Maybe Westfield Isn't Done With Its American Dream After All

It was supposed to be out by now.

Rocked by activist investors, including former CEOs, and battered by the pandemic, Unibail-Rodamco-Westfield announced plans to sell by the end of 2023 the U.S. business it had bought for $16B. 

Officially, the song remains the same. But with the date to close out its U.S. business already gone, URW remains a major player in the U.S. mall market, with 16 schemes across the country. Some assets have been sold as planned. But much of the remaining portfolio doesn't look like the costly burden it appeared to be in 2020 and 2021.

The question now is whether it still makes sense to dispose of a collection of malls that, as the market recovers, appear to be on the up. 

“If you just look at the market in general and the Westfield situation, they have divested certain properties, mostly the ones that weren't performing and where the loan was higher than the value of the center, and they have made some smart decisions,” JLL Managing Director of Agency Leasing and Development Paul Chase said.

“But looking at the market today, why would they sell?”

It’s a far cry from the picture painted in late 2020 when URW staved off a shareholder coup in part by pledging an asset disposal program to reduce leverage and shed unwanted malls.

Front and center were the 24 mall assets in its U.S. portfolio, which it bought for $16B through the acquisition of the U.S. assets of Westfield, the business founded by Australian real estate legend Frank Lowy. URW declared that it wanted to exit North America by the end of 2023. 

URW’s retail portfolio extends from New York City to the West Coast, with over half of its malls in California.

It also has eight airport retail locations across New York, Chicago and Los Angeles. And while the Paris-based giant has sold off — or, in the case of San Francisco, handed over the keys to — eight malls since announcing its divestment plans, at least a dozen in the remaining portfolio appear poised for growth, while any future shareholder rebellion would be harder to land given the more stable picture.

“Top-tier shopping centers are performing better than ever,” Chase said. “Retailers are looking for opportunities to get into the best locations and the best shopping centers, which have a better opportunity for redevelopment opportunities, which further increases their value.”

All this is going on while interest rates are high, which reduces the buyer pool, he added.

As a result, it “makes zero sense” to sell flagship malls in this environment, he said.

“Will Westfield make that decision to change in the future? Who knows?” Chase said. “But why sell now?” 

Indeed, that recovery was crystallized in February when URW reported strong operating performance. Tenant sales were up 6.4% and footfall was up 4.9% year-over-year. Shopping center vacancy rates are back to 2019 levels at 5.4%.

“In 2023, we delivered strong operational performance across all activities, supported by dynamic leasing activity and the positive effect of indexation,” URW CEO Jean-Marie Tritant said in a statement on the results, emphasizing that this had brought the company flexibility on how and when it executes its divestment plan. “Our like-for-like group earnings are now back at 2019 levels, ahead of the 2024 target we set ourselves at our 2022 Investor Day.”

Offloading malls now would likely mean URW fails to capitalize on any further upside, and the market saw a change in emphasis when URW last year refinanced the 1.4M SF Westfield Century City mall in Los Angeles at $925M. Morgan Stanley issued the two-year, floating-rate CMBS loan, which valued the shopping center at just less than $1.4B.

“When they announced they were exiting the U.S., their intention was to do just that, but the business changed over the last few years,” Cushman & Wakefield Executive Managing Director and Retail Practice Leader Richard Latella said. “The market for malls became a lot less attractive because of rising interest rates, and strategically, they have continued to invest in their flagships.

“They are doing very well. So my guess is that they've decided to hold their better assets.”

On top of that, the scale of most of those assets means “it’s an enormous check a buyer would have to write” Latella added.

“I'm not sure if there's really an appetite for that right now, despite the fact that retail is actually in a good place. It's had a very good run in 2023. If interest rates at least stabilize, the picture looking forward will be a little clearer.”

Although it has slowed the pace of divestments, URW has been active in selling off U.S. assets. It generated $1.7B in proceeds from trading U.S. properties in 2021, and in 2022 it sold the Promenade mall site in the San Fernando Valley for $150M and the Westfield Santa Anita in Arcadia, California, for $537.5M.

Last year, the company sold the 1.5M SF Westfield Mission Valley shopping center in San Diego for $290M, plus the Westfield Trumbull in Connecticut and Westfield South Shore in Bay Shore, New York, for a combined $196M. The debt-burdened Westfield Valencia Town Center was sold to Dallas-based redevelopment specialist Centennial for $199M. URW had a $195M secured debt on the 60-acre asset in Santa Clarita, California.

URW also handed lenders the keys to the Westfield San Francisco Centre following the decision by several large U.S. retail chains and anchor department store Nordstrom to pull out of the scheme in the city’s troubled downtown.

Westfield is also looking to cease operating the retail center it built a decade ago at the Fulton Transit Center in Manhattan's Financial District, 10 years before its lease expires.

As well as refinancing Century City, URW has started to move ahead with development opportunities, including Westfield Garden State Plaza in Paramus, New Jersey, where Mill Creek Residential will lead the multifamily redevelopment phase. Westfield UTC in San Diego and the Westfield Old Orchard in Skokie, Illinois, are also in the process of redevelopment.

In February, URW confirmed that local developer Focus would co-develop the latter project, which is expected to break ground in 2025 with the construction of approximately 400 luxury apartments and 15K SF of street-level retail.

“At Garden State, they've announced a massive densification project and they're going great guns, and I would expect that's going to be an accretive return for them over the long term,” Latella said. “That's just such a dominant property. I don't think they have that opportunity in any of the other California malls. I don't think that there's enough land left. 

“The key is what Westfield is doing is investing back into its properties. Simon and Brookfield are doing the same. They're investing in those core assets that they believe have long-term potential, and I think that they're going to continue to work those assets, as they feel it's better investing back in them for their shareholders.” 

Of course, uncertainty remains in the retail sector. Mass Macy's closures are the latest to reflect that volatility, and while Latella said that could become problematic, he believes it is unlikely to impact flagship assets.

“In many cases, the department store is not nearly as important today as an anchor as when the malls were built. And there's case study after case study that shows that you're in a much better place after redevelopment,” he said.

JLL’s Chase added that with redevelopment increasingly focusing on mixed-use, a retail center has become an anchor in its own right.

“If you have strong walkability or a retail presence, you're going to get stronger rents in your residential or your Grade A offices, because they want to be located around strong retail because of that walkability, that lifestyle,” Chase said. “It goes down to experience.”

For all that, malls are still trading at a discount to previous valuations. When Fitch Ratings revised its outlook on URW’s long-term issuer default rating to stable from negative and affirmed the IDR at BBB+ and its senior unsecured rating at BBB+, it noted sales had been achieved at a 3% to 12% discount to already-reduced book values and a 30% reduction on 2018 valuations.

Chase said the transactional market has remained quiet, and bid-ask discrepancies remain the standout issue.

“Expectations just have to get closer,” he said. “We're getting through a lot of the distressed assets on the retail side. We've had a head start on offices and other sectors. Those valuations are working their way through.

“But if the asset is well positioned for growth and redevelopment and has been taken care of, there's always a buyer out there, and it just comes down to price. As interest rates start to come down, we feel we’re going to see investments increase. We've gone through our pain, we've adjusted for that pain. This is a fun story right now.”