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United Hampshire US REIT banks on grocery stores, self-storage properties

Candace Li
Candace Li • 9 min read
United Hampshire US REIT banks on grocery stores, self-storage properties
The Penrose Plaza, one of the properties that forms UH REIT's portfolio / Photo: UH REIT
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United Hampshire US REIT (UHREIT) is a Singapore REIT with a diversified portfolio of stabilised income-producing (i) grocery-anchored and necessity-based retail properties (grocery & necessity properties), and (ii) modern, climate-controlled self-storage facilities (self-storage properties), in the US. UHREIT’s portfolio comprises 20 predominantly freehold grocery & necessity properties and two self-storage properties, primarily in the US East Coast, with a carrying value of approximately US$763.4 million ($1.03 billion) and an aggregate net lettable area of approximately 3.8 million sq ft.  

1. What are some highlights from UHREIT’s recent financial performance?
We delivered a commendable set of results in FY2023, supported by our high-quality portfolio. Our properties cater to consumers’ day-to-day needs and are generally resilient and cycle-agnostic. We have also benefitted from the trend towards work-from-home (WFH). Our grocery & necessity properties are located in the suburbs near where people live and now work, allowing them to visit throughout the week and not just on weekends. 

As at Dec 31, 2023, our grocery & necessity properties’ occupancy has risen to 97.4% and has a long weighted average lease expiry (WALE) of 7.1 years. We have minimal leasing risk with only 2.2% of leases expiring in 2024 and a 92.0% tenant retention rate since our IPO. For our self-storage properties, occupancy is over 91% and average net rental rates remained high. 

Our FY2023 gross revenue and net property income (NPI) increased strongly, by 7.1% and 7.6% y-o-y respectively. This growth was due to the new leases we signed, rental escalations from existing leases, contribution from Upland Square acquired in July 2022, and our latest new development for Academy Sports at Port St Lucie which opened in November 2023.  

Given the strong performance at our properties, UHREIT’s portfolio valuation increased 4.7% y-o-y on a like-for-like basis to US$763.4 million as of Dec 31, 2023. Whilst the capitalisation and discount rates used by the independent valuer were higher on average due to rising interest rates, UHREIT’s stronger operating performance resulted in the higher portfolio valuation.

2. UHREIT has maintained a high tenant retention rate of 92.0% since IPO in 2020 — how does it plan on retaining this?
One reason behind our high occupancy and tenant retention rate is the desirable locations of our properties and focus of our tenants in serving the essential needs of US consumers. These were the key considerations and attributes we looked out for when acquiring our existing properties.

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Another factor behind our high tenant retention is proactive property management and tenant communication, addressing the tenants’ evolving requirements within the property and doing our best to meet these needs. For example, we have been responsive in addressing tenant requests as their omnichannel strategies have evolved. This includes creating designated parking spaces for curbside pick-up.

3. How has the grocery & necessity industry in the US been performing recently? 
The US consumer, which makes up two-thirds of the US economy, continues to show strength. In December 2023, retail sales during the festive period grew 5.6%, exceeding expectations. In January 2024, it was 0.6% higher y-o-y. Grocery sales, a key metric for us, continued to perform well and recorded 2.3% growth in January 2024.

The sector has benefitted from the WFH trend and saw strong demand for goods and services offered in strip centres, ranging from grocery shopping to dining. The sector’s greater emphasis on essentials (such as groceries, drug stores, and medical services) and off-price retail compared to other retail formats is a highly desirable attribute in a period when consumers are diligently managing budgets amidst high inflation.

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Strip centres’ vacancy rates are near historically low levels and rental rates are high, driven by a lack of new supply due to high construction costs and continued high demand for space. This has kept the negotiating power on the landlord’s side.

4. What is your outlook on the US grocery & necessity industry in the upcoming years?
Grocery & necessity shopping centres fulfil an important role, providing for the day-to-day non-discretionary needs of US consumers. We believe both the grocery & necessity and self-storage sectors will remain resilient as they have shown themselves to be recession-resistant and cycle-agnostic.

The strip centre sector continues to witness positive comparable sales growth especially for the discounters, grocers, and quick-service restaurant tenants. The heavy exposure to essential goods and services will result in a continued steady flow of visitors to strip centres as compared to enclosed malls, which are more reliant on discretionary spending. On the supply front, the sector continues to see a lack of new supply as the elevated construction cost makes new development difficult in most markets. Overall, we believe that demand from retailers for space at grocery & necessity shopping centres remains strong.

UHREIT’s portfolio also has strong income visibility given our high occupancy, low lease maturities in 2024 and 2025, long WALE and the majority of our leases are triple-net leases.

