Westfield Retail Trust disappoints investors with unchanged terms – but is it a buy?

The financials were largely in line with expectations but investors were hoping for something else.

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Shares in Westfield Retail Trust (ASX: WRT) finished flat on Wednesday following the release of its results for the year ended 31 December 2013, after having fallen as much as 2.2% in early trading. While the results were largely in line with what the market had forecast, investors were left disappointed as the terms to the controversial merger proposal with Westfield Group (ASX: WDC) remained unchanged.

The Results

In what the company’s Managing Director Domenic Panaccio described as a solid performance, net profit after tax (NPAT) fell by 6.5% to $777.1 million compared to last year’s $830.8 million, while revenue from ordinary activities climbed 2.1% to $1.1 billion.

Funds From Operations (FFO), which is a key metric used in the real estate sector, edged 0.9% higher to $596.8 million for the year, which represented 19.85c per stapled security, while the full-year distribution also rose to 19.85c per security.

As was the case with the Group (which also reported yesterday), the Trust recognised strong sales growth in the December quarter and in January, reflecting a clear improvement in consumer confidence. Meanwhile, vacancy rates remain low with the company reporting occupancy rates greater than 99.5% at the year’s end.

Other Highlights

  • Specialty retail sales in Australia were $9,864 per square metre (just below Westfield Group’s which is $9,901 per square metre)
  • 2,395 lease deals were completed, covering 289,071 sqm of retail space
  • Comparable retail sales growth of 1.7% in Australia and 0.7% in New Zealand
  • $309 million invested in current redevelopments
  • Diluted earnings per share (EPS) of 25.85c, down 5% compared to 27.21c in 2012

The Proposal

On December 4, the company announced a proposal to merge its business with Westfield Group’s Australian and New Zealand assets to form a new vehicle to be known as Scentre Group. While there is logic behind the deal, WRT investors argue that the deal is too heavily weighted in Westfield Group’s favour.

They had been hoping that the deal would be sweetened in the full-year results ahead of the Explanatory Memorandum (to be released in April) and the vote that will take place in May. Instead, they remain in the dark after the Group’s joint managing director Peter Lowy made it clear that the merger will go ahead based on the original terms.

Westfield Retail Trust’s managing director Domenic Panaccio said that he is confident that the merger proposal will receive the support needed from the entity’s major shareholders. After finishing flat at the end of trading on Wednesday, the stock has dropped 0.5% today while the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has fallen 18 points.

Foolish takeaway

Shares in the Trust and the Group are currently trading at attractive prices. Although I would be waiting for more clarity regarding the proposal before considering hitting the “buy” button on either, investors should certainly clear a spot for them on their watchlists.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

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