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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

Paul Checchin - Macquarie Research

Lourens Pirenc - Morgan Stanley, Research Division

Rob Stanton - JP Morgan Chase & Co, Research Division

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

Simon Garing - BofA Merrill Lynch, Research Division

Andrew Smith - Evergreen Capital Partners Pty Ltd.

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

Westfield Group (OTCPK:WFGPY) Q2 2012 (H1 2012) Earnings Call August 14, 2012 7:00 PM ET

Operator

Welcome to the Westfield Group 2012 Half Year Results, connected on Wednesday, 15 August 2012 at 9 a.m. Australian Eastern Standard Time [Operator Instructions] I would like to advise that today's conference is being recorded and 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 6 months ended 30th of June, 2012. With me today is Steven Lowy and Peter Allen. In November 2010, we articulated a strategic plan that would position the group to generate greater long-term value in a volatile economic environment. This plan focused on investing capital in a development of world-class iconic shopping centers in major world cities, introducing joint venture capital to the group and disposing of non-core assets to enhance our return on invested capital and long-term earnings growth.

In the 20 months since the establishment of the Westfield Retail Trust, we have implemented this plan through a number of transactions, and our results today highlight its benefits. Over the period, we have raised approximately $10 billion of capital for redeployment into our higher-return opportunities. We have successfully completed and opened $3.7 billion of development and expansions, including Stratford in London and Sydney in Australia.

We have expanded our business with the World Trade Center development in New York, our entry into Brazil and the development opportunity in Milan, Italy. We have completed a number of joint ventures, including Sydney, Stratford and the 12-asset joint venture in the United States and have disposed of 14 non-core assets globally, 8 in the United States, 4 in the United Kingdom, 1 in Australia and 1 in New Zealand. In the first 6 months of this year, we have also bought back 48.5 million WDC securities for $440 million and raised $3.3 billion of debt facilities, including our recent issuance of GBP 450 million of public bonds in the U.K.

Our business and balance sheet is in a strong position. Since June of 2010, we have reduced our invested capital from $47 billion to $32 billion, whilst maintaining the same $61.7 billion of assets under management. We have also reduced our debt from $19 billion to $11 billion and our gearing ratio, from 37.4% to 31.9% today. We have substantially improved our return on contributed equity, which was around 9% in 2010 and is now 11.4%.

In summary, in just over 18 months, we have moved the group to a stronger financial position, higher return on contributed equity and improved the long-term earnings profile. We will continue to allocate our capital efficiently to create value for our shareholders. We are well-positioned to grow our business, particularly through the investment in our $11 billion pipeline and potential new opportunities. Importantly, we will be able to do all this without the need for additional share capital.

For the first half of this year, funds from operations were $751 million or $0.328 per security, up 3.1% for the year. Distribution for the first half of the year was $558 million, or $0.2475 per security, representing 50% of our announced full year distribution forecast of $0.495. Statutory net profit for the half year was $800 million, up 31% on the previous year. For 2012, we forecast to achieve funds from operations of $0.65 per security.

I'd now like to hand over to Steven, who'll take you through the business review.

Steven Mark Lowy

Thanks, Peter, and good morning, ladies and gentlemen. Our strategy is to invest in and develop world-class iconic retail destinations in major global cities. We are focused on these assets because they are highly productive, create strong franchise value and are resilient through economic cycles. The benefits of this strategy are evident today through the operating performance of our business, and in particular, centers like Westfield London, Stratford and Sydney. We are pleased with the operations in the first half of 2012, which has seen solid performances in all markets.

We are on track to achieve comparable net operating income growth for the 2012 full year in the range of 2.5% to 3% in both the United States and the Australia and New Zealand portfolios. At the end of June, the global portfolio was 97.5% leased, up 80 basis points from the same time last year, with the Australia and New Zealand portfolio at over 99.5%, the United States portfolio at 92.7% leased, up 70 basis points on last year, the United Kingdom at 99.2% and Brazil at 95.8%. We have also seen solid demand for our new projects, as highlighted by the successful completion of our expansion at Carindale in Brisbane and the progress being made at Fountain Gate in Melbourne and UTC in San Diego. Tenant receivables across the portfolio remain low and in line with previous periods, at approximately 1% of annual billings and bad debts at 30 basis points.

Looking now at each market. In the United States, we have continued to see strong conditions, with 30 consecutive months of sales growth. In the half, we have also seen positive re-leasing spreads, solid occupancy gains from long-term leases and net operating income growth. Comparable specialty retail sales for the 12 months to June were up 8.3% and up 8.7% for the half year. This strong sales growth has been across all categories and in our higher quality centers, especially those that have been recently redeveloped, which continue to significantly outperform the average.

