The release of the two entities within the restructured Westfield group this week has vindicated the controversial separation that occurred last year, when a combination of intense lobbying and intimidation only barely got the transaction across the line.
As Frank Lowy said today, since the restructuring, which saw Westfield Group’s Australasian assets merged with those of the Westfield Retail Trust to form Scentre Group and left Westfield Corporation as a pure offshore property play, about $12 billion of market value has been created.
That’s a combined value uplift of more than 40 per cent, and while the A-REIT sector as a whole has been buoyed by the low interest rate environment, it's about twice the increase in the value of the sector as a whole.
While much of that rise in value might have flowed disproportionately to Westfield Corp, whose value has increased nearly $7bn or about 48 per cent since the reconstruction, the international entity was always a higher-risk, higher-reward proposition that was leveraged to the improvement in the US economy in particular.
It says something about the Lowy family’s optimism about the outlook for that business, which underpinned Frank Lowy’s determination to get the restructuring across the line, that Peter Lowy has reversed his previously-announced decision to surrender his co-chief executive responsibilities and remain co-CEO with his brother Steven.
Westfield Corp has $11.4bn of development projects in its pipeline, most of which are within what it described as its 'flagship' portfolio. At the moment the flagship assets represent about two-thirds of the overall portfolio. By the time the current development projects are completed that percentage will be closer to 80 per cent.
In the December half, the overall portfolio generates net operating income growth of 5.3 per cent; the flagship assets growth of 6.2 per cent.
There was significantly higher income growth in the UK than the US but, with the US economy continuing to show some positive momentum, it isn’t surprising that Westfield was able to meet its forecasts at the time of the restructuring and forecast 4 per cent growth in funds from operations for the full year.
With development yields of 7 to 8 per cent it is easy to see why the Lowys are excited about the outlook for the entity on which their attention and wealth is now most focused.
In announcing Peter Lowy’s decision to remain co-CEO, the board said it had asked him to reconsider the decision in the light of Westfield Corp’s exciting prospects, extensive and geographically diverse development pipeline, drive for innovation and ongoing capital management initiatives.
Over time the logic of last year’s restructuring of the Lowy empire ought to become even clearer.
Scentre Group contains a portfolio of high-quality, relatively mature and relatively low-risk retail centres which can sustain relatively high levels of debt while producing solid and predictable income flows to its securityholders.
The internalisation of its management through the restructuring has removed the potential for conflict and diverted income and its distancing from the more complex offshore assets ought to enable a far greater focus by its board and management.
Westfield Corp has more growth in prospect but, with its strong development focus and its big footprints in the US and UK, has a higher risk profile.
At present both have gearing of around 35 per cent (Scentre’s has been edging down) but over time Westfield Corp ought to be able to move to a capital structure appropriate to its risk profile.
At the time of the split there was considerable speculation about the prospect of Westfield Corp moving its headquarters and listing offshore to reflect the nature of the underlying asset base.
It said today that it continues to investigate the appropriate location for its longer term listing. It’s probably only a matter of time before both the primary listing and its head office are moved, probably to the US.