Centro's credit problems may be canary in coal mine

By Ilaina Jonas

NEW YORK, Jan 2 (Reuters) - The credit problems facing Australia's Centro Properties Group (CNP.AX), which owns more than 700 U.S. shopping centers, may afflict others who also used short-term debt to finance their deals.

"Fundamentally, when they bought the portfolio it was an operating successful venture," said Bernie Haddigan, managing director for commercial brokerage Marcus & Millichap. "To me, it was a financing play. They're probably not going to be the last to get caught in the credit crunch."

Centro warned last month that it was struggling to refinance $1.1 billion in debt. The debt is related to its $6.2 billion acquisition of U.S. shopping center owner New Plan Excel. Centro bought the real estate investment trust when shares were near their peak.

Centro has until Feb. 15 to renegotiate the debt.

But some experts said Centro's problems are not necessarily shared by many of its competitors, such as real estate investment trusts Kimco Realty and Equity One who use much less debt to finance their acquisitions.

"Centro was highly levered with short-term financing and had aggressively acquired mediocre shopping centers in secondary and tertiary markets," BMO Capital Research analyst Paul Adornato wrote.

Centro took advantage of the abundance of cheap debt to buy properties, but, before it could refinance its temporary loans, was caught in the roiling credit markets.

"They're not alone," Haddigan said. "I think the pain and suffering, you're going see more of it going through the year. The positive is most of the savvy long-term investors are saying this is going to be one of the best buying opportunities of the last 10 years."

U.S. commercial real estate prices are softening now that lending rates are higher. In the third quarter, vacancy rates at shopping centers inched up to 7.4 percent from 7.3 percent in the second quarter, according to real estate research firm Reis.

"It's not an ideal set of circumstances from the seller's prospective, to put it mildly," Reis Chief Economist Sam Chandan said.

Brian Healey, Centro's chairman, recently said the company had attracted a significant number of unsolicited approaches, prompting the move to invite expressions of interest.

Expressions of interest were being sought for the group as a whole or the acquisition of its interests in its Australian and U.S. wholesale funds, the statement said.

Centro appointed Lazard Carnegie Wylie as its adviser.

U.S. hedge fund Citadel Investment Group was considering buying a stake in Centro, a source told Reuters.

Inland American Real Estate Trust, one of the three real estate investment trusts managed by Inland Real Estate Group of Cos. may be a suitor, Haddigan said.

Darryl Cater, spokesman for Inland Real Estate Group of Cos. declined comment.

Meanwhile, Australian media have named fellow Australian property investors Westfield Group (WDC.AX), CFS Retail Property Group (CFX.AX) and GPT (GPT.AX) as potential buyers.

Centro's U.S. portfolio is valued at about $17 billion, a significant size when one consider that transactions for retail real estate, which includes shopping centers, regional malls, outlet centers and other selling spaces totaled $28 billion in the first three quarters of 2007.

Its largest tenant anchors are TJX Companies Inc (TJX.N), parent of T.J. Maxx and Marshalls -- Wal-Mart Stores Inc (WMT.N), Sears Holdings Corp (SHLD.O), Dollar Tree Stores Inc(DLTR.O) and grocery chains.

(Additional reporting by Denny Thomas in Australia, editing by Leslie Gevirtz)