The U.S. portfolio specialty productivity of $474 a square foot is now at its highest-ever reported level. The previous high was in December '07 and since that time, we have added 2.9 million square feet of specialty area through our redevelopments. We have been very active on the leasing front during the half, completing close to 900 deals. This represents over 2.1 million square feet, with total rent for the new specialty shop leases executed up 15% over expiring rents. Across the U.S. portfolio, average specialty rent grew by 3%, to $64.21 a square foot, and for the half, comparable net operating income grew by 2.5%.

In the Australia, New Zealand portfolio, comparable net operating income for the half grew by 3.3%. Average specialty rent per square meter grew by 3.2% from June last year. In Australia, over 1,400 deals were completed in the first half. Excluding deals for projects, this represented 8.6% of specialty area completed at rents 2.4% lower than expiry, reflecting the more subdued environment. Lease terms are, on average, 5 to 7 years, with annual CPI-based increases.

The productivity of the portfolio in Australia is at its highest level, with sales to specialty stores now over $9,900 a square meter. Comparable specialty retail sales for the 12 months were up 0.7% and up 0.8% for the half. In New Zealand, comparable specialty sales were up 1.9% for the 12 months and up 1.1% for the half. In Brazil, net operating income of the operating centers is in line with our expectations. And in the first half, comparable specialty retail sales were up 11.7% and average specialty rents grew by 13.2%.

In the United Kingdom, comparable net operating income for the June half was up 0.9%, and this was in line with our expectations. Our most recent highlight was the performance at Stratford City that was showcased to the world during the London Olympics. As part of this presentation, we have included links to a short video and silent montage capturing the exciting moments at Stratford City during this amazing event. In total, around 5.5 million visitors came to the center in just over 2 weeks during the games, giving the group an unprecedented exposure to a global audience.

At Westfield London, sales for the 12 months to June were GBP 970 million, up 3% and up 1.6% for the 6 months. This year, our 2 world-class centers in London are expected to attract around 60 million customer visits, spending some GBP 1.8 billion.

During the half, the group continued to progress its digital business strategy, with the establishment of a digital team based in the San Francisco Bay Area, the global hub of innovation and digital technology. Westfield is unique in the retail property industry, with a recognizable brand, and with 1.1 billion customer visits each year, generating over $40 billion in annual retail sales. We are focused on utilizing our global position to innovate the retail ecosystem and leverage the social, mobile and digital market opportunities that converge the digital shopper with the physical world.

During the half, the development of Westfield Sydney was also completed and the center continues to trade successfully, particularly in the food and luxury goods categories. This center now has the highest specialty sales productivity in our global portfolio.

Good progress continues on the construction and leasing of all projects underway. At Carindale in Brisbane, the final stage of the $310 million expansion successfully opened last week. At Fountain Gate in Melbourne, the first stage of its $340 million redevelopment successfully opened in May, and the remainder is on track to open next month. We expect that both Carindale and Fountain Gate to now be in the top 5 centers in our Australian portfolio. And at UTC in San Diego, the $180 million project remains on schedule to open by the end of this year.

During the half, work commenced on $775 million of new projects, including the development of the World Trade Center, the redevelopment at South Shore, New York, and $80 million of smaller projects in the United States. We are pleased to report that our first Costco store will open this Friday at Sarasota in Florida, with a store at Wheaton in Maryland to follow in October. Our integration of Costco into the mall format is unique, and we are really excited to break new ground. In addition, we continue to add a variety of other concepts, including supermarkets, discounters, gyms, cinemas and restaurants, which broaden the range of goods and services in our malls, clearly increasing traffic flow.

Predevelopment work on our new iconic developments in Milan, the next site of Westfield London, where we now have approval for 50,000 square meters of retail and over 1,500 apartments, as well as other projects in Australia, such as Miranda and Mount Gravatt, and in the United States, such as the Garden State Plaza, the first stage of Century City and Montgomery, all continue to progress well. In the second half of this year, we expect to commence over $500 million of new projects, with the group's share being between $100 million and $200 million. In 2012 and 2013, our expected new project starts remain in the range of $1.25 billion to $1.5 billion.

Ladies and gentlemen, that concludes our business review for the 2012 half year. And I'd now like to hand over to Peter Allen to take you through the financial review.

