NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded the Issuer Default Rating (IDR) ratings for Apartment Investment and Management Company (NYSE: AIV) and its operating partnership, AIMCO Properties L.P. (collectively AIMCO or the company) to 'BBB-' from 'BB+'. A full list of ratings actions follows at the end of this release. Fitch has revised the Rating Outlook to Stable from Positive.
KEY RATING DRIVERS
Key factors supporting the upgrade include the material improvement in leverage and fixed-charge coverage, as well as the creation of a sizable pool of unencumbered assets. Fitch expects each to stabilize around current levels. AIV's solid liquidity and portfolio quality are also credit strengths. Below-average financial flexibility relative to peers as a result of the small absolute size of the company's unencumbered pool and fewer capital sources given the secured-only borrowing strategy balance these strengths.
LEVERAGE AND COVERAGE IMPROVED; EXPECTED TO STABILIZE
Fitch expects AIV to maintain leverage between 6x - 7x through business cycles, likely trending towards the lower-end of the range through 2017 given our expectation for positive albeit moderating fundamentals. Since 2007, AIV has reduced debt by $3.6 billion and improved leverage to 6.8x at March 31, 2015 from a peak of 9.2x at Dec. 31, 2010 and 7.5x at Dec. 31, 2014. Asset sales, market driven recurring operating EBITDA growth and equity issuance drove the improvement. Fitch defines leverage as debt less readily available cash to recurring operating EBITDA.
Fixed-charge coverage (FCC) has also improved though to a lesser extent than leverage, and Fitch expects modest improvements through 2017. FCC was 2.0x for the trailing twelve months (TTM) ended March 31, 2015 as compared to 2.0x for 2014, 1.9x for 2013 and 1.7x for 2012. Fitch defines FCC as recurring operating EBITDA less recurring maintenance capital expenditures to total cash interest incurred and preferred dividends.
ASSET UNENCUMBRANCE SUPPORTS UPGRADE
AIV had an unencumbered pool totalling 18 properties with an estimated stressed value of $600 - $700 million at 1Q15 assuming a through-the-cycle capitalization rate of its TTM unencumbered NOI. Growth in the company's unencumbered pool is a primary driver behind the upgrade. AIV had only three unencumbered properties when Fitch initiated ratings in 2Q13. The pool provides adequate contingent liquidity coverage to the generally small and episodic amounts of recourse debt from borrowings under its revolving credit facility.
The pool's value exceeds the full $600 million available under the company's unsecured revolver though not by the 2x coverage of total unsecured debt that is common within Fitch's investment grade rated REIT portfolio. A line balance of that magnitude is not within Fitch's expectations and could result in negative rating momentum. Fitch does not expect the size of the pool will grow markedly from current levels and it continues to comprise only a small fraction of the overall portfolio.
AIV's unencumbered asset coverage of unsecured debt (UA/UD) was not meaningful given that the line was undrawn at March 31, 2015. Coverage was 6x of the average revolver balance since 1999 and 14x of the average revolver balance since 2009.
UNCOMMON BORROWING STRATEGY FOR RATED REIT ISSUER
AIV has a publicly stated strategy of financing via asset-level non-recourse amortizing mortgages which is common for REITs generally given the depth of the commercial real estate mortgage market but uncommon for investment-grade rated REITs. The implications of AIV's strategy are mixed. The lack of recourse debt, save for periodic and modest draws on the line of credit, reduces the probability of a default while the unencumbered pool improves recovery prospects in the unlikely event of a default. Conversely, maintaining investment grade ratings may be a lower priority for AIV given fewer commercial incentives to do so.
The corporate rating has only an indirect effect on access to capital since AIV does not plan to issue long term unsecured debt, the less critical role sponsor quality plays in mortgage lender underwriting and the limited effect on interest expense (and therefore funds from operation and net income) as rating changes would only impact line of credit pricing.
WELL-LADDERED DEBT MATURITIES & APPROPRIATE LIQUIDITY
AIV maintains sufficient liquidity driven by its staggered debt maturities, the meaningful amounts of principal amortization on mortgages and dividend payout policies. Approximately 23% of AIV's debt will be repaid via amortization thereby reducing refinancing risk. In addition, AIV's dividends have comprised 50 - 60% of adjusted funds from operations (AFFO) and 80 - 90% of AFFO after mortgage amortization allowing the company to retain meaningful amounts of internally generally liquidity.
