Growing Grocery-anchored And Necessity-based Retail Through Acquisitions
UHU completed the acquisition of Penrose Plaza in Pennsylvania and Colonial Square in Virginia in Nov 21. The maiden acquisition enlarged AUM by 13.3% and is expected to be accretive to 2020 DPU by 1.75%. Americans are decluttering their homes to create space for home offices and gyms, which leads to strong demand for self-storage space during the COVID-19 pandemic. UHU provides 2021F distribution yield of 9.5% and trades at P/NAV of 0.92x. Maintain BUY. Target price: US$0.95.
WHAT’S NEW
• Completed maiden acquisition. United Hampshire US REIT (UHU) completed the acquisition of two dominant grocery-anchored freehold strip centres – Penrose Plaza in Philadelphia, Pennsylvania and Colonial Square in Richmond, Virginia in Nov 21. This is UHU’s first entry into Pennsylvania and Virginia and will expand its footprint along the Eastern seaboard. The purchase price of US$78.3m (Penrose Plaza: US$52.0m, Colonial Square: US$26.3m) was 3.9% below independent valuation of US$81.5m.
• Continued expansion along the Eastern seaboard. Penrose Plaza is anchored by Publix (15-year lease expiring in 2031), one of the largest grocery chains in the US, while Colonial Square is anchored by ShopRite (20-year lease expiring in 2038), a leading supermarket brand. Other tenants include dd’s DISCOUNTS (discount retailer), Dollar Tree (discount variety store) and Citi Trends (discount retailer) at Penrose Plaza and Locke Supply (home improvement), Wells Fargo (bank) and General Dollar (discount retailer) at Colonial Square. The two strip centres are located within residential neighbourhoods and near major highways. The states of Pennsylvania and Virginia accounted for 7.5% and 3.6% of base rental income post-acquisition.
• Resiliency through exposure to necessity spending at strip centres. UHU’s portfolio value has expanded 13.3% to US$665.4m. Its WALE by base rental income has increased slightly to 8.1 years. Committed occupancy was maintained at 94.8%. The acquisition improved diversification with contributions from the top 10 tenants reduced from 66.2% to 61.0% post-acquisition.
• Acquisition is yield accretive. The acquisition is expected to be accretive to 2020 DPU by 1.75%. It was funded by proceeds of US$35m from private placement of 55.6m new units at US$0.63 each completed in Oct 21 and the balance by additional bank borrowings. UHU’s aggregate leverage is expected to increase by 3.9ppt to 40.3%.
STOCK IMPACT
• Consumer spending remains strong and resilient. Retail sales grew by a robust 4.1% yoy in Nov 21 due to low unemployment rate, rising wages and savings from stimulus cheques. Consumers are worried about inflation but their concern has not stopped them from spending. The shift towards e-commerce has turned out to be less severe than previously feared. Many retailers have stretched out the seasonal promotions over a longer period of time, resulting in consumers shifting their festive spending earlier from November to October.
• Omicron variant not affecting necessity spending at strip centres. The surge in Omicron variant infections has not disrupted the lives of Americans. Some states require masks to be worn in all indoor public places. Otherwise, most states have not imposed new restrictions. UHU’s single-storey open-air strip centres with large car parks are conducive for safe distancing. Anchor tenants, such as supermarkets, grocers, home improvement stores and discount retailers, continue to enjoy brisk recovery in consumer spending.
• Self-storage benefits from the COVID-19 pandemic. Demand for self-storage space has increased during the COVID-19 pandemic. Many Americans decluttered their bedrooms and garages to create space for home offices, classrooms and gyms (exercise equipment). Many have also relocated, thus needing self-storage space to safekeep their personal belongings. Occupancy rates have improved and rentals have shot up.
• Occupancies for self-storage space on upward trajectory. New Jersey’s price gouging law prohibits excessive price increases during a declared State of Emergency and the 30 days after its termination. Tropical Storm Ida lasted from 26 Aug 21 to 4 Sep 21. The price gouging prohibition has since been lifted and UHU was able to re-price rents higher for Carteret and Millburn Self-Storage. There is flexibility to re-price rents higher as self-storage space is on monthly leases. The new completed Elizabeth and Perth Amboy Self-Storage saw improvement in occupancy rates.
EARNINGS REVISION/RISK
• We raised our 2022 DPU forecast by 1.5% due to positive impact from the acquisition of Penrose Plaza and Colonial Square.
VALUATION/RECOMMENDATION
• Enticing and irresistible yield spread. UHU trades at 2022F distribution yield of 9.5%, which represents an attractive yield spread of 7.6% above the 10-year US government bond yield of 1.9%. It trades at P/NAV of 0.92x.
• Maintain BUY. Our target price of US$0.95 is based on the dividend discount model (DDM) (cost of equity: 7.0%, terminal growth: 0.5%).
SHARE PRICE CATALYST
• Recovery and normalisation of domestic consumption in the US.
• Increase in occupancies for UHU’s four self-storage facilities.