Peter Kenneth Allen

Thanks, Steven. Our funds from operations, or FFO, for the half year, were $751.2 million or $0.328 per security, an increase of 3.1%. Distribution for the half year is $0.2475 per security, an increase of 2.3% to the prior year. As detailed on Slide 12, our key metrics remain strong, with net property income up 7%. This increase includes additional property income from our recently completed developments at Westfield Stratford and Westfield Sydney. Management income has increased 13% to $60 million, primarily from the new U.S. joint venture with CPPIB, management income from Stratford for the half year, and increases in property income. Project income remains strong, including the completion of developments at Westfield Stratford City, Westfield Sydney, Carindale and Stage 1 of Fountain Gate.

Overall, EBIT is up 8% to $1.073 billion for the half year. Gross interest for the period was $250 million, of which $209 million was expensed and $41 million capitalized to development projects. We continue to see the benefit from lower debt, as a result of our strategic initiatives, as well as the lower interest rate environment. Our all-in effective interest rate is approximately 4%, similar to that in the prior year. Tax expense has increased to $58 million, in line with the increase in project income during the half year. Our AIFRS profit after tax for the half year was $800.1 million, up 31%. This includes property revaluations of $335 million, mark-to-market expense on our derivative financial instruments of $175 million, deferred tax expense of $38 million, amortization of tenant allowance, minority interests and capital profits.

Turning to our balance sheet on Slide 14. The group is in a strong financial position following the completion of a number of capital initiatives that in aggregate raised approximately $4.8 billion of proceeds during the half year. Our liquidity has improved to $7.1 billion from $5.3 billion at the end of last year as a result of these capital transactions. We've also extended our maturity profile of our borrowing facilities, with $2.2 billion of new or renewed facilities, a GBP 450 million 10-year bond issued in July and USD 400 million of new and renewed secured mortgages. We now have the capacity to cover all of our refinancings to 2015.

Our average term of bonds and mortgages has extended to 5.1 years from 4.7 years at year end and bank facilities to 3.4 years. Our interest rates are currently 85% hedged. Gearing at the end of the half year has also improved as a result of the capital initiative to 31.9% on a look-through basis, compared to 38.4% at the end of last year. We continue to remain committed to a single A credit rating for the group. The group's key financial ratios are detailed in the appendix on Slide 27 and you'll note that we are well within covenant requirements.

Slide 15 summarizes the movement in property investments for the half year, from $34.7 billion at the end of last year to $32 billion. This movement includes $3.4 billion of proceeds from the new U.S. property joint venture and the divestment of 12 non-core assets during the half year. In addition, the group had revaluation gain -- revaluation gains of $335 million, including development gains of approximately $153 million. This primarily includes the completed developments at Westfield Sydney and Westfield Carindale. The group has also spent around $400 million in CapEx during the half year. It should be noted that there was minimal exchange rate movements during this period.

Slide 16 summarizes the group's NTA, which is $8.08 per security prior to deferred taxes compared to $8 at the end of last year. The improvement in NTA is primarily due to our retained earnings. As previously disclosed, due to change in accounting standards, deferred tax is now recognized as a capital gains tax rate for the U.S. of 35%, resulting in a net $1.25 billion increase in deferred tax liabilities. This is also being reflected in our prior year comparatives. The NTA of the group does not include any value for our property management and project income streams, which represent some 21% of the group's FFO for the half year.

For the 2012 year, we confirm our annual forecast FFO of $0.65 per security and distribution of $0.495 per security.

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 the line of Stephen Rich from Crédit Suisse.

Stephen Rich - Crédit Suisse AG, Research Division

Just a few questions for you this morning. Just to start with, on the guidance figure. Previously you've stated that the guidance was prior to any redeployment of capital or further buyback. Is that still the case?

Peter S. Lowy

Stephen, it's Peter here. Yes that's the case. The guidance assumes that there's no additional buyback of securities from what we bought back already.

Stephen Rich - Crédit Suisse AG, Research Division

Great. Just on the development work, you talk about another $500 million of projects kicking off by the end of the year. Can you give us a bit more color on where this is coming from?

Steven Mark Lowy

Well, Stephen, it's Steven here. I mentioned in the opening remarks that we're working on a range of projects that are well advanced, including Miranda in Sydney, Mount Gravatt in Brisbane, Garden State Plaza in New Jersey, Century City, the first stage in Los Angeles, Montgomery in Maryland, as well as a range of others, actually, and depending on how they fall out in terms of their start, some combination of those, Westlake's in Adelaide for instance, it'll be some combination of those, certainly through the balance of 2012 and 2013 starts.

Stephen Rich - Crédit Suisse AG, Research Division

Great. So at the same time, I'm sort of looking at the development activity slide and comparing it to sort of the May update, and I can see the small projects program is running down a little. Are we seeing a bit of a transfer in focus away from the small project into some of these sort of lumpier projects now?

