DBRS Confirms AIMCo Realty Investors LP’s Senior Unsecured Debt at AA (low) with a Stable Trend

DBRS Limited (DBRS) confirmed the rating of AA (low) with a Stable trend on AIMCo Realty Investors LP’s (AIMCo Realty or the Company) Senior Unsecured Debt. 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 relatively small portfolio size.

The Stable trend takes into consideration DBRS’s expectation for moderate EBITDA growth in F2018 and beyond, driven by full-year contributions from properties acquired during F2017, completion of key development and expansion projects currently underway and net property acquisitions. 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; 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 modestly as it pursues an 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 7.30x 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 anticipated over the medium term, DBRS expects the Company’s secured debt-to-total debt ratio will gradually decline to below 40% from its current level of 57%, a figure that is high but not unusual in situations where an unsecured debt program has recently been introduced. As a result, the stand-alone rating benefits from a one-notch uplift.

While not expected in the foreseeable future, a negative rating action could result if one or more of the following factors occur on a sustained basis: (1) the operating environment deteriorates, leading to higher vacancy levels and declines in operating cash flow and/or (2) the Company’s financial metrics deteriorate, resulting in debt-to-EBITDA exceeding 7.3x or EBITDA interest coverage falling below 3.5x. A positive rating action is not currently contemplated.

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

The principal methodologies are Rating Entities in the Real Estate Industry (April 2018) and DBRS Criteria: Guarantees and Other Forms of Support (January 2018), which can be found on dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.