REITs have performed poorly this year as the combination of high inflation and surging interest rates dampens sentiment for the sector.
Many REITs have plumbed to their 52-week lows as investors bail out of the sector in search of greener pastures.
However, there could still be attractive bargains to be found for resilient REITs that own quality assets.
Income-seeking investors also get a bonus – many REITs are trading at attractive distribution yields as their share prices tumble.
Elite Commercial REIT (SGX: MXNU) recently hit a year-low of GBP 0.24 and is down 49% year-to-date.
Meanwhile, United Hampshire US REIT (SGX: ODBU) also hit its 52-week low of US$0.39 recently but is down just 6.7% year-to-date.
We size up both REITs to see which has the more attractive distribution yield and whether its payout is sustainable.
Portfolio composition
Elite Commercial REIT owns a portfolio of predominantly freehold commercial buildings in the UK.
Its main tenant is the UK’s Department for Work and Pensions (DWP), which is the government’s largest public service department.
Hence, its portfolio is part of the crucial public infrastructure through which services are provided by DWP.
United Hampshire, on the other hand, deals with a portfolio of necessity-based shopping centres and self-storage properties in the US.
These properties will do well in a recession as 63.3% of rental income is from tenants providing essential services.
However, Elite wins this round by virtue of its larger number of properties which means rental income is less concentrated as compared with United Hampshire.
Winner: Elite
Financials
Looking at each REIT’s financials, both saw their gross revenue increase year-on-year.
For Elite, revenue was lifted by inflation-linked escalation clauses of 13.1% for 136 of its assets.
United Hampshire saw a double-digit year-on-year increase in revenue from newly-entered leases, rental escalation clauses, and the contribution from a new acquisition – Upland Shopping Center.
However, both REITs saw their distribution per unit (DPU) fall year-on-year.
For Elite, it reported that eight of its assets were vacant as of 30 June 2023 while its finance costs surged by 61.6% year on year to GBP 4 million.
United Hampshire chose to retain US$1.5 million of its distributable income as a capital reserve for asset enhancement initiatives (AEIs).
If it had not done so, DPU would have been flat year on year.
Winner: United Hampshire
Debt metrics
Moving on to debt metrics, both REITs have gearing ratios above 40% but Elite’s gearing is slightly higher than United Hampshire at 46% versus 42% for the latter.
For interest coverage ratio, Elite’s 3.4 times is slightly better than United Hampshire’s 2.8 times.
However, Elite has a much higher cost of debt of 5.2% versus just 3.57% for United Hampshire.
In addition, just 62% of Elite’s loans are on fixed rates, making it more probable that the commercial REIT will see a further rise in its finance costs moving forward.
Winner: United Hampshire
Operating metrics
United Hampshire has stronger operating metrics compared with Elite.
The US retail REIT enjoys a higher occupancy rate of close to 98% versus Elite’s 92.1%.
United Hampshire’s weighted average lease expiry is also longer at 7.2 years versus 4.5 years for Elite.
Winner: United Hampshire
Distribution yield
Finally, we look at the most important aspect of each REIT – its distribution yield.
Based on the trailing 12-month DPU, United Hampshire trades at a 13.4% historical distribution yield.
Elite’s distribution yield is even higher at 17.1%.
However, investors need to assess the sustainability of each REIT’s DPU.
Elite reported that some of its properties were vacant and it is likely that finance costs may continue to climb.
United Hampshire managed to keep its DPU constant if not for the retention sum, and it has a lower cost of debt with close to 81% of its loans on fixed rates.
Winner: United Hampshire
Get Smart: Other factors to consider
United Hampshire wins four out of the five categories even though its trailing 12-month distribution yield is lower than Elite’s.
In addition, the REIT manager for United Hampshire also reported a high tenant retention rate of 92% since its IPO.
United Hampshire is also more active in capital recycling.
The retail REIT has announced the divestment of Big Pine Center at US$9.9 million, 7.7% above its purchase price of US$9.2 million.
It is also undertaking a development initiative to construct a new 63,000 square foot store which will be pre-leased to Academy Sports for 15 years.
The new store is slated to open in 2024 and the REIT will incur around US$12 million for the construction.
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Disclosure: Royston Yang does not own shares in any of the companies mentioned.