Steven Mark Lowy

Well, I think you're seeing probably the tail end, actually, of through the start of the GSC. Of course, that's a number of years ago now, we articulated to the market that we were focusing heavily on a range of smaller projects that were designed to significantly enhance traffic flow and the depth of goods and services in the malls. And everything from filling a number of the department stores with larger mini majors, adding supermarkets discounters and the like, and even Costco was part of that, which opens -- 2 of those are opening very shortly. I think you're seeing the tail end of that program, and I think you're also seeing the benefit of that program coming through in the sales that are really coming through the U.S. business now. And I think that you'll find that, that will have an added benefit for future income growth, certainly in the second half of this year and going through to next year and the year after, as those boxes start to open and take traction. So I think you're seeing that's the reason for that. And of course, as we gain more confidence, we've regained our focus on the larger developments. And so I think you would expect to see what you're seeing now.

Stephen Rich - Crédit Suisse AG, Research Division

Great. And just one just last one, just in terms of the domestic re-leasing environment. Can you give us a feel for how many tenants, or what percentage of your portfolio is in holdover at present?

Steven Mark Lowy

We have -- first of all, we have -- our holdovers are about the same as they were last year as our vacancies are about the same as they were last year as our receivables are about the same as they were last year. So whilst the environment is somewhat more subdued, the operations of the business are very much in line with where we were last year and pretty much the year before that. On the specifics of it, there's about -- just over 1% of our area that is in holdover and just over 2% in specialty area. So, yes, there's really no change to that. Whilst the environment is somewhat difficult out there, and that's reflected in lower leasing spreads, clearly, which certainly will be made up by inflation-indexed leases as those leases go forward. We're very much in a similar position as we've been historically.

Operator

The next question comes from the line of Paul Checchin of Macquarie.

Paul Checchin - Macquarie Research

Just a couple of questions. The first, I'm just wondering, is there any change in the way you're viewing Brazil? Obviously, since you kind of entered the market, the currency has fallen very substantially. And I suspect given you didn't hedge your position, actually your net investment there in Aussie dollar terms is probably down about 20%. Can you just give an update in terms of how you're seeing the market at the moment over there and kind of future prospects?

Steven Mark Lowy

No, we haven't really -- I mean, Brazil is a -- we've really put a stepping stone into Brazil. We've been there just over a year now. We're not viewing it differently. Of course, we take a long view to these countries. We've invested in the U.K. and seen massive shifts in currency in the U.S., seen massive shifts in currency. We're not really there from a -- we're far from there from a short-term perspective. So from a currency perspective, we haven't changed our view. But what we are focused on is learning the market. And I think we are learning the market. You learn the market from being in there, and it's been very interesting to be there, and what we see is a market that has a very exciting future. And we have a relatively small amount of money, AUD 400-odd million invested there, about 1/2 of that is actually in the real estate and the balance is available for future expansion of that business. But we'll keep you up-to-date as we take further steps in that market.

Paul Checchin - Macquarie Research

And just a second one on your valuations. It looks like your valuations overall have gone up to the tune of around about 1% this half. I'm just wondering how you're thinking about valuations, particularly in the U.S. It looks like -- if you look at, say, the listed market that the market is certainly expecting cap rates to come down quite considerably. Yours is still hovering in the U.S. there at around that 6.2 odd percent level. Can you just comment on that as well as the rate through to the World Center? So your initial yield that you've got in your presentation now is 6.5%. Where you think that might end up post completion of the asset?

Peter Kenneth Allen

Sure, Paul. It's Peter here. I think if you look back historically, our valuations have been relatively stable on the way through. And as you get these major movements in stock prices, that when you go through them and you look through -- go to major movements in cap rate, you've seen that happen to us historically over a much longer period of time. So on the other side of the fence when cap rates were moving up, took quite a while for our portfolio to be valued that way as you got through it. Now as they're moving down, exactly the same thing happens. The one thing I always talk about when you look at valuations, cap rates, NAVs, et cetera, is the market that's out there. We put all the information out there. You see the yield of each center that we have and you can go figure it out, if you want to, for want of a better word, mark it to market, as to where all the other stocks are trading, whether they be in the U.K. or the U.S. or here. So we're very comfortable with the valuations there. I agree with you when you look at the U.S. REITS and you look through to the cap rates of their assets, it is below where our valuations are, but our valuations come out where the independent valuers value them. When you talk about the World Trade Center, the 6.5% yield there is really the negotiations we made and the estimates that we made with the Port Authority when we got there. We're still 2 years out from opening March of 2015, 3 years out from opening, actually. So I just -- we're just going to leave it there and then see how the leasing goes, see how the market and the environment is. But I think it's probably one of the best sites in the U.S., if not one of the best sites in the world. So we will do a spectacular job there.

