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Executives

Peter S. Lowy - Co-Chief Executive Officer and Executive Director

Steven Mark Lowy - Co-Chief Executive Officer and Executive Director

Peter Kenneth Allen - Group Chief Financial Officer and Director

Analysts

Stephen Rich - Crédit Suisse AG, Research Division

John P. Kim - CLSA Asia-Pacific Markets, Research Division

Paul Checchin - Macquarie Research

Derek Lowe

Rob Stanton - JP Morgan Chase & Co, Research Division

Simon Garing - BofA Merrill Lynch, Research Division

Benjamin Yang - Keefe, Bruyette, & Woods, Inc., Research Division

Unknown Analyst

Anthony Cay - Perpetual Investment Management Limited

Simon Wheatley - Goldman Sachs & Partners Australia Pty Ltd, Research Division

Westfield Group (OTCPK:WFGPY) 2011 Earnings Call February 14, 2012 5:00 PM ET

Operator

Welcome to the Westfield Group 2011 Full Year Results conducted on Wednesday, the 15th of February 2012, at 9:00 a.m. Australian Eastern Daylight Time. [Operator Instructions] I would like to advise that today's conference is being recorded. I would now like to introduce the presenter for today, Mr. Peter Lowy. Mr. Lowy, please go ahead.

Peter S. Lowy

Thank you. Good morning, everybody. I'd like to welcome you to our results presentation for the 12 months ended 31st of December 2011. With me presenting today is Steven Lowy and Peter Allen.

We have announced today a number of strategic transactions that will enhance our return on equity and long-term earnings growth. We have agreed with the Canadian Pension Plan to become a 45% joint venture partner in a $4.8 billion portfolio of 12 assets currently owned by the Group in the United States. This will result in net proceeds to the Group of $1.85 billion, and we'll see the number of our assets in the U.S. with joint venture partners increase from 7 to 19. Currently, 25% of the Group's U.S. portfolio is held in joint venture. And this will now increase to approximately 50%. The transaction price represents a premium to previous book value.

Following the sale of Nottingham in 2011, we have today divested a further 3 non-core assets in the U.K. at Belfast, Guildford and Tunbridge Wells for GBP 159 million, in line with our book value. In November 2010, with the announcement of the establishment of the Westfield Retail Trust, we articulated a strategy to increase our return on equity and long-term earnings growth through additional joint ventures and the disposal of non-core assets. Since that time, we have completed a number of transactions, including the joint venture of both Sydney and Stratford, the sale of our interest in Nottingham and Cairns, together with today's announcement. We have substantially increased our income from property management and development and this can be seen in our results for 2011, with a 100% increase in property management income and a 92% increase in our project income.

With today's announced transactions, we have freed up approximately $9 billion of capital, including the expected $1.4 billion payment from WRT for Westfield Sydney this April. This capital is available for redeployment in higher return opportunities, including our entry into Brazil, the investments in Milan and the World Trade Center, as well as our share of the $11 billion pipeline of future development opportunities.

We also continued to examine a number of potential acquisitions globally. We are pursuing further non-core asset dispositions, and we expect to make further announcements during the course of 2012. We are now in a position to return a portion of this $9 billion to our security holders, maintain our strong financial position and the ability to grow without increasing our leverage ratio. Consequently, we are today also announcing our intention to commence an on-market buyback of securities for up to 10% of WDC's issued capital. The buyback of securities form a part of our capital strategy, along with the redeployment of capital into the redevelopment pipeline and the expansion of our business.

Our objective is to maximize return on equity and achieve sustainable, long-term earnings growth. Our 2011 results reinforce the quality, strength and resilience of our business. Funds from operations for the year were approximately $1.5 billion or $0.648 per security. This was at the upper end of our guidance range notwithstanding the material adverse movements in the U.S. dollar and pound sterling exchange rates during the year. Net property income in local currency terms was up 8% in Australia and New Zealand, up 1% in the U.S. and up 36% in the U.K. Distribution was $1.1 billion or $0.484 per security, with retained earnings of $377 million. Statutory net profit for the year was $1.5 billion, up 38% on the previous year. Return on contributed equity for the year was 11.4%, a material improvement on the ROE prior to the Group's restructure in late 2010.

For the 2012 year, we forecast to achieve FFO of approximately $0.68 per security. This is before the impact of the transactions announced today and assumes no material change to foreign currency exchange rates from the end of 2011. Distribution for 2012 is forecast to increase to $0.495 per security.

I would now like to hand over to Steven who will take you through the business review.

Steven Mark Lowy

Thanks, Peter, and good morning, ladies and gentlemen. Despite what has generally been regarded as a challenging environment, we are pleased that comparable property net operating income for the year was at the top-end of our forecast range, with Australia and New Zealand portfolio up 4.3%, the United States portfolio up 2% and the United Kingdom portfolio up 7.6%.

This year, we have seen solid demand for our new projects as highlighted by the strong lease up at both Sydney and Stratford, with discontinuing at Carindale in Brisbane and Fountain Gate in Melbourne. A record level of leasing activity was achieved during the year with over 5,100 leasing transactions covering approximately 960,000 square meters or the equivalent of 10 large regional malls completed across the portfolio. These deals represent 2,100 renewals of existing shops, 600 new stores in our development projects and 2,400 leases of existing space to new merchants at operating centers. Clearly, this shows good demand for space as our centers continue to evolve and cater with changes in the marketplace.

Importantly in each market, average rents for the year have also increased. Occupancy has remained high throughout the year. And at year end, our portfolio of over 24,500 retailers was 97.5% leased, with the United States portfolio at 93.1%, the United Kingdom at 99% and the Australia/New Zealand portfolio remaining over 99.5%. The level of bad debts and arrears for the year remained low and in line with previous years at 20 basis points of annual billings for bad debts and 90 basis points for arrears.

