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.”
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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.
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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.
