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Why is Rhizome Partners Bullish About LAACZ?

Insider Monkey recently published Rhizome Partners’ Q2 2019 Commentary. In the said report, Rhizome’s Bill Chen highlighted a few stocks, including Laaco, Ltd. (LAACZ). Laaco is one of the largest self-storage companies in the United States (22nd) with facilities in Southern California, Houston, Las Vegas, and Phoenix. The company owns the Los Angeles Athletic Club located in the downtown Los Angeles area.

The LAACZ stock was at $2300 a couple of years ago and it currently sits at $2460. With a 7% return over the last couple of years, it underperformed the S&P 500 ETF (SPY) which returned 12.9%. Bill Chen remains bullish about the stock because he’s looking at the long-term trends in the gentrifying neighborhood surrounding the Los Angeles Athletic Club. Even though the athletic club currently generates $2 million of EBITDAR, Chen believes that the developments happening in the area will eventually lead to its higher utilization and a boost in cash flow.

downtown la

Here’s what Chen said in the commentary:

“Q2 2019 Updates –  I attended the shareholder meeting in Los Angeles and I personally made sure to spend one night at the Los Angeles Athletic Club and tested out all of their amenities including the hotel room, gym, meeting space, and restaurants.  I also spent an additional night in an Airbnb and talked extensively with my hosts about the trends in the neighborhood. My hosts, a hair stylist and a mortgage broker, told me how DTLA draws residents from all over the US due to its diverse urban mosaic of interesting people and events. Furthermore, a metro station located three blocks away from the Athletic Club opened recently.  DTLA residents can travel to the famous Santa Monica beach in about 30 minutes. The neighborhood is changing rapidly as real estate investors have repositioned the building across the street as a new office development and brought in a new PK Markets, a Korean equivalent to WholeFoods.  Next to the ground floor of the Athletic Club, a new coffee shop called Installation Coffee has replaced an old dingy convenience store.    Installation Coffee has an average of five stars on Yelp and is exactly the type of amenity that residents want in an “up and coming” neighborhood.  The Los Angeles Athletic Club will renovate the ground floor retail space which has been largely unoccupied.  Laaco decided to move forward because they have been receiving inbound inquiries from potential tenants.   Los Angeles Athletic Club sits on the edge of “restaurant row” in Downtown Los Angeles.  I was very surprised to find an active social scene after dark within a 2 block radius of the Athletic Club.  Restaurants such as Little Sister and Bottega Louie were packed during the evening hours.   In addition to the opening of a new Nomad Hotel in 2018, Alamo Draft House opened on “restaurant row” recently in 2019.  After my visit, I am more bullish about the long term trends of the neighborhood.  We believe that these developments will eventually lead to higher utilization of the Athletic Club which will result in increased cash flow.  Currently, the 180,000 sqft building only generates about $2 million of EBITDAR. We think the club has the potential to generate much higher EBITDAR in the future.

During the meeting, I met with many of the family members.  They are good people.  I was hoping that Laaco may consider increasing its share buyback program.  To my dismay, the insiders are reluctant to implement a more aggressive share buyback plan.  I believe that Laaco prioritize the preservation of generational wealth.   Thus, it makes for great allocations for widows, orphans, and retirees.  While we like investing alongside conservative management teams, one could potentially use too little leverage in real estate which hinders long‐term levered returns.

I am starting to come to the realization that Laaco will likely continue to trade at a large discount to net asset value due to its MLP structure and the lack of leverage.   One additional drawback of investing in LAACO is the lack of liquidity and additional burden of MLP tax reporting if we acquire units on different days. The lack of liquidity diminishes our ability to add to our position when the units are trading at large discounts.  In contrast, we were able to increase our position in Howard Hughes Corporation at will.

We are long‐term bullish on the company.  But it is logistically and administratively difficult to accumulate more units over time.  We believe that our best course of action is to keep our position and shrink its portfolio weighting overtime as we grow our assets under management through returns and capital inflows.  Deep value tends to solve its own problem over time.  The good news is that we are paid a healthy 4% per year dividend while we wait.”

Disclosure: None. This article was originally published at Insider Monkey.

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