3Q23: Resilient And Attractive Yield From Strip Centres With Long WALE
UHU provides stability amid the current geopolitical uncertainties. Its strip centres in suburban locations have outperformed other asset classes due to entrenched hybrid work arrangements. They cater to necessity spending and have a long WALE of 7.2 years. Management has switched to paying management fees fully in cash to protect unitholders’ interest. UHU provides resilient and attractive 2024 distribution yield of 11.7% and trades at P/NAV of 0.56x. Maintain BUY. Target price: US$0.60.
• United Hampshire US REIT (UHU) reported distributable income of US$7.1m for 3Q23 (-14.5% yoy). The decline was caused by a change in policy as the manager has elected to receive management fees of S$0.8m fully in cash. On a like-for-like basis, distributable income decreased by a smaller 4.8% yoy.
• Growing organically and via acquisitions. Gross revenue and NPI grew 8.5% and 8.7% yoy respectively for 3Q23, driven by its third and largest acquisition of Upland Square in Pottstown, Pennsylvania (completion: 28 Jul 22), positive rental reversion from new and renewed leases, and rental escalation from its existing properties.
• Resiliency from long WALE. UHU signed eight new and renewal leases totalling 97,098sf in 3Q23 (two new leases and six renewals). It achieved positive low single-digit rental reversion in 9M23. It has maintained high tenant retention ratio of 92% since its IPO. Committed occupancy eased 0.7ppt qoq to 97.2% in 3Q23. UHU’s grocery and necessity properties have a long WALE of 7.2 years. There is minimal roll-over risk with leases expiring in 2024 accounting for only 3.4% of base rental income.
• Resiliency from essential services. As of end-Sep 23, 63.6% of UHU’s base rental income was derived from tenants providing essential services. Its triple net leases require tenants to reimburse the landlord for property taxes, insurance and maintenance for common areas, which shelter UHU from the negative impact of inflation. Leases for anchor tenants typically have built-in rental escalation of 5-10% for every 5-10 years. Tenants typically do not have early termination rights.
• Self-storage properties: Rents on an upward trajectory. Occupancies at self-storage properties Carteret and Millburn were 89.2% and 92.1% respectively as of Sep 23. Average net rent rate for Carteret and Millburn increased 6.5% and 7.5% yoy respectively to US$24.50 and US$27.40psf per year in 3Q23.