In the quarter, revenue and net property income (NPI) came in at $47.5 million and $34.1 million, a 4.1% and 2.8% improvement y-o-y respectively.
Full-year revenue and NPI grew by 5.3% y-o-y and 2.1% y-o-y to $186.6 million and $133.7 million respectively.
Overall, top line growth was supported by resilient portfolio performance and continued strong rental reversions.
Guha writes: “Growth in top line was partly eroded by higher borrowing expenses and performance fees leading to 2.6% y-o-y growth in DPU for the full year.”
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For the full year, AA REIT also recognised $3 million of income from the sale of electricity.
On a quarterly basis, occupancy slipped to 93.6%, led by the REIT’s logistics and warehouse in Singapore, but rental reversion was up 15.5%, led by logistics with an offset from the REIT’s business park asset.
Meanwhile, gearing came in at 28.9% while the cost of debt was 4.3% and coverage was stable at 2.4 times and is seen to be stable, says Guha.
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Portfolio value declined 1.5% on the back of cap rate expansion of two assets in Australia and a weaker AUD.
“New asset enhancement initiatives (AEI) was announced for Optus Centre to foster long-term tenant retention and maximise space functionality,” he says.
With this, the analyst has trimmed his DPU by 0.5% and 1.5% for FY2026 and FY2027 respectively, on the back of lower distribution from capital.
“While yield is high, high gearing and falling occupancy keep us on ‘hold’,” writes Guha.
Risks noted by him include refinancing risks, higher vacancy in logistics and industrial assets and dilutive corporate actions.
On the other hand, the analysts at RHB Bank Singapore (RHB) and DBS Group Research (DBS) are more bullish on the stock, keeping their “buy” calls and at respective TPs of $1.48 and $1.55.
RHB’s Vijay Natarajan writes: “AA REIT’s 2HFY2025 DPU came in slightly better than expected- aided by higher income growth.”
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He adds: “With a recent asset divestment at a healthy premium and refinancing of upcoming perpetual securities at lower costs, AA REIT’s balance sheet is currently in a healthy position to tap into acquisition opportunities. It is one of our mid-cap top picks.”
He says the REIT’s leasing demand so far has not been impacted by trade tariffs and less than 10% of its tenants have direct exposure to the US.
“The latest committed portfolio occupancy has increased to 96.1%, and we expect it to remain healthy at current levels for the rest of the year,” writes Natarajan.
He expects gearing, which fell to 28.9%, to move back to mid-30% levels when the REIT redeems $125 million in perpetual securities in August via additional borrowings.
He adds that with the coupon rate of newly issued perps at 4.7% per annum (p.a.) at around 95 basis points (bps) below the August expiry, it is expected to result in annual savings of $1.1 million.
With another $250 million worth of perpetual securities due to reset in September 2026, Natarajan believes AA REIT could similarly issue new perps to replace it next year at mid-4% levels, thereby achieve additional interest cost savings of about $2 million per year.
On AEIs, he sees that 7 Clementi Loop is about 60% completed, and the master tenant has taken over part of the building for internal works, while 15 Tai Seng Drive is around 78% complete.
He writes: “AA REIT has signed new long master leases for both with a high single-digit return on investment (ROI) expected on AEI costs of up to $32 million.”
Lastly, Natarajan notes that AA REIT, which has brought down its financing costs marginally by 10 bps q-o-q to 4.3%, will likely see a further 10 bps to 20 bps decline in FY2026.
He adds that the REIT’s portfolio valuation declined 1.5%, mainly due to lower valuation for Australian business parks on the back of cap rate expansions as well as foreign exchange (forex) impacts offsetting valuation gains across the Singapore portfolio.
For the coming FY2026, he expects Australian assets’ valuations to see slight improvements with rate cuts anticipated.
With this, Natarajan has tweaked a higher FY2026 to FY2027 DPU by 1% and introduced his FY2028 forecasts.
He writes: “Overall, we expect a DPU compound annual growth rate (CAGR) growth of around 3% from FY2026 to FY2028, aided by lower financing costs. We also slightly raise our cost of equity by 10 bps, factoring in current market uncertainties.”
Key drivers noted by him include high quality industrial assets in Singapore and Australia with the majority being logistic assets, a proven track record on asset redevelopments and enhancements and lastly, a good balance of long master lease and multitenant assets.
Conversely, key risks include tariff impact on the global supply chain and logistics sector, a shorter land-lease for industrial assets in Singapore and finally, rising interest rates and recessionary risks.
DBS’ Dale Lai and Derek Tan, like Natarajan, are similarly pleased by AA REIT’s performance.
They write: “AA REIT's strong operating performance has come as a positive surprise, with robust rental reversions flowing through to revenue growth and more than offsetting the impact of higher borrowing cost.”
“With continued positive rental reversions anticipated, alongside a relatively stable portfolio occupancy supported by an increasing proportion of master leases, we remain optimistic about AAREIT’s near-term prospects,” add Lai and Tan.
They see that the upcoming 21.7% of leases expiring in FY2026 will be a key factor in determining the REIT’s earnings trajectory.
Despite economic uncertainty denting demand in the near-term, Lai and Tan believe that continued strong positive rental reversions will help offset most, if not all of the weakness from leasing demand.
They write: “Moreover, with inflation easing and no loans due for refinancing until November 2026, we believe that costs will remain well contained in FY2026”
With that, they have revised their forecasts to reflect stronger portfolio rental income, the benefits from the upcoming perpetual securities replacement, and the planned divestment of 3 Toh Tuck Link.
“As we roll forward our valuations, we have also raised AA REIT’s weighted average cost of capital (WACC) as a result of lower targeted leverage ratio in the long-term,” add the analysts.
Key risks noted by them include the lack of acquisitions and elevated costs that make it prohibitive for AA REIT to embark on AEI projects and unlock its unutilised gross floor area.
Units in AA REIT closed flat at $1.27 on May 8.
