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Global Credit Research - 30 Jun 2010
Tokyo, June 30, 2010 -- Moody's Investors Service has upgraded to Baa3 from Ba1 its senior unsecured
long-term debt rating on Advance Residence Investment Corporation
(ADR) and changed the rating outlook to stable.
These rating actions take into account the fact that ADR's rated bonds
are subordinate to its outstanding borrowings.
This upgrade concludes the review initiated March 1, 2010,
and reflects Moody's view that the series of measures implemented to improve
ADR's financials following its merger with Nippon Residential Investment
Corporation in March 2010 will lead to better financials and more stable
cash flow from its portfolio, which focuses on residential properties
and is valued at approximately JPY 360 billion.
On June 4, 2010, ADR announced that it was 1) issuing 240,000
units through a public offering; 2) setting up a commitment of line
JPY 25 billion; 3) purchasing six properties for JPY 10.5
billion; and 4) unifying most of its properties under the "RESIDIA"
On June 28, 2010, ADR completed its public offering,
raising JPY 26.4 billion. Approximately JPY 20 billion of
the proceeds will be able to used to pay down loans and bonds.
ADR has already paid down JPY 3 billion in debt, out of the JPY
5.9 billion in proceeds from a sale of nine properties in May 2010.
As a result of these debt payments, as well as the offering,
ADR's ratio of debt to total assets will decline from over 61%
to about 54% (according to Moody's estimates).
The proceeds from the commitment line -- in addition to some of the
offering proceeds -- may be used to redeem the JPY 35 billion in
bonds and approximately JPY 16.5 billion in loans coming due by
Another JPY 10.5 billion will be used to acquire the six new properties.
The net operating income yield for the nine properties sold in May 2010
was 5.6%, but the NOI yield of the six new properties
is estimated at 6.4%, which will help increase ADR's
Although the book values of some of the properties are lower than current
appraisal values (equivalent to unrealized losses of approximately JPY
7.2 billion as of March 1, 2010), the company will
also benefit from approximately JPY 44 billion of negative goodwill resulting
from the merger.
And since the portfolio's operating profits may remain stressed,
this asset "exchange" will effectively help maintain,
possibly even increase, ADR's NOI.
The outlook change to stable is based on Moody's view that the cash
flow from ADR's portfolio will be stable and that the company's
conservative financial management will remain focused on further improvement.
ADR is targeting an LTV of 50-55%, as it announced
after the merger. Nevertheless, even with the improvement
in financial leverage, Moody's still considers this somewhat
high for a J-REIT and thus LTV remains a concern.
Also, Moody's does not believe that ADR's net debt/EBITDA
of 11x-13x will improve for some time -- at least, not
until the company's profits rise. However, a quality
residential portfolio should help minimize profit volatility in an economic
downturn, which mitigates concerns about the company's credit
The collateralization of ADR's properties that took place before
the merger with NRI has been a hindrance to the company's financial
flexibility. Thus, the de-collateralization will be
credit-positive, as the rated bonds will no longer be subordinated.
Moody's previous rating action on ADR took place on March 1,
2010, when it upgraded the unsecured senior debt ratings to Ba1
from Ba2 and kept the ratings under review for possible further upgrade.
The principal methodology used in rating real estate investment trusts
is Moody's "Rating Methodology for REITs and Other Commercial Property
Firms," published in January 2006, which can be found at www.moodys.com
in the Research & Ratings directory, in the Rating Methodologies
Other methodologies and factors that may have been considered in the process
of rating this issue can also be found in the Rating Methodologies subdirectory.
New Investment Corporation - Advance Residence Investment Corporation
is a Japanese REIT that invests in and manages residential properties.
It was listed on the Tokyo Stock Exchange on March 2, 2010.
Operating revenues for the former ADR's came to approximately JPY2.8
billion for the fiscal half-year that ended December 2009,
for Nippon Residential Investment Corporation, JPY8.7 billion
for the fiscal half-year that ended November 2009.
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 upgrades Advance Residence's bond rating to Baa3
No Related Data.
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