Cuscaden Peak Investments, the sponsor of Paragon REIT has proposed the privatisation and delisting of the REIT by way of a trust scheme of arrangement. The offer price comes up to 98 cents per unit in cash, representing 1.07 times price/adjusted NAV, and is at a 10.9% and 12.8% premium over the one-month and 12-month volume-weighted average prices.
In addition, the scheme consideration will not be reduced by the 2HFY2024 cash distributions of 2.33 cents per unit, declared during its results. Management said the indicative date for the dispatch of scheme document is set for March, with scheme meeting and EGM in April.
For the scheme to be approved, more than 50% of the number of unitholders representing 75% or more in value of the units present and voting at the scheme must vote in favour of the exercise. Cuscaden, holding 61.5% in Paragon REIT, will abstain from voting.
See more: Cuscaden Peak offers to privatise Paragon REIT at 98 cents per unit (update)
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With that, CGS International is keeping its “hold” call on Paragon REIT with an increased target price of 98 cents from 92 cents previously.
Cuscaden has proposed the privatisation offer to pave the way for a major enhancement exercise at Paragon. With 72% of Paragon REIT’s portfolio value made up by Paragon Mall (Paragon), increasing competition in the Orchard Rd area, including upcoming newbuilds, could impact the future performance of Paragon.
That said, undertaking a major and necessary asset enhancement initiative (AEI) for Paragon could result in NPI and DPU volatility during its makeover period.
Cuscaden has indicated that it could potentially undertake a $300 million to $600 million AEI to rejuvenate Paragon over the next three to four years. While not many details were shared, it has indicated that the scope of work could include upgrades to Paragon’s façade and interior, a reconfiguration of spaces, connectivity improvements, and M&E upgrades, among others.
In terms of financial impact, Cuscaden has estimated that assuming a 10%-40% decline in NPI during the AEI period, and the $300 million - $600 million capex to be fully debt funded, proforma FY2024 Adjusted DPU could be lowered by 21.4-64%, while adjusted gearing of 34.2% at end-FY2024, could rise to 38.5%-42.4%, according to analyst Lock Mun Yee.
“Given the potential income and DPU yield fluctuations during the AEI period and challenging trading conditions for Paragon REIT, including low trading liquidity, we think the privatisation offer provides an opportunity for existing unitholders to monetise their investments at a premium to adjusted NAV, in cash,” says Lock, who remains positive on Paragon REIT’s firm position in the luxury retail landlord market, but maintains her “hold” rating due to its limited share price upside.
Beansprout too has a similar sentiment towards the REIT and its privatisation plans. Analyst Gerald Wong has a “neutral” rating and a 98 cents target price, which represents an increase from 85 cents previously.
The major AEI at Paragon is expected to create long-term value for the owners of the mall, and cement Paragon’s position as a destination mall along the key Orchard Road shopping belt, which is in itself undergoing a rejuvenation.
That said, should there be no mitigating measures taken, such as via a careful phasing of the AEI over a period of time, minimising the impact on shopper traffic and tenant disruptions while providing financial support to unitholders such as income support measures, Wong expects DPU to see a significant impact to the tune of 21.4%-64.0%, which could pose a near term headwind.
“In the absence of a competing offer, we are inclined to accept the current offer as the offer is at a 1.07x premium to NAV. It is also above precedent privatisations and above the trading price of Paragon REIT for much of the period since the privatisation of SPH,” says Wong.
DBS Group Research on the other hand is more bullish on the scenario, as it keeps its “buy” call and $1.05 target price on Paragon REIT.
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Analysts Geraldine Wong and Derek Tan say: “We previously identified Paragon REIT as a take-over target, which has now materialised. That said, the offer price remains a tad below our 12-month target price of $1.05, which we believe is achievable once the interest rate narrative returns in favour of the sector – well suited for unitholders with a long-term investment horizon. Nevertheless, the privatisation offer highlights the inherent value of Paragon REIT, aligning with our thesis on the stock.”
Paragon REIT’s sponsor Cuscaden Peak and the manager have offered to take the REIT private in a scheme consideration of 1.07x price/net asset value (P/NAV), which reflects a premium to historical trading multiples seen in the few years but in line with its historical trading range. It is also in line with past S-REIT buy-outs and M&A multiples, based on DBS’ observations.
“This premium is certainly justified given the REIT’s premium portfolio, anchored by Paragon Mall, one of Singapore’s most visible shopping mall in Orchard Road, and the few that enjoys freehold lease status in the precinct,” say Wong and Tan, who also except Paragon Mall to continue to be one of the key beneficiaries of the return of tourist footfall and spending.
As at 11.00am, units in Paragon REIT are trading at $1.00.
