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Westfield (WDC)

By InvestSMART · 18 Jan 2012

By InvestSMART ·
18 Jan 2012

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Westfield (WDC)

Westfield Group's core business is the management of shopping centres and it is only indirectly exposed to the ebb and flow of retail sales.

The big property company has most of its assets in the US, Australia and New Zealand, with about 10 per cent in Britain. The key to its success is ensuring each property is as fully leased as possible.

The long-term outlook for consumer activity in these regions is therefore an important consideration for the group's outlook.

In the US, the country's economic recovery obviously ran into something of a quagmire in 2011. But there is tentative evidence that this year the recovery will begin to take hold in more confident fashion. The consumer is key to this for the US, accounting for about two-thirds of the country's gross domestic product.

Retail sales in the country were up about 3 per cent to 4 per cent in 2011, compared with 2010. The important holiday shopping season began well in November, with buoyant trading on "Black Friday" continuing into Christmas. Consumer confidence has also rebounded.

In Australia, the retail sector has been surprisingly weak given the country's comparative economic health. This is due partly to the two-speed economy but also a function of the Reserve Bank of Australia's initial reluctance to adopt looser monetary policy.

The vast majority of Westfield's revenue comes from rental income, of which about 98 per cent is fixed for the term of the lease agreement. In the year to December 2010, for example, only 1.7 per cent of the group's income was directly linked to retailers' sales.

The lack of direct exposure to this ensures Westfield is buffered from periods of weakness in the retail sector.

A little more than 10 per cent of the group's lease agreements are set to expire next year, with about 7.8 per cent expiring annually through to 2015.

In this sense, the prospect of an improved retail environment in the longer term in Australia and the US is positive for Westfield.

Price

Management recently reaffirmed full-year guidance for funds from operations of between 64? and 65? a security. Westfield's total distributions for 2011 will be 48.4?. This equates to a distribution yield of about 5.8 per cent, or more than 8 per cent on a grossed-up basis. Westfield Group looks undervalued at $8.47 a share and we see limited downside risks, an attractive income stream and potentially 20 per cent valuation upside during the next 12 months to 18 months.

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Frequently Asked Questions about this Article…

What is Westfield Group’s core business and how does it make money?

Westfield Group’s core business is managing shopping centres. The vast majority of its revenue comes from rental income rather than retail sales, which means the company earns most of its money by leasing space to retailers and managing centres rather than by selling goods itself.

Where are Westfield’s shopping centre assets located?

Most of Westfield’s assets are in the United States, Australia and New Zealand, with roughly 10% of its assets located in Britain.

How exposed is Westfield to changes in retail sales and consumer spending?

Westfield is only indirectly exposed to retail sales because about 98% of its rental income is fixed for the term of leases. In the year to December 2010 only around 1.7% of the group’s income was directly tied to retailers’ sales, which helps buffer the business during periods of weak retail trading.

How do US and Australian consumer trends affect Westfield’s outlook?

Westfield’s outlook depends on consumer activity in its key markets. The article notes tentative evidence of a US recovery in 2011, with retail sales up about 3–4% and stronger holiday trading and consumer confidence. By contrast, Australia’s retail sector was surprisingly weak at the time due to a two-speed economy and a slow shift to looser monetary policy. Long‑term improvement in consumer activity in these regions would be positive for Westfield.

What lease expiry risks should investors watch for with Westfield?

A little more than 10% of the group’s lease agreements were set to expire in the next year, with about 7.8% expiring annually through to 2015. Because Westfield’s performance depends on keeping properties as fully leased as possible, upcoming expiries are an important factor for investors to monitor.

What financial guidance and distribution yield did Westfield report?

Management reaffirmed full‑year guidance for funds from operations at roughly the mid‑60s per security, and total distributions for 2011 were stated at 48.4 per security. That equates to a distribution yield of about 5.8%, or more than 8% on a grossed‑up basis, according to the article.

Is Westfield Group considered undervalued and what upside did the article identify?

The article stated that Westfield Group looked undervalued at $8.47 a share, with limited downside risks, an attractive income stream and the potential for around 20% valuation upside over the next 12 to 18 months.

What makes Westfield an attractive option for income-focused investors?

Westfield’s appeal for income investors comes from its high proportion of fixed rental income, a stated distribution yield of about 5.8% (over 8% grossed up), and management’s reaffirmed funds‑from‑operations guidance. These factors point to a reliable income stream, while lease management and market conditions in its key regions remain the main factors to watch.