Fitch Rates AIMCO's $125MM 6.875% Series A Preferred Stock 'BB-'; Outlook Positive

NEW YORK--()--Fitch Ratings has assigned a 'BB-' rating to the $125 million 6.875% series A preferred stock issued by Apartment Investment and Management Company (AIMCO). Net proceeds of $121.1 million will be used for general corporate purposes, including repayment of indebtedness under the company's revolving credit facility and repayment of non-recourse property debt.

Fitch currently rates the company as follows:

Apartment Investment and Management Company

--Issuer Default Rating (IDR) 'BB+';

--Secured revolving credit facility 'BB+';

--Preferred stock 'BB-'.

AIMCO Properties, L.P.

--IDR 'BB+';

--Secured revolving credit facility 'BB+'.

AIMCO/Bethesda Holdings, Inc.

--IDR 'BB+';

--Secured revolving credit facility 'BB+'.

The Rating Outlook is Positive.

KEY RATING DRIVERS

The 'BB+' rating reflects AIMCO's large, well-diversified portfolio, improving balance sheet highlighted by reduced leverage and growing unencumbered asset pool, simplified portfolio strategy, and conservative dividend payout ratio. These strengths are balanced by a small unencumbered asset pool, weak credit metrics relative to Fitch-rated investment grade peers, and execution risk tied to completing existing redevelopment projects.

The Positive Rating Outlook anticipates further progress toward building an unencumbered pool to a size and quality that is consistent with that of an investment grade rating. The Rating Outlook also reflects Fitch's view that the company's leverage and fixed charge coverage will continue to improve over the next 12-24 months to levels more consistent with those of an investment grade issuer.

LARGE, WELL-DIVERSIFIED PORTFOLIO

AIMCO maintains a granular $8.2 billion real estate portfolio that averages 'B' to 'B+' asset quality and is geographically diversified, with each market comprising less than 15% of net operating income (NOI). The underlying granularity and diversity across the portfolio insulates the company's cash flow from economic weakness or new supply entering markets, a credit positive.

NON-RECOURSE, PROPERTY-LEVEL BORROWER

AIMCO's debt financing strategy focuses on secured, non-recourse, property-level borrowings with limited corporate debt. This financing strategy somewhat inhibits financial flexibility given that nearly all of the portfolio is encumbered and is unlikely to provide contingent liquidity in a weak capital markets environment. The company does not intend to issue corporate debt in the foreseeable future, which partially mitigates the limited size of the unencumbered pool.

GROWING UNENCUMBERED ASSET POOL

Despite AIMCO's secured debt financing approach, the company has recently shifted its strategy to maintain and grow a modest pool of unencumbered assets via the repayment of maturing mortgage debt. At March 31, 2014, the unencumbered pool was comprised of eight properties with an estimated fair value of $410 million. The pool would need to grow to at least $500 million (based on a stressed 8% capitalization rate of unencumbered NOI) and have the same or better asset quality relative to AIMCO's encumbered pool for Fitch to consider an investment grade rating.

IMPROVING LEVERAGE AND FIXED CHARGE COVERAGE

AIMCO's leverage is 7.3x pro forma for the preferred stock offering and Fitch expects leverage will drive lower toward 7.0x over the next 12-24 months, strong for the 'BB+' rating. Fitch defines leverage as net debt divided by recurring operating EBITDA.

Fixed charge coverage for the trailing 12 months (TTM) ended March 31, 2014 was 1.9x and Fitch expects the metric will exceed 2.0x over the next 12-24 months, driven by low-mid single digit same-store NOI (SSNOI) growth and incremental cash flow from completed redevelopment projects. Fitch defines fixed charge coverage as recurring operating EBITDA less recurring capital expenditures, divided by total interest incurred and preferred dividends. Projected credit metrics are generally indicative of a 'BBB-' rating for a large, well-diversified apartment REIT.

REDEVELOPMENT-DRIVEN GROWTH STRATEGY

AIMCO's growth strategy emphasizes the redevelopment of existing properties as opposed to greenfield development projects, which Fitch views favorably. The investment strategy also aims to improve overall asset quality in a leverage-neutral manner while generating attractive risk-adjusted internal rates of return (IRRs). AIMCO has encountered cost overruns at its Lincoln Place and Preserve at Marin projects; however, Fitch believes the redevelopment of existing assets continues to provide the highest risk-adjusted returns over the longer term.

CONSERVATIVE DIVIDEND PAYOUT

AIMCO reduced its normalized dividend more than 80% in 2009 to align distributions with the weak operating environment brought about by the financial crisis. AIV has since grown the dividend gradually since early 2011 and most recently increased the quarterly rate 8% in January 2014 to $0.26/share. Longer term, Fitch expects that the company will maintain a conservative adjusted funds from operations (AFFO) payout ratio in the 60% range, a credit positive given retained cash flow can be used to repay secured debt amortization requirements of approximately $80 million per year.

RATING SENSITIVITIES

The following factors may have a positive impact on AIMCO's ratings:

--Growing the unencumbered pool to $500 million (based on a stressed 8% capitalization rate) with asset quality consistent with the overall portfolio;

--Fitch's expectation of leverage sustaining below 7.5x (pro forma leverage is 7.3x);

--Fixed charge coverage sustaining above 2.0x (coverage for the TTM ended March 31, 2014 was 1.9x).

The following factors may have a negative impact on the company's ratings and/or Outlook:

--Fitch's expectation of leverage sustaining above 8.5x;

--Fitch's expectation of fixed charge coverage sustaining below 1.5x;

--Encumbrance of the current unencumbered asset pool.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Rating U.S. Equity REITs and REOCs (Sector Credit Factors) (Feb. 26, 2014);

--'Treatment and Notching of Hybrids in Non-financial Corporate and REIT Credit Analysis' (Dec. 23, 2013);

--'Recovery Ratings and Notching Criteria for Equity REITs' (Nov. 19, 2013);

--'Corporate Rating Methodology' (Aug. 5, 2013).

Applicable Criteria and Related Research:

Recovery Ratings and Notching Criteria for Equity REITs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722363

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Rating U.S. Equity REITs and REOCs (Sector Credit Factors)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=737957

Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=726863

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=830099

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Contacts

Fitch Ratings
Primary Analyst
Reinor Bazarewski
Director
+1 212-908-0291
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Stephen Boyd
Director
+1 212-908-9153
or
Committee Chairperson
Sean Pattap
Senior Director
+1 212-908-0642
or
Media Relations, New York
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Reinor Bazarewski
Director
+1 212-908-0291
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Stephen Boyd
Director
+1 212-908-9153
or
Committee Chairperson
Sean Pattap
Senior Director
+1 212-908-0642
or
Media Relations, New York
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com