Analysing Westfield

A cursory glance at the headlines of Westfield Group's result would indicate that, like its peers, it is being ravaged by the global financial crisis. A statutory loss of $2.2 billion looks ugly. The remarkable aspect of the result, however, is the sheer resilience of the group's income despite the distress in the US and UK property markets.

Westfield's operating earnings of $1.94 billion – up 10.4 per cent – would suggest immunity to the financial crisis and the economic fallout flowing from it. That overstates the situation – the group's US and UK malls are being affected and the overall result was under-pinned by the strength of its Australian business – but so far, at least, the impact has been quite modest.

That suggests that either there will be a delayed impact on the group as the pressures on retailers continue to grow or that the quality of Westfield's centres is sheltering it from the worst of a downturn that has destabilised its sector globally.

It is probably a bit of both – retailers, particularly big retailers, are being affected by the deterioration in economic conditions globally but it takes time for that to flow through to the landlords.

The Lowys have confidence in the ability of the core Australian portfolio in particular to withstand a downturn and with good reason, given that the group has ridden through plenty of difficult economic cycles in the past.

Either way – whether that faith is borne out or misplaced – it is well positioned. Westfield went into the crisis in better shape than most of its peers, having raised $3 billion in equity just ahead of its emergence and also having conducted a massive rationalisation of its portfolio that raised several billions more before the financial storm arrived.

That capital, and its strong credit rating, has enabled the group to maintain its development pipeline – it completed $5.6 billion of projects last year and has $4.7 billion of developments still underway – at a time when everyone in its sector is seeking to slash capital expenditures and defer new projects.

The $2.9 billion of additional capital raised earlier this month will provide an extra layer of comfort and, if conditions were to stabilise at some point, would enable Westfield to capitalise on the rest of the sector's misery. It also means it can absorb the non-cash write-downs (which are in any event offset in accounting terms by the effect of currency gains) without any bother.

Westfield's relatively modest gearing (34.6 per cent) and $8.7 billion of available liquidity means that it is reasonably well-insulated against the financial risks in the current environment, particularly as it has demonstrated its ability to tap credit markets that have been generally closed to most property companies – Westfield borrowed or extended $3.1 billion of debt last year.

Even if its centres prove to be somewhat less resilient than it believes, reducing its balance sheet risk means that Westfield could cope with a more severe impact on its income without being immediately destabilised.

While it appears quite comfortable with its position and outlook Westfield has, however, become more cautious. It won't start any new large projects this year, conserving liquidity and balance sheet capacity.

Nevertheless, in the circumstances, its forecast for operational earnings of 94 to 97 cents per security this year ($1 in 2008) is relatively bullish in the conditions. That forecast is built on the assumption that operation income in the US and UK declines by between two and three per cent but the Australasian operations produce growth of between three and four per cent.

If Westfield is right, with a major contribution from its domestic portfolio it would skate through the worst and most threatening conditions for its sector in nearly two decades and come through the other side of it, if not unscathed, then in far better shape than almost any of its international peers. Even if it is wrong, it is in a better position to absorb the hits than most, if not all, of those rivals.