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U.S. OF A(USTRALIA)

AUSTRALIAN FIRM CENTRO PROPERTIES’ LATEST BUY MAKES IT A MAJOR U.S. PLAYER

By Steve McLinden

An Aussie company has gone from turning heads in the U.S. to turning the retail industry on its ear, all in the span of just a few years.

Since April 2005, Melbourne, Australia-based Centro Properties Group has snapped up Kramont Realty Trust, Heritage Property Investment Trust, two major U.S. shopping centers from Westfield Group and some majority stakes in five other Westfield centers. All this was a prelude to its biggest and latest U.S. acquisition prize, New York City- based New Plan Excel Realty Trust.

The New Plan Excel acquisition, for $3.4 billion plus the assumption of $2.8 billion in debt and preferred stock, ranks Centro third on the list of the largest nonmall shopping center owners in the U.S.

New Plan Excel’s 68 million-square-foot portfolio broadens Centro’s U.S. holdings by two-thirds to 90 million square feet, placing it behind only Developers Diversified Realty Corp. (151 million square feet) and Kimco Realty Corp. (138 million square feet).

With New Plan Excel, Centro picked up 467 properties across 38 states, mostly neighborhood centers anchored by grocery stores or name-brand discounters. “The majority of the New Plan properties are first-rate shopping centers that complement our existing platform,” said Centro CEO Andrew Scott. “The New Plan portfolio satisfies investor demand for cash flow.”

The thing primarily fueling Centro’s acquisition machine is Australia’s $1 trillion superannuation pension fund, the fourth-largest pension system in the world, fed unceasingly by that country’s compulsory 9 percent salary levy.

Centro’s actions raise the question of what could be next on its shopping list. “We expect to continue to acquire in Australia and the U.S. and wherever investor demand leads us, and wherever it adds value to that investment,” said Scott. The firm recently opened an office in Europe.

Centro has sought to strengthen its relationships with U.S. retailers, and the New Plan portfolio provides that opportunity, Scott says. Jan Svec, a director at Fitch Ratings, says such attention to tenant relationships is more important in retail than in other real estate sectors. “The larger spaces you have, the more spaces you have to show and the greater your bargaining power,” she said.

Aside from Simon Property Group’s headline-grabbing acquisition of The Mills Corp. in February, the latest surge of REIT buyout activity has focused more on grocery- or discounter-anchored assets. Also in February, Developers Diversified closed on its $6.2 billion purchase of Inland Retail Real Estate Trust, which had 53 Publix supermarkets and 24 Kroger stores as tenants.

Over 70 percent of New Plan Excel’s centers contained a major supermarket or a Wal-Mart. U.S. grocery-anchored centers remain a pretty safe bet, Scott says. “It’s the old adage of ‘everyone has to eat,’ ” he said. “These are not discretionary centers. We believe the business will continue to prosper in the more viable centers.”

Before Centro, Scott was real estate director at Coles Group, a diversified retailer that currently operates some 2,900 stores throughout Australia and New Zealand. Scott says he wants to keep as many of the New Plan Excel staff as possible in the interest of a smooth integration. Typically, Centro keeps 85 percent of the staff. “That has been true of Kramont and Heritage,” he said. “These organizations’ cultures are very important to us.”

Centro’s business model of international risk-managed growth drove returns of 30.9 percent from income and capital growth in 2006. Asked if 2007 has been proceeding similarly, Scott paused. “No, it’s not shaping up that way,” he said. “It’s more like 68 percent.” With a laugh, he added, “The market has been very kind to us.”

Observers expect Centro will unveil redevelopment plans for its Westfield acquisitions at the ICSC Spring Convention this month in Las Vegas. Scott did not disclose specifics, but he did say the company sees some exciting opportunities in the U.S. to add discount formats to malls. “We will continue to spruce up and invest in those [Westfield] centers with an infusion of capital,” he said.

It was at the ICSC Spring Convention in 2005, in fact, that Centro first struck up a business relationship with New Plan Excel. But acquisition talks did not begin in earnest until November 2006. “Centro is very well capitalized, and they are smart buyers,” said Deborah Jackson, executive managing director at Weiser Realty Advisors, a financial advisory service that follows Centro. “And the New Plan piece makes a lot of sense for them. They were looking for quality assets, and that’s what they got.” Further, because Centro already has regional offices in the U.S., it will have an easier time assimilating the new assets, Jackson says.

Moreover, the demands of the public markets favor a larger REIT model, says Svec. “It’s difficult for smaller companies to operate in public format, because you have to spend so much time managing investor and analyst expectations,” she said. “A lot of these costs of being a public company are fixed, and you definitely benefit from a larger platform there.”

Analysts say New Plan Excel’s returns were on the lower end of its peer group. Rich Moore, a REIT analyst at RBC Capital Markets, described New Plan Excel in a report as “a company in search of a strategy, caught between more nimble geographically focused community center REITs like Federal Realty Investment Trust and more successful large cap REITs such as Kimco Realty Corp. and Developers Diversified Realty Corp.”

In five years before its acquisition, New Plan Excel had completed over $300 million in redevelopments, including a partial recasting of Clearwater Mall into a 300,000-square-foot community center anchored by Costco, Lowe’s and SuperTarget. It also bought five Home Depot-owned properties at its centers to develop the surrounding area. The day the Centro acquisition was announced, in late February, New Plan Excel CEO Glenn J. Rufrano said his REIT had been “significantly repositioned over the past several years, recycling over $5 billion of capital and increasing the intrinsic value of our portfolio.”

Centro, with a market capitalization of $8.1 billion, has several operating entities, affiliates and syndicates. Its separately traded retail fund, Centro Retail Trust, of which it holds 52 percent and which it fully operates, split the New Plan purchase with Centro Properties. Centro Watt, a joint venture formed in 2003 with Los Angeles-based Watt Commercial Properties, made its first acquisition, of 14 California shopping centers, the same year. Centro Watt now has offices in Boston and Philadelphia, as well as Los Angeles.

Centro is also Australia’s largest manager of retail investment property syndicates. In total, the Centro organization has about $23 billion in funds under management in the wake of the New Plan Excel deal.

“What’s amazing is that if you were to ask who Centro was even five years ago, not too many people in the U.S. could tell you,” Jackson said. “But everyone knows them now. These deals have made them a huge presence.”