Looking now at each market. In the Australia/New Zealand portfolio, 3,000 lease deals were executed with solid growth in average rents for the year of 3.5%. In particular, in Australia, a number of first-time deals were completed with major international retailers taking prime retail space. And this trend is continuing with offshore retailers taking further space in our centers. Our world-class project at Westfield Sydney, which has already changed the nature of retailing in Sydney's CBD best illustrates an exciting new era for our centers in Australia, with a broad mix of international and domestic, high street and luxury retailers, many in flagship stores, some never seen before in Australia, together with a much expanded range of high-quality restaurants and casual dining experiences. The strength of this mix is well demonstrated with Westfield Sydney already achieving the highest Specialty sales productivity in WDC's global portfolio, annualized at over $15,000 a square meter. Comparable Specialty retail sales for the 12 months were up 1.5% in Australia and up 1.9% in New Zealand, with the strongest performance in both regions being in the December quarter, up 2.0% and 4.8%, respectively. It's pleasing to note that the December quarter represented our strongest quarter in both markets for over 2 years.

In the United States, we have continued to see an improving environment and have been very active on the leasing front with the introduction of more luxury retailers and the broadening of goods and services for our customers. Across our U.S. portfolio, average Specialty rents grew by 3.6%, our highest growth in rents for over 3 years. New Specialty shop total rents achieved represented growth over expiring rents of 11%, with the level of short-term leases substantially reduced.

Retailers in the United States were also strong. Their sales, on a comparable Specialty sales, were up 7.1% and for the December quarter was up 9.8%. Particularly pleasing is that sales growth has been across all categories and that our higher quality centers continue to significantly outperform the average. With now 2 years of strong sales growth, productivity is now $446 a square foot, now above the level last seen in 2008. Given the improving conditions during the year, we also started our first major U.S. project since 2007 at UTC in San Diego, which is on track for completion later this year.

In the United Kingdom, our highlight was the hugely successful opening of the GBP 1.75 billion Stratford City project adjacent to the site of the London 2012 Olympics. We are immensely proud of this new center with an exceptional tenancy mix that exceeded our vision, particularly for food, fashion, entertainment and leisure and represents the next chapter in retail and leisure development. In its first 14 weeks up to the end of December, 13.6 million customers visited the center averaging over 900,000 customers per week, with a number of days exceeding more than 200,000 people. Based on the strong performance so far, we expect that the center will achieve in excess of GBP 800 million of sales in its first full year, exceeding Westfield London's first year sales of just over GBP 700 million.

Now in its third year, Westfield London continues to perform very well achieving retail sales for the year of around GBP 960 million, up 10.8%. As originally forecast, our 2 London centers are now on track to very soon produce around GBP 2 billion of sales from between 50 million to 60 million customer visits a year.

On the development front, good construction and leasing progress continues on the $300 million expansion at Carindale in Brisbane and the $320 million redevelopment at Fountain Gate in Melbourne, with both of these projects currently expected to complete in the latter half of this year.

In Brazil, the group's new joint venture, Westfield Almeida Junior, continues to perform well with the results of the 3 operating centers in line with expectations and good progress being made at the 2 projects under development. The joint venture also continues to examine new development and expansion opportunities. Predevelopment work at our other new iconic development opportunities in Milan, at the World Trade Center in New York and at the next phase of Westfield London continue to also progress well.

Currently, WDC's identified pipeline of future development work is approximately $11 billion, with the WDC share being approximately $5 billion to $6 billion. The Group expects to commence between $1.25 billion and $1.5 billion of new developments in both 2012 and 2013. With the Group's share being $500 million to $700 million for each of those years.

Ladies and gentlemen, that concludes our operating review for 2011, and I'd now like to hand over to Peter Allen to take you through the financial review.

Peter Kenneth Allen

Thank you, Steven. FFO for the year was $1.492 billion or $0.648 per security, which is at the higher end of our 2011 FFO full year forecast range of $0.64 to $0.65 per security. The actual results included $8 million of net project profits from Stratford or $0.03 per security. Distribution for the year is $0.484 per security, which is also consistent with our forecast. A full reconciliation of the Group's IFRS profit to FFO is included in Slide 22.

During 2010, there was an appreciation of the average Australian dollar rate by some 12% versus the U.S. dollar from $0.92 to $1.03 and some 8% versus the British pound from 60p to 64p. This had a net impact on FFO of negative $0.023 per security, which is more than offset from corresponding low interest expense and slightly higher project income.

Statutory net profit for the year was $1.533 billion, up 37.6% on the previous year. Excluding the impact of exchange rates from last year and the establishment of WRT, net property income increased by 7% to $2.03 billion. Further details by country are included in Slide 23. Property management income of $114 million was up 100% and project income of $148 million was up 92%, consistent with the change in our business model announced in November 2010.

Overheads continue to be a focus for the Group, and we have seen a reduction from 2010. Gross interest for the period was $503 million, of which $328 million was expensed and $175 million capitalized to development projects. Our all and effective interest rate is approximately 3.9%, similar to that of the first half. We continue to see the benefit from lower debt as a result of our strategic initiatives, the lower interest rate environment, as well as from termination of surplus interest rate swaps undertaken as part of the capital restructure and the maturity of our fixed rate borrowings. Tax expense has increased $23 million to $110 million, reflecting our increased management fees and project profits. Development gains of $129 million includes revaluations to date on our half share of Westfield Sydney and Westfield Stratford, and the completion of Belconnen in Canberra, Valencia in the United States and Guildford in the United Kingdom during the year. Property revaluations excluding these development gains were $347 million, reflecting higher valuations in Australia and the U.S. on the back of higher income and stable cap rates.

Slides 15 and 16 detail the Group's balance sheet and property investments. Total property investments increased by some $1.9 billion, reflecting capital expenditure of $1.4 billion, the investment in Brazil and asset revaluations, together with the disposal of assets during the year. Group borrowings increased by $695 million, reflecting these activities, as well as the receipt of GBP 872 million from the Stratford joint venture. Overall, the Group's net assets have increased to $16.7 billion at 31 December 2011. Distribution for the 12 months was $1.11 billion and $377 million of 2011 FFO earnings will be retained. Our return on contributed equity was 11.4% on an annualized basis and interest cover was 3.7x.

Slide 17 summarizes the Group's NTA, which is $8.06 per security prior to deferred taxes. The NTA of the Group does not include any value for our property management and project income streams, which represent some 17.5% of the Group's FFO.

