United Hampshire US Reit eyes growth of recession-proof portfolio to trump headwinds 

ROBERT Schmitt, chief executive officer of the manager of United Hampshire US Real Estate Investment Trust (UHREIT), is in a bit of a pickle.

Operationally, the Singapore-listed real estate investment trust (S-Reit) has remained resilient through the pandemic and performed better than expected.

For the full year ended December 2021, UHREIT posted distributable income (DI) of US$31.2 million, beating its initial public offering (IPO) forecast by 3 per cent.

FY2021 distribution per unit (DPU) inched up to US$0.061 – a whisker above the forecast of US$0.0609 made prior to the pandemic.

Net property income (NPI) was also marginally higher than expected at US$41.9 million, exceeding its IPO forecast by 0.7 per cent.

The improvements were spurred on by UHREIT’s maiden acquisitions of 2 assets – Colonial Square in Virginia and Penrose Plaza in Pennsylvania – in November 2021. Together with a 3.7 per cent increase in its portfolio valuation as at end 2021, the acquisitions saw UHREIT’s total assets grow 15.9 per cent year on year to US$688.5 million.

For the first quarter of FY2022 ended March – the first full quarter post the inaugural acquisitions – DI rose 7.9 per cent compared to the corresponding period a year ago, with Q1 gross revenue up 20 per cent and NPI up 13.1 per cent.

Yet, investors are not biting.

UHREIT made its debut on the Singapore Exchange (SGX) in March 2020 – at the peak of the Covid-19 pandemic, which saw a collapse in the wider market. And it has struggled to find its footing since then.

The counter opened at US$0.72 on March 12, 2020 – a full 10 per cent below its IPO price of US$0.80.

A day later, then US President Donald Trump declared a state of emergency in the US over the coronavirus. By the end of its first trading month, units of UHREIT had fallen as low as US$0.47.

“Our timing was not ideal,” Schmitt said.

While it has clawed back some of its losses, UHREIT is still trading underwater. It closed at US$0.61 on June 10, 2022 – some 24 per cent below its IPO price and 18 per cent below its book value, according to Bloomberg data.

Bad IPO timing aside, the real estate investment trust (Reit) also faces another problem: UHREIT’s portfolio mostly comprises strip shopping centres in the US – an asset type that Singapore investors are largely unfamiliar with as they are scarcely found here.

Schmitt explains that the strip shopping centres in UHREIT’s portfolio are grocery-anchored and necessity-based retail properties located in the suburbs. Parking spaces typically stretch across the length of the single-storey buildings, providing convenience to consumers for in-store and curbside pickups.

“You probably don’t see them as much in Singapore,” Schmitt said. “The US is a suburban nation. (Around) 75 per cent of the population either lives in the suburbs or what are considered rural areas or more spread out. So these open-air strip centres are located throughout the suburbs where the housing is.”

“Because we are necessity-based, we are convenience-oriented, we are ecommerce-resistant, we've held up really well over the pandemic,” he added. “The sector is as strong as it ever has been (and) it’s in high demand coming out of the pandemic.”

As at end 2021, UHREIT’s portfolio comprised 20 of such strip shopping centres. It also owns 4 self-storage properties, which Schmitt describes as “1 of the best performing sectors coming out of the Great Recession”.

He noted that trends such as working from home and suburban migration have benefitted the self-storage sector.

“People are trying to create more office space in their houses or create space for gymnasiums, so they need to declutter their homes,” Schmitt said. “And there's a stickiness to self storage demand. Once you put stuff in these units, it stays there.”

While bullish on both the necessity retail and self-storage sectors, Schmitt said the Reit will focus on growing the former for now.

The primary reason for this, he explains, is that capital values of self-storage facilities are very high while cap rates are very low.

“It would be very difficult to make accretive acquisitions for good, stabilised, modern self-storage facilities,” he said.

The manager of UHREIT on June 9 announced the proposed acquisition of another grocery-anchored freehold asset, Upland Square Shopping Centre in Pennsylvania, at a purchase price of US$85.7 million.

The accretive acquisition is expected to lift the Reit’s pro forma DPU by 2.1 per cent to US$0.0623.

UHREIT’s portfolio committed occupancy will increase to 96.6 per cent post acquisition – the highest level since its IPO – while its portfolio value will rise 6 per cent to US$730.1 million.

The acquisition will be partially funded from net proceeds of the divestment of 2 of its 4 self-storage properties – Elizabeth Self-Storage and Perth Amboy Self-Storage – which were sold for a total of US$45.5 million.

“On the acquisition side, we absolutely are looking to grow,” Schmitt said. “We would like to get over a billion dollars in assets under management (AUM) as quickly as possible. That's the first goal and we were not going to stop there.”

“We came to Singapore to grow. The investment demand is there, and I think if we can do more acquisitions, we'll be able to generate more investor volume on the share price (and) be able to push the growth of this fund over time,” he added. “Our goal is to ultimately get to the size where we can get on an index and attract more institutional equity on our share price and our trading volume.”

Over the past year, units of UHREIT have fallen 17.6 per cent, with an annualised total return of negative 10 per cent.

Based on its last closing price of US$0.61 and DPU of US$0.061 for FY2021, UHREIT is trading at a distribution yield of 10 per cent – one of the highest in the S-Reit universe.

“The distribution yield is not justified and is higher than most of the other US property Reits,” Schmitt said. “We need to continue to educate the consumer that the distribution yield is out of line with the resiliency and risk reward structure of our portfolio.”

“Singaporeans don't see these types of assets day in and day out so it's hard to kind of wrap their head around what our offering is. So I think we need to do a better job educating and getting the word out… (and) telling the story,” he added.

The way Schmitt describes it, UHREIT’s portfolio of properties offers essential goods and services that consumers will need to purchase regardless of the state of the economy.

“We're in uncertain times with inflation, with a war in the Ukraine, rising short-term rates, supply chain disruptions,” he said. “Despite all that, the consumer needs these goods on a daily basis.”

Already, UHREIT’s unique resilient offering has caught the eye of some market watchers. RHB, for example, has identified UHREIT as one of the top 20 “jewels” for 2022 among small cap companies listed in Singapore.

“The Reit, although classified as a retail Reit, mainly caters to the suburban grocery and necessity segment, which is less impacted by rising e-commerce and also serves as micro-fulfilment centres of leading retailers' omni-channel platforms,” said RHB analyst Vijay Natarajan, describing UHREIT as “misunderstood”.

“We believe the Reit’s high 10 per cent yield is mainly due to negative investor sentiment surrounding the retail sector but its portfolio of grocery and necessity-anchored assets are, in our view, immune from the Covid-19 impact,” he added. “While liquidity and its relatively smaller size are possible reasons for high yield spreads, we believe the yield spread of more than 700 basis points over the US 10-year Treasury yield is highly attractive, and we see room for yield compression.”