United Hampshire US Reit eyes ‘opportunistic divestments’, accretive acquisitions in growth plans

SINCE it listed on the Singapore Exchange four years ago, retail-focused United Hampshire US Real Estate Investment Trust (Reit) has seen its assets under management (AUM) jump 30 per cent, from around US$580 million to about US$770 million.

This is despite a host of factors thwarting its growth, including higher interest rates and the Covid-19 pandemic.

With interest rates coming down, Gerard Yuen, the chief executive officer of the Reit manager, is optimistic that the Reit can hit its target AUM of US$1 billion by 2026.

“This (target) should allow us to reap the benefits of larger scale, increase institutional investor participation and put us in consideration for various indices while delivering stable and growing distribution per unit (DPU) and total returns to unitholders at the same time,” said Yuen in an interview with The Business Times.

Catering to suburban America

The mainboard-listed Reit has a portfolio of 20 grocery-anchored strip malls and two self-storage properties across the United States. The properties are mostly located on the east coast of the US, in states such as New Jersey and Florida, which are generally regarded as more affluent and densely populated compared to some other parts of the country.

The Reit’s malls typically have a major grocer as an anchor tenant, such as Walmart or Best Buy, which draw customers living in suburban areas. There are also other tenants offering day-to-day goods and services such as casual dining or home improvement stores.

Such businesses are able to attract footfall to their physical stores despite the trend of online shopping.

The Reit’s two self-storage properties are in northern New Jersey, which is near New York City where there is ”resilient demand” for storage facilities, said Yuen.

Self-storage properties, which charge a monthly subscription fee to users, are popular among Americans as the properties are seen as an affordable way to expand their homes, he explained.

Financial performance

The Reit saw its revenue rise 2.4 per cent to US$36.9 million for the first half ended June 2024 on the back of higher rental from existing and new leases.

However, its DPU for H1 FY2024 dropped 24.2 per cent to US$0.0201.

Its net property income also fell 1.7 per cent year on year to US$25.4 million.

As with most Reits, higher interest costs have affected United Hampshire US Reit, said Yuen.

“As interest rates go up, at some point in time, everyone’s interest cost goes up as well, and that just erodes the DPU,” said Yuen.

The year-on-year drop in DPU and distributable income also appears higher in recent years as some of the Reit’s interest rate swaps from 2020, which were pegged to low interest rates, matured last year, he added.

Operationally, occupancy fell in the most recent financial period as the Reit was in the midst of replacing some of its tenants, he added.

Finding opportunistic divestments

The Reit manager is taking steps to pare down its debt, particularly its more expensive floating rate loans.

It is doing so through “opportunistic divestments” where properties are sold above their valuation and the proceeds are put into construction projects or new acquisitions.

As there is demand for grocery-anchored malls, the Reit has been able to sell its last three properties above valuation, said Yuen.

For instance, it most recently divested its assets in Hudson Valley Plaza in August this year for a consideration of US$36.5 million, which is 4.3 per cent over its independent valuation and 17.5 per cent above its purchase price.

Additionally, the Reit manager is taking steps to grow the Reit organically through asset enhancements.

It built a brand new store for sporting goods chain Academy Sports last year on its existing land for an investment of US$12 million. This is one way to grow the portfolio without investing significant amounts of capital, said Yuen.

Tight mall supply to boost demand

The normalisation of remote working as well as the tight supply of strip malls put United Hampshire US Reit in a “a very strong bargaining position” as landlord, said Yuen.

He cited data from real estate advisory firm Green Street which showed that the upcoming supply of strip malls for the next three years stands at around 0.3 per cent.

This is lower than historical growth numbers of around 2 per cent, and is due to high financing and construction costs.

Moving in a positive direction

Ahead of its third-quarter results for the current financial year due next month, Yuen said that he is “positive on the direction” of the portfolio.

Higher rental and occupancy rates and lower interest rates will help the company’s top line, he said.

On whether the Reit’s DPU is likely to rise going forward, Yuen said that he was unable to comment on absolute numbers.

As for achieving its US$1 billion AUM target, the manager is on the lookout for accretive acquisitions that will diversify its portfolio, he said.

“If the macroeconomic environment continues in the current direction, I think the focus for us would very much be to grow the Reit,” said Yuen.

However, acquisitions in the self-storage sector appear unlikely for now as the sector’s capitalisation rate is low.

Therefore, it is more challenging to make a DPU-accretive acquisition in that space, said Yuen.

He added: “So while we do like the sector and would look at opportunities to increase our exposure to this sector, the price has to make sense for the Reit.”