\n\tBy Greg Peel<\/p>\n
\n\tIn the lazy, crazy, hazy days leading up to 2007, money was cheap, property values were rising, and gearing levels never seemed an issue. There was a prevailing attitude of get on or miss out, and such an attitude provided the impetus for copy-catting under skies of eternal upside.<\/p>\n
\n\tSo it was that Babcock & Brown, for example, set about trying to emulate Macquarie Bank. ABC Learning discovered the government would subsidise<\/span> unimpeded borrowing against the education of small children, and Centro fancied itself as the new Westfield. Westfield was the king of the quality shopping mall in both Australia and the US, and for Centro it was just a matter of snapping up any old mall in the American suburbs and a ticket to Frank Lowy-dom<\/span> was a given.<\/p>\n \n\tThat is, until the credit crunch began to bite late in 2007, and suddenly 80% gearing ratios looked pretty uncommercial<\/span> against dubious assets as credit spreads widened by the hour. So came the spectacular collapse of ABC, and Centro, and eventually B&B, along with a devastating re-rating of all Australian listed REITs<\/span> and infrastructure funds. The Christmas of '07 was not a happy one in listed fund land. And Lehman's demise was still another nine months off.<\/p>\n \n\tFast forward to this week, and while ABC Learning is now dust, as is the B&B parent company (some funds have managed to be reinvented after massive dilution), Centro has been hanging in there grimly all this time. After much restructure, this week saw the initial listing of the new Centro Retail Australia ((CRF<\/span>)), effectively an amalgamation of the old Centro Property (CNP<\/span>) and Centro Retail (CER<\/span>).<\/p>\n \n\tUnlike the old model, notes UBS, CRF<\/span> is a 100% Australian focused, 100% retail property REIT with $4.4bn<\/span> of directly owned assets, 27 syndicates worth $2.6bn<\/span> under management, and another $0.5bn<\/span> of co-investments. And as JP Morgan puts it, “Enough of the corporate wreckage has been removed to reveal the quality underlying assets”. <\/p>\n \n\tNot all of Centro's problems have conveniently gone away, however. There is still the small matter of an impending class action from unitholders<\/span> dudded<\/span> back in '07, a CEO has not been found, gearing of 41% is still pretty high compared to a sector average 28% (even if much lower than it once was), and a lot of the register is made up off positions held by opportunistic hedge funds.<\/p>\n \n\tHowever, the three brokers who have moved to “initiate” coverage of the new Centro this week agree that valuation is appealing even after taking a conservative approach to these overhanging issues. On recent share price CRF<\/span> is indicating an earnings yield of 9.0% compared to 8.6% for Australian retail REIT peers, and a distribution yield of 7.2% compared to 6.9%. The stock's discount to net tangible asset value is 26% against 17% for peers.<\/p>\n \n\tAnother attraction is that local banks are still feeling a bit once-bitten-twice-shy about the name Centro, such that while they are prepared to provide finance it is at a rate well above the credit spreads afforded comparable trusts. It's not about the assets, it's about the past. Hence on the assumption CRF<\/span> can prove its performance capabilities, analysts are assuming that spread will narrow over time. Deutsche Bank is forecasting earnings per unit growth of 4.1% over the next three years (compound annual) against a retail peer average of 2.9%. Were CRF's<\/span> funding cost to reduce by 50-100 basis points, that number would rise by another 2.5-5.0%.<\/p>\n \n\tThe bottom line is that all of UBS, JP Morgan and Deutsche are prepared to look beyond the past and into the future and assess CRF<\/span> for what it is now. JPM<\/span> suggests that GPT<\/span> Group ((GPT<\/span>)), which has had most success over the past two years, is a viable template. All three brokers have “initiated” with Buy or equivalent rating.<\/p>\n \n\tThey have set an average target price of $1.97 which, at the time of writing, represents 12% upside, dividends not included.
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