Fitch Ratings assigns a credit rating of ‘A-‘ to the $450 million 5.375% series V preferred stock issued by Public Storage (NYSE: PSA).
Net proceeds from the offering of approximately $437.2 million before the exercise of the over-allotment option are expected to be used to redeem the $247.3 million 6.45% series F preferred stock, redeem the $120 million 6.45% series X preferred stock, to make investments in self-storage facilities and entities that own self storage facilities and for other general corporate purposes.
Fitch currently rates Public Storage and its subsidiary Shurgard Storage Centers, LLC as follows:
- Issuer Default Rating (IDR) ‘A’;
- $300 million unsecured revolving line of credit ‘A’;
- $3.2 billion preferred stock ‘A-‘.
Shurgard Storage Centers, LLC
- IDR ‘A’;
- $186.5 million senior unsecured notes ‘A’.
The Rating Outlook is Stable.
Public Storage’s ‘A’ IDR centers on the company’s minimal debt, which results in low leverage and limited refinance risk, coupled with solid performance of the company’s self-storage property portfolio. Credit strengths also include strong liquidity and access to capital (including recently issued preferred stock at record low rates) and a long management track record. The rating is balanced by the company’s focus on a specialty property type and moderate exposure to geographical regions such as California and Texas, although the portfolio includes over 2,200 properties in 38 states and seven European countries.
The company has minimal refinance risk, funding itself mainly with preferred and common stock. Leverage, calculated as net debt to recurring operating EBITDA, was 0.1 times (x) as of June 30, 2012 pro forma for the series V preferred stock offering, and series F and X preferred stock redemptions, compared with 0.2x and 0.1x as of Dec. 31, 2011 and Dec. 31, 2010, 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 June 30, 2012 pro forma, compared with 2.9x and 3.3x as of Dec. 31, 2011 and Dec. 31, 2010, respectively.
Fitch anticipates that this metric will remain between 2.5x and 3.0x over the next 12 to 24 months, which is solid for the ‘A’ IDR. The improvement stems from Fitch’s expectation that same-store net operating income (NOI) will grow by low single digits. In a stress case in which same-store NOI declines, this metric would remain around 3.0x, which would remain consistent with the ‘A’ IDR.
Portfolio fundamentals are solid. Realized annual rent per occupied square foot in the U.S. same-store portfolio increased to $13.23 in 2Q’12 from $12.61 in 2Q’11, while weighted average occupancy rose to 92.6% in 2Q’12 from 92.3% in 2Q’11. U.S. same-store NOI and Europe same-store NOI increased by 8.3% and 2.2%, respectively, in 2Q’12. Fitch anticipates that self-storage demand will continue to exceed supply, which should result in further rent increases and same-store NOI growth during the remainder of 2012.
Through the recent commercial real estate cycle, Public Storage has performed well alongside its smaller self-storage REIT peers. For 2007 to 2011, PSA’s same-store NOI grew by an average of 1.8% annually, the same as the average for Sovran Self-Storage, Inc. (Fitch IDR ‘BBB-‘ with a Stable Outlook), Extra Space Storage Inc. and CubeSmart during that period.
However, PSA maintained average occupancy of 89.8% during this period, exceeding peers by approximately 900 basis points. The company monitors move-ins and move-outs, volumes of calls to its call center, and inventory by space size by facility on a daily basis, and adjusts prices accordingly while maintaining occupancy.
Fixed-charge coverage ratio is strong for the ‘A’ rating. Recurring operating EBITDA less recurring capital expenditures divided by total interest incurred and preferred dividends and distributions was 4.9x for 2Q’12 pro forma, compared with 4.4x and 3.7x in 2011 and 2010, respectively. Improving fundamentals and lower preferred dividends via lower-coupon issuance used to redeem preferred stock have contributed towards improving coverage. Fitch anticipates that coverage will remain in the mid-to-high 4.0x range over the near term, benefiting from recent preferred stock transactions. In a stress case in which same-store NOI declines, coverage would remain above 4.0x, which would remain consistent with the ‘A’ IDR.
The company maintains strong liquidity. Sources of liquidity (unrestricted cash pro forma, availability from the unsecured revolving credit facility and projected retained cash flows from operating activities after dividends and distributions) divided by uses of liquidity (debt maturities and projected recurring capital expenditures) result in a liquidity coverage ratio of 3.2x for July 1, 2012 to Dec. 31, 2014.
The company has contingent liquidity from a large unencumbered self-storage property pool. Approximately 94.6% of the company’s $10.8 billion real estate portfolio was unencumbered as of Dec. 31, 2011. Fitch calculates that based on a 10% capitalization rate on the company’s unencumbered property NOI, unencumbered asset coverage of unsecured debt and preferred stock was 3.5x as of June 30, 2012 pro forma.
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 Public Storage from weak capital market environments, which Fitch views favorably.
The company has exposure to certain U.S. regions, including Southern California at 16.9% of 2Q’12 same-store U.S. NOI, Northern California at 11.3% and Texas at 9.3%. In 2Q’12, Denver and Charlotte markets led PSA’s U.S. portfolio with a revenue growth of 8.7% followed by Miami and Detroit at 6.6%. Los Angeles, PSA’s largest market grew 4.4% and San Francisco, PSA’s second largest market, had revenue growth of 6.2%. 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.
While metrics continue to improve, the Stable Outlook reflects the company’s specialty focus, coupled with Fitch’s view that fixed-charge coverage will remain in the high 4.0x range over the near term. The Stable Outlook also reflects that the size of the unencumbered portfolio is also not likely to change materially. In addition, the company’s covenants associated with its unsecured obligations are not expected to limit Public Storage’s financial flexibility.
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), Public Storage has, and is expected to maintain, limited levels of debt and 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 on the ratings and/or Outlook:
- If the company’s fixed-charge coverage ratio sustains above 4.5x (pro forma coverage is 4.9x);
- If the company’s net debt plus preferred stock to recurring operating EBITDA sustains below 3.0x (this metric is 2.7x pro forma);
- If the company’s unencumbered asset coverage of unsecured debt and preferred stock sustains above 3.0x (this metric is 3.5x pro forma).
The following factors may result in negative momentum on the ratings and/or Outlook:
- If the company’s fixed-charge coverage ratio sustains below 3.5x;
- If the company’s net debt plus preferred stock to recurring operating EBITDA sustains above 4.0x;
- If the company’s unencumbered asset coverage of unsecured debt and preferred stock sustains below 2.0x.