Centro Retail Group CER
November 24, 2010 - 3:04pm EST by
matt366
2010 2011
Price: 0.23 EPS $0.00 $0.00
Shares Out. (in M): 2,286 P/E 0.0x 0.0x
Market Cap (in $M): 537 P/FCF 0.0x 0.0x
Net Debt (in $M): 3,258 EBIT 0 0
TEV ($): 3,807 TEV/EBIT 0.0x 0.0x

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Description

 

Investment Thesis:

 

Centro Retail Group ("CER") represents a similar situation to that experienced in the recent General Growth Properties bankruptcy/restructuring:

  • - Limited negative and improving operational performance
  • - Asset value (retail shopping malls) well in excess of liabilities
  • - Limited to no recourse among real estate properties
  • - Decline in share price due to technical factors
  • - Clear and evident path forward
  • - Publicly identified strategic interest in the asset portfolio
  • - Ongoing and potential material litigation that has depressed the current share price

 

Centro currently trades at 60% of its stated NAV based on the Company's conservative valuation metrics..  While the company faces some near term debt maturity issues, its announced strategic alternatives process offers an opportunity to unlock its intrinsic value in the near term.  If valued in line with comparable asset comps, the stock would trade at multiples of the current valuation.    

 

Description:

 

CER is an Australian retail property and investment trust owning high quality retail assets in Australia and lesser strip mall shopping center assets in the United States.  CER is part of the Centro Properties Group (CNP AU).  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:                           $0.24

Equity Value:                        $548.7mm

 

Net Debt:                               $3,258.4mm

Enterprise Value:                  $3,807.1mm

 

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 have created a near-term liquidity situation for the Company.  

 

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.  Investors appear to believe that asset-specific refinancing issues could impact the entire portfolio, rather than, for the most part, being ring-fenced.  This perspective, along with concerns about an on-going shareholder lawsuit, caused the stock to trade at less than 50% of the Company's reported 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:

 

CER's assets can be separated into two categories: US and Australia portfolios. 

 

  • - The Australia portfolio consists of 29 properties of which 35% are located in Victoria. At June 30, 2009, the portfolio was 99.6% leased. The lease expiration schedule is typical for shopping centers of this type and the company has been able to push through rent increases of 3.7% on renewal leases and 6% on new leases, leading to 4.3%NOI increase. In short, it is an excellent collection of assets generating over AU$114mm of NOI annually.

 

  • - The US portfolio consists of 382 properties dispersed across the US, 89.6% of the portfolio was leased at June 30, 2010. 67% of CER's gross leasable area is grocery-anchored. These grocery stores have sales per square foot of approximately $574. 68% of the portfolio consisted of community shopping center with the remainder being small, neighborhood shopping centers. Since 2001, 40% of the gross leasable area has been redeveloped and the average portfolio age was 12 years. The assets generated combined NOI of A$353.4mm. Of this amount, approximately A$155.6 mm is situated outside of the Super LLC structure.

 

  • - The Super LLC is a joint venture between CER and CNP to facilitate a number of their historical acquisitions. The structure faces the most near term refinancing issues. However, the company has assured us that the structure is largely ring-fenced, exclusive, exclusive of a small credit facility. The company is in the process of removing this single piece of cross collateralization through the provision of incremental security. which the company is in the process of resolving. Nevertheless, it is generally assumed that the assets in the Super LLC structure are likely out of the money.

 

  • - Set out below are some summary valuation criteria for the entire portfolio:

 

 

 

Cap. Rate

Valuation

Asset

NOI

Low

High

Low

High

Australian Portfolio

114.2

7.5%

7.0%

1,522.7

1,631.4

US Portfolio

368.8

8.5%

7.5%

4,338.8

4,917.3

Enterprise Value

 

 

 

5,861.5

6,548.7

Net Debt

 

 

 

3,258.4

3,258.4

Equity Value

 

 

 

2,603.1

3,290.3

Per Share

 

 

 

A$1.13

A$1.44

 

  • - Set out below are some summary valuation criteria for the portfolio, excluding the SuperLLC assets, which, theoretically, could be returned to the lenders if a near-term refinancing could not be completed.
  • -

 

 

Cap. Rate

Valuation

Asset

NOI

Low

High

Low

High

Australian Portfolio

114.2

7.5%

7.0%

1,522.7

1,631.4

US Portfolio

155.6

8.5%

7.5%

1,830.6

2,074.7

Enterprise Value

 

 

 

3,353.3

3,706.1

Net Debt

 

 

 

1,346.8

1,346.8

Equity Value

 

 

 

2,006.5

2.359.3

Per Share

 

 

 

A$0.88

A$1.032

 

Australian comparables, such CFS Retail Property Trust and GPT Group trade at implied cap. rates of approximately 7.5%.  US Comparables (EQY, REG and WRI) trade at implied cap. rate of approximately 7.0% of lower.

