Fitch Affirms AIMCO at 'BBB-'; Outlook Stable

Fitch Ratings has affirmed the Issuer Default Ratings (IDR) of Apartment Investment and Management Company (NYSE: AIV) and its operating partnership, AIMCO Properties, L.P. (collectively AIMCO or the company) at 'BBB-'. See the full list of rating actions at the end of this release. The Rating Outlook is Stable.

KEY RATING DRIVERS

Key factors supporting the ratings 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 throughout the rating horizon. 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 2018 given our expectation for positive albeit moderating fundamentals. AIV reduced leverage from a peak of 9.2x at Dec. 31, 2010 to 7.5x at Dec. 31, 2014 and 6.7x for the trailing 12 months (TTM) ended June 30, 2016. 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 and Fitch expects modest improvements through 2018 to above 2.5x as compared to 2.3x for 2015, 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 RATINGS

AIV had an unencumbered pool totaling 23 properties (or 13% of all consolidated properties) with an estimated stressed value of approximately $800 million at second quarter 2016 (2Q16) assuming a through-the-cycle capitalization rate of its TTM unencumbered net operating income (NOI). Growth in the company's unencumbered pool was a primary driver behind the upgrade in 2015. 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 AIV's 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 if it were to occur could result in negative rating momentum, absent growth in the unencumbered pool. 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 had only $161 million drawn at June 30, 2016. Coverage was 7x of the average revolver balance since 1999 and 16x 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 BUT LIQUIDITY DEFICIT

AIV maintains sufficient liquidity driven by its staggered debt maturities, the meaningful amounts of principal amortization on mortgages, and dividend payout policies. Approximately 22% 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.

However, AIV is projected to operate with a liquidity deficit (0.8x) for the period July 1, 2016 through Dec. 31, 2017 assuming no access to external capital. The deficit is driven principally by development and redevelopment expenditures and higher borrowings under the revolving credit facility, though Fitch expects AIV will manage through via refinancing mortgages and receiving incremental proceeds and additional asset sales. As AIV's mortgages have significant amortization, they typically mature with below-market loan-to-value ratios, thus incremental proceeds upon refinancing should be highly likely. Fitch defines liquidity coverage as sources (unrestricted cash, availability under the $600 million revolving credit facility due 2017, 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 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 in 2015 had rents averaging $3,188 per month upon stabilization and an implied value of $430,000 per unit as compared to dispositions at $1,041 per month and $105,000 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.

STABLE OUTLOOK

The Stable Outlook reflects Fitch's expectation that while key metrics and 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.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for AIV include:

--Operating fundamentals remain positive but decelerate to with SSNOI growth in the low- to mid-single digits;

--Operating margins remain consistent with prior years;

--AIV completes in-progress developments and redevelopments and spends $75 million per year thereafter in capital expenditures above and beyond recurring maintenance capex;

--AIV does not change its financing strategy and continues to refinance most secured debt maturities while unencumbering a modest number of properties.

RATING SENSITIVITIES

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, in contrast 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 and access to the unsecured bond market.

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 (6.6x as of June 30, 2016);

--Fitch's expectation of fixed-charge coverage sustaining below 2.0x (2.4x for the LTM ended June 30, 2016);

--The encumbrance of or a material deterioration in the value of the unencumbered asset pool.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the ratings as follows:

Apartment Investment and Management Company

--Issuer Default Rating (IDR) at 'BBB-';

--Secured revolving credit facility at 'BBB-';

--Preferred stock at 'BB ''.

AIMCO Properties, L.P.

--IDR at 'BBB-';

--Secured revolving credit facility at 'BBB- '.

The Rating Outlook is Stable.

Additional information is available on www.fitchratings.com.

Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below:

--Historical and projected recurring operating EBITDA is adjusted to add back non-cash stock-based compensation and include operating income from discontinued operations;

--Fitch has adjusted the historical and projected net debt by assuming the issuer requires $10 million of cash for working capital purposes which is otherwise unavailable to repay debt.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/site/re/869362

Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis (pub. 29 Feb 2016)

https://www.fitchratings.com/site/re/878264

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1011407

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1011407

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20160908006646/en/