United Hampshire US REIT IPO Analysis – The Ultimate Safe Haven?

It took more than 6 months after the release of a news article by The Business Times that S-Reit universe may soon welcome grocery-anchored malls as a new asset class. United Hampshire US Reit has finally lodged its initial prospectus in Singapore and you can refer to this website for their prospectus.

The difference between this new IPO and the existing retail REIT is the amount of leasable area leased to supermarkets or grocery shops. Malls owned by existing retail REIT count supermarkets as their anchor tenant, leasing a small amount of leasable space of the property while the new IPO’s anchor tenant accounts for 50 to 70 per cent of the net lettable area. The other inline tenants of this REIT usually make up less than 5 per cent each and tend to be complementary lifestyle services such as hairdressers and dry cleaners that are resilient to the impact of e-commerce.

Introduction

United Hampshire US REIT is a Singapore REIT established with the principal investment strategy of investing in a diversified portfolio of stabilised income-producing grocery-anchored and necessity based retail properties and modern, climate-controlled self storage facilities. All properties are located in the United States. The tenants targeted by the REIT are tenants such as restaurants, home improvement stores, fitness centres, warehouse clubs are resilient to the impact of e-commerce. 

There are two sponsors for the REIT mainly UOB Global Capital and The Hampshire Companies. The sponsors have been partnering for more than 10 years, investing in income producing real estate assets in the United States. It currently owns three funds with Assets Under Management of about US$1.1 billion. 

The Hampshire Companies, has over 60 years of experience in acquiring, developing, leasing, repositioning, managing, financing and disposing of real estate. It has acquired and developed over 12 million sq ft of grocery-anchored centers and conducted 49 self-storage transactions aggregating over 3.8 million sq ft. It currently manages an AUM of about US$2.1 billion. 

Portfolio

The initial portfolio of the REIT consists of 18 Grocery & Necessity properties that has a total Net Lettable Area of 2.86 million sq ft and four Self-Storage properties with a total NLA of 0.31 million sq ft. The total value of the portfolio is approximately US$599.2 million. Out of the 18 Grocery & Necessity properties, two of them are Warehouse Clubs. Warehouse Clubs are membership-based warehouse club chains selling a variety of goods such as groceries, clothing and furniture and technology at a discounted price to members. 

There are three properties that we need to take note in this IPO Portfolio. First of all, Elizabeth Self-Storage and Perth Amboy Self-Storage are two of the Self-Storage properties. The former was recently completed in January 2020 while the latter is currently under development and expected to be completed by the second quarter of 2020. St.Lucie West is one of the Grocery & Necessity Properties that is undergoing asset enhancement works to expand the asset. The AEI is targeted to be completed by the first quarter of 2021. 

This information is important as the management has decided to implement income support for these three properties. There will be income support for St.Lucie West for a period of up to 31 October 2021 while Perth Amboy Self-Storage and Elizabeth Self-Storage have income support for a period of four years from completion of the acquisition. Potential Investors are warned that upon the expiry or termination of the Top-Up Agreements, these Properties may not be able to generate a level of income which is comparable to the level of income with the income support. 

Once the completion of the expansion of the St. Lucie West, it will result in the current anchor tenant to occupy that area. The area which was previously occupied by the existing tenant will be backfilled with new tenants. Currently 57.3% of the existing tenant lettable area has been leased out to new tenants. Income support was necessary for this AEI as the increased cash flows of St. Lucie West to the new tenants will not commence until the completion of the AEI and after it has been backfilled with the new tenants. Income support will help to mitigate the lower rental income due to the AEI. US$1,798,000 from equity proceeds will be set aside for income support. For the avoidance of doubt, the full amount of the Top-Ups will be payable regardless of the actual underlying income for St. Lucie West for a period of up to 31 October 2021 as there will not be any rental income earned from the St. Lucie West Expansion from 1 March 2020 when it is under construction until its occupancy by Publix expected in April 2021. In addition, it is expected to take eight months to be backfilled with new tenants for the existing anchor space. 

As at the Listing Date, Elizabeth Self-Storage would have only recently been completed in January 2020, and Perth Amboy Self-Storage will still be under construction with the target completion period in 2Q2020. As a result, their Net Operating Income will not have reached a level in line with those of more mature or stabilised properties as at the Listing Date. Therefore, income support for these two properties is necessary due to the following reasons above.  US$2,198,123 and US$2,524,356 will be set aside from the purchase consideration for Perth Amboy Self-Storage and Elizabeth Self-Storage, respectively for income support. For Development/Newly Completed Properties Income Support, the purchaser will be entitled to receive the difference between the difference between the relevant Net Operating Income and such Stabilised Net Operating Income, up to an aggregate amount that was mentioned above for a period of four years. 

IPO Portfolio’s occupancy rate stands at 95.2% as of 30 September 2019. The image above shows the occupancy rate trend for the past 3 years. Occupancy rate is quite stable with the highest recorded in 2016 at 97.4% while the lowest recorded at 93% in 2018. Occupancy rate has been improving since 2018. 

Almost all of the Grocery & Necessity Properties have occupancy that is higher than the average of the competing properties in their respective micro-markets. The Manager believes that the key to increasing footfall and long-term popularity of its properties is to look for the highest quality centres, in good locations and with leading anchor tenants.

