Australia | Feb 04 2009
By Greg Peel
“If you can keep your head while all about you are losing theirs,” said Kipling, which might be a nice way to sum up the Westfield Group ((WDC)) since about late 2007. For it was in December of that year that Centro Properties ((CNP)) imploded, sending the whole Australian real estate investment trust (REIT) sector into a death spiral. Since that time the sector has faced covenant breaches, failed debt rollovers and forced asset sales in the simple name of survival.
But not so Westfield. For Westfield is all about quality assets within a longstanding and successful business model, and manageable gearing ratios. If Westfield had an antithesis back in 2007 it was Centro – a REIT, which analysts were suddenly forced to realise, that was built on borrowing large sums to invest in second-rate US shopping malls. When the entire Australian REIT sector collapsed, Westfield remained as a beacon of credibility and every property analyst in town held the company up as the exception which would prove the rule. Westfield was in great shape despite the crisis, they chorused, and would continue to outperform the sector. Its cashflows were reliable, its balance sheet healthy, and an investment in the property icon was clearly a “defensive” one.
So why yesterday’s capital raising?
The proceeds of the $2.9bn placed with investors, noted management, will “further strengthen Westfield’s balance sheet through the retirement of debt and will position the group for potential acquisitions”. While the company may be in good shape it has not been immune from falling property values and rising cap rates, falling tenancies and possible tenant bankruptcies. Its shares have fallen from over $20 in 2007 to $11 today. The situation in retail-land is grim, both in the US and Australia, so there are still tough times ahead.
But Westfield has $5.3bn of unused debt capacity, so the raising was not really a debt issue at all. It was, indeed, about providing a war chest of cash to be deployed when bargain acquisition opportunities arise. And those opportunities are about to come thick and fast. The fresh capital gives Westfield the “flexibility to cherry pick,” as BA-Merrill Lynch put it this morning.
According to Merrills, the expected tidal wave of asset sales from distressed US and UK REITs is about to hit. There will be some quality assets being offered at fire sale prices, and that’s exactly what a cashed-up Westfield is getting set to exploit. There will also be a rush among those REITs to raise fresh capital to pay down debt, so yesterday’s raising was a matter of swift timing on two fronts.
A raising from Westfield was exactly what the market was expecting, and thus its potential has been causing an “overhang” that has crimped the share price. If the market was expecting it, why has Westfield come back from its trading halt down 13%? one might ask. But that is about the value of the discount, so the market is not really trashing the stock. Brokers expect Westfield to be free to outperform again.
Merrills (Buy) views the raising as a positive. Macquarie has an Outperform rating on Westfield on a long term value basis despite the expected retail slowdown in the short term, but is nevertheless not quite so upbeat about the raising. “Unfortunately,” said the analysts this morning, “WDC continues to pay out distributions in excess of free cashflow which, combined with falling asset values and a depreciating A$, has led to a significant increase in WDC’s gearing”.
Westfield’s gearing was reduced to a modest 36% post the raising, but for how long? It is likely cap rates will continue to increase which means Westfield’s gearing ratio will also increase. Macquarie points out it doesn’t take much for gearing to return to pre-raising levels and any further weakness in the Aussie dollar will only hasten the process.
[A cap, or capitalisation, rate is the ratio of property income (rent) to property value. In the current environment, rising cap rates mean falling property values, and falling property values mean rising debt to asset value (or gearing) ratios.]
Indeed, this is exactly what the analysts at ABN Amro are worried about. In short, ABN suggests the $2.9bn was simply not enough. The intention is to fund upcoming acquisition opportunities, but the analysts fear Westfield will have little real firepower at all in a short space of time. The low magnitude of the raising, says ABN, should send a negative message to the market, not a positive one.
ABN is further concerned about the fact that Westfield’s founding shareholders did not participate in the placement. Instead, they simply sat back and let their shareholdings be diluted by 13%. Why are they not jumping in with other excited shareholders? This is not a good sign, says ABN.
And to that end, ABN this morning downgraded Westfield from Hold to Sell, becoming the first FNArena broker to put a Sell on the stock in twelve months. Said ABN:
“With uncertainty as to asset values lingering and expectations that further equity issues will be needed to pursue M&A, albeit at lower global property prices, we move to Sell from Hold.”
So be warned – this $2.9bn may not be the last of it.
The downgrade takes Westfield’s B/H/S ratio down to 5/3/1, and dilution sees the average target fall from $14.45 to $13.85 (ABN is the low marker at $9.77). Only Merrills, Macquarie and ABN reported on Westfield this morning, suggesting other brokers are still digesting the news and re-crunching the numbers.
