The final shoe has dropped in the property trust sector with Westfield issuing an earnings downgrade and revealing a $3 billion cut in asset values for the current year.
The downgrade and cut in asset values has been awaited for some months by analysts who have noted the worsening retail conditions in its global operations and rising capitalisation rates in the sector..
The news was issued after the market closed yesterday and is likely to unnerve investors when trade resumes today.
It’s the first time in more than 20 years that the company has been forced to warn investors that current troubled times in its markets, will hit its bottom line.
Westfield securities closed at $12.10, and could test their 52 week low of $11.57 during trading today if investors take fright.
Westfield is in the top 10 companies on the local sharemarket and is the world’s biggest retail landlord. It dominates Australia and New Zealand, is a major player in the US and had started building a chain of super malls in the UK.
The company said it would pay its 106.5c per security for the year ending December 31, 2008 with a final distribution of 53.25 cents. But Westfield warned that earnings and distributions would be cut by up to 9% this year to between 97c and 100c per security.
It confirms the poor sentiment is in the US and British retail sectors; more than 60% of Westfield’s income is generated from those two countries and retailing in both countries has been hurt by the slump with major chains going bust or cutting back Retail sales and consumer spending is still falling in both countries, especially the US.
The slash in asset values by $3 billion to about $50 billion comes only a few months after the group opened its flagship $2.9 billion Westfield London shopping centre in west London. It has already opened a big centre in the north of the country and is working on a mall to be opened for the 2012 Olympics.
There’s been market rumours that a further development project, also in the north, has been postponed. But Westfield didn’t mention that in the statement last night.
The forecast includes the full year impact of the London development, which the group says has performed very well since opening on October 30.
Westfield is also in the preliminary stages of its $600 million redevelopment of Sydney’s Pitt Street Mall, which is its major Australian project at the moment.
Westfield said that while the write-downs would be included in the accounts under international financial reporting standards, they would a non-cash item.
Here’s what Westfield said in the statement:
"We are pleased to announce an estimated distribution for the Westfield Group for the six month period ended 31 December 2008 of 53.25 cents per ordinary stapled security.
"Taking into account the distribution of 53.25 cents which was paid in respect of the 6 month period to 30 June 2008, the estimated total distribution for the Westfield Group for the 12 months to 31 December 2008 is 106.5 cents per stapled security, in line with the forecast provided in February 2008.
"The Group reconfirms its distribution policy which is to pay up to 100% of Operational segment earnings and associated income hedging.
"For the 12 months to 31 December 2008 it is anticipated that the distribution will be comprised of Operational segment earnings per security of 100 cents and associated income hedging per security of 6.5 cents.
"It is expected that the Group’s IFRS result for 2008 will include a reduction of approximately $3 billion in the value of the Group’s shopping centre assets due principally to an upward movement in capitalisation rates.
"This is a non-cash item which will not affect the distribution.
"However the total value of the Group’s assets as at 31 December 2008 is anticipated to exceed the $50.4 billion reported as at 30 June 2008, primarily as a result of the effect of the strengthening US dollar on the value of the Group’s US assets. Gearing at 31 December 2008 is estimated to be approximately 40% with available liquidity of $5.5 billion.
"The Group is providing a forecast for 2009 ahead of the issuance of securities under the Westfield Group’s Distribution Reinvestment Plan ("DRP").
"For the 12 months to 31 December 2009, assuming no material changes in currency exchange rates or economic conditions, the Group expects to earn Operational segment earnings per security in the range of 97 cents to 100 cents.
"The Operational segment earnings forecast for 2009 reflects the impact of higher finance costs and the deterioration of retail fundamentals in the United States, United Kingdom and New Zealand and a continuation of the strong performance of the Group’s Australian portfolio.
"The forecast includes the full year impact of the recently completed Westfield London development which, since opening on October 30 last year, has performed very well in terms of customer visits and retail sales.
"Under the Group’s existing income hedging contracts, the contracted rates for 2009 are similar to the present currency exchange rates.
"If currency exchange rates continue to approximate the present rates throughout the 2009 year, there will be minimal income hedging available for distribution. Accordingly, the Group’s forecast distribution for 2009 is in the range of 97 cents to 100 cents per security."
