friday expectations, page-15

Read below: The point that intrests me is that there were solid gains in the value of Australia Centres. Behind we have only seen results from US write down provides something postive for me

1:27 PM, 27 Aug 2008 Stephen Bartholomeusz
Westfield's mall mauling

A 35 per cent slump in reported earnings has demonstrated that not even the mighty Westfield, the world’s largest shopping centre owner, is immune from the credit crunch-inspired stresses impacting global property markets.

A relatively modest decline in property income and static net values for its property portfolio – against $1.2 billion of revaluations in the previous corresponding period – caused reported earnings to tumble from $1.97 billion to $1.3 billion.

In terms of its core portfolio, solid gains in the value of its Australian retail centres were offset by write-downs and the effects of adverse currency movements in its New Zealand, UK and, most particularly, its US malls.

Despite Frank Lowy’s reputation for prescience, at least when it comes to property markets, Westfield was never going to be completely immune from the chill winds sweeping through the world’s property markets. Its peers in the US and UK, where it has major exposures through the malls it owns and the developments it is involved in, have been hammered.

Westfield has, however, been relatively less affected by the impact of the crisis on the value and structure of real estate investment trusts and the A-REITS in particularly, where its peers’ values have been savaged and their business models broken.

The distinction the market has made appears to relate to the quality, diversity and size of the Westfield portfolio, although the size of its exposures to the weakening US and UK markets may become an issue if those economies continue to slow and property values continue to fall.

The two big things Westfield has going for it is that it did raise $3 billion of new capital just as the credit crunch was about to hit and that the biggest slab of its $42 billion portfolio of shopping centres – nearly half of them by value – is in Australia which, while not quite unscathed, has so far held up better than offshore markets closer to the epicentre of the crisis.

The capital raising left Westfield with reasonable levels of gearing (about 33 per cent) and interest coverage (3 times), a very strong credit rating and good liquidity.

With a reasonably conservative (by sector standards) distribution policy of paying out only its operational segment earnings – about $1 billion for the half – it isn’t reliant on borrowing against revaluations to fund the payout.

Westfield does have a lot of work-in-progress and property held for redevelopment and has five projects worth $4.5 billion (its share is $3 billion) scheduled for completion in the current half. While Westfield says there is solid retailer demand for the projects, they will come on stream in a softening market, with capitalisation rates in the US and UK firming.

The group also has a lot of off-balance-sheet activity occurring within joint ventures and other entities, mainly involving shopping centre investments, which adds a certain amount of opacity to its performance.

Its share of the equity accounted profits of UK entities, for instance, was a loss of $92 million and its share of earnings from US entities fell from $241 million to $44 million. Westfield’s share of the net assets of those ventures is almost $5 billion.

The recent disclosure that Westfield, along with its occasional bedfellow Simon Property Group of the US, has bought just under 3 per cent of the UK’s largest retail centre owner, Liberty International, is an indication that the Lowys see opportunities in the distressed environment.

It also indicates that they believe Westfield is in a sufficiently strong position that it may be able to take advantage of that distress. Westfield has about $7.3 billion of available liquidity.

That would make Westfield, if not unique among the major players in its sector, one of the tiny minority of big property groups not to have been destabilised by the credit crisis and its flow-on effects to markets, including the property market. It isn’t escaping unscathed but so far, at least, the impact is quite manageable.