DBRS Confirms AIMCo Realty Investors LP’s Senior Unsecured Debt Rating of 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 considers 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 the Alberta Investment Management Corporation (AIMCo).

The stand-alone rating considers the strength of AIMCo Realty’s business risk profile, relatively low leverage and strong interest coverage ratios while acknowledging the expectation of higher leverage and lower coverage metrics going forward. 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 ratings also take into account AIMCo Realty’s property and geographic concentration and relatively small portfolio size, which has improved.

The Stable trend incorporates DBRS’s expectation for moderate earnings growth in the near and mid-term, driven by full-year contributions from recently acquired properties, completion of key development and expansion projects 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.

Although incremental debt will weaken key financial metrics from their currently strong levels, the rating incorporates DBRS’s expectation that the Company will keep total debt-to-EBITDA below 7.8 times (x) and EBITDA interest coverage above 3.50x 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 is expected to decline to below 40.0% from its current level of 53.6%. 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.

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 such that the Company’s financial metrics deteriorate, resulting in debt-to-EBITDA exceeding 7.8x or EBITDA interest coverage falling below 3.5x, on a sustained basis; (2) Secured debt to total debt does not decline below 40% as anticipated; and (3) DBRS changes its views on the level of implicit support provided by AIMCo. A positive rating action is unlikely in the near to medium term given the expectation for metrics to modestly weaken over this period.

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

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 & Criteria.

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.

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

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