Centro in liquidation mode?

The Centro Properties Group hit a low of 42 cents on the market today, closing at 82 cents. They hit a peak of $10 mid last year. At these sorts of prices investors are signaling real concerns about the ability of Centro to survive. If you think that is an exaggeration you should join the bottom feeders and buy up big. My guess is that, at best, the company will be a shadow of its former self as it is forced to liquidate assets at significant losses. More plausibly it will not survive as a going concern.

Centro is the second largest (after Westfield) owner and manager of shopping centres in Australia and a ‘global enterprise’ - it is a significant holder of US sites. Indeed it is the latest victim of the global credit crisis and could potentially be first card to fall in the ‘house of cards’ that defines the Australian listed property trust sector – you know that sector that ‘mom and pop’ investors go for because it is allegedly ‘safer’ than other investment vehicles.

Centro does not seem able to refinance $3.9b of debt and has cancelled distributions to investors. It is tough being a borrower these days – lenders are very risk-averse at prevailing low interest rates. This is, of course smart, since the US property market is imploding and 70% of the assets owned by Centro are backed by debt. If it cannot refinance it is finished.

CEO Andrew Scott is an entrepreneur with distinctive talents. He has bought a stack of US shopping centres funded by billions of dollars of debt just as US debt markets were getting tight. Many of the big acquisitions have occurred over the past year - many from Westfield - with funds under management rising from $10b to $26b. Returns to listed property trusts to managers are very much based on size and this appetitive is fed by investment banks greedy for fees. Centro has also bought a large number of shopping centres in Australia.

It amazes me that every 10 years or so when stock markets go through their periodic booms and crashes that the best paid people in town are those who borrow or lend too much. Even if interest rates are low or even negligible it is always a bad deal to debt finance assets which look like depreciating in value.

Of course, the main claims of these financial gurus are that investing in property involves buying real assets which can always be sold if needed. But a fire-sale of shopping centres in the US these days is going to attract only bottom feeders because investors expect capital losses and are aware of the incentives facing vendors who are potential bankrupts. I am also surprised that many of those who invest in property trusts believe that choosing a listed vehicle offers that much more protection than one which is unlisted.

Digressing I should say that I am very much a nationalist when it comes to investment strategy. Australians investing in other markets face huge informational disadvantages as a string of failed foreign acquisitions over the years confirms. It is partly the naive good nature of the average Aussi businessperson combined with their greed that does them in. The American definition of a ‘deal’ is often what most (outside the 'easy money' society) would describe as overpriced rip-offs. The Aussie entrepreneurs, their inflated egos fanned by B-grade phonies from the investment banks and by nonsensical arguments for ‘going global' because that’s where most of the assets are, go to America like proverbial lambs to the slaughter. Charity for the British should have ended with gifts of lard during World War 2 – avoid these ‘chaps’ like the plague – their greed is borne of necessity. Look at Rio's foolish attempt to scrape a few more dollars out of the much better run BHP-Billiton given a very generous merger offer.

If as an individual investor you must buy foreign assets my suggestion is to buy foreign-based index funds – don’t try to out-guess the sharpies. And of course avoid Australian companies that avoid 'management speak' of the necessity for globalisation of investment efforts.