Fitch Affirms Westfield Corp's IDR at 'BBB+'
The Rating Outlook is Stable.
Fitch has withdrawn Westfield's ratings for commercial reasons.
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 2018 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 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 (94.5% of the gross leasable area was leased as of March 31, 2016) and high average in-line tenant sales per square foot of $725 as evidence of the quality.
The crown jewel for WFD is its 'Flagship' portfolio which comprised 82% of WFD's portfolio at March 31, 2016 based on assets under management (AUM), and had in-line tenant sales of $905/sf at March 31, 2016. Fitch typically views sales/sf above $500 as being consistent with A malls and WFD's $725 average compares favorably to Taubman Centers, Inc. at $790, Simon Property Group at $613 and General Growth Properties and Macerich Company at $625 at March 31, 2016.
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 $1.4 billion (8% 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, and that WFD will back-fill its development pipeline with new projects through the rating horizon, thus mitigating some of the deleveraging.
Westfield is expected to 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.
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 will be 1.8x for the period Jan. 1, 2016 to Dec. 31, 2017. WFD's primary source of liquidity is availability under the $3.25 billion unsecured revolving credit facility (RCF) 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, 24% 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 RCFs, 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 its 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 12-24 months due to the size of the development pipeline. Reported leverage may differ from our projections based on timing effects for development deliveries and dispositions, and the pace at which WFD back-fills the development and disposition pipelines. Projections are consistent with the leverage sensitivities for other 'BBB+' REITs with high-quality portfolios.
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 our 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 4.1x for the 12 months ended Dec. 31, 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 unencumbered assets/unsecured debt (UA/UD) by 1.3x when developments are delivered, assuming a stressed 7% cap rate. Fitch typically views a 2x UA /UD ratio as 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 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 still 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 commensurate with a 'BBB+' rating for a company with WFD's portfolio quality.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
--SSNOI growth of 4% for 2016 and 2017;
--Development expenditures of $800 million in 2016;
--Should WFD start new developments, 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 mid-August 2016, delivering at a 6%-7% yield;
--Maintenance capex of $58 million in 2016 and 2017.
RATING SENSITIVITIES
Rating sensitivities are no longer relevant given today's rating withdrawal.
FULL LIST OF RATING ACTIONS
Fitch has affirmed and withdrawn the following ratings:
Westfield Corporation
--IDR at 'BBB+';
--Senior unsecured guaranteed term loan at 'BBB+'.
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