Just before Christmas the giant Westfield Group, the Australia based but increasingly internationally oriented shopping centre development company led by Frank Lowy, announced a radical corporate restructuring, as reported by Jewish Business News.
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Westfield Group has an affiliated domestic real estate investment trust, the Westfield Realty Trust, which was spun off a few years ago to hold some of their mature properties known more for their steady income producing qualities than for aggressive future development potential.
Westfield Retail TrustUnder the terms of the current proposed restructuring, would acquire all of Westfield Group’s existing Australian and New Zealand shopping centre properties and development sites and, as well its local Australian development management team to provide.
Once the transaction is completed total assets of the newly enlarged Westfield Trust will be over US$25 billion on day one, comprising interests in 47 shopping centres. The portfolio will also include 15 of the top 20 shopping centres in Australia, and have a future development pipeline of about US$1 billion initially.
This would then leave the Westfield Group itself as an aggressive “pure-play” international development company with a large portfolio of super regional, regional and metro central shopping centres in the United States and Europe. On day one it would have over US$17 billion of assets of its own. Then there is the future development pipeline of an estimated US$9 billion of additional new projects. These include a number of massive projects now under way, including the retail component of the new World Trade Center in New York, which is now coming to fruition.
While the Boards of Directors of both entities have approved the proposed reorganization unanimously, shareholder approval is still required, again by both entities, and Westfield hopes to complete the complex transaction by the middle of this year, 2014.
However it looks as though these plans may be affected now by some significant shareholder opposition. The newspaper the Australian reported the other day that a number of major institutional shareholders are unhappy with the deal.
A particularly fertile source of potential disagreement when you have a cross merger of this kind amongst affiliates, with different groups of outside shareholders, has to do with valuations and potential conflicts of interest. The Westfield Group’s domestic Australian and New Zealand assets which are intended to be transferred into the Westfield Retail Trust will have been appraised by independent property appraisers for the purpose of the transaction. This is typically done based on their cash flow performance, land values and future development potential. However such valuations inevitably have a subjective element to them that can legitimately be queried.
It seems Unisuper, the Australian University retirement fund, has done just that. Unisuper holds about a 7.25 % stake in the current Westfield Retail Trust and they, and a number of other institutional investors have expressed concern that the implied P/E ratio the Trust will pay for the assets it will acquire is around 20 times, which for them is too high. Looking at it another way, in the language of real estate the appraisals may imply a “cap rate” of about 5% (depending on taxable status).
The essence of such a difference of view could simply relate to the nature of the assets. Top ranking mature properties in good markets might command a cap rate of, say, 6-7%, so the difference must then come from the development potential of the acquired properties if the valuations are to be accurate. And there will indeed be a development management team put into the Trust, as well, specifically to help achieve such gains.
However that then itself could give institutional investors another potential kind of issue, as when they bought into the Trust it was billed specifically as a vehicle for safe and steady returns, not one engaged in significant future development.
Once the impending merger closes, the mandate will clearly be different in the future, even if only slightly and even if desirable.
UniSuper’s head of property and private markets, Kent Robbins, told the Australian: “The strategy is good in terms of unifying the ownership of the domestic operating and management platform.” But for him the concern is clearly that the cost of the plan for the Trust’s own shareholders, and other corporate governance concerns, meant the deal “simply is just a bridge too far”.
That doesn’t sound like someone who is very upset though, and it may be Westfield Group may adjust the terms of the reorganization slightly to bring everyone on board. This would not be unusual in such complicated transactions after all. Or, Frank Lowy may say it is his way or the highway and seek to just push it through exactly the way it is.