Commentary |
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Comment |
As the potential buyers of the Centro assets that are for sale begin to look at the figures, some clear messages will be coming forward.
The Australian shopping centres are performing very well and while the American Centro centres are also doing well relative to the market the US economy is tougher and the credit squeeze caused by the loss of US bank capital means that the value of most Centro American centres has fallen by between 10 and 15 per cent.
Centro's problem is that the group has some $US17.2 billion in US shopping centres and only $9.4 billion in Australian centres. But Centro's two wholesale funds that are for sale have a much bigger Australian content – about $2.6 billion in Australian Centro centres and only $1.2 billion in US Centro centres.
Centro Properties Group's shares have been rising because the market believes that the skills the new Centro CEO Glenn Rufrano used to convince Centro to pay top value for the US shopping centres he sold last year will also be used to convince the banks to keep most of the group together. For all his mistakes – and there were many – the former Centro CEO Andrew Scott managed to convince leading Australian banks to lend Centro $3.5 billion unsecured. Those banks face big losses if they suddenly carved up the group so they want Rufrano to succeed. Had the bank loan figure been substantially less or secured, then the banks might have ordered quick sales.
About $9.2 billion of the $26.6 billion in Centro shopping centres is held by syndicates, of which $4.2 billion is in the Australian syndicates. For about five years I have had a small holding in two of the Australian syndicates and Centro has sent a letter around valuing each of the syndicates. They all show value rises and the investments have been good, although a large number need to be refinanced which will lower returns.
Centro has yet to tell US syndicate holders their unit values. It will not be easy to value them given the tough US mortgage market. In addition, it is now much harder to get Australian dollar coverage.
A 10 per cent fall in the value of US centres would cost the group $1.7 billion, which is shared by outside interests. That's why the wholesale assets are so tempting to sell, because they have much less outside equity and the well-performed Australian properties are easily funded.
But Glenn Rufrano knows that a significant part of the value of Centro Properties is the management contracts, which were valued by KPMG at $5 billion. So every shopping centre Centro sells, where management goes to the buyer, takes value off the management contracts. And that's an important asset for the banks.
The rising Centro price indicates that the market has confidence in Rufrano to balance the need to lower debt with the need to maximise the number of the centres under management. After the fall in the sharemarket and lower listed property trust values, many Australian superannuation funds are yearning for a secure, less volatile debt-based security. Centro shopping centres, with their stable income, offer a potential opportunity.
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