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Fitch Affirms Westfield Corporation at 'BBB+'; Outlook Stable

February 3, 2016 2:35 PM EST

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the ratings for Westfield Corporation (ASX: WFD) with the Issuer Default Rating (IDR) at 'BBB+'. A full list of rating actions follows at the end of this release.

The Rating Outlook is Stable.

KEY RATING DRIVERS

The affirmation and 'BBB+' IDR reflect WFD's high quality portfolio, the issuer's strong management team and what Fitch views to be above-average access to capital. Fitch projects leverage will sustain in the 6.5x-7.5x range through the end of 2017 with actual results influenced by the timing of developments and dispositions. These credit strengths are offset in part by the weaker contingent liquidity provided by the unencumbered assets pool relative to similarly rated peers considering over half are either developments or held in joint ventures.

Large, Diversified and High-Quality Portfolio

One of the key and differentiating credit strengths for WFD is the quality and diversity of its portfolio of 34 regional mall properties, of which 32 are in the U.S. and two are in the UK. The portfolio is stable and seasoned with low single property and geographic concentration risks. Fitch views the portfolio's high occupancy (95.7% of the gross leasable area was leased as of Sept. 30, 2015) and high average in-line tenant sales per square foot of $722 as evidence of the quality.

The crown jewel for WFD is its 'Flagship' portfolio which comprised 77% of WFD's portfolio at Sept 30, 2015 based on AUM, and had in-line tenant sales of $892/sf at Sept. 30, 2015. Fitch typically views sales/sf above $500 as being consistent with 'A' malls and WFD's $722 average compares favorably to Taubman Centers, Inc. at $805, Simon Property Group at $616 and General Growth Properties and Macerich Company at $593 at Sept. 30, 2015. In comparison, 'B' malls reported average sales per square foot of $375 for 3Q15.

Sizable Development Pipeline & Portfolio Recycling

Westfield's growth has largely been achieved via development as opposed to acquisitions. The development pipeline is sizeable with WFD's share of unfunded costs for in-progress developments totalling $1.5 billion (8.7% of gross assets) which is high relative to A-mall peers and similarly rated U.S. REITs. Fitch considers the current developments to be high quality with limited leasing or completion risk. For example, Westfield World Trade Center is fully leased and expected to open in 2016. Fitch expects WFD will back-fill its development pipeline with new projects through the rating horizon thus mitigating some of the deleveraging.

Fitch expects Westfield will fund its development pipeline through a combination of debt and cash including proceeds from asset sales such that the company's gearing is within its target range of 30% to 40%. Asset sales / portfolio recycling to fund development and improving portfolio quality have been a key part of WFD's portfolio improvement strategy over the past few years. In December 2015, WFD announced the sale of $1.1 billion of lower quality assets in the United States.

Sufficient Liquidity Despite Development

Fitch estimates WFD operates with sufficient liquidity despite the amount of remaining development costs. Fitch projects that WFD's liquidity coverage ratio is 1.8x for the period July 1, 2015 to Dec. 31, 2017 pro forma for the aforementioned $1.1 billion of dispositions in December 2015 and the $1 billion bond issuance in October 2015. WFD's primary source of liquidity is availability under the $3.25 billion unsecured revolving credit facility due 2018 with a one year extension option. Furthermore, Fitch views WFD as having average to above-average access to capital.

WFD has improved the balancing and duration of its debt maturities since the de-merger from Westfield Group. The next meaningful year of debt maturities is 2017 when 15% of pro rata debt matures. In 2019, 25% of pro rata debt matures including $1.25 billion of senior unsecured notes.

Fitch defines liquidity coverage as liquidity sources divided by uses. Liquidity sources include unrestricted cash, availability under revolving credit facilities, and projected retained cash flows from operating activities. Liquidity uses include pro rata debt maturities after extension options at WFD's option, projected recurring capital expenditures, and pro rata cost to complete in-progress developments.

Well-Regarded Management Team

The company has a long track record in developing and managing retail assets as demonstrated by the strong portfolio metrics as well as the operating performance across not only the U.S. and UK, but the Australian and New Zealand portfolio (now held by Scentre Group but previously within the Westfield Group).

High Leverage Driven by Development

Fitch projects that WFD's leverage will sustain in the 6.5x - 7.5x range over the next 12-to-24 months due to the size of the development pipeline. Reported leverage may differ from Fitch's projections based on timing effects for development deliveries and dispositions and the pace by which WFD back-fills the development and disposition pipelines. While projections are above the previous rating sensitivities that Fitch had indicated could result in negative momentum on the ratings and/or Outlook, they are consistent with the leverage sensitivities for other 'BBB+' REITs with high-quality portfolios. As a result, Fitch has revised the Rating Sensitivities (detailed below) to better reflect the quality of WFD's portfolio.

