Westfield's bargain bin

The internet has wreaked havoc on retailers. Now the landlords are hurting.

The great asset shuffle at Westfield continues to gather steam as it continues to dump malls at bargain prices.

For the second time in year, Westfield Group (WDC) has sold a swag of American shopping centres to Starwood Capital, this time eight second tier operations for $1.64 billion after raising $US1.15 billion from a portfolio of seven centres.

Again, Westfield retains a 10% interest in the malls.

The sale marks a rush for the exits by the Lowy family for hard real estate ownership both at a corporate and personal level, recently selling its large holding in the domestic Westfield Retail Trust (WRT).

In the past three years, Westfield has made a determined effort to shift its focus from ownership - raising more than $US6.5 billion from asset disposals - and redirected capital to mall development and management (see my earlier article, Stark choices when shopping for Westfield).

The strategy shift, however, has yet to pay off with the company recently delivering a 35.7% drop in first half earnings.

The sale announced today was completed at slightly below book values of a year ago and is likely to marginally dilute earnings but that should be offset when the company's refurbished and new malls are completed.

The shift in consumer behavior towards more online transactions has wreaked havoc on traditional retailers in the past five years, with the shockwaves moving up the chain to landlords. As retailers reduce demand for floor space, rents would be expected to fall.

As the world’s biggest mall operator, Westfield has been forced to adapt to the changes. The divestment program proceeded at a cracking pace. In March it sold a half share in six Florida properties – raising almost $700 million – to private equity group O’Conner Capital Partners.

That followed similar global joint ventures with the Canada Pension Plan Investment Board, Starwood Capital Group and Hammerson and follows the 2010 spin-off of the Westfield Retail Trust (WRT).

Due to watertight agreements, however, Westfield retains management rights within the joint venture arrangements. In fact, the parent company could sell down to a minimum 25% ownership of most of its malls but still operate them.

The upside for Westfield rests largely on its $12 billion development pipeline and particularly its UK developments.

The Lowy family recently sold its stake in the domestic based Westfield Retail Trust which delivered a result that was slightly ahead of expectations.

With domestic retail conditions remaining tough, particularly in the New Zealand portfolio, that strategy appears to have been sound.

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