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Rating Action:

Moody's downgrades 13 J-REITs and confirms one

21 Apr 2009

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
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