Refinance Costs
Hit Property Trusts

MELBOURNE -- Related Australian property trusts Centro Properties Group and Centro Retail Trust Monday slashed their earnings forecasts because of increased debt-refinancing costs, prompting investors to strip a combined $4.78 billion Australian dollars (US$4.19 billion) from their market capitalizations.

Centro Properties -- which after an aggressive acquisition spree is the fifth-largest mall owner in the U.S., where about 65% of its assets are located -- said it will curb its growth plans there and may sell some U.S. assets. It is the second major Australian company to suffer fallout from the U.S. subprime debt crisis as lenders tighten the taps, after non-bank lender RAMS Home Loans Group Ltd. failed to refinance its loans in August.

Melbourne-based Centro Properties, which manages 810 properties in Australia and the U.S, said it now expects its distribution this fiscal year to be 40.6 Australian cents, down from a previous forecast of 47 Australian cents, reaffirmed just two months ago. The company said that although its business is performing well, it won't pay a distribution for the first half of the year. For the fiscal year ended June 30, Centro increased its distribution per security by 8.2% to 39.8 Australian cents.

Centro Retail, which owns stakes in 16 Australian shopping centers and has an interest in 31 U.S. malls, also cut its earnings forecast for the year ending June 30 because of refinancing costs, to 13.5 cents per security from the previous guidance of 14.2 cents, compared with a distribution of 12.7 cents in fiscal 2007.

"The conditions being experienced around the world in credit and debt markets have made it difficult to refinance," Chief Executive Andrew Scott told reporters in a conference call. The US$80 billion-a-month commercial mortgage-backed securities market has "effectively closed," Mr. Scott said, adding that Centro is seeking refinancing from the banking market, "which has tightened significantly even further in recent weeks."

Centro Properties is in talks to refinance maturing debt of A$1.3 billion and has interests in joint ventures that require A$1.4 billion of refinancing, Mr. Scott said. Centro Retail needs to refinance A$1.2 billion in debt, he said.

The company has been granted an extension until Feb. 15 on all facilities maturing before that date and has another A$3.4 billion in debt to refinance within the next 12 months, Mr. Scott told reporters. The restructure and refinancing will lead to a one-off cost of A$40 million, which has been excluded from the lower profit forecast, he said.

Securities in Centro Properties, Australia's second-largest owner of shopping centers by sales, plummeted 76% Monday to A$1.36, while Centro Retail's stock plunged 40% to 85 Australian cents.

"Centro has been lax with tying down its debt and is now paying the price," said Jonathan Kriska, property analyst at Patersons Securities in Sydney. Other trusts will face tougher competition to acquire debt to fund future acquisitions, he said.

Indeed, shares of other Australian property trusts plunged on concerns they could suffer increased funding burdens. Securities in Goodman Group ended down 26%; Valad Property Group dropped 18%; and Macquarie DDR Trust fell 16%. The A$107 billion S&P/ASX200 Property Trust Index shed 11.4%, more than triple the benchmark S&P/ASX200 index's 3.5% decline.

Since January 2006, Centro's total funds under management have grown to A$26.6 billion, from A$9.9 billion, notably through April's A$5.7 billion debt-funded acquisition of U.S.-based New Plan Excel Realty Trust Inc. and last year's US$3.2 billion purchase of Heritage Property Investment Trust.

Centro Properties said Monday that restrictions imposed on capital expenditure as part of its debt renegotiation will constrain its growth plans in the U.S., which had been expected to generate higher earnings. Centro may now sell assets, including a portfolio of 64 small U.S. properties and possibly its recent New Plan and Heritage acquisitions, and consider approaches from potential joint-venture partners to inject equity as part of a review of its structure to reduce its gearing, Mr. Scott said.

"This is not a good environment to be making forced asset sales (in) and Centro's complex corporate structure may complicate the refinancing," NABCapital said in a client note.

Standard & Poor's lowered its rating on Centro's U.S.-based New Plan unit to BB+ from BBB, which will increase the cost of borrowing and hurt New Plan's earnings and financial flexibility. Two of Centro's funds, Centro Direct Property Fund and Centro Direct Property Fund International, also suspended withdrawals because both have significant investments in Centro's managed funds.

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