On Monday, Evercore ISI raised its rating for Paramount Group (NYSE:PGRE) from Underperform to In Line, adjusting the price target to $5.00 from a previous value. The revision follows a period of notable underperformance by the company, with a decline of 9.5% in 2023 compared to the RMZ's gain of 13.7%, and a further drop of 11.4% year-to-date in 2024, against the RMZ's decrease of 2.6%.
The firm's analyst cited the current valuation of Paramount Group, suggesting that it now reflects most of the downside risks. This assessment is based on a detailed analysis conducted last year, which estimated the value of Paramount Group's unencumbered assets and corporate level assets and liabilities. The resulting valuation was approximately $300 per square foot, closely aligning with the stock's recent trading price.
Paramount Group has made some progress recently, securing a 2.5-year lease extension with KPMG at its property on 55 Second Street in San Francisco and achieving favorable refinancing terms at One Market Plaza in February. These developments have contributed to the analyst's revised outlook on the stock.
Despite these positive steps, Paramount Group still faces challenges, including resolving upcoming lease expirations with significant tenants such as Google (NASDAQ:GOOGL) at One Market Plaza and J.P. Morgan at One Front Street in San Francisco. The firm's analyst believes that while the company is not entirely clear of potential difficulties, the risk of further downside is relatively contained at the current trading levels.
The new price target of $5.00 implies a modest discount to the forward net asset value (NAV) estimate of $5.66. At the time of the rating change, Paramount Group's stock was trading at approximately 12 times the firm's 2025 adjusted funds from operations (AFFO) estimate, with an implied capitalization rate of 9.3% for the entire portfolio.
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