Description
Centro Retail Group
Investment Thesis:
Centro Retail Group (“CER”) currently trades at 60% of its stated NAV based on the Company’s conservative valuation metrics. The Company is in the process of finalizing a debt and corporate restructuring, which will merge the various entities of the Centro Group into one ofAustralia’s larger A-REITS. A series of shareholder votes among various CER affiliates running through November is the major impediment to the completion of the restructuring. Following completion of the restructuring, the current overhang that has created a significant discount to peers should disappate, allowing CER to trade closer to its NAV.
Description:
CER is an Australian retail property and investment trust owning equity interests in high quality retail assets inAustralia. CER is part of the Centro Group, which also includes Centro Properties Group (CNP AU) and a number of other affiliates. CER and CNP own stakes in a number of the same assets and CNP beneficially owns approximately 45% of CER. The difference between CER and CNP is that CER only owns the stakes in the various assets and not indirect stakes through a variety of funds/affiliates. Essentially, CER offers a more direct and simple means of ownership to the underlying real estate asset portfolio.
Basic company financials are laid out below:
Shares Outstanding: 2,286.4mm
Share Price: A$0.27
Equity Value: A$617.3mm
Net Debt: A$928.44mm
EnterpriseValue: A$1,545.7mm
Net Tangible Assets: $0.44
How Did We Get Here:
Between 2005 and 2007, Centro, through its various funds/affiliates, attempted to leverage its significant Australian shopping center and undertook a number of significant acquisitions in the US (Heritage, New Plan and Kramont portfolios) leading to an over-leveraged capital structure in the face of the ensuing global economic meltdown. Despite the fact that its properties were less dramatically affected by the economic conditions than other businesses, debt refinancings created a near-term liquidity situation for the Company. Over the past year, the Centro entities have sold its US shopping Center portfolio, agreed on debt restructurings for the Centro Properties (whereby creditors obtained control of the company) and agreed on an amalgamation of the various Centro Affiliates into one entity, Centro Retail Australia.
Market Failure to Recognize Value:
Admittedly, the Centro situation is complicated given the inter-relationships and intra-ownership between the various affiliates, which has led to market confusion. The overhang from the various restructurings and yet unfinished amalgamation have led to a discount between the underlying strong asset performance/value and the security price (40% discount to NAV). This situation has been exacerbated by the fact that Australian retail investors simply have no interest in investing in a distressed situation that lacks a dividend payout.
Portfolio Performance and Underlying Value:
At present, CER’s assets consists of equity interests in over Australian shopping centers that have all performed extremely well over the last year.
- The Australia portfolio consists of 29 properties of which 35% are located in Victoria. At June 30, 2011, the portfolio was 99.5% leased with a weighted average expiry of 4.5 years. Over 44% of income is secured by leases which expire in or after 2016. The majority of leases incorporate annual rent review provisions which typically reflect fixed increases of between 4.0 – 5.0% annual. Approximately 50% of the portfolio is sub-regional malls, 44% regional and the remainder is convenience. Post-aggregation, the portfolio mix will remain fairly similar. In short, it is an excellent collection of assets generating over A$125mm of NOI annually.
As part of the amalgamation, Grant Samuel has conducted a valuation of the Centro assets and determined a valuation range of $0.41 – 0.48 per unit utilizing an average capitalization rate of 7.29%. This cap. rate compares favorably versus Centro peers (Westfield Trust and CFS Retail Property) of 7.15% and private market cap. rates well below these figures. On a discount to NAV basis, CER trades at a 41% discount vs. a peer average of 16%
Post aggregation – Centro Retail Australia
Centro Retail Australia will become one of the largest Australian shopping center REITS. It will own 43 assets acrossAustraliawith an estimated value of $4.4bn, have gearing of approximately 35% and ownAustralia’s largest real estate syndicate business. The aggregation will reduce the net tangible asset value to CER shareholders by A$0.43, but resolve many of the overhang issues surrounding CER. As one of the largest Australian A-REITS, which post-amalgamation will be paying a dividend, Centro Retail should attract significant investor attention and index inclusion.
Risks:
- Shareholder Class Action: The company is subject to 2 class action lawsuits. The lawsuits allege that the Company failed to disclose the full extent of its debt obligation under prior management. No dollar figure has been placed on the litigation; though, press reports have indicated that the plaintiffs were seeking hundreds of millions. The amalgamation structure has created a litigation reserve consisting of to-be-issued shares to deal with any potential payout.
- Shareholder Vote Failure: While unlikely, it is conceivable that one of the various shareholder votes fails and the amalgamation does not occur. In this scenario, CER would need to refinance some of its indebtedness, Centro Properties would enter into bankruptcy and CER would need to work to extract its asset value. The situation would be complex as Centro Properties is the manager of CER and the ownership stakes of the assets are interlinked. Nevertheless, CER asset value would remain and it would continue to be a solvent entity.
Catalysts:
- Shareholder Vote
- Addition to Australian A-REIT Indices
- Payout of Dividend
Catalyst
- Shareholder Vote
- Addition to Australian A-REIT Indices
- Payout of Dividend