Author Topic: LAACZ - LA Athletic Co  (Read 25876 times)

Deepdive

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LAACZ - LA Athletic Co
« on: March 05, 2018, 11:32:12 PM »
I believe this name appeared in an Oddball newsletter, but I've also seen it mentioned a few times on this site. Many of the REIT names have been hurt recently, probably due to rises in interest rates. The 50% LTV will lead to lower funds from operation while investors will demand a higher yield on their investments.

More on the company:
LAACZ owns a portfolio of self-storage in various cities - namely LA, San Diego, Houston, Las Vegas, and Phoenix. The cap rate for LA and San Diego is sub-5% in the private market and in short, you get to buy the portfolio at a 7-8% cap rate (backing out an estimated $3mm of SGA for 20 employees at HQ). The company also owns a parking garage, surface lot, and the Downtown Athletic Club which has roughly 100 hotel rooms, gyms, restaurants, etc. in an up-and-coming neighborhood (downtown LA). At $350 a sqft for the building, the building and parking lots are worth $80-125mm, while only generating about $2mm of pre-tax cash flow. The parking lot will probably be developed into a luxury condo when the management sees fit in the future.

There's only $52mm of debt on an asset base that is likely in the $600-700mm range. LAACZ pays roughly a 3.3% distribution with a 50% payout policy. The other 50% is re-invested in self-storage where they are building new facilities at an 8-9% cap rate. Because the LA and San Diego facilities are older, they tend to be one-story drive-ups while newer facilities are dense, 3-4 stories. The company has also been investing to add density to existing footprints in LA and is looking to continue doing so as the returns are quite good. The company has new facilities in the process of leasing up in Houston and Phoenix that should lead to increased cash flow in the next few years. The LA and San Diego portfolio should have pricing power and increase rent in the long run.

Management is good and possibly too conservative. Large insider ownership aligned with shareholder interests, but don't expect a buyout anytime soon. Ben Stein calls the company his second best investment after Berkshire Hathaway. This is an MLP, so you will receive a K-1. Be mindful. The controlling family owns 70%, so buybacks are tough, but they do manage to buy back small amounts every year. I take my dividends and buy whenever shares trade low.


BG2008

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Re: LAACZ - LA Athletic Co
« Reply #1 on: March 08, 2018, 10:14:49 AM »
This is probably one of the more undervalued and safer companies out there.  It is rare to find a low leverage cashflowing real estate company trading in the $2,200 per share range with intrinsic value in the high $3,000 to low $4,000.  Intrinsic value also grows about $160-200 a year.  It's cheap on almost every metric including cap rate, P/FFO, and especially $/SQFT which is around $80 or so (backing out the club assets).  Comps for Southern California trade for 3x that and comps for Houston/Phoenix/Vegas trade for 2x that.  Management is pretty good as well (in terms of not doing dumb things).   


bskptkl

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Re: LAACZ - LA Athletic Co
« Reply #2 on: March 08, 2018, 12:18:57 PM »
VIC has a write-up done in 2015 - so available to public.
https://www.valueinvestorsclub.com/idea/LAACO_LTD/136913

DTEJD1997

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Re: LAACZ - LA Athletic Co
« Reply #3 on: March 08, 2018, 02:23:21 PM »
Hey all:

No doubt this company is probably worth more than what it trades for.

No doubt the company has very conservative managers.

It very could be an interesting play going forward.

The one caution I would add is that the "silly" high valuations on coastal properties may not last.  There is some amount of risk here that I think is being overlooked by the market.

What happens if an earthquake hits CA?  What happens if the ranks of homeless swell up even further than where they are at now?  What happens if CA's budget/pension falls to pieces?  A political crisis? 

I would just discount their CA properties a bit more than others is all I'm saying...

BG2008

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Re: LAACZ - LA Athletic Co
« Reply #4 on: March 08, 2018, 06:07:21 PM »
Hey all:

No doubt this company is probably worth more than what it trades for.

No doubt the company has very conservative managers.

It very could be an interesting play going forward.

The one caution I would add is that the "silly" high valuations on coastal properties may not last.  There is some amount of risk here that I think is being overlooked by the market.

What happens if an earthquake hits CA?  What happens if the ranks of homeless swell up even further than where they are at now?  What happens if CA's budget/pension falls to pieces?  A political crisis? 

I would just discount their CA properties a bit more than others is all I'm saying... 

