Credit Opinion: Japan Real Estate Investment Corporation
Global Credit Research - 08 Aug 2012
Tokyo, JapanRatings
Category
Outlook
Issuer Rating -Dom Curr
Senior Unsecured -Dom Curr

Moody's Rating
Negative
A1
A1Contacts
AnalystTakahiro Okubo/Tokyo
Koji Kumamaru/Tokyo

Phone
81.3.5408.4173
81.3.5408.4162

Key Indicators[1][2]Japan Real Estate Investment Corporation
Total Revenue (US$ mil) [3]
EBITDA % Total Revenue
Net Debt / EBITDA (X) [4]
EBITDA / Interest Expense (X)Gross Assets (US$ mil) [3]Net Debt % Gross Assets

2007/9 2008/3 2008/9 2009/3 2009/9 2010/3 2010/9 2011/3 2011/9 2012/3
206.2 302.9 233.0 243.7 253.2 254.9 260.2 260.4 268.6 283.0
65.8% 66.9% 67.6% 66.4% 64.3% 66.6% 64.1% 62.2% 64.9% 64.0%
5.6
4.8
6.9
7.4
7.2
8.4
8.6
9.3
8.4
8.6
10.4 14.2
9.7
8.9
9.0
9.0
7.8
7.5
8.4
8.5
5,534 6,487 6,710 7,014 7,050 7,953 7,975 8,165 8,175 8,925
30.7% 32.2% 35.0% 37.0% 36.8% 38.8% 38.7% 39.2% 38.8% 37.5%[1] Figures are based on the company's disclosure materials. [2] All ratios are calculated using Moody's Standard
Adjustments(excluding adjustments of extraordinary income or loss.) [3] Assumed exchange rate of 85 yen to theUS$. [4] Calculated using doubled EBITDA in each period.

OpinionRating Drivers- Stable cash flows from a well-diversified portfolio- Strengths in its approach to financial management and its business franchise via collaboration with its sponsors,
such as Mitsubishi Estate Co. Ltd. (Mitsubishi Estate , A1 negative)- Conservative management of leverage, and backed by strong bank relationships- Increased leverage and liquidity management

Corporate Profile
Japan Real Estate Investment Corporation (JRE), headquartered in Tokyo, is a J-REIT, which was listed in
September 2001. It invests in and manages office buildings, and owns 57 buildings that were worth JPY718.6
billion as of March 2012. Its operating revenue for the half-year ended March 2012 was JPY24.1 billion.
JRE is one of the largest companies in the J-REIT sector. Its portfolio had an average occupancy of 94.7% as ofMarch 2012, and 86% of its assets (on a purchase-price basis) were in the Tokyo metropolitan area.

JRE's sponsors--Mitsubishi Estate, The Dai-ichi Life insurance Company, Limited (A1, stable) and Mitsui & Co.,
Ltd. (A2, stable) - support its asset management company in human resources and real estate management.
Mitsubishi Estate owns 1.85% of JRE's shares. It is one of JRE's 10 largest shareholders.

SUMMARY RATING RATIONALE
JRE's A1 rating reflects the stable cash flows from its diversified portfolio, and its conservative approach tofinancial management. It is backed by its strong relationships with its banks - including the Mitsubishi Group -- andits collaboration with its sponsors.

DETAILED RATING CONSIDERATIONS
1. Portfolio Characteristics and Financial Stability
JRE's portfolio consisting of 57 office buildings worth JPY718.6 billion is the second largest in the J-REIT sector
next to Nippon Building Fund, Inc. (NBF, A2 stable.) Mitsubishi Estate provides the acquisition pipeline, which
supports JRE's competitiveness in asset performance.
In its portfolio, 57% of its assets (on a purchase-price basis) are located in the Tokyo central's three wards, and86% in the Tokyo metropolitan areas. Geographical diversity generally serves as a positive factor that diminishes
the risks experienced in specific sub-markets, such as declines in property values. However, concentrations inareas that have robust real estate markets can offer benefits in terms of property marketability. Moody's therefore
considers the geographical concentration in Tokyo as advantageous for JRE.
The company purchased the Akasaka Park Building from Mitsubishi Estate in November 2011, and TIXTOWER
UENO from the third party in June 2012. Both assets are large-sized buildings. Even though more than ten years
have passed since its listing, JRE continues to rejuvenate its portfolio through active acquisition of youngerbuildings. As a result, the average age of its properties is 15 years, which is three years younger from the date ofits first listing.
The improvements in the portfolio's quality by acquiring newer buildings will bring rapid and larger recovery of
JRE's profits, when the market recovers, although downward pressure on rental revenues of existing buildings
remain, due to rent discounts by replaced tenants.
JRE's portfolio has maintained around 95% occupancy since the fiscal half year ended in September 2011, while
the market vacancy rate was high. In addition, JRE successfully reduced rent discounts with existing tenants.
Given these outperforming results, the rent revenues in existing buildings in JRE's portfolio will stabilize in next twoyears.
2. Financial Management Policy
As a result of equity financing worth JPY39 billion through a public offering in February 2012, the company has
reduced its leverage, measured by total debt/total assets, to around 40% in March 2012 from around 42% inSeptember 2011. JRE has announced that it will maintain its leverage around 40% through a public offering, though
this might temporarily rise with the purchase of new assets.
The company has conservatively kept its leverage in the range of 30% to 40%, even when it expanded its portfolio
since its listing.
Although JRE's leverage is at its highest level historically and not in line with its announced policy, the company
successfully manages its leverage as well as portfolio growth. It has reduced its debt-to-EBIDTA ratio to less than
9.0 times which temporarily exceeded, due to its high accessibility to the equity markets and backed by theexperience of seven follow-on public offerings, which is the most in the J-REIT sector.
Additionally, JRE's unrealized gains, measured by the difference between total appraisal value and book value,
strengthen its leverage, although unrealized gains have fallen to JPY11.3 billion(1.7% of its total book value) in
March 2012 from their peak of JPY119.2 billion(22.7% of its total book value) in September 2008.
JRE maintains strong relationships with lenders including large financial institutions, such as the Mitsubishi UFJ
Financial Group, backed by its major sponsor - Mitsubishi Estate. In addition, it has diversified its financial sourcesand debt tenors.

