• The Omicron wave has receded. Demand for groceries remains stable while foot traffic for restaurants and gyms have picked up. United Hampshire US REIT (SGX:ODBU) has entered into an agreement for the sale of Elizabeth and Perth Amboy Self-storage properties for US$49m, which is 10.4% above the appraised valuation. Management plans to reinvest the proceeds to higher yielding grocery & necessity properties.
• United Hampshire US REIT provides enticing distribution yield of 10.6% and trades at P/NAV of 0.83x.

Omicron Wave Is Waning and Largely Over

• New cases of COVID-19 infections and hospitalisations have fallen in the US. Many states are dialling back COVID-19 restrictions. In the Northeast, the states of New Jersey and New York have relaxed some COVID-19 restrictions, including the mandatory wearing of masks. Consumer behaviour has started to normalise with pick-up in spending at brick-and-mortar stores (e-commerce sales have conversely slowed) and gradual shift back towards services.
• Normalisation in consumer spending. Demand for groceries remains stable as many employees continue to work from their homes. Full-service and quick-service restaurants are benefiting from pent-up demand to dine out. Movie theatres and fitness centres, which were most disrupted by the COVID-19 pandemic, saw substantial recovery in foot traffic.

Supporting Tenants’ Omni-channel Strategy

• Physical stores have evolved into key nodes for last mile delivery. More retailers will set up in-store micro fulfilment centres with automated picking processes of about 10,000sf. Supermarkets and grocery stores are allocating larger parking areas to facilitate curb-side pickup. United Hampshire US REIT will support tenants’ omni-channel strategy to provide a seamless online and offline shopping experience by providing multiple methods for shoppers to pick up their online purchases.

Unlocking Value for Two Self-storage Properties

• United Hampshire US REIT has entered into drop from 39% to 34.3%, assuming the proceeds from divestment are fully utilised to repay borrowings. The divestment is expected to complete in 2Q22.

United Hampshire US REIT's 2H21 Results Met Expectations

• Gross revenue and net healthy at 95.3% as of Dec 21. United Hampshire US REIT has maintained long WALE of 8 years.

Conservative Capital Management

• United Hampshire US REIT has a conservative aggregate leverage of 39.0% as of Dec 21. 79.6% of its total debt is hedged into fixed rates. It maintains a well staggered debt maturity profile to minimise refinancing risk. Its weighted average debt maturity is 2.5 years with no refinancing until 2023. Its weighted cost of debt is 2.63% and interest coverage ratio is healthy at 6.5x.
• Scaling up in grocery & necessity properties. United Hampshire US REIT has recognised gains in fair value of investment properties of US$20m in 2H21. On a same store basis, United Hampshire US REIT’s portfolio valuation has increased 3.7% in 2021. The blended cap rate for the portfolio was 6.4% (grocery & necessity properties: 6.5%, self-storage properties: 5.3%). Inclusive of its newly acquired Colonial Square and Penrose Plaza valued at US$81.5m, the size of United Hampshire US REIT’s portfolio has grown 17.6%.

United Hampshire US REIT - Earnings Forecast Revision & Recommendation

• We forecast United Hampshire US REIT's DPU of US$0.066 on the dividend discount model (DDM) (cost of equity: 7.0%, terminal growth: 0.5%).
• Catalysts:
  • Recovery and normalisation of domestic consumption in the US.
  • United Hampshire US REIT provides enticing and irresistible yield.

Source: UOB Kay Hian Research - 25 Mar 2022