LAACO is a California limited partnership with ownership interests in a variety of assets in the West. The partnership mainly owns storage unit facilities, as well as the Los Angeles Athletic Club and the California Yacht Club. Part of the Los Angeles Athletic Club is a 72 room hotel. Additionally the company owns two buildings in downtown LA, and some surface parking lots. Measuring by revenue the storage units deliver 65% of the partnership's revenue, and the club, hotel, buildings, parking lots and boat club provide the rest.
The company has been in the storage unit business since the 1970s and has slowly grown to 47 locations. The majority of the facilities are located in California, some in Nevada, Arizona and now Texas. The company has identified Houston as an area where they are targeting growth. They purchased a facility there in 2012 for $6.3m and are looking for further acquisitions.
Storage units qualify as a boring business, that is unless you factor in the crazy TV show focused on them, Storage Wars. I would wager that at least one of LAACO's facilities has been the host of loud antique collectors bidding high prices for units full of junk at least once given the location of the show, and the location of the partnership's units. Where else but in America can someone make a TV show out of people standing around a storage unit bidding like crazy for items they can't even see? When I've watched the show I've been struck by the parallel, that everywhere there is value in cheap junk. It might be cheap companies for some, and old lamps and bed frames for others. Anything purchased cheap gives the possibility of a reasonable return.
When I first found LAACO I had two thoughts, the first was hidden assets, the second inflation play. As far as I can tell neither of these impressions were true. Let's tackle the asset angle first. Using the $6.3m paid for the Houston facility as a metric, and then extrapolating it to the other 46 locations results in a value of $296m, higher than what the balance sheet shows. But further in the annual report there is a comment that two facilities together are only worth $5m, or $2.5 each. Of course the $296m is only the storage units, the company also owns the athletic club and yacht clubs, both worth something, and possibly a lot. Just going back of the napkin I'm not seeing a fat enough pitch on the real estate. If the storage facilities are worth $4.4m each (average of $6.3m and $2.5m) the value of the storage units would be $206m. Book value for PP&E is $267m, leaving $61m for the assortment of other assets. This seems like a fair estimation.
There is some shareholder out there reading this that is going to email me a spreadsheet with the detailed value of each asset proclaiming this is the investment of a lifetime. The caveat will be that shareholder purchased at a much lower price.
Because the company is a collection of assets it makes sense to value them as such and piece their values together. Currently the company is trading for $1074 a share, and book value is $915 per share. And based on my assumptions that book value is mostly correct buying these assets above book value doesn't seem like that great of an investment. If the price of shares suddenly dropped to $600 I would be a very interested buyer.
So to that shareholder, I appreciate the spreadsheet, and I probably don't disagree on your valuation, but at this price I don't have enough wiggle room.
What's impressive about LAACO is that the company is earning a respectable return, they had a 8% ROE in 2012. The company is very generous about paying out a portion of earnings as a dividend, this past year they paid $47 a share in dividends. When evaluating their earnings remember to compare them to real estate rentals, a hotel, and athletic/boat clubs. In that context 8% is reasonable, although some of that return is due to the company's leveraged balance sheet. The company included a five year results table in their annual report reproduced below:
I mentioned earlier my second thought about the company was that they could be a possible inflation hedge. My thought was this company owns real estate, something tangible, and they could possibly raise rates each year at or above inflation. The company is a way to hold Los Angeles real estate, but unfortunately the collection of companies they run haven't been successful at continually raising rates. Part of this is a capacity problem, the storage units are 79% filled. Presumably most other storage locations in the area with similar prices would have similar occupancy rates. This means if LAACO suddenly raised their rates significantly a tenant could easily move their stuff a few miles and save a lot of money. Over the past few years the company has been able to raise rates at roughly 1% a year, far below the rate of inflation.
The company noted in the CEO letter that they had trouble raising rates in the poor economy. The company's athletic club membership grew last year, but a decline in yacht club membership balanced out the gain resulting in no net change.
