UOB Kay Hian analyst Jonathan Koh is maintaining his “buy” call on United Hampshire US REIT (UHREIT) with a target price of 68 cents following the trust’s 3QFY2022 results ended September announcement.
In his Nov 10 report, Koh notes that UHREIT is benefiting from the recovery in retail real estate. According to CBRE, neighbourhood and community strip centres topped all retail formats for the eight consecutive quarters with net absorption of 6.4 million sf in 3QFY2022.
On the back of this, UHREIT’s strip centre occupancy had improved 0.5 percentage points q-o-q to 96.7% in 3QFY2022.
“Availability for neighbourhood and community strip centres both dropped 1.2 percentage points y-o-y to 7.1% and 5.4% respectively. Many retailers are renewing their leases due to high construction costs and a tight construction labour market,” says Koh.
Moving forward, consumers will devote a larger share of their wallets on day-to-day necessities at strip centres as their purchasing power is eroded by inflation, says Koh. In the month of September, for example, grocery sales increased by 6.8% y-o-y compared to 1% y-o-y for discretionary sales.
Tenants providing essential services such as supermarkets, grocery stores, convenience stores, pharmacies, medical supplies, home improvement stores, bank branches and pet stores accounted for 64% of UHREIT’s base rental income as of September.
Shopper traffic at UHREIT’s open-air strip centres have trended higher during summer, Koh highlights.
The REIT completed the acquisition of Upland Square Shopping Center in Pottstown, Montgomery County in Pennsylvania for US$85.7 million ($118.25 million) on July 28. The acquisition increased the size of UHREIT's portfolio by 6% and expanded its exposure to the state of Pennsylvania from 7.3% to 17.7% of base rental income.
The anchor tenant is Giant by Ahold Delhaize and three dominant national off-price retailers, namely Burlington, Ross and TJ Maxx. Upland Square provides an NPI yield of 6.5% while the acquisition is accretive to UHREIT’s pro forma 2021 DPU by 2.1%.
Koh says UHREIT offers an “enticing and irresistible” yield spread, trading at FY2023 distribution yield of 10.8% which represents an attractive yield spread of 6.7% above the 10-year US government bond yield of 4.1%. The REIT trades at P/NAV of 0.66x.
As at 2.25pm, units in UHREIT are trading 1 cent higher or 2.06% up at 49.5 cents.