United Hampshire US REIT ("UHREIT") is actually a very resilient SGX listed REIT that is very much misunderstood. It has even been paying out stable distributions during the worst of the COVID induced global recession period in 2020. The recent announcement of its 1st half results with 3.05 cents interim distribution means an annualized high distribution yield of +8.13% based on unit price of US$0.75 as at 12 August 2021. The high distribution yield is one of the highest in SGX listed REITs out there. As with all high yield REIT, there are certain risk that one needs to take note which I will explain towards the end of this post.
1. Why UHREIT is resilient? UHREIT tenants are mostly in US Essential Services (94.8% occupancy) and long WALE of 8 years
As seen from above screenshot, UHREIT tenants are mostly in grocery, convenience stores and hardware & home improvement stores such as Walmart, Giant and Home Depot. These are excellent defensive tenants with strong financial background hence earnings from leasing of properties are resilient hence the distributions were relatively unaffected during the pandemic induced economic crisis in 2020.
To sum it up, grocery and other necessity made up 94.8% of committed occupancy. In addition, UHREIT has extremely long WALE of 8 years.
2. Key dates to take note to be eligible for the interim distribution
For investors who are interested to get the half year cash distribution, the units must be purchased by 18 August 2021 (Wednesday) given that 19 August 2021 is the Ex-Date. Distribution payment date will fall on 28 September 2021. Nevertheless, note that the current unit price of UHREIT before the Ex-Date actually already imputed this expected dividend payout hence after the Ex-Date, the price of UHREIT will drop. But whether drop is more or less than the dividends per unit being declared will still depend on the latest market expectation.
3. Risk of holding on to UHREIT- Change in US tax rules on withholding tax may remove tax shield on dividends from US
We need to be careful of US tax authority IRS changes in tax rules. Currently, the US REITs listed on SGX are using special vehicles in US and sending back dividends to Singapore via a capital distribution model in order to get past the withholding tax requirement (tax shield). Note that US authorities may pass legislation to change this and having withholding tax being levied will reduce a substantial part of the dividends derived from US properties. For those interested on the technicality of the US tax shield employed by US REITs listed on SGX, I have previously done up a short write-up on the background and origin of "capital distribution" of US REITs in my Manulife US REIT posting here.
4. Risk of holding on to UHREIT- Denominated in USD and subject to forex fluctuation.
For most investors, the functional currency will be SGD while UHREIT is denominated in USD. Hence there will be adverse forex exposure if USD were to weaken further. This is rather obvious. So I will not elaborate further.
5. Unknown financial strength of one of the sponsors, The Hamsphire Companies LLC, and unfamiliarity with the assets held in UHREIT
Since 2008, UOB Global Capital LLC and The Hampshire Companies, LLC have jointly formed three funds with combined AUM of approximately US$1.1 billion (as at 31 December 2020) to focus on investment opportunities in income producing real estate assets in the U.S.
UOB Global Capital LLC locals in Singapore will know of it as it is linked to UOB group. However, the other sponsor, The Hamsphire Companies LLC, is lesser known in Singapore. Also, since the physical assets are all located in the USA, many investors (including myself) do not feel comfortable as they cannot see & feel them. The properties in the form of neighbourhood and community strip centres are also an asset class that is unique on SGX listed REIT thus many investors are unfamiliar with them.
It does not help that some of the brokers like Maybank Kim Eng classified UHREIT as a "B" class marginable securities relative to other REITs which enjoyed a "A" grade rating.
Parting thoughts
UHREIT IPO price was US$0.80 per unit in March 2020. After its debut, its price dropped immediately to US$0.72 per unit and at the lowest point in 2020, it even went down below US$0.50. However, it has proved its earnings resiliency through the baptism of fire in the pandemic induced recession of 2020. Personally, I think that a fairer price should be US$0.85 to US$0.90 per unit given its defensive blue chip tenants in the USA as mentioned in point 1 above (I will accept a lower yield of 6.5% to 7%). However, it may take a very long time for investors to get familiar and comfortable with UHREIT as alluded to the key risks mentioned in Pt 3, 4 and 5 (if unfavorable events were to occur).
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