Westfield deal gets thumbs up from analysts

Westfield's strategy to re-weight its portfolio to owning higher quality, dominant malls with income-generating management fees has led brokers to upgrade the stock to a buy rating.

Westfield's strategy to re-weight its portfolio to owning higher quality, dominant malls with income-generating management fees has led brokers to upgrade the stock to a buy rating.

In the past year, the group has raised more than $2 billion via the sale of half shares in core centres and full holdings in what it has deemed as non-core malls, mainly across the Midwestern parts of the US.

In the latest deal, the group has agreed to sell a 90 per cent stake in seven assets in the US to the Starwood Capital Group for $US1.64 billion ($US1.8 billion for the 90 per cent share).

The sale was at a 6.8 per cent discount to the December 2012 book value, but in line with new valuations revealed in the recent half-year results to June 2013.

Four of the seven assets sold were in the Midwest, reducing the residual exposure to the area to just three assets, and the balance were in California and Washington state.

Under the deal, Westfield will retain a minority interest but will not be the manager of the assets.

Brokers said while Westfield would lose management of the non-core properties, the income downside would be limited and likely offset by downsizing cost savings. The age of the malls indicated that redevelopment would be necessary in coming years.

Westfield's philosophy is to "recycle" cash out of older, mature shopping centres that have limited redevelopment opportunities, and feed its $12 billion global development pipeline to develop centres in what it considers emerging areas such as Italy's Milan and South America.

Simon Wheatley, property analyst at Goldman Sachs, said the sale reflected the group's strategy of reducing the number of assets held but increasing the quality of the residual portfolio.

The focus is to build up a presence internationally where the market for enclosed Westfield-style malls is less mature than in countries where malls are abundant, including Australia, New Zealand, Britain and the United States.

Analysts at Moelis said the deal to sell the seven US non-core assets, and thereby increase the percentage of earnings from the management business, was sound because it would increase both return on equity and earnings per security (EPS).

"We believe Westfield can again trade on a 4.5 per cent yield. If we take our 2014 distribution per security estimate of 54¢, this implies a share price of $12, which is fairly consistent with our 12-month target price of $12.49," Moelis analysts said.

"The transactions improve the quality of the portfolio and will not impact the funds from operation forecast for 2013.

"The dilutionary impact is expected to be mitigated by the redeployment of capital and the current share buyback. We upgrade our recommendation from hold to buy."

Westfield rose 12¢ to $10.96.

Adele Ferguson— Page 26

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