After a year of staying above the fray of the collapsing commercial property market, reality has caught up with Westfield. Yesterday, the company confirmed that it had raised $2.9 billion by way of a placement of shares at $10.50 each. The market responded by marking down WDC scrip to $10.60 — a far cry from the $18.50 which the company had been trading at as recently as October 2008.

In one sense, the drop in Westfield shares is perfectly understandable, and certainly not out of character for a sector which has been hit by slumping consumer demand, especially in the US and UK. However, commercial realities need to be balanced against the recent bullish claims by Westfield management and the overall performance of the company since it merged its management company and various trusts in 2004. Since the merger, Westfield scrip has dropped by around 32%, and 53% since its February 2007 peak.

If Westfield executives were concerned about the company’s prospects and gearing levels, they certainly weren’t showing it last year. In May 2008, Steven Lowy told shareholders that:

“It is clear from what we are seeing across our regions, despite a softening in the economic environment, demand from retailers continues for both new and existing space. Global occupancy remains at high levels and solid comparable specialty rental growth continues to be achieved.”

In October, Westfield revalued its assets upwards and told shareholders that:

“Net revaluation of the portfolio excluding redevelopments was up $37 million reflecting increases in comparable net operating income globally, stable valuation capitalisation rates in Australia and higher capitalisation rates for the United Kingdom, United States and New Zealand portfolios.”

“The Westfield Group’s quality global portfolio, with high occupancy levels and long term leases based on minimum contracted rents, generates strong and stable cash flows that have been resilient through economic cycles. The combination of the Group’s strong financial position and value-creating development program ensures that the Westfield Group is well positioned to deliver sustainable long term growth.”

Given the confidence exuding from Westfield HQ throughout last year, Westfield’s forecast earnings drop (from 106.5 cents per unit to between 94 and 97 cents) and its deeply discounted equity raising indicates a drastic change of heart from the Lowys. (Moreover, the fact the Lowys did not seek an exemption from the ASX to participate in the raising gives an even clearer indication what they think of Westfield’s short-term prospects).

In their defense, the Lowys may have had other things on their mind — last July, a US Senate Panel investigating the use of offshore tax havens claimed the Lowy family “used transfer companies and a foundation with a Delaware corporation to help … hide their beneficial interest in a foundation with $US68 million in assets.”

Peter Lowy appeared before the Senate Committee but refused to answer questions on the matter, taking the 5th Amendment, the right of US citizens to refuse to answer questions which may incriminate them.

Pesky tax issues aside, at least the Lowy family can be grateful that their remuneration is not closely correlated to Westfield’s shareholder returns. Despite losing a third of its value, in the past four years Frank Lowy has received $49.9 million in remuneration for his role as executive chairman — virtually all of those payments have been in cash. Lowy’s sons, Stephen and Peter, collected $25 and $26 million respectively. In addition, Frank is entitled to use Westfield’s corporate jet for 75 hours per year.

Following the equity raising, the Lowy stake in Westfield will be diluted to only 8%. Notwithstanding Frank Lowy’s remarkable achievements in building Westfield from a single Blacktown delicatessen in 1953, its recent performance suggests it’s time Frank followed Kerry and James Packer’s lead and took a drastically lower salary in 2009.

Peter Fray

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