KGI Securities has started coverage on United Hampshire US Real Estate Investment Trust (United Hampshire US Reit) with an “outperform” rating ahead of an anticipated 25 basis point US interest rate cut in September.
The Reit has been assigned a price target of US$0.60, which factors in a terminal growth rate of 2 per cent, as well as a 9.6 per cent cost of equity.
In an initiation report on Tuesday (Aug 13), analyst Alyssa Tee said expected interest rate reductions would benefit the Reit by lowering borrowing costs, enhancing financial flexibility, and potentially attracting higher investor interest.
With a decline in interest rates, the fair value of Untied Hampshire US Reit’s investment properties are also anticipated to increase.
A favourable interest rate environment would further align with the Reit’s growth strategy, and position it for increased profitability and value creation in the upcoming quarters, said Tee.
“If the Federal Reserve implements rate cuts, United Hampshire US Reit stands to benefit in the coming year, enabling proactive portfolio management through strategic acquisitions and divestments. This flexibility underscores the Reit’s capability to adapt to changing market conditions and optimise its asset base,” commented the analyst.
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“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.”
In her view, the Reit presents a “compelling investment opportunity” as it demonstrates good overall valuation metrics, despite having a relatively low market capitalisation compared with its peers.
She highlighted the Reit’s dividend yield that has consistently exceeded that of US Treasury 10-year yields, as well as a low price-to-net asset value ratio of 0.6 times based on KGI’s forecasts for FY2024.
A healthy forecast gearing ratio of 33.9 per cent for the fiscal year would allow the Reit to pursue additional asset acquisitions through future divestments, added the analyst.
KGI’s report was issued before the Reit on Wednesday posted a 24.2 per cent year-on-year drop in distribution per unit to US$0.0201 for H1 FY2024, after accounting for the effect of its manager receiving its fee in cash instead of units.
The Reit ’s gearing ratio as at end-June 2024 stood at 41.9 per cent.
Its manager said it expects recent divestments of two properties within Hudson Valley Plaza to lower the Reit’s aggregate leverage to 39 per cent from 41.7 per cent as at end-2023.
Units of United Hampshire US Reit were flat at US$0.43 on a cum-distribution basis as at the midday trading break on Wednesday, after the release of its first-half results.
