December 19, 2008

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 Credit Analyst:
Yumi Oikawa, Tokyo (81) 3-4550-8775; yumi_oikawa@standardandpoors.com

TOKYO (Standard & Poor's) Dec. 19, 2008--Standard & Poor's Ratings Services
today affirmed its 'A+' long-term and 'A-1' short-term corporate credit
ratings on Nippon Accommodations Fund Inc. (NAF). At the same time, Standard &Poor's affirmed its 'A+' long-term senior unsecured debt rating on NAF's ¥10billion series 1 senior unsecured bond issuance. The outlook on the long-term
corporate credit rating is stable.
The ratings reflect NAF's strong business position and moderately
conservative financial profile. The company's real estate portfolio generates
stable cash flow as it comprises residential properties that are in good
locations, have a low average property age, and have good leasing conditions.
NAF's operating strategy is to specialize in very high quality residential
properties located mainly within the 23 wards of Tokyo, backed by the realestate development capabilities, real estate expertise, and brand recognitionof the sponsor, Mitsui Fudosan Co. Ltd. (BBB+/Stable/A-2). NAF has aconservative capital structure and high financial flexibility. These strengths
are partly offset by issues regarding property concentration risk in NAF's
portfolio.
NAF is a Japanese real estate investment trust (J-REIT) that went public
on the Tokyo Stock Exchange in August 2006. As of the end of its fifth
six-month fiscal term (ended Aug. 31, 2008), NAF's portfolio featured 44
properties, consisting of 4,247 leasing units located mainly in the 23 wardsof Tokyo, and had a total value of about ¥140 billion, based on purchasewww.standardandpoors.com/ratingsdirect
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Ratings On Nippon Accommodations Fund Affirmed At 'A+/A-1'; Outlook Stableprice. The portfolio is diversified in terms of unit type, comprising single,
family-type, and large leasing units, with a focus on comparatively
high-demand compact units. The company has acquired a total of sevenproperties worth ¥16.8 billion in 2008, including Park Axis Nihonbashi Hamacho
located in Chuo-ku, Tokyo, for ¥5.54 billion, and Park Cube Itabashi-honcho
located in Itabashi-ku, Tokyo, for ¥4.17 billion. As the business environment
surrounding the J-REIT market worsens further amid the dislocation in global
and domestic financial and capital markets, NAF has adopted a selective asset
acquisition strategy, using sponsor pipelines.
As part of its strategy, NAF limits its investments to residentialproperties. Activity in the residential property capital market has stagnatedrecently amid difficult conditions. Generally, however, Standard & Poor's
considers residential properties to have more stable cash flows compared withother property types. This is generally due to high tenant diversification,
relative ease in finding new tenants, and small fluctuations in rents during
economic cycles. NAF's investment area is the metropolitan area of Tokyo andmajor ordinance-designated cities, with the company aiming to keep allocating
more than 80% of its portfolio investments to properties located in the 23
wards of Tokyo. Currently, properties located within the 23 wards make up
about 92% of the entire portfolio, which is in line with its investment
policy.
The portfolio includes high-quality, competitive properties located inhigh-demand and convenient residential areas. The portfolio's occupancy rate
at the end of the fifth fiscal term was 96.0 %, and contributes to thestability of cash flows. The weighted average property age of the portfolio is
about 6.3 years as of Aug. 31, 2008, which is low. Moreover, the weighted
average property age drops to about 2.7 years if the Okawabata Apartmentcommunities, completed in 1988 and 1989, are excluded, since the majority ofthe other properties are very new.
The portfolio has asset concentration risk with the Okawabata Apartmentcommunities comprising 21.2% of the total portfolio value. However, this risk
is mitigated by such factors as good tenant diversification at the property,high occupancy rate, stable cash flows, and high competitiveness in thesubmarket. Asset concentration risk is expected to decline modestly over time,as NAF acquires more properties.
NAF aims to enlarge its portfolio by ¥300 billion, or by 10,000
residential units, by 2010-2011. However, the company is not focused solely on
expanding its portfolio size, taking into consideration sluggish equity
markets and uncertainty hanging over the real estate market. NAF's portfolio
growth rate has been moderate thus far.
NAF's management expects to maintain the company's debt-to-capital ratio(interest-bearing debt/total assets) at an average of 40% to 50%, or at amaximum of 60%, which is a relatively conservative level. NAF recorded a
debt-to-capital ratio (interest-bearing debt including security
deposits/(interest-bearing debt + unitholders' capital) according to Standard& Poor's definition) of 56.4% at the end of its fifth six-month fiscal period,
which was relatively high. Its debt-to-capital ratio may hover at levels
higher than the cruising level until equity markets recover and may add
pressure on NAF's credit quality. Any pressure, however, would be mitigated tosome extent by: 1) the portfolio of high-quality residential properties forStandard & Poor’s RatingsDirect | December 19, 2008
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Ratings On Nippon Accommodations Fund Affirmed At 'A+/A-1'; Outlook Stable

rent with high occupancy rates that are generating stable cash flow; and 2)
NAF's maintenance of ample liquidity at hand and good relations with multiplefinancial institutions.
Given that its leverage is relatively high, NAF intends to adopt acautious and selective property acquisition strategy by using its sponsor'swarehousing function.
As of the end of the fifth six-month fiscal period, all of NAF's
long-term debt obligations carry fixed interest rates, and its debt repayment
schedule is diversified through 2014. The company's EBITDA interest coverage
is about 5x and its ratio of funds from operations (FFO) to total debt stands
at 6.1%, both of which are lower than the previous period, reflectingrelatively higher leverage. Regarding the portfolio's profitability, return on
assets (ROA) stood at about 4.4%. On the other hand, the EBITDA margin(EBITDA/real estate rental revenue) is high at about 68%.
NAF currently has relatively good liquidity, with long- and short-term
credit available to meet the company's near-term debt maturities, as well as
to expand its portfolio. NAF's financial flexibility is considered high,reflecting its established relationships with several major financial
institutions, from which it borrows on an unsecured basis.
NAF's portfolio of high-quality assets should generate stable income
despite the aforesaid asset concentration and the difficult businessenvironment. With the support of its sponsor, we expect NAF to maintain thehigh quality of its assets and a relatively conservative financial profile. In
light of a relatively higher debt-to-capital ratio, Standard & Poor's will pay
particular attention to the ratio, the company's cash flow protection, as wellas its profitability.
A Japanese-language version of this media release is available on
Standard & Poor's Research Online at www.researchonline.jp, or via CreditWire
Japan on Bloomberg Professional at SPCJ <GO>.

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