Paul Checchin - Macquarie Research

Great. And then just a final question for me. Peter, can you just clarify how much profit recognition from Sydney CBD [ph] and Stratford was recognized in the half?

Peter Kenneth Allen

In terms of the CBD, in terms of -- it was about $30 million as far as Westfield Sydney is concerned.

Paul Checchin - Macquarie Research

And on Stratford?

Peter Kenneth Allen

And Stratford is about GBP 15 million.

Operator

The next question comes from the line of Lou Pirenc from Morgan Stanley.

Lourens Pirenc - Morgan Stanley, Research Division

Just a few small ones. I mean, first of all, with kind of how it works with the Port Authority, that $625 million for World Trade Center, is that all your share?

Steven Mark Lowy

That's our half share. When we look at the transaction, it was a $1.325 billion, and then if we meet certain leasing hurdles and get a much higher return, then there's another payment offered. But at the moment, it's just too early to tell.

Lourens Pirenc - Morgan Stanley, Research Division

Right. Now then, on the U.S., I mean, you've been running for a few periods now with quite strong sales growth and relatively subdued NOI growth, also a little bit lower than some of your peers in the U.S. I mean, should we expect that to ramp up in the second half and going into 2013? Or are there structural reasons for the lower growth?

Steven Mark Lowy

No, I think that you'll see an improvement going forward. As I again mentioned before that in the second half, we expect the second half in the U.S. to be stronger than the first half. We expect that to flow on to 2013. We have been very focused as you know on filling many of the old Federated boxes. That program is well advanced. And as these expansions come on to play, they're having a very positive benefit on the existing centers that were in place. And I think you'll see that benefit coming through. So we've been very focused on this strategy, and we are confident that, that will prove towards improving growth rates in the U.S. going forward.

Lourens Pirenc - Morgan Stanley, Research Division

And then finally, just on kind of your capital structure. I mean, you've lowered your gearing, you have a CapEx budget. I mean, how should we look at kind of pay-out level? I think you paid out about 74% of FFO in the first half. Your buyback program, are you comfortable continuing that? I mean, where do you expect your gearing to -- or where do you like your gearing to be in the medium-term level?

Steven Mark Lowy

Historically, Lou, as you know, we've been comfortable with that gearing level around 40%, below 40%, we have been around 38% or 39%, and now we've come down. We're very comfortable with the capital structure of where we are without capital commitments going forward in the $11 billion pipeline, which over a period of time $5 billion to $6 billion of that is us. And we are comfortable to keep going on with the buyback program. We announced that we'd buy back up to 10% of stock. At the moment, we've got 2.1% of it, so it's about $440-odd million out of about $2 billion, and we will be continuing the program going forward.

Lourens Pirenc - Morgan Stanley, Research Division

And comfortable with that payout level, at these levels?

Steven Mark Lowy

Yes, we're comfortable with the payout level where it is.

Operator

The next question comes from the line of Rob Stanton of JPMorgan.

Rob Stanton - JP Morgan Chase & Co, Research Division

If we annualize the first half, $0.328 of FFO, get $0.656, you're going to have less shares on issue in the second half. Why would the second half be less than the first half?

Peter Kenneth Allen

Rob, what it does, is with the dilution of the asset sales in the joint venture which we had in the first half, so with the sale of the assets to Starwood, which happened kind of midway [ph] through first half, that has a much bigger impact in the second half and likewise with the joint venture with CPP, that has a bigger impact in the second half than the first half.

Steven Mark Lowy

And, Rob, when you look at the projection we have put out, that assumes we haven't bought back any more stock.

Rob Stanton - JP Morgan Chase & Co, Research Division

From here or at all?

Steven Mark Lowy

No, no, from here.

Rob Stanton - JP Morgan Chase & Co, Research Division

Okay. So there's no kind of warming us up for an uptick? You have $0.65 as the number?

Peter Kenneth Allen

We've been doing this a long time [indiscernible] there's no warming up for it [ph], I'm sorry.

Rob Stanton - JP Morgan Chase & Co, Research Division

Okay, all righty. In the 1H, can I just clarify, was there any above-the-line recognition of Carindale gains?

Peter Kenneth Allen

In terms of, sorry, Rob?

Rob Stanton - JP Morgan Chase & Co, Research Division

In the FFO, did you recognize any gains from Carindale? The uptick on the NTI or the movement in the shares?

Peter Kenneth Allen

Well, yes. In terms of the underlying overall result, included an uplift in Carindale in terms of the revaluation gains. And in terms of FFO, there was a little bit in terms of -- but very small.

