Let’s say you are a successful retail landlord. You’ve honed your skills over 50 years, learning the lessons that accrue from numerous business cycles, economic setbacks and prophets of doom.
The business you built has withstood oil shocks, bouts of high unemployment, high inflation and even higher interest rates.
What doesn’t kill you makes you stronger
Wars, recessions and numerous governments have come and gone over that time, and while you may have taken some glancing blows, each challenge overcome has strengthened your business.
You’ve seen off the threat from numerous competitors, many using excessive leverage that – in the good times – delivered results that had many wondering if you’d missed a trick. Of course, those chickens came home to roost, and while you’ve taken some damage, the business is far stronger than almost all comers.
The business in question is Frank Lowy’s Westfield Group (ASX: WDC). Over its 50+ year history, Westfield has grown from one small centre to be the largest retail landlord in the world.
Bloodied, but unbowed
Westfield didn’t escape its share of pain when the real estate sector of the market was decimated in the wake of the GFC. While many of its brethren went to the wall, or were forced into dilutive capital raisings, Westfield as a business was largely unscathed.
True, learning the lessons of the GFC, the company has subsequently cut back its distributions to shareholders, and the share price has paid the price for a lower growth future, but the underlying business remains largely intact.
Another key change in the business has been the scaling back of the formal involvement of Westfield Chairman Frank Lowy. Assuming a non-executive role for the first time in the company’s history, Lowy has passed day-to-day management of the business to two of his sons, co-CEOs Steven and Peter Lowy.
Keeping their eyes on the horizon
Those challenges and changes notwithstanding, the Lowys are veterans, and have seen downturns come and go, so it was no surprise to see them taking advantage of the depressed market to move into Europe and South America, just as they open their second London centre.
Westfield is clearly a business with a long-term horizon. It’s likely that the management expect retail weakness to continue for some time, but their recent moves provide a glimpse into their view of the future in two key areas.
Firstly, the development of their London properties, and the moves into both Italy and Canada highlight a company that knows times will improve, and just as importantly, that the time to buy assets is during periods of pessimism, when those assets are cheap.
Secondly, the surprise decision to open the company’s first shopping centre in Brazil underscores the changing centre of economic gravity, and the likely gains to be had in that rapidly developing market. A rising level of affluence among Brazilians makes it a natural fit for a company with designs on an increasing share of middle-class spending, and who will be landlord for many of the aspirational brands looking to make similar inroads.
Lessons for business people and investors…
As a business and investment parable, Westfield reminds us that growth doesn’t always occur in the same places it has in the past, and that the current century is destined to look nothing like the last one in terms of the changing balance of global economic power. The opportunistic purchase of retail assets while prices are depressed also provides a further reminder of the contrarian approach which argues that the time to buy is when everyone else is selling.
…and a buying opportunity
However, at current prices, Westfield is not just a parable – it’s a very attractive investment option as well. Westfield currently trades at a price/earnings multiple of just over 11, and sports a trailing dividend yield of 7.4%. As retail sales improve, vacancy rates will fall, and revenue – often a proportion of which is calculated from retail sales – will rise, taking profitability with it.
It’s also very likely that the current asset purchases are being made at favourable prices, which should further improve profitability as the developments come on stream.
It will almost certainly be a bumpy ride, but at current prices Westfield doesn’t need to do too much right from here to provide solid returns from top grade retail assets. Throw in the experience and management skill of the Lowys and their team in getting the most from their investment dollar, and Westfield is a business that may well be poised to outperform as retail spending returns to normal.
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Scott Phillips owns securities in Westfield Group and Westfield Retail Trust. The Motley Fool has a disclosure policy. This article has been authorised by Bruce Jackson.
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