NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed and withdrawn the following ratings for Public Storage:
--Issuer Default Rating (IDR) at 'A+';
--Unsecured revolving line of credit at 'A+';
--Preferred stock at 'A'.
The Rating Outlook is Stable.
Fitch has chosen to withdraw the ratings for Public Storage for commercial reasons.
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.
Factors that balance the rating include the company's focus on a specialty property type and moderate portfolio concentration in regions such as California and Texas; the portfolio includes over 2,478 properties in 38 states and seven European countries.
Fitch's ratings for PSA do not contemplate new long-term unsecured borrowings in the company's capital stack. The addition of long-term unsecured debt would likely cause Fitch to rate PSA's preferred stock two notches below its IDR, rather than one notch.
The one-notch difference between the company's IDR and preferred stock rating reflects Fitch's view that recovery prospects for PSA's preferred stock would be stronger than those for the preferred stock of other REITs, given PSA's lack of senior unsecured borrowings. Fitch typically rates REIT preferreds two notches below the issuer's IDR given the deeply subordinated nature and loss characteristics of the instruments, which would likely result in poor recoveries in the event of a corporate default.
Fitch's IDR for PSA is also supported by the benefit to its liquidity profile from its funding strategy that relies on common and preferred equity. Fitch's would consider downgrading the IDR for PSA were the company to issue a material amount of new long-term unsecured debt, as Fitch would view this as a change in financial policy, all else equal. PSA has historically limited its unsecured debt to shorter-term borrowings under its credit facility and a small amount of unsecured notes it inherited from its 2006 acquisition of Shurgard Storage Centers, Inc. that the company repaid at maturity.
Strategy Limits Repayment Risk
Fitch expects PSA's net debt plus preferred stock-to-recurring operating EBITDA ratio to sustain in the mid-2.5x range over the next 12 to 24 months, which is solid for the 'A+' IDR. Fitch anticipates modest improvement through 2017 due to mid-single-digit same-store net operating income (NOI) growth and incremental NOI as the company stabilizes recent developments and acquisitions.
PSA's unique financing strategy, which emphasizes preferred equity, results in minimal refinance risk which supports Fitch's ratings for the company. PSA's net debt-to-recurring operating EBITDA was 0.1x as of June. 30, 2015, compared with -0.1x and 0.6x as of Dec. 31, 2014 and Dec. 31, 2013, 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 2.5x as of June. 30, 2015, compared with 2.6x and 3.1x as of Dec. 31, 2014 and Dec. 31, 2013, respectively.
Refinancing Boost Fixed-Charge Coverage
Fitch anticipates that FCC will approach the low-7x range by 2017, benefiting from same store NOI growth, the stabilization of recent acquisitions and development deliveries and the refinancing of its $125 million, 6.5% series P preferred stock in early October, utilizing the company's revolver.
FCC was 6.7x for the TTM ending June 30, 2015, compared with 6.x and 6.3x in 2014 and 2013, 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.
Adequate Liquidity Position
Fitch's stressed liquidity analysis shows PSA's sources of cash exceeding uses by 1.4x for the July 1, 2015 to Dec. 31, 2016 period. The company's March 2015 amendment of its revolving credit facility has improved its liquidity profile. PSA expanded the facility size to $500 million from $300 million and extended the expiration to March 31, 2020. Unfunded development expenses of roughly $333 million are the company's largest use of cash. The company also has $125 million earmarked to redeem its series P preferreds in October and $97 million of committed acquisition expenses.
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 $12.8 billion operating real estate portfolio was unencumbered at Dec. 31, 2014. The company had only $11 million of unsecured borrowings under its revolver outstanding at June 30, 2015.
Strong Fundamentals Aided by Low Supply Growth
Fitch expects PSA's same-store NOI growth to remain solidly positive through 2017. Conservatively, same-store NOI growth should taper off but remain in the positive mid-single-digits during the forecast period. Mid-single digit 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, similar to its 1.9% expense growth in 2014.
PSA's U.S. portfolio same-store NOI grew by 8.7% year-to-date through June 30, 2015, based on a 6.4% increase in revenues and 1.1% 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 5.9% to $15.33 during the first six months of the year from $14.48 during the comparable 2014 period. Weighted average occupancy was 95.7% at June 30, 2015 - 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 5.9% same-store NOI growth vs. 6.9% 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 6.7% in 2010 to 3.2% in 2014.
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.
--Mid-single digit same-store NOI growth through 2017;
--$100 million of acquisitions during the balance of 2015 and $200 million in 2016 and 2017 at going in yields of 6%;
--No incremental dispositions during the forecast period;
--Development deliveries of $100 million per year through 2017;
--Development spending of $100 million during the remainder of 2015 and $150 million in 2016 and 2017;
--Repayment of the company's $125 million, 6.5% series P preferred stock in early October, and no additional preferred refinancings during the remainder of the forecast period;
--$200 million of term loan borrowings in 4Q'15 at a fixed rate of 2.5%;
--G&A growth of 2% per year;
--Dividend growth of 3% per annum.
Rating Sensitivities do not apply given the rating withdrawal.
Date of Relevant Rating Committee: Sept. 17, 2015.]
Additional information is available on www.fitchratings.com.
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
Recovery Ratings and Notching Criteria for Equity REITs (pub. 18 Nov 2014)
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis (pub. 25 Nov 2014)
Dodd-Frank Rating Information Disclosure Form