OREANDA-NEWS. February 09, 2015. Fitch Ratings has assigned Australia-listed real estate investment trust Westfield Corporation a Long-Term Foreign Currency Issuer Default Rating and a senior unsecured rating of 'BBB+'. The Outlook is Stable.

Westfield was one of two new independent companies formed in 30 June 2014 after the former Westfield Group was restructured.

The ratings reflect Westfield's credit strengths including steady cash flows from its large and well-diversified portfolio of retail centres located mostly in the US and UK, its large scale with AUD18.51bn in total assets as of 30 June 2014, and its management's track record in originating and managing high-quality retail assets. The ratings are constrained by Westfield's high FFO-adjusted net leverage and a weak ratio of unencumbered assets to unsecured debt when compared to 'BBB+' rated peers.

KEY RATING DRIVERS
Large and Diversified Portfolio: Westfield's property portfolio of owned and equity-accounted assets comprises 41 properties, of which 39 are in the US and two in UK. The property portfolio is a stable and seasoned one, with low single property and geographic concentration risks and strong occupancy (94.4% of the gross leasable area is leased). Westfield's owned assets stood at AUD9.6bn and its equity-accounted assets were AUD8.0bn as of 30 June 2014.

Significant Associate Investments: Westfield has majority stakes of 50% to 55% in all its equity-accounted investments, except one in which it has a 41.7% stake. The equity-accounted entities are profitable, have a consistent record of dividend payments and have a lower balance sheet leverage (net loan to value ratio) of 20% than Westfield's 56%. Westfield's strategy of having a significant associate portfolio enables the company to achieve a more granular portfolio and reduce its development costs, but it also limits management control of the associates.

High Financial Leverage: Fitch estimates that Westfield's FFO-adjusted net leverage will be in excess of 6.0x till end-2016. The company targets a gearing range of 30% to 40% and has historically, albeit under the previous structure, raised equity to maintain gearing within its stated range. Westfield has refinanced its bridge facility in January 2015 such that its weighted average debt maturity profile is consistent with the Group's historical profile.

Below-Average Unencumbered Asset Cover: Westfield's ratio of unencumbered assets (after applying a 25% discount to its investment property portfolio) to net unsecured debt was at 1.43x as of 30 June 2014; lower than similarly rated peers. The risk of inadequate asset cover is mitigated by secured debt constituting only 16.8% of total debt and the ratio of unencumbered assets to unsecured debt improving to 2.56x after including the unencumbered assets and unsecured debt of associates.

Management's Track Record: The Group has a long track record in originating and managing retail assets and strong operating performance across the Australian and New Zealand portfolio. Westfield's UK assets, namely, Westfield London, which opened in October 2008, and Westfield Stratford City, which opened in September 2011 are performing strongly as reflected by their high occupancy levels.

Active Development Pipeline: Westfield has a sizeable future development pipeline of AUD9bn, of which its share is AUD4.5bn. But its capital expenditure commitments to be executed in the next five years are relatively modest at AUD1.09bn and may be easily funded by its AUD3.75bn in undrawn committed facilities as of 30 June 2014. Fitch expects Westfield to fund its development pipeline through a combination of debt, equity and cash such that the company's gearing is within its target range of 30% to 40%.

RATING SENSITIVITIES:

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Ratio of net debt / recurring operating EBITDA increasing to over 6.5x on a sustained basis. Net debt is defined as the sum of on-balance sheet net debt and net debt of associates, and EBITDA is defined as the sum of owned properties EBITDA and associates EBITDA (known as look-through definitions),
- Look-through EBITDA fixed charge cover declining to less than 2.25x on a sustained basis, and
- Look-through unencumbered assets / net unsecured debt, after stressing the asset value by 25%, declining to less than 2.0x on a sustained basis

Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Ratio of look-through net debt / recurring operating EBITDA declining to less than 5.5x on a sustained basis.,
- Look-through EBITDA fixed charge cover improving to over 2.5x on a sustained basis, and
- Look-through unencumbered assets / net unsecured debt, after stressing the asset value by 25%, improving to over 2.5x on a sustained basis.


Contact
Primary Analyst
Nandini Vijayaraghavan, CFA
Director
+65 6796 7216
Fitch Ratings Singapore Pte Ltd
6 Temasek Boulevard
#35-05 Suntec Tower Four
Singapore 038986

Secondary Analyst
Hasira De Silva, CFA
Director
+65 6796 7240

Committee Chairperson
Vicky Melbourne
Senior Director
+61 2 8256 0325

Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Leni Vu, Sydney, Tel: +61 2 8256 0326, Email: Leni.Vu@fitchratings.com.

Applicable criteria, "Corporate Rating Methodology - Including Short Term Ratings and Parent and Subsidiary Linkage", dated 28 May 2014, is available at www.fitchratings.com.

Related Research
"Rating U.S. Equity REITs and REOCs", dated 26 February 2014