Source: The Weekend Australian Financial Review newspaper [Page 17] Date: August 30-31, 2008
Savage $2 billion loss for Centro Report: Mathew Dunckley
Centro Property Group's two listed vehicles have torched more than $3 billion in valuation write-downs over the past year.
The write-downs were at the heart of Centro's $2.06 billion headline loss for the year to the end of June, released on Friday, after it took a $1.2 billion hit on its asset valuations and a $772 million impairment, mostly on goodwill associated with the troubled $US5 billion acquisition of New Plan Excel Realty Trust last year.
Its underlying profit, stripped out measures such as revaluations and one-offs such as increased borrowing costs, was $242 million, down 27.8 per cent on the previous year.
Centro is operating with a negative cash flow, has no cash in the bank, and is surviving day-to-day on a liquidity facility from its lenders which is up for renewal when a broader debt extension falls due at the end of September.
The capitalisation rate, a key valuation metric, softened for both Centro's American centres (37 percentage points to 7.25 per cent) and Australian centres (18 percentage points to 6.44 per cent) over the year.
That produced a $1.26 billion (7.6 per cent) drop in teh value of Centro's American assets.
Write-downs also savaged the affiliated Centro Retail Trust, which is also listed. It posed a $867.7 million headline loss after it put red ink against its property investments (down $883 million) and a $317 million impairment on its share of the New Plan deal. Centro Retail's underlying profit was $256 million.
"Our performance in 2008 met or exceeded budget for almost all major indices, nonetheless we are taking a more conservative stance for 2009," said Glenn Rufrano who is chief executive of both listed vehicles.
"In the US we are operating in a challenging environment, and in Australia economic conditions are weakening."
In America the Group is forecasting net operating income (NOI) to fall by up to 1 per cent. Centro has also faced a slight fall in occupancy in its American portfolio, down from 93 per cent to 92 per cent over the second half of fiscal 2008, as retailers close stores or go into bankruptcy.
The Australian portfolio had much stronger occupancy (about 99 per cent). Although there could be a softening in sales, the company still expects comparable sales growth of 4 per cent for the year.
The company declined to provide much concrete detail on the progress of negotiations to sell assets or secure a new major shareholder. Mr Rufrano said there had been some sales. Four properties were under contract worth about $120 million but no major equity injection proposal had emerged on terms that Centro could accept despite discussions with private equity and sovereign wealth funds. "We have received a number of offers. However, the company, in consultation with its lenders, has not felt that any of the proposals were in the best interests of stakeholders," he said.
It was too early to give detail on the debt-to-equity swap proposal with Centro's lenders, he said.
Mr Rufrano rejected as offensive suggestions that he may be attempting to carve off Centro's American business for himself, saying he would need to be immoral and a genius to pull it off.
No Borrowing To Pay Distributions
Investors in Centro Properties Group's web of syndicates have been warned to brace for lower distributions.
Centro general manager of institutional funds management, Phillippa Kelly, said Centro would now pay distributions only out of core earnings.
"Debt or equity financing of distributions will no longer occur," she said.
According to a letter to investors, that would result in an average drop in distribution of about 28 per cent in the coming year across 30 syndicates.
Centro also flagged the wind-up of syndicates as it tried to sell assets. Centro said it had entered into a conditional contract to sell a centre in Adelaide belonging to Centro MCS 2 for $47.68 million and would now seek to wind up that syndicate.
"We are currently operating in a challenging property market as well as experiencing lower liquidity in debt markets and higher funding costs," the company said. "These market factors have to be considered against the longer term nature of property investment and the strong returns that have been delivered to investors over many years."
Meanwhile, unitholders in the unlisted Direct Property Fund (DPF) and Direct Property Fund International (DPFI), whose investment has been frozen for months, have been told they will not be able to get their money back any time soon.
Ms Kelly said the core tasks during the coming months for the DPF and DPFI would be to increase liquidity and return capital to investors through the proceeds from asset sales.
That would begin with a special 1c distribution to DPF investors.
The company also announced a nationwide roadshow to talk to investors about the performance and prospects for their various funds.
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