LAACZ: Participate in One of the Hottest Areas for Real Estate in the U.S.
Recently, I significantly expanded my position in LAACO. Based on the 48 self-storage properties they own alone, this company provides the opportunity to buy a decently-managed portfolio at 10x Funds From Operations (FFO), with competitors trading for much richer valuations--Public Storage and Cubesmart trading at about 22x and 19x FFO, respectively. However much I like the value of self-storage properties, the exciting thing about LAACO is their downtown Los Angeles real estate.
Downtown revival is picking up steam as residential developers rush to build rental housing. In a car-obsessed culture, this caught everyone by surprise. In the last 14 years, the residential population in downtown L.A. has swelled from 19K to 52K, after a city ordinance allowed historic and underused properties to be converted into housing. Abandoned buildings have been transformed into luxury lofts.
There are now about 14K apartment units in downtown Los Angeles, up about 3K in the last 5 years. About 5K units are under construction; over 1K within a 3 block radius of the L.A. Athletic Club. In my opinion, Carmel’s 700-unit residential building underway close by at W. 8th and S. Grand Avenue (completion scheduled for 3Q15) is pivotal, because it includes a 42K SF Whole Foods.
LAACO owns three contiguous lots in downtown L.A. The footprint of each lot is 21K – 23K SF; altogether they are about an acre. From W. 7th on S. Olive there’s the L.A. Athletic Club / Hotel, 8 story parking garage and surface parking lot, ending at the alley. In October 2013, Mack Real Estate Group and AECOM Capital bought six acres (parking lots) in the South Park area of downtown for $82 million, or $12 million / acre, intending to construct 1.5K units. I believe that within the next five years, a developer will seek to acquire and redevelop the L.A. Athletic Club assemblage, retaining the club, but developing and building on the two adjoining lots. In my opinion, this is not priced into the units.