Why Westfield’s Business Is in Real Estate, Not Retail

Most investors are familiar with Westfield Corporation [ASX:WFD]. They own those ‘big buildings’ you go to on the weekend. You buy designer clothes, shoes and maybe even take in a movie while you’re there. But not people realise what business Westfield is actually in. Interestingly enough, Westfield is in the real estate, not retail, business.

A similar business model is McDonalds. If you ask Steve Easterbrook, CEO of McDonald’s, what business he’s in, you might be surprised by his answer. Like McDonald’s CEOs before him, Easterbrook would say his business is real estate.

Selling burgers and fries is just a side project. McDonald’s real income comes from charging their franchisees rent. For one, franchisees need to pay to use McDonald’s brand. But they also pay for running a business on land that McDonald’s owns. And this is exactly what Westfield does. They rent out their shopping centres in square footage.

It doesn’t matter to Westfield if stores are struggling. Westfield has a steady income stream in the form of rent.

The interesting part about this is that investors can actually invest in Westfield’s real estate businesses.

Saving up for a deposit can take years, if not decades. And tightening regulation that surrounds lending just makes the mortgage process that much harder. But getting into the real estate market doesn’t have to cost you thousands of dollars. Investors can get into real estate with only a few dollars with real estate investment trusts (REITs).

Westfield is one of many real estate companies that offer REITs; claiming their share of rental income costs you less than $11 —for Westfield Retail Trust [ASX:WRT], anyway.

But more on REITs later.

First, let’s look at Westfield’s latest quarterly results for 2016.

When looking at Westfield’s performance, things start to get confusing. But this confusion is only temporary once you understand that Westfield is selling square footage. It’s more commonly referred to as price per square footage (psf).

Westfield’s sales can be broken down into two categories. The first is specialty retail sales. These are centres that specialise on specific stores. Examples include Toy World, Foot Locker or The Body Shop.

The second category of sales is Flagship sales. These centres are recognisable and generally in prestigious locations. These locations are most likely surrounded by other global brands and retailers, in high income trade areas.

Understanding more about Westfield’s financial metrics will make it easier to understand their following results.

Jewellery, Fashion and Retail

The Group posted a solid operating performance for the first quarter of 2016. Westfield’s annual specialty retail sales were flat for the quarter, totalling $725 psf. But, on a 12 month basis, specialty sales growth increased 4.4%.

The clear winners within Westfield’s specialty retail were jewellery stores. Sales growth from jewellery was up 2.6% for the quarter and 6.4% over 12 months.

Flagship sales of $905 psf were up 1.8% for the quarter and represented a 6.3% increase over 12 months. Food retail, general retail and fashion were the major growth contributors over the quarter.

An occupancy level of 94.5% represents a 0.2% increase for the portfolio since last year. However, flagship occupancy slightly dropped 0.7%, to 95.3%.

Westfield also highlighted the significant progress made on their $10.5 billion future development program. Westfield’s $1.4 billion World Trade Centre is expected to be fully leased and opened by August this year.

Add to their list of projects, Westfield expects to commence over $1 billion worth of expansionary projects. The most costly includes their expansion at Valley Fair in Silicon Valley. Westfield now has $29 billion assets under management with 70% in the US.

The chairman of Westfield, Frank Lowy, said in his Annual General Meeting speech this morning, ‘It is difficult to imagine how the new Westfield Corporation could have gotten off to a better start.

Lowy went on to highlight the Groups’ development project stating:

Later this year we will open what will be one of the truly great shopping and entertainment destination in the world at the World Trade Centre in New York. We expect almost 100 million customer visits a year, taking our total customer visits each year to half a billion – a 25% increase.

But even though Westfield has achieved much so far, specialty and flagship sales figures weren’t outstanding. Shares opened down 1.22%, to $10.62 per share, this morning, but have since traded down further.

Westfield Share Price Finance

Source: Google Finance

The basics of REITs

As you now already know, REITs allow you to get into property without owning property. In Australia we have our own version of REITs, called A-REITs. The ‘A’ is just to specify that they’re Australian real estate investment trusts.

A-REITs are designed to generate wealth in two ways — the first being exposure. Buying an A-REIT exposes you to the value of real estate assets that the particular trust owns. For example, if we bought Westfield Retail Trust we would be exposed to all the real estate in Westfield’s portfolio.

It means that, if Westfield’s assets (property) increase, you can claim your share of the increase. The easiest way to think about it is as if they were shares. If the company’s assets increase, then generally, shares will also increase. Therefore, when Westfield’s properties increase in value then so does your share of Westfield’s trust.

The second way A-REITs generates wealth is through rental incomes. And this is exactly what Westfield’s quarterly report referenced this morning. But, to keep things simple, think of Westfield’s rental income as dividends.

A-REITs are a way that some investors use their knowledge of the property market to investing in the share market.

Härje Ronngard,

Junior Analyst, Money Morning 

PS: A-REITs can work both ways. They can be a way to invest in stocks. But they’re also a way to get into real estate. According to Money Morning’s Publisher, Kris Sayce, REITs could be a great investment for the future. In Kris’ report, ‘The Three Best Investments in Australia for 2015 and Beyond’, he’ll reveal why now might be the time to invest in one of Australia’s ‘most hated industries’. To get your free copy of Kris’s report, click here.

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

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