2 revelations from OUE's targeted US asset acquisition

Historical cost is ~US$350m.

According to CIMB, OUE mentioned previously that it was looking to acquire a “distressed” asset in the US with the potential to recycle for a profit in the future.

In 4Q12, Cushman & Wakefield says that the office market in Greater LA is now on firmer ground, with vacancy down 0.4% pts yoy, the first real decrease since 2006.

OCBC adds, while there are few details on this transaction at the moment, it understands from public sources that 1) the historical cost of this asset is around US$350m, just 5% lower than what OUE is paying now and 2) the US Bank Tower was headed for loan default as MPG Office ran into solvency issues.

Here's more:

Overall, we do not see this acquisition as a reflection of OUE’s strategic direction but merely an opportunistic move to enhance returns for the group. The US asset forms c.7% of OUE’s GAV. Management previously guided that Singapore will remain OUE’s core exposure (e.g. over 90% of total assets).

Stay invested. Asset recycling and better office rents remain the key share price drivers, in our view. We tweak our FY13-15 core EPS estimates.

We maintain our Outperform rating and target price (still at 20% discount to RNAV) as we value the US asset at cost due to the lack of details at the moment. Asset recycling, potentially though a REIT and better office rents achieved remain the key share price drivers.

What Happened. OUE announced that it will acquire the US Bank Tower (including Maguire Gardens, and a car park facility) in downtown Los Angeles (LA) for US$367.5m (S$459.4m) from MPG Office Trust, a US REIT.

Completed in 1989, the building has a floor area of c.1.4m sf and is currently 56% occupied.

Net profits from the property (after adjusting for financing cost for the acquisition) work out to3.3% of OUE’s FY12 net profits. The deal is expected to be concluded by early Jul 2013 and will be funded by internal funds and bank loans.

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