DBRS Assigns Provisional Rating of AA (low) to AIMCo Realty Investors LP

DBRS Limited (DBRS) has today assigned a provisional rating of AA (low) with a Stable trend to AIMCo Realty Investors LP’s (AIMCo Realty or the Company) Senior Unsecured Debt. As of June 14, 2017, the Company had no senior unsecured debt outstanding. If Senior Unsecured Notes were to be issued, DBRS would expect the issuance to be on terms and conditions consistent with market practice and satisfactory to DBRS.

The rating takes into consideration AIMCo Realty’s stand-alone risk profile, expected low level of secured debt in its capital structure and DBRS’s view of implicit support by Alberta Investment Management Corporation (AIMCo).

The stand-alone rating considers the strength of AIMCo Realty’s business risk profile and strong interest coverage ratios relative to other DBRS-rated real estate peers while acknowledging the expectation of higher leverage metrics over the next few years. The Company’s business risk profile is largely supported by the underlying cash flow stability from its high-quality real estate portfolio and strong market position in key Canadian markets. However, the rating also takes into consideration AIMCo Realty’s property and geographic concentration and small portfolio size. DBRS acknowledges the incurrence of additional debt should result in the deterioration of currently strong key financial metrics, particularly debt to EBITDA, albeit still within the parameters of the current stand-alone rating.

The Stable trend outlook takes into consideration DBRS’s expectation for moderate earnings growth in F2017 driven by full-year contributions from the 25% interest in Scotia Plaza acquired in F2016, completion of key development and expansion projects currently underway and net property acquisitions. As such, DBRS forecasts AIMCo Realty’s EBITDA to reach approximately $413 million in F2017. In addition, the Company’s modest near-term retail and office lease expiries and focus on high-quality properties are anticipated to provide underlying support to the earnings profile. In the medium term, real estate remains an important and growing asset class for AIMCo and therefore DBRS anticipates EBITDA growth to be commensurate with capital growth.

AIMCo Realty benefits from a conservative financial profile since real estate investments have traditionally been funded with capital contributions from limited partners and internally generated capital, as opposed to mortgage debt, which is at a low level. Over the next several years, DBRS expects the Company’s total debt to increase, from currently low levels, as AIMCo Realty pursues a unsecured debt program. Although an increase in debt will weaken key financial metrics from currently strong levels, the rating incorporates DBRS’s expectation that the Company will keep EBITDA interest coverage above 3.50 times (x) and total debt to EBITDA below 7.3x on a sustained basis. It also considers that AIMCo Realty will manage returns to pension fund clients in a manner that will keep financial metrics and flexibility strong going forward.

With a steady issuance of unsecured borrowings over the near to medium term, the Company’s secured debt to total debt ratio will gradually decline to below 40% from its current level at 99.0%. As a result, the stand-alone rating benefits from a one-notch uplift. In addition, DBRS incorporates the implicit support from AIMCo to AIMCo Realty and believes this level of implicit support is worth a two-notch uplift. The strength of the implicit support is based on factors that motivate AIMCo to support AIMCo Realty, including essentiality, contractual obligations, ownership, reputation and integration.

RATING DRIVERS
A negative rating action could result if one or more of the following factors occur: (1) the operating environment deteriorates, leading to higher vacancy levels and declines in operating cash flow, (2) the Company’s financial metrics deteriorate, resulting in debt to EBITDA exceeding 7.3x or EBITDA interest coverage falling below 3.5x, (3) secured debt to total debt exceeds 40% on a consistent basis with increased leverage and/or (4) DBRS changes its views on the level of implicit support provided by AIMCo.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The principal methodologies are Rating Entities in the Real Estate Industry and DBRS Criteria: Guarantees and Other Forms of Support, which can be found on dbrs.com under Methodologies.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.