Description

Laaco has been written up before and it contains great analysis.  I want to present Laaco in a different light that is slightly different and hope to match the right shareholder base to the company and the instrument. I hope that this idea reaches new owners who will really appreciate the company for what it is, a safe bond instrument that is also an inflation hedge.  

1) Laaco should be viewed as a high quality bond in a ZIRP world.  It currently pays a 5.3% distribution yield that should grow 4-5% a year.  This naturally implies a 10-11% long term CAGR.  In short, when a retiree ask you what should do with their money now that the 30 year is 1.4% and the 10 year is at 68bps, you tell them to buy some Laaco and collect the 5.3% yield. 

2)Laaco is an inflation hedge in that if there is rampant inflation, you can increase the rent on self storage units on a quarterly or semi-quarterly basis.  Unlike offices with 10 year leases, the operation cost may increase faster than the 2% rent bumps each year with an office lease.  Laaco will likely be better than Gold in an inflationary environment.    

3) Laaco only pay out $16.8mm of their operating cashflow while the operating cashflow in 2019 was $32mm.  This is a ratio of 53%.  They also ended a long stretch of investments in Houston. So there will be little cap ex or acquisitions in Houston.  They will try to invest in the Athletic Club in Downtown LA. But for the most part, they are done with the major cap ex. 

4) Laaco is the perfect widow and orphan stock and the perfect "my aging parents need a safe fixed income investment"  

5) Laaco is 70 percent owned by the Hathaway family.  Many of the gen 3 and gen 4s of the family need the distribution for paying their bills and taxes.  For many, it is their main source of income.  Thus, they will not take on excess risk to jeopardize that.  The leverage is at an estimated 8% LTV.  This is not the right way to get rich, but it is the right way to stay rich.   

6) You are buying Laaco at a 10% cap rate roughly (assuming a $3mm G&A which the company does not provide). 

7) The private market value of Laaco is $4,000.  Let's just say that I have had conversation with many private buyers and they have confirmed that this the price that they will gladly pay if Laaco were willing sellers, which they are not at this moment.  As a sanity check, this price implies $152/sqft.  This assigns no value for their 184k sqft building in Downtown LA.  Given Laaco's Southern Cali focused footprint, this is a very reasonable price as most of the transactions are done at over $200/sqft.   

What is the upside for Laaco?  

I think 5.3% distribution yield plus 4-5% annual growth is reasonable.  You can knock the growth down to 2-3% and you can still get 8%.  The key is to own it knowing that that's what you are underwriting to and that you have zero chance of this going to $0 because the Hathaway family is conservative to a fault.  They are good operators, but very conservative.  

The 8-11% return is a baseline.  Now, at some point in the far future, they may decide to sell.  This is where it gets tricky.  I am telling you that this will not happen in the 3 years.  Let's just get that formality out of the way.  But if you have parents who are 65 years old, this is a great part of their portfolio allocation.  Because they can collect that 5.3% for a couple decades, and they can potentially pass that onto you with a step up in tax basis.  This is where I say I am not a tax lawyer, consult your tax attorney.  If somehow in the next 10 years, Laaco sells this self storage portfolio, it will likely sell for around $5,500 (38% higher than todays value of $4,000 per unit), you will achieve a 15.6% return.  If it is sold sooner, than your IRR will be higher.  

Upside Case #2 

Given that we are in a ZIRP world.  A 5.3% dividend machine that grows 4% a year will likely trade to 3.5-4.0%.  This would imply a price of $2,500 to $2,857.  So you're clipping 5.3% and waiting for that to re-rate this likely happen in the next 1-3 years.  

Downside Case 

Given that Laaco only pays out 53% of the operating cash flow, I doubt they will cut the distribution.  Remeber, many of the Hathaway Gen 3 and Gen 4s need the distribution for their living expenses and tax bills.  Financials may trend down 10-25% in the meantime, but I think as long as the distribution stays the same, the shares will not trade lower. Frankly, no one really pays attention to the shares.  It is trading at a 10% cap rate!

Overview of the Asset 

Laaco owns 4.7mm square foot of self storage facilities in Los Angeles, San Diego, Las Vegas, Houston, and Phoenix.  It also own a 184k sqft athletic club in Downtown LA. 

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

https://laac.com/

See the five year chart on page 6 of the 2019 Annual Report 

https://backend.otcmarkets.com/otcapi/company/financial-report/243339/content

Revenue has grown from $71.5mm in 2015 to $90.5mm in 2019 

Operating cashflow has grown from $25.8mm to $32.4mm 

Distribution per share has grown from $80 to now $100 per unit 

What You Can and Cannot Expect The Company To Do

Don't expect the company to sell the company anytime soon

Don't expect the company to provide large cap investor relationship efforts

Treat this like a bond instrument that can grow distribution over time 

Treat this as if you are investing along a large family office in a self storage portfolio at half price or roughly 10% cap rate.   

One day (maybe 5, maybe 10, maybe 20 years) they may sell their self storage to a large REIT or pension fund, but not today, not 2021, and likely not 2023.

Be aware that this is a MLP and you will get a K-1.  I wouldn't own this in a fund.  It delays filing if you are an investment manager.  But it's totally fine to own in your PA.  Do not own this in your IRA (or at least own it in small size).  

Catalyst

Watch paint dry and match the investment to the right investor.  Don't be a HF guy trying to get them to sell in a hurry.  You will simply create more headache and disappointment for yourself and the company.