What motivated the Lowys to sell out of the Westfield Retail Trust?

In February, Westfield founders the Lowy family announced the sale of its entire 7.1% stake in the Westfield Retail Trust for $664 million.

The motivation was to diversify its investments internationally. The Lowy family retains its 8% interest in Westfield Retail Trust’s stable mate Westfield Group worth approximately $1.8 billion. 

The action highlights the potential performance differential of passive asset-owning A-REITs compared to those with a higher earnings growth prognosis. 

Westfield Retail Trust is a passive property-owning A-REIT.

Earnings growth is largely generated by rental increases from assets held in the portfolio.

While rent reviews on retail property held in A-REIT portfolios continue to generate rental increases of up to 3%, renewals and new leases have seen rental reductions of up to 7% with some increases in lease incentives acting as a further drag on earnings.

The difference in the change in rental between renewal of existing leases and new leases is the re-leasing spread. Westfield Retail Trust reported the weakest releasing spread in the retail A-REIT sub-sector at -2.6%. 

Westfield Retail Trust’s forecast earnings growth is 3.0% and its estimated dividend yield for the 2013 financial year is 6.3%.

This compares to the forecast earnings growth for Westfield Group at 4.9% with an estimated dividend yield of 4.5%. The yield differential reflects the difference in anticipated earnings growth. 

Westfield Group also owns property. However, its earnings growth is boosted by profit from property development; revenue generated by higher fees from increased funds under management and increased asset management fees.

Westfield Group reported an 18% increase in net profit over the 2012 year driven largely by profit earned from development of its own shopping centres.

Development profit and fee revenue are more volatile than rental income.