Natarasjan notes that the stake increase by AA REIT’s sponsor is a “positive move” and “a show of confidence” in the REIT’s long-term prospects.
He writes in his July 22 report: “The stake divestment by ESR comes on the back of its recent successful privatisation and a possible shift in focus towards its core business, presenting a win-win deal for both parties, in our view.”
Presently, the REIT has a gearing of 28.9%, which is the lowest among Singapore REITs, notes Natarajan.
He writes: “Gearing is expected to move to mid-30% levels following the recent redemption of $125 million of perpetual securities (perps), but still presents a healthy around $200 million debt headroom for acquisitions.”
AA REIT’s management has remained disciplined over the last few years, keeping a larger focus on asset enhancements and divestments.
Another upside potential Natarajan sees is from the upcoming reset of $250 million worth of perps in September 2026.
He believes the REIT could replace this with new perps at a coupon of low- to mid-4% levels, capitalising on the recent sharp fall in Singapore interest rates. This, the analyst notes, could provide potential savings of $2 million per annum (p.a.), or an around 3% uplift to dividend per unit (DPU), which he is yet to factor in.
Meanwhile, AA REIT’s asset enhancement initiatives (AEI) are progressing well, with income contribution to kick in from the 2HFY2026.
The AEI at 7 Clementi Loop is about 60% completed, and a master tenant has taken over part of the building for internal works, while its asset at 15 Tai Seng Drive is around 78% complete.
AA REIT has signed new long master leases of 10 to 15 years for both assets with a high single-digit return on investment (ROI) expected, on AEI costs of up to $32 million. Rent reversion is expected to remain positive.
Overall, Natarajan has revised his FY2026 to FY2027 DPU by about 2%, mainly by fine-tuning interest cost assumptions. From the FY2026 to FY2028, he expects a DPU compound annual growth rate (CAGR) of about 3%.
He writes: “AA REIT remains well positioned to ride on the growth of Singapore’s and Australia’s industrial sector via strategic asset enhancements and solid operational execution.”
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 finally, a good balance of long master lease and multitenant assets.
Conversely, key risks include the tariff impact of the global supply chain and logistics sector, a shorter land-lease for industrial assets in Singapore and lastly, rising interest rates and recessionary risks.
As at 3.09pm, units in AA REIT are trading flat at $1.40.
