Westfield Group Earnings Up on Management, Project Income

Westfield Group, which plans a restructure to focus on more lucrative offshore markets, reported a 2.3 percent gain in earnings in 2013, driven by growth in its property management and development businesses.

Funds from operations climbed to 66.5 Australian cents a share, the Sydney-based company said in a statement to the Australian stock exchange, compared with an average estimate of 67.1 cents from six analysts surveyed by Bloomberg. Its managed Westfield Retail Trust said FFO increased 2.5 percent to 19.85 cents a share, in line with the average expectation of 19.8 cents from four analysts’ estimates compiled by Bloomberg.

Australia’s biggest shopping center operator in December proposed creating a company, Scentre Group, to own and manage its Australian and New Zealand properties, which are currently jointly held with Westfield Retail Trust. The plan would enable the new Westfield Corp. to focus on expanding overseas, including in the U.S. and U.K. where comparable net operating income climbed 4.7 percent and 4.3 percent respectively in 2013, against a 2 percent increase in Australia.

Restructure Proposal

“Our focus is on creating and owning world leading retail destinations,” co-Chief Executive Officers Peter and Steven Lowy said in today’s statement. “We believe that the restructure positions the new entities for better growth and thereby provides security-holders of both Westfield Group and Westfield Retail Trust with better long-term returns.”

Westfield Group shares slipped 2.7 percent to A$10.39 at the close of trading in Sydney, narrowing gains this year to 3 percent. Westfield Retail Trust ended the day unchanged at A$3.15, climbing 6.1 percent this year. The benchmark S&P/ASX 200 index gained 0.1 percent today.

Under the restructure, Westfield Retail Trust shareholders would receive A$285 and 918 shares in the new Scentre Group for every 1,000 of their shares. The cash component equates to an A$850 million ($770 million) capital return, according to a December statement. Westfield Group shareholders would get 1,000 shares in Westfield Corp. and 1,246 shares in Scentre Group for every 1,000 securities held.

Management Rights

The proposal means Westfield Retail Trust shareholders will pay about A$1.9 billion for Scentre to take over the management rights of Westfield’s Australian and New Zealand malls, said Stuart Cartledge, managing director of Melbourne-based Phoenix Portfolios, which owns about A$50 million of Westfield Retail shares. That is a result of a drop in Scentre’s net tangible assets to A$2.81 from Westfield Retail’s A$3.52 as of Dec. 31, he said.

Westfield Group has no plans to change the proposal in response to “speculation and discussion” in markets and local media that the value placed on the management rights of Scentre is too high, Peter Lowy said in a telephone interview today.

The decline in Scentre’s net tangible assets is due to management income from shopping centers held jointly with both Westfield Retail and other partners; net operating income from the company’s own stakes in those malls; and income from development projects, none of which are recognized on the balance sheet and therefore not included in NTA. This makes the company worth more than its tangible assets, Lowy said, declining to comment on the value Cartledge and local media have placed on the management rights.

Intangible Assets

Cartledge argued the value ascribed to the intangible assets is too high.

“My starting point would be half that value,” Cartledge said by telephone. “I can understand why Westfield Group’s directors have agreed to this, because it’s a transaction that’s very favorable to them. But for Westfield Retail Trust, it’s a different story.”

Westfield will release an explanatory memorandum in April on its proposed restructure and hold a meeting in late May for shareholders to consider the plan, it said.

Westfield Group’s management income jumped 9 percent and project income rose 5 percent, the company said today. It reported net income of A$1.6 billion in 2013, compared with A$1.76 billion a year ago. Westfield Retail’s profit was A$777.1 million from A$830.8 million the previous year.

The group forecast 2014 net operating income growth of between 2 percent and 2.5 percent for Australia, as much as 5 percent in the U.S. and a maximum of 11 percent for the U.K.

Under the existing structure, the group’s funds from operations will rise 3.2 percent to 68.6 Australian cents this year and dividend will climb 3 percent to 52.5 cents, it said.

Scentre would see FFO of 21.5 cents a share in 2014, the company said. Westfield Corp. would have FFO of 39.8 U.S. cents this year, it said.

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