1Q22: Physical Stores Making A Comeback
UHU benefitted from strong leasing momentum and occupancy for grocery & necessity
retail properties improved 1.1ppt qoq to 96.4% in 1Q22, the highest since its IPO. Selfstorage properties have registered an uptrend in occupancies. Management is on the
lookout for yield-accretive acquisitions of strip centres along the East Coast. UHU
provides 2022 distribution yield of 10.2% and yield spread of 7.3%. It trades at a 19%
discount to NAV per share of US$0.75. Maintain BUY. Target price: US$0.92.
RESULTS
• United Hampshire US REIT (UHU) reported growth in gross revenue and net property
income (NPI) of 20% and 13.1% yoy respectively for 1Q22 with contributions from its
inaugural acquisitions of Colonial Square and Penrose Plaza, which were completed in Nov 21. Distributable income increased 7.9% yoy to US$8.1m.
• Grocery & necessity retail properties: Benefitting from strong leasing momentum.
Occupancy of Grocery & Necessity Retail Properties improved 1.1ppt qoq to 96.4% in 1Q22,
the highest since its IPO. Occupancy at Towne Crossing in the state of New Jersey
improved by 25.5ppt qoq to 93.4%. UHU has backfilled the final 2,788sf of retail space at
Fairheaven Plaza in the state of Massachusetts, which is currently 100% leased. UHU
executed a total of 10 new and renewal leases covering 79,928sf of retail space in 1Q22.
New tenants were from the food & beverage (two tenants), fitness (one tenant),
discounter/outlet (one tenant) and consumer services (one tenant) sectors.
• Self-storage properties: Occupancies on an upward trend. Occupancy at Carteret self-storage property improved 4.4ppt qoq to 92.5% in 1Q22. Similarly, occupancy at Millburn
self-storage property improved 1.4ppt qoq to 96.2%. UHU has entered into an agreement for
the sale of Elizabeth and Perth Amboy Self Storage Properties to Storage Post for
US$45.5m. The selling price is 17.7% above purchase price (excluding top-ups) and 2.5%
above appraised valuation. The divestment is expected to complete in 2Q22.
• Resiliency from long WALE. UHU’s grocery & necessity retail properties provide long
weighted average lease to expiry (WALE) of 7.8 years and income stability.
• Sheltered from rising cost of utilities. Majority of its leases for grocery & necessity retail
properties are triple net, whereby tenants are responsible for their pro-rata share of operating
expenses. Thus, UHU is not unduly affected by higher cost of utilities.
• Prudent capital management. UHU has conservative aggregate leverage of 38.9% as of
Mar 22. Its weighted average debt maturity is 2.3 years and does not have any bank loans
due for refinancing till Mar 23. 79.6% of UHU’s borrowings are hedged with fixed interest
rates. Management estimated that every 50bp increase in London Interbank Offered
Rate/Secured Overnight Financing Rate has a negative impact on DPU of 0.051 US cents.
Cost of debt was 2.9% in 1Q22. Assuming that the fed funds rate averages 2.5% in 2023, we
estimate that average cost of debt will increase to 3.3%.
STOCK IMPACT
• Consumers prioritising consumption of necessities. Consumers are expected to
pullback from discretionary spending but will devote a larger share of their wallets on
purchases of day-to-day necessities at strip centres in their neighbourhood. According to US
Census Bureau, grocery sales increased 8.6% yoy in Feb 22 and accelerated to a growth of
9.5% yoy in Mar 22. Spending on essentials is expected to be maintained despite
uncertainties caused by heightened geopolitical tension and higher inflation.
• Shoppers heading back to physical stores. Foot traffic at UHU’s open-air strip centres
have rebounded since COVID-19 vaccines became widely available. Americans are eager to
get back to shopping and dining out due to pent-up demand. Growth in e-commerce sales
was 39.3% yoy in 1Q21 but subsequently slowed to an average of 8.3% yoy during 2Q4Q21. E-commerce sales peaked at 15.7% of total retail sales in 2Q20 and have since
slipped to 12.9% in 4Q21. According to Mastercard SpendingPulse, sales at physical stores
increased 11.2% yoy compared with a drop of 3.3% yoy for online spending in Mar 22.
• Supporting tenants’ omni-channel strategy. Retailers realised that omni-channel
consumers who shop both online and at physical stores tend to spend more. UHU will
support tenants’ omni-channel strategy to provide a seamless online and offline shopping
experience by providing multiple methods for shoppers to pick up their online purchases,
including curbside pick-up for online orders, buy online pick-up in store (BOPIS) and micro-fulfilment of online orders.
• Physical stores are back in focus. Physical stores have evolved into key nodes for last
mile delivery. Supermarkets and grocery stores are allocating larger parking areas to
facilitate curb-side pickup. More retailers will set up in-store micro fulfilment centres with
automated picking processes of about 10,000sf. Walmart plans to add 100 automated
fulfilment centres attached to their existing physical stores. Amazon has experimented with
small department stores to showcase its line of private labels and exclusive third-party
products.
• Maintain focus on the East Coast. According to management, cap rates for groceryanchored neighbourhoods and community strip centres were stable at 5.5-6.0%.
Management is on the lookout for acquisitions of grocery & necessity retail properties
strategically located in neighbourhoods with limited competition. UHU will continue to focus
on expansion along the East Coast.
EARNINGS REVISION/RISK
• We trim our 2022 DPU forecast by 5% due to higher interest rates and cost of debt.
VALUATION/RECOMMENDATION
• Enticing and irresistible yield spread. UHU trades at 2022 distribution yield of 10.2%,
which represents an attractive yield spread of 7.3% above the 10-year US government bond
yield of 2.9%. It trades at P/NAV of 0.81x.
• Maintain BUY. Our target price of US$0.92 is based on the dividend discount model (DDM)
(cost of equity: 7.0%, terminal growth: 0.5%).
SHARE PRICE CATALYST
• Stability of spending on necessity products and essential services.
• Yield-accretive acquisitions of grocery & necessity retail properties