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WRT - Westfield Retail Trust

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Is NTA the best way of valuing the merits of the bid? Because the dynamics of Scentre will be very different to a straight up REIT. I'm asking because I don't really know the answer to the question. I've only read what's in the paper.
 
McLovin said:
Is NTA the best way of valuing the merits of the bid? Because the dynamics of Scentre will be very different to a straight up REIT. I'm asking because I don't really know the answer to the question. I've only read what's in the paper.
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The Scentre group NTA will command a higher multiple than the current discount applied to WRT's NTA. It'd be a blended number between WRT's and WDC's current multiples, probably weighed in WRT's number.

The "capital return" is red herring as well. Not only is it applicable only to 92 shares out of 1000, it is funded by debt. The preso says EPS accretive to both businesses but I suspect a large part of that comes from this increase in debt.

Now I wish I didn't close my short...
 
When WRT was established (2010), there was also an associated equity raising. The rationale then was about reducing overall group debt in the wake of the GFC.

My bolds.
 

The Lowys sold out of WRT earlier this year. In hindsight it looks like it was a move aimed at completing this sort of a deal. WDC will get control of WRT's pristine balance sheet (and $10b of equity backed by A grade retail property) for a song. They can then juice up the new entity with more debt to fund development. Seems like the real winners are WDC.

I guess you need to work out what the value of that equity to WDC is, but I would think even conservatively it would be more than book, given the ability to lever it.
 
nulla nulla said:
I wish I had closed out my long at $3.11 - $3.12
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It's a short term buy for me at $2.95 imo.

drsmith said:
When WRT was established (2010), there was also an associated equity raising. The rationale then was about reducing overall group debt in the wake of the GFC.

My bolds.
Click to expand...

I guess one could argue that the debt market conditions during the GFC was very different.

But it reminded me how the NBA (basketball league in the USA) once moved the 3 point line further back to create better spacing and increase scoring. 3 seasons later, they moved to 3 point line closer to... you guessed it... to increase scoring.


It's all still slightly confusing with respect to Lowy's interest across the different vehicles. The WDC (New) won't really have any more control over Scentre Group from what I can tell... Nonetheless, given the board of both entities are still littered with Lowy's and co., calling it a family business is probably harsh but true.
 
skc said:
It's a short term buy for me at $2.95 imo.
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A few of them have hit buy levels today. Problem is trying to work out whether they are down due to a sell down of A-REIT's that may continue or is it portfolio managers selling off holdings to free up cash to take up WDC?
 
skc said:
It's all still slightly confusing...
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That's an understatement!

I guess my theory is that in an open auction WRT would fetch a higher price or bigger share of the merged entity. Don't ask me how much WRT should be getting though!

ETA: Here's a recent transaction they did at an implied cap rate of 5%.

If you apply that cap rate (probably not reasonable) to the entire portfolio of WRT you get a value of ~$16b a hefty control premium.

Hmm...I may have to have a better look at WDC. Money for nothing and your chicks for free.
 

This didn't look right, Should be:

1,000 x $3.47 = $3,470.00
918 x $2.81 = ($2,579.60)
Capital Return($ 285.00)
Shortfall $ 605.40 per 1,000 share held?

If Scentre trades at a discount to nta like WRT 14% of nta the share would trade in a range around $2.42

I can't see where this deal can be equal to a buy out of WRT at $3.47.
 

It's 82 shares at $3.47.

And 918 shares in Scentre.
 
McLovin said:
It's 82 shares at $3.47.

And 918 shares in Scentre.
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The 82 shares at $3.47 ($285.00) is supposed to represent the difference between 1,000 WRT shares and 918 Scentre shares.

I worked out the shortfall on the basis that the 1,000 WRT shares with a nta of $3.47ea ($3,470.00) is converting to 918 Scentre shares with a nta of $2.81 ($2,579.60) and the compensation for the change over is only $285.00 per 1,000 WRT shares held. There is a shortfall in the value on like for like of $605.40 per 1000 WRT shares held..
 

