Rhizome Partners 2Q17 Letter – West Coast Self Storage, FRPH Holdings, Macy’s, Terraform Power

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Rhizome Partners 2Q17 Letter

  • 8% net gain during 2Q17 vs. 3.1% for S&P 500

West Coast Self-Storage

  • Built a 6% position in West Coast Self-Storage trading at roughly 13x funds from operation and an 8% cap rate
  • Believe we invested in an undervalued, under-levered and growing self storage company with an owner-operator at the helm
  • We paid $100 per share for a collection of assets that is worth roughly $150 and growing over time
  • Will also receive 4% cash distribution per year and we may re-invest in the company if prices remain low
  • During GFC, revenue and FFO decreased by less than 7% during that time period

FRPH Holdings

  • Owns a collection of income producing real estate assets, royalty streams, and valuable land parcels – land parcels provide an organic growth pathway in the next 5-10 years
  • Believe that we purchased the security at less than 60 cents on the dollar
  • Due to a low debt-to-capital ratio, believe downside risks due to interest rate movements or error in our analysis will be dampened
  • Believe that management is conservative and shareholder-friendly
  • Company has publicly stated that their objective is to convert excess land into income-producing assets via internal build outs
  • In instances where they sell land parcels, they will use 1031 exchanges to swap into income-producing assets in order to defer taxes
  • Subsequent to end of Q2, Company reported drops in occupancy rates in their warehouse portfolio and drops in royalty income of the aggregate business
  • Management has indicated that this is temporary and the warehouse occupancy is already back to 90%
  • We expect aggregate royalty revenue to increase in the coming quarters
  • Management indicated that the cash portion of the distribution will be roughly $24 million or $2.40 per share if they elect to convert to REIT


  • Owns and operates via long-term leases a large collection of anchor stores in Class A malls throughout the US
  • Macy’s trophy buildings and their Class A mall real estate is roughly equal to Macy’s entire enterprise value at our cost – we get Macy’s retail operation and credit card processing business for free
  • We do acknowledge that Macy’s retail business is challenging in the age of fast fashion and Amazon – but we believe that Terry Lundgren is one of the best department stores CEOs and Macy’s will continue to generate substantial FCF for the next 10 years
  • Macy’s has been allocating its FCF towards dividend payments and share buybacks
  • Presence of Starboard Value and Greenlight will ensure that Macy’s thoroughly considers its real estate options
  • We have discovered that average asking rent in the Herald Square area in New York City has declined from $890 to $734 per square foot y/y
    • Most retail corridors in NYC have seen declines in average asking rents in the mid-single digits to low teens
  • Given that our thesis is broken, objective now is to trade out of our position the best that we can

What Went Wrong with Macy’s

  • We underestimated the customer concentration risk of owning Macy’s as a proxy for owning all the associated real estate
  • Single tenant concentration risk made it too risky for us to add to our position as the business deteriorated and share prices declined
  • In hindsight, an astute private real estate investor will be very reluctant to invest in a portfolio that is entirely leased to Macy’s
  • In the future, we will avoid investing in operating companies as a proxy for owning the real estate except for extraordinary circumstances
  • These exceptions will include robust operating fundamentals concurrent with publicly announced plans to unlock real estate value
  • The other exception will involve companies that can be quickly liquidated for its real estate value and still return proceeds that far exceeds our purchase price
  • We underestimated the structural deterioration of the department store business
  • Macy’s has the wrong retail offering and was losing customers to both the brick and mortar competitors such as TJ Maxx and fast fashion and to online retailers like Amazon.com
    • This is compounded by Macy’s size as it is incredibly difficult to change Macy’s strategy due to their immense retail square footage
  • To avoid this mistake in the future, we have become more focused on investing in higher quality companies with shareholder friendly management teams rather than lower quality companies trading at cheaper multiples
  • We overestimated Macy’s ability and willingness to monetize real estate assets
    • While we think that Macy’s still owns some incredible assets, it will take a very long time to monetize them

TerraForm Power

  • Renewable energy yieldco that is similar in structure to REITs and MLPs in that it is meant for investors who seek growing distributions over time
  • SunEdison is the sponsor of TERP and its bankruptcy filing has forced TERP to suspend its dividend and delayed the filing of its financials as SunEdison and TERP both share the same financial reporting system
  • Believe that TERP sold off because the natural shareholder base of TERP demands consistent and growing distributions and the market was afraid that the SunEdison bankruptcy will drag TERP into a messy restructuring
  • Brookfield restructuring should occur by year end; wind and solar assets generated $515 million of EBITDA and $170 million of CAFD in 2016
    • Believe that we are 6 months away from Terraform Power fully catching up with its SEC filings
    • Company should start paying a small initial dividend in early 2018
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