SKYH - Sky Harbour Update: Proven Traction In Private Aviation Niche

2023-12-12 18:35:30 ET

Summary

• Sky Harbour's share price has increased by over 150% since August, exceeding expectations.
• The company is building premium hangars for high-net-worth individuals and corporations, with strong financials and expansion opportunities.
• Sky Harbour is fully funded for 12 development projects and plans to execute 50 projects in the future, with high occupancy rates and increasing lease prices.

Investment Thesis Update

I wrote about Sky Harbour ( SKYH ) back in August, and it has exceeded even my best expectations, with the share price booming 150%+ since. As expected, financials have begun to show the firm's traction and ability to command strong prices per square foot and occupancy rates in spite of struggles in other areas of commercial real estate . Private jet hangars are decidedly not the same as office buildings.

SKYH is building premium hangars for Ultra-High Net Worth individuals and corporations, less affected by recessionary pressures, in executive airports that have limited space. I am hanging on to my holdings for the long-term as SKYH delivers on its forecasts, and expansion of opportunities in the future. While the shares are trading at the firm's initial valuation projection , an increase in expected margins and strong financing activities should continue to drive value for investors well into the future.

Progress Since August

Net cash flow is close to breakeven, and in the latest Earnings Call , the firm announced they will be profitable earlier than original expectations of late next year and should occur after the opening of their Phoenix and Denver locations. With the acquisition of RapidBuilt, the firm will have long-term cost advantages built in by manufacturing their own buildings, and the locations will have fewer employees than traditional FBOs by not offering services like fuel, deicing and other capabilities, instead outsourcing those tasks to the providers already on the airport.

The largest risk is the firm’s ability to continue to secure long-term leases in highly competitive locations, but they continue to make progress in this area as well and recently announced a new ground lease at Chicago Executive Airport and have many more in the pipeline to announce later this year and early 2024.

Current Projects

Sky Harbour is fully funded for 12 development projects, but intends to execute on 50 projects in the coming years, with CEO Tal Keinan stating: “the strength of our borrowing program and the potential to achieve investment grade bond ratings in 2025 will support increased leverage and lower debt cost. This will help offset the recent increase in overall market interest rates, and the expected lower NOI yields of these fields in the future will still allow us to continue to yield 30% plus levered project pre-tax ROEs.”

Of completed hangars thus far, Sky Harbour has achieved 72% occupancy rates, but all are expected to be fully leased soon according to the CFO on the latest earnings call . The firm is also experimenting with semi-private hangars that could push occupancy rates over 100%, citing the ability to “stack” aircraft, but still maintain privacy by renting to only 2 or 3 tenants in a space.

Plus, as leases are beginning to expire, they are seeing prices grow much faster than built-in CPI expectations: “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.”

On the latest earnings calls, the CFO also highlights growth in earnings with fuel commissions: “With our two recently opened campuses in Nashville and Miami nearing full leasing, Q3 revenues reflect the step function increase in our rent to own fuel commission revenues… Looking ahead, we expect this step function revenue phenomenon to continue as we open new campuses and the next step is expected to occur in Q2 and Q3 of next year as Phoenix and Denver campuses open and tenant leases there start cash flowing.”

New Aircraft Sales Continue to Rise

New private aircraft sales will be a key metric to watch for Sky Harbour in the future, with premium, private hangar clientele more likely to want new or used. Numbers continue to be strong, with manufacturer backlogs and new aircraft sales dominating the over 30% growth in aircraft sales post-COVID. Risks to the model would be a massive change in the sales of new aircraft, major increases in construction costs, or failure to secure new lease locations.

This target market is also significantly different than the private jet market being chased by firms like Blade ( BLDE ) and Volato (SOAR), whose share prices have declined since SPACing – Sky Habour’s clients have a net worth of at least $150 million and private aircraft are more of a necessity for their safety and security on a continual basis than individuals who fly private occasionally or less than 200 hours a year. Sky Harbour is (potentially) renting to the Oprah’s and Kylie Jenner’s of the world , who even in a recession in 2024, will still need a place to keep their aircraft.

New Investors and Future Value

In a recent deal with Altai Capital and others, the firm has raised almost $60 million since the beginning of November alone, and is expected to access another $200 million in debt for development of 2.4 million square feet of hangars.

While dividends are already being discussed on the earnings call , it will likely be a while before investors see them, as the firm will be reinvesting in projects for the short-term.

My previous ultra-conservative target of $6.23 per share has been completely blown out of the water, but that doesn’t mean SKYH is overvalued at today’s $11.31 per share. That target was solely based on $99 million in NOI at an 8% capitalization rate. The original investor presentation used a 4.2% cap rate, which may indeed be reasonable, given the increase in premiums on renewals, growth in projects and their strong ability to raise capital for future projects. Investors are looking for good projects with good returns that don't involve traditional commercial real estate, and the only thing holding Sky Harbour back is the speed in which they can deliver.

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