Slides 18 and 19 provide details of the Group's financial position. Gearing at year end was 38.4% on a look through basis and 36.4% adjusted for the expected repayment of the $1.4 billion WRT Sydney loan, which is immediately payable following the completion of Westfield Sydney in April this year. The Group continues to focus on balance sheet efficiencies and in particular the amount of available liquidity it requires, which now stands at $5.3 billion. We continue to remain committed to a single A credit rating for the Group. Around $4.5 billion of debt facilities were put in place or renewed during the year. The weighted average term to maturity of the Group's nonbank debt was 4.7 years, with bank facilities providing efficient, shorter-term liquidity to the Group. The average term of the Group's fixed-rate debt and interest rate hedging is 5.1 years, with existing debt around 79% hedged. The Group's key financial ratios are detailed in the appendix on Slide 28, and you will note that we are well within covenant requirements.

It's worth noting that the Group's significant investment in Sydney is reflected on an interim valuation, with the benefit of the value generated from this development only to be fully recognized on completion.

For the 2012 year, we forecast to achieve FFO of approximately $0.68 per security before the impact of the U.S. joint venture, U.K. asset sales and security buyback initiatives announced today. Given the sale yields of the U.S. joint ventures at 5.6% and the U.K. asset sales at 6.4%, these transactions in isolation would have an annualized dilutionary impact to FFO of approximately $0.04 per security prior to the redeployment of capital and the impact of any buyback of WDC securities.

That concludes our presentation for today, and I would now like to open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Stephen Rich with Credit Suisse.

Stephen Rich - Crédit Suisse AG, Research Division

Just a few questions for you, firstly, perhaps one for Peter Allen with respect to the payout ratio. The dividend growth seems to be less than the FFO growth. And of course with today's announcement of the buyback, it seems like there is some surplus capital there, can you give us a feel for how you look at payout ratio going forward?

Peter Kenneth Allen

Sure, Steve, it's Peter here. When we looked at where we went with the dividend, as you can see the dividend is growing at about 1/2 of what the earnings growth is this year. And then when you look at the buyback and the excess capital that we have, we really have the ability to send capital back to shareholders either through the buyback or through a dividend. We're pretty comfortable with the dividend payout ratio where it is, around the 70% to 75% level. So you'll see that going forward.

Stephen Rich - Crédit Suisse AG, Research Division

Just by way of point of reference, can you point us to where the taxable income would kick in? Obviously, Simon's [ph] had some issues there. Do you have a feel for that?

Peter Kenneth Allen

We don't have any issues on the payout ratio versus REIT status or anything like that.

Stephen Rich - Crédit Suisse AG, Research Division

Okay. Secondly, just with respect to timing of redeployment, can you give us a feel for when you might be able to look towards a more serious deployment of capital towards the Brazilian opportunity?

Steven Mark Lowy

Stephen, it's Steven here. I think that we've got to look at that in time. I don't think we can give you much more color to that other than we only concluded our transaction in the third quarter of last year. We've sent a number of executives there at the most senior level to work with our partner, and we're really working through the issues as one would expect moving to a new country. We're excited about what we see, the macro issues. And the more we understand about them, the more they're concerned, but we see good expansion and growth opportunities in that market in time. I think what we're doing in the immediate future is really coming to grips with the more operating issues that one that needs to do to get down to business. But I think we should certainly -- I wouldn't look for immediate or near-term major, major capital redeployment, but I certainly -- we certainly have no shortage of capital redeployment opportunities given our $11 billion pipeline, our focus on major projects like Westfield London, World Trade Center and in Milan, plus the rest of the business, particularly the more near-term opportunities in Australia. But I think in the medium to longer term, I think you can look for exciting opportunities coming out of the Brazilian market, but once we understand it better than we currently do today. The good news is, the long-term macro issues are very, very sound and exciting for that market.

Stephen Rich - Crédit Suisse AG, Research Division

Great. Just one last question in terms of the capital that's been released today from the U.K. and U.S. asset sales in advance of redeployment, can you give us a feel for what denomination of debt that will be paying down?

Peter Kenneth Allen

Yes, Stephen, it's Peter. What we'll be doing is we'll be repaying both our U.S. and sterling debt.

Stephen Rich - Crédit Suisse AG, Research Division

And I think you mentioned that your cost of debt is about 3.9%, have you a feel for the implications of paying down that sort of lower cost debt?

Peter Kenneth Allen

Well, I think, as I said in my speech that what we're seeing is on annualized basis the dilution of both the U.S. joint venture and the U.K. asset sales is around $0.04 per security.

Operator

Your next question comes from John Kim of CLSA.

John P. Kim - CLSA Asia-Pacific Markets, Research Division

Just a question on the use of proceeds from the asset sales. I think, Peter, you mentioned not only are you going to do the announced buyback, but you're looking at acquisitions globally, which I think is new language. Can you just elaborate on this? Is this on new or existing markets and are these development opportunities or acquisitions on completed assets?

Peter S. Lowy

Yes. John, I could say yes to all of the above. I think the issue is that it's not a change in language or a change of what we do. And if you have a look at World Trade Center, if you have a look at what we did within Milan, we are pursuing our developments and acquisition opportunities around the globe, when we look at new markets, when we look at what's going on, and I think Brazil is a really good example of that. So I wouldn't say that's a change in language or a change in focus. But while we still have this capital that we've brought in and that we're sending back to shareholders, the buyback of the stock, we still have the ability to keep doing transactions like Brazil, like Milan, like the World Trade Center, as well as the redevelopment pipeline. So what we're trying to tell you is that we're not actually decreasing the business nor what we are doing, but we have the ability from the balance sheet and the capital that we have to be able to still pursue those opportunities while sending capital back to shareholders.

John P. Kim - CLSA Asia-Pacific Markets, Research Division

It would also seem that buying WRT shares would be an accretive way, an attractive way potentially to buy high quality assets. Is that in the cards? And if not, why not?

Peter S. Lowy

Well, John, I can answer together, if you have a look at what we did 12 months ago, a bit longer than that, in November of 2010, we articulated a change in strategy for WDC in that while we have large amounts of capital in ownership of assets, we are moving the business plan of the company to more of joint ventures investing alongside with institutions and other owners and increasing our return on capital. And so if we would go back to buy stock in WRT, or look to do so, it would be a reversal of the direction that we're sending the company in, and we think that increasing our return on equity, having long-term earnings growth for the company is the way that were going. So we're not buying WRT securities.

John P. Kim - CLSA Asia-Pacific Markets, Research Division

Okay. A question for Peter Allen on Page or Slide 22 of the presentation. I'm just trying to understand where the development profit is on the stakes that you've sold in Sydney and Stratford, if that's included on this income statement somewhere.

