Westfield Seeks Partners, Not Spinoffs in U.S., U.K.

Westfield Second-Half Profit Falls on Spin-Off Costs
Westfield’s net income dropped to A$153.1 million ($152.5 million) in the six months to Dec. 31, from A$250.2 million a year ago. Photographer: Jason Alden/Bloomberg

Westfield Group, which last year spun off a unit owning stakes in its Australian and New Zealand malls to boost shareholder returns, prefers joint ventures with institutional investors for its U.S. and U.K. assets.

The new Westfield Retail Trust “suited the demand in Australia perfectly,” Peter Lowy, joint-managing director of Westfield Group, said in a telephone interview today. “We’re not sure it’ll be suited to the U.S. or U.K.”

Westfield, which today reported net profit of A$1.11 billion ($1.1 billion) in the year to Dec. 31, listed the retail trust -- which owns a 50 percent stake in its 56 Australian and New Zealand malls -- on the Australian stock exchange in December. Westfield formed the unit, partially reversing the merger of its three businesses in 2004, in response to demand from Australian investors for a domestic vehicle, the company has said, enabling Westfield Group to focus on higher-growth investments and new developments.

In the U.S. and U.K., Westfield is seeking joint ventures with sovereign wealth funds and pension funds, similar to the strategy employed in its Stratford City development, Lowy said.

The company sold a 50 percent stake in the project, adjacent to the 2012 Olympic site in east London, to a joint venture comprising APG Algemene Pensioen Groep NV and the Canada Pension Plan Investment Board for 871.5 million pounds ($1.4 billion) in November to bolster its returns from the development.

Joint Ventures

“We’d do more of that in the U.S., either single joint ventures or portfolios with institutional investors,” Lowy said. The company, which has no plans to sell any more of the Stratford City project, will seek to maintain similar stakes and management rights in any future partnerships, he said.

While Westfield expects an internal rate of return of 12 percent to 15 percent over 10 years through such partnerships, the returns may be boosted as more joint ventures are finalized, he said.

Westfield Group shares declined 1 percent to A$9.82 at the 4:10 p.m. close of trade in Sydney. Westfield Retail ended the day unchanged at A$2.72, compared with the A$2.75 price at which it was sold to investors before it started trading on Dec. 13.

A joint venture in which Westfield continues to manage the assets allows the company to free up capital for new investments while increasing the proportion of earnings to assets, Scott Courtney, Sydney-based head of REIT research at Morningstar Inc., said in a telephone interview.

More Options

“It provides them the flexibility, where they may have identified assets that they believe their ability to outperform the market may be limited, to withdraw capital from those assets, retain the management rights, and invest in new centers elsewhere, where they think they can outperform,” he said.

Westfield plans to sell off some assets, predominantly in the U.S., and some in the U.K., and reinvest the capital into development projects in its existing markets and to enter new countries, Lowy said, declining to identify the malls that are likely to be sold.

Westfield is considering a number of projects, both new developments and existing malls, in new places including Asia, Lowy said, without specifying. Currently, its malls are confined to Australia, New Zealand, the U.S. and U.K.

In its existing markets, the capital raised will be used to further its A$10 billion development pipeline, which includes the Century City development in California, Garden State Plaza in New Jersey, Macquarie Center in New South Wales and Westfield London, the company said today in its results presentation.

Operating Income

U.S. operating income shrank 1.4 percent in 2010, less than its 3.9 percent contraction in 2009. The U.K. expanded 12.2 percent, and Australia and New Zealand rose 4 percent. In 2011, the company will see between 2.5 percent and 3.5 percent operating income growth in the U.S., between 7 percent and 8 percent in the U.K., and 3 percent to 4 percent in Australia and New Zealand, it said today.

“Australian retail sales are showing a deteriorating trend, particularly in discretionary sales, in line with what we’re seeing in the broader retail sector,” said John White, who helps oversee $3 billion as Melbourne-based managing director for Asia-Pacific public real estate securities at property management firm Heitman. “U.S. sales are showing steady, not improving growth, which is a negative surprise.”

The flat U.S. sales are expected to continue, with some stronger growth if the world’s biggest economy sees sustainable jobs growth, White said. In Australia, expectations that the central bank will hold off on raising rates will help stabilize retail sales growth, he said.

Retail sales in the U.S. in January and in Australia in December rose less than economists forecast, according to the latest releases.


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