Growth and income investors seeking stocks that perform well in all economic conditions are often quickly drawn to Public Storage (NYSE: PSA), a real estate investment trust that’s basically the king of self-storage facilities.

 

#-ad_banner-#Public Storage’s domain is expansive, comprising more than 2,000 properties in 38 states and Europe. Its $2.1 billion in annual revenue and $35-billion market value are tops among self-storage REITs. Eight dividend hikes in the past 10 years despite a recession also sets Public Storage apart, as does its whopping $5.60 a share payout and 165% stock price gain in the past five years.

 

Investors shouldn’t be too quick to settle solely on Public Storage, though. There are several other excellent self-storage REITs worth considering, both for diversification and as good or better yields.

 

My favorite is one most investors probably wouldn’t recognize right off the bat: Sovran Self Storage, Inc. (NYSE: SSS).

 

But those living in Sovran’s core markets of Florida, Texas and the Mid-Atlantic states may know the company better by its brand, Uncle Bob’s Self-Storage. Typically, an Uncle Bob’s is a large, modern-looking, multi-story facility with 24-hour access, sophisticated security systems and climate control, in keeping with current industry trends.

 

With annual revenues of $313 million and a market value of $3.2 billion, Sovran is much smaller than Public Storage in purely financial terms. It also has a smaller physical footprint, operating about 500 facilities in 25 states under the name Uncle Bob’s Self-Storage.

 

But size is no issue here. Sovran is still one of the top-five industry players by revenue, and anyone who holds Public Storage in their portfolio would do well to have Sovran right there alongside it.

 

Sovran’s dividend growth has been just as reliable as Public Storage’s (also eight raises in 10 years). A month ago, the firm announced an 11% increase to $3.00 a share, which is good for a 3.2% yield. Its stock nearly tripled over the past five years.

 

Sovran’s dividend was affected more by the recession, though, suffering a painful 39% cut in 2009 to $1.54 a share. But it recovered to $1.80 for the next three years before moving even higher.

 

Revenue and net income also took an initial hit in the recession, but have since resumed healthy growth. There was some pressure on margins at times, too, but these remained generally solid.

 

	2008	2009	2010	2011	2012	2013	Past 12 Months
Revenue (Millions)	$203	$195	$192	$211	$236	$274	$313
Net Income (Millions)	$37	$20	$41	$31	$55	$74	$85
Operating Margin (%)	37.7	36.6	34.6	32.7	34.1	37.0	35.7
Net Margin (%)	18.4	10.2	21.2	14.5	23.4	27.1	27.2
Earnings Per Share	$1.72	$0.84	$1.48	$1.10	$1.87	$2.36	$2.60
Dividend Per Share	$2.54	$1.54	$1.80	$1.80	$1.80	$2.57	$2.57

Sovran performed admirably during the downturn because it’s a leader in an industry known for recession resistance. During harder times, many people are forced to downsize to smaller, less expensive housing, which may not be large enough to accommodate all of their possessions. In such cases, they often elect to put the excess in storage.

 

For that reason, Sovran never lacked the resources necessary to expand right through the recession and on into the recovery. The firm’s current footprint is a 31% increase from the 381 properties it owned in 2009.

 

I expect more strong expansion coming years. Consumers are increasingly able to spend now, and they’re notorious for buying more than they can store at home.

 

Moreover, development of single-family homes and apartment buildings is robust in many markets, and there’s typically a positive correlation between residential real estate and self-storage needs. Renters especially help spur demand because they often have less storage space than homeowners.

 

Among the signs of rising self-storage demand: Development rose 47% last year to 4.7 million square feet from 3.2 million in 2013, according to commercial real estate brokerage firm Marcus & Millichap. Plans to develop another 11 million square feet are in the works, the firm reports.

 

Sovran intends to capitalize on increased storage needs largely with acquisitions, mainly in core markets where its brand can be most effectively leveraged. That’s a smart strategy because self-storage markets everywhere are highly fragmented. The top four players only control about 10% of the U.S. market, so there should be plenty more opportunity to grow by purchasing diminutive competitors in prime areas.

 

Management has spent $100-to-$200 million annually on acquisitions during the past few years and reportedly has similar plans for 2015. That target could easily fall by the wayside, though. Already this year, Sovran has announced a $120-million buyout of four self-storage facilities in New York and Connecticut from Arredondo Holdings, a Florida-based commercial real estate developer.

 

In this case, integration should be seamless since the four locations were already operating as Uncle Bob’s through a lease agreement.

 

Looking forward, management sees greater New York (southern New York, southern Connecticut and central and northern New Jersey) as a prime area for acquisitions, since it’s one of the nation’s highest-income regions and matches up well with the Uncle Bob’s brand. Sovran has begun to branch out into new territory, too, purchasing more than a dozen high-quality self-storage facilities in the Chicago metro area during the past few years.

 

Consensus projections for a five-year earnings growth rate of 6.5% seem awfully conservative for a company that quintupled its bottom line since 2009 and has so many years of promising expansion ahead. I believe Sovran is capable of at least 9% growth, which implies 54% upside for its stock during the next five years and should provide ample funds to maintain a dividend yield close to 3%.

Risks To Consider: Self-storage REITs like Sovran may be recession-resistant, but they’re not recession-proof. Sovran may not come through the next recession like it did the last one.

 

Action To Take –> Public Storage may cast a big shadow, but Sovran Self Storage is at least as good an all-weather growth and income stock. And it’s a noticeably better value, trading for 36 times earnings versus 40 times for Public Storage. Consider owning it as an adjunct to Public Storage, or even as a replacement if you tend to favor smaller stocks.

 

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