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Fitch Upgrades Public Storage's IDR to 'A+'; Outlook Stable

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Tue Mar 19, 2013 4:00pm EDT

(The following statement was released by the rating agency) NEW YORK, March 19 (Fitch) Fitch Ratings has upgraded the credit ratings of Public Storage (PSA) as follows: --Issuer Default Rating (IDR) to 'A+' from 'A'; --$300 million unsecured revolving line of credit to 'A+' from 'A'; --$3.4 billion preferred stock to 'A' from 'A-'. Fitch withdrew the IDR and senior unsecured notes ratings for Shurgard Storage Centers, LLC. Shurgard Storage Centers, LLC bonds have matured and the IDR for Shurgard Storage Centers, LLC is no longer considered by Fitch to be relevant to the agency's coverage. The Rating Outlook is Stable. KEY RATING DRIVERS Fitch's upgrade of Public Storage's IDR to 'A+' centers on the company's minimal debt, which results in low leverage and limited refinance risk, coupled with Fitch's expectation of sustained improvements in fixed-charge coverage due to solid performance of the company's self-storage property portfolio and lower preferred dividends. Credit strengths also include strong liquidity and a long management track record. The rating is balanced by the company's focus on a specialty property type and moderate portfolio concentration in regions such as California and Texas, although the portfolio includes over 2,200 properties in 38 states and seven European countries. UNCONVENTIONAL FINANCING STRATEGY LIMITS REFINANCE RISK The company has minimal refinance risk, funding itself mainly with preferred and common stock. Leverage, calculated as net debt to recurring operating EBITDA, was 0.4x as of Dec. 31, 2012 compared with 0.2x and 0.1x as of Dec. 31, 2011 and Dec. 31, 2010, respectively. While not indicative of leverage given the perpetual nature of PSA's preferred stock, the ratio of net debt plus preferred stock to recurring operating EBITDA was appropriate for the 'A+' IDR at 2.6x as of Dec. 31, 2012, compared with 2.9x and 3.3x as of Dec. 31, 2011 and Dec. 31, 2010, respectively. Fitch anticipates that this metric will remain at or below 2.5x over the next 12 to 24 months, which is solid for the 'A+' IDR. The improvement stems from Fitch's expectation that same-store net operating income (NOI) will grow by low- to mid-single digits. In a stress case in which same-store NOI declines, this metric would approximate 3.0x, which would be consistent with an IDR of 'A'. STRONG FUNDAMENTALS AIDED BY LOW SUPPLY GROWTH Low levels of new supply for the industry are supporting PSA's operating fundamentals. The company's realized annual rent per occupied square foot in the U.S. same-store portfolio increased by 4.4% to $13.49 in 2012 from $12.92 in 2011. Weighted average occupancy rose 0.7% to 91.8% in 2012 from 91.2% in 2011. U.S. same-store NOI and Europe same-store NOI increased by 7.9% and 1.4%, respectively, in 2012. Fitch anticipates that self-storage demand will continue to exceed supply, which should result in further rent increases and same-store NOI growth during 2013. Through the recent commercial real estate cycle, Public Storage has performed well alongside its smaller self-storage REIT peers. For 2007 to 2012, PSA's same-store NOI grew by an average of 2.8% annually, which was moderately above Sovran Self-Storage, Inc. (Fitch IDR 'BBB-' with a Stable Outlook) and CubeSmart during that period, but below the 4.4% average growth of Extra Space Storage. PSA maintained average occupancy of 90.2% during this period, exceeding peers by 570 basis points. The company monitors move-ins and move-outs, volumes of calls to its call center, and inventory by space size by facility on a daily basis, and adjusts prices accordingly while maintaining occupancy. The company is looking to bolster occupancy over the next year. REFINANCING OF HIGHER COST PREFERRED BOOSTS COVERAGE Fixed-charge coverage is expected to sustain at levels appropriate for the 'A+' rating. Coverage was 5.3x for 2012, compared with 4.4x and 3.7x in 2011 and 2010, respectively. Improving fundamentals and lower preferred dividends via lower-coupon issuance used to redeem higher cost preferred stock have contributed towards improving coverage. Fitch defines coverage as recurring operating EBITDA less recurring capital expenditures divided by total interest incurred and preferred dividends and distributions. Fitch anticipates that coverage will improve to 5.8x in 2013 and approach the mid-6.0x range by 