Fitch Upgrades Public Storage's IDR to 'A+'; Outlook Stable
NEW YORK -- March 19, 2013
Fitch Ratings has upgraded the credit ratings of Public Storage (PSA) as
--Issuer Default Rating (IDR) to 'A+' from 'A';
--$300 million unsecured revolving line of credit to 'A+' from 'A';
--$3.4 billion preferred stock to 'A' from 'A-'.
Fitch withdrew the IDR and senior unsecured notes ratings for Shurgard Storage
Centers, LLC. Shurgard Storage Centers, LLC bonds have matured and the IDR for
Shurgard Storage Centers, LLC is no longer considered by Fitch to be relevant
to the agency's coverage.
The Rating Outlook is Stable.
KEY RATING DRIVERS
Fitch's upgrade of Public Storage's IDR to 'A+' centers on 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 2,200 properties in 38 states and seven European countries.
UNCONVENTIONAL FINANCING STRATEGY LIMITS REFINANCE RISK
The company has minimal refinance risk, funding itself mainly with preferred
and common stock. Leverage, calculated as net debt to recurring operating
EBITDA, was 0.4x as of Dec. 31, 2012 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 2.6x as of Dec. 31, 2012, compared with 2.9x and 3.3x as of Dec.
31, 2011 and Dec. 31, 2010, respectively.
Fitch anticipates that this metric will remain at or below 2.5x 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- to mid-single digits. In a stress case in which same-store NOI declines,
this metric would approximate 3.0x, which would be consistent with an IDR of
STRONG FUNDAMENTALS AIDED BY LOW SUPPLY GROWTH
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 4.4% to $13.49 in 2012 from $12.92
in 2011. Weighted average occupancy rose 0.7% to 91.8% in 2012 from 91.2% in
U.S. same-store NOI and Europe same-store NOI increased by 7.9% and 1.4%,
respectively, in 2012. Fitch anticipates that self-storage demand will
continue to exceed supply, which should result in further rent increases and
same-store NOI growth during 2013.
Through the recent commercial real estate cycle, Public Storage has performed
well alongside its smaller self-storage REIT peers. For 2007 to 2012, PSA's
same-store NOI grew by an average of 2.8% annually, which was moderately above
Sovran Self-Storage, Inc. (Fitch IDR 'BBB-' with a Stable Outlook) and
CubeSmart during that period, but below the 4.4% average growth of Extra Space
PSA maintained average occupancy of 90.2% during this period, exceeding peers
by 570 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. The company
is looking to bolster occupancy over the next year.
REFINANCING OF HIGHER COST PREFERRED BOOSTS COVERAGE
Fixed-charge coverage is expected to sustain at levels appropriate for the
'A+' rating. Coverage was 5.3x for 2012, 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 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.
Fitch anticipates that coverage will improve to 5.8x in 2013 and approach the
mid-6.0x range by 2015, benefiting from recent preferred stock transactions.
In a stress case in which same-store NOI declines, coverage would remain above
5.5x, which would remain consistent with the 'A+' IDR.
EXCELLENT ESTABLISHED, AND CONTINGENT, LIQUIDITY
The company maintains strong liquidity. Liquidity coverage is 1.1x for Jan. 1,
2013 to Dec. 31, 2014 and 2.9x pro forma for PSA's 1Q'13 preferred equity
issuance. 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
The company has contingent liquidity from a large unencumbered self-storage
property pool. Approximately 96.1% of the company's $11.1 billion real estate
portfolio was unencumbered as of Dec. 31, 2012. 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 3.9x as
of Dec. 31, 2012.
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
MODERATE GEOGRAPHIC PORTFOLIO CONCENTRATION RISK
The company has moderate portfolio concentration within certain U.S. regions,
including Southern California at 13% of rentable square feet, Texas at 12% and
Northern California at 8%. 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 RATING OUTLOOK
While metrics continue to improve, the Stable Outlook reflects the company's
specialty focus coupled with Fitch's view that fixed-charge coverage will
improve to the 6.0x range over the near term. The Stable Outlook also reflects
that the size of the unencumbered portfolio is also not likely to change
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
--Fitch's expectation of fixed-charge coverage sustaining above 7.0x (coverage
was 5.3x in 2012);
--Fitch's expectation of net debt plus preferred stock to recurring operating
EBITDA sustaining below 2.0x (this metric was 2.6x at Dec. 31, 2012);
The following factors may result in negative momentum on the ratings and/or
--Fitch's expectation of fixed-charge coverage sustaining below 4.0x;
--Fitch's expectation of net debt plus preferred stock to recurring operating
EBITDA sustaining above 3.0x.
Additional information is available at 'www.fitchratings.com'. The ratings
above were unsolicited and have been provided by Fitch as a service to
Applicable Criteria and Related Research:
--'Criteria for Rating U.S. Equity REITs and REOCs' (Feb. 26, 2013);
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Analysis' (Dec. 13, 2012);
--'Recovery Ratings and Notching Criteria for REITs' (Nov. 12, 2012);
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012).
Applicable Criteria and Related Research
Parent and Subsidiary Rating Linkage
Corporate Rating Methodology
Recovery Ratings and Notching Criteria for Equity REITs
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Criteria for Rating U.S. Equity REITs and REOCs
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Stephen Boyd, CFA
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
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