Fitch measures leverage as net debt to recurring operating EBITDA on a pro rata basis for equity accounted joint ventures. Fitch considers WFD's pro rata metrics more meaningful than consolidated metrics given Fitch's expectation that WFD would support or recapitalize unconsolidated entities if necessary, the use of a central treasury for wholly-owned and equity accounted properties, property management that is agnostic to the ownership structure and the fact that management targets pro rata metrics when establishing and monitoring credit metrics.

Fixed-charge coverage (FCC) was 4.0x for the six months ended June 30, 2015, and Fitch projects it will sustain at these levels through 2016 before moderating lower when the $3.3 billion of 2.81% interest rate swaps roll-off. Fitch calculates FCC as pro-rata recurring operating EBITDA less straight-line rents and recurring maintenance capital expenditures to total interest and preferred dividends.

Weak Contingent Liquidity with Structural Complexity

The ratings are hindered by the lower contingent liquidity provided by WFD's unencumbered asset pool. Fitch estimates WFD's unencumbered wholly owned operating assets cover unsecured debt (UA/UD) by 1.0x and 1.4x when developments are delivered, assuming a stressed 7% cap rate. Fitch typically views 2.0x UA /UD ratio as being consistent with an investment grade rating and views the contingent liquidity provided by wholly-owned unencumbered assets as a hallmark characteristic of investment-grade REITs.

The weaker contingent liquidity is a consequence of the size of the joint ventures. While Fitch recognizes that there are additional unencumbered assets held in the joint ventures, there could be factors that may limit or impede WFD's ability to access this contingent liquidity such as partner approval for asset sales or encumbrances though WFD could sell its interest. As such, Fitch has not explicitly considered these assets in its unencumbered asset calculations.

Stable Outlook

The Stable Outlook reflects Fitch's expectation that WFD will operate within its targeted metrics through the rating horizon and metrics that Fitch views as 'BBB+' for a company with WFD's portfolio quality.

KEY ASSUMPTIONS

Fitch's key assumptions within its rating case for the issuer include:

--SSNOI growth of 4% for 2016 and 2017;

--Development expenditures of $800 million in 2016;

Fitch expects the issuer will increase dispositions or joint venture contributions to maintain leverage between 6.5x-7.5x;

--$1.425 billion development at WTC to open in 1H16, delivering at a 6-7% yield;

--Maintenance capex of $58 million in 2016 and 2017.

RATING SENSITIVITIES

The following factors may have a positive impact on Westfield's ratings and/or Outlook:

--Fitch's expectation of leverage sustaining below 6.5x (leverage was 9.0x at June 30, 2015, which includes significant development spend for the development of WTC, Century City and Topanga. Fitch projects that WFD's leverage will sustain in the 6.5x - 7.5x range over the next 12-to-24 months);

--Fitch's expectation of FCC sustaining above 3.0x (FCC was 4.0x for the six months ended June 30, 2015);

--Fitch does not envision positive momentum unless the Company's wholly owned unencumbered asset coverage sustains above 2.0x.

The following factors may have a negative impact on the company's ratings and/or Outlook:

--Fitch's expectation of leverage sustaining above 7.5x;

--Fitch's expectation of fixed charge coverage sustaining below 2.0x;

--Fitch's expectation of a liquidity shortfall;

--A deterioration in the breadth and depth of capital access;

--A deterioration in the quality, value and/or financability of the unencumbered pool. Examples could include tenant credit issues, adverse selection between the encumbered and unencumbered assets and/or the recycling of unencumbered assets in exchange for development of challenged assets.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following rating:

Westfield Corporation

--IDR at 'BBB+';

--Senior unsecured at 'BBB+'.

Fitch has assigned the following ratings:

WEA Finance LLC, Westfield UK & Europe Finance PLC, WCL Finance PTY LTD

--Senior unsecured guaranteed revolving credit facility at 'BBB+';

--Senior unsecured guaranteed term loan at 'BBB+'.

WEA Finance LLC, Westfield UK & Europe Finance PLC

--Senior unsecured guaranteed notes at 'BBB+'.

The Rating Outlook is Stable.

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=998980

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=998980

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Fitch Ratings
Primary Analyst
Britton Costa, CFA
Director
+1-212-908-0524
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Daniel Kornblau
Associate Director
+1-646-582-4946
or
Committee Chairperson
Steven Marks
Managing Director
+1-212-908-9161
or
Media Relations:
Sandro Scenga, +1 212-908-0278
[email protected]

Source: Fitch Ratings



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