A month after selling a 5.1-million-square-foot chunk from its U.S. portfolio, Centro Properties Group reported in mid-August that one of its domestic units, Centro NP, experienced a second-quarter loss of almost $300 million, rekindling questions about its viability as a going concern.
The Australian listed property trust has been trying to unload the bulk of the assets in its U.S. portfolio amid a sluggish market in order to repay $1.1 billion to its U.S. lenders by Sept. 30 and A$2.3 billion to its Australian lenders by Dec. 15. It also needs to repay $450 million to its U.S. private placement note holders by Dec. 15. The company took on billions of dollars in debt with its 2007 acquisition of New York-based shopping center REIT New Plan.
Centro had planned to raise cash through massive asset sales in both the United States and Australia. After agreeing to sell 29 of its choice properties from its 106.5-million-square-foot U.S. portfolio to a private real estate advisor for $714 million in July, it now has to dispose of its weaker assets in an environment that does not favor sellers. The properties sold in July, which came from the Centro America Fund, were purchased at a 10 percent discount to the assets' previous book value. Centro officials could not be reached for comment.
“It's already tough to sell assets in this environment, and having a weak portfolio is difficult,” says Rich Moore, an analyst with RBC Capital Markets. “I think it will affect their ability to sell.”
In a U.S. Securities and Exchange Commission filing, Centro NP, one of Centro Properties Group's U.S. divisions, said it lost $299 million in the quarter ended June 30. The loss resulted in a $95 million impairment charge to its properties. With its asset value off almost 9 percent in the first half of the year, the report noted there is “substantial doubt about the company's ability to continue as a going concern, given that the company's liquidity is subject to, among other things, its ability to negotiate extensions of credit facilities.”
The news does not mean Centro NP faces imminent demise, notes Merrie Frankel, vice president and senior credit officer with Moody's Investors Service, a New York City-based credit rating agency. Given that Centro is under constant scrutiny because of its credit problems, the firm had to include that statement in the report for accounting purposes, she says. The development with Centro NP raises serious concerns about whether the firm will be able to sell the remainder of its U.S. assets for a sufficient amount of money to meet its loan obligations.
Centro, on its Web site, stated in late August that it will not be able to meet those deadlines and has started talks with its bankers about a new extension. A statement from Centro company secretary Elizabeth Hourigan, reads: “Discussions with the lenders are at a preliminary stage and no assurance can be given that further debt extensions will be achieved beyond the expiry of the current debt extensions on September 30.”
Even before the latest write-down, Centro was aware it would face some challenges in selling the rest of its U.S. properties. The firm chose and marketed the properties from its Centro America Fund as a portfolio because most of them continued to bring in solid results and were located in the Northeast, says Bernie Haddigan, national director of the retail group with the Encino, Calif.-based brokerage firm Marcus & Millichap Real Estate Investment Services. Now, however, the firm is marketing most of the remaining assets on an individual basis, Haddigan notes.
“Centro America Fund properties were of higher quality than Centro's [other] U.S. property [portfolio], which was valued in December 2007 on a 6.95 percent cap rate,” wrote Callum Bramah, analyst for Macquarie Research Equities, last month. “This leads to our belief that on any further U.S. asset sales, cap rate expansion of more than 70 basis points is likely.”