Brokers' take

OUE Commercial Reit | Hold Target price: S$0.67 Oct 4 close: S$0.71 OCBC Investment Research, Oct 4

OUE Commercial Trust (OUE C-Reit) announced it will be carrying out a redemption of 75 million convertible perpetual preferred units (CPPUs) at the issue price of S$1 for each CPPU. The issuance of these CPPUs to OUE C-Reit's sponsor was for partial payment of the purchase consideration for its stake in One Raffles Place. Following the redemption on Nov 2, 2017, 475 million CPPUs will remain outstanding. The manager notes that this move is part of its proactive capital management strategy and to mitigate dilution in distribution per unit (DPU) in the future.

While CPPU distributions will drop, OUE C-Reit's finance costs should move up, given that the redemption will be largely funded by existing loan facilities. OUE C-Reit's pro-forma aggregate leverage as at June 30 is expected to increase from 36.4 per cent to 38.7 per cent. On balance, we expect DPUs to soften slightly by 0.2 per cent and 0.8 per cent in FY2017 and FY2018 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 475 million units is highly unlikely.