 

Risks:

 

  1. 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.  The Company is seeking to settle the lawsuits, so that they do not become an impediment to any of its strategic alternatives.  No dollar figure has been placed on the litigation; though, press reports have indicated that the plaintiffs were seeking hundreds of millions.

 

  1. Convoluted Centro Structure:          Many of the assets owned by CER are at least partially owned by other Centro entities.  Two other entities have significant ownership stakes in CER as well.  This structure may make it difficult to resolve some of the asset sales.

Catalyst

 
  • Sale of underlying assets
  • Recapitalization
  • Debt restructuring
    sort by   Expand   New

    Description

     

    Investment Thesis:

     

    Centro Retail Group ("CER") represents a similar situation to that experienced in the recent General Growth Properties bankruptcy/restructuring:

     

    Centro currently trades at 60% of its stated NAV based on the Company's conservative valuation metrics..  While the company faces some near term debt maturity issues, its announced strategic alternatives process offers an opportunity to unlock its intrinsic value in the near term.  If valued in line with comparable asset comps, the stock would trade at multiples of the current valuation.    

     

    Description:

     

    CER is an Australian retail property and investment trust owning high quality retail assets in Australia and lesser strip mall shopping center assets in the United States.  CER is part of the Centro Properties Group (CNP AU).  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:                           $0.24

    Equity Value:                        $548.7mm

     

    Net Debt:                               $3,258.4mm

    Enterprise Value:                  $3,807.1mm

     

    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 have created a near-term liquidity situation for the Company.  

     

    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.  Investors appear to believe that asset-specific refinancing issues could impact the entire portfolio, rather than, for the most part, being ring-fenced.  This perspective, along with concerns about an on-going shareholder lawsuit, caused the stock to trade at less than 50% of the Company's reported 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:

     

    CER's assets can be separated into two categories: US and Australia portfolios. 

     

     

     

     

     

     

     

    Cap. Rate

    Valuation

    Asset

    NOI

    Low

    High

    Low

    High

    Australian Portfolio

    114.2

    7.5%

    7.0%

    1,522.7

    1,631.4

    US Portfolio

    368.8

    8.5%

    7.5%

    4,338.8

    4,917.3

    Enterprise Value

     

     

     

    5,861.5

    6,548.7

    Net Debt

     

     

     

    3,258.4

    3,258.4

    Equity Value

     

     

     

    2,603.1

    3,290.3

    Per Share

     

     

     

    A$1.13

    A$1.44

     

     

     

    Cap. Rate

    Valuation

    Asset

    NOI

    Low

    High

    Low

    High

    Australian Portfolio

    114.2

    7.5%

    7.0%

    1,522.7

    1,631.4

    US Portfolio

    155.6

    8.5%

    7.5%

    1,830.6

    2,074.7

    Enterprise Value

     

     

     

    3,353.3

    3,706.1

    Net Debt

     

     

     

    1,346.8

    1,346.8

    Equity Value

     

     

     

    2,006.5

    2.359.3

    Per Share

     

     

     

    A$0.88

    A$1.032

     

    Australian comparables, such CFS Retail Property Trust and GPT Group trade at implied cap. rates of approximately 7.5%.  US Comparables (EQY, REG and WRI) trade at implied cap. rate of approximately 7.0% of lower.

     

    Risks:

     

    1. 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.  The Company is seeking to settle the lawsuits, so that they do not become an impediment to any of its strategic alternatives.  No dollar figure has been placed on the litigation; though, press reports have indicated that the plaintiffs were seeking hundreds of millions.

     

    1. Convoluted Centro Structure:          Many of the assets owned by CER are at least partially owned by other Centro entities.  Two other entities have significant ownership stakes in CER as well.  This structure may make it difficult to resolve some of the asset sales.

    Catalyst

     

    Messages


    SubjectNumbers
    Entry11/24/2010 07:14 PM
    Memberjohn771
    The background you describe makes the story interesting, but could you help me connect the numbers in your write-up to the financial statements.  They show total assets of $6,957mm, debt of $5,136mm, other liabilities of $1,056mm leaving net assets of $765mm, or $0.33/share.
     
    The financial statements value the Asutralian assets at a cap rate of 7.47% and the US assets at 8.54%.  So the property values seem to be in line with your figures.
     
    It looks like the biggest variance may be items shown as "Controlled Operations" on page 59 of the annual report.  This includes ($1,308mm) of "unallocated debt and derivatives".  I don't see a good explanation of what these are.  Have you included them in your figures or is there a reason for excluding them?