Usually companies like this are structurally cheap for a few reasons. The first is the company is a partnership meaning shareholders receive a K-1 each year which complicates taxes. The second is the share price is high. At $1k per share prospective buyers are locked into buying in $1k increments. Lastly as a collection of assets the company doesn't fit into a mold. They're not a hospitality company because they have storage units. They aren't a pure storage unit company either because they own a boat club, hotel and athletic club.
For now shares of the company aren't cheap, but this is the type of company I want to keep on my radar, and if shares do drop I'd consider picking them up and tucking them away into a corner of my portfolio.
Talk to Nate about LAACO
Disclosure: No Position.
I read your LAACO post with interest. I believe that the company’s value is greater than you conclude for two principal reasons: (1) The building at 431 West 7th Street in Los Angeles that houses the Los Angeles Athletic Club was built in 1911 and is, I believe, carried on the company’s books for less than $1 million. I think that LAACO is trying to sell an adjacent small parcel of land for $2 million. The location bordered on Skid Row for many years but has improved markedly as downtown L.A. has boomed and expanded. The building’s value may well be irrelevant since there is little possibility that LAACO will sell it at any time in the near future so it should probably be valued at a multiple of the free cash flow it generates. However, to the extent that the land, hotel, athletic club and parking garage are worth considerably more than stated book value, perhaps one should be willing to pay more than stated book for this “hidden asset.” It is worth noting that LAACO previously owned the Riviera Country Club and a lot of land at the bottom of Topanga Canyon (technically Malibu), both of which it sold at prices vastly exceeding their carrying values. LAACO subsequently made at least two large special distributions (something like $700 per share in total) to shareholders. My point is simply that LAACO has previously been willing to own real estate for decades but also to sell it on occasion and that book value may very well understate these assets.
ReplyDelete(2) Although you are correct in observing that the self-storage business is highly competitive and that LAACO has experienced little growth in same store rents in recent years, it is worth noting that its facilities are all located in the hard-hit Sunbelt and that as the economy in that region recovers, it is certainly possible that the occupancy rates and cash flows from its self-storage properties will improve. Over a long (say, twenty year) time horizon, self-storage facilities, which require little in the way of capital investment and even less in terms of maintenance capital expenditures, can be viewed as a bet on the growth of the value of the underlying land while throwing off an income stream along the way. I do not think that taking two or three properties out of 47, averaging their value and multiplying by the number of facilities is a good way to value the entire self-storage business since the size, age and location of the facilities vary.
My bottom line is that the downside in LAACO is pretty limited, the operator and controlling Hathaway family has proven astute over time, the current dividend (4.4% at the current ask price of $1075) is attractive and you are not paying much for the upside optionality that I have described briefly above. A small additional positive is that the company does not issue new shares (LP units) and is very slowing repurchasing shares.
Do you think that I am too optimistic?
I think Laaco is worth way more than book. Comps from SSS, Cubesmart show that storage units are going for 10x revenues. Laaco's 2012 rental revenues alone were 38.5M$, put a 10x multiple on it -30M$in net debt and you get ~2000$ per unit. Alternatively, use 20M$in EBITDA and compare the multiple to EV for pure play storage business like SSS, Cubesmart or PSA and you will get a similar discount to fair value.
ReplyDeleteThey had trouble raising rents because their storage units are in the areas hardest hit by the real estate crash (Phoenix, San Bernadino, Las Vegas) but these areas are now recovering, which bodes well for the storage business of course.
FWIW, they raised the distribution for Q1 to 14$ (from 11.5$), so I think that is an indication that business is recovering. Based on the raised distribution, the units are yielding ~5.4%.
Another plus is that the unitholders interest is well aligned with the Hathaway owner operators, which have shown great business accumen with real estate over many decades.
Disclosure:I own Laaco units and it's one of my larger positions.
How do you get access to Laaco financial statements? Do you need to be a shareholder?
ReplyDeleteThey're available on OTCMarket's site under financial statements.
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