Moody's affirms Aimco, revises outlook

Moody's Investors Service said it has affirmed its Ba3 preferred stock rating of Apartment Investment and Management Co. and simultaneously changed the real estate investment trust's rating outlook to negative from stable.

According to Moody's, this revised outlook reflects an expectation of continued deterioration of Aimco's operational performance and lower earnings and earnings predictability from Aimco Capital's development and equity placement fees and from income generated from Aimco's large portfolio of notes receivable.

In addition, Moody's expects capital expenditures and expenses to remain high as Aimco focuses on maintaining occupancies. Reduced fixed charge coverage is also a credit negative resulting in a reduction in available cushion to absorb further deterioration in operating performance. Moody's, however, acknowledges Aimco's prudent step in cutting its dividend to a level that is covered by current free cash flow (about 91% of AFFO, as of third quarter 2003).

Moody's ratings continue to incorporate the REIT's focus on multifamily real estate appealing to middle-income residents, Aimco's significant size, experienced management team and well-laddered maturities. Moody's acknowledges the positive aspects of the REIT's focus on maintaining stable leverage levels, (high in comparison to its peers) in a very difficult operating environment for multifamily REITs, and the 37% dividend cut implemented by the board.

Moody's also acknowledges Aimco's successful effort to reposition its portfolio, through sales of non core assets and redevelopment efforts on its current portfolio.

These positive rating factors are offset by Aimco's substantial levels of encumbered properties, material investments in loans to leveraged partnerships in which the REIT owns a general partnership interest, and interest and fixed charge coverages that are low compared to its similarly rated apartment REIT peers.

The negative outlook reflects an expectation of continued weakness in Aimco's earnings, higher cash flow needs for re-tenanting, as well Moody's expectation that the REIT will focus on stabilizing its operational performance while maintaining fixed charge coverage of at least 1.5x to 1.6x (including interest expense, capitalized interest, preferred dividends and preferred unit distributions, as well as principal amortization and all pro-rated numbers for the joint venture activity).

Continued deterioration of the REIT's operations, and a decrease in fixed charge coverage below the 1.4x range will likely result in a downgrade, as will a leveraged acquisition. A sustained upward earnings momentum, which will in turn increase the fixed charge coverage ratio, would be required to change the outlook to stable.

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