    SubjectRE: Numbers
    Entry11/29/2010 08:32 AM
    Membermatt366
    First, I would point you to 11/14 slides presented at the 2010 AGM for some updated information that may be helpful to you.  Regarding the unallocated debt and derivatives line item, my understanding is that for the most party these relate to a series of foreign exchange hedges that the company put in place to protect their equity SuperLLC equity investment.  The majority 3 of 5 of these hedges have been closed out as part of the late 2009 SuperLLC restructuring.  Of the other 2, the maximum liability that the Company faced was 120mm over the last 18 months and that figure is down to 30mm due to the movement of the currencies involved (USD/AUD).  The counterparty on the hedge is CNP and the parties have an agreement that if the mark to market value moves to 0, the contracts can be extinguished.  Also, I believe you are looking at the Centro Properties Group annual report vs. the Centro Retail Trust annual report where the amount is significantly lower (412mm vs. 1,308mm number).

    SubjectRE: RE: Numbers
    Entry11/29/2010 04:57 PM
    Memberjohn771
    <!-- @page { margin: 0.79in } P { margin-bottom: 0.08in } -->

    I have seen the slide presentation available at this link:

    http://asx.com.au/asxpdf/20101115/pdf/31tw9wbhqr6wrr.pdf


    It does not contain any balance sheet.


    The Annual Report I mentioned in my previous message is available at this link:

    http://asx.com.au/asxpdf/20100830/pdf/31s5tfh6d3v383.pdf


    It is titled Centro Retail Trust and I believe it corresponds to the entity traded as CER.  The balance sheet information on page 59 is identified as "Centro Retail Trust".   This balance sheet appears to contain significant assets and liabilities that were not included in your writeup.


    The company made this announcement regarding the benefit from closing the foreign exchange hedges:

    http://asx.com.au/asxpdf/20101104/pdf/31tp6jkfkjh9z0.pdf


    It says the benefit amounted to $0.05/share.  Adding that to the 6/30 NTA would boost NTA to $0.38.


    I don't see how to get from the regulatory filings to your NTA of $0.88.  Sorry if I'm missing something obvious.  Maybe there's something I don't understand about the corporate structure.


    SubjectRE: RE: RE: Numbers
    Entry12/03/2010 12:45 PM
    Memberruby831
    You both are looking at the same numbers and the correct company. john771 is looking at book value, and matt366 is looking at an implied market value.
    matt366: you have 1,347 net debt in the ex-super llc scenario, and 3,258 net debt in the super llc scenario, or an implied 1,911 of super llc net debt. according to the balance sheet, super llc has 1,682.430 current liabilities and 591.968 non-current interest bearing liabilities (page 62 of 6/30 annual report). do you make an assumption for cash on hand to get from debt to net debt (or is this info available) or have you made an adjustment based on a post-6/30 filing refinancing?
    thanks for the idea - just trying to pin down what I can given the complexity of the situation 

    Subjectincorrect debt assumption
    Entry12/06/2010 02:35 PM
    Memberruby831
    I spent some time looking more closely at the financials this weekend. The NOI you use is for both controlled operations AND those on the balance sheet accounted for using the equity method, yet your net debt is just for their controlled operations. If you use a total NOI number, you need to subtract out their share of debt for each of the jv investments. 1,347 severely understates their leverage relative to the NOI numbers you are using, and value per share is more like $0.40 using reasonable cap rates and recurring income. Can you please comment as to whether this analysis is correct?

    SubjectRE: incorrect debt assumption
    Entry12/07/2010 11:27 AM
    Membermatt366

    Sorry for the delay in responding to you.  Thanks to your questions, I have noticed an error in my work, essentially I did not fully include the Australian property debt, which for the most part explains the difference between my debt number and the June 30th AUD5.6bn number you cited.  That being said, given that certain events have occurred since June 30th, I still believe the idea has merit (although without the same upside).  The events fall into two categories: 1) the change in the derivatives previously discussed reduces the total debt number by AUD210mm; and 2) the conversion of the US debt to Australian dollars based on the exchange rate movement from 0.841 at 06/30/10 to 0.9938 today.  The change in the exchange rate results in a change in the AUD debt level of approximately AUD600mm.  Combined these changes result in total AUD debt of AUD4.8bn or AUD2.9bn ex. SuperLLC. 

     With respect to the valuation of the underlying assets, in your first email you indicate that I am using the same cap. rates as the company in their valuation.  This is not the case, comparable Australian assets trade at similar cap. rates, US assets (EQY, REG, and WRI) trade at cap. rates significantly below the 8.5% cited by the company.  These assets trade at cap. rates of 7% or below and are not involved in what appears to be a fairly robust auction process.  Assuming a 7.5% portfolio cap. rate and the revised debt levels,  the asset ex. Super LLC should trade at AUD0.52.  To the extent SuperLLC has value, the valuation would be higher.


    SubjectRE: RE:
    Entry12/08/2010 11:30 AM
    Memberruby831
    News release today regarding CER property sale. do you have a sense of how this will impact value per share?
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