Westfield Group agreed to sell seven malls in the U.S. for $1.6 billion to an affiliate of Starwood Capital Group LLC, as the company consolidates its U.S. portfolio to fund higher-return activities.
Westfield is selling malls to redeploy capital into planned development projects, the Sydney-based shopping-center owner said in a statement to the Australian stock exchange. It will retain a 10 percent interest in the shopping centers, which will be managed by Starwood.
Westfield, founded by billionaire Frank Lowy, is exiting properties in the U.S with lower productivity and fewer redevelopment opportunities, mostly in the Midwest and north-west, to reinvest in higher-return assets and projects both in the country and overseas. It divested seven U.S. malls in April 2012 to Starwood for $1 billion and sold half stakes in six Florida malls to O’Connor Capital Partners for about $700 million in March, while maintaining management rights.
“Westfield have well flagged their intention to concentrate their U.S. portfolio,” Louise Mylott, executive director for specialist sales, and Lou Pirenc, REIT analyst, at Morgan Stanley, wrote in an e-mailed note. With this transaction, Westfield “has exited all of its Midwest assets outside the Chicago area and all non-core West-Coast assets.”
Westfield will own and operate 40 malls in the U.S. following the sale, and average annual specialty sales at its malls there will increase by 3.8 percent to $513 per square foot following the disposal, it said today.
Slowing sales among retailers and rising borrowing costs are sparking concern that U.S. mall landlords could be hurt too. Growth in mall-tenant sales for U.S. mall real estate investment trusts, which rose 4.3 percent in the second quarter from a year earlier, peaked in the three months through June 2012 and has slowed each quarter since, according to Bloomberg Industries.
Westfield has started work on the retail part of the World Trade Center in New York, in which it invested $612.5 million in a joint venture with the Port Authority of New York and New Jersey in July 2011. It is also undertaking $240 million of redevelopments at Garden State Plaza in New Jersey and Montgomery in Maryland, it said in August.
Westfield shares closed 1.1 percent higher at A$10.96 in Sydney, extending gains this year to 3.8 percent. That compares with a 13 percent increase in the benchmark S&P/ASX 200 Index this year.
The malls Westfield is selling include three properties in Ohio, two in California and one each in Indiana and Washington state, it said. The deal is in line with the assets’ book value as of June 30, and $120 million below their Dec. 31 value, the company said.
“They’re remixing the remaining portfolio based on their views about where the best value is going forward,” said Winston Sammut, Sydney-based managing director of Maxim Asset Management. “This is part and parcel of their strategy, not a change in strategy or outcome.”
Retail sales in the U.S. rose 0.2 percent in August from the previous month, less than forecast and the smallest gain in four months, the Commerce Department said Sept. 13. Higher payroll taxes, limited job opportunities and restrained income growth are moderating consumers’ interest in shopping.
Westfield reported comparable net operating income growth of 4.3 percent in the U.S. in the six months to June 30, compared with 1.8 percent in Australia and New Zealand, and 0.2 percent in the U.K. The company had debt of A$13.1 billion ($12.2 billion) as of June 30, representing 36 percent of total assets, it said in its earnings statement.
Perceptions of Westfield’s credit risk have improved, with the cost of protecting the company’s debt against non-payment dropping relative to other Australian companies. Credit-default swaps on the mall owner have fallen 51 basis points to 106 over the past year. The CDS were 9 points below the benchmark Markit iTraxx Australia index at the end of last week, having traded at a 22 basis point spread above the average a year earlier. Westfield is the fifth best performer in the 25-member gauge over the past 12 months.
Australia’s biggest publicly traded property trust has focused on boosting developments and fund management income since it spun off the domestically focused, more conservative Westfield Retail Trust in 2010. The change in strategy followed Frank Lowy’s decision to hand day-to-day control of the company he founded in 1959 to his sons Peter and Steven Lowy.
Frank Lowy emigrated to Australia in 1952 after fleeing the Nazis in Hungary and fighting as a commando in Palestine. He built up Westfield into the world’s biggest shopping-center operator by assets with properties in Australia, New Zealand, the U.S. and U.K. The company has since expanded into Italy and Brazil.
Westfield is moving forward on A$2.8 billion worth of higher-return development projects in cities including London, New York and Los Angeles, the company said at its first-half results announcement last month. It also has a further A$12 billion of projects planned, including a mall in Milan that it is developing in partnership with Italian firm Gruppo Stilo.
“Today’s announcement continues the implementation of our strategic plan which positions Westfield to generate greater shareholder value,” Westfield’s Co-Chief Executive Officer Peter Lowy said in the statement. “We are focused on redeploying our capital into superior retail destinations in major cities through divesting non-core assets and introducing joint venture partners.”
At Westfield London, Westfield is proceeding with an expansion after receiving approval for more than 500,000 square feet (46,452 square meters) of additional space and 1,500 apartments, it said last month.
While the sale to Starwood, the investment firm led by Barry Sternlicht, will dilute annualized funds from operations by 4.5 cents a share, this will be mitigated when it reinvests the funds and by its share buyback program, it said.
The sale won’t affect forecast funds from operations of 66.5 cents a share for the year ending Dec. 31, Westfield said. The deal is expected to close by the end of 2013, it said.
“For this to be the source of capital as they expand into mega-centers is a whole lot more refreshing than coming to investors asking for more money,” said Stuart Cartledge, managing director of Melbourne-based Phoenix Portfolios. “It would be interesting to see for how long they have to maintain their 10 percent stake, because clearly they’re not a long-term holder of passive stakes in assets they don’t even manage.”