TEXT - Fitch affirms Sovran Self Storage
Dec 13 - Fitch Ratings has affirmed the credit ratings of Sovran Self Storage, Inc. (NYSE: SSS) and its operating partnership, Sovran Acquisition L.P. (collectively, Sovran or the company) including the Issuer Default Rating (IDR) at 'BBB-'. Fitch also withdrew the indicative preferred rating as it is no longer considered to be relevant to the agency's coverage and combined the unsecured term notes and term loans ratings (as the company no longer references them separately). The affirmations reflect the strength of Sovran's credit metrics supported by a strong liquidity position and positive operating fundamentals projected over the next two years. Credit concerns include the company's small-size, geographic concentration and focus on a non-core asset class. Fitch affirmed the following ratings: 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-'. Sovran's portfolio has benefited from strong operating fundamentals. Same-store net operating income (SSNOI) growth turned positive in the fourth quarter of 2010 (4Q'10), and accelerated to 6.2% for 2011 and 10% year-to-date. Growth has been driven by materially higher occupancies (88.2% at Sept. 30, 2012 as compared to 81.7% at Dec. 31, 2011) as the company improves its market share through the use of internet marketing and revenue management software. Fitch expects Sovran to achieve SSNOI growth of 2%-4% through 2014, primarily from continued gains in occupancy. Fixed charge coverage was 3.3 times (x) for the 12 months and quarter ended Sept. 30, 2012, compared with 2.8x and 2.7x during 2011 and 2010, respectively. Fitch projects that over the next 12 to 24 months fixed charge coverage will improve to 3.7x. In a stress case whereby SSNOI declines are similar to those of 2008 and 2009, fixed charge coverage would remain flat from current levels at 3.2x which would be appropriate for the rating. Fitch defines 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). Fitch expects Sovran's leverage to remain appropriate for the rating at approximately 5.0x, driven by growth in recurring operating EBITDA from the same-store portfolio. Leverage for the trailing 12 months (TTM) ended Sept. 30, 2012 was 4.8x, compared with 5.7x and 4.8x as of Dec. 31, 2011 and Dec. 31, 2010, respectively. The elevated leverage for 2011 reflects the company's then recent portfolio acquisition that had provided minimal contributions to earnings during the period. Under the aforementioned stress case, leverage would increase to 5.2x in 2013 and 5.6x in 2014 which would remain appropriate for the rating. Fitch defines leverage as net debt to recurring operating EBITDA. Sovran's forecasted liquidity coverage ratio is solid at 1.7x for the period Oct. 1, 2012 to Dec. 31, 2014. When including Fitch's estimate of expenditures for the expansion and enhancement of properties as a liquidity use, liquidity coverage remains appropriate at 1.4x. Fitch defines liquidity coverage as sources (unrestricted cash, availability on the unsecured credit facility and projected retained cash flow from operations after dividends and distributions) divided by uses (pro rata debt maturities and projected recurring capital expenditures). The majority of Sovran's assets are unencumbered following the repayment of almost all of the remaining secured debt in 4Q'11, providing a large asset pool for contingent liquidity. Unencumbered asset coverage of unsecured debt (calculated as unencumbered net operating income, divided by a stressed 9% capitalization rate, divided by unsecured debt) was 3.0x as of Sept. 30, 2012. However, the mortgage market provides limited contingent liquidity for the self-storage asset class as the small asset size increases the time and number of assets necessary to aggregate a collateral pool. As such, Fitch expects self-storage REITs to have a higher UA / UD coverage than similarly rated REITs in other asset classes. Sovran's credit strengths are partially offset by the company's small size, geographic concentration and limited earnings visibility as a result of the month-to-month lease terms which may cause increased cash flow volatility. Texas and Florida comprise 37% of SSNOI combined as of Sept. 30, 2012. The Stable Rating Outlook reflects Fitch's expectation that Sovran's credit metrics and business risk will remain consistent with a 'BBB-' rating over the next 12 to 24 months. 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 4.0x (leverage was 4.8x for the TTM ended Sept. 30, 2012); --Fitch's expectation of fixed charge coverage sustaining above 3.0x (fixed charge coverage ratio was 3.3x for the TTM ended Sept. 30, 2012; --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; --Base case liquidity coverage sustaining below 1.0x; --Engaging in a highly levered transaction; --If Fitch expects the company to breach any covenant, reducing the company's financial flexibility.
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