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Last updated: January 2, 2008 8:27 pm

Centro bites the dust

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This year, investors can expect a stampede of executives blaming credit markets for poor performance. However, the reality is often a familiar tale of greed and managerial dizziness. Australia’s Centro Properties, which invested in commercial real estate, is a classic example. Like the UK’s Northern Rock, it was the darling of its sector, tripling funds under management over the past two years and lifting its market capitalisation to almost A$10bn. Since last May, Centro’s shares have fallen by 90 per cent as funding evaporated. Yesterday, it announced that it is in effect for sale.

But it can only blame itself. First, managerial heads were lost in the froth of rising asset prices and cheap funding. Centro expanded rapidly and a large US acquisition last year meant a debt obligation too far. Centro has about A$27bn of assets under management (making it the second biggest owner of shopping centres in Australia and the fifth biggest in the US). But book equity was just A$3.5bn at the last fiscal year end. Dividends are barely covered by operating earnings and interest cover is low.

Second, Centro’s structure is extraordinarily complex, while disclosure is poor. More than 800 properties are either owned, partly owned or managed through two listed funds and then scores of unlisted syndicates. Untangling Centro’s exposure to assets and debt is tricky. Investors care little for transparency while share prices are flying. But since Centro defaulted on A$1.3bn of short-term debt last month, belief has turned to mistrust.

Buyers are believed to be circling – the company now trades on two times trailing earnings. But the environment has changed. After years of revaluations, commercial property, especially in the US, is rolling over. Net asset values may also decline, not least from discounting future rents at higher rates. Centro’s woes are of its own making, but if commercial property prices continue to fall, it will not be the only one suffering.

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