Just thought I'd drop a few words on the CNP release from...

Just thought I'd drop a few words on the CNP release from yesterday:

1. Occupancy has improved in the last 6 months

Despite the "worst financial crisis since the great depression" (cough), occupancy in Centro US centres has actually improved since March. Take a look at the 20th May CNP ann "Centro March Quarter Portfolio & Sales Statistics" - Centro US stablised was at 91.7%. At the end of the last quarter it had gone up 2bps to 91.9%. Print that AFR.

...oh and the same is true for the Australian centres too. No, really... occupancy has gone up since March, from 99.5% to 99.7%.

I'm surprised the media missed this, it would have made a great news story.

Anyway, it doesn't sound like a mass exodus of tenants at this stage and it also sounds like the Centro leasing teams here and stateside are doing a fine job. Well done people.

If there is some caution, it's that we have seen the return of some space by Linens and Things, Steve & Barrys and Circuit City. As the announcement says, some of this happened between Jan and Sep, some since October. What happened between Jan and Sep has obviously had no negative impact on the occupancy rate (i.e. it looks to have been re-leased). It remains to be seen how much of this space can be re-let by the leasing team before the end of this quarter.

2. Yearly rent increases

Most (if not all) leases would include a yearly rent increase so those tenants that remain will pay more rent over time. I remember Andrew Scott saying a long while ago that if the asset values were to drop at any point, the rent increases would make up some (some) of the shortfall.

3. Centro ain't Westfield (thank goodness)

One of the many great things about Centro leases in the US is (unlike Westfield) most of them are not dependent on the turnover in the store. Even if retail sales drop off, a large number of centres are anchored with a grocer which provides some level of security. Remember too that the closure of a store is usually last resort for a retailer; they tend to cut staff, supplier and other costs first.

4. New leases being signed above CPI

The new leases being signed are being done so at increased rental rates. As you would have seen yesterday, the 396 new leases in the CNP AU portfolio have had income growth of 6.5%. The 461 in the CNP US have 6.4%. This is still way above CPI.


So, in summary tenants are staying put, they are not paying rent based on turnover, in fact their rent is increasing every year. Those leasing deals that are being signed are done so at rates way above CPI. If they do leave, the team are finding replacements.

It's easy to say "Things are going to get a lot worse", but we've been hearing that since January.

"No, but they really, really are going to get very bad", etc, etc. No, really, we've been hearing that since January.


One other point, the US$ has strengthened significantly against the AU$ since financial year end. This means a few things:

a) Any equity in the US vehicles is worth a lot more in AU$ terms.

b) Any US income repatriated back to CNP in Australia is worth a more.

c) The FX hedge book (p29 of the YE presentation) will look even healthier at a headstock level. Notice how Centro went to great pains to show how their FX hedging had improved between 30 June and 15 August? Well that was as a result of a ~10c strengthening of the US dollar. Since then, the greenback has strengthened another 20c. I reckon the entire FX hedge book is now in the money, which could mean a $400m upside to CNP at headstock level. "Ah but Swap", I hear you argue, "a lot of these are related-party hedges". True dear reader, but remember that CNP does not 100% own all of the related parties (even though they are consolidated) so we are interested in the look-through position which on a CNP basis will improve.

I appreciate everything hangs on 15th Dec deadline and things are really tough, but I don't think we should write-off the company just yet.