LAACZ - LA Athletic Co

[Deepdive]

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]

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]

VIC has a write-up done in 2015 - so available to public.

https://www.valueinvestorsclub.com/idea/LAACO_LTD/136913

[DTEJD1997]

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]

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]

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]

https://www.storagewest.com/locations/texas/

https://www.storagewest.com/locations/nevada/

https://www.storagewest.com/locations/arizona/

 

Here are the footprint to Vegas, Phoenix, and Houston

[BG2008]

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]

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.

[txvalue]

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.

[BG2008]

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.

 

http://www.nytimes.com/2005/06/19/business/yourmoney/these-stocks-are-short-on-glamour-long-on-returns.html

[BG2008]

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.

 

http://www.nytimes.com/2005/06/19/business/yourmoney/these-stocks-are-short-on-glamour-long-on-returns.html

 

I also think that the LP structure was a remnant of a time ago where more real estate companies were LP structures.  The GP have very little take here in this situation unlike a Kinder which at the high splits takes 50% of the incremental cashflow above a certain threshold.  Yes, you will get a K-1 form for investing in LAACZ.  People should be mindful of that. 

[Foreign Tuffett]

Hi, just going to chime in here. Our company has 155 shares in LAACO. I believe we are treated very fairly by GP. Fees are something like a half percent. Hathaway family has a history of treating shareholders quite fairly.

 

I wouldn't get so hung up on the GP/LP structure regarding having minority shareholders being screwed at shareholders expense.

 

Only 155 shares? If you bump your position up to 200 shares then I'll buy some too. Otherwise I'm on the sidelines.*

 

 

* In case it's not obvious, this is a tongue-in-cheek comment

 

 

[Spekulatius]

I bought my position in 2012 for about $1000/share after doing a fair amount of research. I have little concern that the Hathaway will treat minority’s owners unfairly. THey have proven to be fair to shareholder, predating the LP incorporation for decades now. I think these guys are pretty good sellers and buyers of real estate shown over a long period of time and at least decent operators.

 

I did notice thwt this year the expenses have outrun revenues and recent results were somewhat subpar.

[BG2008]

A few of us have mentioned that management team is honest and shareholder friendly despite the LP/GP structure.  I highly encourage people to read the Ben Stein New York Times articled titled These Stocks Are Short on Glamour and Long on Returns.  For someone like Ben Stein to claim that Laaco is their second best investment next to Berkshire Hathaway has to mean something.  That's a pretty bold statement.  It's not enough to buy a stock based on what he said, but it's enough to dig deeper. 

 

Many years ago (2-3 decades, but with the same family in control), the company paid a special dividend that was 1.5-2x of its share price.  I don't know too many companies that does that.  I think they did that because the family owns 70% of the shares outstanding, so they are the shareholders who benefits the most.  Per my conversation with management, many of the current 70% family shareholder depends on the distribution for their living expenses and taxes etc.  Hence, the distribution and the allocation of additional growth cap ex is a lot more long term and sustainable rather than the typical "weighted cost of capital is x and buy assets at x + 100 bp cap rate" strategy.  Then you add in the fact that you're buying these self storage assets at 9% cap rate and 1/2 of $/sqft of private comps, it becomes really interesting. 

 

http://www.nytimes.com/2005/06/19/business/yourmoney/these-stocks-are-short-on-glamour-long-on-returns.html

 

My 2 cents

[johnny]

I'm concerned about any valuation of this company that tries to estimate the market value of the club property: as far as I can tell you should consider that property not-for-sale-under-any-circumstances. I'd bet the surviving Hathaways would much rather retain the family legacy/identity associated with being the custodians of this Grand Institution than discard it all just so that they can go all-in on being vulgar storage facilitators and bump their partnership's ROE up another percent or so.

 

That said, has anybody here actually been to the club? I'm sort of flabbergasted how cheap it is. Monthly dues were $84 in 1985 and are barely twice that now. There's a conspicuous lack of pictures of the actual exercise facilities on their website, so maybe I'm not correctly weighing the "athletic" part against the "club" part in my head. I realize this business isn't -really- about the club or its operations (by my own argument), but I'm just curious what the deal is with it, exactly.

[BG2008]

I'm concerned about any valuation of this company that tries to estimate the market value of the club property: as far as I can tell you should consider that property not-for-sale-under-any-circumstances. I'd bet the surviving Hathaways would much rather retain the family legacy/identity associated with being the custodians of this Grand Institution than discard it all just so that they can go all-in on being vulgar storage facilitators and bump their partnership's ROE up another percent or so.

