Westfield: Interim Result 2016

The shopping centre giant continues to spread its brand around the world and shows no signs of slowing down.

With its white spiky facade rising out of the grounds of one of the world’s most famous locations, the recently opened Westfield World Trade Centre (WTC) is a hard building to miss.

Due to its prime location in downtown Manhattan and role as a major transportation hub, Westfield WTC is expected to have more than 300,000 people walk through it every day. Not surprisingly, demand for space has been high and the building opened fully leased.

Key Points

  • Westfield WTC opened fully leased

  • Flagship malls continue to perform well

  • Regional malls flat, but less important

With Westfield WTC now open and the company continuing pre-development work on its Milan centre, Westfield will soon have flagship properties operating in two of the world’s financial capitals, three of the four major fashion capitals as well as the entertainment and technology capitals of the world in Los Angeles and Silicon Valley. It’s an impressive feat.

Flagship’s commanding performance

With many retailers around the world looking to shrink the amount of stores they have as online retailing becomes increasingly popular, quality locations are an important advantage for shopping centre landlords and Westfield’s flagships are about as good as they come. Where those retailers choose to close stores will depend on sales activity and Westfield is leading the way, as is Scentre in Australia.

Table 1: Westfield interim result 2016
Six months to June ($m) 2016 2015 /(–)
(%)
Rental income 378 415 (9)
Borrowing exp. (100) (85) 18
Distributable profit 342 380 (10)
DPS (c)* 12.55 12.55 0
Gearing (%)** 28.4 25.3 12
NTA per share ($) 4.55 4.48 2
*12.55 cents unfranked, ex-date already past
** Net debt / (total tangible assets – cash)

Westfield’s centres generated specialty sales of US$724 per square foot, much higher than centres owned by competitors such as General Growth, Simon Property and Macerich at US$583, US$607 and US$626 per square foot. Even more impressive was the performance of Westfield’s flagship centres — 81% of its total portfolio — where specialty sales increased 4.6% to reach US$905 per square foot.

Whilst the flagship malls shine, Westfield’s regional malls show the challenges many others face across America. Although total occupancy in regional malls increased to 94%, specialty sales and specialty store rent remained flat. Comparable net operating income for regional malls only increased 2.2% compared to the flagship division at 4.4%. Westfield is looking to offload some of these regional malls, and with development focused on flagship properties, this division will continue to become less important in the years ahead.

Despite the performance of its regional malls, the future actually looks bright for Westfield. It currently has US$2.6bn worth of development activity under construction and another US$6.9bn in pre-development. The company expects these projects to yield between 7% and 8% and should provide a boost to distributable profit once completed.

A growth story

Westfield expects total distributions of US$0.251 (unfranked) for the full year which, assuming an exchange rate of $1.31 for every US dollar, means the stock is trading on an unfranked yield of 3.4%.

With retailers looking to reduce the number of their stores and shopping centres shutting across America this might sound expensive. However, all malls are not created equal and we expect Westfield’s flagship properties to be largely unaffected.

With its sizeable development pipeline in major cities, Westfield actually has strong growth prospects. Although we only expect distributable profit to grow between 3% and 4% in 2016, long-term growth should be a little higher – perhaps 3–6% (the wide range being due to the added risk of currency fluctuations).

Adding that to the current yield gives a total expected return of around 6–9% before tax. Note, however, that you will only get this return if our assumptions are correct and you hold forever. The sooner you sell before then, the more your actual return will be affected by changes in the price the market puts on Westfield's stream of income. If interest rate expectations increase, then the stock's yield will surely increase them, meaning that its price will fall.

We'd need to see a higher potential return for us to recommend Westfield as a Buy for all members, but for those happy to accept relatively low total returns in exchange for a high-quality stream of distributions and international diversification, the stock might make sense at a little above our Buy price. We also wouldn't make the stock an outright Sell until the yield fell to below 3%. As a result, we're decreasing our Buy price to $6.00 and raising our Sell price slightly, to $12. HOLD.