Rob Stanton - JP Morgan Chase & Co, Research Division

Above the line. Okay. And then just another one, it looks to me like you're dropping the approach segmental earnings, the operating, the development, the corporate segment. Is that right? I can't see a bottom line number. I can only see the EBIT split.

Peter Kenneth Allen

I'm sorry, can you ask me that again?

Rob Stanton - JP Morgan Chase & Co, Research Division

It looks like you're dropping -- just in the way you're reporting your numbers, it use to be quite a strong feature that you had the operating segment, the development segment, the corporate segment. I don't see that in this present [ph]?

Steven Mark Lowy

The whole focus, Rob, in terms of where we got to, is looking at FFO so therefore we've, in effect, consolidated those 3 segments into the FFO. You'll see that in our segment analysis that you do have the segments on the operational end, the development and the corporate segment as part of our segment analysis, because that's the way that we manage the business. But in terms of presenting the results to the market, we're focused on FFO. And just, Rob, just so you're clear, in terms of the accounting for Carindale, what you'll see is in terms of the uplift in the valuation, there's no uplift in valuation in FFO. The uplift in valuation is in the revaluation of the assets. There has, however, as I've said, a small amount of project profit recognition, which is included in FFO. But it has nothing to do with the uplift in valuation.

Rob Stanton - JP Morgan Chase & Co, Research Division

Okay. That's just standard generation of development fee income.

Steven Mark Lowy

That is correct. Yes.

Operator

[Operator Instructions] And your next question comes from the line of John Kim of CLSA.

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

Steven, a couple of questions on Australia. You mentioned in your prepared remarks on leasing that you're having annual CPI-based increases. Is this a change from the CPI plus 1% and 2% that you've had...

Steven Mark Lowy

No. It's CPI-based. If I was not clear, I'll be clear now. It's CPI plus 2%.

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

Okay. And can you comment on incentive levels?

Steven Mark Lowy

Excuse me?

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

Can you comment on incentives on leases that you find during the period?

Steven Mark Lowy

Yes. I mean I think that within a subdued environment, you would expect those to increase, and they have been somewhat increased, not on the renewal of existing sites, but on the re-leasing of sites when you get them back. The overall churn in the business is no more than it's been, still less than 10%, somewhere between -- somewhere closer to 9% actually, and that's pretty consistent with the last number of years. But on the level of incentives, they have risen. We're very cautious how we use them. There's generally a higher level on major projects, and that's pretty consistent with the environment that we're in right now.

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

Can you comment on Western Australia going to 7-day trading and what the outlook is for sales growth in your centers? Also, the adoption rate as well given the penalty rates that the retailers need to pay to go to 7-day trading?

Steven Mark Lowy

Well, I think the 7-day trading is a really good thing. None of our centers, actually, were previously open 7 days, and some of our competitors were. So we will be on equal footing with them. And I think you'll see a benefit in trade, not just from the overall lift in business. Every other state historically where we've gone from 6 to 7 days we've seen an overall uplift in business. We expect that to occur, and of course it puts us in a much better competitive situation. Just clarify your second point, please?

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

I'm just wondering if the retailers have indicated that they're going to adopt the 7-day trading given the additional penalty rates, and my understanding is it's not mandatory 7-day trading.

Steven Mark Lowy

No, it's not mandatory, but it's definitely desirable. And yes, they have adopted that, yes.

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

Okay, there's been some discussion on your retailer Internet sales and how that's allocated to the sales of the individual stores. Can you comment on where these negotiations are heading right now?

Steven Mark Lowy

Are you talking about Internet sales whether they're included in stores or not?

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

Yes. On the clicks-and-bricks strategy that the retailers have and the Internet sales, are they allocated at all to the actual individual stores located near the buyers of the...

Steven Mark Lowy

Yes. I think -- first of all, it's a very, very small issue right now, but I think it's just another one of those sort of structural technological issues that we'll have to come to grips with over time. And I'm sure that as this plays out and increases, there will need to be discussions between us and the retailers in how to adjust to that new environment. But I wouldn't worry about it at the moment. It would be miniscule in the scheme of our business.

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

Okay. And then just looking out over the next couple of years. The 5-year rental review in Westfield London, when will that -- when will we start to get the benefits of those rental reviews? And when it fully be implemented, at Westfield London?

Steven Mark Lowy

Well, the building opened in October of '08, so 5 years later is obviously end of next year. So you would expect in the following year, you would expect 2014 and '15, that would flow through.

Operator

The next question comes from the line of Simon Garing of Merrill Lynch.

Simon Garing - BofA Merrill Lynch, Research Division

Just on the development side of the business, just wondering sort of the feasibility of the Australian. There's been a bit more focus and shift to other parts of the world. Just wondering given the subdued environment, the confidence level of the Australian component end of the pipeline.

