The Westfield Group's success is predicated on its many strengths. One of the key strengths from which Westfield derives competitive advantage is its human resources program. One of the key competitive drivers in the industry is knowledge, so Westfield has made the development of knowledge, information and wisdom a cornerstone of its strategy. The company not only strives to identify, attract and hire the best talent, but it also has extensive programs in place to bring that talent along. There is a detailed training program, for example. The goal of Westfield's human resources strategy is to grow and nurture key staff members. The firm believes that wisdom derives from experience, and therefore seeks to have executives with a significant amount of work experience and a long tenure with the company. Supporting the human resources strategy are tactics of open communication, fostering diversity, and encouraging the free flow of ideas at the managerial and executive levels.
Another key strength of the Westfield Group is its high occupancy rates and long-term leases. These help the company to weather economic downturns. For example, the current weakness in the U.S. market has not affected the Westfield Group significantly because its properties have a high occupancy rate, currently at 97.3%. Customers are generally locked into long-term leases, ranging from 5-7 years in Australia to 10-15 years in the United Kingdom. This provides stable cash flows that help insulate the company from the economic shocks to which they, being dependent on the retail sector, would otherwise be exposed.
Another strength is the company's vertical integration. Since their very first property in Blacktown, Westfield has undertaken the design, the construction and the operation of their properties themselves. As a result, they have a high degree of control over their operations. This allows them to stay at the cutting edge of developments in the mall industry, something that has afforded them a competitive advantage since the earliest days. It also allows them to cover their risks more effectively. For example, they are able to establish anchor tenants before beginning construction. As a result of vertical integration, Westfield is able to consistently complete projects on time and on budget, giving them a significant source of competitive advantage.
Lastly, Westfield derives strength from its capital management. As of the end of 2007, the company had $7.7 billion in liquidity, which the company uses to invest, both in new property developments and on the open market. This allows them to engage in income hedging to help protect their investments from foreign exchange fluctuations. The group's expertise in capital management has allowed them to make that function a third component of their business.
Westfield has few weaknesses. One is their lack of diversification. Although they are invested in four countries, 92% of their capacity is located in either the United States or in Australia. This lack of geographic diversification is not unusual in the industry, but it does increase the risks inherent in Westfield's operations. Weakness in the UK and U.S. markets to this point has been offset by strength in Australia, indicating some operating hedge, but overall two markets is insufficient to provide strong insulation against market fluctuations. Moreover, the company only operates in one business. They are very good at retail property management but are exposed to declines in this business. Moreover, the Australian market is becoming saturated, which compromises Westfield's ability to grow business domestically.
Another weakness is found within the composition of their Board of Directors. Although the most important functions are well-represented, there is little geographic representation. Although over 50% of their capacity is located in the United States, only one of thirteen Board members is American. Ten are Australian. This does not reflect the structure of the company's operations nor does it accurately reflect the importance of the U.S. market to the company's success. As a result, Westfield does not have adequate oversight of American operations, because they do not have on their Board enough directors with sound knowledge of the U.S. market.
Lastly, the company appears to suffer from limited innovation potential. There is little room for upward mobility in the company, with the top positions being taken by sons of co-founder Frank Lowy. This can be a hindrance to attracting top personnel; as such talent will recognize that career potential is limited. Westfield appears to provide strong opportunities to learn about the retail property management business, but with the top positions seemingly locked up by family, it is difficult to imagine that the company will be able to execute its human resources strategy to its fullest potential. Moreover, the long-term human resources approach would appear to stifle innovation. The industry is not very dynamic, but should market forces shift dramatically or accelerate rapidly, the firm is likely exposed precisely because of its lack of dynamism.
Westfield is a solid company financially. The income statement shows a decrease in the past year in their revenue earned of 27.5%, mainly on a decline in revenue from property revaluations. However, the core property revenue also posted a decline, of 6.3% last year. Although the company cut expenses slightly (1.3%) the bulk of this was in financing costs rather than operating costs. As a result, the company's profits declined 38.6% last year.
The reduction in financing costs reflects a reduction in debt at Westfield. The company was also able to increase assets. This was a result not only of new project completions but an increase in the value of existing assets year-over-year. As a result of these changes to the balance sheet, Westfield improved its debt ratio to 45.6% from 52.0% and its debt-to-equity ratio to 84.1% from 108.4%. These figures also represent an improvement in leverage from the point when the current incarnation of the company was founded in 2004.
In the past year, the balance sheet has maintained this structure, with the debt ratio increasing slightly to 45.8%. Revenue and net income for the first half of this year, however, was down significantly over any six-month period since the 2004 reincarnation. The company has affirmed guidance recently, however, as a sign that despite the slowdown, the firm's recent performance is more or less as expected.
The Westfield Group has several opportunities of which it can take advantage. The market in the United States still has significant room for growth. Westfield has only slightly more capacity in the U.S. than it does in Australia, which indicates substantial growth potential in that market. Moreover, it has access to capital that U.S. retail property developers may not have at present, due to the credit crunch in the U.S. Thus, Westfield's international scope and ability to raise capital in the relatively stable Australian market provides it with the opportunity to move on U.S. competitors whose growth may be stifled by the current economic situation in that country. For example, the company expects to raise $2 billion in the next couple of years as a result of reinstituting its dividend reinvestment plan.
Another key opportunity for Westfield is the Asia-Pacific market. Outside of Japan, Western-style shopping centers are a relatively new concept. Yet, the burgeoning economies of the region have given rise to a substantial middle class. Western-style suburbs have even begun to emerge in larger centers, such as Shanghai and Bangkok. There has been significant contact between Australia's business community and many of these countries in recent decades, so such a move would not at all be without precedent. Furthermore, the growth prospects in the region appear strong, and the Asian economies provide an additional level of diversification for Westfield.
A third potential opportunity is a move to other real estate markets, such as commercial/light industrial. Such a move could take place in Australia or the United States and leverage many of Westfield's existing competitive advantages and core competencies. Such a move would not be without risk, but would provide an additional level of diversification to the firm's earnings.
Westfield's strengths have allowed their revenues and profits to be relatively stable despite a substantial number of threats in the external environment. Chief among those threats is the economy, in particular in the U.S. And in Australia. The economies of these countries can impact Westfield in a number of different ways. Because Westfield's customers are retail outlets, the company is subject to demand fluctuations that are tied to consumer spending. Consumer spending in turn is affected by a wide range of economic variables. These include consumer confidence, interest rates and inflation. Reduced consumer confidence will lower purchases, which in turn will reduce profitability for retailers. This will lower the demand for retail spaces. Interest rates and inflation can not only affect consumer demand but can also affect the value of the rents earned by Westfield. Remember that Westfield's tenants typically sign long-term leases. A strong upward shift in inflation or interest rates will reduce the future value of those cash flows.