A lot of credit goes to AlexB91 for his writeup of this business. I originally found this company in one of my stock screeners when it was briefly selling below NCAV (on paper). But it quickly became apparent that this is not a cigar butt company. And Alex’s writeup explained why that is very well. Here I briefly summarize his analysis in my own words.
Sky Harbour is the first scaled builder and operator of private jet hangars in the United States. They are the first mover in their industry, currently only really competing with a fragmented network of fixed based operators (FBOs) in local markets. (generally unpleasant to work with).
They operate in the luxury segment (clients include Rick Ross, Jeff Bezos and NetJets). These clients are price insensitive and provide the company with high margins and pricing power.
They operate in a favorable market. They aren’t making new airports, and there is a growing shortage of private jet hangars, and the hangars that do exist typically do not accommodate the higher tail height of the latest private jets. While SKYH hangars do.
SKYH has excellent unit economics. On average the cost to build a hangar is ~$300 per rentable square foot, and earned $50+ per square foot in annual net operating income. If SKYH maintains a 80-20 leverage to equity ratio it will achieve a 14.47% NOI Yield, and a 50.33% ROE for its first 14 airports. With those numbers increasing as it further expands to higher value airports.
SKYH also has a long runway (pun intended) with hundreds of potential locations under consideration by management. With additional growth potential for add-on services like catering and detailing.
With pricing power, the company can and has raised the price of their leases.
“We are experiencing the first leases coming to term. As you know, we stagger our lease terms from one year to 10 years. We’re seeing our first leases coming to term. And the reups, whether it’s a tenant staying with us or bringing in a new tenant into the hangar has been occurring at a very significant premium to the original lease rate. So as people who have followed us closely know, we have CPI escalators in the leases. But when lease terms end and we re-lease, we’re experiencing much bigger jumps. In one case, a new tenant came in at a close to 20% premium to what the original tenant was paying.”
– Tal Keinan on the Q3 2023 Conference Call
“Lease renewals and replacements in the past twelve months have exhibited a weighted average step-up in total revenue of approximately 20%.”
– Sky Harbour Q2 2024 Press Release
Management is excellent and aligned. Tal Keinan owns 17,943,792 shares of Sky Harbour. He has a background in private equity and has led the company since its inception.
SKYH sells at a reasonable price
Alex uses cap rates to value the business, but I will use cash flows. I assume that $65M pre tax cash flow to equity will be reached in Q1 2028. With 67.3M shares outstanding*, and 15.8M warrants, we can assume there will be 83.1M shares outstanding at that point. (The cash provided by warrants will cover 2x the equity needed to build out the 14 hangers) At an earnings multiple of 15x, we get to a valuation of $11.73. At a 6% discount rate that is a net present value of $9.74
Alex uses a 6.5% cap rate, 76M shares outstanding to arrive at a per share value of $11.46
Again this is without pricing in future cash flows from additional airports, or added services or increased lease pricing. As the first 14 airports come on line in Q1 of 2028, the stock will reprice accounting for future growth in the next phase of development.
*25,326,328 and 42,046,356 shares of Class A Common Stock and Class B Common Stock outstanding. 15,803,001 Warrants remain outstanding. These are exercised at 11.50.
Risks
Competition is the biggest risk, but the company has some protection here.
“There are significant barriers to entry: It is tough to obtain ground leases at airports. Once the time it takes to obtain a ground lease and then stabilize a project is accounted for, it may take 10 years for a new entrant to become profitable at the parent level. A successful private equity executive we spoke to said private equity will be dissuaded from entering this space given how long it would take for the parent entity to demonstrate profitability.”
Overall, this is an excellent business, with a lot of upside selling at a reasonable price. It is currently my biggest position.
Price: $12.05
Date: 12/5/24
Update
1/25/25
I revisited SKYH considering that they get uplisted on Monday, and I had a few more thoughts to add.
To look at the stock from a different angle. I built out a DCF-like model for SKYH. In that model I can tell that the market is pricing the stock based on two assumptions, a 4.64% discount rate and a 2% growth rate. This is a very conservative approach, but using that approach the stock is fairly valued.
I think a 4% growth rate is probable (as AlexB91 assumes), and at a 4.64% discount rate (the 10 year bond rate), then the equity (market cap) is worth $1,312,717,000.
I think the real value in this business is in its supply side advantages and in its high likelihood of future revenue growth.
I think a growth rate of 4% a year (of higher) is reasonable for a few reasons:
1. Leases are for 30 years, they have that time to improve efficiency, operations, pricing efficiency, etc.
2. CPI escalators alone will provide protection against inflation (at least 2%).
3. “Lease renewals and replacements in the past twelve months have exhibited a weighted average step-up in total revenue of approximately 20%.”
– Sky Harbour Q2 2024 Press Release
4. They are the only player in the market right now, they have no competition and high barriers to entry. See AlexB91’s comment on that above.
5. Market growth. There will be more billionaires over the next decade. As AlexB91 points out, there are more private planes being sold. As for the airside land: God (or man) isn’t making any more of it.
Preconditions I will keep an eye on:
1. If they hit a free cash flow of $55M in 2028.
2. Whether they achieve an annual pricing growth of approximately 4%.
3. Watch their market share, look out for competitors in the space.
4. Interest rate on the debt.
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