SINGAPORE (Dec 5): OCBC Investment Research is maintaining its “hold” call on OUE Commercial REIT (OUECT) with a target price of 67 cents.
This came on the back of the trust announcing that it will be carrying out a redemption of 100 million convertible perpetual preferred units (CPPUs) at $1 per CPPU.
Previously, these CPPU were issued to the trust’s sponsor as part payment for the acquisition of an 83.33% indirect interest in OUB Centre, which owns 81.54% of One Raffles Place.
To recap, the CPPUs were issued at a coupon rate of 1.0% per annum back in 2015 at 84.1 cents per unit with a restricted period of four years from the date of issuance.
The redemption will be taking place on Jan 2, 2018, and a special preferred distribution relating to the redeemed CPPUs, being 1% per annum pro-rated over the period from July 1 to Dec 31, has been declared.
In a Tuesday report, analyst Joseph Ng notes that this announcement came shortly after a redemption exercise that was concluded last month, which involved the redemption of 75 million 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,” says Ng.
In addition, OUECT’s manager highlighted that the reduction of CPPUs will help to mitigate possible DPU dilution from conversion of CPPUs into units.
Hence, the analyst maintains his view that more CPPUs might be redeemed ahead of the non-call period in 2019, but a full redemption of the outstanding 375 million units is 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,” says Ng.
Particularly, the analyst assumes that the combined CPPU redemptions of $175 million by the start of 2018 will be financed at an interest rate of about 3.1%, similar to the recently issued $150 million fixed rate note which is due in 2020.
On balance, Ng expects the net effect will cause the trust’s FY18’s DPU to ease by a slight 0.3% against his last forecast.
As at 10.03am, units in OUECT are trading at 71 cents or 27.6 times FY17 earnings with a DPU yield of 6.6%.
