centro to distribute dividends

One aspect of the Centro affair is that both Centro Properties and Centro Retail are trusts and therefore must distribute most of the income they generate back to unit holders or face stiff tax penalties.

A Business Spectator reader emailed me saying that Centro had announced that its distributable income for the half year to December 31 was 22 cents. He is looking forward to receiving it. Theoretically, if Centro Properties does not distribute its distributable income, then around 8 out of 22 cents would be deemed as income earned by Centro Properties unit holders and another 2.7 cents would be taxed at around 46 cents in the dollar.

So Centro Retail and Centro Properties must distribute any income they receive in a full year. The good news is that both trusts have been allowed to distribute their income by their bankers and indeed it is possible that Centro Retail will have a minute distribution for the year to June 30 2008.

But Centro Properties distributable income of 22 cents announced in the half year has not materialised. The Centro Properties trust in the current half year has incurred a lot of costs and worse still, the anticipated income from the US did not materialise because the US lenders ring fenced the income coming from American assets and did not let it come to Australia.

Centro has two huge syndicates in the US – the Galileo syndicate and the SuperLLC syndicate. The lending covenants on the SuperLLC syndicate are very complex and effectively there is no chance that income from the centres in the super LLC syndicate will come back to Australia in the group’s present form.

But the Galileo syndicate which includes about $US1 billion in properties is being ring fenced by a small group of lenders who are owed about $US105 million. A relatively small number of shopping centres need to be sold to repay that loan and allow income after paying interest to come back to Australia. The Galileo money flows to Centro Retail.

It is likely that the entire group will be reconstructed in the next six months but it would not take much to free up a big chunk of US income for Centro Retail and in the event of that happening, Centro Retail would distribute in 2008-09.