Westfield Corporation Annual Financial Report 31 December 2014 WESTFIELD CORPORATION WESTFIELD ANNUAL FINANCIAL REPORT 31 DECEMBER 2014DECEMBER Westfield Corporation Limited ABN 12 166 995 197 WorldReginfo - affa2c63-531d-4428-8985-53744410b2e9 Annual Financial Report WESTFIELD CORPORATION (1) For the Financial Year ended 31 December 2014 Contents 1 Directors’ Report 32 Independent Audit Report 33 Income Statement 34 Statement of Comprehensive Income 35 Balance Sheet 36 Statement of Changes in Equity 37 Cash Flow Statement 38 Notes to the Financial Statements 89 Directors’ Declaration 90 Corporate Governance Statement 102 Investor Relations 104 Members’ Information IBC Directory (1) Westfield Corporation comprises Westfield Corporation Limited and its controlled entities as defined in Note 2. WorldReginfo - affa2c63-531d-4428-8985-53744410b2e9 Directors’ Report The Directors of Westfield Corporation Limited Company( ) submit the following report for the period from 1 July 2014 to 31 December 2014. 1. OPERATIONS AND ACTIVITIES 1.1 Review of Operations, Business Strategy and Drivers We are pleased to report on the inaugural results for Westfield Corporation (theGroup ) for the six months ended 31 December 2014. In June 2014 the Westfield Group successfully implemented the restructure and merger to create two new independent companies (the Restructure). The Group was created to own and manage the Westfield Group’s business in the United States and United Kingdom / Europe, while Scentre Group was created to own and manage Westfield’s Australian and New Zealand shopping centres. The combined market capitalisation of Westfield Corporation and Scentre Group is currently over A$41 billion, representing A$12 billion of value creation for securityholders of the Westfield Group and Westfield Retail Trust who participated in the Restructure. Because it was in existence prior to the Restructure, the statutory results for the year to 31 December 2014 include Westfield America Trust for the entire year. The results for the WFD Trust and Westfield Corporation Limited relate only to the second six months to 31 December 2014. Accordingly, the Directors believe the relevant results for the Group are for the six months ended 31 December 2014 (ie. the period following the establishment of the Group following the Restructure). As the Group’s assets and operations are located overseas, principally in the United States, the Group has adopted United States dollars as its presentation currency. Westfield Corporation owns a pre-eminent portfolio in the United States and United Kingdom valued at $28.5 billion (Group’s share: $17.7 billion)(1) with some 7,400 retailers and 50 million sqf of gross leasable area. The performance of Westfield Corporation’s portfolio in the United States and United Kingdom remains strong. Significant progress is being made on the $11.4 billion pipeline of current and future developments, which include Westfield World Trade Center in New York, Century City in Los Angeles and the expansion of Westfield London and Valley Fair in Silicon Valley. The Group’s investment in the development pipeline is expected to create significant long-term value for securityholders. The Group’s strategy is to continue to focus on creating and operating flagship assets in major markets that deliver great experiences for consumers and retailers. The Group is focussed on innovation and digital technology, and bringing together the best of fashion, food, entertainment and leisure. During the period, the Group has seen a strengthening of retail trading conditions driven by an improvement in consumer confidence, lower unemployment, low interest rates, falling gasoline prices and higher GDP growth. Profit after tax, funds from operations and distribution for the period (i) 6 months ended 31 Dec 14 $million Net property income 438.5 Net project and management income 57.1 Overheads (71.8) Currency gain / (loss) 5.9 Financing costs (38.0) Interest on other financial liabilities (6.1) Mark to market of derivatives and preference shares (63.4) Property revaluations 387.0 Tax expense (126.9) Profit after tax 582.3 Adjusted for: – Property revaluations (387.0) – Amortisation of tenant allowances 21.8 – Mark to market of derivatives and preference shares 63.4 – Deferred tax expense 110.2 Funds from operations (FFO) (ii) 390.7 Less: amount retained (135.1) Dividend / distributions 255.6 FFO per security 18.80 Dividend / distribution per security 12.30 (i) The Group’s income and expenses have been prepared on a proportionate basis. The proportionate basis presents the net income from, and net assets in, equity accounted properties on a gross basis whereby the underlying components of net income are disclosed separately as revenues and expenses. (ii) A key measure of the financial performance of the Group is FFO. FFO is a widely recognised measure of the performance of real estate investments groups by the property industry and is a useful measure of operating performance. The Group reported AIFRS profit of $582.3 million for