Earthquake will probably temporarily be very good for the company as it creates more demand for the storage units as people get displaced.  In the long run, peoples views on Southern CA sours and it will impact value.  I think there is a degree of undervaluation where you say "yes, the market maybe silly, but I'm paying $80 a sqft for the portfolio and the market is low to mid $200 for the SoCal and mid $100 for the Phonenix, Houston, and Vegas.  At a certain point, it becomes a bit of a non-factor.  If your thesis is that NYC and CA will migrate to the warmer climates with lower taxes, I think the Phoenix, Houston, and Vegas are those cities that will become net beneficiaries of that migration.  There is an inherent hedge built into the portfolio.  Never thought of it that way until you bought up the question.  I wonder if management meant to do that.  It appears that Houston, Phoenix, and Vegas are the cities where development opportunities still exist and that's why LAACZ has allocated capital there.  It's very hard to build in SoCal with the NIMBYism there.  Which makes it a good portfolio.       

We're not saying that their CA properties should go for 2% cap rate.  Private market value is sub 5%.  Their assets sit on large sites and have re-development opportunities.  So, if you're paying a 5% cap rate for them in the private market, you've got optionality on the development side.  Sure, 2% is silly.  5% is too rich for me.  But, I'm paying 9% when I strip out the downtown LA assets.  Plus, they have development assets that should increase cashflow in the next couple years.   

DTEJD1997

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Re: LAACZ - LA Athletic Co
« Reply #5 on: March 08, 2018, 06:54:50 PM »
Hey all:

No doubt this company is probably worth more than what it trades for.

No doubt the company has very conservative managers.

It very could be an interesting play going forward.

The one caution I would add is that the "silly" high valuations on coastal properties may not last.  There is some amount of risk here that I think is being overlooked by the market.

What happens if an earthquake hits CA?  What happens if the ranks of homeless swell up even further than where they are at now?  What happens if CA's budget/pension falls to pieces?  A political crisis? 

I would just discount their CA properties a bit more than others is all I'm saying... 

Earthquake will probably temporarily be very good for the company as it creates more demand for the storage units as people get displaced.  In the long run, peoples views on Southern CA sours and it will impact value.  I think there is a degree of undervaluation where you say "yes, the market maybe silly, but I'm paying $80 a sqft for the portfolio and the market is low to mid $200 for the SoCal and mid $100 for the Phonenix, Houston, and Vegas.  At a certain point, it becomes a bit of a non-factor.  If your thesis is that NYC and CA will migrate to the warmer climates with lower taxes, I think the Phoenix, Houston, and Vegas are those cities that will become net beneficiaries of that migration.  There is an inherent hedge built into the portfolio.  Never thought of it that way until you bought up the question.  I wonder if management meant to do that.  It appears that Houston, Phoenix, and Vegas are the cities where development opportunities still exist and that's why LAACZ has allocated capital there.  It's very hard to build in SoCal with the NIMBYism there.  Which makes it a good portfolio.       

We're not saying that their CA properties should go for 2% cap rate.  Private market value is sub 5%.  Their assets sit on large sites and have re-development opportunities.  So, if you're paying a 5% cap rate for them in the private market, you've got optionality on the development side.  Sure, 2% is silly.  5% is too rich for me.  But, I'm paying 9% when I strip out the downtown LA assets.  Plus, they have development assets that should increase cashflow in the next couple years.   

I think there is a tremendous opportunity to "arbitrage" the coastal properties/businesses with those lower cost areas of USA. 

I know that there is a "on-shoring" business going on the USA.  That is, moving office/production work from high cost areas (NYC, Wash DC, San Francisco) to the low cost mid-west.  i have briefly worked for a company doing this.  It really opened my eyes to some things.
I think there is a tremendous amount of money to be made moving stuff to the lower cost areas of the USA.  How many companies are already doing this I do not know.

Obviously not everything can be moved....but a lot of stuff can.  There is no need for a company to have relatively low & medium level work done in the NYC area.  Move it to Detroit.  Detroit is FULL of skilled people who will work for less than 1/2 of NYC rates.  Keep client interaction & C-suite & the very highest level work in the coastal areas...move everything else to the hinterlands.  Rental rates are a FRACTION of NYC.  Detroit is in same time zone as NYC.  Most of it's denizens can talk American pretty good.  Detroit has interweb access, postal access, phone access.  It is a huge shipment hub (America's most valuable international crossing is in Detroit). There are banks.  Detroit uses the USD$.  Manufacturing is abundant, just waiting to be utilized...semi-paved roads, interstate highways that can reach NYC in one day's drive.  There are airports here too!

I've BOUGHT commercial properties in Michigan for way LESS than what you could rent for in NYC....Heck I BOUGHT property for the equivalent of about 3 months rent in Manhattan.  Could this article be true?

https://therealdeal.com/2016/02/11/average-manhattan-office-asking-rent-exceeds-72-psf-for-the-first-time-report/

It states that the AVERAGE office rent in NYC is $72/foot.   That is about $6/month.  So I got property for less than 3 months rent in NYC.  That is where I am working and typing this reply.

