United Hampshire US REIT IPO Review – Recession Proof Supermarket REIT?

So I did a poll earlier this week, asking which one you guys preferred to read – (1) Impact of COVID-19 on markets, or (2) United Hampshire US REIT IPO Review.

The answer was quite clearly in favour of (1), but a big number of you guys said you wanted to hear about United Hampshire US REIT as well.

So let me try to see if I can cover both. More work for me, but these are very volatile times, and I owe it to you guys!

We’ll do the United Hampshire US REIT IPO Review today, and COVID-19 tomorrow.

Basics: United Hampshire US REIT IPO

United Hampshire US REIT is a supermarket REIT. They own supermarkets in the US (95% of income), and a small percentage in self storage.

Probutterfly has a pretty good summary, which I’ve set out below:

[United Hampshire US REIT] Hampshire REIT has a portfolio of 22 properties on the east coast of the US, consisting of 18 grocery and necessity-based retail assets and four self-storage properties. 21 of the properties are freehold and the exception is Wallington ShopRite which has a leasehold term expiring in 2040 with two consecutive ten-year extensions – in other words with the extension options in place, the tenure could be as long as 2060.

According to the preliminary prospectus, the nature of the grocery-anchored retail and self-storage trade mix is recession-resistant, cycle-agnostic and defensive attributes. Grocery and necessity retail make up about 95.4% of the REIT’s base rental income while self-storage makes up about 4.6%.

The annualised yield is forecasted is expected to be between 6.5% to 7.0% and the IPO portfolio occupancy will start at 95.2% with the WALE at a comfortable 8.4 years. Its grocery and fresh food anchor tenants are household names in the US such as Walmart, BJ’s Wholesale Club, Lowes Company, Stop & Shop, Giant Food and Wakefern Food Corp. Others include Home Depot, LA Fitness and PetSmart. Together, their top-10 tenants contribute an estimated 66.7% of the base rental income of the REIT.

The REIT’s sponsors are UOB Global Capital and the Hampshire Companies; the former is the global asset management subsidiary of United Overseas Bank Limited (UOB). Hampshire is a US based real estate manager with investments in industrial, multifamily (residential), groceries and self-storage properties.

Former StarHub CEO Tan Tong Hai sits as the independent chairman of the REIT’s board.

Here is a picture of where their assets are located.

Sponsor

The sponsor is UOB Global Capital and the Hampshire Companies. Neither has a track record of sponsoring REITs in Singapore, which is always tricky because you don’t know how it will turn out. They could turn out to be great sponsors, but they could also turn out not to.

Post listing stakes are set out below, which doesn’t look great. Each of UOB Global Capital and Hampshire will hold under 10% stakes post listing, and even lower if the over-allotment is exercised.

I get why they have to do this (US Tax Code requires them to hold less than 10% stake for tax transparency status), but seeing the numbers stack up like this, I can’t help but wonder whether this looks like a pseudo-exit for the sponsor. We’ll want to see how alignment with interests of unitholders holds up going forward.

Cornerstone investors are primarily private banking and high net worth individuals, which again is not amazing. I always prefer to see institutional clients in an IPO – but that said, most of them probably can’t take up a small cap IPO like this.

Assets

The lease expiry profile looks pretty good actually, with no big expiries coming up in the next 5 years. Looks like Sponsor really worked on this prior to listing.

Trade sector is dominated by grocery and wholesale, which lends this REIT it’s slightly more defensive profile.

A big, big problem though is that the assets are located in the US, and I’ve never seen them. It’s always tricky to invest in real estate you’ve never seen, because real estate is such a local business. Nothing beats being able to go down, take a look at footfall traffic, look at the condition of the walls and piping etc, and just get a feel of the property. I’m a traditional guy, and I’ve learnt first hand the difficulties of investing in foreign real estate that I’ve never seen personally from a friendly REIT called Eagle Hospitality Trust.

What seems like a decent investment on paper, can be very troubling once asset prices / NPI take a dive. So unless you’ve been down to the properties or have specific knowledge on the ground, this point alone counts as a big negative for me.

