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Japan Real Estate Investment Corporation -- Moody's affirms Japan Real Estate's rating at A1; revises outlook to negative from stable

Rating Action: Moody's affirms Japan Real Estate's rating at A1; revises outlook to negative from stable

Global Credit Research - 16 Dec 2020

Tokyo, December 16, 2020 -- Moody's Japan K.K. has affirmed the A1 issuer and senior unsecured ratings of Japan Real Estate Investment Corporation (JRE).

At the same time, Moody's has changed the rating outlook to negative from stable.

"The change in outlook to negative reflects our expectation that JRE's financial leverage will remain weak when compared to similarly-rated peers, both in terms of net debt/EBITDA and debt/gross assets," says Ryohei Nishio, a Moody's Analyst.

"At the same time, the affirmation of the A1 rating reflects JRE's portfolio of prime office properties in Tokyo, diversified tenant base, excellent liquidity, the absence of development exposure, as well as its strong fixed charge coverage ratio," adds Nishio.

RATINGS RATIONALE

Low interest rates in Japan have reduced yields from real estate assets, and in turn kept JRE's net debt/EBITDA at a high level for its current rating. The company's gearing ratio -- as measured by debt/gross assets -- is also more in line with that of lower-rated peers, including The GPT Group (A2 stable) and Gecina SA (A3 stable), even after taking into account unrealized gains. JRE's book value-based gearing ratio was around 37% as of September 2020, or around 33% when using the appraisal value of the leasing properties.

The coronavirus-induced economic downturn has triggered a deterioration in Tokyo's office leasing market both in terms of vacancy rate and rent levels, following many years of recovery and growth since the last downturn. In this subdued environment, Moody's expects it will be increasingly challenging for JRE to improve its credit metrics to levels more appropriate for its current A1 rating.

At the same time, JRE continues to benefit from its collaboration with its sponsor Mitsubishi Estate Co., Ltd. (A2 stable), one of Japan's largest integrated real estate developers, which underpins the prime quality of JRE's portfolio as well as its strong access to funding from Japanese banks and the capital markets at favorable rates. The sponsor also provides substantial resources such as property management and human resources to JRE through a dedicated asset management company.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

An upgrade is unlikely in the near term, given the negative outlook and because the rating is already on par with the Government of Japan's rating (A1 stable). JRE's outlook could return to a stable if the company meaningfully strengthens its scale and the quality of its property portfolio as well as lowers its financial leverage. Metrics that could lead to a stable outlook on its A1 rating include debt/gross assets sustained at or below 30%, even after reflecting cautious assumptions on property valuations in light of rising vacancy rates and uncertainty over long-term demand for office space.

Moody's could downgrade JRE's ratings if its financial leverage remains elevated compared to similarly-rated peers', with net debt/EBITDA staying above 8x or debt/gross assets above 30%. In addition, a downgrade of Japan's sovereign A1 rating will likely result in a downgrade of JRE's rating.

The principal methodology used in these ratings was REITs and Other Commercial Real Estate Firms (Japanese) published in September 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1097765. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Japan Real Estate Investment Corporation, headquartered in Tokyo, is a publicly listed Japanese real estate investment trust (J-REIT). The company invests in and manages office buildings.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These rating are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Ryohei Nishio Analyst Corporate Finance Group Moody's Japan K.K. Atago Green Hills Mori Tower 20fl 2-5-1 Atago, Minato-ku Tokyo 105-6220 Japan JOURNALISTS: 81 3 5408 4110 Client Service: 81 3 5408 4100 Mihoko Manabe Associate Managing Director Corporate Finance Group JOURNALISTS: 81 3 5408 4110 Client Service: 81 3 5408 4100 Releasing Office: Moody's Japan K.K. Atago Green Hills Mori Tower 20fl 2-5-1 Atago, Minato-ku Tokyo 105-6220 Japan JOURNALISTS: 81 3 5408 4110 Client Service: 81 3 5408 4100

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