Peter Kenneth Allen

Yes. In terms of -- the recognition of development profit in FFO, which is the profit recognition from our joint venture partner, so therefore it excludes any profit or revaluation uplift that Westfield Group receives from its own ownership interest is shown there in the line project income. And that includes project income, as I said in my call, from Sydney, from Stratford, from the completion of Guildford, from Valencia.

John P. Kim - CLSA Asia-Pacific Markets, Research Division

Okay. And so the capital transactions, that's the -- those are the asset sales like Cairns, is that correct?

Peter Kenneth Allen

That is correct.

John P. Kim - CLSA Asia-Pacific Markets, Research Division

Okay. And then final question, I think you guys had mentioned that Westfield Sydney had the highest sales productivity in your global portfolio, which was around $15,000 per square meter, but that seems lower than the sales per square meter you had at, for instance, Bondi Junction and Sydney Central Plaza. What's the discrepancy there?

Steven Mark Lowy

No. I think there's some issue with the numbers you're looking at John. $15,000 for the Specialty shops is the highest we have on a project of that scale.

John P. Kim - CLSA Asia-Pacific Markets, Research Division

So that would be higher than Westfield London and Westfield Stratford?

Steven Mark Lowy

Well, yes. Westfield London and Stratford are slightly different because of the makeup of the centers. The answer is yes, it's higher, but the makeup of the centers in the United Kingdom are about 1/3 major tenancies, about 1/3 what we call the big mini major tenancies and 1/3 Specialty shops. And that's sort of -- if you look at Westfield London and Westfield Stratford, that's what they are. In Australia, they're more made up of about 20% of the mall, the rent comes out of the major tenancies, about 80% comes out of the balance with a more heavy emphasis towards Specialty shops from that. Actually, for Bondi Junction it’s just $12,000 a square meter, and we're seeing the first year of Sydney is over $15,000 a square meter. And that's actually the blended between the old Sydney Central Plaza, as well as the new stores, some of which haven’t been open for a year yet. So as that grows, we expect the $15,000 figure to grow as well.

Peter Kenneth Allen

Yes, John, it's all set out in terms of the 4E, in terms of the property table of the 4E, we set out each of the assets together with the sales per square foot on a Specialty store basis.

John P. Kim - CLSA Asia-Pacific Markets, Research Division

I thought those other 2 assets were higher, but, Steven, do you see any cannibalization of Westfield Sydney to Bondi Junction and Central Plaza?

Steven Mark Lowy

It's very difficult to tell that. There may be some, it's very minor. Bondi Junction has been slightly off last year. Quite a bit of that is at the majors. As you can see, the overall the majors, particularly department stores have traded down last year and there may be some overlap between what's going on there. But it's actually very minor, the impact, if there is an impact it's been very minor. I just want to be very specific with you on your previous question. We have in our 4E that the sales for Sydney Central Plaza last year, which is really only the 2 small levels underneath Myer, was just over $16,000 a meter and that was for the old Sydney Central Plaza. When you combine that with all of the new shops that have opened in Westfield Sydney, that is immediately over $15,000 a meter, which shows a slight decrease in the old Sydney Central Plaza. But I would suggest to you that the old Sydney Central Plaza got quite a kick when Centrepoint was being redeveloped for a couple of years. So overall, we're extremely pleased with where that's going and the first year of sales. And in our sense, if you would combine -- we don't have the exact numbers from David Jones, of course, but if you would combine what we understand David Jones does in the city and Myer and Westfield Sydney, that center is now doing around $1.1 billion of sales. So overall, I think we're giving the impression of its immediately become a success and the change in the nature and the face of retailing in downtown Sydney.

Operator

Your next question comes from Lou Pirenc from Morgan Stanley.

Peter Kenneth Allen

Well, in terms of the level of gearing, we are committed to the single A credit rating, and we're very comfortable with the gearing that we currently have, and I think as Pete said in this call that we anticipate that we've got the capacity to be able to do a buyback, as well as look at future acquisition opportunities globally without increasing our gearing.

Steven Mark Lowy

Sure. What I said last call is we'd announce some of the transactions that we're doing and we did announce the sale of those non-core assets in the U.K. today. On the ones in the U.S., we are pursuing those and we are negotiating on some of them to move down the track. And we will make announcements as we get closer to any transaction. So we'll let you know on the way through.

Steven Mark Lowy

Well, we've been working with CPP for quite a long time. As you know, we have them as a joint venture partner in Stratford along with ABP there and that was a very large investment for them at the time. CPP have been looking to -- I don't want to talk for them, you can talk to them, but CPP have been looking to make major investments in the U.S. We've got very comfortable with each other, we think they're very good investors, we're very pleased to be partners with them. And when you look at the portfolio overall, it has quite a good geographic diversification, has quite a lot of assets in California, 1 or 2 out on the East Coast and up in Washington. And I think when you look at the mix of assets, it really suited what CPP was looking for. Where you have a stable assets with very good incomes and strong income growth in what I would call very high-end markets with very good demographics, as well as the ability to do some development. And if you actually go through the table that's in the press release, we've done major redevelopments over the last 4 or 5 years at Annapolis called The City. We're doing one at North County now. We did one at Oakridge, we did one at Bonita, we did one at Santa Anita and at Southcenter, as well as Topanga. So those centers are really -- capital is being spent on them, they are trading well, they have good future incomes and they're very stable. And we have the ability to do the major development at the West Valley and at the Promenade. So when you look at that from their point of view, they're able to have the stable incomes, as well as the ability to get a higher return from development.

