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Sovran Self Storage: A Technology Play?

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I t's a safe bet that when most people think of self-storage units, the term "high tech" doesn't immediately leap to mind. After all, they're just storage units, right? You open the door, put a few things inside and then close the door.

About the most high-tech thing involved is turning a key in a lock.

Behind the scenes, however, technology plays a big part in the success of large, publicly traded self-storage facility operators likeSovran Self Storage ( SSS ).

Sovran is a real estate investment trust that owns or operates 500 self-storage facilities in 25 states. It operates under the name Uncle Bob's Self Storage and serves more than 250,000 customers.

Like the three other publicly traded players in the self-storage space --Public Storage ( PSA ),Extra Space Storage ( EXR ) andCubeSmart ( CUBE ) -- Sovran uses its size to take business away from small mom and pop operations. A big part of its edge against the little guys involves technology -- specifically, its revenue management system and Internet marketing strategy.

Fitting The Markets

Sovran's revenue management system was developed a few years ago to help the company gauge how much it should charge in specific markets during specific times of the year. The system crunches massive amounts of data to determine why some customer inquiries turn into rental contracts, while others don't.

"The system uses computer algorithms that help them price units better and increase occupancy," Jefferies analyst George Hoglund told IBD.

"The result is that you're seeing overall occupancies rise at the big public REITs."

The publicly traded REITs typically have storage unit occupancy rates in the low-to-mid 90% range, he says. That's about 5 to 10 percentage points higher than the average for small private players.

"Sovran and the other public REITs have the kinds of systems in place that generate more data than the mom and pops, which gives them a big edge in terms of finding and winning customers," Hoglund said.

The same holds true for Sovran's Internet marketing strategy, which basically involves paying top dollar to secure important search terms. These include the obvious -- "storage unit," "self-storage," etc. -- as well as street names, city names, ZIP codes and terms like "cardboard boxes" and "moving vans."

What's It Worth?

"Self-storage operators have to ask themselves how much it's worth to pay for a particular search term," Hoglund said. "You can only do that efficiently and effectively if you have scale, which gives Sovran and the other public REITs another advantage over the small players."

Analyst R.J. Milligan of Robert W. Baird echoed that point in a research note, saying the larger players "continue to out-market" the smaller players online.

"Technology and economies of scale are allowing the REITs to capture greater market share at better rates, while the data analysis is contributing to a more efficient use of marketing dollars," Milligan noted.

Those advantages help explain why Sovran regularly trots out double-digit revenue and earnings growth -- and why its stock price has been trading at record highs this month, along with those of its publicly traded peers.

Macro Trends Helping

The sector also is getting help from several favorable macro trends, analysts say. One is the rising population of millennials entering the workforce. Many choose to live in densely populated areas where apartments are small and storage units are needed to house items that don't fit in the available living spaces.

It also helps that the U.S. job market is improving, which means more millennials are finally able to leave home and move out on their own. Meanwhile, there's a shortage of storage units nationwide, which helps drive up rental rates.

"The lack of development financing, an increasingly difficult land entitlement process, and increasing development land values have kept new supply relatively muted," Milligan said.

It all adds up to a pretty stout operating environment for Sovran. The company has a years-long streak of double-digit revenue growth, helped by a stream of acquisitions. Funds from operations, or FFO -- the figure that REITs use to define cash flow from their operations -- have risen by double digits for five quarters in a row.

During its third quarter, Sovran logged FFO of $1.29 a share, up 15% from the prior year and above analysts' consensus estimates. Revenue grew 12% to $95.4 million. Same-store revenue climbed 6.5%.

High Occupancy

The company's same-store occupancy rate as of Sept. 30 was 91.4%, up 100 basis points from the prior year. In July, it set an occupancy record rate of 93.1%. Sovran spent $66 million to acquire 11 self-storage facilities during the quarter.

Analysts polled by Thomson Reuters expect Sovran's full-year funds from operations to rise 20% in 2015. Growth is seen as slowing to 11% in 2016 and 8% in 2017.

One area of concern is Sovran's large exposure to the Houston market, which has been hurt by the slumping oil and gas industry. Sovran's same-store revenue in Houston rose 6.9% during the third quarter, though the occupancy rate there fell by 180 basis points year-over-year.

Sovran Chief Executive David Rogers downplayed the problem during a Q3 conference call with analysts, pointing out that rental rates in Houston actually rose faster than the company average during the quarter.

"Things are real strong and continue to look strong in Houston," Rogers said.

Wall Street doesn't seem too worried. Sovran's stock price shot to a new intraday high of 106.59 on Friday and is up more than 20% since Sept. 4. The company has an IBD Composite Rating of 98 out of a possible 99.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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