the six months ended 31 December 2014. The drivers of profit include FFO earnings of $390.7 million (or 18.8 cents per security, in line with forecast), $387.0 million of property revaluations, $21.8 million of tenant allowance amortisation, $63.4 million relating to the mark to market of derivatives and preference shares and a $110.2 million charge for deferred tax. The distribution for the six months ended 31 December 2014 is 12.30 cents (A15.8522 cents) per security. This distribution will be paid on 27 February 2015. (1) Adjusted for the $925 million joint venture with O’Connor over three regional assets in February 2015. WESTFIELD CORPORATION ANNUAL FINANCIAL REPORT 2014 // PAGE 1 WorldReginfo - affa2c63-531d-4428-8985-53744410b2e9 Directors’ Report (continued) The analysis of the results has been completed on a proportionate The development at Century City will comprise new flagship stores for basis as approximately half of the shopping centre investments are Nordstrom and Macy’s, a refurbished Bloomingdales, 200 premium equity accounted. FFO earnings include net property income (before specialty retail shops and world-class restaurants, anchored by the amortisation of tenant allowances), management and project Eataly. On completion, Century City will become the landmark retail income, corporate overheads, underlying net interest (excluding destination for West Los Angeles. derivative mark to markets), currency gains and underlying taxation of The Group’s two London assets, Westfield London and Stratford the business (excluding deferred tax). City achieved combined annual sales of almost £2.1 billion with Net property income (on a FFO basis) was $460.3 million for the six approximately 70 million annual customer visits. The upcoming months ended 31 December 2014. The Group’s portfolio achieved expansion at Westfield London will be anchored by a new flagship comparable net operating income growth of 5.3% for the year and was John Lewis department store. On completion, Westfield London 95.8% leased at year end. The Flagship portfolio representing 66% is expected to become the largest shopping centre in Europe. of assets under management, achieved comparable net operating The Group has also agreed terms with key anchors for future income growth of 6.2% for the year with the Regional portfolio development projects which are expected to commence in the next growing by 3.7%. few years, including a new Nordstrom’s department store at UTC in Specialty sales productivity was $700 psf with comparable sales up San Diego and a new Bloomingdales department store at Valley Fair. 3.9% for the year. The Flagship portfolio achieved specialty retail sales Significant progress continues to be made at Milan, to be anchored of $986 psf, up 4.5% with the Regional portfolio achieving specialty by a flagship Galeries Lafayette department store, their first in Italy, retail sales of $476 psf, up 3.3%. and at Croydon in South London. Average specialty rents for the total portfolio were $86.34 psf, up The Group’s capital investment is almost entirely weighted towards 4.1% with the Flagship portfolio at $115.35 psf, up 5.0%. Growth over Flagship assets and is expected to create significant long term expiring rents for comparable space was 20%, comprising 26% in the value, with estimated development yields in the range of 7% – 8%. Flagship portfolio and 7.7% in the Regional portfolio. This includes the Upon completion of these projects, it is expected that the Flagship five yearly rent reviews at Westfield London. The performance of the assets will represent approximately 80% of the total portfolio and the Flagship portfolio reflects the Group’s continued investment in iconic business will be more evenly weighted between the United States assets in major markets. and United Kingdom / Europe. Management and project income was $57.1 million for the six months As at 31 December 2014, the Group has balance sheet assets to 31 December 2014. This includes income from managing centres of $19.6 billion, including property investments of $18.1 billion. In held in joint ventures and project income principally from Stratford September 2014, the Group successfully completed its inaugural bond and joint venture assets. issue, raising $3.5 billion. The debt issue was across four tranches Underlying interest before interest capitalised for the period was from 3 years to 30 years with a weighted average duration of 9.6 years $86.3 million. Interest capitalised for the period was $48.3 million, and a weighted average interest rate of 3.1%. including $23.0 million capitalised interest on the development at In February 2015, the Group announced a series of transactions Westfield World Trade Center in New York. with O’Connor Capital Partners which resulted in a $925 million joint Property revaluations of $387.0 million have arisen during the period. venture over three of its regional assets. The Group realised net The majority of the revaluation gain was for the Flagship assets, in proceeds (before tax) of approximately $700 million.