Real Estate Sector Ideas

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>>> Public Storage: Positioned For The New Industrial Revolution



Aug 8 2013

by: Michael van der Meer


about: PSA (Public Storage), includes: CUBE, EXR, IPGP, SSS


http://seekingalpha.com/article/1618032-public-storage-positioned-for-the-new-industrial-revolution?source=yahoo



The poster boy of the New Industrial Revolution (NIR) is 3D printing. But the NIR is about more than just one technology, it's about the convergence of several technologies including automation, laser cutting, 3D scanning, communications and software. This convergence makes the democratization and mass customization of manufacturing a distinct possibility within the near future.

With valuation metrics at multiples of those of the S&P 500 investing in NIR-related stocks is not for the faint-hearted - IPG Photonics (IPGP) being a notable exception which, for a growth stock, has a reasonable trailing P/E of 21 and an S&P 500 beating PEG ratio of 0.56. (The PEG ratio adjusts P/E for expected growth).

Select NIR stocks
Ticker
NIR sub-sector
P/E
PEG

3D Systems Corp
DDD
3D printing
113.53
2.34

iRobot
IRBT
Robotics
38.16
3.86

Proto Labs
PRLB
Injection molding
60.26
1.53

FARO Technologies
FARO
3D scanning
30.57
1.35

IPG Photonics
IPGP
Fiber lasers
21.41
0.56


After taking a breather earlier in the year NIR-related stocks seem to be making a run towards breaching new highs. If you wanted to gain exposure to the NIR but were waiting on the sidelines for valuations to come down to earth you probably have that nagging feeling that you may have missed the boat. Below I propose a way to satisfy that itch without throwing your copy of The Intelligent Investor out the window.

The Revolution will spread from the cities

Manufacturing will increasingly become a tinkering, trial and error, creative process - much like a music band getting together to record an album: there will be a songwriter (CAD designer), musicians (engineers), lead vocalist (marketers) and producers (venture capitalists). This "band of Makers" will want to use a fully kitted warehouse where they can collaborate and compete with other multi-talented teams using CNC machines, 3D printers, laser cutters, injection molding and a Roomba® or two humming in the background to clean up the mess.

The NIR will lead to structural changes in industrial activity; these changes will in turn invigorate the development of new technologies thereby creating a positive feedback loop. One of the most significant changes we'll see is the return of manufacturing to high density urban environments. Only major urban centers have the diversity of human capital and niche demands in place to warrant the time and investment in custom made products - at least in the earlier stages of the NIR.

Research carried out by the Brookings Institution and the Pratt Center has highlighted the increasing role of local networks of small manufacturers, which they say will form the backbone of the new urban economy. Urban centers, they argue, favor the decentralized organizational form of 21st-century production: supple, peer-to-peer networks, rather than large, vertically integrated, multi-tier entities. One of their core recommendations is that older industrial buildings should be renovated and divided to accommodate these smaller but more technologically advanced manufacturers.

And this is really happening. In October last year 3D printing service provider Shapeways opened its "Factory of the Future" in an old warehouse located in NYC's Long Island City. Similarly TechShop, an early mover in the NIR space has established workshops in places such as downtown San Francisco.

Although the convergence of technologies is democratizing manufacturing the paradox that future manufacturing will concentrate in urban centers points to an important constraint to true democratization - the availability of prime urban floor space, such as that pictured below. For investors this scarcity presents an opportunity for monopoly profits that cannot be easily competed away (what Warren Buffett popularly termed "an economic moat").

Prime 21st century manufacturing real estate: Long Island City, NY


Enter the Self-Storage REIT

REITs are worth looking at as investments in their own right. REITs pay little to no corporate taxes and are required to pay out the majority of their profits as dividends thereby providing a steady stream of (re-investable) income. In addition REITs may offer some diversification benefits compared to non-real estate equities. There are several types of REITs but Self-Storage REITs by virtue of their business models have a significant legacy exposure to warehouse properties in, or near, urban centers.

The self-storage industry remains very fragmented - according to the Self-Storage Almanac the biggest player by far is Self-Storage REIT Public Storage Inc. (PSA), which accounts for 5% of rentable square footage in the US. Fellow REIT Extra Space Storage (EXR) comes a distant second with slightly over 2% of rentable square footage. Self-Storage REITs Sovran Self Storage, Inc. (SSS) and CubeSmart (CUBE) each only own 1% of the market.

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