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%
CNP Price at posting:
0.0¢ Sentiment: Hold Disclosure: Held