December 17, 2010

Ratings On Nippon Accommodations Fund
Affirmed At ‘A+/A-1’; Outlook Negative
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• Business conditions in the residential property market appear to bestabilizing. Even so, since NAF's debt-to-capital ratio remains high, it
may take a certain amount of time until we see a complete recovery in theJ-REIT's financial profile.
• We have affirmed our long-term and short-term corporate credit 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.
• We have maintained the negative outlook on the long-term rating on NAF.

Tokyo, Dec. 17, 2010 – Standard & Poor's Ratings Services today affirmed its'A+' long-term corporate credit and senior unsecured debt ratings, as well as
its 'A-1' short-term corporate credit rating on Nippon Accommodations Fund Inc.
(NAF). The outlook on the long-term rating on NAF remains negative.
We today maintained the outlook on the long-term rating on NAF because:• Financing conditions and business conditions in the residential property
market appear to be stabilizing. In addition, NAF's financial indicators
seem to have improved slightly. Yet, they are still weak compared withformer levels. In particular, the Japanese real estate investment trust's(J-REIT) debt-to-capital ratio has remained high for five consecutive
fiscal terms.
• Given current conditions in the real estate market, NAF is likely toactively pursue external growth. As such, we believe it may take acertain amount of time until we see a complete recovery in NAF's

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Ratings On Nippon Accommodations Fund Affirmed At ‘A+/A-1’; Outlook Negative

financial profile.

As for NAF's credit quality, the J-REIT maintains a strong business position
and generates stable cash flows from its high-quality portfolio of residential
properties with high occupancy rates. Accordingly, we today affirmed ourlong-term and short-term corporate credit ratings on NAF.
NAF's management had said that it expected to maintain the company'sdebt-to-total assets ratio in the 40% to 50% range (cruising range), which isrelatively conservative. Recently, however, NAF's debt-to-total assets ratio
has hovered at levels that are slightly higher than previous levels due to theimpact from prolonged instability in the capital markets. As NAF acquired 18
properties and raised about ¥20.1 billion through equity offerings in theeighth fiscal term (ended Feb. 28, 2010), its leverage has declined slightly.
However, since the J-REIT used debt to finance its acquisitions, its
debt-to-capital ratio [interest-bearing debt/(interest-bearing debt + net
assets), according to Standard & Poor's definition] stood at about 55.8% as ofthe end of the ninth fiscal term (ended Aug. 31, 2010). The uptrend in theshare of the unrealized loss to the total value of NAF's portfolio appears tohave come to a halt. Even so, the share was still about 5.6% as of the end of
the ninth fiscal term, suggesting that the J-REIT's financial buffer has
weakened to a certain degree.
Because NAF expects the residential market to bottom out in the foreseeable
future, it intends to phase in a business policy focused on external growth inan effort to meet its near-term growth targets (portfolio size: ¥300 billion,or 10,000 residential units). Although the J-REIT's financial indicators
appear to have improved slightly, they are still relatively weak compared with
our assumptions at initial rating assignments. Hence, it is our view that acertain amount of time may be needed for the J-REIT to see a complete recovery
in its financial profile.
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, 2010,
NAF owned a portfolio of residential properties with a total purchase price ofabout ¥187.0 billion. From the eighth to the ninth fiscal term, the company
acquired a relatively large volume of properties, allowing it to secure
reasonable acquisition yields. Hence, its portfolio has become morediversified and its portfolio yield has improved to a degree.
NAF is expected to maintain good credit quality, backed by its strong businessposition, its portfolio of well-managed and well-maintained rental properties,
its liquidity at hand, and its high financial flexibility. We may consider
lowering the ratings on NAF if the recovery of its financial profile,particularly its debt-to-capital structure, is delayed, or if we see a higher
likelihood of the J-REIT suffering prolonged weakness in its financial
indicators for over one year and the financial indicators appear unlikely toStandard & Poor’s | RatingsDirect on the Global Credit Portal | December 17, 2010

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Ratings On Nippon Accommodations Fund Affirmed At ‘A+/A-1’; Outlook Negative

improve in the near term. On the other hand, we may revise the outlook on therating on NAF to stable from negative if leverage declines to a level that isin the cruising range of its financial policy and the outlook for improvement
in financial indicators, such as interest coverage and profitabilityindicators, becomes clear as the J-REIT moves forward with its external growthstrategy.
RELATED CRITERIA AND RESEARCH
Principles Of Corporate And Government Ratings, June 26, 2007
Rating Policy For Japanese Real Estate Investment Trusts, 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 2Rating
A+/Negative
A-1
A+

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>.

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