United Hampshire US REIT: Capitalizing on Declining Interest Rates

March 6, 2025 | KGI Securities (Singapore) Pte. Ltd.

Favourable Interest Rate Environment

The Federal Reserve has cut interest rates by 25 basis points in December 2024, bringing the target range to 4.25% to 4.50%. Lower borrowing costs are expected to enhance United Hampshire US REIT’s financial flexibility and support growth. Projections for the Fed funds rate indicate a range of 3.50% to 3.75% by the end of 2025 and 3.25% to 3.50% by the end of 2026. [[1]]

Strategic Divestments

United Hampshire US REIT successfully divested properties, including Lowe’s and Sam’s Club in 2H24 and Supermarket at Albany in January 2025, at over 4% above valuation, demonstrating strong capital recycling efforts. [[1]]

Resilient 2H24 Operational Performance

Revenue increased 0.4% year-over-year to US\$36.4 million, while net property income dipped 1.6% to US\$24.4 million, mainly due to divestments and higher property expenses. Distribution per unit (DPU) declined 4.2% to 2.05 US cents, reflecting higher finance costs. [[1]]

Strong Performance Metrics

Grocery & Necessity portfolio occupancy remained high at 97.5%, with a weighted average lease expiry (WALE) of 8.1 years. Self-storage assets saw occupancy improve to 93.1%. [[1]]

Maintain Outperform Rating

KGI Securities reiterates its OUTPERFORM rating with a target price of US\$0.60, supported by a stable portfolio against uncertain macroeconomic conditions. [[1]]

FY24 Financials Update

In FY24, United Hampshire US REIT reported a 1.4% year-over-year growth in revenue, reaching US\$73.2 million compared to US\$72.2 million in FY23. However, its net property income decreased by 1.7% year-over-year to US\$49.8 million from US\$50.6 million last year. This decline was attributable to the absence of revenue from the divested Lowe’s and Sam’s Club properties within Hudson Valley Plaza alongside higher property expenses during tenant transitions. Additionally, overall distributable income declined by 16.2% year-over-year to US\$25.5 million, impacted by change in manager’s base fees with effect from 2H23 and higher interest expenses due to rising interest rates, refinancing of maturing loans, and less favorable new interest rate hedges. Despite these challenges, it benefited from ongoing work-from-home trends in the US and a shortage of self-storage facilities in the New York region. [[1]]

Resilience in Operational Performance

As of 31 December 2024, United Hampshire US REIT achieved a high occupancy rate of 97.5% for its grocery and necessity properties, coupled with a tenant retention rate of 92%. The portfolio’s Weighted Average Lease Expiry (WALE) improved from 7.1 years in FY23 to 8.1 years in FY24, with only 2.5% and 3.4% of leases expiring in 2025 and 2026 respectively. In the full year, the REIT successfully executed 35 new and renewal leases, covering over 786,359 sq ft, highlighting strong tenant demand. Additionally, self-storage occupancy rose from 91.8% last year to 93.1%. Importantly, there are no refinancing requirements until November 2026, ensuring financial stability in the near term. [[1]]

Management Fee Adjustment

Due to the change in management fee distribution, the distribution per unit has been impacted in FY24. From 2H23, the manager’s base fee, approximately 10% of distributable income, has been paid out in cash instead of through share issuance. [[1]]

Valuation and Action

KGI Securities maintains an OUTPERFORM rating with an unchanged target price of US\$0.60. This is based on a valuation model that considers a terminal growth rate of 2.0% and a cost of equity of 9.4%. 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. Additionally, with a favourable interest rate on its loan, there is no pressure for early refinancing unless the interest rates decline below its current financing rate. [[1]]

Risks

Potential risks include economic slowdown, regulatory changes, and prolonged high interest rates. [[1]]