Yield

Yield comes in at a 7.4% for FY2020, going up to 7.6% for FY2021.

With the US 10 year treasury at 1.02% (I know right, that’s not a misprint), this works out to about a 6.4% yield spread, which if this were a bond, puts it firmly in junk territory.

Income Top Up

What is really tricky though, is the income support built into the yield.

This is what the manager has to say in the prospectus:

Elizabeth Self-Storage was recently completed in January 2020 and Perth Amboy Self-Storage is currently under development and expected to be completed by the second quarter of 2020 (“2Q2020”). One of the Grocery & Necessity Properties in the IPO Portfolio, St. Lucie West, is also undergoing asset enhancement works to expand the asset (“St. Lucie West Expansion”) which is targeted to be completed by the first quarter of 2021 (“1Q2021”). For avoidance of doubt, Elizabeth Self-Storage and Perth Amboy Self-Storage (together, the “Development/Newly Completed Properties”) are part of the IPO Portfolio and will be acquired by United Hampshire US REIT on or prior to the Listing Date.

Long story short, there are 2 properties under construction and not generating income.

So the income support is designed to replace the lost income from the 2 properties.

And I know what you’re thinking. But wait, how would I know the actual performance of these 2 properties once construction is completed? Will the actual performance be in line with what is being forecast via income support?

To which I reply – “Hell yeah”.

Of course on the flip side, once the buildings open, the actual performance could be even better than what is being projected, so I leave it up to you to decide which is the more likely outcome.

My take – income support always worries me, and it’s just about as close to a deal breaker in a REIT IPO as it gets. I almost never invest in anything with income support, unless I know the assets really well, which I definitely don’t here.

Price to Book Value

NAV is $0.75 per unit, which works out to an IPO price of 1.06x P/Book. That looks to be on the high side, especially in the current macro climate.

Cap rates range from 4% to 7% on average. I’m not going to comment on the accuracy of the cap rates used because I don’t have the on the ground info required for an analysis like that, but as a general comment, if supermarket assets are selling at 4% to 7% cap rates these days, then I think we’re approaching the later stages of the real estate cycle, and it has me really worried about investing in US real estate.

Offering Details

Market capitalization at listing is about $614 million USD. The bulk of the offer is taken up in the placement trance though, and the public offer only consists of 7.5 million units.

So it’s a really small public offer, where manager probably has most of their books covered already, so the IPO will probably do okay regardless of how the retail tranche turns out.

The Offering consists of (i) an international placement of 80,329,600 Units to investors, outside the United States of America (the “U.S.” or “United States”) (the “Placement Tranche”) and (ii) an offering of 7,500,000 Units to the public in Singapore (the “Singapore Public Offer”).

Will I take up this United Hampshire US REIT IPO?

I think this is probably the easiest decision for me since starting Financial Horse – I’m going to give this United Hampshire US REIT IPO a miss.

I think the assets of United Hampshire US REIT look good on paper, but what I don’t like is the (1) price, and (2) global macro.

The price looks pricey to me, both on a P/B basis and yield. Knock 10% to 20% off the offering price, and perhaps I’ll take a more serious look.

But what really scares me here, is the global macro. I’ll share more thoughts on this tomorrow, but for now, let’s just say the possibility of a global recession has gone up significantly. I’ve been raising cash in my own portfolio, and I’m not about to dump it all on an IPO like this.

Closing Thoughts

If I really were to buy it, I’d probably wait for United Hampshire US REIT to stabilize a few quarters post IPO first, so I can take a look at the actual earnings. I’d also want to wait for the under construction properties to open to take a look at the actual operating numbers.

I’ll give United Hampshire US REIT a 2 Horse rating. On paper, the assets look decent, tenant profile looks good, and cash flow looks sound.

But under the hood, there are some troubling points like the Sponsor stake, the capitalization rates and the income support.

It may just turn out to be a fantastic REIT, but it’s probably too early to say with any certainty for now.