Centro U.S. new president and CEO Michael Carroll hopes the firm's concentration on grocery-anchored neighborhood and community shopping centers will help it weather the current market storm relatively unscathed. Carroll, a veteran of New Plan Excel Realty Trust who for almost two years served as executive vice president and chief operating officer of Centro U.S., stepped into his new role this February. The move coincided with the re-appointment of Glenn Rufrano as CEO of Centro Properties Group (Rufrano became CEO in January 2008 and has now extended his contract for another 12 months). Centro U.S., together with Centro Australia, makes up Centro Properties Group.
The transition means that Carroll now holds primary responsibility for Centro Properties Group's U.S. operations, with the U.S.-based leasing, finance, legal, accounting and human resources staff reporting directly to him, instead of Rufrano. In turn, Carroll, along with newly appointed Centro Australia CEO Tony Clarke, will report directly to Rufrano and receive his input on Centro's strategy in the U.S. Carroll has 15 years of experience in the retail real estate industry and has spent most of his career in variousand asset management roles with New Plan Excel.
His appointment as CEO of Centro U.S. was partly the result of Rufrano having to spend a large portion of his time in Australia, Centro Properties Group's home base. For the past year, Rufrano has been based in Melbourne. He will now be based in Centro's New York City office, but will continue to travel to Melbourne on a regular basis, whenever his presence is required.
Going forward, Carroll plans to concentrate on strengthening Centro's U.S. portfolio, through a combination ofefforts and some redevelopment initiatives.
The move comes at a time when Centro—which was plagued with debt issues for much of the past two years—can be firmly focused on operations. Since Centro Properties Group worked out a financingwith its lenders this past December, it no longer faces pressure to sell off assets to pay down its debt or negotiate for continued extensions. That leaves its executives in the states free to concentrate on improving property fundamentals. Currently, the firm owns 633 retail centers stateside totaling more than 103 million square feet, down from 674 centers totaling 107 million square feet reported at the end of 2007. In the six months between June and December 2008, Centro sold 36 of its U.S. assets, for a combined price of $193 million. The most pressing issue now is that the company has been affected by a number of bankruptcies and liquidations in the big box space recently, according to Carroll. His current strategy is to try to raise the portfolio's occupancy level by working with regional tenants looking to take advantage of a leasing environment that favors retailers.
As of year-end 2008, Centro had at least 34 rejectedin its U.S. portfolio. Among these were 12 leases signed by Linens ‘n Things, 3 leases signed by Steve & Barry's and 3 leases signed by Goody's Family Clothing. As of December, the firm was also awaiting resolution on 36 additional leases, which included 15 Circuit City stores and 4 Linens ‘n Things locations, among others.
Those lost leases are contributing to a drop in NOI growth in the portfolio. As of December, Centro U.S. registered an annual NOI decline of 2.8 percent, compared to a gain of 2.0 percent for 2007. Rental income growth declined to 5.6 percent in 2008 down from 11.1 percent in 2007.
"Our short-term focus here is very much on the day-to-day running of properties—we are all dealing with a big amount of big box space that's available," says Carroll. "We are very well diversified by tenant, but because our portfolio is so large, if there is a bankruptcy, we are affected by it."
So far, the company has been trying to find replacement tenants of comparable size for the recently vacated properties, as breaking big box spaces up into smaller units is more costly. To that end, Centro has been working with several regional retailers that are still expanding, including regional big box operators in the electronics and home goods sectors. As of March, the firm's U.S. portfolio had an occupancy rate of approximately 90 percent, according to Carroll. At December 2007, the occupancy rate for Centro's stabilized U.S. portfolio was 92.9 percent.
Carroll hopes, however, that the portfolio's current positioning, with a concentration that includes 64 percent in community shopping centers and 36 percent in neighborhood shopping centers, will help Centro avoid the worst of the current recession. "We are predominantly grocery-anchored and there is a positive story out there for people who have grocery-anchored centers," he notes. "Where you struggle in is anything related to home: home furnishings, home décor, anything within that type of space seems to have its challenges, given the slowdown in housing development."
Approximately 62 percent of Centro's U.S. centers are grocery-anchored, with a large concentration of Kroger, Ahold USA and Publix Super Markets stores. And although the drop in consumer spending will affect every property type out there, owners of grocery-anchored centers will probably be in the best position to survive today's challenging environment, says Michael Magerman, senior vice president for the REIT sector with Realpoint, LLC, a Horsham, Pa.-based credit rating agency. In the past, Magerman covered New Plan Excel Realty Trust, before its acquisition by Centro in 2007. Today, properties acquired through that transaction make up a large part of Centro's U.S. portfolio. Magerman does not cover Centro U.S.
As of December 2008, Centro Properties Group estimated the total value of its U.S. assets at $12.1 billion, down 11 percent from $13.6 billion in December 2007. The 2007 figure was reported prior to the disposition of Centro's U.S. assets. From June to December of 2008, the portfolio's valuation on a comparable basis declined $670 million, or 5.3 percent.