S&P Affirms Ratings on Japan Real Estate Investment Corp
TOKYO--Standard & Poor's said last week that it had affirmed its 'A+' long-term and 'A-1' short-term ratings on Japan Real Estate Investment Corp. (JRE) and its senior unsecured note (unsecured J-REIT bond) based on its strong business position and relatively conservative financial profile. The outlook is stable.
JRE currently has a dominant position in Japan's newly founded J-REIT market, with a high-quality real estate portfolio and strong sponsorship. These strengths are partly offset by concerns regarding the still unseasoned market in which JRE operates, the company's moderately aggressive growth strategy, and its portfolio's asset concentration risk.
In the fiscal period ending September 2002, JRE acquired three additional office properties in central Tokyo, MD Kanda Building, Burex Kyobashi Building, and Kandabashi Park Building, amounting to an aggregate investment of JPY19.6 billion. The quality of these newly acquired assets is high and is consistent with the quality of the portfolio overall. As of the end of fiscal period, JRE owned a portfolio of 27 office properties located throughout Japan worth JPY159.5 billion (based on Standard & Poor's underwriting value), which was well diversified by region and occupied by a solid tenant base with an average occupancy rate of approximately 95.3%. This rate has remained strong despite the recent softening of the Tokyo property market.
JRE's strategy is to enlarge its portfolio base at a moderately aggressive pace, aiming to reach JPY300 billion by March 2006. Standard & Poor's expects that this external growth strategy is achievable given the company's current rate of property acquisition, and that the portfolio's asset concentration risk will decline modestly as the company acquires additional properties.
With regards to internal growth, in 2001, JRE announced its plan to achieve a 5% cost reduction within three years for each of its properties, and it has already achieved 90% of its target for the 19 properties contained in its initial portfolio.
As of the fiscal period ending September 2002, JRE posted total revenue of JPY7.9 billion, net operating income (NOI) of JPY5.2 billion, and net income of JPY2.9 billion, which were consistent with Standard & Poor's previous projections. JRE demonstrated its ability to control its capital structure in a timely manner by issuing an additional JPY31 billion in equity in April 2002, and a JPY25 billion J-REIT bond in June 2002. The company's leverage following these issuances remains at a conservative level, with a debt-to-capital ratio at 31.9%, and its loan-to-value (LTV) ratio at 37.2% (calculated from Standard and Poor's underwriting value following deductions for security deposit liabilities).
JRE's financial flexibility remains appropriate, with 42% of JRE's portfolio NOI encumbered by secured bank borrowing, which is modestly lower than Standard & Poor's 50% threshold for placing the unsecured rating one-notch below the corporate credit rating. The company appears committed to pursuing an unsecured borrowing strategy, and has the ability to further reduce the level of encumbrance in its portfolio through the acquisition of additional unencumbered properties. Cash flow protection is strong, with the debt-service coverage ratio (DSCR) at 3.62x, using Standard & Poor's conservative stressed constant interest rate of 6%. EBITDA interest coverage, based upon the currently attractive financing costs is 14x.
In the current fiscal period ending March 2003, JRE has already acquired two additional properties in central Tokyo, namely Kokusai Iidabashi Building and Da-Vinci Harajuku Building, with a total purchase price of JPY9.9 billion. The total number of properties has increased to 29, and the total portfolio value is now JPY169.9 billion (based on Standard & Poor's underwriting value). Even including these purchases and anticipated additional property acquisitions, Standard & Poor's still expects that JRE will be able to maintain average LTV ratios in the mid 30% range during the current fiscal period.
JRE's high quality assets should provide for a stable income stream and sustainable profitability. With the support of its sponsors, JRE is expected to maintain a moderate financial profile associated with improved financial flexibility and asset diversification as the company pursues acquisition and portfolio growth.