NEW YORK, May 3 /PRNewswire/ -- Duff & Phelps Credit Rating Co. (DCR) has
revised its Rating Outlook for Public Storage, Inc. (NYSE: PSA) to Stable from
Positive. While financial protection factors remain healthy for the current
DCR ratings, fixed-charge coverage is expected to be modestly lower in 2000 as
compared to 1999. DCR has also reaffirmed its 'A-' (Single-A-Minus) rating
for PSA's $138 million of senior unsecured notes and 'BBB+' (Triple-B-Plus)
rating for the company's outstanding $1.2 billion of cumulative preferred
stock.
Public Storage is a self-managed equity REIT and the nation's largest
owner/operator of self-storage rental properties with a total managed
portfolio of more than 1,300 properties in 37 states. The DCR ratings reflect
positively on the company's leading industry position, strong asset and market
diversification, history of internal growth in same-store net operating income
(NOI), manageable exposure to development risk and conservative capital
structure. DCR's rating concerns include the potential that continued stock
repurchases and development funding needs could pressure PSA's historically
conservative financial profile. DCR has a neutral view of the pending
spin-off of PSA's portable storage and truck rental business (PS Orangeco,
Inc.) due to the limited cash flow contribution from this entity. DCR also
notes that potential event risk related to PSA's $45 million investment in the
common stock of Shurgard Storage Centers, Inc. (NYSE: SHU) seems to have
abated, as PSA has recently begun to reduce this investment through open
market sales.
PSA continues to achieve solid growth in portfolio NOI, with growth in
development-constrained regions such as California and the Atlantic Seaboard
(Md./Va./N.J./N.Y.) more than offsetting supply-induced pressure in markets
such as Atlanta and Houston. For 1999, same-store revenue and NOI growth
were 4.4 percent and 5.3 percent, respectively, on average occupancy of
92.5 percent. PSA's occupancy rate continues to be several points higher than
industry peers, partially due to the benefit of a national telephone
reservation center that has helped channel demand into weaker facilities. DCR
also believes that PSA has been less aggressive in pushing rental rates in
some cases as a trade-off for higher occupancy. PSA has similarly maintained
a conservative policy in assessing late fees, and revenues from this source in
2000 are expected to be comparable to 1999.
DCR considers PSA's development activities to be manageable, although a
larger proportion of the company's future development funding is expected to
occur on-balance-sheet rather than through joint ventures (JVs). PSA's
development program consists of traditional self-storage properties,
expansions at existing properties, and development of combination facilities
that serve the self-storage and portable-storage segments. Net of remaining
funds to be contributed by a JV partner, PSA's development commitments for the
balance of 2000 and 2001 total approximately $210 million, which will be
funded with proceeds from two recent offerings of preferred partnership units.
While PSA continues to be proactive in financing its development with
permanent capital, the company's desire to expand its store count is likely to
result in additional funding needs in the form of preferred securities. In
this regard, PSA's strategy of avoiding funded debt and asset sales as a means
of financing development leave the company with fewer financing options.
The DCR ratings also acknowledge PSA's strong balance sheet with an
approximate 35 percent fixed-obligation ratio (pro forma the preferred unit
offerings) and nominal exposure to debt refinancing risk. However, the impact
of ongoing common stock repurchases ($72 million in 1998 and $108 million in
1999) combined with funding needs for development are expected to lower fixed-
charge coverage from 3.8 times in 1999 to the low 3 times range for 2000. In
order to fund its current development pipeline, PSA recently issued
$315 million of preferred units from a subsidiary partnership. The preferred
units represent approximately 21 percent of PSA's total preferred securities,
and the partnership has ownership interests in properties representing
approximately 22 percent of PSA's total rentable square feet. DCR therefore
views the preferred units on a pari passu basis with PSA's public preferred
stock, and notes that the preferred units are exchangeable into equivalent
preferred shares of Public Storage in certain circumstances.
PSA's limited use of debt leverage and low dividend payout ratio continue
to result in strong flexibility and the ability to meet scheduled debt
maturities from internal cash flow. As of December 31, 1999, debt leverage
was just 4 percent of total capital, and there were no borrowings under PSA's
$150 million unsecured revolving credit agreement. PSA's strategy of
maintaining a relatively low dividend payout ratio (in the 60-70 percent range
of cash available for distribution in 1998 and 1999) provides additional
flexibility, although this benefit has largely been offset by ongoing stock
repurchases.
For additional research about Public Storage, Inc., visit DCR's Web site
at http://www.dcrco.com under REITs (Quick Search: Public Storage).
SOURCE Duff & Phelps Credit Rating Co.
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Related links:
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CONTACT:
Scott J. O'Shea, 212-908-0213,
oshea@dcrco.com, or Mark L. Berry, 212-908-0236, berry@dcrco.com,
both of Duff & Phelps Credit Rating Co.
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