What is the news?

Barely two weeks after hinting its intention to seek expansion beyond Singapore, OUE announced on Monday that it is acquiring a Class A office tower and related properties located in downtown Los Angeles, US for a total price of US$367.5mn (S$459.4mn) from a subsidiary of US REIT, MPG Office Trust Inc. The target assets include the US Bank Tower, Maguire Gardens and a car park facility. The office tower featuring 72 floors of office space and six levels of underground parking totaling 1.4mn sf. The building was completed in 1989 and is currently 56.3% occupied. OUE intends to fund the purchase with own working capital and bank loans.

How do we view this?

While there were limited information given, the deal looks decent at first glance given that it is an iconic building in the downtown LA. Based on figures from Cushman & Wakefield’s report, average Class A gross rent in LA Central is US$2.76psfpm as of 4Q12. That could provide a potential yield on cost of 7.6% by optimizing the occupancy and rent rates to market average. Nonetheless, leasing environment in LA remained challenging with vacancy rate inched up 1.3pps to 20.4% in 2012 although gross rental rates were on a recovery trend since the trough in 2010. We believe the assets provide room for improvement in both rental income and capital value, especially so when the US economy is on the brink of recovery but any accretions to OUE are unlikely to be immediate.

Investment Actions?

We keep our estimates unchanged pending further details on the acquisition. Maintain Accumulate with fair value unchanged at $3.07.

Source: PhillipCapital Research - 12 Mar 2013