DBRS Limited (DBRS Morningstar) 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 confirmation considers AIMCo Realty’s stand-alone risk profile, which incorporates the heightened level of uncertainty in AIMCo Realty's operating environment because of the ongoing Coronavirus Disease (COVID-19) pandemic and related economic slowdown, 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, relatively low leverage, and strong interest coverage ratios, while acknowledging the recent trend 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 rating also takes into account AIMCo Realty’s property and geographic concentration and relatively small portfolio size, which has improved.
The Stable trend incorporates DBRS Morningstar’s expectation for some moderation in earnings growth in the near and medium term resulting from the coronavirus, offset by 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 key financial metrics have incrementally weakened in recent years, they remain at relatively strong levels. The rating incorporates DBRS Morningstar’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.
The Company’s secured debt-to-total debt ratio stood at 41.3% as at year-end 2019 and is expected to decline comfortably below 40.0% with over $400 million in mortgages coming due in 2020. As a result, the stand-alone rating benefits from a one-notch uplift. 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.
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 total debt-to-EBITDA exceeding 7.8x or EBITDA interest coverage falling below 3.50x on a sustained basis; (2) secured debt-to-total debt does not decline below 40% as anticipated; and (3) DBRS Morningstar changes its view 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.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Entities in the Real Estate Industry (April 23, 2019); DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019); and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 22, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.
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 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 firstname.lastname@example.org.
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.
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