Lowy family signs up to doubter list
When the smart money sells down, why wouldn’t you follow suit? That’s a question shareholders in Westfield Retail Trust are asking themselves. The Australia-focused property trust was spun out of Westfield Group in 2010 and is pitched at income investors looking for a safe, attractive yield. What are they to make of the Lowy family selling its entire $664 million stake in Westfield Retail Trust?
Westfield Group owns shopping centres in Australia, New Zealand, the US, Britain and, shortly, Brazil and Italy. Westfield Retail Trust is the passive owner of primarily Australian assets, with its future tied to Australian retail rents.
Westfield Group’s isn’t. And that may well be a problem.Where once retailers had to stomach rent increases, now they’re extracting reductions. Former David Jones chief exectuive Mark McInnes (now chief executive of Premier Investments) managed to lower his rents by 30 per cent by threatening store closures.
With Sydney retail rents overtaking Paris, London and Singapore as the second-highest in the world (Melbourne and Brisbane aren’t far behind), something had to give.
If you’re looking for a reason the trust has traded at a persistent discount to net-tangible-assets, this is it.
Investors don’t believe the book values and neither do we. Now the Lowy family has added their names to the list of doubters. That’s why Westfield Group’s internationally diverse portfolio is a better long-term bet.
Westfield Group’s future is about building premium centres focused on luxury fashion, food and entertainment in leading cities such as Sydney, London, New York and Milan. These retail categories are much less exposed to the threat of online retailing.
There’s already evidence that this strategy is paying off. In Britain – hardly a booming economy – new centres in Stratford and White City are practically full. So should you, like the Lowys, switch? Yes, but only at the right price. Westfield Retail Trust, which delivered a 14 per cent rise in distributions in 2012 after paying out 100 per cent of distributable earnings, is comparatively cheaper than Westfield Group.
Although Westfield Retail is reducing rents to sign new tenants, the portfolio remains fully tenanted and contracted rent rises will help boost future income, at least for the next few years. While the Lowys also want cash to diversify overseas (a sensible strategy with the dollar so high) the current yield of 6.1 per cent is enough to hold on – but you should have one eye firmly on the exit.
This article contains general investment advice only (under AFSL 282288). Nathan Bell is the research director at Intelligent Investor Share Advisor, shares.intelligentinvestor.com.au.
Frequently Asked Questions about this Article…
The article says the Lowy family added their names to a list of doubters about the trust’s Australian-focused assets. They sold their entire $664 million stake partly because they were sceptical of the trust’s book values—given pressure on Australian retail rents—and also to raise cash to diversify overseas while the dollar was high.
Westfield Group owns an internationally diversified portfolio of shopping centres across cities like Sydney, London, New York and Milan and focuses on premium, luxury, food and entertainment destinations. Westfield Retail Trust was spun out in 2010 and is a passive owner of primarily Australian shopping centre assets, so its future is more directly tied to Australian retail rents and local retail conditions.
Westfield Retail Trust’s income and valuation are linked to Australian retail rents. The article highlights that retailers have been extracting rent reductions (one example cut rents by 30%), and very high rents in cities like Sydney forced adjustments. That pressure helps explain why the trust has traded at a persistent discount to net tangible assets and why investors may be wary of its book value.
According to the article, Westfield Retail Trust delivered a 14% rise in distributions in 2012 after paying out 100% of distributable earnings, and at the time the trust had a current yield of about 6.1%. The piece suggests that yield makes the trust reasonably attractive to income investors, but cautions investors to watch their exit because of valuation and rent risks.
The article argues Westfield Group’s international diversification and strategy of building premium centres focused on luxury fashion, food and entertainment makes it less exposed to the threat of online retailing. It cites evidence that new UK centres (Stratford and White City) are practically full, supporting the view that the Group’s strategy can pay off long-term.
Yes. The article notes that while Westfield Retail Trust is reducing rents to attract new tenants, the portfolio remains fully tenanted and contracted rent increases should help boost income for the next few years.
The article explains that the trust has persistently traded below its reported net tangible asset (NTA) value because investors don’t fully trust the book values—largely due to pressure on Australian retail rents and tenant renegotiations. The Lowy family’s sale reinforced market scepticism, contributing to the discount.
The article’s view is: yes, switching can make sense but only at the right price. Westfield Group offers international diversification and exposure to premium, less online-vulnerable retail, while Westfield Retail Trust is cheaper and offers attractive yield. Investors should weigh valuation, yield, rent pressures and their own exit strategy before deciding.
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