Paragon REIT’s reversions could be negative to flat in FY2023; CGS-CIMB maintains 'hold'

The analysts believe that the REIT’s DPU downside is likely limited.

CGS-CIMB Research analysts Natalie Ong and Lock Mun Yee have kept “hold” on Paragon REIT SK6U with an unchanged target price of $1.01 following the trust’s 1QFY2023 ended March results announcement.

The analysts note that Paragon REIT’s 1QFY2023 revenue of $72 million was in line at 24.1% of CGS-CIMB’s full year estimates. All assets performed at 1QFY2022 revenue levels or better during the quarter, concealed by writebacks and depreciation of Australian dollars against the Singapore dollar.

In 1QFY2023, portfolio occupancy slid q-o-q to 97.7% from 98.5% previously due to lower occupancy at Australia’s Westfield Marion. Nonetheless, Paragon REIT’s Singapore portfolio achieved a full occupancy across all three assets as at March.

“While no reversion numbers were reported this quarter, the management shared that it was getting good leasing momentum and had signed about 5% of expiring leases by gross rental income in 1QFY2023,” the analysts note.

Paragon REIT’s Singapore and Australia reversions narrowed from -8.2% and -10.8% respectively in FY2021 to -3.3% and -7.0% in FY2022. CGS-CIMB believes that the reversion could continue narrowing in FY2023 as tenant sentiment recovers on the back of improving tenant sales.

Although the REIT’s total borrowings on fixed rates were unchanged q-o-q at 84%, average cost of debt jumped from 3.09% as at December 2022 to 3.71% for 1QFY2023. This is due to the expiry and subsequent rollover of interest rate swaps, translating to about 33$ of total borrowings being re-hedged at higher rates. Due to hedges locked in for FY2024, the trust’s FY2024 interest cost will be in the 4% bracket, its management guided.

Paragon REIT has $300 million in perpetuals with a call/reset date on August 30, 2024. Assuming interest rates remain at present levels, the coupon rate will increase from 4.1% to about 5.5%, the analysts highlight. “However, Paragon REIT’s low gearing of 29.8% as at December 2022 affords it the option of redeeming the perpetuals by drawing on bank loans, which could push gearing to about 37%,” they add.

Moving forward, the analysts believe that the REIT’s DPU downside is likely limited as gross turnover rent upside from returning tourist dollars will be eroded by higher cost of debt and negative to flattish reversion.

Ong and Lock cite stronger than forecast reversions, asset enhancement initiatives and accretive acquisitions as potential re-rating catalysts.

As at 1.05pm, units in Paragon REIT are trading 0.5 cents lower or 0.53% down at 93 cents.

See Also: