DBRS, Inc.(DBRS Morningstar) confirmed AIMCo Realty Investors LP’s (AIMCo Realty or the Company) Issuer Rating and Senior Unsecured Debt rating of AA (low). The trends are Stable. The rating confirmations consider AIMCo Realty’s stand-alone risk profile, the expected low level of secured debt in its capital structure, and DBRS Morningstar’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, historically low leverage, and strong interest coverage ratios. However, leverage has been rising in recent years, and the combined effect of the Coronavirus Disease (COVID-19) pandemic, related economic slowdown, and higher construction debt have contributed to deterioration in the debt-to-EBITDA ratio such that it is above DBRS Morningstar’s expectations for investment-grade issuers, which has resulted in reduced flexibility at the current rating level. 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 account AIMCo Realty’s property and geographic concentration and relatively small portfolio size.
AIMCo Realty’s current ratings incorporate DBRS Morningstar’s expectation of steady issuance of unsecured borrowings to replace secured debt over the near to medium term so that the Company’s secured debt-to-total debt ratio declines to below 40.0% from its current level of 44.0%. While AIMCo Realty hasn’t achieved this ratio yet, DBRS Morningstar recognizes this has been in part a result of the pandemic as well as new construction debt related to AIMCo Realty’s development pipeline. As a result, the stand-alone ratings benefit from a one-notch uplift; however, DBRS Morningstar will likely remove the uplift if AIMCo Realty further delays in achieving the 40% threshold. In addition, DBRS Morningstar 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.
The Stable trends incorporate DBRS Morningstar’s expectation for moderate EBITDA growth from existing properties supplemented primarily by increasing EBITDA from new and expansion construction projects coming to market in the near and midterm. In addition, the Company’s modest near-term retail and office lease expiries and focus on high-quality properties are likely to support the earnings profile. Conversely, meaningful exposure to indoor shopping centers and the Calgary office market has resulted in stress to rental collections, occupancies, and cash flow, and DBRS Morningstar sees continuing challenges in the future, the passing of the pandemic notwithstanding.
While DBRS Morningstar’s EBITDA calculations exclude distributions and realized gains received from AIMCo Realty’s holdings in various closed-end funds and public equities, DBRS Morningstar could attribute some positive rating benefit should distributions grow to a meaningful size and demonstrate reasonable stability. DBRS Morningstar believes that this would provide the Company with minimum stable cash flow that it can use for debt service. This would also somewhat enhance diversification of AIMCo Realty’s cash flows.
A negative rating action could result if one or more of the following factors occur: (1) the operating environment fails to improve, leading to permanently higher vacancy levels, particularly for the Company’s retail and Calgary office assets, and declines in operating cash flow such that the Company’s financial metrics do not improve from current levels, with debt-to-EBITDA exceeding 9.0 times (x) or EBITDA interest coverage falling below 4.0x, on a sustained basis; (2) the secured debt-to-total debt ratio does not decline below 40% as anticipated; and (3) DBRS Morningstar changes its views on the level of implicit support provided by AIMCo. The triggers to a negative rating action are less tolerant than the prior year’s review as AIMCo Realty’s financial flexibility has weakened during this period. A positive rating action is unlikely in the near to medium term given that the debt-to-EBITDA and secured debt-to-total debt ratios are higher than DBRS Morningstar’s expected levels for the ratings.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Entities in the Real Estate Industry (April 23, 2021; https://www.dbrsmorningstar.com/research/377358), DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2, 2020; https://www.dbrsmorningstar.com/research/369167), and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 14, 2021; https://www.dbrsmorningstar.com/research/372344), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.
For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at email@example.com.
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