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By Desiree Quijalvo
September 12th, 2012
American credit-rating agency and financial services company, Standard & Poor’s recently confirmed Nomura Real Estate Office Fund’s (NOF) ratings at A- for long term corporate credit and A-2 short-term credit. All in all, the agency’s outlook rating on NOF is stable. NOF is a Japanese REIT specializing in office buildings.
According to Reuters, S&P’s ratings on NOF are based on its strong business position supported by its sponsor’s real estate management and development capabilities, the high-quality of its sizable portfolio of office properties and its liquidity on hand and high financial flexibility. However, at the same time, the ratings were also tempered by weak portfolio profitability and interest coverage indicators, caused by the slow recovery of the office leasing market which then affects rental revenue, the huge unrealized losses of the portfolio, the debt-to-capital ratio that is slightly above the range set under its financial policy and the high average age of its properties.
Reuters said that when the 17th six-month fiscal term ended on April 30, 2012, NOF has already owned a portfolio of 51 office buildings nationwide primarily in Tokyo, with a total purchase price of about 375.4 billion yen. Because of the poor performance and slow growth of the office building market in Japan, NOF’s profitability was affected. But the high occupancy rates in its portfolio and other acquisitions helped it to full extent. In fact, at the end of the fiscal term, NOF’s recorded occupancy rate in its portfolio stood about 97.1% from 93.8%. However, the overall flow of tenant departures continued as seen with Surugadai Plaza Building in Chiyoda Ward in Tokyo. The single tenant fully occupying the building will vacate the premises in May 2013. This shows that the leasing activities of NOF is one of the key factors for its credit quality.
Meanwhile, in terms of external growth, NOF’s goal is to expand its portfolio to 500 billion yen in the midterm and maintain its debt-to-total asset ratio at between 35% and 45%. As of the end of the 17th fiscal term, the debt-to-capital ratio of NOF stood at about 49.2%, which is slightly higher than the range set under its financial policy, which was 46.1% while its portfolio’s unrealized losses represented about 9.8% of book value.
S&P reported that NOF’s liquidity is adequate. They believe that NOF has enough liquidity resources for the 18th fiscal term. NOF maintains good relationships with many financial institutions, which helps it to secure refinancing loans easily. It also has high financial flexibility, despite the fact that all of its debt is unsecured. S&P added that the outlook for NOF is stable because business conditions for them remain challenging. Also, its portfolio cash flow is also unlikely to decline materially from current levels in the midterm, supported by its high-quality portfolio. The credit-rating agency also noted that they may consider raising their ratings if they see an improvement in NOF’s profitability, debt-to-capital ratio and interest coverage indicators as well as signs of recovery in the office leasing market in the future. S&P may also consider an upgrade if the ratio of NOF’s funds from operations (FFO) to interest-bearing debt exceeds and remains above 7.5% or so and if its debt-to-total asset ratio stays below 45%. S&P said that they might consider lowering their ratings if NOF’s ratio of FFO to debt remains below 5.5% or if the debt-to-total asset ratio remains above 55% and appears less likely to improve.
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