Lippo’s OUE Sells Los Angeles Tower for $430M – 34% Below Book Value

OUE Limited, the Singapore-based property developer controlled by Indonesian conglomerate Lippo Group, said Friday that it has agreed to sell the iconic US Bank Tower in Los Angeles for $430 million.

The SGX-listed developer is selling the property to USBT Property Owner LP, an entity connected to New York’s Silverstein Properties, at a 34 percent discount to its fair value of $650 million as of December 31, 2019, as the economic fallout from the Covid-19 pandemic dampened investor appetite for commercial properties. As a result, the company said it will report a S$0.35 ($0.25) decrease in earnings per share this year.

The sale comes as the Covid-19 pandemic dragged the global economy into recession, ravaging commercial properties from hotels, shopping malls to office buildings around the world. The US property market is among the hardest hit, with JLL data showing office leasing in the country dropping 53.5 percent in the second quarter

Rental Income Hit by COVID Crisis

“The disposal will enable the group to streamline its asset ownership in a period when the longer term outlook of the US property market may not be favourable,” OUE said in a filing to SGX. “Due to the measures implemented by state governments in the US in response to the COVID-19 pandemic, the tenants in the property have reduced, or temporarily closed down, their operations, and the rental income from the property has been correspondingly affected.”

OUE bought the 72-storey office building from MPG Office Trust in 2013 for $367.5 million through US subsidiary Beringia Central in what some analysts considered a distressed asset sale. Originally built in 1989, the property has been featured in Hollywood blockbuster movies including Independence Day.

The Singapore developer implemented several asset enhancement projects to spruce up the building. It added the OUE Skyspace LA, an open-air observation deck that provides a 360-degree panoramic view of Hollywood Hills and the Pacific Ocean, as well as an outdoor glass slide 1,000 feet (305 metres) above ground.

The company intends to sell its leasehold interest in OUE Skyspace separately, with Beringia Central now in discussions with several prospective buyers of the observation deck operations but no definitive agreements have been signed.

A “Really Underwhelming” Deal

While OUE believes the divestment allows the company to “recycle its capital to more optimally pursue higher growth reinvestment opportunities if and when such opportunities arise,” some investors in Singapore were disappointed. OUE shares dropped 1.7 percent to S$1.20 at the opening bell on Friday morning, but rebounded to close unchanged at S$1.22.

“The price was really underwhelming,” said David Lum, an analyst at Daiwa in Singapore. “They planned to put it on the block well before Covid-19. They could have held on but probably did not want to wait another 5 to 10 years for the office cycle to recover.”

OUE said proceeds from the sale would boost its cash reserves and pare down existing debts, allowing the group to “remain nimble in the current uncertain global economic climate.”

The group put the 1.4 million square feet (130,000 square meter) building up for sale in January 2019 with a reported price tag of $700 million and gave its subsidiary OUE Commercial Real Estate Investment Trust the right of first refusal to buy the property.

OUE REIT Shuns US Tower Opportunity

The REIT passed up the opportunity saying, without citing financial details, that acquiring the property based on the terms proposed by its parent would not be “accretive” to its shareholders.

“OUE Commercial REIT will continue to explore opportunities for the acquisition of yield-accretive assets which are in line with its investment criteria and strategy,” it said in a separate filing to the SGX.

Despite the lower pricing, OUE agreed to sell the building to the Silverstein Properties affiliate amid heightened concerns that the economic crisis sparked by this pandemic might be prolonged, said Vijay Natarajan, an analyst at RHB Securities in Singapore.

“While it would be ideal to wait out until the market conditions stabilize, we believe the reason OUE went ahead with the transaction could possibly be due to a shift in its management’s views on the long-term outlook of the US commercial sector on the back of COVID-19,” he said.

Watershed Year

While 2019 appeared to be a watershed year for OUE after the company increased its net profit to S$255.2 million from S$10 million the year before, executive chairman and group CEO Stephen Riady earlier this year told shareholders to brace for challenging times ahead.

‘“Moving forward, amidst the challenges that the group may face, and the fallout from the unfolding COVID-19 situation, we will continue to diversify our recurring income streams,” Riady said in the company’s 2019 annual report published in March. “We remain focused on maximising value for our shareholders while maintaining financial resilience as we navigate the uncertainties of the year ahead.”

OUE, which is 68.7 percent owned by the Indonesian tycoon, has assets primarily in Singapore, Indonesia and China. It owns the 62-storey One Raffles Place Tower 1 at the heart of the Singapore central business district and the 36-store Lippo Plaza in Shanghai. The group plans to build a 57-storey mixed-used development in Jakarta targeted for completion in 2026.