Westfield heads back to the future

Westfield Group's decision to ditch seven US shopping centres for $1.6 billion, after selling seven last year, has a ring of back to the future about it.
By · 17 Sep 2013
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17 Sep 2013
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Westfield Group's decision to ditch seven US shopping centres for $1.6 billion, after selling seven last year, has a ring of back to the future about it.

The Lowy family, which sold its entire stake in Westfield Retail Trust in February and retained its holding in Westfield Group, is returning to the old Westfield model of not holding too much property but focusing instead on property management and development.

In the past year Westfield Group has sold almost $3 billion of shopping centres in the US, keeping a minority stake, and the talk is there are a few more to go in the quest to remove low-performing shopping centre assets that drag down its overall productivity.

It is part of a grand plan by the Lowy family to boost its return on equity and become more of a growth stock by investing in property developments, selling "lower-growing assets" and increasing revenue generated in management fees.

It was a plan it began in earnest in December 2010 when it split the Westfield juggernaut into two listed entities: Westfield Retail Trust, a vanilla property trust that brings steady returns; and Westfield Group, a more active and diverse global business with a strong pipeline of shopping centre developments.

Sales of the US property assets on Monday were completed at a 7 per cent discount to their book value at December 31.

But, to put it into context, the productivity (sales per square foot) on the seven properties is 22 per cent below its US portfolio average. Their removal, coupled with developments including the World Trade Centre and Century City, will automatically improve its US portfolio's quality and return potential.

Westfield will use part of the proceeds to fund its development pipeline. It is also rumoured to be looking for development and acquisition opportunities in Rio de Janeiro, Britain and Milan, where shopping centres are not abundant.

As the Westfield Group loosens its grip on assets by either selling properties or selling down to joint-venture partners and beefs up its property development pipeline, the appeal to investors will increase.

Westfield Group is one of a few listed real estate investment trusts trading above net tangible assets - Westfield Retail Trust is trading at a discount.

The Westfield empire is one of the few trusts that did not get into trouble during the global financial crisis. Before the crisis, Westfield was at the cutting edge of listed REITs. During the crisis it hunkered down. However, since the split, it has been selling assets, reducing debt and developing a pipeline of $12 billion of property projects.

Its global diversity has been its making, particularly now that US and British retail sales are starting to pick up as Australia faces tough times.

When the Lowy family sold its stake in Westfield Retail Trust this year at a 10 per cent discount to net tangible asset backing I suggested it could be a portent in retail as the family's success is built on correctly picking retail trends.

At the time I speculated that the Westfield Group could sell down its Australian and New Zealand property portfolio.

Last week the two Westfield trusts sold their 33 per cent stake in the Karrinyup shopping centre in Perth - days after the Australian Competition and Consumer Commission gave the green light for both trusts being allowed to take full control of the centre.

A day later, on September 11, Charter Hall announced it had entered a put option to buy Westfield Group and Westfield Retail's Innaloo shopping centre, in Perth, for $255 million.

Last month when Westfield announced its interim results it said it had been offering discounts of up to 10 per cent to new tenants.

Discounting on leases was flagged in February by colleague Carolyn Cummins, who wrote that, at an investor briefing, Westfield's Peter Lowy had warned that if sales growth in Australia did not pick up, rents might have to fall.

Retail sales have been suffering from a structural shift to online.

The latest online sales figures released by NAB show that online sales rose to $14.1 billion in the year to July, which is equivalent to 6.3 per cent of the country's traditional sales. Online sales grew 14.2 per cent for the year.

In sharp contrast, department store chain Myer released flat sales figures last week. Indeed, for the past five years, sales have been flat despite its opening new stores and refurbishing others.

Myer is not alone in this challenge to boost sales.

Australian Bureau of Statistics figures for retail sales came in at 0.1 per cent in July, largely due to a 7.9 per cent fall in sales at department stores month-on-month and 3.4 per cent year on year, seasonally adjusted.

The June-quarter GDP figures, released last week, show total consumption spending rose 4 per cent, yet retail spending grew less than half that at 1.9 per cent.

Shopping centres in Australia have been able to charge high rentals, but if sales keep going backwards and some shops close, high rentals may become a thing of the past.

It will make Westfield's pipeline of global developments all the more attractive.
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