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DBS keeps 'buy' on Paragon REIT following divestment of Rail Mall

The Edge Singapore
The Edge Singapore  • 2 min read
DBS keeps 'buy' on Paragon REIT following divestment of Rail Mall
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DBS Group Research has kept its "buy" call and $1.05 target price on Paragon REIT following its divestment of The Rail Mall, the smallest asset within its portfolio.

The sale, understood to be to a "private investor", will be made at $78.5 million, which is 27% above valuation of $62 million.

The divestment is expected to complete by 2H24 and proceeds from the divestment will be used to repay debt amongst other potential uses. 

Following the divestment, Paragon REIT continues to hold larger properties namely Paragon Mall and Clementi Mall. 

In its June 21 note, DBS estimates the exit cap rate on the proposed transaction price at 6.5% based on FY2023 net property income of $5.2 million, and higher than precedent market transactions due to the low lease remaining of around 22 years. 

"With operating occupancy at around 96% and by nature of its small size and land lease decay, The Rail Mall is the best-suited asset within the portfolio to be divested," says DBS.

See also: Haw Par trading below historical book value, CGSI highlights in unrated report

DBS observes that this transaction has "similar characteristics" to the divestment of Changi City Point by Frasers Centrepoint Trust J69U -

: "a non-core asset, with decaying land lease tenure and transacted above asset valuation."

DBS estimates that with the divestment proceeds used towards the redemption of a $300 million perpetual securities issue due August, the REIT's gearing can be reduced by around 2 percentage points to 36%.

DBS figures that with the exit cap exceeding Paragon REIT’s average cost of debt of 4.3%, there should be a small exposure to DPU but capped at 2% on a gross rental income level. 

See also: Meaningful contributions from new initiatives expected only from FY2025, DBS keeps ‘hold’ on Nanofilm

"We read this move positive in unlocking value within Paragon REITs portfolio, a right step in the direction to catalyse a potential takeover, and another positive datapoint for the retail sector in delivering transaction above asset valuations," says DBS.

Paragon REIT units last changed hands at 84 cents.


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