But you can't value what you're getting based on NTA. The merged entity will be an owner and manager of real estate. Using NTA you're excluding the value of Scentre's management revenue (or more correctly the savings to WRT in not having to pay managment fees) because it doesn't show up on the balance sheet.

I don't disagree that WRT are probably not getting what they should but I don't think you can quantify it in such black and white terms.
 

Maybe I look at shares differently to you? I pretty much assess all shares based on NTA. Net Tangible Assets is pretty much what any company is worth if the share holders decide to liquidate the company and realise the assets for distribution to the share holders.

It is normally also the starting point in respect of any takeovers. If a buyer isn't offering shareholders nta plus a premium, why would/should they sell? With management revenue staying in house, through self management, this means there will be a greater proportion of earnings or Funds from operations available for distribution. This should mean that the yield and return on equity improve. This should mean that the share price (WRT is currently trading at a discount to nta) should close the gap on nta and even move to a price incorporating a premium to nta.

Time will tell as to whether the market is prepared to factor in a premium to nta or a larger price as a multiple of earnings. However the initial market response has been fairly negative.
 
nulla nulla said:
Maybe I look at shares differently to you?
Click to expand...

Maybe you do.

nulla nulla said:
Net Tangible Assets is pretty much what any company is worth if the share holders decide to liquidate the company and realise the assets for distribution to the share holders.
Click to expand...

No, it's not. It's the value a bunch of management and financial accountants have ascribed to the company's tangible assets. Are you really telling me that if WOW shut up shop tomorrow it would only realise $2.59/share or TLS $0.35/share?

nulla nulla said:
It is normally also the starting point in respect of any takeovers. If a buyer isn't offering shareholders nta plus a premium, why would/should they sell?
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No it's not. The starting point in a takeover is the forecast future cash flows of the business. I have never, ever seen someone mention NTA as the basis for a takeover. Even in property, cap rates seem to be the standard metric (FWIW the NTA is a function of adjusting the cap rate). I worked in M&A for a few years, so I'm not talking out of my hat.

nulla nulla said:
If a buyer isn't offering shareholders nta plus a premium, why would/should they sell?
Click to expand...

Because the bean counters who came up with the number in the first place haven't gotten around to writing it down to it's realisable value. That happens all the time.

NTA probably worked a treat back in the 60's when the old hammer and anvil businesses were laden with heavy manufacturing equipment, these days, outside of some very particular stocks (property trusts and LIC's), it is a pretty irrelevant number, in my humble opinion. You'll end up pretty much ignoring all the earning power of a business because it trades above it's NTA.
 
There is no doubt this is a highly complex deal and your suspicions are correct - it is a dud deal for WRT shareholders. Let me take you through the high level analysis:

1. Ignore the capital return

The capital return is smoke and mirrors. It is using leverage to boost WRT's EPS (which drives the quoted 5% accretion). WRT could do this in its own right and is not a benefit of the transaction.

2. The rest of the deal is simply a WRT acquisition of WDC's Australian platform
So, WDC is basically selling:
a. the half share in all the australian assets it owns; and
b. the management rights to WRT including property / development and asset management

The question then becomes, what is WRT buying these for and is this a fair price?

The way the transaction is being effected is that in exchange for the assets WDC is selling, WRT is allowing WDC shareholders to own roughly half of Scentre Group going forward while WRT shareholders will own about half themselves. In determining the price, WDC management stated that they looked at the relevant amount of earnings that WRT and WDC brought to the table of Scentre Group and then valued them at the same multiples. In other words, if WRT contributed half of Scentre's earnings and WDC contributed half, then each group of shareholders would get roughly half of the vehicle each. This sounds fair, right? Wrong.

This ignores the fact that the earnings WDC is bringing to the table are very different in nature to the WRT earnings. WRT basically has a high quality rental stream of earnings from a half share in the Australian Westfield portfolio. WDC is bringing their share of the Australian assets along with the development / property / asset management business earnings. By valuing all the earnings at the same multiple, WDC are ignoring the fact that the management business earnings are very different in nature and more volatile than the rental streams from the properties. WRT's average cap rate is ~6.5% or thereabouts, equating to a 15.4x EV/EBIT multiple. Applying that sort of multiple to development / property management earnings is simply too high and inflates the value of the WDC management business and therefore gives the WDC shareholders an unfair share of Scentre going forward. In effect WRT is paying WDC a very high price for the management business.

