A volatile United States economy will not hamper Centro’s massive expansion plans into the USA’s retail investment market.
Yesterday, Centro through its US platform Centro Watt sealed a $A4.3 billion deal to buy 157 grocery anchored shopping centres across 27 states from New York Stock Exchange listed real estate investment trust Heritage Property Investment Trust.
Despite fears that the US retail sector is abating due to the volatility in the US economy, Centro’s chief executive Andrew Scott told Australian Property Journal grocery-anchored shopping centres sector will sustain itself because everyone has to eat.
However, US analysts said the retail sector offers less upside than the other major property types.
According to the recent Pramerica Real Estate US quarterly market perspective, lifestyle centers continue to draw investors’ and retailers’ attention, and should offer attractive development opportunities over the next few years as the format matures.
“But the most interesting dynamics and, potentially, the biggest risks are in the grocery-anchored shopping center segment,” the report said.
“The grocer landscape has changed radically since the early 1990s. In a recent presentation at an ICSC conference, a Wachovia Securities analyst showed that only four of the top-10 grocers in the U.S. last year were ranked among the top 10 in 1993, before Wal-Mart launched its assault on the grocery business.
“While Wal-Mart clearly dominates the business today, the industry has become far more concentrated as more grocers have consolidated while others simply have failed. The changing dynamics of the grocery business underscore the potential risk in shopping centers anchored by grocers that either do not dominate their local market or do not occupy some market niche, such as organic or ethnic foods,” the report added.
Meanwhile, a report from the National Association of Real Estate Investment Trusts found that total return in the retail sector has been falling in recent months.
According to NAREIT, total return in the retail sector for the month of June was 3.11%, while the total return for the year to date was 6.40% compared to 11.8% in 2005.
At the same time, total return in the office/industrial sector for the month of June was 7.29% and 16.02% for the year to date compared to 12.85% in 2005.
Total return in the residential sector for the month of June was 4.43% and 20.16% for the year to date compared to 13.67% in 2005.
Leading property analysts Property Investment Research’s head of listed securities Paul Pavlidis said Centro had to make a big acquisition sooner or later.
“Centro’s security price is trading at a 100% premium to NTA which reflects the market’s expectations of growth and returns from the Centro syndicates. There is a lot of money tied up in Centro and it is evident through this acquisition where Centro will not be raising any funds.
“This acquisition will also allow Centro to replenish stock and continue to pump up its syndication business,” he added.
Meanwhile, Scott told Australian Property Journal Centro tends to take a long term view and the assets are good quality as well as sustainable.
Under terms of the merger agreement, shareholders of Heritage’s stock will receive $US36.15 per share in cash upon the closing of the merger, representing a 5.7% premium to Heritage’s average closing price over the past 10 days.
Heritage’s shares last closed 39 cents lower at $US34.98 on Friday.
Heritage’s chairman and chief executive Thomas Prendergast said even though Heritage has made great strides during the past few years, the company continues to be undervalued in the public markets.
“In recognizing the underlying value of the company’s real estate portfolio, the transaction announced accomplishes Heritage’s ultimate objective as a public company, which is to maximize stockholder value," he added.
Centro will spin off three vehicles from the Heritage’s portfolio, including two new Centro MCS syndicates to be formed with $A2.5 billion of newly acquired assets
In addition, Centro will form the Centro International Wholesale Fund with $A1.1 billion of newly acquired assets.
The remaining $A700 million of Heritage assets, including 33 retail centres and three offices not suitable for Centro managed funds, have been earmarked for sale.
The Centro Direct Property Fund International and Centro Retail Trust have committed to investing in the international funds, with DPFI committing $300 million and CER committing $150 million investment into the two Centro MCS syndicates.
Meanwhile in Australia, Centro will spin off $2.4 billion of assets to the new Centro Wholesale Fund.
The fund will comprise 33 Australian shopping centre interests currently owned by Centro, including a 50% interests in Centro Galleria, Centro Bankstown, Centro The Glen and Centro Colonnades.
Scott told Australian Property Journal the remaining $A1.8 billion worth of assets in the US and Australia on Centro’s balance sheet, are likely to be spin off into new and other syndicates.
Following the acquisition of Heritage, Centro will become the ninth largest US retail property owner with 49 million sq ft of GLA diversified across 264 properties.
Centro has also increased its asset ownership to $A15.7 billion.
Centro security holders not wishing or able to invest in the fund will be offered 75 cents in cash per Centro security.
Meanwhile, Heritage will continue to pay its regular quarterly dividend of $US0.525 per share through the third quarter of 2006, but will not pay dividends on its common stock thereafter.
Centro is expected to settle the transaction in the fourth quarter of 2006.
Wachovia Securities acted as Heritage’s exclusive financial advisor and J.P. Morgan Securities acted as financial advisor to Centro.
Centro shares closed 23 cents higher at $6.80.
By Nelson Yap
