Self storage is increasingly popular during these transient times, and one real estate investment trust is in the best position to benefit: Sovran Self Storage (SSS) .
What's more, the stock has fallen more than 10% in the past three months. Scoop up this rare gem before the rest of the herd catches on.
Wall Street has been so enamored with CubeSmart, Extra Space Storage and Public Storage that it failed to notice the deepening valuation gap in favor of Sovran.
Over the past 41 quarters, the average same-store net operating income growth for Sovran has been 5.1%. This is higher than many of the company's peers such as CubeSmart at 4.2% and Public Storage at 4.6%.
This consistent higher growth rate of NOI is a positive sign, and being able to maintain this over a long period of time, speaks volumes about Sovran's time-tested business model and disciplined approach to expansions.
The company hasn't chased business and sacrificed margins.
Smart strategy and better utilization are key levers that Sovran has used perfectly. Even though Extra Space Storage has higher gross margins, its operating margin at at 37.3% is quite a few percentage points away from Sovran, and CubeSmart's operating margin is 29%.
REITs are mostly about dividends.
On that front, Sovran is poised to maintain its excellent track record of returning wealth to investors. Between 2011 and 2015, Sovran has expanded its annual dividend by 78%, in line with peers such as Public Storage.
Although many can argue that Extra Space Storage has offered a 300% hike to its dividend in the same time frame, the fact is that Sovran's yield is more sustainable. To outsmart everybody in the dividend game, Extra Space Storage has stretched its payout ratio to 83%, and any number beyond 75% raises red flags.
The company's $1 billion-plus LifeStorage portfolio acquisition may appear expensive, but according to Fitch, the acquired portfolio is stronger than Sovran's existing one going by any metric such as asset age, rent per square foot and nearby demographics.
This may well narrow the quality gap between Sovran's portfolio and its public peers. With double-digit revenue growth projected for Sovran, the company is set to edge out rivals such as CubeSmart, Extra Storage and Public Storage over the next five years in terms of year-over-year earnings growth.
Finally, it all boils down to whether Sovran offers bang for the buck.
A good way to assess the valuation of REITs is by checking price to cash flow. The stock trades at a price-cash flow ratio of 19.8 times, compared to CubeSmart (22.6 times), Extra Storage (31.5 times) and Public Storage (24.6 times).
This discount in the valuation gap is unsustainable, given that LifeStorage acquisition benefits will appear quickly and the 7% to 8% full-year projected growth rate for Sovran's 2016 same-store NOI.
Sovran is the best storage REIT out there, and what's more, it offers absolute value for the money. Analysts expect the stock to gain nearly 15% in the next year, while the 3.6% yield can provide nearly 19% to 20% in total returns.
The total return potential of CubeSmart is between 12% and 13%. Public Storage is already above its 12-month analysts' median price target, which could indicate a stock decline if the company fails to beat expectations.
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