TOKYO, Feb. 13 /PRNewswire/ -- Standard & Poor's today assigned its
single-'A'-plus long-term and 'A-1' short-term corporate credit ratings to
Japan Real Estate Investment Corp. (JRE). The outlook on the long-term rating
is stable.
The rating reflects JRE's strong business position and relatively
conservative financial profile. The company currently has a dominant position
in Japan's newly founded real estate investment trust fund (J-REIT) market,
with a high quality real estate portfolio and strong sponsorship. JRE has a
conservative capital structure, and at present strong coverage measures
supported by above-average profitability. The rating also takes into
consideration the unique nature of the structure of J-REITs (in comparison to
REITs rated by Standard & Poor's in other global markets), which prohibits
them from pursuing certain higher-risk activities, such as ground-up
development, so as to safeguard investors. These strengths are partly offset
by concerns regarding the unseasoned market in which JRE operates, the
company's moderately aggressive growth strategy, and its portfolio's asset
concentration risk. In addition, although the company's limited track record
is a further concern, this is offset to a certain degree by the sufficient
performance track record of the portfolio real estate assets, as evidenced by
historical rent rolls.
JRE is among the first J-REITs to be listed on the Tokyo stock exchange.
The company's sponsors are Mitsubishi Estate Co. Ltd. (BBB+/Stable/A-2), Tokio
Marine & Fire Insurance Co. Ltd. (AA/Negative/-), and Dai-Ichi Mutual Life
Insurance Co. (A+/Stable/-). Between them, these companies own a combined 14%
of JRE, as well as 100% of JREA, the recently formed asset manager of JRE. As
of the end of November 2001, JRE owned a portfolio of 21 office properties
located throughout Japan worth JPY124.4 billion (Standard & Poor's
underwriting value), which was well diversified by region and occupied by a
solid tenant base. The overall asset quality is strong, with current average
occupancy at approximately 95%, and portfolio rent levels are consistent with
sub-market rents, which provides some modest protection against lease
rolldown, given the market's exposure generally to short-term leases. There
is, however, a degree of property concentration risk within the portfolio,
with Shibuya Cross Tower currently comprising 27% of asset value, although its
high occupancy rate and diverse roster of tenants mitigates this risk to some
extent. Additionally, single property concentration is expected to decline
modestly as the company acquires more properties. JRE's strategy is to
enlarge its portfolio at a moderately aggressive pace, aiming to reach
JPY300 billion by March 2006.
JRE's management expects to maintain a fairly conservative capital
structure, with its debt-to-capital ratio averaging 30%-39%. However,
leverage could periodically rise to 50% as the company pursues its growth
strategy by using debt to acquire additional properties. Following
acquisitions, the company is expected to raise additional equity, returning
the leverage level to a more moderate range. However, this strategy and
policy is untested, as the company has a limited track record. JRE's strong
sponsorship and sound investment criteria and underwriting procedures somewhat
offset this concern. The portfolio diversity produces a stable rental revenue
stream. Cash flow protection is strong, with the debt-service coverage ratio
(DSCR) expected to remain above 3 times (x) on average, using Standard &
Poor's conservative stressed constant interest rate of 6%. At present EBITDA
interest coverage, based upon currently attractive financing costs is 10x.
JRE's financial flexibility is also considered to be solid, despite the
encumbrance of the portfolio's major holdings, as JRE has established banking
relationships and benefits from strong sponsorship. With more than 50% of the
company's net operating income encumbered, the rating on any unsecured note
issue would be one notch down from the corporate credit rating.
OUTLOOK: STABLE.
JRE's high quality assets should provide for a stable income stream and
sustainable profitability. With the support of its sponsors, JRE is expected
to maintain a moderate financial profile as the company pursues acquisitions
and portfolio growth. The rating anticipates that although JRE's leverage may
vary throughout this portfolio growth period, average leverage is expected to
remain in the moderate range indicated.
A detailed analysis of JRE and the J-REIT market will soon be available on
RatingsDirect, Standard & Poor's premier Web-based credit analysis system, at
http://www.ratingsdirect.com.
SOURCE Standard & Poor's
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CONTACT:
Tomoyoshi Omuro, Tokyo, +81-3-3593-8584, Roko
Izawa, Tokyo, +81-3-3593-8674, Andrea Bryan, Tokyo,
+81-3-3593-8657, or Elizabeth Campbell, New York,
+1-212-438-2415, all of Standard & Poor's Ratings Services
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