However, income was weighed down by higher operating costs and the divestment of a hotel the REIT used to own at Changi Business Park.
On a "same-store" basis, ESR-REIT's revenue rose 1.4% y-o-y, helped by positive rental reversions and higher rents on new leases, while NPI was broadly flat at -0.1% y-o-y due to higher utilities and property tax. Distributable income rose 1.4% y-o-y to $44.8 million, supported by lower borrowing and perpetual securities costs.
The REIT's gearing was 44.3% but is set to lower to 39.5% on a pro-forma basis after non-core divestments and debt repayment. Overall borrowing costs remained fairly stable q-o-q at 3.34%.
Dale Lai of DBS Group Research calls 1QFY26 a "transition" quarter with operations remaining largely steady, but strategically more important for the balance sheet.
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He points out the divestment of $439.1 million of non-core assets should reduce leverage and improve land-lease quality, but the market will likely watch whether proceeds can be recycled into AEIs, redevelopments or acquisitions fast enough to protect DPU.
Down the road, the REIT's AEI of 29 Tai Seng Street AEI is 97% completed with completion by July; the redevelopment of 2 Fishery Port Road, to commence in 4QFY2026, offers a potential 7.0% stabilised yield on cost, says Lai.
Despite the marginal improvement in earnings on same-store basis, the key catalyst remains successful redeployment of proceeds into accretive assets, which will continue driving DPU, says Lai, who is keeping his "buy" call and $3.20 target price.
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Separately, Li Jialin and Lock Mun Yee of CGS International, note that the REIT is supported by its stable operations and stabilising core earnings. Citing the 8.7% FY2026 yield, they maintain their "add" call and target price of $3.43.
Potential re-rating catalysts include accretive acquisitions as well as earlier completion of AEI and redevelopment projects. On the other hand, downside risks include unexpected lease non-renewals, delay in AEI completion, and unfavourable exchange rates.
ESR-REIT closed at $2.42 on April 30, down 2.42% for the day.
