no dividend, page-19

I think that everyone is making this harder than it really is. The fact remains that even after this extension CER still remains a fairly highly geared during a credit crunch. They would like to fix this for the long term benefit of the trust and the only options to do this are 1. asset sales, 2. raising new equity or 3. retaining earnings.

1. They are trying to sell assets and making some minor progress
2. Impossible due to the dilution
3. An easy and effective way to pay down debt

Tax law requires that the taxable income of a trust is paid out to unitholders or the top marginal rate plus Medicare levy is charged (46.5%). Now the taxable income of the trust is very different from the distributable earning of the trust as distributable earnings is an accounting concept rather than a tax one. The main difference is that CER will be allowed a tax deduction for depreciation of the properties which is not booked for accounting purposes. This means that CER will likely have a similar taxable income to last year of around 1.5 cents. I believe this will be paid out as the 30 June distribution as was the case last year. Distributable earnings will probably be up in the 10 to 12 cent range.

Now I can hear you asking why don't they pay out the rest of the distributable income now that they have an extension. Well the fact is that commercial property prices are moving south and if your assets are worth less and your debt amount stays the same then you end up even more highly geared. Lenders also have Loan To Value Ratio (LVR) covenants that dictate how high the gearing can be on their particular secured assets. CER will definitely be pushing close to some of these covenants and the retained earning can be applied to any loans where this is occurring.

In short, I don't think that we will be seeing any large distributions until commercial property markets have stabilised, but will receive a distribution equal to the taxable income of the trust at about 1.5 cents at 30
June. Still very nice when compared to the closing price of 5c.

Going forward, once markets have stabilised they will need to come up with a sustainable distribution policy. I predict that the calculation for distributable income will change so that operating capex is paid out of earnings rather than debt and there will be further retention to apply an equity portion to any centre redevelopments. To put some numbers around this, I think that distributable earnings as calculated in prior years will be around 12 cents going forward, operating expenditure will come to around 2 cpu and so will the retention for future value add activities. This leaves an 8 cent distribution payable to unitholders paid in two 4 cent half yearly payments. Not bad for a five cent stock, but some patience will be required.