Punters got it wrong on one notable count in reacting to profit announcements yesterday.
They sold off the securities of leading property group, Westfield, after apparently not understanding the difference between headline and operational profits.
Cannier investors moved in after the initial sell down and pushed Westfield securities back into positive territory.
Westfield saw its securities sold off by more than 3.5% in early trade after reporting its 2007 results. The securities finished up 38c at $18.05 after rising as high as $18.23 in a solid day of trading on the ASX generally.
Those early sellers were no doubt influenced by the headline result: which had Westfield reporting a 38% fall in earnings because of a slowing in the rate of growth in property revaluations, especially in the US and Britain.
The company said profit fell to $3.4 billion in 2007, from $5.6 billion a year earlier. The company said the value of its properties increased by $1.7 billion, 59% less than last year.
But that was confusing revaluations, which property companies now have to take into earnings because of international accounting rules, and earnings from operations.
The revaluations (up or down) are paper entries and concern the value of the assets: operational earnings come from running the businesses and on that basis Westfield looks in solid shape, even accounting for worries about the health of retailing in the sluggish US and British economies.
Operating profit rose an 11.6% rise in 2007, thanks to the performance of its core business, its Australian malls and Westfield sees similar returns this year from its interests in 118 shopping centres in Australia, New Zealand, the US and Britain, adjusted for currency moves.
Operating income rose was $1.79 billion in calendar 2007 from $1.651 billion on a constant currency basis a year earlier.
Analysts were expecting an operating profit of $1.882 billion, so the result disappointed.
The company has been buffeted in the past eight months by fears about the impact of the rising Australian dollar (which climbed back over 94 US cents overnight, for the first time since late 2007) and concerns the US and British economies were slowing, as were retail sales in both economies.
Retail sales in the US contribute around 47% of Westfield’s annual revenues but it said yesterday it hadn’t seen any signs that vacancies will increase at its American malls.
Joint Managing Director Steven Lowy said on a conference call that "We haven’t had a greater level of store closings or abandonment or bankruptcies than last year, and last year was actually a pretty good year from that perspective.
Mr Lowy said that long leases in markets such as Britain had low churn rates while top-end centres in the US offered significant resilience to negative economic cycles.
”Recent downturns in the US and UK have not changed our returns from our pipeline and are still delivering strong yields, for example our Derby centre in the UK is achieving a yield of 8.5%,” he said.
”What will happen in the US for us is that the performance in our locations on the West Coast are performing better than elsewhere in the country and that trend has been occurring over a number of years.”
Westfield said that average retail sales over its Australian centres rose 5.9%, led by department and specialty stores. Compared to the performance of the likes of Woolies, David Jones, JB Hi Fi and Harvey Norman, that’s a bit slower than the industry average.
"In New Zealand total retail sales increased 7.9% (comparable 3.5%) and in the United States portfolio, sales for the year increased 3.1% with comparable sales up 1.2%. In the United Kingdom, the retail sales statistics show growth for the year of 4.3% with comparable sales up 2.2%.
“Whilst it is apparent that retail sales growth in Australia is stronger than our other markets, a trend that has been consistent across the portfolio during the year is the strong sales results from those centres that have recently benefited from expansion and redevelopment”, Steven Lowy said in yesterday’s statement.
Westfield confirmed plans to move redevelop around Sydney’s Pitt Street Mall starting in September, when it $600 million-plus redevelopment is due to start.
Under the plan, Westfield will demolish Centrepoint, excluding the tower, and join it up with the Imperial Arcade and Skygarden.
It’s part of the company’s still ambitious $16 billion of projects planned or under construction around the world. The largest is its $3.5 billion share in the development of White City, London’s biggest shopping mall.
Westfield said that 2007 the Group completed $1.9 billion of major development projects (WDC investment – $1.3 billion) with a weighted average development yield of approximately 9.3%. These included the opening of 5 major projects across 4 countries in a 4 week period, with one of these being the Group’s first development in the United Kingdom at Derby.
"Currently there are 12 major projects under construction at a forecast investment of $5.9 billion (WDC share – $4.0 billion). This includes $1.5 billion of developments commenced during the year.
"In addition, the Group is planning to commence in excess of $10 billion of new development projects over the coming years. These include landmark projects at Stratford in London, World Trade Center in New York and Sydney CBD. The future projects are expected to generate long term ungeared internal rates of return on invested capital in the range of 12% – 15%, providing substantial value creation for security holders."
It raised around $7.7 billion last year through a share and bond sale and will use it to finance its ambitious expansion. It said it currently has $7.7 billion in liquid reserves available to it.
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