Westfield Group: Interim result 2012

Westfield Group’s recent half year result (it has a calendar year end) shows that its focus on massive flagship shopping centres is working. Retail sales within Westfield's shopping centres are growing faster than the wider retail industry, which allows Westfield to charge high rents and keep occupancy rates high. Funds from operations (the company's preferred measure of profitability) increased 3% to $751m due to rent increases and higher property development fees, as part of the company's strategy to increase return on equity. Westfield paid an interim distribution of 24.75 cents per security (ex date already passed), up from 24.20 cents in 2011. The company maintained its full year guidance of funds from operations of 65 cents.

The performance of its US shopping centres was impressive, with speciality retail sales growing 9%. Discount membership warehouse retailer Costco has also recently opened its doors for the first time in a Westfield shopping centre. Retail sales from the new Brazilian operations increased 12%, albeit from a low base. Across the Atlantic Westfield London increased sales 2%. These international markets are key to Westfield's future growth.

In contrast, the Australian portfolio reflected the slowdown in local retailing, with speciality retail sales failing to register 1% growth. Sales were particularly weak in the fashion, footwear, jewellery and homewares sectors, all posting negative sales growth. The tougher environment has forced Westfield to increase lease incentives to keep existing tenants. Despite this, new leases continue to be signed at higher rents and its shopping centres are virtually fully tenanted.

Though Westfield's security price is no longer deeply undervalued, the company is buying back securities. Westfield’s security price has risen 5% since 16 May 12 (Hold – $9.18) and remains a classic HOLD.

Note: The model Income and Growth portfolios own Westfield Group securities.