Westfield plans to boost global projects
The creation of the Westfield Retail Trust in November 2010 was seen at the time as a shift by the owners, the Lowy family, in their long-term strategy for the retail empire.
The trust was formed to own a half share in Westfield's 54 shopping centres in Australia and New Zealand, worth about $12 billion.
By separating the businesses, the Westfield Group would focus on developing and upgrading existing centres across the globe, while the trust would manage the Australian and New Zealand centres.
Since that time, the strategy has been adhered to, with Westfield Group using any spare cash to enter the markets of Brazil and Milan. Westfield Group is trading on a dividend yield of 4.4 per cent and its shares have gained 30 per cent over the past year. Meanwhile, the $9.5 billion Westfield Retail Trust is trading on a yield of a little over 6 per cent, while its units have largely tracked the bigger Westfield group.
At its recent earnings results for the 2012 year, co-chief executives Steven and Peter Lowy said the focus for Westfield Group would be the group's global $12 billion development pipeline.
A further indication that overseas development is a priority was the $660 million sale of the Lowy family's stake in the trust. While it was an independent move by the family's fund, run by eldest brother David, analysts said it suggested Australia was less of a focus for the group overall.
One analyst, who declined to be named, said it was becoming "more apparent" that the investment of 7.1 per cent in the trust was "not a Lowy-style investment".
"The sale came as no surprise as there has been an expectation that the group will be selling down its exposure to Australia to focus on overseas developments," the analyst said.
Speculation is also growing that Westfield Group will now start to sell down its direct stakes in the co-owned assets with the trust.
To maintain management rights, it must retain a 25 per cent stake in the assets. Westfield has 39 shopping centres across Australia. It holds a 50 per cent interest in 18 centres with joint venture partners, including the listed Westfield Retail Trust. The remaining centres are co-owned by Westfield Group at the minimum 25 per cent threshold.
Brokers have expressed doubt the group would sell down all the interests, but said given its expansion plans overseas and the global $12 billion development pipeline, it was a good way to generate income.
JPMorgan analysts Rob Stanton and Richard Jones say it could be argued that the Lowy exit clears the path for Westfield Group to sell down an additional 25 per cent in assets it owns 50:50 with Westfield Retail Trust.
If that occurred for all the Australian and NZ assets, this would be about a $4.3 billion transaction.
Westfield Retail Trust stated at its result it has had no discussions with Westfield Group about acquiring further interests in centres. But the sale and focus on the development pipeline comes amid ongoing weakness in the retail sector. While retail sales rose in January, both chief executives said they expected flat sales in the year ahead in Australia.
That led to a startling admission that rents for new leases across about 15 per cent of the portfolio could be completed at about 4 per cent to 5 per cent lower than previous leases. For renewals the rent is likely to be unchanged. While that is encouraging for tenants, it indicates how tenuous retail landlords are in the current climate.
The head of real-estate research at Bank of America Merrill Lynch, Simon Garing, has downgraded Westfield Group to neutral following its strong share price performance over the past 12 months. "The key drivers of our change in view are: Westfield is now trading above our $11.11 valuation ... and the annual result did not reveal any new information to cause us to upgrade our numbers, with the 2013 financial year guidance slightly lower than our expectations," he said.
In contrast he has upgraded Westfield Retail Trust saying it is trading on a 6.2 per cent distribution per unit yield.
Mr Garing said the trust's assets have an "overall higher quality" over rivals with the Australian shopping malls expected to deliver flat to positive net operating income, compared to its key retail peers.
Frequently Asked Questions about this Article…
The Westfield Retail Trust, created in November 2010, owns a half share in 54 Westfield shopping centres in Australia and New Zealand (about $12 billion of property) and manages those assets. The Westfield Group is the developer/operator that focuses on developing and upgrading centres globally and retains direct stakes in shopping centres; the split was designed so the Group could concentrate on development while the Trust manages the Australian/NZ portfolio.
According to the article, Westfield Group shares have gained about 30% over the past year and the Group is trading on a dividend yield of roughly 4.4%. The Westfield Retail Trust (valued at about $9.5 billion) is trading on a yield a little over 6% (Bank of America Merrill Lynch noted a 6.2% distribution-per-unit yield when upgrading the Trust).
Westfield’s co-chief executives said the Group’s priority is its global development pipeline, which totals about $12 billion. The Group has been using spare cash to enter markets such as Brazil and Milan, indicating a strategic shift to overseas development rather than concentrating only on Australia.
The Lowy family’s fund (run by eldest brother David) sold a $660 million stake in the Westfield Retail Trust. Analysts suggested that the sale signalled Australia was becoming less of a focus for the broader Westfield Group and made it more likely the Group might further reduce its exposure to Australian assets to fund overseas expansion.
There is growing speculation the Westfield Group may sell down some direct stakes in co-owned assets with the Trust. To retain management rights it must keep at least a 25% stake in an asset. The Group currently has 39 Australian centres, holds a 50% interest in 18 centres (many co-owned with the Trust), and other centres are held at the minimum 25% threshold. JPMorgan analysts suggested selling an additional 25% in 50:50 assets could amount to about a $4.3 billion transaction if applied across the Australian and NZ portfolio.
The article notes ongoing weakness in the retail sector: while retail sales rose in January, Westfield’s co-CEOs expected flat sales in Australia for the year ahead. They admitted rents for new leases across roughly 15% of the portfolio could be completed about 4–5% lower than previous leases, while renewals were likely to be unchanged — highlighting some pressure on landlord income but relatively stable renewals.
Brokers expressed doubt the Group would sell down all its interests but said selective disposals could generate income for overseas expansion. Bank of America Merrill Lynch’s Simon Garing downgraded Westfield Group to neutral after strong share-price gains and slightly weaker 2013 guidance, while upgrading Westfield Retail Trust because its assets appeared higher quality and were trading on a stronger yield.
From the article, everyday investors should note Westfield is prioritising a $12 billion global development pipeline and expanding into overseas markets (eg Brazil, Milan). That strategy has involved selling some Australian exposure (the Lowy family sale) and raises the possibility of further sell-downs of 50:50 assets to fund development. At the same time, retail sector softness and modest rent pressure in a portion of the portfolio are factors that could affect near-term income for both the Group and the Trust.
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