experts (swap,defab,reggie) please comment, page-2

Well, I'm feeling good about the whole situation. Firstly because it is now plainly obvious that CER isn't going bust. Secondly because it appears they have their 2009 refinancing plan under way. Thirdly because GR has agreed to stay on as CEO. Finally because the modelling I posted on 23/12 here:

http://www.hotcopper.com.au/post_threadview.asp?fid=1&tid=798544#3612934

..was pretty close.


In the posting I said:

1. The situation was likely to get worse before it got better.

There is a lag between stock markets falling and the translation to the real economy. It appears that the bankruptcies and tenancy vacancies increased last half within the portfolio. If I had to take a stab, I would say that the Dec half (reported today) or the current half (ends Jun 09) will be the bottom of the write-downs before the cycle inevitably swings back up again. Cap rates are now such that they are becoming attractive. However there is still risk-aversion and lack of credit on the part of buyers.

I also pointed out that intuitively and empirically, the NTA was going to go down, not up.

2. I made some comments about hedging, saying that it will swing to a major liability and knock off about 50c per share. Actual numbers came in at 53c per share, which was close. Again, over time this will get a lot healthier if the AUD strengthens. On the call and in the disclosures, the company gave some more information on these arrangements. This is still a bit of a black box.

3. We overestimated the drop in the US and underestimated the drop in the Aus assets. The currency effect helped to reverse this as everyone expected it would.

4. I said that the SuperLLC impairment would end up being written back although I said it might not be for some time. Clearly this is now the case, but when it does get written back it will provide a huge upside to the NTA. We predicted a further $220m impairment (10% of assets) which equated to 10c per share. This was overestimated, which is good. We also marked the current impairment to market which gave a further 8c per share loss. In total, we predicted an 18c drop in NTA due to further SuperLLC impairment but pleasingly, this only came out at 10c.

So, after all this we predicted a worst-case NTA of $0.52 if SuperLLC was written off and either $1.15 (post full impairment write-back) or $1 (with no write-back but a further SuperLLC impairment). I still stick by our 2 year NTA at between $1.30 and $1.50 once the impairment charge has been worked through, cap rates start to improve and the hedging gets sorted.


Now, down to the content...

I don't think there is anything that came as a surprise. They are well under way on the asset sales program and it is obvious that this is not being done at fire-sale prices. They highlighted that most of the properties that were sold came from the disposals list which reinforces the point. I would say that the target of $550m FY09 is achievable and this would go along way to reducing the debt load.

Although Glenn didn't commit, it feels to me like they want to get LVR under 50%, probably closer to 40%. However, I think we all realised that this was based on the current macro environment sentiment where debt is a dirty word. When the cycle turns again, 50% leverage will be acceptable and deep-down Centro knows it. 68.7% is high, but they are certainly pulling all stops out to get it down and they confirmed no breaches at the end of the half. If there was an area of concern, it was the LVR covenant on the Aus debt and we'll need to keep an eye on this.

They are progressing the board separation and I'm pleased we got an update during the call on their goals for this. Four 'non-Centro' directors should be applauded.

On the income and cash flow sides, it's obvious that the wheels are still firmly on. Withholding a divvy this half and using it to pay down debt was the right thing to do in my view. SuperLLC cash flow seems like it will be restricted for a while but I'd say CSF cash will start flowing very soon once the loan comes down to $50m.

It is also obvious that most investment banks have ceased coverage of CER - only 2 analysts asked questions, which was disappointing.

In summary, there were no major surprises. It's clear that CER is alive and kicking and (as always) the team are working towards a full recovery when the cycle swings up.