I understand that the 77% gearing ratio reported yesterday takes into account SuperLLC. It also takes into account some Australian assets that were revalued as at 30 September 2009.
However, it does not take into account the likely significant writeup of equity hedges, FX income hedges and interest rate swaps since 30 June 2009.
Any capital transaction must take into account the gearing ratio of CER excluding Super.
Why should we have our holdings diluted because of an investment that currently contributes 0c equity to CER?
Any capital transaction should and must be made in mind to not include SuperLLC.
I personally dont believe CER should entertain the notion of an equity raising in the forseeable future.
I believe it is a very dangerous to consider such a thing especially when we are at or close to the bottom of the cycle, particular for the Australian assets.
Until June 2011, CER barely has any debt maturities excluding SuperLLC.
We have two Aust CMBS facilities in the amount of $320m approx that matures next month.
There is another CMBS facility in the amount of $171m that matures in Dec next year.
It is my understanding, that all of CER's properties are held in sub trusts and the debt secured against those properties are quarantined within those particular sub trusts.
Should there be a shortfall in the sale of properties secured against a particular facility, then CER’s liability ends with that financier.
CER should identify those sub-trusts that have a high gearing and lay out a seperate plan for each sub-trust.
Having a high gearing ratio does not necessarily mean, equity should be raised to bring the sub-trust's LVR down.
We should look at when the debt secured against that asset is to mature. If it is long dated, is the trust pronged to LVR or ICR covenants?
In the US, it is my understanding we only have ICR covenants. In Australia, we have LVR and ICR covenants.
Lets look at the Australian portfolio:
If LVR covenants are not likely to be breached, then I believe no action should be taken. NOI is increasing in Australia at a very healthy rate and is increasing the buffer. I understand interest rates are increasing but CER has adequate hedges in place to minimize the risk of increasing interest rates
If an LVR covenant has been breached, what options do we have?
- Well we can remedy the breach to have the income from the sub trust released? Is the cost significant?
- Can we negotiate a waiver?
- Are those properties likely to increase in value in the forseeable future putting a bit of space between current LVR and the covenant.
- If that looks unlikely, what other options do we have with the bank? - We may then need to perhaps consider disposing of a property within a sub trust with a very high LVR. - What happens though if the sale doesn’t reduce LVR?
- Could we perhaps make the financier an equity holder within a particular sub trust? For example, that way CER’s capital remains untouched. For example, CER owns 50% of the Mildura Centre Plaza Unit Trust (Centro Mildura), which CER’s share is currently valued at $44.3m. CER could consider issuing 50% of its 50% share to the financier to bring down debt. That way CER would in this case end up with a 25% holding in the trust and will have brought its debt down by $22m. CER could perhaps entertain a hybrid issue over that particular sub trust similar to what CNP will be doing. Equity raising should be looked at from a micro rather than macro perspective.
- What happens if that doesn’t work? Remember if CER's LVR is say 75% but say the property within the sub trust has a higher LVR (say at 85%), then if even if the property is sold at more than a 15% shortfall, the financier will not have recourse to any other assets unless of course that facility was secured against other assets. it is unlikely anyhow that an Australian asset now would be sold at more than a 15% discount but say even if the other few properties secured against the same financier are sold and theres still a shortfall, CER's overall LVR will improve anyway as the LVR of the facility was 85% vs CER's overall LVR of 75%. That financier will no longer have recourse against CER. Thats a worst case scenario and highly likely that would not eventuate.
Australian imminent maturities:
- The plan would be to extend the debt for as long as possible and pay as little margin as possible
- Review the terms and conditions of the information memorandum set out in the original CMBS issue to ascertain what the consequences are if CER cannot refinance the debt.
- Is there a penalty margin charged? If penalty margin is say 0.75% for 12 months and current margin is 0.75%, then use that as leverage to negotiate a slightly higher margin over a longer period.
- Does income become locked within the relevant sub trusts if refinancing deal cannot be reached? Locking of income may increase liquidity risk.
- If a property needs to be sold to bring LVR down in order for debt to be refinanced, then look at perhaps disposing of a property within a sub-trust secured against the CMBS facility.
- Similar to above, look at raising equity from a micro perspective but use this as a last resort
US portfolio:
- With REIT1 and 5, these parts of the business are not material enough to warrant any excessive management attention. Continue to monitor these syndicates as done previously.
CSF:
There are no LVR covenants and all ICR covenants are from 1.15 to 1.7 (pg 14 presentation)
You will note that the maturity dates of CSF debt facilities are long dated.
Top 8 biggest CSF debt facilities: US$775.3m (84% of total CSF debt)
Total CSF debt: US$923m
As you can see most CSF debt matures from 2012. Other debt facilities maturing within the next year should be rolled over or paid down from further CSF asset sales and/or cashflow. The facility in February may have already been paid down.
Even with CSF alone, CER will be generating approx 2.5c-3c from this portfolio on a look forward basis.
Occupancy rates have stabilized in the US since 31 March 2007 and there have been no major retail bankruptcies since this time.
CSF alone on a look forward net profit basis is worth more than the current CER unit price. Perhaps we should consider demerging CSF from CER to unlock equity value for CER holders.
Before going to investment banks and paying them big dollars to come up with great ideas to pay them more money, please consider what I have said.
The cost of undertaking an equity raising for current equity holders must be looked at versus the cost of applying the above measures.
CER has already done the hard work getting it to this point. Raising equity would be akin to turning back just before the summit of Mount Everest only because we were too lazy to walk an extra few steps!
Any thoughts?
CER Price at posting:
17.0¢ Sentiment: Buy Disclosure: Held
