December 5, 2011

Outlook On Nippon Accommodations Fund
Revised To Stable; Ratings Affirmed
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 Inc. (NAF) is a J-REIT specializing inresidential properties.
• Amid signs of increased stability in the residential property rental
market, NAF has launched equity offerings and pursued external growth.
These moves have enabled the J-REIT to improve its business profile,particularly the diversity and profitability of its portfolio, as well as
its financial standing.
• We have revised to stable from negative the outlook on the long-term
rating on NAF.
• We have affirmed our long-term and short-term corporate credit ratings
and unsecured debt ratings on NAF because the J-REIT has a strong
business position and a high-quality real estate portfolio, allowing it
to generate stable cash flows.

TOKYO (Standard & Poor's) Dec. 5, 2011--Standard & Poor's Ratings Services
today said that it has revised to stable from negative the outlook on its
long-term corporate credit rating on Nippon Accommodations Fund Inc. (NAF). At
the same time, we have affirmed our 'A+' long-term and 'A-1' short-term
ratings on NAF, as well as our 'A+' ratings on NAF's series 1 and series 2
unsecured J-REIT bonds.
We today revised the outlook on the long-term rating on NAF because:• Amid signs of increased stability in the residential property market, NAF
has acquired multiple properties, while securing acquisition yields thatwe consider reasonable. This has enabled the Japanese REIT (J-REIT) towww.standardandpoors.com/ratingsdirect

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Outlook On Nippon Accommodations Fund Revised To Stable; Ratings Affirmed

improve its business profile, particularly the diversity andprofitability of its portfolio.
• NAF's financial indicators have improved to a degree. In particular,
NAF's debt-to-total assets ratio, although still fairly high, hasdeclined moderately because the J-REIT has conducted equity offerings. Inaddition, NAF's interest coverage indicators have recovered and are now
virtually in line with previous levels.

In terms of portfolio size, NAF ranks relatively high among the listed J-REITs
that specialize in residential properties. As for NAF's credit quality, theJ-REIT maintains a strong business position and generates stable cash flows
from its high-quality portfolio of residential properties for lease, whichhave high occupancy rates. Accordingly, we today affirmed our long-term andshort-term corporate credit ratings on NAF.
Business conditions in the residential property rental market seem to bestabilizing. Specifically, occupancy rates have generally bottomed out, andthe decline in rent levels appears to have virtually come to a halt as thesupply of newly constructed properties in the market is receding.
NAF's operating strategy is to invest in high-quality residential properties
that are, for the most part, located in the 23 wards of Tokyo, backed by thereal estate management and development capabilities, and brand recognition ofits sponsor, Mitsui Fudosan Co. Ltd. (BBB+/Stable/A-2). As of Nov. 30, 2011,
NAF owned a portfolio of 86 residential properties with a total purchase priceof about ¥229.5 billion.
In its 11th six-month fiscal term (ended Aug. 31, 2011), NAF raised ¥22.1
billion through equity offerings and acquired 20 properties for a totalpurchase price of ¥36.7 billion. These include relatively new, high-quality
properties, such as Shibaura Island Air Tower (Minato Ward, Tokyo; purchaseprice: about ¥7.9 billion), that it purchased from its sponsor. NAF also
increased its ownership stake in another property during the same fiscal term.
Meanwhile, for the first time since listing, NAF has acquired other types ofhousing assets, such as student dormitories and corporate housing facilities,
which the J-REIT categorizes as "other accommodation assets." Although theseassets are managed by one company, which entails a degree of operational risk,
we consider any possible adverse impact on cash flow to be limited because:(1) these assets can be easily converted into typical rental properties; and(2) the total purchase price of the assets represents only about 3.5% of thetotal value of NAF's portfolio. In addition, portfolio profitability has
improved moderately because the properties that the J-REIT purchased in the11th fiscal term command higher average yields than those acquired before thatterm.
As of Nov. 30, 2011, NAF's portfolio featured 86 residential properties forlease (about 9,000 residential units), suggesting that portfolio
diversification has progressed significantly. The J-REIT has improved its

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Outlook On Nippon Accommodations Fund Revised To Stable; Ratings Affirmed

business profile, particularly the diversity and profitability of its
portfolio, since it resumed its external growth strategy in 2009.
NAF aims to maintain its ratio of debt to total assets at a relatively
conservative level of between 40% and 50% (cruising level). The ratio of debt
to total assets, which hovered at levels that we considered fairly high overthe last few years, declined moderately following the J-REIT's equityofferings, to about 51.8% as of the end of the 11th fiscal term. The ratio ofdebt to capital (interest-bearing debt including hoshokin
liabilities/(interest-bearing debt including hoshokin liabilities + total netassets), as defined by Standard & Poor's) stood at about 53.0% as of the endof the same fiscal term. Although its still fairly high debt ratios are anegative credit factor, NAF's funding conditions have been improving and it isable to secure funds in a stable manner. The share of unrealized losses to thetotal value of NAF's portfolio has declined moderately after peaking in theseventh fiscal term (ended Aug. 31, 2009). Furthermore, the J-REIT's cash flow
has increased and its debt ratios have declined slightly. As a result, its
interest coverage indicators have recovered and are now virtually in line withprevious levels.
NAF has shifted its focus to external growth in an effort to meet its
near-term growth targets (portfolio size: ¥300 billion, or 10,000 residentialunits) because it believes that the residential market has reached bottom.
Accordingly, to maintain our ratings on NAF, we need to see whether the J-REIT
is able to strike a balance between achieving external growth and maintaining
its financial health by controlling debt levels.
NAF is expected to maintain good credit quality, backed by its strong businessposition, its well-diversified portfolio of well-managed and well-maintained
rental properties, its adequate liquidity on hand, and its high financial
flexibility. We see little likelihood of the ratings on NAF being raised
because the J-REIT's ratio of debt to total assets is somewhat high. On theother hand, we may consider lowering the ratings on NAF if the J-REIT's debt
profile, capital structure, and interest coverage indicators worsen again, andif it suffers prolonged weakness in its financial indicators, particularly if
its ratio of debt to total assets rises to and remains above 55%.
RELATED CRITERIA AND RESEARCH"Key Credit Factors: Global Criteria For Rating Real Estate Companies,"
published June 21, 2011
"Principles Of Credit Ratings," published Feb. 16, 2011
"Rating Policy for Japanese Real Estate Investment Trusts," published May 9,
2001
RATINGS AFFIRMED
Nippon Accommodations Fund Inc.
Long-term corporate credit rating
Short-term corporate credit rating
Senior unsecured J-REIT bonds series 1 and 2

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Outlook On Nippon Accommodations Fund Revised To Stable; Ratings Affirmed

A Japanese-language version of this media release is available on Standard &Poor's Research Online at www.researchonline.jp, or via CreditWire Japan onBloomberg Professional at SPCJ <GO>. Complete ratings information is available
to Global Credit Portal subscribers at www.globalcreditportal.com and toRatingsDirect subscribers at www.ratingsdirect.com.

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