Fitch Upgrades & Removes from Watch Negative Sovran Self Storage, Inc; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded the following ratings for Sovran Self Storage, Inc. and Sovran Acquisition Limited Partnership (together, Sovran or the company):

Sovran Self Storage, Inc.

-- Issuer Default Rating (IDR) to 'BBB-' from 'BB+';

-- $125 million senior unsecured revolving credit facility to 'BBB-' from 'BB+';

-- $250 million senior unsecured term loan to 'BBB-' from 'BB+';

-- $250 million senior unsecured term notes to 'BBB-' from 'BB+'.

Sovran Acquisition Limited Partnership (as co-borrower)

-- IDR to 'BBB-' from 'BB+';

-- $125 million senior unsecured revolving credit facility to 'BBB-' from 'BB+';

-- $250 million senior unsecured term loan to 'BBB-' from 'BB+';

-- $250 million senior unsecured term notes to 'BBB-' from 'BB+'.

The ratings have been removed from Rating Watch Negative. The Rating Outlook is Stable.

The upgrades center on recent steps the company has taken to reduce leverage to provide it sufficient cushion relative to covenants contained in certain of its unsecured debt agreements.

The removal of the Negative Watch reflects the material improvement in Sovran's leverage ratios following the curing of the company's unsecured note covenant violation and the company's demonstrated access to the equity capital markets.

On May 8, 2009, Fitch downgraded Sovran's credit ratings by one notch and placed the IDR on Negative Watch due to Fitch's view that the company's total leverage covenant violation limited the company's liquidity and financial flexibility. In May 2009, the company obtained a waiver of the covenant violation as of March 31, 2009, but Fitch remained concerned that the company would continue to have limited capacity to draw its unsecured revolving credit facility in the absence of a deleveraging transaction that would provide sufficient cushion relative to the company's covenant limitations.

Sovran has taken several deleveraging steps to mitigate potential future covenant violations, including an Oct. 5, 2009 follow-on common stock offering of $114 million, a 30% common stock dividend reduction, and the issuance of 1.3 million shares via a DRIP and Share Purchase Plan. The company also intends to preserve capital by scaling back its expansions and enhancement program.

Pro forma for the equity offering and DRIP Share Purchase Plan share issuance, Fitch estimates Sovran's net debt to recurring operating EBITDA ratio to be 4.5 times (x) as of June 30, 2009, compared with 5.9x as of March 31, 2009. Fitch projects that 2010 and 2011 leverage may increase above 5.0x given ongoing challenging operating conditions, but that these leverage levels would remain supportive of a 'BBB-' IDR. In addition, Fitch estimates that the company's total liabilities to gross asset value based on the methodology employed in Sovran's unsecured debt agreements to be 45%, which is materially below the covenant limit of 55% and which has improved from 55.4% as of March 31, 2009.

With respect to operating performance, pro forma for the deleveraging transactions noted above, Sovran's fixed charge coverage (defined as recurring operating EBITDA less capital expenditures and straight-line rents, divided by interest expense and capitalized interest) was 2.4x for the 12 months ended June 30, 2009, up from 2008. Fitch projects that the company's fixed charge coverage ratio would be approximately 2.4x for both 2010 and 2011, given a 5% decline in EBITDA for 2010 and stabilization in 2011. Fitch considers these fixed charge coverage ratios to be consistent with a 'BBB-' IDR given the specialized nature of self-storage properties, Sovran's portfolio size and moderate geographical concentration.

While Sovran has experienced declining fundamentals with same store declines since the third quarter of 2008, the company's credit metrics will remain consistent with a 'BBB-' IDR. Sovran's Same Store NOI declined 3% for the six months ending June 30, 2009 versus the same period of 2008 and weighted average occupancy has also declined to 81% for the same store portfolio at June 30, 2009 from 82.3% as of June 30, 2008. Additionally, while the company operates in 24 states, more than 40% of the company's NOI is represented by Florida and Texas.

The Stable Outlook is driven by the company's liquidity coverage ratio which, pro forma for the deleveraging transactions noted above and defined as sources of liquidity (cash, availability under the company's revolving credit facility, expected retained cash flows from operating activities) divided by uses of liquidity (debt maturities and expected capitalized leasing commissions and building improvements) is 2.0x from June 30, 2009 to Dec. 31, 2011.

The Stable Outlook also reflects Fitch's view that significant declines in operating performance over the next 12 to 24 months are not likely due to the quality of the portfolio and indications that fundamentals are beginning to stabilize. While same store NOI has declined since the third quarter of 2008, Fitch believes Sovran's fixed charge coverage and leverage metrics will remain at investment-grade levels over the next 12 to 24 months, as the company's deleveraging activities have provided additional cushion to unsecured term note holders. Fitch believes further covenant breaches are unlikely and that the company's liquidity and financial flexibility has improved.

The following factors may have a positive impact on the company's ratings:

-- Maintaining fixed charge coverage above 2.5x (for the 12 months ended June 30, 2009, pro forma for deleveraging transactions note above, fixed charge coverage was 2.4x);

-- Net debt to recurring operating EBITDA remaining below 5.0x (for the 12 months ended June 30, 2009, pro forma for deleveraging transactions note above, leverage was 4.5x, though Fitch anticipates leverage to be above 5.0x going forward given the operating environment);

-- Unencumbered asset coverage of unsecured debt remaining above 2.0x (as of June 30, 2009, pro forma for deleveraging transactions note above, unencumbered asset coverage was 3.1x as measured by applying a 8.5% capitalization rate to unencumbered NOI.)

Going forward, the following factors may have a negative impact on the company's ratings:

-- If fixed charge coverage declines below 2.0x;

-- If net debt to recurring operating EBITDA increases above 6.0x;

-- A liquidity shortfall;

-- If Fitch expects the company to breach any financial covenant contained in its unsecured debt agreements.

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

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. 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.