Westfield buys half-stake in Brazilian shopping centre owner for $440 million

Westfield Group will spend $440 million to acquire a half-share of a Brazilian shopping mall owner, marking a long-awaited move into a new geographic retail market.

Westfield, which currently owns or has interests in 119 centres in the US, UK, Australia and New Zealand, will buy 50% of Almeida Junior Shopping Centers SA, giving it an interest in five malls in southern Brazil and two currently under development.

Almeida Junior is one of the eight largest Brazilian companies operating in the shopping centre sector.

"Today's announcement represents an exciting and significant strategic investment for the group, which expands our global franchise into this large and high-potential market,” Westfield chairman Frank Lowy said in a statement.

"This is our first new market entry since we entered the United Kingdom in 2000 and follows the restructure of the group in late 2010.

“Whilst the climate in the world financial markets is volatile at present, this transaction is in the group's long term investment and funding plan, and one we have been investigating for an extensive period of time."

The Brazilian company, led by its founder and CEO Jaimes Almeida Junior, has been operating shopping centres in Brazil since 1993.

Westfield Group co-CEO Steven Lowy says the underlying characteristics of the Brazilian market combined with a strong and diversified local retailer base and growing consumer spending make Brazil a strategic long-term growth opportunity for the group.

Brazil is the seventh-largest economy in the world, with a GDP of approximately US$2.1 trillion and a population of approximately 190 million people. Brazil’s economy has grown substantially over recent years, as has its middle-class population. More than 110 million people in Brazil are now considered to be middle class or above.

Retail sales have grown strongly since 2000, with shopping centres in Brazil representing only 18% of the country's total retail sales, compared with 52% in the United States and 41% in Australia. In addition, shopping centre space per capita of population is relatively low in Brazil, at 0.05 square metres per person, compared with 1.37 square metres  in the US, 0.54 square metres in Australia and 0.21 square metres in the United Kingdom. The ownership of shopping centres is also highly fragmented.

The underlying characteristics of the shopping centre industry in Brazil are similar to the other markets in which WDC operates. There is an established industry of anchor-based centres, with the majority of income sourced from a wide offer of local and international specialty stores on mainly five-year lease terms and rents, similar to Australia, indexed annually to inflation. The average size of a specialty store in the company's portfolio is smaller than in WDC's existing markets at approximately 70 square metres.

Under the terms of the transaction, Westfield will invest a total of R$740 million (A$440 million) in acquiring a 50% interest in the company, valuing the company at R$1,480 million (A$880 million). The valuation for the company represents an 11.2 times EBITDA multiple on first-year forecast earnings.

WDC's investment includes a direct capital injection into the company of R$400 million (A$240 million), which will give the company a net debt of zero and provide it with the capacity to grow over time.

The company owns and manages three existing shopping centres throughout the state of Santa Catarina, a high-income demographic region of Brazil with a population of 6 million people. It will also continue the development of two new shopping centres in Blumenau and Florianopolis (the capital of Santa Catarina), with completion expected by year end 2011 and 2012, respectively. The company will have a 55% market share of the shopping centre space in the state.

The total portfolio comprises approximately 157,000 square metres of retail space, with almost 900 stores. The sales productivity for the centres is high with occupancy cost ratios for the established centres at the lower end of the industry's peers.

The company is based in Sao Paulo and employs approximately 1,000 people.

WDC will be directly involved in the management and growth of the company.

As a result of the transaction, the group's assets under management will increase by almost A$1 billion. The group expects to achieve an unlevered internal rate of return in excess of 15% on its invested capital.

The transaction is expected to be earnings positive and is forecast to contribute 0.3¢ to Funds from Operations in 2012. The accretion is expected to increase further in future years as a result of both the income growth from Westfield Almeida Junior's existing portfolio as well as the anticipated growth in the overall size of the business.