OREANDA-NEWS. Fitch Ratings has revised the Rating Outlooks for Sovran Self Storage, Inc. (NYSE: SSS) and its operating partnership, Sovran Acquisition, L.P. (collectively Sovran) to Positive from Stable. In addition, Fitch has affirmed Sovran's ratings as follows:

Sovran Self Storage, Inc.
--Issuer Default Rating (IDR) at 'BBB-';
--Unsecured revolving credit facility at 'BBB-';
--Unsecured term notes at 'BBB-'.

Sovran Acquisition, L.P.
--IDR at 'BBB-';
--Unsecured revolving credit facility at 'BBB-';
--Unsecured term notes at 'BBB-'.

KEY RATING DRIVERS
The Outlook revision to Positive from Stable and rating affirmation of the IDR at 'BBB-' reflects Sovran's key credit metrics being consistent with those of a 'BBB' IDR. Fitch forecasts metrics will stay at such levels and that the company will have sufficient cushion to maintain them through-the-cycle. Further to the point, Fitch expects Sovran will seek to issue its inaugural public unsecured bond in 2016 which would improve its access to capital. The Outlook revision as opposed to an upgrade endeavors to avoid a procyclical rating action and allow for the issuer to demonstrate its willingness and ability to operate with leverage in the 4x-4.5x range as compared to 4.4x-5.7x (2008-2011).

These positive elements are balanced, in part, by a concentrated debt maturity schedule, the inherent cyclicality in fundamentals given the sector's short lease term and a smaller, geographically concentrated portfolio.

INTERNET MARKETING DRIVING CONSOLIDATION & OPERATING PERFORMANCE
Sovran's portfolio continues to perform exceedingly well with same-store net operating income (SSNOI) growth of 9.1% in 2014 following growth of 9.9%, 10.3% and 6.2% in 2013, 2012 and 2011, respectively. Operating performance has been driven by both traditional demand drivers and the implementation of sophisticated revenue management software and internet marketing which has been the catalyst for the long-anticipated consolidation of market share from smaller competitors.

The fragmented nature of the sector, coupled with the profile of the smaller owners (local families/developers) has often been cited as reasons for consolidation that, until recently, had not occurred. Traditionally dependent on advertising in the Yellow Pages and street signage, smaller operators had the financial capacity to compete with national owners. The internet has changed this dynamic largely due to the costs of internet marketing. Internet advertising and marketing is now the second largest component of general and administrative expenses behind corporate level salaries and benefits for Sovran. Consolidation and increasing market share is occurring via higher occupancies at the expense of smaller operators as opposed to the original expectation of taking ownership of competitors' properties.

Same-store occupancy improved to 92.8% for 2014 as compared to 90.8% for 2013 and a trough of 79% at Sept. 30, 2009. Fitch's base case assumes SSNOI growth will moderate to 5% in 2015 and 3.5% thereafter and will be mostly rate driven as compared to the past few years when occupancy was the primary growth driver. Nonetheless, the ratings recognize that self-storage operating fundamentals will continue to exhibit volatility through-the-cycle given the short lease terms.

STRONG HEADLINE METRICS; CUSHION TO SUSTAIN THROUGH-THE-CYCLE
Sovran has significantly de-levered the balance sheet since 2008 through both equity offerings and the aforementioned improvements in fundamentals. Leverage was 4.3x and 4.6x for the quarter and trailing 12 months (TTM) ended Dec. 31, 2014, respectively as compared to being above 5.5x in both 2008 and 2011. Fitch's past projections forecast leverage sustaining around 4.5x. Fitch now projects leverage sustaining closer to 4x.

Moreover, Fitch believes Sovran has the capacity to sustain leverage below 4.5x through-the-cycle assuming a similar decline in operating fundamentals as during 2009-2010 and that the company either ceases net investment activity or continues to acquire but can fund with new equity (70%) via common stock issuances. Fitch believes no acquisition activity is the more likely scenario. While not explicitly contemplated in the stressed scenarios, the advent of the aforementioned internet marketing and revenue management software may result in more moderate declines in operating fundamentals during future downturns as smaller private owners face the brunt of occupancy declines.

