valuation dates and book values, page-9

Given how critical asset valuations are going to be in the short-term, I personally would not feel comfortable having a CNP position without knowing the company strategy for revaluations.

Centro has a policy of revaluing all assets annually, whether they are owned directly or through an associate. This is not a regulatory requirement, Centro have chosen to adopt it and have done for a number of years.

In the half yearly reports for CER and CNP for December 07 on p24 (both), Centro disclosed that is had re valued the entire US property portfolio. That's right, the entire US portfolio.

"Management considered it prudent at 31st December 2007 to perform revaluations on all US retail investment properties held by the Group directly or through an associate."

As you will read and hear from the webcasts, these were independently reviewed by CBRE and Cushman Wakefield.

50% of the Australian assets were re valued at December year end.

I wrote to the company a couple of weeks ago asking about assets revaluations and was told that any assets not revalued in December (which in this case is the remaining 50% of the Australian assets) AND those that management considers there have been a material movement on will be revalued at the end of this half.

This is in keeping with Centro policy.

The details of the revaluations are questioned at length in the half year webcasts for CNP and CER. Glenn also outlines how the company ranks assets into classes A, B and C and goes into detail on the impact of this. To get a greater insight, I recommend listening to the webcast yourself.

So the question then is a) how much have the US assets and 50% of the Australian assets dropped since January? b) How much have the other 50% of the Australian assets dropped since June last year?

There has not been a great deal of transactional evidence on which to base the answers. We know that the shopping centres in Australia which have been sold recently have done so at around or above book value. I am confident that we will not see a huge impact when the Australian portfolio is reappraised.

For the US, we know that the Centro portfolio is typically anchored by a major retailer and the recent sales results announced by Centro suggest they are in strong position. You also need to be aware that unlike competitors (such as Westfield) Centro rents are not dependant on the sales volume going through the individual stores. This means Centro will continue to collect the same rent so long as the tenant remains in the property. You'll also note that under the lease terms, the amount of rent is growing every year.

As you may be aware, 9 of the 13 US shopping centre REITs who reported results last half actually beat analyst estimates. Further details can be found here:

http://plainvanillashell.com/article.asp?ID=9831

It is worth reading the third paragraph where the article mentions grocery-anchored centres, of which Centro has many.

As far as which properties are for sale, the company has outlined since December that only CAWF and CAF are for sale. The company has a 'disposal pool' (as do all LPTs) of properties available in the normal course of business and we will probably see some updates here as well.

Recently, Centro has announced that is is decoupling some of the CAWF properties (smartly) and selling them separately. We know the details of these from our own research and I have given an indication of where they are located previously. The Australian assets are highly sought after and appear to be selling at or above book. We have no information on the US assets. I am now very confident we will see an announcement regarding both CAF and CAWF in the near future. Centro 'owes' the market an update on CAF within the next week, as promised in the May announcement.

The company has a document entitled “Asset Disposal and Proceeds Sharing Terms” which forms part of the inter-lender agreements signed on May 30th and outlines which properties are available for sale and how the proceeds will be distributed. Exact details of this are not clear but we know from previous announcements that the banks are not putting pressure on Centro to sell assets and now know that the list of assets which are to be sold has been finalised. I would suggest that Centro will try to retain all management rights for any properties sold, which may account for some of the delays.

Assuming that any proceeds from the sales will be used to pay litigation expenses is, quite frankly naive. We may see a provision raised in the next accounts but time will tell on this. You might want to familiarise yourselves with the potential costs involved in litigation in the Centro cases and the time frames involved (all of which we obtained from IMF with very little effort), the types of insurance which Centro might reasonably by expected to have which would cover parts of the costs and outcomes in similar cases such as the recent Aristocrat matter.

So, in conclusion, we are going to see further property revaluations at the end of this half. My feeling is that these are going to result in a net (non-cash) position for the company but I wouldn't want to be speculating on what this is OR assuming it is going to be very bad (especially given the US assets have already been re valued). The proceeds of any sales will doubtless be used to pay down debt and reduce gearing. I have outlined some scenarios in previous posts which indicate the impact CAF and CAWF sales would have. There is no evidence to suggest at this stage that Centro will lose the class action, which is unlikely to be resolved for 2-3 years anyway.

Hope this helps.