I've worked with skilled graduates of U of M, University of Chicago, Michigan State and other Mid-Western schools that I would put up against almost anybody in terms of skill/experience. 

A similar thing is going to occur in Houston.  I lived/worked in Houston for a decade.  That is a city/state that knows how to get things done.  It is not as inexpensive as Detroit, but it is safer and more civilized. 

If  I were in charge of a company with coastal operations, in-shoring is exactly what I would be doing.

I think that management is ahead of the game at LAACZ if they are taking cash flow from CA and moving it inland, especially to Texas and Houston. 

California & NYC has gotten ahead of itself, I would short it if I could!

BG2008

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BG2008

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Re: LAACZ - LA Athletic Co
« Reply #7 on: March 08, 2018, 07:44:26 PM »
Hey all:

No doubt this company is probably worth more than what it trades for.

No doubt the company has very conservative managers.

It very could be an interesting play going forward.

The one caution I would add is that the "silly" high valuations on coastal properties may not last.  There is some amount of risk here that I think is being overlooked by the market.

What happens if an earthquake hits CA?  What happens if the ranks of homeless swell up even further than where they are at now?  What happens if CA's budget/pension falls to pieces?  A political crisis? 

I would just discount their CA properties a bit more than others is all I'm saying... 

Earthquake will probably temporarily be very good for the company as it creates more demand for the storage units as people get displaced.  In the long run, peoples views on Southern CA sours and it will impact value.  I think there is a degree of undervaluation where you say "yes, the market maybe silly, but I'm paying $80 a sqft for the portfolio and the market is low to mid $200 for the SoCal and mid $100 for the Phonenix, Houston, and Vegas.  At a certain point, it becomes a bit of a non-factor.  If your thesis is that NYC and CA will migrate to the warmer climates with lower taxes, I think the Phoenix, Houston, and Vegas are those cities that will become net beneficiaries of that migration.  There is an inherent hedge built into the portfolio.  Never thought of it that way until you bought up the question.  I wonder if management meant to do that.  It appears that Houston, Phoenix, and Vegas are the cities where development opportunities still exist and that's why LAACZ has allocated capital there.  It's very hard to build in SoCal with the NIMBYism there.  Which makes it a good portfolio.       

We're not saying that their CA properties should go for 2% cap rate.  Private market value is sub 5%.  Their assets sit on large sites and have re-development opportunities.  So, if you're paying a 5% cap rate for them in the private market, you've got optionality on the development side.  Sure, 2% is silly.  5% is too rich for me.  But, I'm paying 9% when I strip out the downtown LA assets.  Plus, they have development assets that should increase cashflow in the next couple years.   

I think there is a tremendous opportunity to "arbitrage" the coastal properties/businesses with those lower cost areas of USA. 

I know that there is a "on-shoring" business going on the USA.  That is, moving office/production work from high cost areas (NYC, Wash DC, San Francisco) to the low cost mid-west.  i have briefly worked for a company doing this.  It really opened my eyes to some things.
I think there is a tremendous amount of money to be made moving stuff to the lower cost areas of the USA.  How many companies are already doing this I do not know.

Obviously not everything can be moved....but a lot of stuff can.  There is no need for a company to have relatively low & medium level work done in the NYC area.  Move it to Detroit.  Detroit is FULL of skilled people who will work for less than 1/2 of NYC rates.  Keep client interaction & C-suite & the very highest level work in the coastal areas...move everything else to the hinterlands.  Rental rates are a FRACTION of NYC.  Detroit is in same time zone as NYC.  Most of it's denizens can talk American pretty good.  Detroit has interweb access, postal access, phone access.  It is a huge shipment hub (America's most valuable international crossing is in Detroit). There are banks.  Detroit uses the USD$.  Manufacturing is abundant, just waiting to be utilized...semi-paved roads, interstate highways that can reach NYC in one day's drive.  There are airports here too!

I've BOUGHT commercial properties in Michigan for way LESS than what you could rent for in NYC....Heck I BOUGHT property for the equivalent of about 3 months rent in Manhattan.  Could this article be true?

https://therealdeal.com/2016/02/11/average-manhattan-office-asking-rent-exceeds-72-psf-for-the-first-time-report/

It states that the AVERAGE office rent in NYC is $72/foot.   That is about $6/month.  So I got property for less than 3 months rent in NYC.  That is where I am working and typing this reply.

I've worked with skilled graduates of U of M, University of Chicago, Michigan State and other Mid-Western schools that I would put up against almost anybody in terms of skill/experience. 

A similar thing is going to occur in Houston.  I lived/worked in Houston for a decade.  That is a city/state that knows how to get things done.  It is not as inexpensive as Detroit, but it is safer and more civilized. 

