Westfield - Intro - Australia's GOAT multibagger

Westfield is Australia's GOAT multibagger, a $1,000 investment in Westfield would have grown into a $109M from 1960 - 2004 with Dividends and rights reinvested.

This Westfield deep dive is going to be a multi part post as I complete the historical restructure of the Westfield group. The reason I am doing this is to thoroughly research this high performing business model and best performer in ASX history. My goal is to find one of these in my life so studying the greatest of all time makes sense.

To do this study I’ve read ‘The Westfield Story - The first 40years’, ‘Frank Lowy - pushing the limits’, ‘Frank Lowy - a second life’ and have been finding and reading annual reports from national archives back to the 1960 - this was a f*ing difficult one.

The Westfield story is exceptionally complicated as the founder Frank Lowy continually re-structured the group to unlock value from property assets and management rights.

The focus of my research has been on Westfield Holdings (this is the management company) rather than the entire group but to understand the manager I first needed to reconstruct the historical journey of the group, I’ve copied below my corporate timeline that has been reconstructed from my readings. The property assets performed well but not as well as the management company for obvious reasons. Westfield Holdings started its listed life with $760k of shareholder equity and compounded this to $1.6B a 20% CAGR over 42 years when it was re-stapled to the property assets in 2004. I’ve focused on the period of 1960 - 2004.

The economics of Westfield Holdings were supercharged by some factors that I came to understand through this research:

1- A shopping centre is a unique piece of property, it requires active management, constant redevelopment and is very different to all other real estate asset classes

2- ManCo and PropCo can sustainably exist separately because of the importance of management in running these assets.

3- There are cornered resources at play which create barriers to entry with property ownership of A grade assets.

4- 2 sided network effects accelerate the success of the best centres and build a competitive moat to competitors.

The active management and constant redevelopment involves maintaining full occupancy, this is critical for the feel of the mall, getting the right tenants in the right places and exiting the bad tenants or moving them, maintaining flow of shoppers changing levels etc without noticing, having entry and exit spaces in the best spots, car parking availability and suitability, maximising retail space. All of these elements are always changing as many retailers boom and bust and consumer preferences change. The difference between a good and bad visitor experience has existed for centuries, back to the 18th century Istanbul Bazaars that were built to bring shoppers and owners together.

This requirement for experienced A grade management enabled Westfield to profitably and sustainably de-staple from their property but retain large margins on the management and development rights. Capital providers are not able to compete solely with capital like they can with other real estate categories. The management rights can also scale enormously as it is part service provider part fund manager.

The locations of the best centres in the world are almost irreplaceable today as these locations own share of mind for regular visitors which grows as the centre is expanded and continually improved.

As shopping centres grow they attract more retailers, as there are more retailers more shoppers are drawn to the centre, more shoppers creates more demand for even more retailers. As the A grade malls get bigger they continue to have the best offering as a one stop destination and become harder to compete with as an alternative.

The way Westfield holdings really supercharged earnings was via development profits. Executing shopping centre development requires a lot of niche expertise as it is intertwined with effective management, you cant just plonk an extension on to the side of a building it needs to be coordinated with minimal disruption to shoppers and tenants (mostly at night) it needs to be leased up with the right tenants, and it needs to maintain shopper experience to be a encouraging place to visit and it needs to be executed with urgency. Westfield developed all this expertise and retained it in house over decades including architecture, building managers, planning, legal etc. Of course, the economics are superb. Westfield holdings earns an asset management fee on the asset and also charged development profits to the property owners and it resulted in a win/win relationship. The property trusts fund the development costs, when they are complete the valuation of the property is valued based on a cap rate and has resulted in a ~60% increase on cost value of developments this grows the asset base. Westfield holdings charges a percentage of the capital deployed by the trusts which also expands the lettable area which results in larger leasing fees and management rights. Westfield would charge ~5% of development costs.

Subscribe and stay tuned if your interested to unpack this one.