UOBKH initiates coverage of United Hampshire US Reit with 'buy' call

Singapore

UOB Kay Hian has initiated coverage on United Hampshire US Real Estate Investment Trust (United Hampshire US Reit) with a "buy" call and a target price of 92 US cents.

In a research note published on Wednesday, analysts Jonathan Koh and Loke Peihao highlighted the Reit for its defensive strength, blue-chip tenants and long weighted average lease expiry of 8.4 years.

United Hampshire US Reit's initial portfolio comprises four self-storage properties, as well as 18 grocery and necessity retail properties which the analysts view as e-commerce resistant due to "prohibitive" last-mile logistics costs. The Reit's top 10 tenants include Walmart, Lowe's and Home Depot.

"United Hampshire US Reit's neighbourhood and community strip centres are often anchored by a supermarket that primarily caters to necessity consumption, which is less sensitive to economic cycles. Delivery costs are prohibitive, particularly in suburban residential areas. This problem is especially acute for the grocery industry due to low offline grocery margins of 5 to 7 per cent, which leave little room for delivery costs to be absorbed," said the analysts.

More than 70 per cent of the Reit's base rental income is derived from essential service providers such as grocery and convenience stores, all of which have been open for business since September 2020.

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Additionally, the UOBKH analysts believe the Reit's self-storage facilities will benefit from an outflow of population from New York City to suburban areas in New Jersey, coupled with increasing demand for self-storage space as residents increasingly work from home.

UOBKH is forecasting a 2021 distribution per unit (DPU) of 6.1 US cents. At the unit price of 57 US cents, United Hampshire US Reit trades at a distribution yield of 10.7 per cent for 2021F, representing a yield spread of 9.8 per cent above the 10-year US government bond yield of 0.9 per cent.

"United Hampshire US Reit trades at a significant 24 per cent discount below 2020F net asset value (NAV) per unit of US$0.75. Other US Reits, such as Keppel Pacific Oak US, Manulife US and Prime US, are trading at an average discount of 7 per cent to NAV per unit. We expect the discount to gradually diminish with the normalisation of consumer confidence and spending with the Covid-19 vaccination already underway," the analysts noted.

Units of United Hampshire US Reit closed at 62 US cents on Thursday, up four US cents or 6.9 per cent.