(The following statement was released by the rating agency)
Sept 07 -
-- NOF is a Japanese REIT specializing in office buildings.
-- Japan's sluggish office building market continues to constrain NOF's
profitability, but higher occupancy rates in the J-REIT's portfolio and
property acquisitions have helped its earnings to an extent.
-- NOF's portfolio cash flow is unlikely to decline substantially in the
midterm because of the J-REIT's relatively strong business position and the
relatively high quality of its portfolio.
-- We have affirmed our 'A-' long-term corporate credit and unsecured
debt ratings and our 'A-2' short-term credit rating on NOF. The outlook on the
long-term rating is stable.
Standard & Poor's Ratings Services today said that it has affirmed its 'A-' long-term
corporate credit and unsecured debt ratings and its 'A-2' short-term credit rating on Nomura
Real Estate Office Fund Inc. (NOF). The outlook on the long-term rating on NOF is
The ratings on NOF reflect its relatively strong business position, backed by
its sponsor's real estate management and development capabilities; the high
quality of its sizable portfolio of office properties; and its adequate
liquidity on hand and relatively high financial flexibility. At the same time,
the ratings are tempered by weak portfolio profitability and interest coverage
indicators, owing to the slow recovery of the office leasing market, which
continues to constrain rental revenue; the portfolio's large unrealized
losses, which diminishes its financial buffer; a debt-to-capital ratio
slightly above the range set under its financial policy; and its properties'
high average age.
As of the end of the 17th six-month fiscal term (ended April 30, 2012), NOF
owned a portfolio of 51 office buildings nationwide, though primarily in the
Tokyo metropolitan area, with a total purchase price of about JPY375.4 billion.
We view a substantial decline in NOF's cash flow as unlikely in the midterm,
due to the high quality of the properties in its portfolio. Nevertheless,
NOF's cash flow has faced downside risk. In the second half of 2010, NOF's
largest tenant reduced the rent for the sublessee of one of the J-REIT's major
properties, NRE Tennozu Building (Shinagawa Ward, Tokyo; purchase price: about
JPY33.1 billion). Thereafter, the sublessee evacuated some of its subleased
space. Although the master lessee concluded a lease agreement with a new
sublessee, effective October 2011, to fill the vacated portion of the
building, we believe it will take time for NOF's profits to recover.
The average occupancy rate of NOF's portfolio stood at about 97.1% as of the
end of the 17th fiscal term, improving year-on-year from a recent, term-end
low of 93.8%. However, rents in the office leasing market continue to fall,
and the overall flow of tenant departures has not stopped. In NOF's case, the
single tenant fully occupying NOF Surugadai Plaza Building (Chiyoda Ward,
Tokyo; accounts for about 1% of the total net rentable area of NOF's
portfolio) is scheduled to vacate the building in May 2013. Accordingly, we
see the status of NOF's leasing activities and earnings profile as key factors
for its credit quality.
In terms of external growth, the J-REIT aims to expand its portfolio to JPY500
billion in the midterm. It plans to continue selective property acquisitions
and replacements by utilizing its sponsor's property sourcing pipeline, while
considering its debt level. For example, in the 17th fiscal term, NOF acquired
from its sponsor three properties, including PMO Akihabara (Chiyoda Ward,
Tokyo), for a total purchase price of JPY7.7 billion. The J-REIT supports its
earnings to a degree by steadily, albeit gradually, expanding the size of its
NOF aims to maintain its debt-to-total asset ratio at between 35% and 45% (as
defined by NOF), which is a conservative level. As of the end of the 17th
fiscal term, NOF's debt-to-capital ratio [interest-bearing debt including
hoshokin liabilities/(interest-bearing debt including hoshokin liabilities +
total net assets), as defined by Standard & Poor's] stood at about 49.2%
(46.1% based on NOF's definition), which is slightly higher than the cruising
range set under NOF's financial policy. The portfolio's unrealized losses (the
difference between the portfolio's appraisal value and book value at the end
of a fiscal term) represented about 9.8% of book value. Although the increase
in unrealized losses is decelerating, the situation is a reversal from when
the portfolio had unrealized gains under strong market conditions. NOF's weak
profitability and interest coverage indicators make it likely, in our view,
that the J-REIT's financial standing will take time to completely recover,
amid the subdued office leasing market.
We assess NOF's liquidity as "adequate." We believe NOF has sufficient
liquidity sources for the 18th fiscal term (ending Oct. 31, 2012)--including
liquidity on hand and funds from operations (FFO)--to cover uses--such as debt
repayments, capital expenditures, and dividend payouts. Outstanding cash and
deposits totaled about JPY26.7 billion as of the end of the 17th term. Following
a JPY10 billion reduction in June 2012, NOF's current committed credit lines
total JPY30 billion, all of which are unused. The J-REIT maintains good
relationships with many financial institutions, allowing it to secure
refinancing loans with relative ease, among other benefits. NOF also has
relatively high financial flexibility, given that all of its debt is unsecured.
The outlook is stable. Although business conditions for NOF remain
challenging, we believe that its portfolio cash flow is unlikely to decline
materially from current levels in the midterm, underpinned by its high-quality
portfolio. We may consider raising our ratings on NOF if we see an increased
likelihood of improvement in its profitability, debt-to-capital ratio, and
interest coverage indicators, and if signs of recovery in the office leasing
market emerge. Specifically, we may consider an upgrade if its ratio of FFO to
interest-bearing debt exceeds and remains above 7.5% or so, and if its
debt-to-total asset ratio (as defined by NOF) falls and stays below 45%. On
the other hand, we would consider lowering our ratings if NOF's ratio of FFO
to debt fell and remained below 5.5%, or if its debt-to-total asset ratio
remains above 55% and appears unlikely to improve.
RELATED CRITERIA AND RESEARCH
"Key Credit Factors: Global Criteria For Rating Real Estate Companies," June
"Principles Of Credit Ratings," Feb. 16, 2011
"Rating Policy For Japanese Real Estate Investment Trusts," May 9, 2001
Nomura Real Estate Office Fund Inc.
Corporate credit rating A-/Stable/A-2
Unsecured J-REIT bonds* A-
*The above 'A-' rating on NOF's J-REIT bonds refers to its series 1, 2, 4, and
6 to 9 J-REIT bonds (total issue amount: JPY39.5 bil.). NOF has already redeemed
its series 3 and 5 bonds.