Which Westfield would be the best to back, asks Nathan Bell.
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.