Westfield: Result 2012

Results for Westfield Group are largely known in advance. Long leases and fixed rent increases mean it’s a company that rarely misses guidance. Funds from operations – that is, excluding property revaluations – for the full year (it has a calendar year end) came in slightly lower at $1,474m, as asset sales reduced the current level of income. Helped along by the current buy back, earnings per security rose 0.3% to 65.0 cents and a 49.5 cent distribution was declared (unfranked, ex date already passed).

Australia weak, international strong

Westfield’s local results highlighted the weak retail environment. Although overall specialty rents increased 2.5% on a like-for-like basis, Westfield had to offer discounts of up to 5% for new tenants. This is an important dynamic to understand: as only 15%-20% of leases come up for renewal each year it’s the price of new leases that will fuel future profits. This slight fall in rents for new tenants corroborates our theory that retail rents in this country are too high (see Reassessing Westfield–Part 1). Westfield now clips around an astonishing 16% of specialty sales, up from less than 12% a decade earlier.

Still Westfield's centres are full, and it remains the owner of the country's leading shopping centre assets. We’re simply cautioning that Westfield is unlikely to be able to capture much more of the retailers’ top line, so further rent rises will prove increasing difficult. It’s also why we prefer Westfield Group's internationally diverse portfolio over the Australian and New Zealand focused Westfield Retail Trust.

Elsewhere, performance of the portfolio was much better. In the US, specialty sales within its centres grew 6.3% and generated a 2.3% like-for-like increase in specialty rents. Importantly it also increased occupancy by 1.3% to 94.4%. Sales per square foot are now at record levels within its centres.

In the UK its new centres in Stratford and London are practically full and generated a small increase in rents. Over the other side of Atlantic, its new Brazilian joint venture is progressing nicely, with sales in its centres jumping 12.8% and specialty rents 7.4%.

Management and project income also provided a nice boost to earnings, totalling $322m, up 23% for the year. This is likely to increase in the coming years as Westfield enters more joint ventures, allowing it to profit from its management and development expertise.

A future founded on luxury

Westfield's future is firmly focused on building premium centres focused on luxury fashion, food and entertainment in the world’s leading cities, such as Sydney, London, New York and Milan. Critically these retail categories are less exposed to the threat of online retailing. We expect almost all new capital to be spent on such activities, a move we support. Westfield’s portfolio, though, contains numerous centres in second-tier cities or suburban locations. We expect a slow withdrawal from these regions, with the sale of eight US centres and a centre in downtown Auckland in 2012 a good start.

Westfield remains the world’s largest – and best – integrated shopping centre owner-developer. Repeatedly it’s shown an ability to create shareholder value by using its 50 years of experience to design, build and then operate leading property assets. Its new centres in Sydney and London are a culmination of this strategy, and we expect similar success in New York and Milan.

Westfield’s share price is up 5% since our Property sector round up 2012 on 21 Dec 12 (Hold – $10.65), and remains a comfortable HOLD.

The passive Australian and New Zealand focused Westfield Retail Trust holds less appeal. The 14% rise in distributions in 2012 reflect a move to pay out 100% of distributable earnings rather than outstanding operational performance. But a cheaper valuation, as compared to Westfield Group, means we're happy to HOLD for now.  

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