Fitch Ratings has assigned a credit rating of 'A' to the $250 million
6.00% series Z preferred stock issued by Public Storage (NYSE: PSA).
Net proceeds from the offering of approximately $242.9 million before
the exercise of the over-allotment option are expected to be used to
make investments in self-storage facilities and in entities that own
self-storage facilities and for general corporate purposes.
Indeed, PSA disclosed that it has agreed to acquire 30 self-storage
facilities totaling approximately 2.1 million net rentable square feet
for $266 million. Nineteen of the properties are located in Florida. The
remaining properties are in Maryland (3), North Carolina (6), New Jersey
(1) and Virginia (1).
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'.
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 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, although the portfolio includes over 2,300 properties in 38
states and seven European countries.
Strategy Limits Refinance 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 3.0x, which would be consistent with an IDR of
'A'.
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 0.3x as of March
31, 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 2.9x as of March 31, 2014, compared with 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. Occupancies are expected to
remain flat and it is conservatively assumed that expenses will 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 8.2% during 2013; Europe
decreased by 3.4% due to moderate oversupply in select markets against
the backdrop of weak macro-economic conditions. Low levels of new supply
for the industry are supporting PSA's operating fundamentals. The
company's realized annual rent per occupied square foot in the U.S.
same-store portfolio increased by 3.8% to $14.13 in 2013 from $13.61 in
2012. Weighted average occupancy for the year rose by 1.4% to 93.3% in
2013 from 91.9% in 2012.
PSA's internal growth has slightly lagged its public REIT peers during
the last five years. Since 2009 the company has averaged 3.8% same-store
NOI growth vs. 4.3% growth for the sector. 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-basis point 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.
Refinancing of Higher-Cost Preferred Boosts Fixed-Charge Coverage
Fitch anticipates that fixed-charge coverage (FCC) will approach the
mid-6.0x 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.
Fitch expects FCC to sustain at levels appropriate for the 'A+' rating.
FCC was 6.3x for the TTM ending March 31, 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 towards 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
PSA has meaningfully improved its liquidity position since the end of
2013 through approximately $510 million of net preferred equity under
its Series Y and Z preferred issuance, along with the sale of a 51%
interest in its loan to Shurgard Europe ($216 million of net proceeds).
The company now has full availability under its $300 million revolver
and has reduced the amount of borrowings under its term loan that
matures in Dec. 2014 to $322 million as of May 1, 2014. Fitch calculates
the company's liquidity coverage at 1.4x as of March 31, 2014 and 1.7x
on a pro forma basis that includes the company's series Z issuance and
$49 million of additional series Y preferred issuance in April.
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. Approximately 97.6% of the company's $12.3
billion real estate portfolio was unencumbered as of Dec. 31, 2013.
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 3.2x as of Dec. 31, 2013 and 3.5x
pro forma for the company's sale of the 51% interest in its Shurgard
Europe loan and $225 million preferred equity issuance.
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 Public Storage 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.
Stable Outlook
The Stable Outlook reflects the company's specialty focus coupled with
Fitch's view that FCC will sustain in the mid-6.0x 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), Public Storage 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.
Fitch's ratings for PSA contemplate a moderate level of transitional
(i.e. short-term) unsecured debt in its capital structure used to bridge
the timing gap between completing investments and raising permanent
common and/or preferred equity capital funding. However, the one-notch
differential between PSA's IDR and its preferred obligations contains
little tolerance for any long-term unsecured debt in PSA's capital stack.
RATING SENSITIVITIES
The following factors may result in positive momentum in the ratings
and/or Outlook:
--Fitch's expectation of FCC sustaining above 7.0x (coverage was 6.3x
for the TTM ending March 31, 2014);
--Fitch's expectation of net debt plus preferred stock-to-recurring
operating EBITDA sustaining below 2.0x (this metric was 2.9x for the TTM
ending March 31, 2014).
The following factors may result in negative momentum in the ratings
and/or Outlook:
--Fitch's expectation of FCC sustaining below 4.0x;
--Fitch's expectation of net debt plus preferred stock-to-recurring
operating EBITDA sustaining above 3.0x.
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.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'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. 19, 2013);
--'Corporate Rating Methodology' (May 2014);
--'Parent and Subsidiary Rating Linkage' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Parent and Subsidiary Rating Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Recovery Ratings and Notching Criteria for Equity REITs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722363
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT
Credit Analysis - Effective Dec. 13, 2012 to Dec. 23, 2013
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696670
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=832203
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