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Nov 28 -
Summary analysis -- Japan Retail Fund Investment Corp. ------------ 28-Nov-2012
CREDIT RATING: A/Stable/A-1 Country: Japan
Primary SIC: Real estate
Mult. CUSIP6: 471095
Credit Rating History:
Local currency Foreign currency
22-Dec-2009 A/A-1 A/A-1
28-Sep-2004 A+/A-1 A+/A-1
The ratings on Japan Retail Fund Investment Corp. (JRF) reflect its highly diversified asset portfolio, comprising high-quality retail properties and representing the largest portfolio among listed Japanese REITs (J-REITs) that focus on retail properties, as well as the highly regulated nature of J-REITs in general. The ratings also reflect JRF's strong business position in the J-REIT market, backed by the favorable credit quality and strong brand recognition of its sponsors, Mitsubishi Corp. (A+/Stable/A-1) and UBS AG (A/Stable/A-1). The ratings also reflect a strengthened debt profile, and relatively high financial flexibility.
These strengths are tempered by JRF's somewhat weak financial profile compared with its business profile, given its relatively high debt-to-capital ratio and its relatively weak interest coverage indicators. Weak profitability measures also constrain the ratings. The ratings also reflect somewhat unclear prospects over JRF's ability to maintain asset quality at formerly high levels.
Standard & Poor's Ratings Services views JRF's business risk profile as "strong." JRF's diversified real estate portfolio comprises 76 properties with a total value of about JPY720.0 billion (based on purchase price as of Oct. 31, 2012). At the same time, its average portfolio occupancy rate was high, at 99.8%. The proportion of properties under long-term contracts with remaining terms of over 10 years accounts for about 35.4% of all of JRF's leasing agreements. The average remaining period of JRF's leasing agreements is still relatively long, at about 7.7 years as of Aug. 31, 2012. These factors support our view that JRF is likely to continue to generate largely stable cash flows.
The retail industry in Japan remains competitive, partly due to the contracting domestic market as a result of the country's aging population and declining birthrate. In addition, JRF has a degree of tenant concentration risk in its portfolio because rents paid by three tenants--Aeon Mall Co. Ltd. (NR), Aeon Retail Co. Ltd. (NR), and Ito-Yokado Co. Ltd. (NR)--represent about half of its total rental income. Nevertheless, the strong competitiveness of these three retailers, even amid heated domestic competition, partly mitigates this risk, in our view.
JRF raised about JPY24.7 billion in equity capital in October 2012, just a year after its previous offering. It used the funds procured from the equity offerings, as well as new borrowings, to acquire seven properties for a total purchase price of about JPY52.2 billion. The newly purchased properties have slightly lifted the profitability of JRF's entire portfolio, because most of the new properties have higher yields than the existing portfolio. Due to the newly acquired properties, we expect JRF's return on assets (ROA) to improve to the high 4% range and return on investment (ROI; NOI/purchase price) to stand in the mid 5% range. Meanwhile, JRF's profitability indicators remain somewhat weak, in our view. To strengthen its profitability, JRF has started adding various types of retail properties with high yields, such as amusement facilities, to its portfolio. In our view, this leads to somewhat unclear prospects over whether the J-REIT can maintain asset quality at high levels.
Standard & Poor's evaluates JRF's financial risk profile as "modest." The J-REIT'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 51.4% as of the end of the 21st fiscal term (ended Aug. 31, 2012). We hold the view that its debt-to-capital ratio remains relatively high. Although JRF has stated its intent to lower its ratio of total liabilities, the J-REIT will need one or two years to improve its financial standing, in our view, given its relatively high debt-to-capital ratio.
All of JRF's interest-bearing debt is unsecured. The J-REIT has been actively shifting its debt to longer maturities in line with its aim to increase its ratio of long-term liabilities to total debt. This has substantially improved its average debt maturity to about 5.0 years as of the end of the 21st fiscal term. Although we regard the slightly high proportion of JRF's floating-rate loans to overall debt as a negative factor for its credit quality, we also consider its improved debt profile as a positive factor.
Due to the acquisition of new properties, we expect JRF's ratio of funds from operations (FFO) to debt (including hoshokin liabilities) to exceed 8%. Although cash-flow related measures have slightly improved, the ratio remains somewhat low, in our view. We believe that lower debt levels and improved profitability will be key for JRF to achieve better cash flow protection.
Our short-term rating on JRF is 'A-1', reflecting our long-term corporate credit rating and our assessment of JRF's liquidity as "adequate." JRF had unused committed credit lines of JPY50.0 billion as of the 21st fiscal term. We expect JRF to have sufficient sources of liquidity--including liquidity on hand and FFO--for the 23rd fiscal term (ending Aug. 31, 2013) to cover its uses of liquidity, such as debt repayments, capital expenditures, and dividend payments. In addition, JRF had about JPY16.7 billion in cash and deposits as of the end of the 21st fiscal term. Although some of JRF's properties in its portfolio are pledged as collateral for security deposits and "hoshokin" liabilities (hoshokin liabilities are deposits, sometimes interest-bearing, with multiple, scheduled repayments regardless of the leasing period, and thus have similar characteristics to conventional debt), JRF maintains financial flexibility, in our view, given that: pledged security deposits and hoshokin liabilities account for a reasonably small share of total assets; and all of its current interest-bearing debt is unsecured.
The outlook remains stable, reflecting our expectation that JRF will maintain generally stable earnings from its high-quality and well-diversified portfolio. To revise the outlook upward, we would need to see clear signs of improvement in JRF's profitability and financial indicators; however, we believe that the J-REIT's currently weak financial indicators limit this likelihood for the foreseeable future. On the other hand, JRF's credit quality may come under downward pressure if its debt-to-capital ratio exceeds and remains above 55%; its EBITDA interest coverage ratio falls below 5x; or its cash flow deteriorates substantially due, for example, to departures of major tenants.
Related Criteria And Research
-- Key Credit Factors: Global Criteria For Rating Real Estate Companies, June 21, 2011
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- Rating Policy For Japanese Real Estate Investment Trusts, May 9, 2001