closed in April have re-opened for business in May and tenants comprising approximately 87% of the total base rental income, are now open. We also achieved approximately 82% and 77% of retail tenant base rent collection for the months of April and May, respectively, as at May 31. We anticipate this upward trend in openings to continue into the second half of the year with a similar increase in footfall at the properties. The construction of the new Publix store at Port St. Lucie is targeted for completion in 1Q2021. While the immediate focus is working with our tenants to ensure we maintain occupancy and cash flow through, we will continue to seek out properties for acquisition that are DPU accretive. We believe grocery-anchored properties will come out of the pandemic even stronger as an asset class and there may be some opportunities to purchase properties at a discount due to the dislocation caused by the economic downturn.
7. What is the outlook for grocery & necessity properties as well as self-storage properties in the near to mid-term?
As the US economy recovers, we believe investment demand for the grocery and necessity sector will increase as consumer demand for essential goods and services at our properties increased despite the lockdown. As a result, we believe the value of best in class, openair grocery-anchored centres will increase in the near to midterm and capitalisation rates are expected to drop to pre-pandemic levels.
Our self-storage properties, Carteret Self-Storage and Millburn Self-Storage, continue to benefit from consistent occupancy levels of 91.0% and 60%, respectively. Elizabeth Self-Storage, which opened in January, has leased 94 units.
Despite an uptick of supply in self-storage development recently, we believe that the economic downturn caused by the pandemic will significantly slow new self-storage development. Nonetheless, there is still strong demand for this asset class in the dense, infill submarkets with high barriers, especially in North-eastern US.
We remain optimistic towards the growth of these two sectors, which are recession-resistant and cycle-agnostic, and will continue to take a disciplined approach to seek out new acquisitions.
8. Given the REIT’s focus on retail properties, how does it intend to compete with the rise in ecommerce trends?
Our tenants in essential businesses have seen escalations in e-commerce demand since the onset of Covid-19. This e-commerce demand has not displaced the need for physical stores as the majority of transactions are fulfilled by in-store inventories and are delivered to or picked up at the store directly by the consumer.
Post-pandemic, we believe need for physical stores in the proximity to residential areas will remain as grocery is a low margin business in nature. This is because the cost of delivery, which becomes exponentially higher based on the distance, dramatically reduces profitability.
9. What role does one of your sponsors, The Hampshire Companies, play in boosting your growth strategy?
With its track record in the retail and self-storage space, Hampshire has developed strong relationships with other developers, owners, investors and brokers. This has given it a competitive advantage in sourcing new grocery-anchored shopping centre opportunities.
10. What is United Hampshire US REIT’s value proposition to its shareholders and potential investors?
We offer investors attractive total returns underpinned by stable and sustainable cash flow as well as growth potential. We believe that UHU REIT features an e-commerce resistant portfolio, with mainly essential business tenants that are cycle-agnostic and recession-resistant in nature.
With a differentiated portfolio of open-air suburban shopping centres focused on the densely populated and affluent North-east markets, the REIT’s properties are also anchored by several best-of-breed tenants with strong business models and growing footprints, catering to the basic and essential needs of US consumers.
Candace Li is a research analyst with Singapore Exchange
