1H22: Resiliency And Stability From Provisions Of Essential Services
1H22 NPI grew 10.6% yoy with full contributions from newly-acquired Colonial Square and Penrose Plaza. Occupancy for grocery & necessity retail properties was stable at 96.2% in 2Q22. UHU has completed the acquisition of Upland Square Shopping Center in Pennsylvania for US$85.7m on 28 Jul 22. Management is on the lookout for more yield accretive acquisitions along the East Coast. UHU provides 2023 distribution yield of 9.3% and trades at 18% discount to NAV per unit. Maintain BUY. Target price: US$0.83.
RESULTS
• United Hampshire US REIT (UHU) reported 1H22 DPU of 2.91 US cents (-4.6% yoy), which is in line with our expectations. Adjusting for top-ups and stimulated damages received in 1H21, 1H22 would have increased 13.4% yoy. The Distribution Reinvestment Plan is applicable to the 1H22 DPU.
• Maiden acquisition started to contribute. Gross revenue and NPI grew 18.5% and 10.6% yoy respectively for 1H22 with full six-month contributions from its inaugural acquisition of Colonial Square and Penrose Plaza, which was completed in Nov 21.
• Grocery & necessity retail properties: Providing income stability. Occupancy of grocery & necessity retail properties was stable at 96.2% as of Jun 22. UHU executed a total of 13 new and renewal leases covering 150,012sf of retail space in 1H22. It has maintained long weighted average lease expiry of 8.0 years.
• Self-storage properties: Rents on an upward trajectory. Occupancies at self-storage properties Carteret and Millburn were 94.7% and 97.5% respectively as of Jun 22. Average quarterly net rent rate for Carteret and Millburn increased 31% and 35% yoy respectively to US$22.60 and US$24.40. The divestment of Elizabeth and Perth Amboy Self Storage Properties to Storage Post for US$45.5m was completed on 22 Jun 22.
• Sheltered from rising cost of utilities. Majority of UHU’s 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 a conservative aggregate leverage of 38.0% as of Jun 22. Its weighted average debt maturity is 2.0 years. Cost of debt edged higher by 0.1ppt qoq to 3.0% in 2Q22. 80.5% of UHU’s borrowings are hedged with fixed interest rates. Management estimated that every 50bp increase in LIBOR/SOFR reduces DPU by 0.048 US cents.
STOCK IMPACT
• Consumers prioritising consumption of necessities. Consumers are expected to pull back from discretionary spending but will devote a larger share of their wallets on day-to-day necessities at strip centres in their neighbourhood. According to US Census Bureau, retail & food services (excluding motor vehicles and parts) grew 10.6% yoy and 1.0% mom in Jun 22. Grocery sales increased 8.3% yoy and 0.6% mom. Consumption continues to be supported by a strong labour market and growth in wages. Spending on essentials is expected to be maintained despite erosion of purchasing power caused by higher inflation.
• Tenants providing essential services accounted for 67.5% of UHU’s base rental income as of
Jun 22.
• Building scale brick by brick. UHU has completed the acquisition of Upland Square Shopping Center in Pottstown, Montgomery County (third highest populous county), Pennsylvania for US$85.7m on 28 Jul 22. The acquisition increased the size of UHU’s portfolio by 6% and expanded UHU’s exposure to the state of Pennsylvania from 7.3% to 17.7% of base rental income. The anchor tenant is Giant by Ahold Delhaize and three dominant national off-price retailers, namely Burlington, Ross and TJ Maxx. Upland Square Shopping Center provides NPI yield of 6.5%. The acquisition is accretive to pro forma 2021 DPU by 2.1%.
• Maintain focus on the East Coast. According to management, cap rates for grocery-anchored neighbourhood 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.
• Supporting tenants’ omni-channel strategy. The role of physical stores is enhanced as they also serve as a hub for fulfilment of online orders. UHU will support tenants’ omnichannel strategy 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. Fundamentals for strip centres are positive due to limited supply.
EARNINGS REVISION/RISK
• UHU has bank loans of US$94.5m due for refinancing in Mar 23. Its weighted cost of debt would increase to 3.9% assuming the bank loans are refinanced at an interest rate of 4.0%. Thus, we cut our 2023 DPU by 5%
VALUATION/RECOMMENDATION
• Enticing and irresistible yield spread. UHU trades at 2023 distribution yield of 9.3%, which represents an attractive yield spread of 6.5% above the 10-year US government bond yield of 2.8%. It trades at P/NAV of 0.82x.
• Maintain BUY. Our target price of US$0.83 is based on the dividend discount model (DDM) (cost of equity: 8.0%, terminal growth: 1.3%).
SHARE PRICE CATALYST
• Stability of spending on necessity products and essential services.
• Yield-accretive acquisitions of grocery & necessity retail properties.
