With a remaining land lease of 22 years, The Rail Mall has accounted for 2.4% of the REIT’s FY2023 net property income (NPI), write Ong and Lock.
They add that the announcement divestment price translates into an exit yield of 6.6% or around 7.1% after factoring in the 12.8% increase in rental reversions on 55% of net lettable area renewed in FY2023.
“A positive carry asset, Rail Mall provided an FY2023 NPI yield of 8.4%, part of which was return on capital given the short land lease of 22 years,” say the analysts.
With the assumption that divestment proceeds will be utilised to pare down debt, Ong and Lock expect a decline of 0.8% and 1.2% of the REIT’s FY2024 and FY2025 distribution per unit (DPU) respectively with a slight net asset value per share (NAVPS) accretion of around 0.5%.
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“Should Paragon REIT decide to top up distributions to match the income vacuum from the divestment of Rail Mall, we estimate that the divestment gains of $16.0 million would translate into around six years of distribution top-ups,” they add.
However, due to the recent transaction yields of 4.0% to 4.5% and the large quantum of retail assets in Singapore, it is unlikely that Paragon REIT will be able to accretively redeploy the divestment proceeds locally, in the analysts’ view.
Ong and Lock note that despite identifying Australia as a possible geography for accretive acquisitions due to its transacting between 6.25% and 7.25% in 1QFY2024 according to Savills, management has announced in its 1QFY2024 analyst briefing that it will hold off on Australian acquisitions in the near term given the soft consumption market.
“Nonetheless, the divestment gain compensates for the difficulty of near-term capital redeployment and could be used to top up distributions,” say the analysts.
They add that any potential redeployment of divestment proceeds will likely be at yields below The Rail Mall exit yield. Since the divestment, Singapore continues to anchor the REIT’s portfolio, accounting for around 80% of the analysts’ FY2024/FY2025 NPI.
“While we do not see any near-term catalysts for Paragon REIT, we remain positive given its firm position in the luxury retail landlord market and reiterate Hold,” write Ong and Lock.
Paragon REIT currently trades near its five-year historical average DPU of 5.3% for FY2024.
Overall, the analysts have lowered their target price by one cent from 86 cents to 85 cents. Potential upside risks identified by Ong and Lock include stronger rental reversion and accretive acquisitions.
On the flip side, weak reversions and slowdown in consumer spending may lead to lower turnover rent and softer tenant sentiment, which could hurt the REIT’s ability to command positive reversions.
Shares in Paragon REIT closed at 1.5 cents lower, or down 1.73%, at 85 cents on June 24.
