Singapore Stocks analysis of OUE Commercial REIT

1. Redemption of 75m CPPUs
2. Aggregate leverage to increase
3. Fair value of S$0.67

CPPU Redemption as Part of Capital Management Strategy

 

 

OUECT announced that it will be carrying out a redemption of 75m convertible perpetual preferred units (CPPUs) at the issue price of S$1 for each CPPU. The issuance of these CPPUs to OUECT’s sponsor was for partial payment of the purchase consideration for OUECT’s stake in One Raffles Place. Following the redemption on 2 Nov 2017, 475m CPPUs will remain outstanding. The Manager notes that this move is part of its proactive capital management strategy and to mitigate dilution in DPU from potential conversion of CPPUs into units of OUECT in the future.

Higher Finance Costs Expected

We note that the CPPUs were issued at a coupon 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. While CPPU distributions will drop, OUECT’s finance costs should creep up, given that the redemption will be largely funded by existing loan facilities.

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OUECT’s pro-forma aggregate leverage as of 30 Jun 2017 is expected to increase from 36.4% to ~38.7%. On balance, we expect DPUs to soften slightly by 0.2% and 0.8% in FY17 and FY18 against our last forecast, respectively. We also believe it is possible for more CPPUs to be redeemed ahead of the non-call period in 2019, though a full redemption of the outstanding 475m units is highly unlikely.

Maintain HOLD

We believe that the Investment Outlook 2017 for the office sector is improving, as demonstrated by the flat QoQ Grade A CBD Core monthly rents of S$8.95 in Q2’17, according to CBRE. The same sentiment can also be observed from CapitaLand Commercial Trust’s recent acquisition of Asia Square Tower 2 (excluding the hotel component), where the potential benefits from an expected uptick in Grade A office rents has been cited as one of the reasons for the transaction.

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We will be waiting for further evidence to corroborate our view as we head into the earnings season. For now, based on our revised DPU forecasts, we maintain our HOLD rating but with a slightly lower fair value estimate of S$0.67 (previously S$0.68).

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