Chairman's address annual general meeting of members of Westfield Holdings Ltd
14 November 2003
CHECK AGAINST DELIVERY
I am very pleased to report to you on yet another good result for the company.
During the 12 months to 30 June, Westfield Holdings reported another record profit for the 2003 financial year. That makes it 43 consecutive years of profit increases since the inception of the company.
The financial highlights included:
- An after tax profit of $288.4 million, up 23.1% on last year’s result;
- Earnings per share on a fully diluted basis was 50.63 cents, up 21.7% on last year;
- Earnings Before Interest and Tax was $401 million, up 13.6% on last year;
- Return on Equity of 18.6% compared with 16.7% for last year; and,
- The total dividend payout for the year of 25.57 cents per share, up 21.5% on last year.
This year’s results highlight one of the great strengths of Westfield’s business the ability to maintain a good performance despite the peaks and troughs of economic cycles.
That is because shopping centres are a long-term business with strong fundamentals. We now have assets under management of $32.5 billion representing 118 shopping centres in four countries with 17,700 retail outlets.
I’d like to begin a summary of our activities over the past year with a brief update on the retail environment in the various markets in which we operate.
The strong sales environment we have experienced in Australia and New Zealand for the past year or so is continuing with total retail sales in the September quarter increasing by 5 to 6% in Australia and 3 to 4% in New Zealand, while in the UK sales are improving with the latest quarterly result tracking up around 5%.
In the United States, we are starting to see signs of an improvement with six months of positive sales growth and other indicators pointing to a generally stronger economic environment. The sales growth in the September quarter in the US was 4.4%.
Occupancy levels in our centres in all markets remain very high, demonstrating the strong demand for space in our shopping centres.
In Australia, New Zealand and the UK occupancy remains higher than 99% while in the US it is at 93%, which is at the top end of the industry in that market.
The business continued to grow during the year with the acquisition of quality properties both in Australia and the US. Taking into account the acquisition of the Joliet centre near Chicago two weeks ago, Westfield America Trust purchased six centres in the US over the past year with a total value of $1.5 billion.
Here in Australia, interests in eight shopping centres have been added to the Westfield Trust portfolio with a total value of $1.8 billion, including the acquisition of AMP Shopping Centre Trust in May, which added a net six shopping centres to the portfolio.
In our capacity as Trust manager, we are very selective in our acquisition strategy for both Westfield Trust and Westfield America Trust, buying centres at prices which will generate good returns to investors in the medium and long term.
During the year, the group also completed $840 million of development projects, while in the United Kingdom, we received outline planning consent for three major development projects significant progress in this new market.
During the year $2.6 billion was added to the future development pipeline worldwide which now stands at $11.4 billion.
Our funds management business continued to perform well, with both Westfield Trust and Westfield America Trust achieving their distribution forecasts.
For the half-year to June, Westfield Trust announced a 10% increase in net profit after tax to $258 million, representing a 4.2% increase in distribution per unit.
For the same period, Westfield America Trust announced a 65% increase in net profit after tax to $270 million, representing a 3.4% increase in distribution per unit.
I’d like to talk now about our UK business in a little more detail.
As I said earlier, we continue to progress our redevelopment program in the UK.
We entered the market there in 2000 and since that time have increased income from the shopping centres, thereby increasing the value of the portfolio, and secured planning consents for three projects.
We are also working on our funding structure for the UK, the timing of which will be determined by maximising value from our current investment and the need for additional capital to fund the redevelopment program which is expected to get underway late next year. At that time we intend to securitise our investment and reduce our equity interest.
You can see that we have had a very busy and productive year and I’d like to take this opportunity to acknowledge the role of the board in guiding the strategy of the company, and thank our executive team who yet again have undertaken a number of major transactions and at the same time continued to manage the underlying business, all without missing a beat.
Now, I’d like to talk to you about corporate governance issues, executive salaries, and some specific references to Westfield and me in this regard, and I would like to take this opportunity to talk to you about these issues.
If what I say doesn’t adequately cover the points, I’ll be happy to take questions at the end of my address.
Firstly, I realise that community concern about corporate governance has stemmed, in large part, from high-profile examples of corporate failure or poor accounting practices, both here and overseas.
There’s also been a lot of discussion about executives receiving large payments regardless of the performance of their company.
I am not here to comment on what others do. I will speak only about our company.
To state the obvious, we are in business to be successful for our shareholders whilst at the same time being good corporate citizens. We have always understood that each and every day we must earn the trust and respect of investors and the market generally.
From a regulatory point of view, we operate within the framework laid down by governments and overseen by bodies like the ASX and ASIC.