 

That said, has anybody here actually been to the club? I'm sort of flabbergasted how cheap it is. Monthly dues were $84 in 1985 and are barely twice that now. There's a conspicuous lack of pictures of the actual exercise facilities on their website, so maybe I'm not correctly weighing the "athletic" part against the "club" part in my head. I realize this business isn't -really- about the club or its operations (by my own argument), but I'm just curious what the deal is with it, exactly.

 

Johnny,

 

Fair statement.  The club is not for sale.  They've given me a tour.  Some others have seen it.  The club is nice in a Gordon Gekko kind of way.  It's got nice restaurants and amazing facilities.  They recent put a good chunk of cap ex into the club redoing the locker rooms etc.  Two ways that the market pays proper value for the club assets.

 

1) They eventually develop the surface parking lot on the same block as the club into a luxury high rise condo building. 

2) Enough millennial move to DTLA that they actually start using the club amenities.  It's very under utilized right now.  Frankly, if I were trying to start a tech business in DTLA, I would probably just get a membership there.  You can do work, eat, and get awesome workouts in.  Which is perfect for a tech incubator, small money manager, etc.  So, the upside comes from EBITDA going from less than $2mm from the club to some number that is $5-10mm.  You can pretend that there is no value attached to the brick and mortar of that 184k sqft or you can use the $/sqft of what people pay for a rat infested building within a one block radius and get to a $65mm figure just for the club building alone.  Just because a tree stands in a forest and there's no one to see it doesn't mean it isn't there. 

 

Regarding your comments about the vulgar storage facilitators, I think these guys understand very well that the vulgar storage facilities is what's paying for their living expenses and taxes. 

 

Kind of not surprised about prices being about 2x today vs 1985.  If you follow the trajectory of downtown LA, it's only in the last 5-10 years that there's been some revival of downtown. 

 

 

 

[oddballstocks]

There is a *club* here in Pittsburgh that I sort of view along the same lines.  It's the Duquesne club, and there's a tiny hotel, a gym, a restaurant, bar etc.  But the value is in belonging.  If you're selected you're "in".  And it's hard to get that invite.

 

The Duquesne club is beautiful, a very old money feel.  Dark wood rooms, fountains, marble etc.  If you look them up online there are barely any pictures as well.  I don't think that's a coincidence.  Places like this are the type where they aren't necessarily interested in attracting the public.

 

Case in point.  A few years ago I was in a business transaction with some people in Chicago.  Turns out one of these guys was in a tight knit gym there as well.  He regularly played basketball with Obama before he was President, and I suspect they're back at it again.  From my understanding it was the type of gym where you shoot hoops, then sit in the sauna and ink deals.  You don't walk up in January and apply for a membership..

 

From the looks of the website LA Athletic Club is a similar club. 

[johnny]

Fair statement.  The club is not for sale.  They've given me a tour.  Some others have seen it.  The club is nice in a Gordon Gekko kind of way.  It's got nice restaurants and amazing facilities.  They recent put a good chunk of cap ex into the club redoing the locker rooms etc.  Two ways that the market pays proper value for the club assets.

 

So would you say the fitness component is on par with, say, Equinox? At this point I'm asking because now I'm interested in becoming a member. Club membership might be the most unambiguously undervalued component to my unsophisticated brain. Did you get a tour as a prospective member, or as an investor?

 

 

So, the upside comes from EBITDA going from less than $2mm from the club to some number that is $5-10mm.  You can pretend that there is no value attached to the brick and mortar of that 184k sqft or you can use the $/sqft of what people pay for a rat infested building within a one block radius and get to a $65mm figure just for the club building alone.

 

I think that's a very reasonable case: looking at what the EBITDA of the club could be and valuing from there. But frankly I just can't shake the feeling that even if the club enjoys some sort of renaissance, the entire offering is basically an anachronism that will never really pencil out to a plausible "best use" of the property, so any market investment case; I am almost tempted to say that the economic loss of that property being indefinitely underutilized is outweighed by the positive expectations it should give you about the conservatism of management in other areas. But still, that property doesn't look like it's going anywhere, and that makes the value of the building to somebody with designs on turning it into a 200-unit loft conversion is just an intellectual conversation.

 

Regarding your comments about the vulgar storage facilitators, I think these guys understand very well that the vulgar storage facilities is what's paying for their living expenses and taxes.

 

No doubt. I used strong language not to take a stab at the family (or business), but only to try and evoke what seems to me to sometimes be a very under-appreciated reality in our spectrumy/spreadsheety circles. Owning 300 self storage facilities and a 120 year old social club in downtown LA will get you a lot more Tinder interest than owning 350 self storage facilities, and the marginal utility of money diminishes much faster than the marginal utility of SuperLikes in my unjustly limited experience with either.

 

Kind of not surprised about prices being about 2x today vs 1985.  If you follow the trajectory of downtown LA, it's only in the last 5-10 years that there's been some revival of downtown.

