Paragon REIT 9M24 business update
Paragon REIT issued 9M24 business and operational updates. 9M24 revenue rose 3.0% year-on-year to S$223m.
3Q24 revenue of S$75.6m was 2.8% higher than 2Q24, which reflect the positive rental reversions in previous quarters.
This is in spite of the absence of contribution from Rail Mall which was divested in mid-August.
Portfolio occupancy fell marginally to 97.9% (end June: 98.1%) due to dip in occupancy at Westfield Marion in Australia to 96.6%.
About 7% of the leases by floor area or 14% of leases by gross rental income in this mall will expire in this year.
Management stated that it is common practice that tenants may continue to occupy the space on the same terms without extending the leases.
Year-to-date, tenant sales fell 6.6% year-on-year at Paragon mall, which is the largest asset that contributed 63% of rental income in FY23.
Tenant sales growth ranges between 0.9% and 8.8% for the other three malls. Paragon mall is impacted by decline in demand for luxury goods.
Gross debt rose to S$1.5bn at end-Sep (Jun 24: S$1.27bn). Paragon REIT raised more debt to pay for the redemption of the S$300m 4.1% perpetual securities at end Aug.
As a result, gearing increased to 35.9% (Jun 24: 29.0%). Average cost of debt eased marginally to 4.5% (Jun 24: 4.6%) due to a higher share of S$ debt.
The higher debt level will lead to higher interest expense in 4Q24, albeit offset partly by the savings from dividends on perpetual securities.
Another S$106m of debt is maturing at end 2024. It paid out a special distribution of S$52.5m (or 1.85 cents/share) in Oct from the sale proceeds of the Rail Mall. All in, we expect interest expense to be elevated unless an asset disposal takes place.
Softer retail sales do not bode well for Paragon REIT. Singapore September retail sales excluding motor vehicles fell 1.4% year-on-year, the third consecutive month of decline.
Department stores fell more at -6.8%, after recording -6.2% in August. In Australia, retail sales edged up 0.1% month-on-month in Sep 24, which was a sharp slowdown from 0.7% growth in August.
What would Beansprout do?
We maintain our NEUTRAL rating and target price of S$0.85.
We expect DPU at 5.87 cents in FY24E, and 4.10 cents in FY25E. Our TP translates into yield of 6.9% and 4.9%, for FY24E and FY25E, respectively.
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