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UOB Kay Hian maintains 'buy' on United Hampshire US REIT, raises TP to 71 US cents

Bryan Wu
·3-min read

Analyst Jonathan Koh says UHREIT's strip centres have benefitted from a rebound in retail real estate.

UOB Kay Hian Research analyst Jonathan Koh has maintained his “buy” recommendation for United Hampshire US REIT (UHREIT) ODBU with a higher target price of 71 US cents (96.13 cents) from 68 US cents previously. His new target price is based on the dividend discount model (DDM) which features an 8.5% cost of equity (COE) and a terminal growth rate of 1.5%.

To Koh, UHREIT’s distribution per unit (DPU) of 2.97 US cents for the 2HFY2022 ended Dec 31, 2022, stood “slightly” above his expectations despite its 2.6% decline y-o-y. The REIT’s higher gross revenue and net property income (NPI) in the 4QFY2022, driven by its third and largest acquisition of Upland Square, which was completed in July 2022, also shows that the REIT is still continuing to grow via acquisitions, he adds.

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In the REIT’s results, Koh adds that rents for self-storage properties are also on an upward trajectory. Occupancies at UHREIT’s self-storage properties Carteret and Millburn were 92.4% and 93.9% respectively as of December 2022. The average net rent rate for Carteret and Millburn increased 29% and 31% y-o-y respectively to US$24.30 and US$26.60 per sqft in 4QFY2022.

In his report dated Feb 28, the analyst says that UHREIT’s net asset value (NAV) per unit is stable at 75 US cents, with an appraised portfolio valuation that increased 1.3% y-o-y.

He sees this as a “testament” to the resilience of UHREIT’s grocery and necessity and self-storage properties as strip centres lead the recovery in retail real estate after several years of minimal construction, accounting for some 45% of retail absorption in 2022.

According to CBRE, neighbourhood and community strip centres registered the strongest performance and accounted for 38 million sqft or 45% of retail absorption in 2022, while Green Street says that strip centres have the least new supply coming on stream over the next five years due to elevated construction costs and supply barrier, especially in dense affluent residential suburbs.

Physical stores are also back in favour, according to Koh. “The balance between e-commerce and physical in-store shopping has reached an equilibrium. There is a revival in brick-and-mortar retailing as consumers seek in-store shopping experiences. Shoppers have returned to physical stores as the economy reopens,” he says.

As such, UHREIT’s strip centres which cater to necessity spending have benefitted from this, with an occupancy rate that has improved 0.2 percentage points q-o-q to 96.9% in 4QFY2022. Essential services accounted for 64.2% of base rental income as of December 2022, adds Koh.

He notes that the REIT executed a total of seven leases, comprising three new leases and four renewed leases, covering 84,464 sq ft of retail space in 4QFY2022. UHREIT also has a long weighted average lease expiry (WALE) of 7.5 years, with minimal leasing risk as only 2.6% of leases will expire in 2023, down from 8.7% a year ago.

UHREIT will also engage in asset enhancement initiatives (AEIs), such as its investment of US$12 million to develop a new 63,000 sqft store on excess land within its St Lucie West property in Florida. Academy Sports + Outdoors, a Fortune 500 sporting goods retailer, will lease the new store for 15 years that is set to be completed and opened by 1QFY2025.

Koh says that UHREIT provides a “lucrative” FY2023 distribution yield of 9.6%, which represents an attractive yield spread of 5.6% above the 10-year US government bond yield of 4.0%. It is trading at a price-to-NAV (P/NAV) multiple of 0.69x.

As at 11.56am, units in UHREIT were trading 0.5 US cents or 1.05% up at 48 US cents.

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