Westfield (ASX WFD) is the largest listed REIT on the ASX. Its brand has become synonymous with medium and high end retailing destination. In 2015 it split itself between the Australian shopping center portfolio called Scentre (ASX SCG) and its international portfolio kept its main brand.
Similar to any company with predictable dividend yield. WFD share price has had a great run in the last 18 month driven by market expectation that the generational low in interest rates will continue for the foreseeable future.
Westfield shares listed on the ASX are priced in Australian dollars but its earnings are mostly in US dollars. The appreciation of the US dollar vs Australian dollar has helped Westfield as its earnings in local currency terms.
The weaker Australian dollar has also boosted the value of its portfolio in AUD. We feel the cycle is turning and thus are cautious on companies with heavy reliance on overseas earnings.
Currently we see a number of headwinds for the Westfields share price going forward:
1. Low interest rates will not last forever
The low interest environment represented by the US bond yield curve has pushed up long duration income asset values across the board. We invest in companies through the cycle. There is no doubt Westfield is a well run business with some great assets like the World Trade Center but we don’t have to buy it at any price.
Westfield share price today is priced to perfection where interest rates are expected to remain low for the foreseeable future. Any change in market expectation on interest rates will have asymmetric outsizes impact on WFD. We consider a strong risk and reward case of taking the short side of this position.
Any further deterioration in long rates will not help the value of the company but any reversion to long term interest rates means the rug will be pulled from the stock price. Valuation using a normalized discount rate means that there is a long way to drop from where it is today.
2. Development pipeline uncertainty
A major investment thesis for the stock is the development pipeline. In order to redevelop malls, they have to be take offline which means there will be a temporary earnings hole. In addition, the older malls are yielding higher than newer centers. This means that the business will face earning headwind from lower immediate earnings on developments and lower yield post development.
Whilst it is long term earning positive it has to take a short term hit with almost every development which will weight on the earnings in the near term.
Its major UK redevelopment with residential projects will also be less attractive following the fall in the pound and uncertainty regarding Brexit.
3. Primary listing uncertainty
Similar to News Corp, Westfield has always been rumored to want to shift is primary listing to the US. We see this as mixed blessing. US Retail REITs (MAC) sector especially with a exposure to premium retailers trades at a even higher multiple than Westfield.
The flipside is that WFD make up 10% of the REIT index. If it does shift its primary listing to the US, those stock holders without foreign mandate will be forced to sell immediately. We like events where there are forced sellers for uneconomic reasons and this could present a buying opportunity.
Exhibit above shows the dividend payments of WFD since the split between international and Australia business. Earnings of the new Westfield are reported in US dollars.