UOB Kay Hian analyst Jonathan Koh has kept “buy” on United Hampshire US REIT (UH REIT) with a lower target price of 92 US cents from the previous 97 US cents.
In his May 17 note, Koh says UH REIT is trading at 2022 distribution yield of 10.2%, representing an attractive yield spread of 7.3% above the 10-year US government bond yield of 2.9%. UH REIT is trading at P/NAV of 0.81x.
UH REIT benefitted from strong leasing momentum for its grocery and necessary retail properties in 1QFY2022. The occupancy for these properties improved 1.1 percentage points q-o-q to 96.4% in the quarter, the higher since its IPO, Koh highlights.
Meanwhile, the occupancies for UH REIT’s self-storage properties are on an upward trend. UH REIT has also entered into an agreement for the sale of Elizabeth and Perth Amboy Self Storage Properties to Storage Post for US$45.5 million, 17.7% above purchase price and 2.5% above appraised valuation. The divestment is expected to complete in 2QFY2022.
Aside from resiliency from the long weighted average lease to expire, UH REIT is also sheltered from the rising cost of utilities, says Koh. “Majority of its leases for grocery and necessity retail properties are triple net, whereby tenants are responsible for their pro-rata share of operating expenses. Thus, UH REIT is not unduly affected by higher cost of utilities,” he adds.
UH REIT has conservative aggregate leverage of 38.9% as at March 22. Its weighted average debt maturity is 2.3 years and does not have any bank loans due for refinancing till March 23.
“79.6% of UH REIT's borrowings are hedged with fixed interest rates. Management estimated that every 50 basis points increase in London Interbank Offered Rate/Secured Overnight Financing Rate has a negative impact on DPU of 0.051 US cents.
“Cost of debt was 2.9% in 1Q22. Assuming that the fed funds rate averages 2.5% in 2023, we estimate that average cost of debt will increase to 3.3%,” says Koh.
On higher interest rates and cost of debt, Koh trims his 2022 DPU forecast by 5%.
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As at 10.14am, units in UH REIT are trading flat at 60.5 US cents with an FY2022 P/B ratio of 0.8x and DPU yield of 10.2%.
Photo: UH REIT
