DBRS Limited (DBRS Morningstar) 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 ratings consider (1) the stand-alone credit assessment of AIMCo Realty, (2) the low level of secured debt in its capital structure, and (3) DBRS Morningstar’s view of implicit support from Alberta Investment Management Corporation (AIMCo).
The Stable trends consider DBRS Morningstar’s expectations that (1) the Company’s EBITDA will continue to grow from its existing properties, supplemented primarily by increasing EBITDA from new and expansion construction projects coming to market in the near and medium term; (2) AIMCo Realty’s leverage will continue to increase periodically as it upgrades its overall portfolio quality through use of incremental debt to fund its sizable development pipeline; and (3) the Company's meaningful exposure to energy-centric office markets will remain challenged by secular headwinds facing the office sector (oversupply, obsolescence, and work from home dynamics).
Notwithstanding the relative weaker performance in its office segment, the Company outperformed DBRS Morningstar’s expectations for YE2022 total-debt-to EBITDA in the high 8 times (x) range, driven mainly by a robust post-pandemic recovery within its other asset classes. Nevertheless, DBRS Morningstar now expects AIMCo Realty's strategy to periodically pursue opportunistic development or other growth initiatives will continue to 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, 2022.
The 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) the Company’s modest near-term retail and office lease expiries; (3) DBRS Morningstar’s expectation that the Company’s secured debt-to-total debt ratio (the Company’s adjusted secured debt-to-total debt ratio was 36.2% in F2022 pro forma repayment of construction loans that matured slightly after December 31, 2022) will remain below the 40% threshold; (4) DBRS Morningstar’s expectation that the Company will continue to maintain the large pool of unencumbered assets that had an estimated value of approximately $11.8 billion at December 31, 2022, which could be pledged as security for loans, if needed; and (5) DBRS Morningstar's view of implicit support from AIMCo. The ratings continue to be constrained by AIMCo Realty’s property and geographic concentration, relatively small portfolio size, and modest execution risks stemming from the Company's capital-intensive development pipeline that will require ample funding and continued support from AIMCo.
DBRS Morningstar is also of the view that an additional modestly positive overlay factor is warranted in consideration of other revenues received through distributions and realized gains from AIMCo Realty’s holdings in various closed-end funds and public equities.
A negative rating action could result if either (1) AIMCo Realty’s total debt-to-EBITDA exceeds 9.0x or EBITDA interest coverage falls below 4.00x, on a sustained basis; (2) the secured debt-to-total debt ratio remains above 40% on a sustained basis; or (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 DBRS Morningstar’s expectation of the Company’s total debt-to-EBITDA and secured debt-to-total debt ratios remaining high in the foreseeable future.
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 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 (May 17, 2022) at https://www.dbrsmorningstar.com/research/396929.
All figures are in Canadian dollars unless otherwise noted.
DBRS Morningstar applied the following principal methodologies:
-- Global Methodology for Rating Entities in the Real Estate Industry (April 11, 2023) https://www.dbrsmorningstar.com/research/412477
-- DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (March 28, 2023) https://www.dbrsmorningstar.com/research/411694
The following methodologies have also been applied:
-- DBRS Morningstar Global Criteria: Common Adjustments for Calculating Financial Ratios (December 8, 2022) https://www.dbrsmorningstar.com/research/407058
-- DBRS Morningstar Global Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (October 26, 2022)
The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.
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 rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the rating process for this rating action.
DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this 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. DBRS Morningstar trends and ratings are under regular surveillance.
Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at email@example.com.
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