If  I were in charge of a company with coastal operations, in-shoring is exactly what I would be doing.

I think that management is ahead of the game at LAACZ if they are taking cash flow from CA and moving it inland, especially to Texas and Houston. 

California & NYC has gotten ahead of itself, I would short it if I could!

I think Manhattan, NYC has gotten ahead of itself.  The property value is so high that all the landlord just want to sign a Chipotle as their retail tenant.  Over time, restaurant owners and bar operators move to cheaper locations.  This is why Brooklyn is now so hip and even more expensive than Manhattan (certain locations near the water and closer to Manhattan). 

I was out in LA for the Daily Journal conference.  LA certainly has some of the best weather and scenery.  There is some stickiness to that.  The traffic is atrocious.  A bunch of guys way smarter than me had a conversation.  We talked about different places getting expensive and how geographic constraints such as ocean, mountain, etc wind up creating natural barriers to entry for new supply for real estate.  Regarding shorting NYC, LA, or SF, or Seattle, one cannot overlook at the fact of clustering of talent, attractive mates, job opportunities, career advancement etc.   

If you are a 23 year old recent college grad from a respectable school, where do you go?  Most elect to go to these cities that I mentioned because they believe it offers the best career advancement.  What's often not talked about is the mating opportunities.  I once overheard a recent college grad basically boil it down to the following "if I take a job at Cincinatti, I'll never get laid!"  Although, politically incorrect, I think it conveys a tremendous amount of wisdom.  Young talented college graduates want to flock to NYC, LA, SF, or Seattle because their potential mates are flocking there.  So, I will not dismiss this powerful dynamic so readily.  While, I am not a buyer of NYC, LA, and SF real estate assets at current market value, I wouldn't short it either. 

I don't know how old you are, but my friends and I have been complaining about New York being expensive for the last 15 years and why we should rent.  We've missed out on a heck of an investment.  Aetna has been in Hartford CT for 164 years, yet they recently announced that they are moving to New York City.  They simply can't attract and retain talent in Hartford.  Maybe Detroit is different and have much more to offer than bumblefuck Hartford CT.  But we're actually witnessing the opposite of what you're describing in real time.  In Sam Zell's book, he talked about the delayed marriage.  That's a permanent structural change.  That means more millenials will wait till their 30s to get married.  That's why Sam Zell sold all his Garden style apartment buildings and re-allocated to cosmopolitan urban locations. 

I think the finance, Tech Advertising Media Information (TAMI) folks still look to these coastal cities.  Where Amazon picks its HQ2 will tell us a lot about the future of corporate HQ locations.  Sure, it makes sense to stuff some of the call centers or lower paid jobs in Detroit.  But can you really convince the math wiz from MIT, Harvard, or even the scrappy Cornell kids to move to Detroit for their first job?  LA, NYC, and SF, certainly sounds a lot more exciting, both from a job and getting laid perspective.   

The Delta between Detroit, Houston, NYC, Jacksonville, FL, Reno, etc have always been there.  It's there for a good reason in my opinion.  Going back to LAACO, you're buying at a 9% cap rate (backing out the DTLA assets), not a 5% cap at today's price.  I think that's called the Margin of Safety. 

DTEJD1997 - In the spirit of being true value investors, would you host me if I come out to Detroit for a visit.  Maybe you can even show me a couple properties in the market?  I would love to learn more about the "on-shoring" that's going on. 




Foreign Tuffett

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Re: LAACZ - LA Athletic Co
« Reply #8 on: March 09, 2018, 06:23:08 AM »
To play devil's advocate here: I don't understand why almost everyone glosses over the GP-LP structure here. Generally speaking I detest investing in GP "yieldco" structures as they usually result in management teams with incentives that conflict with outside shareholders' best interests.
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txvalue

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Re: LAACZ - LA Athletic Co
« Reply #9 on: March 09, 2018, 08:30:03 AM »
I bought a small position in this years ago, I found it along with Ash Grove and some others in an old Walkers manual.  Management is not spectacular but they are solid and conservative as others have mentioned. They have been slowly growing the self storage side through tax free exchanges of various real estate pieces they owned as well as a bit of debt and the cash they have coming in.  If they were to stop developing new properties and acquiring new land this would spit off quite a bit of cash.

On the OTC markets web site they disclose financial info, quarterly letters and annual reports. 

An intersting site for self storage news is insideselfstorage.com

News for LAACO is mixed between LAACO and Storage West but searching around can give you some history on comps and what they have been up to.  The site is not the easiest to navigate but I found it helpful to give a sense of their scale vs public and private competitors. For example on the 2017 operator list they are the 23rd largest self storage company in the US (net rentable sq ft).

Lots of interesting scuttlebutt out there on blogs, write ups and message boards.