NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB-' rating to the $175 million 4.533% Series E senior unsecured term notes due 2024 jointly issued by Sovran Self Storage, Inc. and its operating partnership, Sovran Acquisition, L.P. (NYSE: SSS, collectively Sovran). Net proceeds will be used to repay amounts outstanding on Sovran's line of credit and to fund future investment activity.
Fitch currently rates Sovran as follows:
Sovran Self Storage, Inc.
--Issuer Default Rating (IDR) 'BBB-';
--Unsecured revolving credit facility 'BBB-';
--Unsecured term notes 'BBB-'.
Sovran Acquisition, L.P.
--IDR 'BBB-';
--Unsecured revolving credit facility 'BBB-';
--Unsecured term notes 'BBB-'.
KEY RATING DRIVERS
The ratings reflect the strength of Sovran's credit metrics, driven in large part by the sustained robustness of operating fundamentals. Leverage and fixed-charge coverage are strong for the rating but expected to moderate along with fundamentals through 2015. These positive elements are balanced, in part, by a concentrated debt maturity schedule, the inherent cyclicality in fundamentals and a small, geographically concentrated portfolio.
ROBUST OPERATING FUNDAMENTALS
Sovran's portfolio continues to perform well with same-store NOI (SSNOI) growth of 9.9% for 2013 following growth of 10.3% and 6.2% in 2012 and 2011, respectively. Operating performance has been driven by a variety of factors including the traditional drivers (e.g. the single-family home market and economic growth), the implementation of sophisticated revenue management software and the long-anticipated consolidation of market share from smaller competitors.
Since implementing its revenue management system and cutting rents during the downturn, same-store occupancy has improved to 89.1% at Dec. 31, 2013 as compared to 79% at March 31, 2010. In 2013, asking rents grew by +5.7% and average rent increases in 4Q'13 were +3.3% year-over-year. Fitch's base case assumes SSNOI growth moderates through 2015 to the low-to-mid single digits and will be mostly rate driven as compared to the past few years when occupancy was the main supporter of growth.
STRONG CREDIT METRICS, EXPECTED TO MODERATE
Fitch expects metrics will stabilize at current levels due to moderating fundamentals. Leverage was 4.1x for 2013 as compared to 5.4x and 5.7x for the years ended 2012 and 2011, respectively. Fitch defines leverage as net debt to recurring operating EBITDA.
Similarly, fixed charge coverage improved to 4.2x for 2013 as compared to 3.2x and 2.8x for the years ended Dec. 31, 2012 and 2011, respectively. Fitch expects fixed charge coverage will remain strong going forward, though may decrease temporarily as Sovran redeploys net proceeds. The improvements have been driven in large part by the aforementioned strong fundamentals. Fitch defines fixed charge coverage as recurring operating EBITDA less maintenance capital expenditures divided by total interest incurred.
CONCENTRATED DEBT MATURITIES
Following the debt refinancings in 2013 and pro forma for the note issuance, Sovran's debt maturity schedule is long-dated but concentrated with more than 43% maturing in 2020. A concentrated debt maturity increases refinancing risks, all else being equal. However, Fitch expects concentration will decrease as Sovran grows and layers in additional corporate debt obligations. Further, as the 2020 maturities are comprised of multiple bank term notes, Fitch expects Sovran will begin to prepay them ahead of 2020.
Fitch expects Sovran will continue to borrow principally via unsecured term loans. Should Sovran pursue an index-eligible public bond offering, Fitch would view it positively, as it would diversify the company's funding sources; however, it is unlikely to occur in the near term given the lack of corporate debt maturities absent acquisition volumes greater than Fitch's expectations.
APPROPRIATE CONTINGENT LIQUIDITY
An ancillary benefit of the concentrated debt maturities is Sovran's near-term liquidity. Pro forma for the issuance, Sovran will have full availability under its $175 million line of credit, $136 million of unrestricted cash and the ability to retain $45 million to $55 million of cash flow from operating activities after common dividends. Notably, Sovran has no debt maturities in either 2014 or 2015 other than immaterial amounts of secured debt amortization.
Sovran's contingent liquidity (as measured by unencumbered asset coverage of net unsecured debt) is also appropriate at 3.4x at Dec. 31, 2013 pro forma (assuming a stressed 9% cap rate). Sovran's contingent liquidity has improved materially since 2011 due to the continued repayment of secured debt and improvement operating cashflows. Fitch expects self-storage REITs to have higher contingent liquidity ratios than similarly rated REITs in other asset classes as asset granularity increases the time and number of properties necessary to aggregate a collateral pool.
Lastly, Sovran's dividend payout ratios allow it to retain some internally generated liquidity. Fitch calculates Sovran's adjusted funds from operations payout ratio to have been 62% for 2013 and 72% for 2012.
GEOGRAPHIC CONCENTRATION
SSS's portfolio is geographically concentrated thereby increasing the effects of changes to certain states' fiscal and employment health on SSS's cash flows. Texas and Florida comprised 40% of total same-store NOI in 4Q'13. Further, these markets are characterized by lower barriers to entry, thus making operating cash flows susceptible to new supply. However, Fitch notes that supply has remained limited at this point in the cycle and that concentration in higher population markets is part of the business strategy for the sector.
STABLE RATING OUTLOOK
The Stable Outlook centers on Fitch's expectation that although Sovran's metrics are currently strong for the rating, Fitch expects SSS's credit profile will remain consistent with a 'BBB-' rating through the cycle.
RATING SENSITIVITIES
The following factors may have a positive impact on Sovran's ratings and/or Outlook:
--Fitch's expectation of net debt to recurring operating EBITDA sustaining below 4.5x (leverage was 4.1x for 2013);
--Fitch's expectation of fixed charge coverage sustaining above 3.0x (fixed charge coverage was 4.2x for 2013 and 3.5x pro forma);
--Increased geographic diversification of the company's cashflows.
The following factors may have a negative impact on Sovran's ratings and/or Outlook:
--Fitch's expectation of leverage sustaining above 6.0x;
--Fitch's expectation of fixed charge coverage sustaining below 2.0x.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating U.S. Equity REITs and REOCs: Sector Credit Factors' (Feb. 26, 2014);
--'Recovery Ratings and Notching Criteria for Equity REITs' (Nov. 19, 2013);
--'Corporate Rating Methodology' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Criteria for Rating U.S. Equity REITs and REOCs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=700091
Recovery Ratings and Notching Criteria for Equity REITs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722363
Corporate Rating Methodology -- Effective 12 August 2011 to 8 August 2012
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=826718
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