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United Hampshire US Reit launches IPO at US$0.80 per unit

THE “retail apocalypse” will not affect the asset classes that United Hampshire US Reit invests in too much, said Robert Schmitt, CEO of the real estate investment trust (Reit) manager. 

In a meeting with media on Tuesday, he noted that brick-and-mortar still plays a big part in grocery- and necessity-based retail. “They need the stores to push the products,” he explained. While sales at department stores such as Nordstrom, Sears and Macy’s are declining, necessity retail such as BJ’s Wholesale Club, Lowe’s Home Improvement and Walmart are still doing well. Grocery- and necessity-based retail also have the added benefits of being recession-resistant and cycle-agnostic, he said.

In its initial public offering (IPO) prospectus lodged on Tuesday, online penetration for grocery sales remained at about 2 per cent in 2017, compared to 78 per cent for computers, 66 per cent for books, 38 per cent for electronics, and 22 per cent for clothing.

The low penetration rate for grocery sales is due to high last-mile logistics and delivery costs, particularly in the suburban US markets with low density populations, as well as consumers’ preference for picking their own produce, it said.

The Reit, which will be Asia’s first US grocery-anchored shopping centre and self-storage Reit, is raising  gross proceeds of about US$394.6 million by offering units at US$0.80, or S$1.12, each. This represents a yield of 7.4 per cent for the March-to-December period of 2020, and 7.6 per cent for 2021. Investors can choose to receive their distributions in US or Singapore dollars.

There are about 7.5 million units offered to the retail public, making up 8.5 per cent of the total offering. Asked why the public tranche was not bigger, Gerard Yuen, chief financial officer of the Reit manager, said: “We had  a very good response from the cornerstones, and these were very good investors very keen to participate, so the public tranche is in essence what’s left after we addressed the good demand that we saw in the cornerstone tranche.”

There is no current retail Reit with US exposure in the Singapore Reit sector for comparison, but the US office Reits have forward yields ranging from 6.4 per cent to 8.4 per cent.

The cornerstone investors, together with the sponsors and existing investors in Hampshire funds injecting the properties in the IPO portfolio, have committed to take up about 82.2 per cent of the total number of units, investing about US$324.4 million in total.

The cornerstone investors include Kuang Ming Investments, an investment holding firm privately owned by Philip Ng and family; mutual fund management company Kasikorn Asset Management; director of Wing Tai Property Management Helen Chow; founders of Malaysia-listed piling and foundation firm Pintaras Jaya, Chiu Hong Keong and Khoo Yok Kee; and Bangkok Life Assurance.

Sponsors UOB Global Capital, which is the asset management subsidiary of United Overseas Bank, and American real estate manager The Hampshire Companies will each own a 9 per cent stake in the Reit. 

The two sponsors have collaborated on investments for more than a decade, launching private equity vehicles and splitting the roles, with the UOB sponsor in charge of sourcing capital from its European and Asian client base, while the Hampshire sponsor was the property investor and asset manager. Their joint funds have assets under management of about US$1.1 billion. The properties assembled in the three investment vehicles have also become the seed assets that will be injected into the Reit vehicle.

The Reit has a portfolio of 22 properties, including 18 mostly freehold grocery-anchored and necessity-based retail properties and four self-storage facilities. Most of them are located on the Eastern seaboard of the US. 

For the retail stores, the anchor tenants  make up the bulk of the occupancy at about 70 per cent, booking modest rent increments over time. Most of the rental growth will come from the “satellite shop spaces”, which are complementary businesses to the anchor tenant such as dry cleaners, pizzerias, bagel stores and local restaurants. These have shorter leases but more rental growth built into their leases.

As for the self storage space, Mr Schmitt noted it has become more mainstream in the past decade, driven by socio-economic reasons often abbreviated as the 4 Ds: death, divorce, downsizing and dislocation. At a current utilisation rate of 8 per cent of the total US population, he believes that occupancy across the board has room to grow, while rentals at stabilised assets are able to grow about 3-4 per cent year. The self-storage assets currently make up about 14 per cent of the total equity value of the portfolio, and the Reit has plans to beef that up in the future.

The public offer opens at 9am on March 4, and closes at noon on March 10. If all goes well, the Reit will list on March 12, 2020.