K-REIT portfolio occupancy climbs but rentals stay flat

Occupancy rose to 96.1% from 94.1% but signing rents showed no increase at S$11-13 psf.

Overall, K-Reit notched higher revenues in the quarter due to the contributions from new office spaces at Prudential Tower, but with the portfolio almost at its capacity limits, there is a chance for negative rental reversions on the back of lease expirations.

Here's more from DBS:

Portfolio occupancies moving up, rental remained flat. Portfolio occupancy continued to move up progressively on the back of healthy leasing demand, especially from small-to medium-size companies across all sectors. Occupancy rose from 94.1% a quarter ago to 96.1% with c.50,000 sf of new leases tied at OFC. Meanwhile, rent remained flat with OFC signing rents at S$11-13 psf -- no change compared to a quarter ago.

Prudent capital management to mitigate high gearing risk. While K-reit’s gearing of 41.8% is higher than its peers, we like the trust‘s proactive efforts in mitigating refinancing risk, including early negotiations to refinance its $535m loan due at the end of the year. The trust is likely to refinance the loan with a 5-year term which would help to extend its debt expiry profile from the current 2.9 years to 4.0 years when concluded.

Recommendation. Limited catalysts in sight, maintain HOLD at an unchanged TP $1.12. While we like K-reit for its high quality portfolio, we see limited near-term catalysts. Its portfolio is running at almost full capacity, while the remaining leases that are expiring this year, while small (c.0.3% of the portfolio's NLA), are likely to see some negative rental reversions. Therefore, we maintain our HOLD call at an unchanged TP of S$1.12.