Steven Mark Lowy

Yes. I do think we'll grow NOI in all the markets in which we're operating. I think at this stage, we're probably going to look what we achieved 2% this year in the United States, which was at the higher end of where we thought we would be. I think we'll be a bit better than that this year going forward, maybe somewhere around 2% to 3%, though little early to tell exactly if it does fluctuate based on issues of term income, et cetera. While I think that we could -- given where the level of sales are and where they're going, given our knowledge of the amount of leasing work, and you'll see that an enormous amount of leasing work took place in 2011, much more than the prior year, good long-term deals, I think we are feeling pretty good about being in that range going forward next year. We do expect to open a number of the smaller projects that we've spoken about, some Wal-Marts, Costcos, supermarkets, et cetera that we're in the process of building. So we're feeling good about that. I think if you look in Australia, whilst this year, we've been well over 4%, and in fact we've been over the higher end of the range, I think given that some of the challenging conditions that is well understood in the market, all of our centers are performing very, very well, as I've said, with a very high level of racing [ph] activity, very low level of arrears and debtors, I think we'll probably be more in the range of probably 2.5% to 3%, would be – we may be a little better than that but I think in that range would be a reasonable estimate to be looking at. The U.K. I think is -- we need to look at differently because Westfield London is really next year in its fourth year of operation and at the end of the fifth year of the operation obviously, the rent reviews will kick in. So I think you need to look at Westfield London in terms of the next couple of years pretty flat, which will be made up when the rent reviews take place. Of course, Westfield Stratford is new and the balance of the portfolio we've actually build a lot of that. So I think that, that better gives you a picture of how we look to next year's NOIs.

Operator

The next question comes from Paul Checchin of Macquarie.

Paul Checchin - Macquarie Research

I just had a few questions on some of the numbers actually. I'm just starting with the U.S. and U.K. assets sales. Your current guiding towards $0.04 annualized and dilution, and from those sales if the asset portfolio is worth kind of around about $2.5 billion and the dilution equates to around AUD $90 million, given the running yield on those assets of somewhere in the high-5s, maybe 5.7, it implies that the debt you're paying down is only costing you around 2.2-odd percent. I just wanted to check with you whether that's the case?

Peter Kenneth Allen

Yes. Paul, it's Peter here. That is correct, because what we're doing is we're utilizing U.S. proceeds from the joint venture to repay U.S. dollar denominated debt, which as you know is at a lower level than that where other debt is. We also have our euro bonds, which are maturing the end this -- the middle of this year, which is I think around 3.6%. But you're correct in that assumption.

Paul Checchin - Macquarie Research

Okay. And so, is there any opportunity for you, Pete, to close out some of your hedges or some of the kind of fixed term debt you've got that is costing you substantially higher than that 2.2% to essentially minimize the extent of that dilution?

Peter Kenneth Allen

Paul, at this stage I don't believe so. I think that, yes, that something if we go further down the track, we've additional asset sales and we have additional capital that’s something, which we would look at doing but at this stage, no.

Paul Checchin - Macquarie Research

Excellent. And then just secondly -- in terms of the buyback. I suspect given you're buying stock in Aussie dollars, you would be drawing down Aussie dollar debt. Could you give me a feel for your incremental cost of debt? Is 6%, 6.5%, a kind of fair all-in cost range at the moment?

Peter Kenneth Allen

I think, yes, that is a correct assumption as well we will be using A dollar debt in terms of buying back the stock. You also got to recall that, and remember that we’re bringing in $1.4 billion in A dollars from Westfield Retail Trust in April. And in terms of the average cost of A dollar debt, it's probably in the 5% -- 5% to 5.5% range.

Derek Lowe

5% to 5.5%, okay, excellent. And then just a final question, probably for you again Peter, just in terms of your cash flow. So if I look at your operating cash flow statement and subtract the working capital benefit, which was something like $0.5 billion and then the interest expense, which you classified as a financing activity, your operating cash flow is about $1.27 billion, which is well short of your FFO of $1.49 billion, can you just give me some color please as to the differential? I suspect part of it is the project-management profits of the development management profits on Sydney and Stratford, but I suspect that wouldn't be the whole kind of $220 million?

Peter Kenneth Allen

No. And, Paul, I disagree with the calculation that you've done. So I might have to take it offline with you. But when I look at the capitalized interest that we are not paying, et cetera, which is the higher number this year, $175 million, that -- what I could do is I’ll have to look at it now while we're going through the call, and I might get back to you, Paul, during the call.

Operator

Your next question comes from Rob Stanton of JPMorgan.

Rob Stanton - JP Morgan Chase & Co, Research Division

Can you tell us what the impact to the $7.27 NTI is with these transactions?

Steven Mark Lowy

Well, we're selling them pretty close to book value plus the joint venture is slightly above book value. So it should stay relatively the same.

Rob Stanton - JP Morgan Chase & Co, Research Division

So there is no swaps broken?

Steven Mark Lowy

No, no, no.

Rob Stanton - JP Morgan Chase & Co, Research Division

Okay. Would you say that post the move to be -- and then with the U.S. non-core assets still to be sold post that, would you say that the capital structure is roughly where you wanted to be from an asset ownership perspective or should we expect another transaction of this sort of scale?

Steven Mark Lowy

Rob, I'm not sure how many times we're going to keep doing this altogether. But we do transactions from time to time that are rather large and help us get the business down the path that we think it should go. When you look at it, we are growing the capital structure of the company and the ownership structure of the assets pretty close to where we are comfortable to be. And if you look at what we're saying, we really are trying to maximize return on equity, as well as have long-term growth in earnings. And I think the key is that the company is now in a position where around 20% of our FFO is generated out of management fees for the operations of the assets, as well as development profits. We're pretty comfortable at that sort of level and you'll see us moving to, as we have to have more joint venture partners and deal with third-party capital. So I think within the next 12 months or so, we should have the company pretty much where, we’re comfortable to be. You also have to figure in a little bit though also, Rob, that we have some of these major projects that will be coming online on the way through and you can't just look at the company statically as to the capital structures today. We've done the joint venture, we've done the asset sales, we're doing more asset sales because when you go down the track a little bit, we'll be building the World Trade Center, which is a $1.3 billion asset, we'll be building Milan, which is EUR 1.25 billion, we'll be doing other redevelopments in the second stage of Westfield London. These are very big capital commitments. And so, when you look at where we're investing the company's capital into assets, we are investing in these major projects that give you very good benefits and very good returns. And so we're running a dynamic system here. But it's very hard to say that in a year, we'll be exactly comfortable where we are but you can see the direction that we're moving in.

Rob Stanton - JP Morgan Chase & Co, Research Division

I don't think anyone would argue that you've got a capital structure that you changed going on. I'm just trying to get a feel for this higher ROE model, whether this transaction does it. It sound seems to me like probably not.

