United Hampshire US REIT (UHU SP/ODBU.SI)
Company Update: 13 August 2024
Tailwinds from the potential soft-landing of US economy
- Optimism surrounding US Federal Interest rate cuts in 2H24. Following recent inflationary data in June, the market anticipates a potential 25 basis points rate cut in September 2024. These expected rate reductions are poised to benefit United Hampshire US REIT by lowering borrowing costs, enhancing financial flexibility, and potentially attracting higher investor interest. This favourable interest rate environment aligns with the REIT’s growth strategy, positioning it for increased profitability and value creation in the upcoming quarters.
- Organic growth to drive upside in profitability. United Hampshire US REIT expects organic growth to drive profitability, leveraging built-in rental escalation in the majority long-term tenant contracts and shorter-term leases in prime self-storage properties. These factors contribute to potential revenue growth and enhanced operational performance.
- Better positioning for active management. If the Federal Reserve implements rate cuts, United Hampshire US REIT stands to benefit in the coming year, enabling proactive portfolio management through strategic acquisitions and divestments. This flexibility underscores the REIT’s capability to adapt to changing market conditions and optimize its asset base.
- We initiate an OUTPERFORM recommendation and a TP of US$0.60 based on the DDM valuation method.
1Q24 financial review
In 1Q24, United Hampshire US REIT reported a 2.3% YoY growth in revenue, reaching US$18.5mn compared to US$18.1mn in 1Q23. However, its net property income decreased by 1.3% YoY to US$12.7mn from US$12.9mn in the same quarter last year. This decline was attributable to the absence of revenue from the divested Big Pine Center, partially offset by new leases, rental escalations, and rental revenue contribution from the new Academy Sports store at St Lucie West. Additionally, distribution income (inclusive of management fee paid in cash) declined by 19% YoY to US$7.1mn, impacted by higher interest expenses due to rising interest rates, refinancing of maturing loans and less favourable new interest rate hedges.
Valuation & Action
We initiate coverage with an OUTPERFORM recommendation and a target price of US$0.60. This is based on our valuation model, which considers a terminal growth rate of 2.0% and a cost of equity of 9.6%. The proactive management positions the company well for further improvements to its portfolio, and its long-dated refinancing requirement enables it to remain stable for a longer period.
Risks
Regulatory changes and higher-than-expected interest rates.
