OUE Commercial REIT - OCBC Investment 2017-12-05: Further CPPU Redemptions Afoot

OUE COMMERCIAL REIT TS0U.SI

OUE Commercial REIT - Further CPPU Redemptions Afoot

OUE Commercial REIT (OUECT) has announced that it will be carrying out a redemption of 100m convertible perpetual preferred units (CPPUs) at its issue price of S$1 per CPPU. These CPPUs were previously issued to OUECT’s sponsor (OUE Limited) as part payment of the purchase consideration for OUECT’s acquisition of an 83.33% indirect interest in OUB Centre Limited, which owns 81.54% of One Raffles Place.

As a recap, the CPPUs were issued at a coupon rate of 1.0% p.a. in 2015, at a conversion price of S$0.841 per unit with a restricted period of 4 years from the date of issuance. The redemption will take place on 2 January 2018, and a special preferred distribution relating to the redeemed CPPUs, being 1% per annum pro-rated over the period from 1 July 2017 to 31 December 2017, has been declared.

We note that this announcement comes on the back of a previous redemption exercise that was concluded last month, involving the redemption of 75m CPPUs. We understand that the manager is carrying out these redemptions as part of its proactive capital management strategy in order to enhance OUECT’s capital structure for longer term sustainability.
The manager has also highlighted that the reduction of CPPUs will help to mitigate possible DPU dilution from conversion of CPPUs into units.
We maintain our view that more CPPUs might possibly be redeemed ahead of the non-call period in 2019, though a full redemption of the outstanding 375m units will be highly unlikely.

While CPPU distributions will see a drop, OUECT’s finance costs should inadvertently increase as we assume that the redemption will be largely debt funded. Specifically, we assume that the combined CPPU redemptions of S$175m by the start of 2018 will be financed at a ~3.1% rate of interest (similar to the recently issued S$150m fixed rate note due 2020).
On balance, we expect that the net effect will cause FY18’s DPU to ease slightly by 0.3% against our last forecast.
OUECT is currently trading at a 6.6% yield in both FY17F and FY18F. We maintain our HOLD rating and our fair value estimate of S$0.67.

Joseph Ng OCBC Investment | http://www.ocbcresearch.com/ 2017-12-05

OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 0.670 Same 0.670