Fitch Upgrades Sovran Self Storage to 'BBB'; Outlook Stable
KEY RATING DRIVERS
The upgrade of SSS' Issuer Default Rating (IDR) to 'BBB' reflects Fitch's expectation that Sovran will be able to maintain leverage between 4x - 4.5x through-the-cycle despite the inherent cyclicality in self-storage operating fundamentals due in part to the favorable structural changes in the competitive landscape between local operators and public REITs. Fitch expects Sovran will seek to issue its inaugural public unsecured bond later in 2016 which would improve its access to capital.
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.
STRONG OPERATING PERFORMANCE DRIVING METRICS
Sovran's portfolio continues to perform exceedingly well with same-store net operating income (SSNOI) growth of 7.9% YTD in 2015 and has been between and 6.2% and 10.3% for the years ended 2011 through 2014. 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 (now included in property operating expenses and previously the second largest component of general and administrative expenses 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 was 91.4% at Sept. 30, 2015 compared to 90.5% at Sept. 30, 2014 and a trough of 79% at March 31, 2009 and 2010. Fitch's base case conservatively assumes SSNOI growth will moderate to 6% in 2015 and 4% 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 largely through the aforementioned improvements in fundamentals. Fitch projects leverage will sustain around 4x through 2017, roughly in-line with the 3.8x for the quarter ended Sept. 30, 2015 and 4.2x pro forma for the recently announced acquisitions and equity offering, respectively and as compared to being above 5.5x in both 2008 and 2011.
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 mostly equity via common stock issuances. Fitch believes the scenario whereby Sovran doesn't acquire during a downturn as more likely. 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 continued to improve in 2015 to 5.3x and 4.8x for the quarter and LTM ended Sept. 30, 2015 as compared to the 3x Rating Sensitivity. Fitch projects fixed-charge coverage will sustain above 5x through 2017. Fitch defines fixed-charge coverage as recurring operating EBITDA including recurring cash distributions from joint venture operations less recurring maintenance capital expenditures 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 \\$688 million of equity including the January 2016 follow-on as compared to \\$1.1 billion of net acquisitions over the same period. Common stock issuances have comprised 64% of net acquisitions, validating that management has funded investments close to its strategy (70% equity).
AMPLE LIQUIDITY YET CONCENTRATED DEBT MATURITIES
Following the debt refinancings in 2013 and bank financing agreements in December 2014, Sovran's debt maturity schedule is long-dated but concentrated with approximately 38% maturing in 2020. A concentrated but longer-dated debt maturity allows for more liquidity initially with higher refinancing risk in the out years. Fitch expects debt maturity 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 1.3x for the period Oct. 1, 2015 through Dec. 31, 2017 pro forma for the equity issuance and portfolio acquisition announcements in January 2016. 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 3.2x at Sept. 30, 2015 (assuming a stressed 9% 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 (\\$25 million in 2014 and \\$32 million for TTM ended Sept. 30, 2015) 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 39% of total SSNOI in 2015-YTD. Further, these markets are characterized by lower barriers to entry, thus making operating cash flows more susceptible to new supply. Geographic concentration will improve on the margin once SSS begins operating the recently announced California portfolio. The entrance to California marks a long-standing milestone for the issuer which had been looking to enter the state but had struggled to find appropriately priced portfolios that would give it sufficient scale. 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 SSS' credit profile will remain consistent with a 'BBB' IDR through the cycle, supported by management's commitment to maintaining credit metrics.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for SSS include:
--SSNOI growth moderates to the mid-single digits through 2017;
--SSS continues to acquire properties funding with 70% equity via common stock issuances;
--SSS issues \\$250 million of senior unsecured notes per year;
--Should equity values decline meaningfully, SSS would reduce acquisitions to maintain leverage between 4x-4.5x.
RATING SENSITIVITIES
Fitch does not envision positive momentum in the issuer's ratings and/or Outlook. However, should the issuer and asset class demonstrate more durable through-the-cycle operating performance or meaningful access to secured capital, Fitch could re-assess the ratings. Fitch could also envision positive momentum should the issuer commit to lower leverage.
The following factors may have a negative impact on Sovran's ratings and/or Outlook:
--Fitch's expectation of leverage sustaining above 4.5x;
--Fitch's expectation of fixed charge coverage sustaining below 3.0x.
FULL LIST OF RATING ACTIONS
Sovran Self Storage, Inc.
--IDR to 'BBB' from 'BBB-';
--Unsecured revolving credit facility to 'BBB' from 'BBB-';
--Unsecured term notes to 'BBB' from 'BBB-'.
Sovran Acquisition, L.P.
--IDR to 'BBB' from 'BBB-';
--Unsecured revolving credit facility to 'BBB' from 'BBB-';
--Unsecured term notes to 'BBB' from 'BBB-'.
Комментарии