On Friday, Evercore ISI adjusted its price target for Paramount Group (NYSE:PGRE), increasing it to $6.00 from the previous $5.00, while maintaining an In Line rating on the stock. The firm's decision comes after a detailed review of Paramount Group's third-quarter results and subsequent conference call. Despite the unchanged forecast for the fiscal year 2024 core funds from operations (FFO) at $0.78, the estimate for fiscal year 2025 received a slight bump up by $0.01 to $0.66.
Paramount Group's management has revised its fiscal year 2024 guidance, raising it by $0.01 at the midpoint to a new range of $0.78 to $0.80. This adjustment reflects improved portfolio operations, but concerns persist due to unresolved vacates and a slow leasing environment.
The third quarter saw Paramount Group signing leases for 179,000 square feet of space, which represents a slight decrease from the second quarter but an increase from the first quarter. Notably, leasing activity was evenly split between San Francisco and New York, despite San Francisco's recent underperformance.
The leasing volume decrease resulted in a drop in Paramount Group's leased percentage by 1.6 percentage points to 82.0%, and occupancy also fell by 1.3 percentage points to 79.0%. However, the company anticipates an uptick in leasing activity, raising its forecast by 63,000 square feet at the midpoint, now expecting between 825,000 to 925,000 square feet.
Paramount Group is facing several upcoming lease expirations and known vacancies, particularly in San Francisco, with major tenants like JPMorgan Chase (NYSE:JPM), Google (NASDAQ:GOOGL), and Visa (NYSE:V), which is expected to keep occupancy rates under pressure.
Despite these challenges, management is optimistic about a robust leasing pipeline of 230,000 square feet, with 80% of that involving new tenants. Consequently, Evercore ISI has increased its new leasing assumption for the fourth quarter of 2024 to 175,000 square feet from 100,000 square feet and for fiscal year 2025 to 550,000 square feet from 450,000 square feet.
In light of a recent 4% decline in Paramount Group's stock price and its trading significantly below its net asset value (NAV), Evercore ISI conducted a "scorched earth analysis" to determine a potential floor value for the stock, which is estimated at around $4.70 per share—only 3% below the last closing price of $4.85.
With the revised estimates and forecasts for net operating income growth, Evercore ISI acknowledges the near-term leasing challenges faced by Paramount Group but sees limited downside risk to the stock, suggesting that an acceleration in leasing activity could serve as a catalyst in the near term.
In other recent news, Paramount Global has made significant moves in its business operations. The company has secured full annual bonuses for its co-CEOs, George Cheeks, Chris McCarthy, and Brian Robbins, even if they depart from their roles. This decision comes as Paramount is preparing for a merger with Skydance Media, a deal orchestrated by software billionaire Larry Ellison, who is set to gain control of Paramount through this acquisition.
Simultaneously, Paramount Group, a separate entity, has suspended its regular quarterly dividend to enhance its financial flexibility. This strategic move aligns with the company's commitment to fortify its balance sheet, as stated by Albert Behler, the CEO of Paramount Group.
In the midst of these developments, Paramount Global is also reducing its U.S.-based workforce by 15% as part of its cost-saving initiatives. This decision follows the company's efforts to decrease annual expenses by $500 million.
Furthermore, Paramount Global had been a subject of a $4.3 billion acquisition bid by media executive Edgar Bronfman Jr., challenging Skydance Media's prior agreement to purchase Paramount. Despite this, Skydance proceeded with the takeover after Bronfman withdrew his bid.
These recent developments highlight Paramount's strategic adjustments and its focus on strengthening its business operations and financial health.
InvestingPro Insights
To complement Evercore ISI's analysis, InvestingPro data offers additional insights into Paramount Group's financial position. The company's market capitalization stands at $1.15 billion, with a price-to-book ratio of 0.36 as of the last twelve months ending Q3 2024. This low P/B multiple, highlighted as an InvestingPro Tip, suggests the stock may be undervalued relative to its book value, aligning with Evercore's observation of the stock trading below its NAV.
Despite the challenges in occupancy and leasing noted in the article, InvestingPro Tips indicate that Paramount Group's liquid assets exceed its short-term obligations, potentially providing some financial flexibility as it navigates the current market conditions. Additionally, the company offers a dividend yield of 2.89%, which may attract income-focused investors.
It's worth noting that while the article discusses improved portfolio operations, InvestingPro data shows a revenue decline of 12.2% over the last twelve months ending Q3 2024. This contrasts with the quarterly revenue growth of 21.66% in Q3 2024, suggesting recent improvements in line with management's optimism about the leasing pipeline.
For investors seeking a more comprehensive analysis, InvestingPro offers 7 additional tips for Paramount Group, providing a deeper understanding of the company's financial health and market position.
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