This is highly reminiscent of the initial stapling of Westfield Holdings, Westfield America Trust and Westfield Trust to form WDC. That transaction was very complex to analyse but effectively ended up with the two trusts paying a significant premium / multiple for the earnings of the development / management business Westfield Holdings. It is hardly surprising the Lowy's have sold down their stake in WRT some time ago and retain a strong interest in the welfare of WDC going forward.
 
McLovin said:
...... I have never, ever seen someone mention NTA as the basis for a takeover. Even in property,....so I'm not talking out of my hat.... You'll end up pretty much ignoring all the earning power of a business because it trades above it's NTA.
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With respect, I am not trolling for an argument, however I only need to point to the offers of both Dexus and GPT for CPA, both of which are projected arround nta. We are not talking about facebook or google or twitter, we are talking about A-REIT's. The proposal in respect of WDC/WRT is also based around the WRT nta.
 
McLovin said:
Is NTA the best way of valuing the merits of the bid? Because the dynamics of Scentre will be very different to a straight up REIT. I'm asking because I don't really know the answer to the question. I've only read what's in the paper.
Click to expand...


I find it curious that you went from the position of asking "whether nta was the best way of valuing the merits of the bid" to stating "you can't value what you are getting based on NTA". From my personal perspective, nta is a good starting point, supported by return on equity (or FFO for the purists) and yield.

From what I have read today, holders of WRT are not getting the best of this proposal. I'm happy to be corrrected when someone points out how this proposal will greatly benefit holders of WRT and would be even happier when this great deal is reflected in a share price that rises to or above nta. I don't think it is unreasonable to expect the share price of WRT to match the nta or go higher, when you see so many other A-REIT's (in Retail) trading at nta or higher. As always, do your own research and good luck.
 

I'm not looking for an argument either but..

You were the one who said...

Net Tangible Assets is pretty much what any company is worth if the share holders decide to liquidate the company and realise the assets for distribution to the share holders.
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(my bolding)

So naturally, I assumed you were talking about any company.

NTA is how a bid might be pitched to retail investors but the actual number crunching would be around cap rates, not what the REIT's own accountants think the NTA should be. It would be like having an IP generating $10k/year in rent, you think it's worth $200k but I don't like the area and I think it's worth $100k. Now either I'm offering you 50% of NTA when I lob in an offer, or your NTA is unrealistic to begin with, I use a cap rate of 10% you use a cap rate of 5%. I'm sure you can work out what would happen to asset values if they were blindly accepted as being fact rather than opinion.

At least with a LIC that invests in equities you have a real market value not a theoretical value based on cash flow.


Right, like I said then I hadn't read the announcement. I don't pay much attention to REIT's and the deal was pretty complex, but my immediate reaction was...

Is NTA the best way of valuing the merits of the bid? Because the dynamics of Scentre will be very different to a straight up REIT.
Click to expand...

Again bolding mine.


From what I have read today, holders of WRT are not getting the best of this proposal.
Click to expand...

And I've been agreeing with you.

Anyway. Enough said. Goodnight.
 
For what it is worth, I have looked through the Westfield proposal to restructure WDC and WRT and tried to work out, at least for my own interests, how it will work out and how it may impact on holders of WRT shares. Basically the nitty gritty of it as I see it is:

WRT will do a capital return to Shareholders of $850 million dollars equal to 82 shares per 1000 held at the nta rate of $3.47. The number of shares on issue, 2,979,214,029, will effectively be reduced by approximately 244,956,772 shares to 2,734,257,257 shares.

WRT will be rebranded as Scentres Group. The Australian & New Zeaand holdings of WDC will be transferred into the rebranded WRT (here-in-after referred to as WRT II). By way of compensation for the transfer of assets, WDC share holders will receive 1,246 shares in WRT II for every 1000 WDC shares held.