Steven Mark Lowy

Well, this transaction helps us move towards the goal of higher return on equity. When you combine bringing in the capital with buyback of securities, with the investment in higher returning assets, with what we've done in Brazil, that's moving us down the track to have higher returning -- higher return on equity. And if you have a look at where we are at the moment, we announced this year, we're at 11.4% ROE and we see that increasing.

Rob Stanton - JP Morgan Chase & Co, Research Division

This may be a dumb question, but the $9 billion, how do I get to that number?

Peter Kenneth Allen

I've been waiting for someone to ask that, because I have it sitting right in front of me. What you -- when we did WRT and we distributed 7-odd billion dollars of equity to shareholders, WRT also took over $3.5 billion of debt that was relating to those assets. So you take that $3.5 billion, you have $1.3 billion that came in from the Stratford joint venture. You have $1.4 billion coming in at April from the joint venture of Sydney. We have $1.8 billion coming in from the CPP joint venture that we announced today. And we have sold approximately $1 billion worth of assets and if you go through those assets, that's Nottingham, Cambridge Wells, Belfast and Guilford in the U.K. and Cairns here in Australia.

Rob Stanton - JP Morgan Chase & Co, Research Division

Just one last one. Normally, at the start of the year, you give a range on earnings to deal with the currency. That's not the case this time. Does that -- should we assume that there is a full natural hedge happening on the offshore earnings?

Peter Kenneth Allen

Robert, there's not a full natural hedge. As you can imagine we do have U.S. dollars still in denominated debt, so have a little bit of a natural hedge but I think as we said on the call, the forecast is based on year-end average 2011 rates. So therefore, it could fluctuate as far as changes in currency based on that.

Operator

Your next question comes from Simon Garing of Merrill Lynch.

Simon Garing - BofA Merrill Lynch, Research Division

Just following on the ROE discussion. You’re still speaking to the 15% sort of target from the 11.5% that you've achieved?

Peter Kenneth Allen

I'm sorry, Simon, it's Peter here. I'm not sure if we went to 15%, but what we are doing is we have been substantially moving up ROE from when we did the Westfield WRT transaction last November. We are at 11.4% now. And that if you look at how we're going to deploy some of this capital, when you look at the deployment of this capital in our development pipeline, when we're looking at development pipeline and acquisitions, we're looking for a 12% to 15% unlevered IRR. If we're going to deploy this capital now those returns, which are much higher than the returns of the assets that we've sold, we should be able to be pushing ROE further than it is now.

Simon Garing - BofA Merrill Lynch, Research Division

And on that basis, would there be a potential change in the remuneration KPIs of the execs? Currently it's based on operating segment EPS and development starts. Would you look to put some sort of ROE target into the structure for this year or beyond?

Peter Kenneth Allen

The answer to that is yes. As a company that's focusing on increasing ROE and FFO, the executives, including Steven and myself, are actually compensated depending on our ability to meet those targets and increase those numbers.

Simon Garing - BofA Merrill Lynch, Research Division

Right. And an operational question on Australia, you provided leasing spreads for the U.S., what were the leasing spreads on the 2.5 -- 2-odd thousand leases in Aus?

Peter Kenneth Allen

The leasing spreads -- the leasing spreads in Australia, are slightly different as you know because each year the leases are growing by CPI plus a factor. So the CPI around 3, and growing around 4% to 5% on an annual basis. This year, the leasing spreads have been around 1%, maybe just slightly under for all of the deals done, renewals which have been higher than that and some of the new leases, which overall we've leased -- we leased all of the shops we got back during the year, particularly you'll be aware in the middle of the year, a number of shops came back particularly from Borders, the REDgroup, Colorado, et cetera, and we've managed to get all of those away. But that was a lot of shops coming on the market all at one time. And that probably had an impact on the overall rent spreads for this year that I think would be abnormally lower because of that. But x that, we were around 1%.

Simon Garing - BofA Merrill Lynch, Research Division

So the 1% is the total number?

Peter Kenneth Allen

Yes.

Simon Garing - BofA Merrill Lynch, Research Division

Okay, yes. Great. And I'm trying to understand this, I noticed in Note 11, which is only about 1/2 of your Australian assets lifted on an expense basis from $1 million to $9 million when you quote your leasing spreads, are you -- natural gross of those TIs?

Steven Mark Lowy

Those leasing spreads would be gross leasing spreads. I wouldn't take into account 10 incentives, which actually on a deal by deal basis are not that dissimilar to what they've been.

Operator

Your next question comes from Ben Yang of KBW.

Benjamin Yang - Keefe, Bruyette, & Woods, Inc., Research Division

Just a few questions on the CPP joint venture. Just curious were there any considerations such as selling these models out right rather than taking a partner to maybe take advantage of what has been a pretty floppy market for high-quality models in the U.S.?

Steven Mark Lowy

No. If you have a look at those assets themselves there, Ben, we have spent quite a lot of capital on those assets over the last 3 or 4 years. They are very good assets, they form part of our strategic portfolio and we would not think of selling them. But as we have said, to get higher return, I'll say it again, to increase the return on equity and to be able to have a more third-party income come into the company from assets that we own and operate, we believe this was a very strategic transaction for the company.

Benjamin Yang - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. So I understand maybe why you kept the majority of assets but I'm curious if you have any thoughts on what the CapEx rate spread is when you sell a minority insurance versus maybe selling out right. I mean do lease this as the basis [ph] or point on the table when you do a joint venture like this rather than sell onto one of your public peers in Europe?

Steven Mark Lowy

Ben, when you look at it, that's a theoretical discussion that's I've been having for 30 years. I'm not sure whether there is a discount for selling a partial interest from an institutional owner or not. But you do have the issue, which we bring into our FFO. We do have a issue that we get management fees for operating the asset here and those management fees have come to us and that the joint venture owner pays to use. So you have less NOI if you have management fees over internal costs. So that does figure into the total capital that you get. But those management fees are coming to us from the company point of view should have a multiple attached to them anyway. So you sort of end up the same place.

Benjamin Yang - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. That's fair enough. And just final question -- I'm sorry if I missed this. But did you say one of the assets in the joint venture were so heavily weighted to California? I mean, was it primarily during the development spend or maybe just re-internalized, are you kind of stating what your view at California generally in the next few years?

