NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a credit rating of 'A' to the $175 million 5.875% series A preferred stock issued by Public Storage (NYSE:PSA). A full list of ratings is provided at the end of this release.
PSA plans to use the net proceeds from the offering of approximately $169.2 million before the exercise of the over-allotment option to make investments in self-storage facilities and in entities that own self-storage facilities, and for general corporate purposes.
The Issuer Default Rating (IDR) for PSA is 'A+' and the Rating Outlook is Stable.
KEY RATING DRIVERS
The 'A+' IDR reflects 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 (FCC) 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; the portfolio includes over 2,400 properties in 38 states and seven European countries.
Strategy Limits Repayment Risk
Fitch expects PSA's net debt plus preferred stock-to-recurring operating EBITDA ratio to sustain in the mid-2.0x range over the next 12 to 24 months, which is solid for the 'A+' IDR. Fitch anticipates modest improvement over the rating horizon (typically two to three years) due to mid- to low-single-digit same-store net operating income (NOI) growth and incremental NOI as the company stabilizes recent developments and acquisitions. In a stress case in which same-store NOI declines, this metric would approximate 3x, which would be weak for the 'A+' rating.
PSA's unique financing strategy, which emphasizes preferred equity, results in minimal refinance risk which supports Fitch's ratings for the company. PSA's debt-to-recurring operating EBITDA was -0.2x as of Sept. 30, 2014, compared with 0.6x and 0.3x as of Dec. 31, 2013 and Dec. 31, 2012, 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 2.7x as of Sept. 30, 2014, compared with, respectively, 3.1x and 2.5x as of Dec. 31, 2013 and Dec. 31, 2012.
Strong Fundamentals Aided by Low Supply Growth
Fitch expects PSA's same-store NOI growth to moderate, but remain solidly positive through 2016. Conservatively, same-store NOI growth should taper off but remain in the positive low- to mid-single-digits during the forecast period. Higher rental rates for new and renewal leases will drive the majority of the gains. Fitch expects occupancies to remain flat and has conservatively assumed that expenses grow by approximately 2% per year, compared to expense decreases of 1.3% and 2.2% in 2013 and 2012.
PSA's U.S. portfolio same-store NOI grew by 6.7% year-to-date through Sept. 30, 2014, based on a 5.3% increase in revenues and 2% expense growth. Low levels of new supply for the self-storage industry are supporting PSA's operating fundamentals. The company's realized annual rent per occupied square foot in its U.S. same-store portfolio grew by 4.7% to $14.73 during the first nine months of the year from $14.07 during the comparable 2013 period. Weighted average occupancy was 94% at Sept. 30, 2014 - up 60 basis points (bps) year-over-year.
PSA's internal growth has slightly lagged its public REIT peers during the last five years. The company has averaged 3.8% same-store NOI growth vs. 4.3% growth for the sector during the last five calendar years. PSA's peers have generally benefited from larger occupancy gains stemming from a greater amount of vacant space at the trough of the last cycle. Indeed, PSA's occupancy has averaged a 540-bp premium to the sector during the last five years, but the spread has compressed from 6.5% in 2009 to 3.2% in 2013.
Differences in calculation methodologies can be a challenge when making same-store NOI growth comparisons across REITs, including self-storage REITs. For example, some companies will include tenant insurance in same-store NOI; PSA does not. Additionally, PSA allocates internet marketing expense at the property level while some of its peers reflect this expense at the corporate level, in general and administrative expense.
Refinancings Boost Fixed-Charge Coverage
Fitch anticipates that FCC will approach the mid-6x range by 2016, benefiting from preferred stock transactions during 2013. In a stress case in which same-store NOI declines by approximately 4%, coverage would fall to the mid-5.5x range, which would remain consistent with the 'A+' IDR.
FCC was 6x for the TTM ending Sept. 30, 2014, compared with 6.3x and 5.5x in 2013 and 2012, respectively. Improving fundamentals and lower preferred dividends via lower-coupon issuance used to redeem higher-cost preferred stock have contributed toward improving coverage. Fitch defines coverage as recurring operating EBITDA less recurring capital expenditures divided by total interest incurred and preferred dividends and distributions.
Improved Liquidity Position
Fitch calculates PSA's liquidity coverage at 2.2x for the Oct. 1, 2014 to Dec. 31, 2016 period and 1.9x on a pro forma basis that includes the company's series A issuance and $161 million of completed ($98 million) and pending ($63 million) acquisitions during 4Q'14.
PSA has improved its liquidity position since the end of 2013 through approximately $725 million of net preferred equity under its Series Y, Z and A preferred issuance, along with the sale of a 51% interest in its loan to Shurgard Europe ($216 million of net proceeds) and Europe's refinancing of its debt in 3Q'14 ($205 million of net proceeds). The company has full availability under its $300 million revolver and has repaid its term loan ahead of its December 2014 maturity ($700 million balance at Dec. 31, 2013).
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 excellent contingent liquidity from a large unencumbered self-storage property pool. Fitch estimates that approximately 98% of the company's $12.3 billion real estate portfolio was unencumbered at Dec. 31, 2013. The company has no unsecured borrowings outstanding.
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 PSA 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 12% of rentable square feet, Texas at 12% and Florida at 12%. 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.
The Stable Outlook reflects the company's specialty focus coupled with Fitch's view that FCC will sustain in the mid-6x range over the rating horizon. The Stable Outlook also reflects that the size of the unencumbered portfolio is also not likely to change materially.
Preferred Stock Notching
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), PSA has, and is expected to maintain, limited levels of debt. Therefore recoveries of preferred stock would likely be stronger than recoveries of preferred stock of other REITs.
The following factors may result in positive momentum in the ratings and/or Outlook:
--Fitch's expectation of FCC sustaining above 7x (coverage was 6.2x for the TTM ending Sept. 30, 2014);
--Fitch's expectation of net debt plus preferred stock-to-recurring operating EBITDA sustaining below 2x (this metric was 2.7x for the TTM ending Sept. 30, 2014).
The following factors may result in negative momentum in the ratings and/or Outlook:
--Fitch's expectation of FCC sustaining below 4x;
--Fitch's expectation of net debt plus preferred stock-to-recurring operating EBITDA sustaining above 3x.
In addition, a change in PSA's stated financing strategy that included the issuance of long-term unsecured debt would likely cause Fitch to revise the company's preferred obligations down two notches below its IDR, as opposed to the current one-notch differential.
Fitch currently rates Public Storage (PSA) as follows:
--Issuer Default Rating (IDR) 'A+';
--$300 million unsecured revolving line of credit 'A+';
--$3.9 billion preferred stock 'A'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014);
--'Rating U.S. Equity REITs and REOCs: Sector Credit Factors,' Feb. 26, 2014' (Feb. 26, 2014);
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis' (Dec. 23, 2013);
--'Recovery Ratings and Notching Criteria for REITs' (Nov. 18, 2013).
Applicable Criteria and Related Research:
Recovery Ratings and Notching Criteria for Equity REITs
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis - Effective Dec. 13, 2012 to Dec. 23, 2013
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage