Broker’s take: RHB foresees higher earnings, valuations for AA Reit on master lease renewals

AIMS Apac Real Estate Investment Trust (AA Reit)’s latest master lease renewals with Kinetsu World Express and Aalst Chocolate are set to boost the valuations of the Reit’s assets while providing an uplift to the Reit’s near-term earnings, said RHB Research.

This comes after the Reit manager announced it had renewed its master lease with the Japanese logistics group for a new five-year term, and extended the master lease term with Cargill’s chocolate manufacturer for a further 10 years.

Analyst Vijay Natarajan on Tuesday (Jan 9) said he viewed the overall development as positive for AA Reit, adding that “valuations remain attractive” as its unit price trades slightly below book value.

The analyst said he also liked the Reit for its stable income profile with about 44 per cent master leases and a balance of multi-tenanted leases.

After factoring in the latest lease extensions, RHB raised its FY2024 to FY2026 earnings projections by 1 per cent to result in a slightly higher price target of S$1.48 versus S$1.47 previously.

The research house continues to rate AA Reit at “buy”.

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“Asset enhancement benefits should kick in later this year and the Reit remains in a fairly healthy financial position,” added Natarajan.

The analyst noted that AA Reit’s overall weighted average lease expiry is due to increase from 4.2 years to 4.6 years as a result of the extension, which is among the highest among Singapore Reits.

He also believes the lease extensions should boost valuations of the assets, while an ongoing asset enhancement initiative at the Reit’s high-specification industrial asset is estimated to result in a 30 per cent rental uplift.

He however cautioned that though AA Reit’s gearing remains “healthy” at 32.1 per cent, this does not include two of the Reit’s perpetual securities that are due for rate resets in August 2025 and September 2026.

“(The perps) may need to be partly refinanced via debt, depending on market conditions then.”

Units of AA Reit were trading S$0.01 or 0.8 per cent higher at S$1.33 as at 1.41pm on Tuesday.