WDC currently has 2,113,501,814 shares on issue (according to comsec/iress) which should mean that WDC share holders will receive 2,633,423,260 WRT II shares. WRT II should subsequently have approximately 5,367,680,517 issued shares.

The release provides the following table as a break up of the proposed share allocation:

Issued shares Percentage
WRT 2734 51.40%
WDC 2582 48.60%
WRT(II) 5311 100.00%

The release figures are probably more current than comsec/iress so I will run with them.

WRT II will inherit the management team of WRT (currently employed by WDC) and will be self managed going forward. This will save WRT II $55 million per annum currently paid each year to WDC as “management fees”.

WRT II will subsequently have total assets under management of $37.9 billion:
$18.5 billion of these assets will be 100% owned by WRT II;
a further $10 billion of the assets will be the WRT II portion of jointly owned assets with other investment partners;
and the final $9.4 billion of assets will be the portion of jointly owned assets owned by the investment partners. It would appear that WRT II will maintain a controlling interest in jointly owned assets to protect their right to manage the assets.

The release confirms that WRT will be kicking approximately $9.5 billion assets into WRT II (after the $850 million buy back). Equity in WRT II will increase to $14.9 billion, meaning WDC is kicking in a net of $5.4 billion to WRT II. The gearing of WRT II will increase to 38.2% from the present gearing of WRT of 22.5%. However, it should be remembered that WRT is doing a capital return which would increase the gearing of WRT to around 30%. Notwithstanding there is a lot of debt being transferred into WRT II. The release also shows that the nta of WRT II will drop to $2.81 in comparison with the nta of WRT at $3.47.

WRT WRT(p) WDC WRT II
Assets 13.7 13.7 14.8 28.5
Borrowings -2.9 -3.75 -7.1 -10.9
Liabilities -0.3 -0.3 -0.8 1.1
Minor Int 0.0 0.0 -1.6 1.6
Equity 10.4 9.5 5.4 14.9
Securities(b) 2,979 2,734 2,582 5,311
NTA 3.47 3.47 2.81
Gearing 21.5% 29.0% 38.2%
* WRT(p) is WRT post the $850mill capital return.

I spoke to a young lady at Westfield Investor relations. The advice was that this proposal should not be considered wholey on the basis of nta. However when I asked “why not?” the adviser did not have a prepared answer. We then discussed the intangibles of WRT II including: the $0.6 billion projects in progress; the $2 billion projects in the pipeline; the savings of $55 million per year through self management; and possibly the one with the most potential, the ability of WRT II to enter into joint ventures in respect of the $18.5 billion of 100% owned assets that they would retain management rights for while freeing up $8-$9 billion capital for further expansion.

The WRT distribution forecast for 2013 is 19.85cents per annum which appears to be 100% of FFO. The WRT distribution forecast for 2014 is 20.4 cents per share. If WRT II continues this pattern share holders can expect to receive 21.5cents per annum per share, an increase over the projected WRT distribution for 2014 of 5.2%

Hard call, what does the market think? Immediately after the release, WRT fell and WDC rose. The initial market reaction appeared to indicate that the deal favored WDC against WRT.



However the sell down of WRT over Thursday and Friday was actually less severe than the corresponding sell down of other A-REIT’s like CFX, Charter Hall and GPT. Then I noticed news articles wherein ratings agency Standard & Poor were putting Westfields on “Credit Watch negative” following a similar Credit watch warning from Moody’s. Moody’s Chairman actually indicated that divesting the Australian Assets would weaken the Westfield Corporation as the Aus/NZ centres appear to be the better assets. By implication this would suggest that WRT II will get the better part of the deal?

I suspect that McLovin and the Westfield Investor relations advisor are probably correct in that the proposal should not be evaluated on the basis of nta. The intangibles outlined above will probably add significant value to WRT II. When you consider how much GMG trades above it’s nta and their share price as a multiple of earnings, there is no reason WRT II can’t do it also…is there? As always do your own research and good luck.
 