Combined, these policies create sufficient liquidity which Fitch estimates sources cover uses by 1.2x for the period April 1, 2015 through Dec. 31, 2016. Fitch defines liquidity coverage as sources (unrestricted cash, availability under the revolving credit facility, committed and undrawn construction financing and retained cash flow from operations after dividends) to uses (debt maturities and amortization, remaining development and redevelopment expenditures and recurring maintenance capital expenditures).
AVERAGE PORTFOLIO QUALITY, IMPROVING
AIV's portfolio quality continues to improve as the company disposes of its affordable segment (now 10% of net operating income) and recycles capital from weaker assets (principally those in markets with below average demographics or limited constraints on new supply) and into higher quality assets via its pair-trade strategy that identifies a specific disposition to offset any acquisition. For example, acquisitions during 2014 had rents averaging $1,652 per month and an implied value of $247k per unit as compared to dispositions at $937 per month and $81k per unit.
Fitch views AIV's portfolio as average relative to its public peers when measured by average rent per unit, enterprise value per unit and implied cap rate. Nonetheless, many of the public peers are rated 'BBB' or 'BBB+' by Fitch thus indicating that in isolation from all other credit factors, AIV's portfolio quality alone would be consistent with a higher rating.
The Stable Outlook reflects Fitch's expectation that while key metrics and the portfolio quality may continue to improve on the margin, the majority of the improvements have been completed. Moreover, absent a material balancing between the unencumbered and encumbered pools, positive momentum in the ratings is unlikely.
PREFERRED STOCK NOTCHING
The two-notch differential between AIV's IDR and preferred stock rating is consistent with Fitch's criteria for corporate entities with an IDR of 'BBB-'. Based on Fitch Research on 'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis', also available at www.fitchratings.com, these preferred securities are deeply subordinated and have loss absorption elements that would likely result in poor recoveries in the event of a corporate default.
Fitch's key assumptions for AIV in Fitch's base case include:
--Same-store NOI growth of 5% in 2015, 4% in 2016 and 3.4% in 2017 to reflect a moderation in operating fundamentals;
--G&A to maintain historical margins relative to total revenues;
--No acquisitions or dispositions beyond those announced as Fitch expects any potential investments will be match-funded, slightly dilutive on an EBITDA basis and slightly accretive on a free cash flow basis;
--Development and redevelopment expenditures of $245 million through 2017 with modest NOI contributions due to timing and stabilization;
--Secured debt maturities are largely refinanced with new mortgages except for $100 million of principal paydowns;
--Recurring capital expenditures to remain between 10-12% of recurring operating EBITDA through 2017;
--No equity issuance and an AFFO payout ratio before amortization of approximately 65% through 2017.
The ratings assume no change to AIV's financing strategy and that AIV will not have recourse debt beyond normal use of its revolving credit facility. A change or expected change in financing strategy could result in a change to the ratings and/or Outlook.
Moreover, Fitch does not envision positive momentum in the ratings and/or Outlook given the relative size of the unencumbered pool and Fitch's expectation that AIV will not access the unsecured bond market, similar to all other investment-grade rated REITs. However, the issuer's asset class and portfolio quality are consistent with higher ratings if matched with material improvements to contingent liquidity and financial flexibility via an expansion in the unencumbered pool.
The following factors may have a negative impact on the company's ratings and/or Outlook:
--Fitch's expectation of leverage sustaining above 7.5x (6.8x as of March 31, 2015);
--Fitch's expectation of fixed-charge coverage sustaining below 2.0x (2.0x for the LTM ended March 31, 2015);
--The encumbrance of or a material deterioration in the value of the unencumbered asset pool.
FULL LIST OF RATING ACTIONS
Fitch upgrades the following ratings:
Apartment Investment and Management Company
--Issuer Default Rating (IDR) to 'BBB- ' from 'BB+';
--Secured revolving credit facility to 'BBB- ' from 'BB+';
--Preferred stock to 'BB ' from 'BB-'.
AIMCO Properties, L.P.
--IDR to 'BBB- ' from 'BB+';
--Secured revolving credit facility to 'BBB- ' from 'BB+'.
The Rating Outlook has been revised to Stable from Positive.
Additional information is available on www.fitchratings.com.
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)
Recovery Ratings and Notching Criteria for Equity REITs (pub. 18 Nov 2014)
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis (pub. 25 Nov 2014)