$$$ KPO and CZM $$$: OUE Commercial REIT Rights Issue - Very Very Very Bad Deal

Friday, September 14, 2018

OUE Commercial REIT Rights Issue - Very Very Very Bad Deal

If you are an existing shareholder, you should be aware of the proposed acquisition of the office components of OUE Downtown. You might be aware that I actually do like rights issue as they present an opportunity to accumulate more shares at a lower price. However, I have sold all my OUE Commercial REIT today (8,000 units @ $0.605) and these are the reasons why I will not be participating this extremely bad deal (at least for my case).

Some important numbers to take note:
- 83 rights units for every 100 existing units
- issue price of $0.456
- TERP of $0.570
- Pro Forma DPU of $0.0354 vs Current DPU of $0.0467
- Pro Forma NAV of $0.70 vs Current NAV of $0.91

My average price was $0.70 and before the rights issue, the yield on cost was around 6.67% and with a NAV of $0.91, it was trading at >20% discount. However, after the rights issue, even with a huge oversubscription, I can no longer get back the same yield. Besides not being yield accretive, this proposed acquisition/rights issue reduces the NAV significantly! You can use my google spreadsheet/calculator to see how would this rights issue work out for you - KPO Rights Issue Calculator. Just fill in those in yellow and the rest are formula-linked.

OUE Commercial REIT IPO in 2014 and based on historical data since then, it has been trading at mean/median PB of 0.78/0.75 and mean/median dividend yield of 6.48%/6.59%. What does that mean? After the rights issue, with a lower NAV and lower DPU, the price will have to fall further in order for it to reach its mean/median PB and dividend yield. My REIT Scanner is predicting $0.54 which is lower than the TERP of $0.57.

Before the rights issue was announced, it was still trading at around $0.68 and with a NAV of $0.91, the PB would be around 0.747. Take this PB and multiply by the new NAV of $0.70 and we will arrive at the estimated price of $0.523.

In addition, note the falling NAV and DPU over the years since 2014. There was some safety margin when my entry price was way below the NAV but with the rights issue, it would simply disappear! One thing which I cannot understand is if there is a need to issue so many rights/shares and price it at such a low price. Theoretically, they can issue lesser rights at a higher price (e.g. $0.60 as compared to $0.68) to achieve the same result + the NAV/DPU would not have dropped as much @_@

On the bright side, after holding it for ~1,200 days (> 3 years) and including all the dividends collected over the years, the total return is 8.5% and the annualized return is 2.9%. Should have just top up this amount to CPF SA 3 years ago instead.

Good luck to the existing shareholders! Those that are planning to enter, my advise is to avoid it first and wait till it falls further. This rights issue is not attractive at all. Do not make the same mistake as I did previously - Mistake on Rights Issue - CapitaLand Commercial Trust.

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  1. Thanks for the detailed analysis. I wonder it will be better to buy the rights after it is tradable?

    And could you please share which tools are you using for the REITs screener?

    1. Hi goser,

      Welcome! Got to see what price the rights will be trading at but I'm guessing it will be around TERP - exercise price. However, if the shares itself continues to drop, the price of the rights will follow too.

      The screener is not available to the public because it's built by me :)

  2. sometimes or maybe vry often, conventional wisdom can be wrong. have to see what happen later.

    1. Haha. True. I am just sharing my views, doesn't mean it will really happen. We can only wait and see :)

  3. If we already have the shares, can we sell off our rights and buy back later the shares ex rights? May even get it cheaper?

    1. Hi Francis,

      Yes you can sell the rights.

      As to whether you may get it cheaper by selling the rights and buying back the shares, I do not have an answer for that. Hahaha.

  4. I have to agree with you on this one. The rights issue is absolutely bad for the minority shareholders of OUEC-REIT.

    My detailed analysis of the deal, same conclusion:

    1. Hi Ging Wien,

      Thanks for dropping by! Read your detailed article, love it :)

  5. I got out at at 0.605 too at a loss from 0.70 from holding only for 1 year. Management leaves a bad taste in the mouth, and even if the ex-rights price drop below 50 cents, I would still avoid it.

    1. Yeah. I agree, don't think I will be going back in...

  6. Thanks for all the information.