2015, benefiting from recent preferred stock transactions. In a stress case in which same-store NOI declines, coverage would remain above 5.5x, which would remain consistent with the 'A+' IDR. EXCELLENT ESTABLISHED, AND CONTINGENT, LIQUIDITY The company maintains strong liquidity. Liquidity coverage is 1.1x for Jan. 1, 2013 to Dec. 31, 2014 and 2.9x pro forma for PSA's 1Q'13 preferred equity issuance. Fitch defines liquidity coverage as liquidity sources divided by uses. Sources of liquidity include unrestricted cash pro forma, availability from the unsecured revolving credit facility, and projected retained cash flows from operating activities after dividends and distributions. Uses of liquidity include debt maturities and projected recurring capital expenditures. The company has contingent liquidity from a large unencumbered self-storage property pool. Approximately 96.1% of the company's $11.1 billion real estate portfolio was unencumbered as of Dec. 31, 2012. Fitch calculates that based on a 10% capitalization rate on the company's unencumbered property NOI, unencumbered asset coverage of unsecured debt and preferred stock was 3.9x as of Dec. 31, 2012. DISCIPLINED AND CYCLE-TESTED MANAGEMENT Public Storage's management team has navigated through various commercial real estate and capital market cycles with a conservative balance sheet, which is factored into the 'A+' rating. The company's utilization of preferred stock provides permanent funding for a specialty property type that may be less liquid than other commercial real estate sectors. This strategy also insulates Public Storage from weak capital market environments, which Fitch views favorably. MODERATE GEOGRAPHIC PORTFOLIO CONCENTRATION RISK The company has moderate portfolio concentration within certain U.S. regions, including Southern California at 13% of rentable square feet, Texas at 12% and Northern California at 8%. While not anticipated by Fitch, reduced economic activity and an increase in price-sensitive customers in geographic regions in which PSA is concentrated could reduce overall earnings power. STABLE RATING OUTLOOK While metrics continue to improve, the Stable Outlook reflects the company's specialty focus coupled with Fitch's view that fixed-charge coverage will improve to the 6.0x range over the near term. The Stable Outlook also reflects that the size of the unencumbered portfolio is also not likely to change materially. The one-notch difference between the company's IDR and preferred stock rating reflects that unlike the majority of preferred stock issuers in the REIT industry (which have a two-notch difference between their IDRs and preferred stock ratings), Public Storage has, and is expected to maintain, limited levels of debt and therefore recoveries of preferred stock would likely be stronger than recoveries of preferred stock of other REITs. RATING SENSITIVITIES The following factors may result in positive momentum on the ratings and/or Outlook: --Fitch's expectation of fixed-charge coverage sustaining above 7.0x (coverage was 5.3x in 2012); --Fitch's expectation of net debt plus preferred stock to recurring operating EBITDA sustaining below 2.0x (this metric was 2.6x at Dec. 31, 2012); The following factors may result in negative momentum on the ratings and/or Outlook: --Fitch's expectation of fixed-charge coverage sustaining below 4.0x; --Fitch's expectation of net debt plus preferred stock to recurring operating EBITDA sustaining above 3.0x. Contact: Primary Analyst Stephen Boyd, CFA Director +1-212-908-1153 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Secondary Analyst Sean Pattap Senior Director +1-212-908-0642 Committee Chairperson James Rizzo Managing Director +1-212-908-0548 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors. Applicable Criteria and Related Research: --'Criteria for Rating U.S. Equity REITs and REOCs' (Feb. 26, 2013); --'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis' (Dec. 13, 2012); --'Recovery Ratings and Notching Criteria for REITs' (Nov. 12, 2012); --'Corporate Rating Methodology' (Aug. 8, 2012); --'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012). Applicable Criteria and Related Research Parent and Subsidiary Rating Linkage here Corporate Rating Methodology here Recovery Ratings and Notching Criteria for Equity REITs here Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis here Criteria for Rating U.S. Equity REITs and REOCs here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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