Fitch defines leverage as debt less readily available cash to recurring operating EBITDA including recurring cash distributions from joint venture operations.

FIXED CHARGE COVERAGE CONTINUES TO IMPROVE
Sovran's reported fixed-charge coverage was volatile but strong during 2014 due to fluctuations in maintenance capital expenditures. Fixed-charge coverage was 4.3x for 2014 and was as high as 4.8x in the fourth quarter of 2013 (4Q'13), 1Q'14 and 3Q'14. Fitch projects fixed-charge coverage will continue to improve beyond 5x through 2017. Fitch defines fixed-charge coverage as recurring operating EBITDA including recurring cash distributions from joint venture operations less to total interest.

CONSISTENT EQUITY ISSUANCES TO FUND INVESTMENTS
Sovran has consistently issued equity over the past few years via its at-the-market (ATM) equity program, its dividend reinvestment program (DRIP) and follow-on offerings. Since 2012, SSS has issued \$352 million of equity including the February 2015 follow-on as compared to \$484 million of net acquisitions over the same period. Common stock issuances have comprised 73% of net acquisitions, validating that management has funded investments consistent with its strategy (70% equity).

AMPLE LIQUIDITY YET CONCENTRATED DEBT MATURITIES
Following the debt refinancings earlier in 2013 and bank financing agreements in December 2014, Sovran's debt maturity schedule is long-dated but concentrated with more than 40% maturing in 2020. A concentrated longer-dated debt maturity allows for more liquidity initially with higher refinancing risk in the out years, all else being equal. 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 would view a public unsecured bond offering positively as it would further diversify the company's funding sources.

Fitch calculates Sovran's liquidity coverage ratio to be 1.5x for the period Jan. 1, 2015 through Dec. 31, 2016 pro forma for the equity issuance and Westy portfolio acquisition in February 2015. Fitch calculates liquidity coverage as sources (readily available cash, availability under the unsecured revolving credit facility and retained cash flow from operations after dividends) to uses (debt maturities, maintenance capital expenditures and development expenditures).

APPROPRIATE CONTINGENT LIQUIDITY
Sovran's contingent liquidity (as measured by unencumbered asset coverage of unsecured debt) is also appropriate at 3.1x at Dec. 31, 2014 (assuming a stressed 9.0% cap rate). Fitch believes self-storage REITs should 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 policies allow it to retain some internally generated liquidity (\$21 million in 2012, \$39 million in 2013 and \$25 million in 2014) by paying out only 60%-80% of its adjusted funds from operations (AFFO). Fitch projects Sovran will increase its dividends going forward to reflect higher taxable income.

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 41% of total SSNOI in 2014. Further, these markets are characterized by lower barriers to entry, thus making operating cash flows more 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.

POSITIVE RATING OUTLOOK
The Positive Outlook centers on Fitch's expectation that SSS's credit profile will remain consistent with a higher rating through the cycle, supported by management's commitment to maintaining credit metrics.

KEY ASSUMPTIONS
--SSNOI growth of 5% in 2015 and 3.5% in 2016 and 2017;
--Net acquisitions of \$270 million in 2015 and \$150 million in both 2016 and 2017 at 6% yields;
--Maintenance capital expenditures grow to sustain at 12.6% of recurring operating EBITDA;
--Equity issuances of \$105 million per year through 2017 (in addition to recently completed) to maintain 70% equity funding policy for acquisitions;
--The issuance of an inaugural public senior unsecured note (\$250 million with a 5% coupon).

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 4.3x and 4.6x for the quarter and year ended Dec. 31, 2014);
--Improved access to the capital markets as measured by demonstrated access to the unsecured public bond market;
--Fitch's expectation of fixed charge coverage sustaining above 3.0x (fixed charge coverage was 4.3x for 2014);
--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.