Bloomberg News

Westfield Retail Considers Redevelopments to Buoy Returns

March 23, 2012

Westfield Retail Trust (WRT), the listed vehicle spun off from Westfield Group (WDC), is planning as much as A$300 million ($312 million) of redevelopments a year and may sell some malls as it seeks to boost shareholder returns.

“There will be one or two projects we will push the green light on before the end of the year,” Managing Director Domenic Panaccio said in an interview in Sydney yesterday, declining to name potential projects. “There may be opportunities to recycle assets, which will include disposals, potentially this year.”

Westfield Retail, which was created in November 2010 to jointly own Westfield Group’s 54 Australian and New Zealand malls, reported net income of A$851.7 million in its first full year of operation. The trust is planning about A$1.3 billion of redevelopments of malls it owns over the next five to seven years, it said in February.

The company remains susceptible to weakness in the retail industry and could see rent reductions on new leases this year, analysts led by Lourens Pirenc at Morgan Stanley, wrote last month. Pirenc has an “underweight” rating on the stock.

Australian consumer confidence dropped 5 percent in March to the lowest level in three months, and the unemployment rate rose to 5.2 percent in February, as banks raised mortgage rates and a stronger currency hurt tourism and manufacturing.

Redevelopments

Westfield Retail is targeting an internal rate of return of between 12 percent and 15 percent on malls that it redevelops, Panaccio said. It is currently completing the development of Westfield Sydney mall in the city’s center, with the project expected to be finished next month, and Westfield Fountain Gate in Melbourne’s south-eastern suburbs, which will open in October.

While the Sydney-based company will also consider acquisitions, “today, the most logical return, the best risk- adjusted return you would get is reinvesting in the development pipeline,” Panaccio said.

The trust’s plans could send its gearing, a measure of its long-term debt compared to equity capital, into the “high 20’s” from 21 percent now in the next five years, Panaccio said in the interview.

The company’s malls “require substantial ongoing capital expenditure to maintain its strong appeal to the consumer, which will, over time, result in higher debt,” Craig Parker, an analyst at credit rating company Standard & Poor’s, which assigned it an A+ rating last April, wrote in a November report. “We expect the trust would seek to reduce leverage in a timely manner at a peak gearing level.”

Potential Sales

Westfield Retail may look to the U.S. bond market, where terms are longer than in Australia, to fund future projects and acquisitions, Panaccio said. It will also weigh up sales of some malls if returns on potential acquisitions or redevelopments are higher than on the existing properties, he said.

“We’ve got to be mindful that we don’t necessarily have to own every single asset we currently own,” Panaccio said. “The recycling of assets, where you can sell an asset and reinvest in something else that’s incrementally providing a bigger return, is a way you can increase value for security holders.”

The shares climbed 1.2 percent to A$2.57 at 4:10 p.m. close of trading in Sydney.

To contact the reporter on this story: Nichola Saminather in Sydney at nsaminather1@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net


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