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Centro Clears Minor Hurdle With First Asset Sale

As it continues to wrestle with a mountain of debt, Centro Properties Group, a poster-child of the credit crunch, on Tuesday announced the sale of the first piece of its 106.5-million-square-foot U.S. portfolio for $714 million to an unnamed private real estate investment advisor.

Though the deal itself represents just a small portion of the Melbourne-based listed property trust's portfolio--29 of its more than 665 centers in the U.S.--it has broader implications for the company and for the U.S. retail real estate investment market. The assets were all from Centro America Fund--one of Centro Properties Group's many funds under management.

For one, Centro sold the properties--covering 5.1 million square feet in 15 states--to a private real estate advisor rather than to a public or private retail REIT. (Some reports indicate that New York City-based DRA Advisors LLC closed the deal.) Jason Lail, senior real estate analyst with SNL Financial, a Charlottesville, Va.-based research firm, thinks that despite the deal's relatively small size, it is at least reflective of "Centro really pushing hard to get their balance sheet into shape."

The deal also sheds a little light on retail real estate pricing in the current climate. Retail real estate investment sales volume has dropped considerably because of the credit crunch. In May, the most recent month for which statistics are available, investment sales of retail properties totaled $1.3 billion, down 70 percent compared to the same period a year ago, reports Real Capital Analytics. Prices have dropped as well and the bid/ask gap between buyers and sellers means there is little consensus on where property values should be. Some estimates are that prices are down 5 percent to 10 percent for prime assets and up to 20 percent for lower quality assets, according to Bernie Haddigan, national director of the retail group with the brokerage firm Marcus & Millichap Real Estate Investment Service.

In Centro's case, the company estimated the sale price represents a 10 percent discount to what the company had originally paid for the assets, indicating that the properties are probably some of the firm’s best assets, Haddigan says.

The pricing “seems about right,” agrees Merrie Frankel, vice president and senior credit officer with Moody’s Investors Service, a New York City-based credit rating agency. The 10 percent discount is in line with what should be expected from a company in Centro’s position. Frankel added that Centro has direct ownership of just 46.65 percent of the Centro America Fund. Centro’s net proceeds from the sale are projected to bring in approximately $250 million.

However, some real estate watchers caution that too much should not be read into the deal. Suzanne Mulvee, senior real estate economist with Property & Portfolio Research, a Boston-based real estate research and portfolio strategy firm, says there could be deeper discounts on retail properties if credit tightens and real estate fundamentals continue to slip.

“People that are selling today are stressed sellers, not necessarily distressed sellers,” Mulvee says. “More distressed properties may come to market later.”

The deal is expected to close in late September/early October, subject to approval from Centro’s lenders. Centro declined to comment on the transaction. The company has been able to obtain a series of extensions on nearly $4 billion of debt to both U.S. and Australian lenders that it is supposed to pay back by December 15. More on Centro's debt

Overall, Centro's shareholders took the news in stride. The company's shares on the Australian Stock Exchange closed Wednesday at A$0.26 per share, up slightly from A$0.24 per share the day prior.

--Elaine Misonzhnik

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