Westfield Punished for Expanding as Default Swaps Surge: Australia Credit

Bond investors are penalizing Westfield Group (WDC) for its first new market forays in 11 years.

The 52-year-old, Sydney-based company announced joint ventures last week to buy and develop shopping centers in Milan and Brazil, after sticking to existing markets since 2000. While the developer, which now owns 124 malls in Australia, New Zealand, the U.K., U.S. and Brazil, said the expansion will boost returns, bond investors see increasing risk.

“Their formerly conservative strategy is straying from course,” said Scott Rundell, head of credit research at ING Investment Management in Sydney, which manages about A$15 billion ($15.7 billion) of fixed-income assets. “The acquisitions are in two countries that Westfield doesn’t have a track record in, which makes investors more nervous.”

Credit-default swaps on Westfield surged 54 basis points this month to 190.9 yesterday, the highest since October 2009, CMA data show. The contracts were the most expensive relative to the Markit iTraxx Australia index of corporate debt since November 2009, and the highest compared to an index of global real-estate investment trusts since at least May 2009, Bloomberg and CMA data show.

The extra yield investors demand to hold the company’s $1 billion of 4.625 percent notes due in May 2021 instead of similar-maturity Treasuries increased 78 basis points this month to 241, the most since they were issued, Royal Bank of Scotland Group Plc prices show. The notes were sold at a yield premium of 147 basis points in May, according to Bloomberg data.

Spin Off

Chairman Frank Lowy, 80, and his co-chief executive officer sons Peter and Steven, spun off half of the company’s Australian and New Zealand shopping centers into Westfield Retail Trust at the end of last year to give investors the option of owning an entity with low debt and steady returns. That freed up Westfield Group to seek riskier, higher-return developments in new markets, the Lowys said at the time.

Westfield yesterday said net income fell to A$650.9 million in the six months ended June 30, from A$960.9 million a year earlier, as the spinoff dented the group’s property revenue. The retail trust, which owns half of each of the company’s 56 Australian and New Zealand shopping centers, posted a profit of A$571.3 million for Nov. 2 to June 30.

Westfield has about A$14 billion of bonds and loan facilities maturing by the end of 2021, according to data compiled by Bloomberg.

Stock Slide

Westfield, which would have transformed a A$1,000 investment in its shares made in 1960 into A$159 million in 2009 according to its website, is trying to snap a recent stock slide.

The retail trust spinoff paved the way for the group’s entry into higher-return markets, said Scott Courtney, head of REIT research at Morningstar Australasia Pty in Sydney.

“The creation of Westfield Retail Trust (WRT) has allowed Westfield Group to do what it’s all about, to grow its global model,” Courtney said in a telephone interview. “In spite of markets moving up and down, the announcements last week show Westfield remains focused on its longer-term strategy.”

Like the debt market, the equity world hasn’t rewarded the move. Westfield Group shares have declined 56 percent since a peak in February 2007 and lost 20 percent since the spinoff was announced Nov. 3. Westfield Retail is trading 12 percent below its debut price and closed at A$2.43 today in Sydney.

New Markets

“Westfield’s return on capital is still more like a REIT than a developer, so I can understand why investors are concerned about their strategy,” said John White, who helps oversee $3 billion as Melbourne-based managing director for Asia-Pacific public real estate securities at investment firm Heitman. “What it requires is to continue to ramp up their development pipeline.”

Westfield said Aug. 10 it will spend 740 million reais ($465 million) to acquire half of Sao Paulo-based mall operator Almeida Junior Shopping Centers SA. Two days later it announced plans to invest 115 million euros ($166 million) to buy a 50 percent stake in the development site of a Milan shopping center in partnership with Italian developer Gruppo Stilo, with the cost of the entire development totaling as much as 1.25 billion euros.

Brazil, Italy

Brazil’s economy grew 7.5 percent last year, the fastest in two decades, as unemployment fell to a record in December, fueling wage growth and consumer confidence. Retail sales rose 7.1 percent in June from a year earlier, beating economists’ forecasts, as the emerging middle class lifted spending.

“Westfield has a strong track record of gradually expanding in new markets and Brazil seems to offer attractive fundamentals for future growth,” Lourens Pirenc, an analyst at Morgan Stanley, wrote in a report on Aug. 12. “With the share price giving Westfield little to no credit for future growth, this announcement should help improve sentiment.”

Italy is a different story, with the nation’s parliament last week approving 45.5 billion euros in deficit cuts to balance its budget and try to convince investors the country can tame the Euro area’s biggest debt burden after Greece.

Westfield’s investment in the Milan development “is more of an expansion into the European Union than Italy,” John Kim, an analyst at CLSA Asia-Pacific Markets in Sydney, who has a “buy” recommendation on the stock, wrote on Aug. 15. “This part of Italy is clearly the most affluent in Italy and one of the most affluent in Europe.”

Where Next?

The company’s choice of joint ventures is a safe method of introducing itself into new markets, and paves the way for future growth in the regions, Morningstar’s Courtney said.

Westfield may next expand into Argentina from Brazil, through a similar joint-venture arrangement, and into a mature economy like Germany, where more retailing is still done on the main street rather than in malls, he said.

“On top of the ventures into new markets, Westfield is also facing an economic slowdown at home,” said Jason Watts, Sydney-based head of credit trading at National Australia Bank Ltd. “Anything related to the consumer discretionary sector is suffering at the moment.”

Reserve Bank of Australia Governor Glenn Stevens is seeking to balance surging commodities exports to China, which are boosting expectations for growth and price increases, with consumer confidence in its deepest slump since 2008 and a faltering global economy.

Jobs Worry

The nation’s jobless rate unexpectedly rose to an eight- month high in July as hiring stalled, and retail sales unexpectedly declined in June for a second straight month, statistics bureau data released this month show.

While Australia’s central bank considered lifting borrowing costs on Aug. 2 to control inflation, cash-rate futures indicate policy makers will lower the benchmark by one percentage point by year-end after Europe’s sovereign debt crisis and concern about a double-dip recession in the U.S. roiled markets worldwide.

The yield on Australia’s benchmark 10-year bond fell 13 basis points to 4.36 percent as of 5 p.m. in Sydney, below the 4.75 percent cash rate. The notes yielded 221 basis points more than similar-maturity Treasuries.

The Australian dollar has fallen 4.7 percent against the U.S. currency in August, paring its advance against the greenback in the past 12 months to 17 percent. The so-called Aussie, the world’s fifth-most traded currency, bought $1.0478 in Sydney trading.

The gap between yields on Australian government bonds and inflation-indexed notes shows investors estimate consumer-price gains to average 2.58 percent for the next five years, the highest inflation expectations among eight developed markets tracked by Bloomberg.

Handing Over

Frank Lowy and a fellow Hungarian refugee started Westfield more than half a century ago, capitalizing on a wave of immigrants entering Australia to grow from a suburban deli to the nation’s biggest mall owner.

The company entered the U.S. in 1977, with the acquisition of a mall in Trumbull, Connecticut; New Zealand two decades later, after assuming management of the country’s biggest shopping center group, St. Luke’s; and the U.K. in 2000, with the purchase of a center in Nottingham.

While Westfield continues to seek new markets, debt and equity investors may not need to digest another move in the near future.

“History is littered with companies rushing into new markets overseas without doing their homework,” Peter Lowy told reporters yesterday. “We’re not running to open new markets until we can see the real investment returns.”

To contact the reporter on this story: Nichola Saminather in Sydney at nsaminather1@bloomberg.net; Sarah McDonald in Sydney at smcdonald23@bloomberg.net.

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net; Shelley Smith at ssmith118@bloomberg.net.

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