Fitch Affirms Sovran Self Storage's IDR at 'BBB-'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the following credit ratings of Sovran Self Storage, Inc. (NYSE: SSS) and its operating partnership, Sovran Acquisition, L.P. (collectively, Sovran or the Company):

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 ratings reflect the strength of Sovran's metrics, driven in large part by the sustained robustness of operating fundamentals. Leverage and fixed charge coverage are strong for the rating but expected to moderate along with fundamentals through 2015. These positive elements are balanced, in part, by a concentrated debt maturity schedule, the inherent cyclicality in fundamentals and a small, geographically concentrated portfolio.

ROBUST OPERATING FUNDAMENTALS

Sovran's portfolio continues to perform well with same-store NOI (SSNOI) growth of 10.7% year-to-date (YTD) through Sept. 30, 2013 following growth of 10.3% and 6.2% in 2012 and 2011, respectively. Operating performance has been driven by a variety of factors including the traditional drivers (e.g. the single-family home market and economic growth), the implementation of sophisticated revenue management software and the long-anticipated consolidation of market share from smaller competitors.

Since implementing its revenue management system and cutting rents, same-store occupancy has improved to 90.9% for the quarter ended Sept. 30, 2013 as compared to 79% at March 31, 2010. In 3Q'13, asking rents grew by +1.7% and average rent increases were +9.4% year-over-year. Fitch's base case assumes SSNOI growth moderates through 2015 to the low-to-mid single digits and will be mostly rate driven as compared to the past few years when occupancy was the main supporter of growth.

STRONG CREDIT METRICS, EXPECTED TO MODERATE

Fitch expects metrics will stabilize at current levels due to moderating fundamentals. Leverage was 4.0x and 4.4x for 3Q'13 and the trailing 12 months (TTM) ended Sept. 30, 2013 as compared to 5.4x and 5.7x for the years ended 2012 and 2011, respectively. Fitch defines leverage as net debt to recurring operating EBITDA.

Similarly, fixed charge coverage improved to 4.4x and 3.9x for 3Q'13 and TTM from 3.2x and 2.8x for the years ended Dec. 31, 2012 and 2011, respectively. The improvements have been driven in large part by the aforementioned strong fundamentals. Fitch defines fixed charge coverage as recurring operating EBITDA less maintenance capital expenditures divided by total interest incurred.

CONCENTRATED DEBT MATURITIES

Following the debt refinancings earlier in 2013, Sovran's debt maturity schedule is long-dated but concentrated with more than 50% maturing in 2020. A concentrated debt maturity increases refinancing risks, all else being equal. However, 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 expects Sovran will continue to borrow principally via unsecured term loans. Should Sovran pursue an index-eligible public bond offering, Fitch would view it positively, as it would diversify the company's funding sources; however, it is unlikely to occur in the near term given the lack of corporate debt maturities absent acquisition volumes greater than Fitch's expectations.

APPROPRIATE CONTINGENT LIQUIDITY

An ancillary benefit of the concentrated debt maturities is Sovran's near-term liquidity. Fitch forecasts Sovran's liquidity coverage ratio to be 6.4x for the period Oct. 1, 2013 through Dec. 31, 2015 which is strong for the rating. Fitch calculates liquidity coverage as sources (cash, availability under the revolving credit facility and retained cash flow from operations after dividends) dividend by uses (debt maturities and recurring capital expenditures).

Sovran's contingent liquidity (as measured by unencumbered asset coverage of unsecured debt) is also appropriate at 3.4x at Sept. 30, 2013 (assuming a stressed 9% cap rate). Sovran's contingent liquidity has improved materially since 2011 due to the continued repayment of secured debt and improvement operating cashflows. Fitch expects self-storage REITs to 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 payout ratios allow it to retain some internally generated liquidity. Fitch calculates Sovran's adjusted funds from operations payout ratio to have been 60% YTD and 72% for 2012.

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 same-store NOI YTD in 2013. Further, these markets are characterized by lower barriers to entry, thus making operating cash flows 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.

STABLE RATING OUTLOOK

The Stable Outlook centers on Fitch's expectation that although Sovran's metrics are currently strong for the rating, Fitch expects SSS's credit profile will remain consistent with a 'BBB-' rating through the cycle.

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 4.4x for the TTM ended Sept. 30, 2013);

--Fitch's expectation of fixed charge coverage sustaining above 3.0x (fixed charge coverage was 3.8x for the TTM ended Sept. 30, 2013;

--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.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Recovery Rating and Notching Criteria for Equity REITs,' Nov. 19, 2013;

--'Corporate Rating Methodology,' Aug. 5, 2013;

--'Criteria for Rating U.S. Equity REITs and REOCs,' Feb. 26, 2013.

Applicable Criteria and Related Research:

Recovery Ratings and Notching Criteria for Equity REITs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722363

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Criteria for Rating U.S. Equity REITs and REOCs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=700091

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=811614

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Contacts

Fitch Ratings
Primary Analyst
Britton Costa, +1-212-908-0524
Associate Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Reinor Bazarewski, +1-212-908-9153
Associate Director
or
Committee Chairperson
Robert Curran, +1-212-908-0515
Managing Director
or
Media Relations
Sandro Scenga, New York, +1-212-908-0278
sandro.scenga@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Britton Costa, +1-212-908-0524
Associate Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Reinor Bazarewski, +1-212-908-9153
Associate Director
or
Committee Chairperson
Robert Curran, +1-212-908-0515
Managing Director
or
Media Relations
Sandro Scenga, New York, +1-212-908-0278
sandro.scenga@fitchratings.com