United Hampshire US REIT 2H DPU Drops 27.9%! Should You Be Concerned?

Introduction

 It's no secret that the US Retail REIT comprises the majority of my portfolio. It could even be said that my portfolio IS UHREIT, and I can safely say that this will continue to be the case. If you're a regular reader of my blog, then you may recall in a previous post that I mentioned the fact that I would cut my UHREIT holdings if it reached 0.60 USD per unit. Obviously, that never materialised and instead of shooting up to 0.6, it has recently fallen to 0.44. Hence, in the spirit of doing things in an "opposite" sense, I believe this calls for a time of accumulation, foolish as it may initially seem. 

United Hampshire US REIT's Logo (Source: UHREIT's LinkedIn Page)

The headline of UHREIT's 2H DPU drop of 27.9% is scary. I mean, it's understandable. Living on $60,000 per year of income is extremely different from living on $45,000 per year, so investors are naturally spooked by the seemingly dire results posted by the REIT. However, in this blog post, I'll hopefully be able to convince you that fundamentally, the REIT has actually posted rather average results, one could even say they're good going by certain yardsticks. 

Review of Balance Sheet

One would most definitely be forgiven for categorising UHREIT in the same group as other SGX-Listed US REITs such as the likes of Keppel Pacific Oak US REIT (KORE), Prime US REIT, and even Manulife US REIT. I mean, UHREIT literally has the word "US" in the name. But it's important to differentiate the crème de la crème from the bourgeoisie. Do note however that with the state of US Commercial Real Estate nowadays, I use the term "crème de la crème" rather loosely, but we'll take what we can get.

With US CRE, the main concern within the context of Singapore REITs is the fact that many US CRE property valuations are on a free fall, reducing the REIT's overall portfolio valuation, which is the denominator in the formula for the gearing ratio. Naturally, this would mean that the overall leverage of US REITs may breach the 45% gearing limit imposed by the Monetary Authority of Singapore, alongside various bank loan covenants that may have been imposed on the REIT, leading to insolvency. In fact, certain REITs have already suffered this fate, and the results have been only what could be described as disastrous. 

UHREIT's Balance Sheet FY2023 (Source: UHREIT FY2023 Financial Results)

Taking a quick cursory glance at the balance sheet, we can see that leverage ratio concerns can immediately be dismissed. Although NAV per unit has slightly decreased from 0.75 to 0.74 USD, it's mainly due to dilution from management fees paid in units alongside the DRIP programme. 

UHREIT's FY2023 Aggregate Leverage (Source: UHREIT FY2023 Investor Presentation)

We can see that in a time when US office property valuations are free-falling, UHREIT's property valuations instead continue to climb, reducing overall leverage. 

This tells us two things:

1. There's not too much to worry about regarding property valuations revising downwards due to higher interest rates. These increased property valuations are already conducted in an environment of high-interest rates, so ceteris parabus, as long as management doesn't decide to take on any more debt, we're most likely safe from any covenant or regulatory breach.

2. The asset class UHREIT specialises in is expected by financial institutions to do well in the coming years

I don't know about you, but I believe both are plus points for the REIT. 

UHREIT's FY2023 Debt Maturity Profile (Source: UHREIT FY2023 Investor Presentation)

If you're concerned about refinancing into higher rates, then you'll be happy to know that not only is the next refinancing cycle taking place in 2025, but the company also has the option to exercise a delay in their loan repayment to 2026, with the common consensus being that interest rates would have lowered and normalised a great deal by then. 

Overall, I believe we can say that UHREIT's balance sheet continues to remain fundamentally sound so any risk of insolvency can be brushed off for now.

Review of FY2023 Performance

UHREIT's FY2023 Performance (Source: UHREIT FY2023 Financial Results)

In terms of actual financial performance, we can say that occupancy rates have slightly moderated for both Self-Storage and Grocery-Anchored Retail asset classes, with self-storage being hit harder. This makes sense since self-storage is more of a luxury as opposed to being an actual necessity. Despite this moderated occupancy, we see that net property income continues to climb, implying much further upside in DPU is in store for us in the near future when the economy recovers from the recent interest rate hikes. 

So Why Did DPU Drop So Much?

Firstly, the management has opted to take its fees entirely in cash as opposed to cash, which was previously around the 10% mark in terms of distributable income. 

Another reason is the fact that the management has retained $1.3 million USD for capital expenditure for Asset Enhancement & Development initiatives, further enhancing its portfolio's competitiveness, such as the recent St. Lucie Academy + Outdoors expansion. In fact, since the expansion was only completed in November, the full increased rental hasn't been captured by the accounting period of FY2023, so we'll continue to see the upside contributed by that. 

Lastly, the distributable income (and conversely DPU) fell due to higher financing costs which has plagued the highly leveraged REIT sector as a whole. Adjusted DPU which excludes the other above two reasons would result in only a total of 5.8% decrease between FY23 and FY22, which I believe is fairly reasonable given the fact that rates have skyrocketed so fast in such a short period of time. In a sense, one could say that investors are currently facing short-term "pain" for long-term gain as the DPU reductions reduce dilution by management alongside further bolstering the REIT's portfolio valuation and potential future NPI via AEIs. 

Overall Conclusion

Even at the artificially reduced annualised DPU of 4.28 US cents per unit per year, at an 8% dividend yield which I believe is fairly reasonable for an overseas robust REIT, that would indicate a valuation of 0.535 USD per unit, which far exceeds the current valuation the market is pricing the REIT at, not to mention how conservative this valuation already is. The market has severely underpriced this ticker as a result of it being misunderstood as simply just another US CRE REIT when it clearly sets itself apart from the rest in terms of the resiliency of its cashflows coupled with its unique asset class. 

Overall, I believe that the REIT has actually delivered a rather good result for the year, and will now pivot to contributing more funds into the battered-down ticker. 

Author's Note: Sorry if this is a rather short and sparse post, simply wanted to articulate some of my thoughts and see if my investment thesis still made sense. Recently started a job which is why I haven't had much time to post, still hope you guys still enjoyed it though!

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I have no plans to initiate any additional positions in the stocks I have mentioned within the next 72 hours. All content published by me should not be construed as any sort of financial or investment advice and is simply for informational purposes. Although all research and figures are accurate and calculated to the best of my ability, I am not liable for any decisions made based on inaccurate information.