Steven Mark Lowy

Well, we live in California so we're very bullish on California. We have very big investments there. I think the way -- the best way to look at it is we spent quite a lot of capital on the assets in California over the last 4, 5 years and if you look to take out Annapolis, we've done a major redevelopment at Culver City, we've done a major redevelopment at Oak Ridge, we've done one at Santa Anita, we've done one at Southcenter, although that's in Washington even though it's on the West Coast and we did a major one at Topanga. So you have assets that are in a very good position. They are up-to-date, they've got the most up-to-date retailers and they have very good stable incomes with good growth in them and that's really what was attractive to the portfolio.

Benjamin Yang - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. And then just finally, I think you said overall, same-store NOI in the U.S. up about 2% to 3%, would you say that these assets should generate more than that in the coming year or kind of in line with that average or below? How do these compare with the rest of the portfolio, better, worse, same?

Steven Mark Lowy

We would say it's probably within that same average of 2% to 3%.

Operator

Your next question comes from Patrick LaChance [ph] of Green Street Advisor.

Unknown Analyst

Just to stay on the topic of joint ventures a little bit, and thinking philosophically about what you perceive to be the right percentage of ownership to retain when you dispose the stake. You've been doing around keeping 50%, 55% of the ownership. What do you think is the right level going forward in order to maximize fees but retain control on the assets?

Steven Mark Lowy

Well, Patrick, obviously, we can get to around 50% or 55%. Now I actually think from the company point of view, if you look at it historically, we historically wanted to have an equal investment in the asset with our major investors. Just have a look at what we did in Stratford in London. We have 2 major global institutions who own 25% a piece, and we own 50%. We believe that is extremely important. We do like to keep a major stake in the assets, so we're not just in a fee generating business, but I'll tell you the real reason we do it is we believe that we have an expertise in the business. We believe we can generate extremely good returns by having that expertise from management, leasing and development. And if you own too little of the assets, you're doing a whole bunch of work for the fees and you don't actually get the benefit in the increasing value of the assets. So if you look at the company as a whole, we both own real estate and we're in the management and development business. And we think having a major stake in those assets gives us a very good return while being able to increase those returns through our management and development fees.

Unknown Analyst

Okay. And while that works for core assets, when you think about non-core properties, is there a different threshold of ownership that might be acceptable?

Steven Mark Lowy

Yes, there is actually. And of you have a look at what we did just now in the U.K., we sold 3 assets. And if you go back a number of years in 2007, we sold $1.5 billion of assets outright from the portfolio in the U.S. And so we don't think the assets will meet our return criteria, as we said, we will sell those assets and redeploy the capital either back into the portfolio itself while looking at new opportunities or returning that capital to shareholders.

Unknown Analyst

Okay, so in regards to the non-core properties still on the market in the U.S. you're still intending to sell the entire amount and not do any JVs there?

Steven Mark Lowy

I wouldn't be as black and white as that. But we are still looking to raise capital from further non-core assets sales.

Operator

Your next question comes from Anthony Cay of Perpetual.

Anthony Cay - Perpetual Investment Management Limited

Further to the question 2 ago, the asset sales and the effect or consequence of deferred tax, did that play any role in this -- in the percent -- the 45% being [ph] sold? And further to that, also related, can you expand in layman's terms please on the Note in the account from Page 24 about this deferred tax possibly being an extra $1.3 billion?

Peter Kenneth Allen

The answer to the first one is a lot easier in layman's terms than the answer to the second one. On the first one, there is no tax effect of the joint ventures that we've done. So that's quite easy. On the layman's terms, I think I got to leave it to Peter to try and do this in layman's terms, but otherwise I'll help out, but I'll leave it to him for a second.

Peter S. Lowy

Yes. As far -- Anthony, as far as the Note 17, which sets out the change into Australian Accounting Standards as far as deferred tax is concerned, there is a change in terms of the calculation of the tax rate in terms of what that deferred tax will be based on. So the tax rate change really is rather than looking at, for example, our U.S. FFO rate, we're currently looking at the U.S. withholding tax of around 15%, it goes to a change in terms of the underlying capital gains tax rate in the United States, which is around 35%. And so therefore, you'll see that the additional amount of potential deferred tax, and I'll stress the word potential, is $1.3 billion, which would be required to be charged against our retained earnings.

Anthony Cay - Perpetual Investment Management Limited

And could you -- on top of this layman's, can you give a real-life color to it? Like, I mean, do we take it -- you won't be selling -- majority of these assets are at 100% in time and therefore the tax is sort of hypothetical, is that what you're trying to say?

Peter Kenneth Allen

I think that would be the correct assumption.

Operator

Simon Wheatley of Goldman Sachs.

Simon Wheatley - Goldman Sachs & Partners Australia Pty Ltd, Research Division

I just had a few questions on the U.S. portfolio, I just wanted to find out, with the leasing spread that you're quoting around 11%, obviously, a lot of your portfolio in the U.S. now your quoting as having a fixed rent increase. That leasing spread would seem quite high in the context of the existing fixed reviews, which are in place. But I'm assuming quite a few of those leases that are expiring as yet don't have the fixed reviews in place, is that the correct assumption?

Steven Mark Lowy

Yes, Steven here, that is correct. I mean, that calculation, to be clear, is the calculation that is consistent with the U.S. market where you basically take all the shops that expired and then you look at all the shops that you leased and the differential run rate is 11. That's just -- that's sort of the U.S. standard on how it's looked at. So that's pretty consistent with what has been probably over -- if you average it over a period of time, it's not that inconsistent with that.

Simon Wheatley - Goldman Sachs & Partners Australia Pty Ltd, Research Division

Sure. Now, I guess what I was looking for was whether any of the expiring rents had the fixed -- have to extend the escalation or not?

Steven Mark Lowy

Very, very, very few.

Simon Wheatley - Goldman Sachs & Partners Australia Pty Ltd, Research Division

Okay. Some peers in the U.S. are reporting some overage rent benefit from -- or to comp NOI to '11? Is that something that you benefited from?

Steven Mark Lowy

You're referring to percentage rents?

Simon Wheatley - Goldman Sachs & Partners Australia Pty Ltd, Research Division

Yes.

Steven Mark Lowy

There was some benefit of that, and of course as you get better sales, you achieve that. It wouldn't be a material amount though.

Simon Wheatley - Goldman Sachs & Partners Australia Pty Ltd, Research Division

Okay. And just on the cost in the U.S....

