December 13, 2012 / 4:25 PM / 5 years ago

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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