centro as responsible entity

I was having a conversation with a mate last night who suggested that the risk for the whole Centro group is that if a debt for equity swap eventuates for CNP, that the banks will sack Centro as the responsible entity and employ another entity devaluing the Centro group significantly as most of the value in the Centro group is recognised in its ability to operate as a responsible entity (RE).

Whilst I believe that there is a significant chance that a debt for equity swap may eventuate for CNP and a condition may be inserted into the agreement that CNP is to stand down as RE, I do not believe this would materially affect CER.

If you refer to page 26 of CER’s annual report, it states that revenue is recognised as follows:

Revenue is measured at the fair value of the consideration
received or receivable. Revenue is recognised for the
following activities:

(i) Property Ownership Revenue
As the owner of a number of shopping centres, the Group
derives rental revenue from the leasing of these properties.
Lease income is recognised on a straight-line basis over
the lease term. Contingent rental revenue is recognised
on an accruals basis as earned.

(ii) Distribution Revenue
Distributions are recognised as revenue when the right to
receive payment is established.

In contract CNP recognises revenue as follows. Please refer to page 40 of CNP’s annual report:

(h) Revenue Recognition
Revenue is measured at the fair value of the consideration
received or receivable. Revenue is recognised for the
following activities:

(i) Property Ownership Revenue
As the owner of a number of shopping centres, the Group
derives rental revenue from the leasing of these properties.
Lease income is recognised on a straight-line basis over
the lease term. Contingent rental revenue is recognised
on an accruals basis as earned.

(ii) Services Revenue

Property Management Revenue
As the manager of properties owned • by clients, the
Group receives management fees in accordance
with generally accepted commercial terms. Property
management revenue is recognised on an accruals
basis as earned.




Development and Leasing Fees
• The Group operates a development management and
leasing business and derives project management
and leasing fees in respect of new developments and
redevelopments of its own properties and those of
other clients. The fees are in accordance with generally
accepted commercial terms and conditions based on
agreed milestones and are recognised on an accruals
basis as earned.

Funds Management

• The Group derives fees from the establishment and
ongoing management of managed investment vehicles.
Funds management revenue is recognised on an
accruals basis as earned.

(iii) Managed Vehicle Income

Distributions from managed vehicles are recognised as
revenue when the right to receive payment is established.




So even assuming a debt for equity swap eventuates and upon the conversion of debt to equity the banks replace CNP as the RE, I cant see how this is going to affect CER as CER are currently paying management fees to CNP to manage its properties.

There is no value that can be unlocked for management contracts in the current book value of CER’s properties as CER is not a manager of its properties.

If CNP loses its RE status, the portfolio value of CER’s properties should not materially change.

In addition, much has been said about the risk of cross ownership of assets should CNP be placed into administration.

Please refer to page 3 of CER’s annual report. It states that:

CER currently has individual property co-ownership
positions with Centro in 28 of 33 properties in Australia
and 37 of 419 properties in the US

Only 37 out of 419 properties or less than 10% of its US properties are jointly owned with Centro. A fairly insignificant figure.

CER’s merger with Centro Shopping America late last year has mitigated any cross ownership risk with CNP.

Yes there are cross ownership issues with CNP in relation to the Australian properties but its Australian portofilo is not the reason why CER is languishing at 12c at the moment. The fundamentals of CER’s Australian portfolio remain strong.

As always CER I believe is a strong buy at current levels.

I would appreciate some feedback. Please advise if Iam on the wrong track.

Cheers