Federation Centres in $602m share deal with Challenger

Federation Centres has struck a deal to sell a half-share in six assets to Challenger, with the $602 million proceeds being used to shore up the balance sheet for future redevelopment and acquisitions.

Federation, formerly Centro Properties, will retain management of the regional centres at Bankstown and Roselands, and the convenience centres at Toormina and Lennox (all in New South Wales), Sunshine in Victoria, and Karratha in Western Australia.

These assets are owned by Federation and Retail Direct Property (RDP) syndicates (previously the Centro MCS syndicates), which have a gross value of $1.2 billion.

The sales were also prompted by the expiry of the syndicates.

Federation's chief executive, Steven Sewell, said the transaction was part of the retail landlords' strategy of engaging in more co-ownership deals and releasing cash from the balance to reduce gearing and channelling to new development.

"The co-ownership strategy provides Federation with the liquidity and balance sheet flexibility for the future funding of our redevelopment and enhancement program of our portfolio of quality Australian shopping centres," he said.

Since settling the debt issues of the former Centro group and renaming the business, Mr Sewell has sold a number of centres in joint ventures, including with Perth-based Perron Group, which took a half-stake in $1.38 billion of assets, and super-fund-backed ISPT, which took a half-stake in $742.8 million of centres.

According to Morgan Stanley, Federation now benefits from asset remixing and a lower cost of debt.

Mr Sewell said Federation would look to reduce the size of its debt facilities by up to $450 million in the near term and it expected pro-forma gearing to drop to about 22 per cent in the coming month.

Morgan Stanley analysts said the group's focus on food and less on apparel had also made it a preferred buy over its peers.

According to sales agent Simon Rooney of Jones Lang LaSalle, while these types of joint venture transactions are common here, they are also indicative of a growing world trend.

"This latest announcement by Federation Centres follows GPT's sale of a half-share in Erina Fair [NSW] for $397.1 million in May and precedes a number of major transactions to be completed in the near term," he said.

According to Simon Wheatley, the head of property research at Goldman Sachs, the important element of these transactions is that mostly it is not Federation itself selling the assets to Challenger, it is the managed syndicates.

"This multi-asset transaction with Challenger means that Federation will no longer need to increase exposure to the assets, but will continue to manage the properties," he said. "The sale and reduced potential requirement to fund the syndicate wind-up also is beneficial to the balance sheet."