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21 Apr 2009
Tokyo, April 21, 2009 -- Moody's Investors Service has downgraded to A2 from A1 the issuer rating
of Frontier Real Estate Investment Corporation ("FRI"). The rating
had been under review for possible downgrade. The rating outlook
is negative. This concludes the review initiated on February 19,
2008.
The downgrade reflects Moody's concerns that FRI's conservative financial
policy may be stressed, since its ratio of debt to total assets
(including security deposits and construction deposits) is roughly 47%
and remains high relative to its historical level.
The negative rating outlook reflects Moody's view that FRI will need some
time to reduce its leverage.
When it assigned the rating, Moody's had assumed that FRI would
hold the ratio in the range of 30% to 40%. However,
the new sponsor allows for higher ratios, which Moody's has reflected
in the rating. Moody's is concerned that FRI's already conservative
financial policy may be stressed, given the high debt ratio relative
to its historical leverage. However, FRI plans to hold its
leverage at current levels or to reduce it if it can. Moreover,
its share price, as indicated by the PBR (price to book value ratio),
is higher than that of many other listed REITs, which partly mitigates
this concern.
Long-term debt may be as low as 27% of all its debt.
However, the amount of FRI's property guarantee deposits is
high, which functions as extra liquidity and mitigates concerns
about the company's debt management. Still, its limited
liquidity -- such as the lack of a commitment line -- will be
an issue in the future.
FRI's portfolio focuses on retail properties. Since switching its
sponsor to Mitsui Fudosan Co., Ltd. ("Mitsui Fudosan"),
FRI has expanded its portfolio by actively acquiring properties developed
mainly by Mitsui Fudosan.
Despite concerns about the retail industry's deteriorating performance
and the portfolio's large-property concentration; the
five largest properties account for 60% of the portfolio's value
(based on acquisition prices), Moody's believes that any impact
on FRI's near-term cash flows will be limited, because (1)
the properties in the portfolio are competitive in their submarkets,
and (2) many have long-term leases. In addition, Moody's
expects the "property pipeline" from Mitsui Fudosan will grow.
It has signed a "SC Management Agreement" with Mitsui Fudosan, and
will thus benefit from Mitsui Fudosan's considerable expertise in
the management/operation of retail properties.
Moody's previous rating action on FRI took place on January 15,
2009, when the agency changed the direction of a review of its issuer
rating of A1 for a possible downgrade.
The methodology used in rating 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.
Frontier Real Estate Investment Corporation is a J-REIT and focuses
on investing in and managing retail properties. Its operating revenue
for the fiscal half-year that ended in December 2008 was approximately
JPY 5.7 billion.
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 FRI's rating; outlook negative
No Related Data.
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