Of course, we comply with these requirements and continually review our policies and structures, and in fact we have restructured ourselves several times.
A few years ago we had one board which served Westfield Holdings, Westfield Trust and Westfield America Trust. I firmly believe that the directors were always acting in the best interests of investors in each of those entities.
Nonetheless, we adopted a board structure for Westfield Trust and Westfield America Trust where the majority of directors are external and independent of the manager, Westfield Holdings. You should know that this involves a lot of work, and ongoing administration and expense, but we believed it was appropriate to make the change.
In March this year, the ASX Corporate Governance Council published its Principles of Good Corporate Governance and Best Practice Recommendations. In response to this, and as part of our corporate governance policy, Westfield is now formalizing a number of policies and charters based on the ASX’s recommendations.
In accordance with the timetable prescribed by the ASX, we will review the implementation of these initiatives during the current financial year and the market will be kept informed.
Corporate governance is, of course, a means to an end, not an end in itself, and this is a fact that seems to be lost on some commentators.
Sensible corporate governance helps us run better companies, ensures we meet our obligations to stakeholders and society generally and contributes to the overall confidence and trust of the investing public.
We also acknowledge that disclosure to investors of matters which are material to the company is important to the operation of an efficient market.
However, I do not believe that the cause of improving corporate governance will be well served by our regulators or market participants adopting inflexible positions on some governance issues.
There should always be room for treating some issues on their merits rather than applying an artificial, tick-the-box regime to corporate governance, or any other issue.
I believe that this philosophy of allowing for different approaches where appropriate is endorsed in the ASX Best Practice Recommendations which require companies to explain where they do not follow these recommendations.
By providing this information to the market, companies will highlight the issues for investors to consider and the market can make its own assessment of the facts.
From time to time, the issue of my position as executive chairman is raised, although I must say that when this is raised, most people at the same time recognize that Westfield is a somewhat unique company.
I can accept that in many circumstances a company and its shareholders might be best served by having a non-executive chairman. But I do not believe that this is true in my case.
I was fortunate to be there at the beginning more than 40 years ago and I’m very proud of our achievements over the years since then.
Our performance has been, I think, unparalleled in Australia, and perhaps in the world, when it comes to 43 years of unbroken profit increases with reliability and predictability.
My role as chairman of the company’s remuneration committee has also been questioned.
I should explain that the committee and the board set the overall policy and strategy for remuneration for the group. It deals not only with the remuneration of executive directors but with the top echelon of management as well.
The committee comprises myself as Chairman and three highly experienced independent directors Fred Hilmer, Rob Ferguson and David Gonski.
I think it is entirely proper, and it makes good sense, for me to play a key role in deliberations which determine the remuneration of senior management. I know the executives, I see their performance, I have worked closely with most of them for several years. I am able to provide an internal perspective of senior management, while the independent directors provide an external perspective, which includes their thoughts on what is happening in the broader market.
The three independent directors and I discuss the issues. I’m there at the beginning and usually I step back from the process and the other directors discuss further among themselves, sometimes at several meetings over a number of weeks. I then rejoin the process and am advised of the independent directors’ views.
As for my salary, about which there has been some discussion, let me present the facts.
I am heading an international group of three publicly-listed entities, with total assets of more than $32 billion and a combined profit approaching $1.5 billion each year.
I provide two things to the company I contribute capital, like you, and I contribute my labour. I believe I am entitled to be paid for my labour irrespective of how much of the company I own.
My salary package is based on a contract. The bulk of it comes via a performance component which is tied directly to profits. If there is no profit, there is no bonus. The package is absolutely aligned with shareholders’ interests.
I have a binding contract with the company which was put in place some years ago and which currently provides me with a base salary and benefits of $932,000. It also provides for an incentive equal to 4% of the pre-tax profit generated by Westfield Holdings, which this year amounted to $12.38 million. The incentive component of my package has, in recent years, been adjusted downwards to take account of the capital raising undertaken by the company in connection with the RNA transaction. As a consequence, the effective figure is now less than 4%.
I do not have any options. The last time I received options was in 1987. I should also note that my retirement benefits are limited to one month of basic salary for each of my 40-odd years of service. I have no other contractual rights to receive retirement or severance payments from the company.
The other members of the remuneration committee meet and review, without me present, the calculation and my performance under my contract.
This covers the issues relating to my salary, my position and other corporate governance issues.
Ladies and gentlemen, the company has a strong balance sheet and is in a strong financial position to take advantage of opportunities that might arise for expansion and growth in the future.
We have an outstanding international management team and a single-minded approach to intensively managing our business.
I therefore believe the current financial year will be another strong one for Westfield, with increased profits and a further growth in our assets under management.