Tuesday, December 18, 2007

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.


Anonymous said...

Bullshit harry.

We've had successes and failures like everyone else. So you nationalist screed looks a little silly.

America is no more difficult to us as it is to anyone else. The Dutch at one stage were the biggest investors in the US. And who are the Dutch?

The problem is not that they bought overpriced assets in the US market. The problem is that most of their balance that was funded with mismatched debt. That's hardly the US's fault.

Westfield on the other hand is a large US investor but it has used equity and so is able to weather any storm in the US market.

By the way, commercial real estate has not been hard hit. So much for getting picked off.

And by the way, US returns on commercial real estate is higher than it is here, even before the fall.

Your nationalism looks silly to me.

and don't blame the investment banks as they generally do a good job.

hc said...

Using debt to make acquisitions works fine if you know what you are doing. You have a better chance of knowing what you are doing in a local market. Yes Australian firms like Westfield have done well in the US but they have market experience there.

Retailing is a tough business to do well at - market feel and experience are vital.

The assets purchased by Centro were overpriced. Most were purchased over the past 12-18 months - in some cases from firms like Westfield which has developed a substantial information capability in the US and which saw the signs.

FXH said...

Isn't Centros exposure to debt mainly with regard to the USA holdings? (~70% debt financed)Their debt ratio on Oz holdings is much less.(~40%)

I don't know how the company is structured but might they not get out of USA, retire hurt, but do ok in australia in the longer run.

Anonymous said...


Thye're idiots becaue they are idiots, not becsue they entered the US market.

That's a plainly silly assertion to make.

Bring Back CL's blog said...

they have knownsince July their business model was stuffed and now they act?

Where is their line of credit for whenthings go wrong?

They do appear to have sound assets however although so did Ramsand Northern Rock

Spiros said...

Centro shares went uo 50% today, from 80c to $1.205.

I told you, JC, that you should have jumped in.

Anonymous said...

if had it gone back to 42 cents, Spiros you would have you tail between your legs looking for the exit.

that stuff is gambling.