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« A Few More Comments on Buyback | Main | Prada is Planning an IPO: Are they looking for someone to hold the bag? »

December 19, 2007


Bond investor

ZB, thank you for giving this "airtime" on the Web. At least the Financial Times had it on the front page -- seems to be ignored by the mainstream U.S. press. I agree it's a sign of deflation, but I question whether it is a catalyst for a further consumer spending slowdown, as you suggest in the final sentence.

According to page 15 of Centro's Dec. 17 market update, many of their U.S. drive-up or strip malls have grocery stores and Wal-Marts as their anchor tenants -- I don't see much of a problem with the revenues for those kinds of businesses. So let's hypothesize what, if anything changes for the consumer or the retailer if Centro files for Ch. 11 in Feb. 08 (when its refi extensions run out):

Consumer still needs to eat/buy essentials at Kroger, Wal-Mart, etc.
While profits might fall at KR, WMT, I don't see a major revenue decline
Stable anchor tenants are highly sought after by CRE investors
Centro claims a 95% occupancy rate (also desired by CRE investors)
Centro has to sell assets, presenting opportunity for CRE investors but not requiring any change in the operation of the assets

The only real economic damage I can see is if the appraised values Centro "is presently finalizing" turn out to be way off. Then the fire-sale prices would depress the values of other comparable properties, reducing sales volume and activity in the CRE market.

Note that I would be short REITs of all kinds here, so I think we're mostly in agreement, and I think interest rates are headed lower, but I'm struggling to see how this is a "Code Red" event instead of just another example of overleveraging a business... like the CDO market, Bear Stearns' hedge funds, Northern Rock, SIVs, etc.

Link to Centro presentation: http://www.centro.com.au/NR/rdonlyres/5EF2F3C1-0D6E-4A3B-86EF-B42D74C0B433/0/PresentationCentroEarningsRevisionandRefinancingUpdate.pdf


I think you misread me. I don't think this foretells anything about the consumer but rather that they run US Malls, and that revenues may be somewhat stable. The fact is they overpaid for the property and overleveraged it. Its deflationary because if consumer spending continued to grow like they thought it would, so would the cash flows from Centro's properties. The spending doesn't have to decline, it would only have to not increase or increase much less than they thought as well as and credit costs increase more when purchased for an overleveraged investment. This is why people foreclose on houses as well.

I am actually very bullish on this area. I think in the last 10 years we've seen these malls sprawl up all over suburbia after not having any of them for years. I believe this trend will reverse if the credit contraction continues - and those who own this property will get smoked. Thats why I do believe this is a code red. Whether this actually turns out to be true is a whole different story.

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