Fitch Affirms AIMCO's IDR at 'BB+'; Outlook Positive

NEW YORK--()--Fitch Ratings affirms the following credit ratings for Apartment Investment and Management Company (NYSE: AIV), AIMCO Properties, L.P., and AIMCO/Bethesda Holdings, Inc. (collectively AIMCO):

Apartment Investment and Management Company

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

--Secured revolving credit facility at 'BB+';

--Preferred stock 'BB-'.

AIMCO Properties, L.P.

--IDR at 'BB+';

--Secured revolving credit facility at 'BB+'.

AIMCO/Bethesda Holdings, Inc.

--IDR at 'BB+';

--Secured revolving credit facility at 'BB+'.

Fitch maintained the Positive Rating Outlook.

KEY RATING DRIVERS

The 'BB+' IDR reflects AIMCO's large, well-diversified portfolio, reduced leverage, simplified portfolio strategy, and ample financial flexibility highlighted by strong liquidity and conservative dividend payout ratio. These strengths are balanced by a small unencumbered asset pool, somewhat weak fixed-charge coverage relative to Fitch-rated investment grade peers, and execution risk associated with completing the redevelopment pipeline.

The Positive Rating Outlook anticipates further progress over the next 12 months 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 months to levels consistent with those of an investment grade issuer.

LARGE, WELL-DIVERSIFIED PORTFOLIO

AIMCO maintains an $8.2 billion real estate portfolio that averages 'B' to 'B+' asset quality and is geographically diversified across coastal and job growth markets (i.e. Chicago), with each market comprising less than 15% of NOI. The underlying granularity and diversity across the portfolio insulates AIMCO's cash flow from regional economic weakness or new supply entering individual markets, a credit positive.

NON-RECOURSE, PROPERTY-LEVEL BORROWER

AIMCO's debt financing strategy centers on secured, non-recourse, property-level borrowings with limited corporate debt. This strategy somewhat inhibits financial flexibility given the majority of the portfolio is encumbered and is unlikely to provide contingent liquidity in a weak capital markets environment. However, AIMCO's recourse debt is limited to its secured line of credit and the company does not intend to issue corporate debt in the foreseeable future. Further, the company's secured debt contains contractual amortization payments that drive moderate loan to values on property debt, implying some equity cushion across the portfolio.

GROWING UNENCUMBERED ASSET POOL

AIMCO has recently shifted its strategy to maintain and grow a modest pool of unencumbered assets via the repayment of maturing mortgage debt. The pro forma unencumbered pool is comprised of 10 properties with $572 million of gross asset value. The pool would need to grow to at least $600 million (based on a stressed 8% capitalization rate) and have comparable asset quality to AIMCO's encumbered pool for Fitch to consider an investment grade rating. Fitch's stressed valuation on the pool is currently $361 million, an improvement from $220 million year-over-year.

IMPROVING LEVERAGE AND FIXED CHARGE COVERAGE

Fitch's projected credit metrics are indicative of a 'BBB-' rating for a large, well-diversified apartment REIT. AIMCO's leverage is 7.3x as of March 31, 2014 pro forma for its $125 million 6.875% preferred stock offering in May 2014, the proceeds of which were used to repay secured debt. Fitch expects leverage to trend lower toward 7.0x over the next 12 - 24 months. 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 redevelopment completions. TTM coverage was somewhat skewed lower by $16.6 million of capital replacements tied to multi-phase projects. Fitch defines fixed charge coverage as recurring operating EBITDA less recurring capital expenditures, divided by total interest incurred and preferred dividends.

REDEVELOPMENT-DRIVEN GROWTH STRATEGY

Fitch views favorably AIMCO's growth strategy, which emphasizes redeveloping existing assets rather than greenfield development projects. The investment strategy also aims to improve overall asset quality in a leverage-neutral manner while generating attractive risk-adjusted internal rates of return. AIMCO has encountered sizable cost overruns of more than $90 million at its Lincoln Place, Preserve at Marin, and Pacific Bay Vistas projects (18% of initial project costs); however, these missteps are not expected to have a material adverse impact on corporate credit metrics and Fitch believes redevelopment 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. Management has since grown the dividend gradually since 2011 including an 8% increase 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 approximately $100 million of retained cash flow can be used to repay annual secured debt amortization requirements of approximately $80 million.

RATING SENSITIVITIES

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

--Growing the unencumbered pool to $600 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:

--'Corporate Rating Methodology' (May 28, 2014);

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

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

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

Applicable Criteria and Related Research:

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

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 Nonfinancial Corporate and REIT Credit Analysis - Effective Dec. 13, 2012 to Dec. 23, 2013

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696670

Recovery Ratings and Notching Criteria for Equity REITs

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=834598

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Contacts

Fitch Ratings
Primary Analyst:
Reinor Bazarewski, +1-212-908-0291
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Stephen Boyd, CFA, +1-212-908-9153
Director
or
Committee Chairperson:
Steven Marks, +1-212-908-9161
Managing Director
or
Media Relations:
Sandro Scenga, New York, +1-212-908-0278
sandro.scenga@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst:
Reinor Bazarewski, +1-212-908-0291
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Stephen Boyd, CFA, +1-212-908-9153
Director
or
Committee Chairperson:
Steven Marks, +1-212-908-9161
Managing Director
or
Media Relations:
Sandro Scenga, New York, +1-212-908-0278
sandro.scenga@fitchratings.com