As a result of the 70 billion in debt to be refinanced in the next 12 months, JRE's average remaining debt tenor has
been shortened to 3.6 years. However, because of banker's positive view of the current financial market, as well as
JRE's credit worthiness, the company's debt tenor will be substantially lengthened and diversified throughrefinancing in the next 12 months.

Liquidity
Due to the concentration of debt payments in the next 12 months, JRE's liquidity coverage ratio declined toapproximately 91 % in March 2012, after significantly improving to 194% from 49%, as a result of an expansion ofcommitted bank lines to JPY43 billion from JPY25 billion in September 2011.
Although JRE's ratio is lower than some single A-rated J-REIT companies, it will improve to over 100% in and after
2013 when debt payments stabilize. In addition, the company maintains strong relationships with its bankers,backed by the sponsors, and this will alleviate any immediate concerns.
Moody's is particularly focused on liquidity coverage, when assessing the ratings of J-REITs, which have capitalintensive businesses. Liquidity coverage is measured by a company's liquidity sources, including cash, cash
equivalents, and committed bank lines, against debt maturing over the next 12 months,

Rating Outlook
The rating outlook is negative. The outlook reflects Moody's concern that it will take more time for the company toimprove its leverage to a level appropriate for the rating, given the downward pressure on profits.

What Could Change the Rating - Up
Any improvement in profitability and a decrease in leverage could lead to upward rating pressure. For example, if
net-debt-to-EBITDA stays below 4.0x, debt-to-gross-asset remains at around 30%, liquidity coverage stays above
100%, and the tenor of its debt is lengthened and evened out, then JRE's rating could be upgraded.

What Could Change the Rating - Down
Factors that could lead to a downgrade include: [1] a deterioration in portfolio cash flows, [2] falling real estate
prices, and [3] higher financial leverage. For example, JRE's rating would be downgraded if net-debt-to-EBITDA
and debt-to-gross-asset remained above 7.0x and 40%, respectively.

Other Considerations
1. Comparison with other issuers
JRE is the second largest company in the J-REIT sector, next to NBF. Both were listed around the same time, andhave maintained their advantages in asset management and their strong relationships with lenders. They arebacked by major real estate companies-- Mitsubishi Estate and Mitsui Fudosan Co., Ltd (A3 stable) respectively-as sponsors.
Both companies maintain a high level of competitiveness, stable profits and conservative financial managements.
Their portfolios are mainly composed of office buildings in Tokyo. NBF's portfolio is JPY150 billion larger than thatof JRE. On the other hand, JRE has controlled its leverage and net-debt-to-EBITDA lower than NBF.
Compared to Nomura Real Estate Office Fund, Inc. (NOF, A3 stable) and Japan Prime Realty Investment
Corporation (JPR, A3 negative), which mainly invest in office buildings, JRE's portfolio is JPY300 billion larger thanboth. JRE's portfolio maintains 1.7% in unrealized gains, while the other two show between 5% and 10% in
unrealized losses. In addition, its leverage remains lower than NOF and JPR which are around 45%.
2. Applied Methodology
In assessing the company's credit, Moody's applies "Global Rating Methodology for REITs and Other Commercial
Property Firms," published on 1 October 2010.
The grid indicated rating is A3, based on track records in last 12 months. The difference from the current rating isbecause leverage has temporally increased due to acquisitions and its profit has slightly decreased due to rent
discounts. Moody's believes JRE's stable cash flows from its good-quality portfolio and collaboration with sponsors
will support the current rating, but will focus on whether the company will continue with its conservative financial
approach to stay at the current rating.

approach to stay at the current rating.

Rating Factors
Japan Real Estate Investment Corporation
600064135
Real Estate Industry
Factor 1: Liquidity & Fundinga) Liquidity Coverageb) Debt Maturitiesc) FFO Payoutd) Amount of Unencumbered Assets

AaABaaBaBCaaCaXXXX

Factor 2: Leverage & Capital Structurea) Debt+Preferred / Gross Assetsb) Net Debt / EBITDAc) Secured Debt / Gross Assetsd) Access to Capital

X
X
X
X

Factor 3: Market Position & Asset Qualitya) Franchise / Brand Nameb) Gross Assetsc) Diversity-location/tenant/industry/economicd) Development assets % Gross assetse) Asset Quality

X
X
X
X
X

Factor 4: Cash Flow & Earningsa) EBITDA/ Revenueb) EBITDAMargin Volatilityc) Fixed Charge Coveraged) JV/Fund Business % Revenues

XXXXRating:a) Indicated Rating from Gridb) Actual Rating AssignedA3A1Copyright 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights
reserved.

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