The Year Of Retail Renaissance
UHU’s strip centres are benefitting from: a) continued growth of domestic consumption, b) population migration to suburban locations, c) overcoming of e-commerce disruption through adoption of omni-channel strategies, and d) limited new supply and record low vacancy of 6.6%. There is renewed interest from institutional investors, who are rediscovering the merits of retail assets and strip centres. UHU provides a 2024 distribution yield of 9.2% and trades at P/NAV of 0.68x. Maintain BUY. Target price: US$0.64.
WHAT’S NEW
• Industry outlook has turned positive. Personal consumption continues to power growth in the US economy and expanded by 2.4% in 3Q23, supported by low unemployment rate of 3.7% and growth in average hourly earnings of 4.0% yoy. According to Coresight Research, retailers are planning to open 4,500 new locations compared with 3,500 closures, resulting in net new stores of 1,000. Retailers are now able to more accurately pinpoint locations for successful stores utilising data analytics.
• Strip centres benefit from population migration. Strip centres benefit from hybrid work arrangements as consumers are spending more time at home at suburban locations than city centres where their offices are located. Thus, foot traffic at strip centres has improved, especially during weekdays. Retailers are also repositioning to serve customers in suburban locations, where asking rents are rising at a faster clip.
• Strip centres adapt through seamless omni-channel strategy. Shoppers are returning to physical stores, which are differentiated by pleasant in-store shopping experiences, including the ability to see and try out the products. Shoppers could purchase their desired products instantaneously without having to wait for delivery. Strip centres, in particular, have redesigned their layout to complement the usage of e-commerce apps, including offering curb-side pick-up. Nowadays, strip centres also serve as last-mile fulfilment hubs to deliver online orders and process returns.
• Strip centres recovering after years of minimal construction. Supply of new retail space has been limited over the past decade since the 2008-09 Global Financial Crisis and continues to be crimped by high construction cost. According to Green Street, strip centres have the least new supply coming on-stream over the next five years due to elevated construction costs and supply barrier, especially in dense affluent residential suburbs. According to CBRE, availability for neighbourhood and community strip centres saw the largest drop of 0.5ppt yoy to a record low of 6.6% in 3Q23.
• Retail assets becoming hot properties. Institutional investors are accumulating grocery stores, pharmacies, convenience stores and other recession-resistant retail properties, which benefit from hybrid work arrangements. Open-air strip centres are also being snapped up (investors are avoiding enclosed malls). Dine-in restaurants are a booming business. These retail assets offer positive yield spread above cost of debt. More institutional capital is expected to flow into this sector in 2024.
• Industry peers starting to outperform. Share prices for industry peers listed in the US have rallied. Brixmor Property (BRX US), Kimco Realty (KIM US), Regency Centers (REG US) and RPT Realty (RPT US) have gained 12.0%, 21.7%, 12.7% and 22.0% respectively in 4Q23. The industry is consolidating. Regency Centers has completed the acquisition of Urstadt Biddle Properties (UBP US) in Aug 23 to expand in premier suburban areas. Kimco Realty will acquire RPT Realty to expand its presence in coastal and Sun Belt markets.
STOCK IMPACT
• Resiliency from essential services. As of Sep 23, 63.6% of United Hampshire US REIT’s (UHU) base rental income was derived from tenants providing essential services. Its triple net leases require tenants to reimburse the landlord for property taxes, insurance and maintenance for common areas, which shelter UHU from the negative impact of inflation. Leases for anchor tenants typically have built-in rental escalation of 5-10% for every 5-10 years. Tenants typically do not have early termination rights.
• Asset enhancement initiative (AEI). UHU has invested US$12m to develop a new 63,000sf store on excess land within its St Lucie West property in Florida. Academy Sports + Outdoors, a Fortune 500 sporting goods retailer has leased the new store for 15 years. Construction was completed ahead of schedule and Academy Sports has commenced interior build-out. The new store opened in Nov 23, ahead of the festive season, and provides high single-digit ROI.
• Successfully completed refinancing for 2024. Aggregate leverage improved 0.3ppt qoq to 41.7% as of Sep 23 due to the divestment of Big Pine Center. UHU’s key bankers are Canadian Imperial Bank of Commerce (Bloomberg ticker: CM CN) and M&T Bank (Bloomberg ticker: MTB US). It has successfully completed the refinancing of its term loans due in 2024. It only has a small mortgage loan of US$21.1m maturing in Mar 24. There is no significant refinancing requirement until Nov 26. The weighted average debt maturity is 3.2 years.
EARNINGS REVISION/RISK
• We maintain our existing DPU forecasts.
VALUATION/RECOMMENDATION
• Attractive and irresistible yield spread. UHU trades at 2024 distribution yield of 9.2%, which represents an attractive yield spread of 5.3% above the 10-year US government bond yield of 3.9%. It trades at attractive P/NAV of 0.68x.
• Maintain BUY. Our target price of US$0.64 is based on the dividend discount model (cost of equity: 8.5%, terminal growth: 1.5%).
SHARE PRICE CATALYST
• Stability of spending on necessity products and essential services.
• Yield-accretive acquisitions of grocery & necessity retail properties.