Instead of an initial public offering to kick off the year, the Singapore Exchange (SGX) has yet another privatisation offer. Via a Scheme of Arrangement (SOA), the owner of Paragon REIT’s manager, Cuscaden Peak, which, in turn, is equally owned by CLA Real Estate and Mapletree Investments, has offered minority unitholders 98 cents per unit. Minority unitholders will also receive their distributions per unit (DPU) of 2.33 cents, making the total price $1.0033.
The move by Cuscaden Peak follows two earlier privatisation bids launched by the controlling shareholders of SGX listcos SLB Development and Japfa , both of which were announced on Jan 24.
For minority unitholders of Paragon REIT looking forward to their DPU, it will be paid out on March 28 with an ex-date of Feb 18.
The offer values Paragon REIT at $2.782 billion compared to its Dec 31, 2024 net asset value of $2.675 billion. The REIT’s investment properties, which include The Clementi Mall and Westfield Marion along with Paragon were valued at $4.038 billion. The REIT's aggregate leverage stood at 35.3% as at Dec 31, 2024. Figtree Grove was divested in January.
On Jan 24, an SGX filing showed that Nassim Developments, a unit of Hotel Properties (HPL), had divested its stake in Paragon REIT and the REIT’s manager. Analysts point to HPL having its hands full with the redevelopment of Voco (the former Hilton) and Forum Galleria.
The rationale for the offer, in addition to premiums on volume weighted average price (VWAP) for one month, three months and one year, is that the sponsors and owners of the manager, CLA Real Estate and Mapletree, believe an extensive asset enhancement initiative (AEI) is necessary to maintain Paragon mall’s competitiveness.
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Gerald Yong, CEO of Cuscaden Peak, says: “The AEI, based on the capital expenditure per square foot of Paragon’s gross floor area (GFA), could be anything between $300 million to $600 million. This represents 10% to 21% of Paragon’s appraised value,” he says. Paragon’s appraised value in FY2024 is $2.9 billion. Paragon is valued as a 99-year leasehold property and Cuscaden Peak owns the freehold title to the land.
Paragon’s net property income (NPI) in FY2024 was $142.8 million, giving the asset an NPI yield of 4.9%. The reported capitalisation rate was 4.5% for the retail portion and 3.75% for the medical suites. As of end-December 2024, Paragon mall’s committed occupancy was 99.5%, and the reported rental reversion was 22.5% for the new and re-leased net lettable area (NLA) of 330,000 sq ft, representing 45.9% of the NLA.
A potential AEI could take some three to four years to complete, carry significant execution risk such as cost and timing uncertainties, is subject to approvals by the authorities during this period, could be affected by potential changes in market conditions and may also impact leasing demand and rental rates, Yong describes.
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The AEI would result in fluctuations in NPI and distributable income. The offeror believes the major AEI would be more suited to being carried out in a private setting, Yong continues. He adds that Paragon mall’s GFA is maxed out, with no permissible change of use to build luxury apartments on top of the mall.
Asked if the offer is final, Yong says the offeror believes the proposal is attractive to unitholders and hopes unitholders will accept the offer. “By accepting the scheme, unitholders can realise their investment in 100% cash, at an attractive premium, and reinvest in other opportunities. Unitholders will not need to bear the associated execution risks, as well as potential distributable income, DPU and unit price volatility,” Yong says.
An SOA is a neat way to privatise a REIT, especially an all-cash clean offer. A couple of votes need to take place. Paragon REIT’s trust deed has to be amended to include provisions that will facilitate the implementation of the SOA. This requires at least 75% of voting rights held by unitholders present and voting at an extraordinary general meeting (EGM) to be convened. To approve the SOA, at least 50% of unitholders representing at least 75% in value of units present and voting at the scheme meeting are required. Cuscaden Peak which owns 61.5% of Paragon REIT will abstain from voting on the scheme.
The joint announcement by the offeror has the usual clauses including a switch option and a tweak in the unlikely event a competitive offer materialises. A competitive offer is unlikely to materialise because any offeror would need to acquire the manager which will not make financial sense.
The scheme meeting and the EGM are likely to be held in April following the court hearing in March. A second court hearing is likely in May to approve the scheme and unitholders should get their monies after that.
Vijay Natarajan, vice-president of real estate at RHB Bank, says the move is not a surprise as Paragon REIT had divested Rail Mall and Figtree Grove.
“Earlier, we have identified it as one of the potential M&A targets for this year, considering its high-quality assets in prime locations and potential value unlocking potential for Paragon mall,” he says.
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The move highlights the deep value in the sector with Singapore-focused commercial REITs such as Keppel REIT, Starhill Global REIT , Suntec REIT, OUE REIT , Lendlease Global Commercial REIT , CapitaLand Integrated Commercial Trust and Frasers Centrepoint Trust “trading at a good discount to book value”, Natarajan indicates.
“Direct beneficiaries and comparable REITs to Paragon REIT will be Starhill Global REIT (P/NAV (Price/Net asset value) of 0.7 times) and Lendlease Global Commercial REIT (P/NAV: 0.7 times) that have a relatively similar profile,” he suggests.
Meanwhile, several analysts have recommended that minority unitholders accept the offer. “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 Mun Yee of CGS International in her Feb 11 note.
“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,” says Gerald Wong of financial portal Beansprout. “It is also above precedent privatisations and above the trading price of Paragon REIT for much of the period since the privatisation of SPH,” he adds.
In their Feb 11 note, Geraldine Wong and Derek Tan call the privatisation bid the “end game”. They reiterate that they have previously identified the 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,” they state.
“Nevertheless, the privatisation offer highlights the inherent value of Paragon REIT, aligning with our thesis on the stock,” according to Wong and Tan.
