TEXT: S&P: Nomura Real Estate Residential Fund Bonds Rated 'A'

(The following was released by the rating agency)

TOKYO (Standard & Poor's) Feb. 8, 2012--Standard & Poor's Ratings Services today assigned its 'A' rating to Nomura Real Estate Residential Fund Inc.'s (NRF; A/Stable/A-1) proposed JPY5 billion series 2 unsecured bonds, due Feb. 24, 2017.

The rating on NRF reflects its relatively strong business position and moderately conservative financial policy. NRF has secured a relatively strong business position in the Japanese REIT (J-REIT) market, supported by the real estate management and development capabilities and the brand recognition of its sponsor, Nomura Real Estate Holdings Inc. (not rated). As of Jan. 31, 2012, NRF's portfolio comprised 153 residential properties for lease (total number of rentable units: 8,906) worth approximately JPY150.1 billion based on total purchase price. NRF's portfolio is extremely well diversified, which is a factor that supports the J-REIT's credit quality. NRF has a conservative financial policy, maintaining a cruising-level ratio of debt to total assets of between 35% and 45%.

Operating in the residential leasing market--where we have observed occupancy rates stabilizing and rent levels stopping their decline--NRF has a policy of acquiring properties selectively, targeting tenants that can provide sustainable demand. As a result, the average occupancy rate of properties in NRF's portfolio has been high and stable, standing at 96.0% as of the end of December 2011. NRF's real estate portfolio is highly diversified with high occupancy rates, and changes in rents of properties have been limited. As such, Standard & Poor's expects NRF to generate stable profits.

NRF raised about JPY7.2 billion in equity capital in December 2011. It also purchased eight properties in the same month for a total purchase price of about JPY15.1 billion, funding the acquisitions with the equity it raised as well as additional bank loans. Standard & Poor's holds the view that NRF's profitability indicators will recover gradually, based on the following: (1) The equity issuance in December 2011 made it possible for NRF to purchase properties with higher yields than existing ones; and (2) the J-REIT replaces existing properties with new ones with higher profitability.

On the other hand, Standard & Poor's views the following as risks to NRF's credit quality: (1) NRF's debt-to-capital ratio remains high despite its conservative financial policy; (2) its financial indicators related to interest coverage and its profitability measures have been somewhat low; and (3) although the unrealized loss (the difference between the appraisal value and the book value of the portfolio at the end of a fiscal term) in its portfolio has improved slightly due to the purchase of new properties, the unrealized loss remain high, thereby weakening NRF's financial buffer. Nevertheless, in our view, NRF's conservative financial policy--which the J-REIT intends to firmly maintain--and its new property acquisitions--which could lead to enhanced profitability--partially mitigate these risks.

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

RATING ASSIGNED

Nomura Real Estate Residential Fund Inc.

Unsecured J-REIT bonds (series 2)

Proposed issue amount Coupon Rating

JPY5 bil. 1.03% A