Steven Mark Lowy

[indiscernible] percent of the level of ultimately what your base rents are and percentage rents. If you have high base rents, you generally receive a lower level of -- you'll have less percentage rent, which is subject to fluctuations and retail sales. And overall, we have around 1% of our overall rent that is subject to that.

Simon Wheatley - Goldman Sachs & Partners Australia Pty Ltd, Research Division

Right. Okay. And the occupancy cost, you're in the 15% range in the U.S. and again some peers were reporting range in the 11% to 12% or of that magnitude, is -- that seems like a fairly substantial differential. Do you know what the difference might be there or whether that hampers rent growth opportunity for the U.S. growth portfolio level?

Steven Mark Lowy

Well, I think if you -- first of all look at it in the right -- in an absolute sense, occupancy costs have actually been coming down in the United States in the last couple of years as we've had more than 24 months now with sales growth. And we've had 2% growth this year. Last year was not, it was not that, it was below that. The last few years have been pretty tough there. So you've had obviously occupancy costs being re-writed along the way. I think historically in our business, we've had higher occupancy costs than many of our peers. I think you'll find that in Australia and I think you'll find that in London. I think we would see and we've had this discussion probably in many calls over many, many years that the -- there is obviously a skill in balancing what is an appropriate occupancy cost for a shop and different developers approach that differently. And from our perspective, to the extent the occupancy costs are sustainable and can grow, our job is really to maximize what that figure is for the benefit our shareholders. And we think over a long period of time, that's our job and we hopefully do a very good job with that.

Simon Wheatley - Goldman Sachs & Partners Australia Pty Ltd, Research Division

Okay. And what's the progress on 2012 expiries in the U.S. at this point?

Steven Mark Lowy

Well actually, it's quite good. We've entered the year -- we've entered the year moving into 2012 very well, moving into early, early, early dealing with those expiries early on. We will have, obviously, a number of expiries coming up and you can see that in our expiry schedule, which is somewhat in place because of the short term deals we've done a number of years ago. And I think we'll be in good shape with regard to expiries this year.

Simon Wheatley - Goldman Sachs & Partners Australia Pty Ltd, Research Division

Is it your sense that leasing spreads will be higher in the U.S. this year than in '11?

Steven Mark Lowy

Well, I think we'll have to see how that plays out during the year. We certainly would expect to have positive leasing spreads through the year. And as that plays out, we'll relay that to you.

Simon Wheatley - Goldman Sachs & Partners Australia Pty Ltd, Research Division

And just a few quick questions on the financials. Just on the U.S. equation, from the buyback, that looks to be less than sales dilution guidance you've given us. So I just wanted to see whether that was your correct initial first term?

Steven Mark Lowy

Simon, just to be clear, the $0.04 dilution from the sales and the joint venture does not include any accretion or anything from the deployment of capital.

Simon Wheatley - Goldman Sachs & Partners Australia Pty Ltd, Research Division

Definitely talking about that, yes. Yes. So if you just do the buyback in isolation as well, the uplift from that on my first kind of look to be about $0.025?

Steven Mark Lowy

Yes, we're going to leave that to you because then you have to decide over what period of time the buyback happens, how quickly the stuff gets bought, what you pay for it. But I will tell you this and I do want to say this, the -- from the company's point of view, we intend to buy the stock back and we intend to deliver this capital back to shareholders so that as you model it, you should model it as you choose. We will be sending the capital back to shareholders.

Simon Wheatley - Goldman Sachs & Partners Australia Pty Ltd, Research Division

Okay. Just one other thing on the guidance, the $0.68, there's obviously still a big potential other non-core portfolio sale in the U.S. out there which is at a significantly higher yield in terms of its cap rate and therefore the dilution impact in that could be quite a bit more. Presumably that's not in any of the guidance given at $0.68?

Steven Mark Lowy

That is not in any of the guidance given for the $0.68. We haven't sold those assets yet, we are negotiating, we are going down the track, but when and if those happen and we give you the information, we'll let you know on the dilution at the time.

Operator

Your next question comes from Michael Liddell [ph] of AIG Asset Management.

Unknown Analyst

Just one point of clarification, in terms of the U.S. portfolio, the ideal ownership structure would you be looking to JV the entire remaining core portfolio?

Steven Mark Lowy

Well, I'd say the best way to look at that instead of asking the question directly, is if you had a look at our annual report, we are looking to decrease the amount of capital we have invested in the assets. In the U.K., for instance, we have approximately 50% ownership of the assets. In Australia, we have about 35% of the ownership -- 39% of the ownership in the assets. In the U.S. prior to this transaction -- no, including this transaction, it’s 76%. We'd be looking to bring that down.

Unknown Analyst

Okay. And then in terms of just how you think about JV-ing assets versus keeping them wholly-owned. Do you believe there's any limited flexibility to monetizing a partial interest relative to a wholly-owned interest, let it be a mortgage or a sale?

Steven Mark Lowy

No, I don't -- I think we look at it a little bit differently, Michael. The real issue for us is does the asset fit our investment criteria, does it fit our return criteria and can we get -- does it hold a position in the marketplace or can we do a redevelopment to it. So we really look at the asset first and then decide what -- where it goes and then decide whether we should hold a piece of that, or sell it or joint-venture it. And I think that's really the way we look at it.

Peter Kenneth Allen

Just before we finish here, I'd like to get back to Paul in terms of the cash flow statement. As I look at the cash flow statement, which is stated in the 4E [ph], we have made cash flows from operating activities of $23.35 [ph] billion. We have financing costs, excluding interest capital over $479 million, which gives $1.856 billion and our FFO of 1.492 [ph]. I think the difference Paul, may be, and we can take this off-line and have a discussion is that there is also set out in the cash flows that use the financing activities, the termination of surface interest rates swaps with regards to the capital restructure, and we're seeing that as a capital item rather than an operating item. So hopefully that clears that up, but I'll give you a call afterwards.

Operator

I would like to advise that there are no further questions and I now hand the conference back to Mr. Lowy for closing remarks.

Peter S. Lowy

We thank everyone for their time. As always the team is available for any questions that you have. And again, thank you for your time.

Operator

Thank you, ladies and gentlemen. This concludes the Westfield Group 2011 full year results. You may now disconnect.

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