CGS-CIMB Research analysts are awaiting more catalysts after Paragon REIT reported its most recent set of results, with distribution per unit (DPU) in line with forecasts.
Formerly known as SPH REIT, the REIT changed its name in December 2022. Just five months before, the REIT changed its financial year-end to Dec 31, 2022, from Aug 31, 2022 previously. The change resulted in its current reporting period spanning 16 months from Sept 1, 2021, to Dec 31, 2022
16MFY2022 revenue grew 1.8% y-o-y, driven by better performance in the Singapore portfolio and on the back of lower rental reliefs given and step-up in rents, note CGS-CIMB Research analysts Lock Mun Yee and Natalie Ong.
Net property income (NPI) grew 3.3% y-o-y due to lower property expenses, resulting in NPI margin expanding from 73.1% in FY2021 to 74.4% for 16MFY2022. Portfolio occupancy was largely stable y-o-y at 98.5%, add Lock and Ong.
In a Feb 14 note, Lock and Ong are maintaining “hold” on Paragon REIT with a higher target price of $1.01 from 96 cents previously.
Tenant sales at pre-Covid-19 levels
See also: Paragon REIT reports DPU of 1.72 cents for 4MFY2022
Tenant sales for January to December 2022 at Paragon is up 31% y-o-y, Clementi Mall is up 10% y-o-y, while Australia’s Westfield Marionis is up 8.1% y-o-y and Figtree is up 15.4% y-o-y; all recovering to match or exceed pre-Covid-19 levels.
16MFY2022 portfolio reversions narrowed to -4.1% from -10.8% in FY2021, with Singapore and Australia reversions coming in at -3.3% and -7.0% respectively.
“Recovery in tenant sales has lifted tenant sentiment but this was not captured in 16MFY2022 reversion numbers as Paragon REIT typically commences renewal discussions six months prior to lease expiry,” say Lock and Ong. “Going forward, we think the portfolio could start showing positive reversions.”
See also: Paragon REIT 'one of the key beneficiaries' of Singapore's reopening; upgrade to 'buy': DBS
Adjusted ICR still healthy
Average cost of debt increased from 1.77% for 12MFY2022 to 2.05% for 16MFY2022 due to higher floating rates and higher locked-in rates as Paragon REIT increased its interest hedge from 71% to 84%.
About 7.3% of borrowings are up for refinancing in FY2023. Adjusted interest coverage ratio (ICR) slipped slightly from 5.2x to 4.7x.
“Based on our forecasts, we estimate FY2023 adjusted ICR of 3.7x, comfortably above the Monetary Authority of Singapore’s required adjusted ICR of 2.5x, allowing Paragon REIT a maximum gearing limit of 50%,” write Lock and Ong.
In addition, Paragon REIT's “low” gearing of 29.8% translates to debt headroom of $1.1 billion to reach 45% gearing, add the analysts. “While the management is keen to acquire one of its right of first refusal (ROFR) assets, Seletar Mall, we understand that the sponsor, Cuscaden Peak, is still in the midst of evaluating its strategy for its portfolio.”
Lock and Ong raise their FY2023 and FY2024 forecasts “to factor in stronger operating performance”.
“The return of Chinese tourists is expected to lift tenant sales and sentiment at Paragon. Potential re-rating catalysts include stronger-than-forecast reversions, asset enhancement initiatives and accretive acquisitions. Downside risks include weaker-than-forecast reversions/leasing and slowdown in consumer spending, which may result in lower gross turnover rents and weaker tenant sentiment, impeding Paragon REIT’s ability to command positive reversions.”
As at 9.42am, units in Paragon REIT are trading 1 cent lower, or 1.03% down, at 96 cents.
