S&P Asgns 'A' Rtg to Nippon Building Fund J-REIT Bond.

Business Editors

TOKYO--(BUSINESS WIRE)--May 30, 2003

Standard & Poor's--Standard & Poor's Ratings Services said today that it had assigned its 'A' rating to Nippon Building Fund Inc.'s (NBF) proposed JPY10 billion senior unsecured note due June 2018.

At the same time, the 'A' long-term and 'A-1' short-term corporate credit ratings on NBF were affirmed. The outlook on the long-term rating is stable. The 'A' rating assigned to the company's outstanding JPY10 billion second senior unsecured note due February 2007 was also affirmed.

The rating reflects NBF's strong business position, high asset quality, and moderately conservative financial profile. The company holds a dominant position in the relatively young Japanese real estate investment trust (J-REIT) market, and has good brand recognition. NBF owns a portfolio of well-maintained office buildings with high occupancy rates, which generates stable and sustainable cash flow. The company has a relatively conservative capital structure and benefits from high profitability and above-average cash flow protection, which contribute to good financial flexibility. These strengths are partly offset by concerns regarding the unseasoned market in which NBF operates, the relatively weak credit quality of some of its sponsor companies, its moderately aggressive growth strategy, and asset concentration and tenant concentration risk in its current portfolio.

As of the end of December 2002, NBF owned 28 office properties located throughout Japan, worth approximately JPY249 billion based on Standard & Poor's underwriting value. During 2003, NBF acquired Nakameguro GT Tower and the remaining ownership rights in Tsukuba Mitsui Building. Furthermore, the company plans to purchase Sapporo L Plaza in November. These transactions amount to an aggregate investment of approximately JPY19 billion. Standard & Poor's believes that the quality of these properties is high and their addition will not change the overall above-average quality of NBF's asset portfolio. As of the end of June 2003, it is expected that NBF's asset portfolio will have grown to 29 properties and will be worth approximately JPY263.9 billion based on Standard & Poor's underwriting value. The portfolio is well diversified by region and enjoyed a high average occupancy rate of approximately 95.4% as of March 2003. The largest tenant of Shiba NBF Tower, the second largest building in the portfolio (7% of total net rentable area), will soon move out and consequently the occupancy rate is expected to decline during the renovation period for the vacant space, and overall portfolio occupancy could temporarily dip to around 92%. With good leasing capability and multi-tenant leasing prospects for the renovated space, both overall occupancy and tenant diversification are expected to improve by early to mid 2004. Furthermore, NBF has been operating its properties efficiently, and has exceeded its property management cost reduction goals. The rates for asset management fee and property management fees will be reduced from July 2003.

For the fiscal period ending December 2002, NBF posted a total revenue of JPY11.8 billion and a net income of JPY4.6 billion. NBF's leverage at December 2002 was moderately conservative, with debt-to-capital and loan-to-value (LTV) ratios at 42% and 44% respectively based on Standard & Poor's underwriting value. Owing to the debt-financed acquisition of new properties, NBF's debt-to-capital and LTV ratios are expected to increase to 45% and 48% respectively as of the end of June 2003. The leverage could periodically rise to 60% as the company pursues its growth strategy, although NBF is expected to reduce it to a more moderate 40%-50% range following acquisitions by issuing new equity. As the company has a limited track record, the effectiveness of this strategy and policy is untested. However, NBF's sound investment criteria and underwriting procedures to date somewhat offset this concern.

Cash flow protection is strong, with EBITDA interest coverage based on attractive low financing costs was 13x for fiscal 2002. The debt service coverage ratio for the same period was 2.7x, applying a conservative stressed constant interest rate of 6%. While these coverage ratios are expected to decline slightly to 11x and 2.3x respectively for June 2003, they are expected to improve as the company pursues its leverage control. Coverage of debt service and common stock dividends as a liquidity measurement is expected to be above average at approximately 1.6x. NBF's retained internal cash flow from operations after dividends provides ample coverage for the company's moderate required levels of capital expenditures. As of December 2002, the company had JPY32 billion in cash, which was sufficient to cover immediate operating expenses including security deposit liabilities. The company has good liquidity to meet its JPY38 billion short-term debt, which matures in 2003, given its ample cash position, unused commitment line of JPY30 billion, and sound and diversified banking relationships. NBF's portfolio remains completely unencumbered by secured debt and the company has good financial flexibility.

OUTLOOK: STABLE

NBF's high quality assets should provide the company with a stable income stream and sustainable profitability. NBF is expected to maintain a moderate financial profile with ample liquidity as the company pursues acquisitions and portfolio growth.

Copyright 2003, Standard & Poor's Ratings Services