The Westfield Corp Ltd (ASX: WFD) share price traded flat this morning, following the release of the company's annual financial report. Revenues and profits fell modestly due to the divestment of assets during the year. Here's what you need to know (all figures in U.S. Dollars):
- Revenue fell 7% to $1,798 million
- Net profit after tax fell 41% to $1,366 million (due to large one-off event in prior year)
- Funds From Operations (FFO) fell 11% to $700 million
- Earnings (based on FFO) of 33.7 cents per security
- Dividends of 25.1 cents per security
- Net tangible assets (NTA) of $4.60 per share (approx $5.97 in AUD)
- Outlook for between 33.8 cents per security and 34 cents per security for the full year 2017, assuming no capital transactions and no change in foreign exchange rates
So What?
Westfield's results today were a little confusing, what with all the 'AIFRS profit', 'AIFRS profit excluding significant items', 'FFO', and 'adjusted FFO' metrics. For keeping track of the business' ongoing performance, I believe FFO is the most appropriate measure, as it strips out changes in property valuations and includes the impact of centres being closed for redevelopment, etc.
Both FFO and revenue fell due to $1.7 billion of divestments in 2015, which meant that the company did not earn money from those assets in 2016. On an adjusted basis, which is just for illustration – as it assumes currency rates remained constant and that divested assets were not divested – FFO would actually have risen 3.8%.
Much like Scentre Group Ltd (ASX: SCG) which reported on Tuesday, Westfield is focused on investing in things like data analytics and digital engagement, in order to both improve the customer experience and create value for tenants. This will underpin the company's case for charging higher rents from tenants over time. On the topic of creating value for tenants, specialty sales grew 3.5% in the group's flagship portfolio, while regional sales rose just 0.5%.
Westfield's business is divided into two segments, its 'Flagship' malls, and its 'Regional' malls. The company is gradually divesting its regional business in order to focus entirely on the flagship centres – currently the portfolio is split 82% flagship and 18% regional. Flagship centres are thought to offer the greater opportunity, and we have seen this backed up by better performance in recent years.
Now What?
Westfield has a strong pipeline of development opportunities, a solid balance sheet, diversified assets in several countries, and experienced management. It's a good business, an easy way to add foreign currency exposure to a portfolio, and should be able to grow its income at above-inflation rates for the foreseeable future.
The downside is that it won't grow fast. Investors are looking at mid-single digit growth rates on average (with some upside from development activity), which means that both price and patience are important. I would prefer to buy Westfield at a lower price, to give myself a greater chance of making a good investment.
