article from www.intelligentinvestor.com.au

This is an old article I found on centro intresting to see some of the insites they provided. Its from June '07.

Centro’s American
shopping spree
Centro has recently filled its trolley with regional US
shopping centres and it’s busy unpacking them for
investors. We wonder who’ll be left holding the empty
shopping bags.
When we last reviewed Centro, on 18 Jul 06 (Hold for
Yield—$6.82), it had announced a $4.3bn takeover of an
American group, Heritage Property Investment Trust. It
turned out to be the beginning of an acquisition frenzy that
has turned the group into Australia’s largest manager of
American property (no mean feat in today’s climate).
We didn’t think much of the Heritage assets, but we
took comfort from the fact that they were destined to
become feedstock for several new unlisted funds, rather
than additions to Centro’s own direct property portfolio.
The deal had another effect, though. To help fund it,
management decided to demerge $2.5bn worth of its own
shopping centres into a new listed vehicle called Centro
Retail Trust, which we’ll discuss in more detail in a moment.
New Plan
Without any hint of indigestion following the Heritage
acquisition, management announced the US$3.7bn
purchase of New Plan Realty in April. New Plan manages
467 American neighbourhood and community shopping
centres across 38 US states, including a direct portfolio
of 290 centres that Centro has bought on an average yield
of just 6.75%. That doesn’t leave much wiggle room for
higher borrowing rates.
The New Plan deal increased Centro’s funds under management (FUM) dramatically to $23.1bn. But still
not content, it recently bought out the interest of its
American joint venture partner, Watt Companies Inc,
thereby further increasing FUM to $25.5bn. It’s a huge
change from being a dominant Australian owner of
niche regional shopping centres with a fledgling property
and fund management business on the side.
Institutional appetite
With the current institutional appetite for all things
property, Centro has willingly purchased assets quicksticks
to satisfy the demand. The assets barely make it
on to Centro’s balance sheet before they are hived off
into funds and syndicates for institutional investors
Even though it’s usually a co-investor in its funds,
management prefers the fees it can generate over longterm
ownership of the assets. So high prices, particularly
in the US, haven’t been a deterrent. The focus has instead
been on finding willing investors for its funds and
syndicates. It’s a great business as long as the punters’
dollars keep rolling in. While the rewards for a fund
manager are potentially higher than for a staid property
trust, the risks are also higher. Mass redemptions, for
example, could force Centro to sell parts of its own
portfolio to raise cash.
Occupancy almost perfect
Centro’s strategy has worked a treat in the current
economic environment. Whatever Centro has paid for
assets, the next year’s revaluations have sent them higher,
thereby improving the asset backing and performance
of its funds.

Occupancy rates remain almost perfect in Australia
and hover around 94% in its US centres. While interest
rates stay low and shoppers keep spending, Centro can
increase rents and distributions.
But at some point this self-reinforcing scenario will
be challenged and then we’ll see how shrewd the recent
acquisitions have been. For now, though, it’s hard to know
what the likely impact on Centro might be, because it’s
continually shuffling assets between itself and its funds.

Perhaps this is a warning sign in itself.
Fortunately for securityholders in Centro itself, the
fees will keep rolling in even if the assets’ underlying
performance suffers. It’s the investors in the various funds
that will likely end up carrying the can. But ultimately,
of course, poor fund performance would reflect badly
on the manager.
Frequent capital raisings
As you might expect with this level of activity, there
have been frequent capital raisings. In the latest halfyear
result, net tangible assets (NTA) per unit had fallen
98 cents to $2.65 (although this included a 75 cent special
distribution for the Centro Retail Trust demerger) and
net debt-to-equity was hovering around 90%. Remember
that this is before the latest round of acquisitions.
The stock currently trades on a forecast yield of 5.2%
and expectations for the property and funds management
business continue to increase. Debt is sky high and
American property owners must be thanking their lucky
stars for Australia’s willingness to fatten their wallets.
Centro has been Australia’s best-performing listed
property trust over the past decade, but this company
has rapidly transformed into a much different beast,
and both the new assets and the new strategy will
struggle when the cycle turns. With risks mounting and
expectations high, we’re happy to sit this one out for the
time being. AVOID.

Centro Properties Group: key financials
2002 2003 2004 2005 2006 CAGR*
Total assets ($bn) 1.58 2.34 3.52 6.15 5.15 32.8%
Total FUM ($bn) 2.40 3.00 6.40 9.10 11.50 45.3%
NTA per unit ($) 2.71 3.09 3.42 3.60 3.63 7.1%
Net debt-to-equity 42% 17% 49% 83% 39%
Interest cover 4.2 3.9 3.9 4.8 3.7
Distribution 26.25 27.40 30.55 33.60 36.80 8.0%