UOB Kay Hian (UOBKH) introduces the idea that Paragon REIT (former SPH REIT) has been divesting assets, and this could be a precursor to an M&A.
On Nov 22, Paragon REIT entered into a put and call option to divest Figtree 5F4 Grove Shopping Centre at Wollongong, Australia for A$192 million (5% premium above valuation). Pro forma 2023 DPU is expected to drop 1.8% to 4.80 cents post-divestment. Pro forma NAV per unit as of end-Dec 2023 is expected to fall 2.2% to $0.90.
The divestment is expected to be completed in 1Q2025. Upon completion, Paragon REIT will have three retail properties, Paragon, Clementi Mall and Westfield Marion. Singapore would account for 83% of net property income (NPI) and 87% of AUM.
The sale price of A$192 million for Figtree Grove Shopping Centre is above the independent valuation of the property of A$183.0 million as at Oct 31. The then SPH REIT acquired Figtree Shopping Centre for A$175.1 million in 2018. At the time the purchase price translated into $175.1 million. As a result, there is likely to be a loss in translation.
In June this year, Paragon REIT divested Rail Mall for $78.5 million, above its last valuation and the purchase price of $63.2 million.
"Valuation of Singapore assets increased 3.4% or $116 million due to improved performance from Paragon and Clementi Mall. Valuation for Westfield Marion declined 5.3% to A$580 million as capitalisation rate expanded 25bp to 6.25%. NAV per unit increased 3.3% to $0.94," observes UOBKH.
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The local broker adds that the Singapore properties continue to perform well. Gross revenue and NPI increased 3% and 4.5% y-o-y respectively in 1HFY2024 for the two Singapore properties. NPI margin improved 1.1 ppt y-o-y to 75.2%. NPI from Paragon and Clementi Mall grew 6.3% and 11.1% y-o-y respectively.
"New sponsor Cuscaden Peak is a consortium made up of Hotel Properties
Other market observers have indicated that the REIT may have received offers for Paragon on Orchard Road.
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Whatever the case, UOBKH says the share price catalyst is likely to be continued recovery in visitor arrivals and tourism receipts. Resilient domestic consumption, and limited supply of retail space along Orchard Road are additional catalysts.
Otherwise, the unit price is fairly valued since Paragon REIT is trading at post-divestment pro forma DPU yield of 5.49%. UOBKH does not have a rating for the REIT.