Steven Mark Lowy

Well, I think the confidence level remains. I mean, clearly, we're in an environment of softness. I mean, soft consumer spending, retailers are cautious within that environment. There clearly needs to be a spark. I'm not sure what that spark is, but there needs to be a spark to kick that along. The fundamentals of the country remain very strong, with sound GDP growth, low inflation, very good employment figures. So on any macro scale, the country's very strong, but there does need to be a spark at the consumer level. From a perspective of our confidence in the future developments, I think when you look at our pipeline in Australia, that's basically focused at our strongest assets. And I think we have shown in what has been a subdued environment for probably up to 3 years now in Australia, projects like Carindale and Fountain Gate are and will be delivered at expected returns. And we remain confident in that Carindale and Fountain Gate in this environment have been expanded now and they'll be our top 5 centers in the country. Retailers want to be in the top 5 centers in the country. Retailers want to be in the primest assets. That is completely -- that focus is driving our entire business, whether it's in Australia or the United States, or London, or Europe. And our focus, and our next run of projects at Miranda, at Mount Gravatt, flowing through over time to Chermside and Marion, these are some of our strongest assets. So whilst we are in a subdued environment, we remain very focused on increasing particularly and investing in particularly our better assets, because they will remain strong and have proven resilient through major cycles. So whilst we are more cautious, yes. Are we more focused on risk? Obviously. And we'll start -- we will only start projects that we're confident in delivering the feasibilities we put out to the market. So I think that it would be better if there's a strong environment. But even within that, we remain confident. And I think that, that's a local question, but that would flow through the same to United States and the same to Europe. If I could spend a moment on Milan for a moment, I mean, obviously, the euro crisis is very complex and Italy is sort of at the center of that, yet the retail demand we're seeing in our predevelopment activity in Milan is unprecedented, and we are absolutely confident we can put on the ground something of the nature of Westfield London in Milan and probably even exceed that. And so it's very interesting that the focus of the retailers is absolutely towards bigger and better stores in the best centers, and that remains our focus.

Simon Garing - BofA Merrill Lynch, Research Division

Are you making more progress towards securing other European fortress sites?

Steven Mark Lowy

We're working very hard on it, and we believe in that strategy, and we're working on that strategy, and as that plays out, we'll keep you informed. Until that time, we're working on it.

Simon Garing - BofA Merrill Lynch, Research Division

Okay. And just on that, are you expecting, still, the management income and project income, which is currently around 21% of FFO, to hit that 30% mark that I think you put out last year? Is that still a medium-term track?

Peter Kenneth Allen

Well, Simon, I think that when we commented late [ph] last year, I think we said that it was going to be around that 20% going forward. Because what you'll see is you'll see that the property management income, that will grow in line typically with growth in net operating income out of the centers. And then the project income that we receive from the developments, that's probably going to remain if we complete $1 billion to $1.5 billion of projects each year, that, that will remain similar to where it is today, which for the full year forecast, is around $200 million.

Simon Garing - BofA Merrill Lynch, Research Division

And, Peter, on that, you don't expect to sell that many more assets from where you are today at around the $32 billion on balance sheet?

Peter S. Lowy

I think in terms of asset sales, we've talked previously about selling some more of our non-core assets in the U.S. and so we're looking out at that. And that depends on the terms of the market. But it's -- in terms of the change that, that would have and the impact that, that has on the overall group, it's very minor.

Operator

The next question comes from the line of Andrew Smith of Evergreen Capital.

Andrew Smith - Evergreen Capital Partners Pty Ltd.

I'm looking at the Australian component of the portfolio. I'm looking at the specialty sales of less than 1%. If that trend is to continue, what do you guys think that you could drive for NOI growth?

Steven Mark Lowy

Andrew, it's Steven here. We have been, as I've said, in quite a subdued retail sales growth environment for best out [ph] of 3 years now just after the stimulus in '09. And I think it would be good to see sales growth sometime in the future. It's evident that net income, overall comparable net income growth at that time in '09 was circa 5%. And we're forecasting now in the range of 2.5% to 3%. Of course, a component of that is lower CPI, and a component of that is just simply a tougher market to do business in. So within this environment, I think that we can achieve these type of figures. But clearly, if you get -- to kick rental growth back to the levels it was, sales growth will need to occur. And for that to occur, you'll need to see in the macro side of the country, the benefits of the macro picture of the country flowing through to the rest of the economy, and the 2-speed economy will need to become more of a 1-speed economy in that sense.

Andrew Smith - Evergreen Capital Partners Pty Ltd.

