Tokyo, April 21, 2009 -- Moody's Investors Service has downgraded the ratings of 13 real estate
investment trusts and confirmed one. These actions conclude the
reviews initiated on January 15, 2009.
The individual rating actions follow:
- Japan Real Estate Investment Corporation: downgraded to
A1 from Aa3 (under review for possible downgrade) both the issuer rating
and the senior unsecured long-term debt rating; outlook is
stable.
- Japan Retail Fund Investment Corporation: downgraded to
A2 from A1 (under review for possible downgrade) both the issuer rating
and the senior unsecured long-term debt rating and confirmed P-1
short-term debt rating; outlook is negative.
- Nippon Accommodations Fund Inc.: downgraded to A2
from A1 (under review for possible downgrade) both the issuer rating and
the senior unsecured long-term debt rating; outlook is negative.
- Nomura Real Estate Residential Fund, Inc.:
downgraded to A2 from A1 (under review for possible downgrade) the issuer
rating; outlook is negative.
- Frontier Real Estate Investment Corporation: downgraded
to A2 from A1 (under review for possible downgrade) the issuer rating;
outlook is negative. This action concludes the review initiated
on February 19, 2008.
- TOKYU REIT, Inc.: confirmed A2 (under review
for possible downgrade) both the issuer rating and senior unsecured long-term
debt rating; outlook is negative.
- Japan Excellent, Inc.: downgraded to A3 from
A2 (under review for possible downgrade) the issuer rating; outlook
is negative.
- Hankyu REIT, Inc.: downgraded to A3 from A2
(under review for possible downgrade) the issuer rating; outlook
is negative.
- Top REIT, Inc.: downgraded to A3 from A2 (under
review for possible downgrade) the issuer rating; outlook is negative.
- United Urban Investment Corporation: downgraded to Baa1
from A3 (under review for possible downgrade) the issuer rating;
outlook is stable.
-Premier Investment Company: downgraded to Baa1 from A3 (under
review for possible downgrade) both the issuer rating and the senior unsecured
long-term debt rating; outlook is stable.
- MORI HILLS REIT INVESTMENT CORPORATION: downgraded to Baa1
from A3 (under review for possible downgrade) both the issuer rating and
the senior unsecured long-term debt rating; outlook is negative.
- Japan Hotel and Resort, Inc.: downgraded to
Baa3 from Baa2 (under review for possible downgrade) the issuer rating;
outlook is stable.
- Kenedix Realty Investment Corporation: downgraded to Ba1
from Baa2 (under review for possible downgrade) both the issuer rating
and the senior unsecured long-term debt rating; outlook is
negative.
The global credit crunch and financial crises have adversely affected
the Japanese real estate investment trusts (J-REITs), particularly
their ability to raise funds. Many are finding it increasingly
difficult to raise funds from the stagnant equity market. In addition,
financial institutions are growing reluctant to extend them loans,
which has raised funding costs and shortened borrowing terms. The
bond market has been nervous to the point that J-REITs' opportunities
to issue bonds will be very limited. Some of the J-REITs
have even been forced to dispose of properties to make partial payments
upon refinancing.
The turbulence in the financial market has affected the real economy,
accelerating the economic slowdown, as evidenced by the projection
for negative GDP growth. Moody's has observed a rise -- albeit
a slow one -- in vacancy rates and a decline in offering rents in
the rental office market. Given financial institutions' growing
reluctance to finance real estate properties, property prices are
also declining. Official prices (from the Japanese government)
as of January 2009 for both commercial and residential land were down,
as were the appraisal values of properties owned by the REITs, regardless
of asset type. Worsening real estate fundamentals look to continue
in the near future, which will stress the J-REITs'
business performance and financial results.
Thus, on January 15, 2009, Moody's placed the ratings
of 14 J-REITs on review for possible downgrade.
In its review, Moody's focused on certain factors for both individual
issuers and the sector, and its findings are stated below.
Moody's believes that, in the J-REIT sector, these
14 J-REITs have high credit quality, and has no general concerns
over their ability to raise funds from financial institutions at this
point.
(1) Likelihood of raising funds from equity and leverage
Given the difficulties of raising funds from equity, Moody's believes
that J-REITs may have to adopt even more conservative financial
policies. Their policies -- already conservative -- may
be stressed, given the high debt ratios relative to historical leverage
and the difficulty of paying down debt by issuing new equity. The
financial policies of many of the J-REITs reviewed have experienced
some stress, and this is one of the factors driving the downgrades
or the changes to outlooks.
(2) Relationships with banks and liquidity
As a result of the review, Moody's finds at this point that
it has no immediate concerns over the 14 rated J-REITs' relationships
with their banks, which allows for stable access to funds.
However, we assume that the banks will remain cautious, and
remain selective about lending to the sector for some time. Moreover,
many of the J-REITs have limited amounts of cash (or cash equivalents)
to cover debt maturing in the next 12 to 18 months, which will be
a challenge to achieving financial stability.
