Morningstar DBRS Confirms AIMCo Realty Investors LP Credit Rating at AA (low), Stable

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating and Senior Unsecured Debt rating of AIMCo Realty Investors LP (AIMCo Realty or the Company) at AA (low) with Stable trends. The credit ratings consider (1) the stand-alone credit assessment of AIMCo Realty, (2) the low level of secured debt in its capital structure, and (3) Morningstar DBRS’ view of implicit support from Alberta Investment Management Corporation (AIMCo).

Key Credit Rating Considerations
The Stable trends consider changes to AIMCo Realty’s business risk assessment (BRA) and financial risk assessment (FRA) that have become apparent since Morningstar DBRS’ prior review. Morningstar DBRS has revised AIMCo Realty’s BRA factors, including asset quality and portfolio size. Asset quality has been revised lower and portfolio size has been revised higher. Morningstar DBRS has also lowered its assessment of the Company’s FRA, namely AIMCo Realty’s EBITDA-interest coverage ratio. Taken together, these revisions are modestly credit negative and provide lower tolerance for leverage (i.e., total debt-to-EBITDA) for a given rating. Morningstar DBRS’ modest downward revision in AIMCo Realty’s asset quality is primarily attributed to a higher proportion of net operating income (NOI) generated from relatively lower-quality assets as compared with the previous year. On the other hand, portfolio size has been revised higher on account of the Company’s higher projected EBITDA in the near term, which reflects AIMCo Realty’s growth strategy and increased operational scale driven by organic growth initiatives and acquisitions. While the Company's year-over-year (YOY) leverage remained unchanged at 7.9 times (x) as at December 31, 2023, the EBITDA-interest coverage (including capitalized interest), however, deteriorated year-on-year (YOY) to 3.72x as at December 31, 2023, from 4.51x because of Company's modest exposure to variable rated debt to fund its capital intensive development pipeline amid a persistently high-interest-rate environment. Morningstar DBRS continues to attribute rating benefit through an additional modestly positive overlay factor in consideration of other revenues received through distributions and realized gains to AIMCo Realty’s holdings in various closed-end funds and public equities.

Credit Rating Drivers
All else equal, a negative credit rating action could result if either (1) AIMCo Realty’s total debt-to-EBITDA exceeds 8.6x or EBITDA interest coverage falls less than 3.3x on a sustained basis; (2) the secured debt-to-total debt ratio remains more than 40% on a sustained basis; or (3) Morningstar DBRS changes its view on the level of implicit support provided by AIMCo. A positive credit rating action is unlikely in the near to medium term, given Morningstar DBRS’ expectation of the Company’s total debt-to-EBITDA and secured debt-to-total-debt ratios remaining high in the foreseeable future.

Financial Outlook
Morningstar DBRS expects AIMCo Realty’s EBITDA-interest coverage (including capitalized interest) to deteriorate further and fluctuate in the mid-3.0x range in the near to medium term as it continues to refinance its upcoming mortgages and bank indebtedness and fund its upcoming development pipeline through variable rated construction debt at current elevated rates. Similarly, Morningstar DBRS expects AIMCo Realty's strategy to periodically pursue opportunistic development or other growth initiatives will put downward pressure on the Company's total debt-to-EBITDA ratio with a modest deterioration toward the low 8x range in the near to medium term from 7.9x for the last 12 months ended December 31, 2023. Based on Morningstar DBRS’ revised expectations, the Company has little additional financial flexibility within the current credit rating.

Credit Rating Rationale
The credit ratings continue to be supported by (1) the underlying cash flow stability of its high-quality real estate portfolio and strong market position in key Canadian markets; (2) Morningstar DBRS’ expectation that the Company’s secured debt-to-total-debt ratio (the Company’s secured debt-to-total-debt ratio was 38.1% as at year-end 2023) will remain less than the 40% threshold; (3) Morningstar DBRS’ expectation that the Company will continue to maintain the large pool of unencumbered assets that had an estimated value of approximately $12.2 billion at December 31, 2023, which could be pledged as security for loans, if needed; (4) Morningstar DBRS' view of implicit support from AIMCo.; and (5) a well-diversified tenant base with low counterparty risk.

The credit ratings continue to be constrained by (1) AIMCo Realty’s property and geographic concentration and (2) modest execution risks stemming from the Company's capital recycling initiatives and capital-intensive development pipeline that will require ample funding and continued support from AIMCo.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) at https://dbrs.morningstar.com/research/427030.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)

(A) Weighting of BRA Factors
In the analysis of AIMCo Realty Investors LP, the BRA factors were considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of AIMCo Realty Investors LP, the FRA factors were considered in the order of importance contemplated in the methodology.

(C) Weighting of the BRA and the FRA
In the analysis of AIMCo Realty Investors LP, the BRA carried more weight than the FRA.

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

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Entities in the Real Estate Industry (April 15, 2024)
https://dbrs.morningstar.com/research/431170

The following methodology has also been applied:
-- Morningstar DBRS Global Corporate Criteria (April 15, 2024)
https://dbrs.morningstar.com/research/431186/

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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@morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577