Excellent. If you don't mind also, a bit of an opportunistic question. Looking at the assets within the AMP JV, in sort of a rough dollar quantum, can you give some indication of future development that could be expected in those assets?

Steven Mark Lowy

I think, Andrew, clearly there's been a lot of media speculation about this in the last few days and month or so. We made a statement the other day to the market that we're in confidential discussions and negotiations with AMP right now. I think it would be inappropriate to make any further comment than that and we'll just see how that plays out.

Operator

And the next question comes from the line of Simon Wheatley of Goldman Sachs.

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

Just following on from that question a little bit from Andrew there. With respect to comp NOI growth in Australia. Obviously, CPI-linked reviews there, given broadly 2.5% to 3% comp NOI growth expectation for the year, for Australia and the U.S., are you -- obviously, CPI is low at the moment, are you expecting CPI to remain low in terms of that outlook?

Steven Mark Lowy

Boy, it's hard for us to predict CPI. it's probably lower than most people think at the moment. Whether it will stay there, I mean, it's clearly a reflection of what's going on in the economy right now. Difficult for us. We'll just flow with it and whatever it is. We'll adjust to it. I'm not quite sure how to comment other than that.

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

Okay. I guess I was just kind of thinking about what your way of thinking of in terms of the broader guidance there. But if you look at the U.S., could you just comment on your average annual rent increases there? Presumably there's no CPI or inflation base. They're fixed numbers...

Steven Mark Lowy

I mean, it's just different markets do different things. It's circa 3%, in that range. We do what -- we are -- the vast majority of leases now being entered into have fixed annual increases in both common area maintenance and underlying rent. And depending on the negotiation that takes place, but that -- you can't expect to see annual increases in the vast majority of leases. And pretty much all leases we're entering into now are under that basis.

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

Okay, great. And where would you be up to in terms of number of leases overall in the U.S. portfolio that would be subject to fixed reviews here?

Steven Mark Lowy

It's very high, it's in the 70-plus percent range. And as we turn over circa 15% of the leases every year, you'll see that flowing through, yes.

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

Okay. The U.S., you've still got some residual non-core assets, I believe, that you were looking at. Just wanted to see what your thoughts were on those at the moment.

Peter S. Lowy

Yes. It's Peter here, Simon. We did that South Starwood earlier in the year for about $1.1 billion, including Eastland that got sold somewhere else. We keep reviewing the market. We keep seeing where it is. Obviously, we put about $2 billion of assets out there over a year ago. We'll look to sell those as we get the opportunity to do so. The sales in them are pretty good. The growth in them is pretty good. And then just as the market is, we'll look to trade them out. We're not under any pressure to do it at all, and we'll just see how it goes.

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

Okay. Just maybe one for Peter Allen. On the interest expense and interest rates, I haven't had a good look through the profile just yet in terms of whether there's been any changes. But I'm just interested in your thoughts in terms of whether you think there is, or where you have reduced [ph] expenses at the moment, and whether you think there's any opportunity to reduce that going forward. Or whether that's, largely -- the opportunity has largely been the same there?

Peter Kenneth Allen

Well, I think that where we are with our interest rate around 4% that the opportunity is pretty much there. I think that what we will look to do, as we've shown with the issue of the GBP 450 million U.K. bond, is that we'll continue to look with this low interest rate environment to term out our facilities. And so therefore, we get the benefit in terms of having length and maturity, but also lower interest rates.

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

Okay. And just one final question on NTA. I'm not sure whether -- I just picked these up a moment ago, but just looking at the reported NTA, I think it's saying now that December '11 was 673, but it was previously stated at 727. Am I looking at the right numbers there?

Peter Kenneth Allen

Yes, Simon. If, I think, as we showed in our accounts last year, given the accounting change in terms of the way the calculation of deferred taxes, and I think I mentioned in my comments, that in effect we've had a net increase in deferred taxes of around $1.25 billion, but the comparable accounts as of December were adjusted similar to June. And so that's the major change.

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

And just, I guess, a final follow-on from that, was there any change in deferred tax from those asset sales that were made during the half?

Peter S. Lowy

In terms of the asset sales, there was a slight change in the deferred tax. And when you look at those asset sales, as Pete mentioned, the sales at roughly $1 billion of assets, we have, probably, an expected tax cost of around $30 million with regards to that asset sale.

Operator

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

Peter S. Lowy

Thanks, everybody, for your time. And as always, the team is here if anybody wants to call us. And we look forward to doing this in 6 months' time. Thanks very much.

Operator

Thank you, ladies and gentlemen. This concludes the Westfield Group 2012 Half Year Results. You may now disconnect.

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