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Global Credit Research - 30 Sep 2010
Tokyo, September 30, 2010 -- Moody's has changed to stable from negative the outlook for its
A2 issuer rating on Frontier Real Estate Investment Corporation (FRI).
This outlook change reflects Moody's view that cash flow from FRI's
portfolio will be stable and that FRI will use a conservative approach
to expand its business platform, exemplified by the improvement
to leverage afforded by the company's public offering in July.
FRI's portfolio comprises mostly retail properties with good long-term
tenants (the occupancy rate was 100% as end-August 2010),
which contributes to the stability of rent revenues.
After Japan Tobacco (Aa3, stable) was replaced as sponsor by Mitsui
Fudosan Co., Ltd. (A2, negative) in March 2008,
FRI expanded its portfolio mainly by purchasing property from Mitsui Fudosan;
at this point about 40% (based on acquisition prices) of its properties
have been purchased after the sponsor's change.
FRI has also purchased some fairly young properties, which is helping
keep the average age of the portfolio at about the same as it was when
Japan Tobacco was sponsor.
Tenant concentration is somewhat high, with the Ion Group taking
up 40% of the company's portfolio. However,
FRI also has a number of good core tenants, such as Mitsui Fudosan
and the Seven & i Group, which mitigates its concentration risk.
Moreover, in light of the properties' strong competitiveness
in their sub-markets and the preponderance of long-term
leases, Moody's expects that any potentially adverse effects
of tenant concentration to FRI's cash flow will be limited.
Also, the two properties FRI bought from Mitsui Fudosan for around
JPY29 billion in July 2010 have raised the value of the portfolio to more
than JPY200 billion (based on acquisition prices) and have alleviated
its property concentration somewhat.
Furthermore, the property pipeline from, and the SC Management
Agreement with, Mitsui Fudosan (for the management and operation
of Mitsui's retail properties) will be critical to expanding FRI's
FRI used JPY20 billion of the proceeds from the public offering for its
July purchases. As a result, it needed to take out a loan
of only JPY10 billion for the buy, and its debt ratio -- by
FRI's definition, of (debt plus deposits and guarantee funds
minus usable cash)/(total assets minus usable cash) -- improved to
43% from 45.7%, the second time its leverage
has declined since July 2008.
Although FRI is aiming to expand its assets to JPY300 billion over the
medium term, it also plans to strengthen its business platform.
Moody's expects that FRI will maintain a conservative financial
approach and will continue to focus on lowering leverage, which
may fluctuate. Moreover, the company's share price,
as indicated by its price to book, is higher than that of many other
listed REITs, which is a support factor for its debt management.
FRI takes advantage of its investment focus on retail properties,
which require "deposits and guarantee funds," and uses
these funds for financing. (Tenants' guarantee funds are
similar to deposits, but are paid back over 10 years or so with
almost zero interest.) With these funds taken into account,
its debt (loans only) to total assets has been as low as 24% and
its interest coverage as high as 14.6x, which allows for
longer debt durations.
FRI includes deposits and guarantee funds in its long-term debt,
for a ratio of 75% as of August 2010. However, its
long-term debt (loans only) comprises 56% of total debt
(loans only), which is low for a REIT. To further expand
its portfolio FRI will need to lengthen its debt duration and diversify
its loan maturities.
In August, FRI set up an additional commitment line in the amount
of JPY3 billion (it had set up a line of JPY3 billion earlier) to be used
for refinancing, which has improved its liquidity. Nevertheless,
it still has JPY23.7 billion in short-term loans as of end-August
2010, so it still needs to further strengthen its liquidity.
Moody's previous rating action on FRI took place on April 21,
2009, when it downgraded FRI's issuer rating to A2 from A1,
with a negative outlook. The rating had previously been placed
under review for possible downgrade on January 15, 2009.
The principal methodology used in rating real estate investment trusts
is Moody's "Global Rating Methodology for REITs and Other Commercial
Property Firms," published in July 2010, which can be found
at www.moodys.com in the Research & Ratings directory,
in the Ratings Methodologies subdirectory.
Other methodologies and factors that may have been considered in the process
of rating this issue can also be found in the Ratings Methodologies subdirectory.
Frontier Real Estate Investment Corporation is a J-REIT that invests
in and manages retail properties. Its revenues totaled approximately
JPY 6.4 billion for the fiscal half-year ended June 2010.
Structured Finance Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100
Senior Vice President - Team Leader
Structured Finance Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100
Moody's Japan K.K.
Moody's changes FRI's outlook to stable from negative
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
No Related Data.
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