 

Even so, it's basically on par, or maybe even slightly cheaper than a single-club membership to the Equinox just 3ish blocks away. Definitely can see those dues outpacing inflation substantially, assuming the club is anything like I'm imagining.

 

[BG2008]

I got a tour as an investor.  I don't think the club is that exclusive and you can probably just walk in and ask for tour to become a member.  Their equipment is older.  But they feature a pool, a running track, sauna, steam rooms, basketball courts etc.  My assessment is also clouded by NYC lens.  I will gladly pay $300-500/month for amenities like that in Manhattan.  The WeWork rent in NYC is $2,000 for 100 sqft of fishbowl office.  They also have hotel rooms that you can book.  They mentioned that Equinox took a lot of their business.  I think Equinox is posh and cool.  This is an old school athletic club that I would personally love to be a member of.  New York has a NYAC which cost over $10k to join and the monthly is quite expensive. It's all about the cost of the land.  DTLA is ironically somewhere between rat infested buildings and the hip and cool Nomad hotel across the street.  If you pay attention to any sorts of gentrification in the last 20 years, there is always a weird period when a neighborhood has warehouses and WholeFoods on the same block.  But directionally, it seems like the forces of gentrification is inevitable sometimes.

 

Johnny, I'll be willing to subsidize 50% of your first three months of membership if you want to try it out.  I would love to get some real on the ground feedback on the competitiveness of the club vs other options in the neighborhood. 

 

If the club generates $10mm of EBITDA, it trades at some absurd 10-11x FFO.  Anachronism or not, it's becomes smack you in the face cheap.  I would also expect dividend yield to approach 5% with a 50% payout ratio in that scenario.  I think the surface parking will be built to highest and best use.  In a previous annual meeting, they have mentioned that it will likely be a luxury building when the time is right (DTLA gentrified).  So, club operation is a EBITDA play.  Do more members join?  Do they increase their EBITDA.  Surface parking lot is a DTLA luxury condo development play. 

 

The management team is older.  I doubt they are on Tinder.  But nice imagery.  I got a laugh out of it.  But true and more applicable for 30-40 year old.  I get your point.  I think they're holding onto their club business because of the legacy.

 

[BG2008]

This is a pretty good representation of the club. Renovations are pretty new.  The difference of when I was there is that there were people in the spaces rather than it being empty. 

https://www.discoverlosangeles.com/blog/los-angeles-athletic-club-hotel-champions?utm_source=Facebook&utm_medium=post&utm_campaign=SocialMedia

 

 

[Spekulatius]

This is a pretty good representation of the club. Renovations are pretty new.  The difference of when I was there is that there were people in the spaces rather than it being empty. 

https://www.discoverlosangeles.com/blog/los-angeles-athletic-club-hotel-champions?utm_source=Facebook&utm_medium=post&utm_campaign=SocialMedia

 

That‘s a pretty awesome club. I would rather be member of this club in the 1920 Art Deco style with a storied history, rather than a new and maybe more practical but generic Equinox club.

 

I think they will keeping because it is their legacy. If they develop the building, it will probably become a new place somewhere. Anything wrong with this either, because I think these sort of things have a real and enduring brand value.

[Deepdive]

Posted this a while back - here's a presentation on the company from Rhizome Partners, I think it's definitely worth a look.

RhizomePartners_LAACZ_Presentation.pdf

[Spekulatius]

It’s listed confidential, so hopefully Bill is Ok with posting it here.

 

One should note that recent results have been poor due to cost increasing faster than revenues. Their annual report will be published on 4/1 (probably coming in by mail a few days earlier) and they hopefully will shed some light into this trend.

 

I have a seizable stake (for me) since 2012 and I agree, this is a great LT investment.

[BG2008]

2017 Annual Reports Out

 

Consolidated revenues grew by 5% to $81 million, driven by increased self-storage revenue in all regions.

 

Storage West grew from 52 to 56 self-storage facilities in 2017, as four newly constructed stores came on line – three in the Houston market and one in Phoenix. Significant startup costs are

associated with newly opened self-storage facilities, including staffing, marketing and depreciation, while revenues are low during the beginning of the lease-up period. As occupancy increases, rents reach and then pass the break-even level, revenues offset expenses, and the property begins to generate profits.

 

The Houston market is extremely competitive, and we are still growing into our capacity there. But in September 2017, nearly 1,000 new customers – many of whom were dealing with the effects of the hurricane – chose Storage West Houston. The average occupancy of our five newest Houston stores nearly doubled from 26% to 49% in the space of just a few weeks.  By year end, all of the new stores reached break- even occupancy, a level far greater than we would normally expect so early in the lifecycle of new properties.

 

Bought back 777 shares or 1.5% of the float

 

2017_FY_Annual_Financials.pdf