Ratings On Nippon Accommodations Fund
Affirmed At 'A+/A-1'; Outlook Stable
Primary Credit Analyst:
Roko Izawa, Tokyo (81) 3-4550-8674; roko_izawa@standardandpoors.com
Secondary Contact:
Yumi Oikawa, Tokyo (81) 3-4550-8775; yumi_oikawa@standardandpoors.com

OVERVIEW• Nippon Accommodations Fund is a J-REIT that specializes in residential
properties.
• NAF has a relatively high debt-to-capital ratio. Nevertheless, NAF's
recent property acquisitions have improved the J-REIT's business profile,particularly the diversity and, to a degree, the profitability of its
portfolio.
• Amid relatively favorable conditions in the residential property rental
market, we expect NAF to continue to generate stable cash flow, supported
by its strong business position and high-quality real estate portfolio.
• We have affirmed our 'A+' long-term corporate credit and unsecured debt
ratings and our 'A-1' short-term credit rating on NAF. The outlook on thelong-term corporate credit rating remains stable.

TOKYO (Standard & Poor's) Dec. 3, 2012--Standard & Poor's Ratings Services
today said that it has affirmed its 'A+' long-term corporate credit andunsecured debt ratings and its 'A-1' short-term credit rating on Nippon
Accommodations Fund Inc. (NAF). The outlook on the long-term corporate credit
rating on NAF remains stable.
NAF is a Japanese REIT (J-REIT) that specializes in residential properties.
NAF has secured a firm position in the J-REIT market, backed by the realestate management and development capabilities and brand recognition of its
sponsor, Mitsui Fudosan Co. Ltd. (BBB+/Stable/A-2). The ratings on NAF reflect
its strong business position, its high-quality portfolio of rental properties

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Ratings On Nippon Accommodations Fund Affirmed At 'A+/A-1'; Outlook Stablewith high occupancy rates, and its high financial flexibility. Meanwhile, we
see some factors that constrain the ratings. In particular, NAF's
debt-to-capital ratio is hovering at levels that are relatively higher than
the target range it established under its financial policy. In addition, NAF
has a level of unrealized losses (the difference between the portfolio'sappraisal value and book value at the end of a fiscal term) in its portfolioand bears a degree of asset concentration risk from its largest property.
As of Nov. 30, 2012, NAF owned a portfolio of 89 residential properties thatare, for the most part, located in the 23 wards of Tokyo, with a totalpurchase price of about ¥233.1 billion. From January to November 2012, NAF
purchased four properties and acquired anonymous partnership ("tokumeikumiai") equity interests in a special-purpose company (SPC) that holds two
properties in Tokyo. Moreover, NAF is set to acquire Apartments Tower Meguro(Meguro Ward, Tokyo; purchase price: ¥9.0 billion) in December 2012,indicating its pursuit of external growth. NAF resumed property acquisitionsin 2009, and as a result, it has been able to improve its business profile,particularly the diversity and, to a degree, the profitability of its
portfolio. Although NAF's portfolio still has a degree of concentration in its
largest property, we note that the J-REIT's recent expansion of its portfolio
has reduced this asset concentration risk.
Meanwhile, NAF has been acquiring other types of housing assets, such as
student dormitories and corporate housing facilities, which the J-REIT
categorizes as "other accommodation assets." Although property operators
manage these assets, which entail a degree of operational risk, we consider
any possible adverse impact on cash flow to be limited because: (1) NAF caneasily convert these assets into typical rental properties; and (2) the totalpurchase price of the assets represented only about 4.2% of the total value ofNAF's portfolio as of Nov. 30, 2012. We consider business conditions forresidential J-REITs to be somewhat favorable, given the current limited supplyof rental housing in the real estate market. Rents at NAF's properties, whichhave high occupancy rates, are showing signs of bottoming out, and the cash
flows from these properties are stable. As such, we expect NAF's profitability
to slowly improve as the residential housing rental market regains strength.
NAF aims to maintain its ratio of debt to total assets at a relatively
conservative level of between 40% and 50% (cruising level). As of the end of
NAF's 13th six-month fiscal term (ended Aug. 31, 2012), its ratio of debt tototal assets was about 53.2% and its 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 54.4%. We consider both ratios to be fairly high. Meanwhile, although
the share of unrealized losses to the total book value of NAF's portfolio had
declined to about 3.1% as of the end of the same term, the J-REIT's financial
buffer remains lower than the levels seen during market upswings. On the otherhand, NAF's interest coverage indicators are stable because portfolio cash
flow has improved. Indeed, we expect NAF's ratio of funds from operations(FFO) to debt to hover at or slightly higher than 7.0% over the next one to
two years, compared with 7.0% as of the end of the 13th term.

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Ratings On Nippon Accommodations Fund Affirmed At 'A+/A-1'; Outlook Stable

NAF has shifted its focus to property acquisitions to meet its near-term
growth targets (portfolio size: ¥300 billion, or 10,000 residential units).
Accordingly, to maintain our current ratings on NAF, we will need to see theJ-REIT maintain a balance between achieving external growth and preserving its
financial health by controlling debt levels.
Our short-term credit rating on NAF is 'A-1', reflecting our long-term credit
rating and assessment of the J-REIT's liquidity as "adequate." We expect theJ-REIT's sources of liquidity--such as liquidity on hand and FFO--to besufficient in the 14th fiscal term (ending Feb. 28, 2013) to cover its uses ofliquidity--including debt repayments, capital expenditures, and dividendpayments. Although NAF does not have committed credit lines to complement
liquidity, it held cash and deposits of about ¥6.2 billion as of the end of
the 13th term. Furthermore, the J-REIT maintains good relationships withmultiple major financial institutions, from which it borrows on an unsecured
basis. Based on this, we believe NAF has high financial flexibility.
The outlook is stable. NAF's solid business position; its portfolio of
well-managed and well-maintained rental properties, with improved
diversification in terms of the value and number of assets; and its highfinancial flexibility underpin the J-REIT's credit quality. Nevertheless, webelieve the likelihood of an upgrade is limited for the foreseeable future
because NAF's debt-to-capital ratio has been hovering at relatively highlevels. On the other hand, the ratings may come under pressure if NAF suffers
prolonged weakness in its financial indicators, particularly if its ratio ofdebt to total assets rises and remains above 55%, or if its ratio of FFO todebt declines and remains below 6.5%. This could happen if NAF's debt profileand capital structure, as well as its interest coverage ratios, deteriorate asa result of property acquisitions funded by debt.
RELATED CRITERIA AND RESEARCH"Key Credit Factors: Global Criteria For Rating Real Estate Companies," June21, 2011"2008 Corporate Criteria: Analytical Methodology," April 15, 2008
"Rating Policy For Japanese Real Estate Investment Trusts," May 9, 2001
RATINGS LISTRatings Affirmed
Nippon Accommodations Fund Inc.
Corporate credit ratings
Senior unsecured J-REIT bonds series 1 and 2

RatingA+/Stable/A-1
A+

Complete ratings information is available to RatingsDirect subscribers on theGlobal Credit Portal at www.globalcreditportal.com and RatingsDirect
subscribers at www.ratingsdirect.com. All ratings affected by this rating
action can be found on Standard & Poor's public Web site atwww.standardandpoors.com. Use the Ratings search box located in the left
column.

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