(3) Debt profiles, i.e., the proportion of long-
and short-term debt, as well as average funding terms
The debt management of most of the 14 rated J-REITs is more conservative
than of others in the sector. However, their flexibility
in finance policies may be stressed due to tighter funding conditions,
i.e., rising funding costs, the growing proportion
of short-term debt, and shorter funding periods, in
an environment in which financial institutions are already taking increasingly
conservative positions in extending loans to J-REITs.
(4) Impact of the economic slowdown on the stability of cash flow from
rents and on real estate prices
In Moody's opinion, when the diversity in the portfolio, the
quality and tenant attractiveness of the properties in the portfolio,
tenant turnover, the structure of leases, and rents are taken
into account, the economic downturn is having only a limited impact
on the near-term cash flows of most the 14 rated J-REITs.
However, Moody's assumes that the decline in offering rents
for office buildings will become more marked. Moreover, cash
flows may be pressured if a J-REIT's portfolio contains a significant
proportion of performance-based rents for retail properties and
hotels, or if the portfolio is dominated by luxury rental apartments.
The decline in property prices is affecting the portfolios of all the
J-REITs. Moody's is concerned that the J-REITs
are going to raise their market-value-based leverage,
if the gap between appraisal values and acquisition prices (unrealized
gains) is small at this point. According to the financial covenants
of many of the loan agreements, appraisal values are used to calculate
leverage. If the safety margin in the covenants were to decline,
financial flexibility may be strained.
(5) Portfolio strategies
J-REITs may have to revamp their portfolio growth strategies if
equity prices remain stagnant. For a J-REIT whose rating
incorporates expectations for portfolio growth or mitigation of asset
concentration risk, Moody's re-examined it based on the size
and diversity of the portfolio at this point, as well as the J-REIT's
ability to raise funds from the equity market. Thus, the
fact that alleviating concentration may take some time led in part to
the downgrades of some of the rated J-REITs.
In December 2008, the Japanese government and the Bank of Japan
(BOJ) implemented a program to support the J-REIT sector.
Development Bank of Japan Inc., as a designated financial
institution, has already started providing loans to cope with the
damage caused by the crisis, while the BOJ expanded the definition
of "eligible collateral" to include J-REITs' loans
and bonds.
The direct effect of these measures on the most of 14 rated J-REITs'
credit quality has been limited up to this point, because their
ability to raise funds from financial institutions has not been a concern.
Moody's expects the government's proactive support to ease funding
may improve the funding environment and will likely mitigate the financial
stress across the J-REIT industry.
Rationales for each of the rating actions are provided on the individual
press releases. For more information regarding the individual J-REITs,
please refer to their Credit Opinions, which will be published in
the near future.
Moody's previous rating actions follow:
- Japan Real Estate Investment Corporation: placed the Aa3
issuer and senior unsecured long-term debt ratings on review for
possible downgrade on January 15, 2009.
- Japan Retail Fund Investment Corporation: placed the A1
issuer and senior unsecured long-term debt ratings on review for
possible downgrade on January 15, 2009.
- Nippon Accommodations Fund Inc.: placed the A1 issuer
and senior unsecured long-term debt ratings on review for possible
downgrade on January 15, 2009.
- Nomura Real Estate Residential Fund, Inc.:
placed the A1 issuer rating on review for possible downgrade on January
15, 2009.
- Frontier Real Estate Investment Corporation: placed the
A1 issuer rating on review for possible downgrade on January 15,
2009.
TOKYU REIT, Inc: placed the A2 issuer and senior unsecured
long-term debt ratings on review for possible downgrade on January
15, 2009.
- Japan Excellent, Inc.: placed the A2 issuer
rating on review for possible downgrade on January 15, 2009.
- Hankyu REIT, Inc.: placed the A2 issuer rating
on review for possible downgrade on January 15, 2009.
- Top REIT, Inc.: placed the A2 issuer rating
on review for possible downgrade on January 15, 2009.
- United Urban Investment Corporation: placed the A3 issuer
rating on review for possible downgrade on January 15, 2009.
- Premier Investment Company: placed the A3 issuer and senior
unsecured long-term debt ratings on review for possible downgrade
on January 15, 2009.
- MORI HILLS REIT INVESTMENT CORPORATION: placed the A3 issuer
and senior unsecured long-term debt ratings on review for possible
downgrade on January 15, 2009.
- Japan Hotel and Resort, Inc.: downgraded to
Baa2 from Baa1 its issuer rating, and continued its review for a
further possible downgrade on January 21, 2009
- Kenedix Realty Investment Corporation: downgraded to Baa2
from Baa1 its issuer and senior unsecured long-term debt ratings,
and continued its review for a further possible downgrade on March 6,
2009
The methodology used in rating J-REITs is the "Rating Methodology
for REITs and Other Commercial Property Firms" (January 2006), which
can be found at www.moodys.com in the Credit Policy &
Methodologies directory, in the Ratings Methodologies subdirectory.
Moody's Special Report "Japan Real Estate Investment Trusts: Assessing
Debt Credit Quality During Financial Turmoil" (December 2008), can
be found at www.moodys.com.
Tokyo
Takuji Masuko
VP - Senior Credit Officer
Structured Finance Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100
Tokyo
Tetsuji Takenouchi
Senior Vice President - Team Leader
Structured Finance Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100
Moody's downgrades 13 J-REITs and confirms one