5. In anticipation of potential rate cuts in 2024, what are your focuses and plans?
Falling interest rates are generally beneficial for REITs. When interest rates fall, the cost of servicing debt decreases. This can lead to lower interest expenses for the REIT, contributing to higher distributable income for unitholders. Lower interest rates may also stimulate demand for real estate investments as borrowing becomes more affordable.

Since our IPO in 2020, we have been focused on growing the REIT. By increasing our size and trading liquidity, we believe we can benefit from cost savings from economies of scale as well as attract a broader pool of investors, particularly institutional investors. 

Whilst we have successfully grown our asset under management (AUM) by 30% since IPO, our growth has not been as fast as we would have liked due to the rising interest rate environment. If interest rates fall, we believe this will present us with more attractive, value-enhancing acquisition opportunities and we will focus on executing such opportunities so as to grow the REIT and distribution per unit (DPU) for unitholders. 

For more stories about where money flows, click here for Capital Section

6. UHREIT announced in August 2023 to retain distributable income as capital reserves for asset enhancement and development initiatives (AEIs). How would you assess these initiatives so far?
We are very pleased that our AEIs have delivered strong results. With high interest rates, inorganic growth through DPU-accretive acquisitions is challenging. We therefore decided to focus on organic growth via AEI. These initiatives improve financial performance through higher rental income and enhance the attractiveness of the property by bringing in more foot traffic. 

Since IPO we have completed two new grocery & necessity development projects. Our latest project was for Academy Sports at Port St Lucie. We built a new 63,000 sq ft store on our existing excess land and entered into a new 15-year lease with a Fortune 500 Company. Construction took less than a year and the store opened ahead of schedule in November 2023. UHREIT is now benefiting from additional rental income from the new store.  

Our other AEIs include reconfiguring existing space layouts to maximise rent. For example, we may divide a larger space into several smaller units or combine units for a tenant looking for a larger space. This has allowed us to bring in better tenants and achieve higher rental rates.

7. What is the group’s acquisition strategy? What are some key considerations?
Our focus is to grow UHREIT in a prudent and disciplined manner as well as deliver long-term value for our unitholders. Since our IPO, we have completed three DPU-accretive acquisitions worth over US$160 million. Overall, our total assets now exceed US$800 million. 

We will continue evaluating acquisitions in the grocery & necessity and self-storage sectors. 

As part of our capital recycling efforts, we have also divested three properties, all at healthy premiums to valuation. Our recent sale of Big Pine Centre at a 7.7% premium to purchase price demonstrates the strong demand for well-located, strong performing grocery & necessity properties and we will also consider potential opportunistic divestment opportunities that come up.

8.The focus on sustainability has grown — how are you committed towards this area?
We believe that a robust environmental, social and governance (ESG) strategy is vital to our long-term success. We look for ways to strengthen our ESG efforts and achievements each year. Some of our key ESG initiatives include the installation of energy-efficient LED lighting at the common areas of our properties, installation of electric vehicle charging stations at our properties and engaging our tenants on how we can work together on ESG initiatives. 

UHREIT maintains high standards of corporate governance and transparency. We have been included in the SGX Fast Track for our good compliance track record since 2021. We also boast zero instances of non-compliance with anti-corruption laws and regulations, which further highlights our commitment to strong corporate governance.

9. What are the most significant ESG risks or opportunities you face? 

UHREIT’s energy and utility usage is very low since we only manage the common area spaces in our grocery & necessity properties. Our tenants are responsible for the energy and utility usage within their premises.

Nonetheless, we set annual targets to further reduce our energy use and are constantly looking for new and better ways to achieve this. 

We also actively engage with our tenants on how we can work together to reduce our collective carbon footprint. For example, through the installation of solar panels on roofs of tenant spaces.

10. Why should investors take a closer look at UHREIT? 
UHREIT provides investors with several compelling investment merits:
Stable cash flow: Grocery & necessity and self-storage properties are generally considered cycle-agnostic and not as vulnerable to cyclical shifts in the economy. Our high occupancy and long WALE of 7.1 years further boost the stability of UHREIT’s cashflow. Moreover, our grocery & necessity properties largely have triple net leases with built-in rental escalations.

High-quality assets: Our properties are located in the affluent and populous US Eastern seaboard with higher spending power and lower supply growth. The majority of our tenants are also considered essential businesses.

Yield & growth: UHREIT provides exposure to the strong and growing US consumer sector. We offer investors a dividend yield of 10.2% based on the unit price of US$0.47 as at Feb 29.

E-commerce resistant: Tenants for grocery & necessity properties have been successful in adopting an omnichannel strategy. Moreover, UHREIT properties also contain many service-sector tenants with limited online alternatives making them highly e-commerce resistant. 

Candace Li is associate director of research at the SGX Group

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