Westfield Corporation Annual Financial Report 31 December 2016 Westfield Corporation Limited ABN 12 166 995 197 Annual Financial Report WESTFIELD CORPORATION (1) For the Financial Year ended 31 December 2016 Contents 1 Directors’ Report 35 Independent Audit Report 40 Income Statement 41 Statement of Comprehensive Income 42 Balance Sheet 43 Statement of Changes in Equity 44 Cash Flow Statement 46 Notes to the Financial Statements 90 Directors’ Declaration 91 Corporate Governance Statement 103 Investor Relations 104 Securityholders’ Information IBC Directory (1) Westfield Corporation comprises Westfield Corporation Limited and its controlled entities as defined in Note 2. Directors’ Report The Directors of Westfield Corporation Limited (Company) submit the following report for the period from 1 January 2016 to 31 December 2016 (Financial Year). 1. OPERATIONS AND ACTIVITIES 1.1 Strategy 2016 was a significant year for the Group, which saw the continued execution of the Group’s strategy to transform the Group’s assets into the pre-eminent global shopping centre portfolio. The Group is focused on creating great experiences for retailers, consumers and brands and has significantly enhanced its resources and capability in the areas of events, entertainment, digital technology and data analytics. The Group is transforming its food, fashion, leisure and entertainment offer with a broader mix of uses including the introduction of new concepts and brands. The Group’s $9.5 billion retail development program continues to progress well with the successful opening on Westfield World Trade Center in New York and the commencement of the expansion at Valley Fair in San Jose. In 2016, over $1 billion of revaluation gains was achieved, largely driven by the value created from the Group’s completed developments. The Group’s development program is creating significant long-term value and earning accretion for securityholders. 1.2 Financial results The Group reported FFO earnings for the year ended 31 December 2016 of $700.4 million, in line with forecast. FFO per security was 33.7 cents per security, up 3.8% on a constant currency basis adjusted for asset divestments and income lost from redevelopment projects underway. IFRS net profit of $1,366.1 million for the year includes $1,005.0 million of property revaluations, $54.9 million of leasing incentives and related leasing costs amortisation, $30.2 million relating to the mark to market of derivatives and preference shares, $1.7 million gain on capital transactions and a $255.9 million charge for deferred tax. The distribution for the year ended 31 December 2016 is 25.1 cents per security, also in-line with forecast. The Group’s financial position is strong with balance sheet assets of $21.1 billion, gearing ratio of 35.2%(1) and $2.8 billion in available liquidity. The Group has assets under management of $30.9 billion, of which 82% are Flagship assets. Flagship assets are leading centres in major market typically with total annual sales in excess of $450 million, specialty annual sales in excess of $500 per square foot and anchored by a premium department store. Profit after tax, funds from operations and distribution for the period (i) 31 Dec 16 $million Net property income 740.2 Net project and management income 126.1 Overheads (116.1) Financing costs (64.0) Interest on other financial liabilities (18.9) Mark to market of derivatives and preference shares (30.2) Property revaluations 1,005.0 Gain/(loss) in respect of capital transactions 1.7 Tax expense (277.7) Profit after tax 1,366.1 Adjusted for: – Amortisation of leasing incentives and related leasing costs 54.9 – Mark to market of derivatives and preference shares 30.2 – Property revaluations (1,005.0) – (Gain)/loss in respect of capital transactions (1.7) – Deferred tax expense 255.9 FFO (ii) 700.4 Less: amount retained (178.8) Dividend/distributions 521.6 FFO per security (cents) 33.70 Dividend/distribution per security (cents) 25.10 (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) FFO is a widely recognised measure of the performance of real estate investments groups by the property industry and is an important measure of operating performance of the Group. The analysis of the results has been completed on a proportionate basis as approximately 58% (by asset value) of the shopping centre investments are equity accounted. FFO earnings include net property income (before the amortisation of leasing incentives and related leasing costs), management and project income, corporate overheads, underlying net interest (excluding derivative mark to markets), currency gains and underlying taxation of the business (excluding deferred tax). (1) Based on market capitalisation. WESTFIELD CORPORATION ANNUAL FINANCIAL REPORT 2016 // PAGE 1 Directors’ Report (continued) 1.3 Operating