Today's Sydney Morning Herald BusinessDay section is running an article by Carorlyn Cummins: "Westfields faces investor backlash over split".

http://www.smh.com.au/business/prop...backlash-over-split-terms-20131210-2z3wa.html


I have taken the liberty of posting some extracts from Ms Cummins article:
"Westfield is facing an investor backlash to its proposed split, with institutional managers threatening to vote the deal down if the share component of Westfield Retail Trust is not reworked. The concern is the gearing level of WRT is too high and would require partial asset sales to joint venture partners, which could dilute the underlying asset portfolio. The proposal is subject to approval by 75 per cent of Westfield and WRT security holders at meetings expected to be held next May".
Ms Cummins includes two quotes from analysts:
John Kim, at CLSA, said: " the proposed transaction was an acknowledgment by the Westfield Group that the WRT experiment has been a ''disappointment'', given the huge transaction costs involved and WRT's discount to net tangible assets since listing in December 2010.
''Another negative from the transaction is that pro-forma gearing in the new Scentre will be 38.2 per cent, considerably higher than WRT's 21.5 per cent, with S&P putting WRT's A+ credit rating on CreditWatch negative.
''We appreciate that the new group will have a significantly higher asset base of $28.5 billion compared to WRT's $13.7 billion, with active earnings from management income, nevertheless it is still a material increase in gearing.''
And:
Andrew Smith, fund manager at Freehold Investment Management, said:.."by splitting into geographic domiciles, Westfield's management was attempting to maximise value for the two entities".
''Prima facie, these suggested changes for WRT make sense and the new vehicle Scentre will have a lot more appealing characteristics than the former WRT".
''The perceived negative is the increase in gearing for WRT, however there is a strong likelihood that a partial sale of existing assets to super funds will help to lower the debt levels.''
But he added: ''Although there is some time for the deal to be worked on, there is the prospect of the terms of the deal being reworked or sweetened to get approval from WRT investors".

It would seem that some retail share holders are not the only ones concerned about the proposed redistribution of equity. The proposed restructure of WRT/WDC to WDC/Scentre(WRT II) as previously posted is:

WRT WRT(p) WDC Scentre
Assets 13.7 13.7 14.8 28.5
Borrowings -2.9 -3.75 -7.1 -10.9
Liabilities -0.3 -0.3 -0.8 1.1
Minor Int 0.0 0.0 -1.6 1.6
Equity 10.4 9.5 5.4 14.9
Securities(b) 2,979 2,734 2,582 5,311
NTA 3.47 3.47 2.81
Gearing 21.5% 29.0% 38.2%
Equity 51.4% 48.6%


While the total number of Scentre shares is understated by 5.9 million shares "securities held by executive share option plan trust in WRT" the break up of the WRT/WDC ownership of Scentre will be 51.4%/48.4%.

The proposed ownership break up of Scentre looks heavilly weighted in favour of WDC shareholders. WRT are putting in a net of $10.4 billion in assets geared at 21.5% before the proposed capital return or $9.5 billion in assets at gearing of nearly 30% after the capital return. WDC on the other hand is only putting in a net of $5.4 billion of assets and "goodwill" (Self management, income from assets under management etc). While the assets will increase to a gross of $28.5 billion, the increase in debt reduces this to a net of $14.9 billion assets geared at 38.2%.

If the perspective was that share holders in WRT and WDC took ownership of Scentre on the basis of equity, WDC share holders would only receive around 750 Scentre shares for every 1000 WDC shares held. The structure of Scentre would be :

WRT WRT(p) WDC Scentre
Equity 10.4 9.5 5.4 14.9
Securities(b) 2,979 2,734 1,554 4,288
NTA 3.47 3.47 3.47 3.47
Equity 63.7% 36.3%


That is obviously not going to happen. While the restructure in Scentre could open up "shareholder value" it seems that WDC is definitely getting a premium for their contribution. Not surprisingly the institutional shareholders in WRT are rumbling about needing a "sweetener" to approve the deal. Even less surprising is the hit the WRT share price has taken since the proposal was announced.
 
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