WALE for its Grocery & Necessity Properties is 8.4 years. 8.6% of its Base Rental Income will only expire in the next two years with the majority of 59.4% expiring 2025 and beyond. I am a fan of higher WALE as having higher WALE means that the management does not need to find tenants thus providing stability in rental income. However, the con of having a longer WALE is that if the REIT will miss out any opportunity of rising market rental rates unless there are rental review in the lease. The Grocery & Necessity Properties also enjoyed a 97.6% tenant retention rate over the 12 months ended 30 September 2019, further increasing the stability of its cash flow as the management does not need to look for new tenants which will affect rental income negatively. In addition, the income received from tenants are generally fixed with no exposure to the variability of underlying tenant sales. This protects the downside risks of having variable income based on tenant sales. The portfolio has a well-diversified tenant mix that focuses on growing and e-commerce resistant sectors such as grocery, discounters, wholesale, home improvement, food & beverage, and fitness operators.

As for organic growth, 83% of the existing leases of the Grocery & Necessity Properties by Base Rental Income have built in rental escalation that ranges from 5% to 10% at every five to ten years. Inline tenancies are tenants that account for net lettable area that is less than the grocery anchor tenant have built in rental increases ranging from 1% to 3% annually. 

Rental rates for its Self-Storage properties are updated on a daily basis. The property manager utilises computer algorithms that measure supply and demand for space at the property and in the market. Rental increases of 5% to 8% have been built in for the Self-Storage Portfolio for Forecast Period 2020 and Projection Year 2021, with discounts of 10% to 32% offered during the ramp up period of approximately up to four years which is the time which the Manager estimates to be required for each of the Self-Storage Properties to stabilise. Tenant leases carry from month to month and the leases are renewed automatically each month and tenants can elect to terminate with 10 days of notice.

IPO portfolio’s Top 10 tenants accounts 66.7% of the Base Rental Income. The Top 10 tenants include well known brands such as Walmart, Home Depot and Lowe’s Companies have positive same store sales growth of around 2-5%.

The image above shows the trade sector breakdown based on Base Rental Income. 45.3% of Base Rental Income belongs to the Grocery & Wholesale sector where it is resilient to e-commerce. According to a research, online penetration for grocery sales remains at 2% despite the fact that online penetration for retail sales has risen rapidly over the last decade, reaching approximately 15% in 2019. A survey conducted concluded that 84% of respondents prefer in-store grocery shopping because they prefer to pick out their own products. In addition, Home Improvement and Food Drink being the two largest trade sectors after Grocery & Wholesale have the least E-Commerce penetration in 2017 at 3% where this will increase to 6% and 4% respectively. Therefore, this shows the balance of defensive attributes arising from its cycle-agnostic grocery and necessity-anchored tenants. 

Debt

United Hampshire US REIT is expected to have gross borrowings of US$219.5 million as of listing date. This represents an aggregate leverage of 37%. 

Management

Looking at their profile, I believe the managers of the REIT are not unfamiliar in managing a REIT as they have prior experience and knowledge in managing them or anything that is related to real estate. 

Take for example, the CEO of the Manager, Mr Robert Totten Schmitt. Mr Schmitt is a Principal of The Hampshire Companies and currently serves as the Fund Manager of Hampshire’s Core Plus Fund Platform, which is comprised primarily of retail and industrial properties with an aggregate asset value in excess of US$1 billion invested through private equity funds and direct investment vehicles funded by both foreign and domestic institutional investors. As a Fund Manager, his primary roles are to develop and execute Fund Strategies, lead the sourcing, investment, disposition and acquisition functions and provide oversight to the investment management and leasing platform. Prior to his affiliation with Hampshire in 1995, Mr Schmitt was an Asset Manager with Legg Mason Real Estate Advisors in Philadelphia, Pennsylvania from 1991 to 1995. At Legg Mason, he was responsible for managing a portfolio of real estate investments for pension fund clients including equities, joint ventures and mortgages.

Closing Thoughts

This will be the first pure overseas retail REIT that will be listed in SGX. Due to the increase in popularity of E-Commerce, most investors shun retail REIT. This was reflected in the unit price of CapitaMall Trust and Frasers Centrepoint Trust in 2016 or 2017. However, the Food and Beverage trade sector is one of the largest revenue contributors for retail malls owned by REITS thus helping to cushion the negative impact of E-Commerce to retail malls. E-Commerce is not spared in the United States. Online penetration for retail sales has risen rapidly over the last decade, reaching approximately 15% in 2019. However, online penetration for grocery sales remains at approximately 2%. These characteristics result in grocery presenting long term challenges to e-commerce. Therefore, grocery and necessity-anchored shopping centers and self-storage tenants are resilient to the impact of e-commerce. They are the most recession resistant, cycle-agnostic, and stable property types in the U.S. Furthermore, the cash flow of the REIT will be stable since the properties have long WALE by Base Rental Income of 8.4 years. 

I am definitely interested in owning this REIT as it is recession-proof but given the current situation, I might wait till the end of the IPO application period to decide whether to subscribe for the IPO. I believe that REITs are undergoing small corrections and price might tank below its IPO price. For yield hungry investors, this is definitely the REIT to subscribe to as the nature of business should reflect on its share price once it is listed. In addition, the yield at IPO price is 7.4% which is very attractive. Therefore, what to look for now is the current market situation and whether to invest during IPO or once it is listed. 

 


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