environment At Valley Fair, the $1.1 billion expansion commenced in late 2016. The operating performance for the Financial Year was solid. During Valley Fair is already one of the most productive centres in the US with the year, the Group successfully opened the Westfield World Trade sales of around $1,200 per square foot and contains Nordstrom and Center and commenced the expansion at Valley Fair in San Jose. Macy’s department stores which are amongst the highest grossing The Group continued to make good progress on the $1 billion stores in their respective portfolios. The expansion comprises over redevelopment of Century City in Los Angeles, $600 million expansion 500,000 square feet of additional retail space, anchored by new at UTC in San Diego and the £600 million expansion at Westfield flagship Bloomingdale’s department store. London. For the year ended 31 December 2016, over $1 billion of At Westfield Milan, to be anchored by a Galeries Lafayette department revaluation gains were achieved, driven by the value created from store, pre-leasing and pre-development is progressing well and the completed developments. Group expects to commence this €1.4 billion project in early 2018 with Net property income (on a FFO basis) was $795.1 million for the completion in 2020. Financial Year. The Group’s portfolio achieved comparable net Good progress continues on pre-development for residential operating income growth of 3.2% for the year and was 94.9% leased rental projects in the UK and US with forecast starts in 2018 at at year end. The Flagship portfolio achieved comparable net operating the 1,200 apartment project at Stratford City in London and the income growth of 4.0% for the year with the Regional portfolio growing 300 apartment project at UTC in San Diego. by 0.6%. 1.5 Capital management Specialty sales productivity was $725 psf, with comparable sales up As at 31 December 2016, the Group has balance sheet assets of 2.2% for the year. The Flagship portfolio achieved specialty retail sales $21.1 billion, including property investments of $19.1 billion. During the of $898 psf, up 3.5% with the Regional portfolio achieving specialty year the Group refinanced $555 million (Group’s share $339 million) of retail sales of $457 psf, up 0.5%. Mortgages to August 2026 and extended $150 million of bank facilities Management and project income was $126.1 million for the Financial from July 2017 to July 2020. The Group continues to operate well Year. This includes income from managing centres held in joint within its covenants with gearing at 37.1%, secured debt to total assets ventures and airports; and project income including developments at at 12.9%, interest cover at 3.8 times and unencumbered leverage London, UTC, Valley Fair and from the finalisation of third party project of 243%. at Bradford. 1.6 Principal activities Financing costs of $64.0 million includes underlying interest before The principal activities of the Westfield Corporation are the ownership, interest capitalised of $197.5 million and $133.5 million of interest development, design, construction, asset management, leasing and capitalised on the Group’s developments including the Westfield World marketing activities with respect to its US and UK portfolio. There were Trade Center and Century City. no significant changes in the nature of those activities during the year. Property revaluations of $1,005.0 million have arisen during the year, 1.7 Outlook driven by the value created from the Group’s completed development After taking into account lost income from redevelopment projects and revaluations from the Group’s flagship assets including London underway, the Group expects to achieve FFO for the 2017 year of and Stratford in the UK. between 33.8 and 34.0 cents per security. On a constant currency The mark to market of interest rate derivatives and preference shares basis, this represents growth of between 3.0% and 3.5% from 2016. of $30.2 million primarily reflects the revaluation of the minority The forecast assumes no further capital transactions and no material interests in the US. change in foreign currency exchange rates. The deferred tax expense of $255.9 million includes deferred The distribution forecast for the 2017 year is 25.5 cents per security. tax accrued on the revaluation and tax depreciation of property investments. 1.8 Subsequent events For the period dating from the end of the Financial Year, there are 1.4 Development activities no subsequent events to report. In August 2016, the Group successfully opened the $1.2 billion major stage of Westfield World Trade Center ahead of the target yield. The 2. SUSTAINABILITY opening of Westfield World Trade Center was a hugely important Laws and regulations in force in the jurisdictions in which the milestone in the execution of the Group’s strategy.