A few months ago in a note titled “Frank-ly, you should give a damn”, I recommended to our Westfield Retail Trust (WRT) shareholders that they should vote “yes” in favour of the demerger. That vote scraped over the line.
I ended that note with “Through time, co-investing with the Lowy’s in various Westfield entities has made our clients a lot of money. It’s been a great ride and one I encourage you to continue.”
Fast forward to today and the “yes” vote recommendation has been vindicated, with the demerged entities, WFD and SCG, having a combined market cap of $35b, or +$4.5b in demerged value creation for the shareholders of the former Westfield Group and Westfield Retail Trust.
The simplification of the two businesses by geography was ALWAYS going to lead to a re-rating. It allows investors to choose their “weapon” in terms of lower growth dominant domestic assets (A$), or higher growth offshore assets ($USD, GBP). It also makes both companies easier to take over.
Today I want to focus on Westfield Corporation (WFD) as the macro and micro drivers of growth come together.
WFD has assets under management of $27.7b, with balance sheet assets of $19.2b and a gearing ratio of 35.1%, as at June 30.
In terms of trading conditions, co-CEO’s Peter and Steven Lowy said yesterday “the operating performance of WFD’s pre-eminent portfolio of 40 shopping centres in the United States and United Kingdom remains strong, and in line with expectations, with significant progress being made on the $11.6b pipeline of current and future developments. Our strategy is to continue the focus on creating and operating iconic assets in major markets that deliver great experiences for consumers and retailers. We aim to achieve this with an increased focus on digital technology and by bringing together the best of fashion, food, entertainment and leisure.”
The biggest attraction to me of WFD is they are in the right markets in the right first world countries. If you look where their “flagship” malls are, they are all in high income, high tax paying, high white-collar employment precincts. It is therefore no surprise that on this map of the United States, there is a massive gap in the middle.
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It’s a similar strategy in the UK, with all the assets in Greater London, while the one flagship European asset is in the Italian fashion capital of Milan.
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WFD centre management continues to run the assets hard. WFD’s portfolio achieved comparable net operating income growth of +5.3% for the six months ending June 30. WFD’s flagship portfolio of 11 centres, representing 66% of the total portfolio by value, achieved comparable net operating income growth of +5.5% for the six-month period. WFD’s regional portfolio of 23 centres, representing 30% of the total portfolio by value achieved comparable net operating income growth of 5.0%.
Specialty retail sales were +5.8% in the flagship portfolio and +2.1% in the regional portfolio. The flagship portfolio was 95.9% leased and the regional portfolio 93.1%.
It is therefore quite easy to see why WFD is focused on growing its flagship portfolio and reducing its exposure to regional malls. By the end of its $9b development pipeline (WFD share $4.5b), WFD’s expects flagship assets will be 80% of its portfolio and the assets split more evenly between the US and UK/Europe. That further increase in flagship weighting, with its associated higher returns, will lead to a P/E re-rating of WFD over the next few years. Below is the current portfolio statistics and you can see why the focus is “flagship”. The rent difference alone per sqf is the key metric.
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The balance sheet is strong, with $3.9b of available liquidity provided by committed bank facilities and cash. The average term of mortgages is 5.9 years and bank facilities 4.5 years.
The way to look at WFD, in my opinion, is a mixture of tier one mall owner/operator, developer and currency play. This is not a vanilla property trust: this is an ASX listed global growth stock with entirely offshore earnings. It arguably shouldn’t have its primary listing on the ASX (NYSE??).
Perhaps that “non-vanilla LPT” status is why the current analyst view on WFD is so tepid. The current BUY/HOLD/SELL ratio is 3/8/4 and median 12 month price target $7.52, below last night’s closing price of $7.61.
I think that consensus view will prove too conservative, particularly when I look out to CY15. In CY15, if I am right about a resurgent USD, WFD’s FFO could be 44c. I have a view the market would pay 20x for that offshore earnings stream, setting a 12-18 month price target of $8.80 for WFD.
WFD FFO growth over the next few years should strongly outpace Scentre Group FFO growth. In pretty simple macro terms, Australia has slowing GDP and rising unemployment, while the USA/UK has accelerating GDP growth and falling unemployment. Similarly, SCG’s domestic malls are 99% leased, while more tenants can be added to the WFD portfolio.
At the current respective share prices, SCG is trading on 15.3x consensus CY15 FFO, while WFD is trading on 17.8x consensus CY15 FFO forecasts. I believe those WFD CY15 FFO forecasts will prove too conservative, as I mention above, and on my 44c FFO forecast for WFD for CY15, the stock is trading on 17x. Either way on just a 2 P/E point premium to the lower growth SCG, I think it’s time for active investors to take profits in SCG and switch to WFD.
Switching from SCG to WFD also more aligns us with the Lowys themselves, who own 8% of WFD and 4% of SCG. 8% of WFD currently has a value of $1.25b, while 4% of SCG has a value of $739m.
Co-investing with proven people has been a core investment philosophy of mine, which has served us very well.
In this case, I am now rotating to the global growth vehicle, WFD, and rate WFD a high conviction buy.
This is another strategic portfolio manoeuvre to gain more US dollar exposure, lower pure yield compression exposure (via taking SCG profits), and add more structural growth (at a reasonable price).
Go Australia, Charlie
100% of Charlie Aitken’s fees for writing for the Switzer Super Report are donated to The Sydney Children’s Hospital Foundation.
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