Sovran Self Storage Bucks the Market Trend

The Oxford Communiqué Portfolio Update

Lately there has been a lot of negative press about the so-called “earnings recession.”

An economic recession is characterized by two consecutive quarters of negative GDP growth. An earnings recession is characterized by two consecutive quarters of declining corporate profits.

However, most of the weak earnings over the last two quarters have been in one sector: energy. That’s not surprising given that both oil and natural gas price are sharply lower over the past year and a half.

Problems in the oil patch, however, are creating a bonanza for the thousands of companies that thrive on lower energy prices. Moreover, there are plenty of firms that are posting strong results in this earnings season.

Take Sovran Self Storage (NYSE: SSS), for example. In the most recent quarter, its net income jumped 23% on a 12% increase in revenue. And earnings are likely to move substantially higher in the months ahead.

Based in Buffalo, New York, Sovran owns and operates more than 500 self-storage facilities encompassing more than 30 million square feet. Its stores operate under the trade name Uncle Bob’s Self Storage, serving over a quarter of a million customers in 25 states.

Over the last few years, Sovran has achieved record high revenue growth, occupancy levels and funds from operations. Much of this has come through acquisitions. It has also invested heavily in its systems and its stores.

As net income has grown, so has the dividend. Our shares currently yield 3.4%.

The company’s current focus is high-end, third-generation properties. These are high-tech (more than 70% of its customers use the Internet at some point in the rental process) and temperature controlled, with modern amenities such as security systems and 24-hour access.

CEO Dave Rogers says his key metric is 1 million. Once a metropolitan area hits this population level, it becomes profitable for Sovran to set up shop.

It doesn’t matter what the economy is doing or how the stock market is performing. Once the firm taps into a population of 1 million people or more, the numbers always seem to come out right.

Demand is driven by what industry experts call The Four D’s: death, divorce, disaster and dislocation. As people move – or their life circumstances change – they often require storage facilities.

Nearly 10% of American households currently rent a self-storage unit, a 65% increase from 15 years ago.

Yet the top five self-storage companies – four of them real estate investment trusts – own, operate and manage only 12% of all U.S. facilities. They will continue to gobble up private companies and mom-and-pop operators in the years ahead.

Sovran has acquired 125 stores over the last 3 1/2 years. That has helped it expand in core markets like Florida, Texas and the mid-Atlantic states. And management insists more acquisitions are in store.

Our shares of Sovran are up 10% since we got in eight months ago. (The S&P 500 is down 2% over the same period.)

Expect the trust to earn $4.89 a share this year and $5.52 in 2016 – and for the share price to maintain its positive trend.

Good investing,

Alex

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