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Thu, December 15, 2011

Fitch Affirms Sovran Self Storage's IDR at 'BBB-';; Outlook Stable


Published on 2011-12-15 11:57:03 - Market Wire
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NEW YORK--([ ])--Fitch Ratings affirms the credit ratings of Sovran Self Storage, Inc. (NYSE: SSS) and Sovran Acquisition Limited Partnership (collectively, Sovran or the company) as follows:

Sovran Self Storage, Inc.

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

--$175 million unsecured revolving credit facility at 'BBB-';

--$350 million senior unsecured term notes at 'BBB-';

--$225 million senior unsecured term loans at 'BBB-';

--Indicative preferred stock at 'BB'.

Sovran Acquisition Limited Partnership (as co-borrower)

--IDR at 'BBB-';

--$175 million unsecured revolving credit facility at 'BBB-';

--$350 million senior unsecured term notes at 'BBB-';

--$225 million senior unsecured term loans at 'BBB-'.

The Rating Outlook is Stable.

The rating affirmations reflect the strength of Sovran's credit metrics supported by a solid liquidity position and positive operating fundamentals over the last four quarters. Credit concerns include elevated leverage metrics resulting from the recent sizable acquisitions, the company's small-size, and geographic concentration.

The Stable Outlook centers on the expected consistency of Sovran's credit ratios over the near term and the company's mostly unencumbered asset pool which provides sufficient contingent liquidity. However, the company's small size and geographic concentration limits positive momentum to the company's rating.

Fixed charge coverage was 2.7 times (x) for the 12 months ended Sept. 30, 2011, compared with 2.7x and 2.4x during 2010 and 2009, respectively. Fitch projects that over the next 12 to 24 months, limited same store net operating income (SSNOI) growth will result in fixed charge coverage of approximately 3.0x, consistent with the assigned ratings. Fitch calculates fixed charge coverage as recurring operating EBITDA less Fitch's estimate of routine capital expenditures divided by total interest incurred (excluding the swap termination fees paid in 2009 and 2011).

Sovran's leverage, defined as net debt divided by recurring operating EBITDA, is elevated for the rating category at 6.4x as of Sept. 30, 2011, compared with 4.8x and 4.4x as of Dec. 31, 2010 and Dec. 31, 2009, respectively. The elevated leverage reflects the company's recent portfolio acquisition that provided minimal earnings contribution during the recent period. Fitch estimates that pro forma leverage on a trailing 12 month basis is 5.9x. Fitch anticipates leverage to trend towards 5.0x to 5.5x through EBITDA growth given recent acquisitions and net debt reductions, consistent with a 'BBB-' rating.

Sovran's liquidity coverage ratio is solid for the rating category. Sources of liquidity (unrestricted cash, availability under its unsecured revolving credit facility, availability under a delayed draw term note and retained cash flows from operating activities after dividend payments) divided by uses of liquidity (debt maturities and projected routine capital expenditures) result in a liquidity coverage ratio of 1.2x for the period from Oct. 1, 2011 to Dec. 31, 2013. The liquidity ratio declines to 0.9x upon the inclusion of unfunded development expenditures. Additionally, the company's debt maturities are long-dated with 77% of debt maturing after 2015. The retirement of $100 million of term notes in 2013 is the company's nearest meaningful debt obligation. Fitch estimates Sovran's liquidity coverage will improve provided the company retires its 2011 and 2012 secured debt maturities.

The majority of Sovran's assets are unencumbered, providing a large asset pool for contingent liquidity. Fitch notes the small size of properties however, which may limit Sovran's ability to rapidly monetize these assets. Unencumbered asset coverage of unsecured debt (calculated as unencumbered annualized trailing six-months net operating income as of Sept. 30, 2011, divided by a 9% capitalization rate, divided by unsecured debt) results in coverage of 2.2x as of Sept. 30, 2011.

Separately, Sovran's portfolio benefits from recently positive operating fundamentals. SSNOI growth turned positive in the fourth quarter of 2010 (4Q'10) and has grown between 4.4% and 8.6% on a quarterly basis. While positive, Fitch does not consider the peak growth rate sustainable. Occupancy remains materially below 2006 levels, with an average quarterly occupancy of 81.2%. The company has generated growth through increasing rental rates, up 6.1% on a year-over-year basis as of Sept. 30, 2011. Concessions have also declined consistently over the same period.

Sovran's credit strengths are partially offset by the aforementioned elevated leverage metrics resulting from the recent portfolio acquisition. Additional credit concerns include the company's small size, geographic concentration and limited earnings visibility as a result of the month-to-month lease terms. Finally, the mortgage market provides limited contingent liquidity for the self storage asset class.

The two-notch differential between Sovran Self-Storage, Inc.'s IDR and the indicative preferred stock rating is consistent with Fitch's criteria for corporate entities with an IDR of 'BBB-'. Based on Fitch research titled 'Rating Hybrid Securities,' dated July 28, 2011, available on Fitch's Web site at '[ www.fitchratings.com ]', these preferred securities would be deeply subordinated and have loss absorption elements that would likely result in poor recoveries in the event of a corporate default.

Although Fitch does not anticipate positive ratings momentum in the near- to medium-term, the following factors may have a positive impact on Sovran's ratings and/or Outlook:

--Net debt to recurring operating EBITDA ratio remaining below 4.0x (leverage was 6.4x as of Sept. 30, 2011);

--Fixed-charge coverage ratio sustaining above 3.0x (coverage was 2.7x for the 12 months ended Sept. 30, 2011);

--Increased geographic diversification of the company's cashflows;

--A liquidity surplus.

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

--Fixed-charge coverage ratio declines below 2.0x;

--Leverage ratio sustaining above 6.0x;

--Engaging in sizable acquisitions not on a leverage neutral basis;

--If Fitch expects the company to breach any covenant, reducing the company's financial flexibility;

--Negative SSNOI performance.

Sovran Self Storage, Inc. is a real estate investment trust (REIT) headquartered in Buffalo, NY. As of Sept. 30, 2011, Sovran had $1.6 billion in undepreciated book assets, a common equity capitalization of $1 billion and a total market capitalization of $1.7 billion. As of Sept. 30, 2011, Sovran owned or operated a portfolio of 434 self-storage properties totaling 25.6 million square feet of leasable space in 25 states.

Additional information is available at '[ www.fitchratings.com ]'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology', Aug. 12, 2011;

--'Parent and Subsidiary Rating Linkage', Aug. 12, 2011;

--'Rating Hybrid Securities', July 28, 2011;

--'Treatment of Hybrids in Corporate and REIT Credit Analysis', July 11, 2011;

--'Recovery Rating and Notching Criteria for Equity REITs', May 12, 2011;

--'Criteria for Rating U.S. Equity REITs and REOCs', March 15, 2011.

Applicable Criteria and Related Research:

Corporate Rating Methodology

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229 ]

Parent and Subsidiary Rating Linkage

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647210 ]

Rating Hybrid Securities

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647091 ]

Treatment of Hybrids in Corporate and REIT Credit Analysis

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=642132 ]

Recovery Rating and Notching Criteria for Equity REITs

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=628490 ]

Criteria for Rating U.S. Equity REITs and REOCs

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=610687 ]

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