Fitch Affirms Sovran Self Storage Ratings

Business Wire, Oct 11, 2000

Business Editors

NEW YORK--(BUSINESS WIRE)--Oct. 11, 2000

Fitch has affirmed its `BBB-' senior unsecured debt rating for Sovran Acquisition Limited Partnership, the principal operating subsidiary of Sovran Self Storage, Inc. (Sovran). Fitch has also affirmed its `BB ' rating for Sovran's outstanding $30 million 9.85% cumulative preferred stock. The Rating Outlook is Stable.

Sovran is a $570 million equity real estate investment trust (REIT) specializing in the ownership and management of self-storage rental properties. The Fitch ratings reflect favorably on Sovran's good portfolio diversity with 226 properties in 21 states, moderate single-market concentration, and manageable use of financial leverage at approximately 40 percent of book capital. Ratings also incorporate the moderate business risk and lower capital expenditure needs of this property type. Substantially all of Sovran's portfolio is unencumbered by mortgage debt, which mitigates refinancing risk for unsecured lenders. Fitch's primary rating concern is Sovran's reliance on bank financing for the majority of its borrowed funds, which results in higher refinancing and interest rate risk. Previous concerns regarding rapid growth through acquisitions and seasoning of assets under management have moderated since 1998 when Fitch assigned its initial ratings.

Sovran's portfolio growth has slowed considerably from prior years, reflecting both constrained access to equity capital markets and management's decision to plateau the use of debt financing at the current level. The company is now pursuing internal growth initiatives, although same-store NOI growth has been reduced this year due to higher overhead costs for Sovran's `Flex-a-Space' initiative. Fitch also notes that Sovran's predominant portfolio location in the Eastern U.S. results in lower growth compared to other self-storage REITs with operations in California and other higher-barrier markets. Fitch expects that Sovran will continue to pursue selected in-market acquisitions using proceeds from asset sales or joint ventures. The company continues to limit development to expansions of existing facilities, which reduces fill-up risk and moderates the need for significant external financing.

Sovran's financial profile remains satisfactory for the assigned ratings, although the impact of higher interest rates has lowered interest coverage to 3.4 times (x) for the first half of 2000 as compared to 3.9x for 1999. Adjusting for maintenance capital expenditures and preferred stock dividends, fixed charge coverage as calculated by Fitch was healthy at 2.7x for the first half of 2000, partly reflecting Sovran's moderate use of preferred stock financing. Debt leverage was 39.5 percent of total undepreciated book capital as of June 30, 2000 (44.8 percent including preferred stock), which is consistent with other REITs rated investment grade by Fitch.

Due to the company's heavy reliance on bank borrowings, Fitch considers Sovran's flexibility to be somewhat weaker as compared to REITs that balance their capital structures with a mix of long and short-term debt. Sovran is currently in the process of refinancing its $150 million revolving credit facility and $75 million term loan, with the intention of extending the revolver for another three years and the term loan for five years. While Fitch acknowledges that Sovran's large unencumbered asset base and satisfactory coverage ratios continue to support a stable rating profile, potential improvement in the current ratings will need to include a move toward use of long-term fixed-rate debt.

Fitch is an international rating agency that provides global capital market investors with the highest quality ratings and research. Dual headquartered in New York and London with a major office in Chicago, Fitch rates entities in 75 countries and has some 1,100 employees in more than 40 local offices worldwide. The agency, which is a combination of Fitch IBCA and Duff & Phelps Credit Rating Co., provides ratings for Financial Institutions, Insurance, Corporates, Structured Finance, Sovereigns and Public Finance Markets worldwide.