Parkit Enterpise is a high growth real estate company trading at NAV with a start-up asset management business that is on the verge of raising its first fund, and which on its own will be worth multiples of the current share price when the first close is completed next month. PKT shares have 10-bagger upside over the next few years as the company executes on a 5-year plan that calls for average annual after-tax earnings of around $10 M ($0.35 per share) at the low-end of projections, with further upside driven by the raising of even larger follow-on funds in future years. This is definitely the only opportunity I’ve seen in my career to get essentially free equity in a start-up asset manager with very exciting prospects.

Parkit is an extremely compelling investment opportunity as it has the rare combination of:

• very strong downside protection as it trades at NAV with a high growth, high barrier to entry, moderately-levered (<40% LTV) property
• 10-bagger upside potential from building an asset light investment management business
• significant and frequent recent insider buying -- almost $700,000 worth spread across over 70 different purchases since last fall
• a strong management team
• multiple imminent catalysts on the horizon.

Shares trades as PKT on the TSX Venture exchange in Canada and PKTEF on OTC Markets in the US. Dollars amounts are in Canadian dollars unless otherwise specified.

Canopy Airport Parking

The company’s sole asset is Canopy Airport Parking, an off-airport parking lot in Denver, Colorado that they built with their partner, Propark America in 2010. The project has been a massive home run and the lot’s continued success has turned Parkit’s ~$1 million equity investment into a $12 million ownership stake over the last four years. There is a waterfall disclosed in the filings that lays out precisely how distributions are divided among Canopy’s owners, and from there you can calculate that PKT owns roughly 53% of the equity in this parking lot.

In conjunction with last year’s refinancing 3rd party appraisals were conducted (CBRE and C&W) that valued Canopy at $41 M ($38 M in USD) with a stabilized value of $47 M to be achieved by next year. Since then Canopy has performed exceptionally and its value has almost certainly appreciated. I have calculated the NAV of PKT’s stake in Canopy assuming a valuation of $43 M for Canopy ($40 M in USD), which yields a $13.7 M value to PKT, or $0.48 per share. This valuation works out to a 7.7% cap rate on 2014 NOI of $3.3 M and a 10.0% cap rate on 2015 stabilized NOI of $4.3 M. Parkit also has $0.04 per share in net cash at the corporate level, thus giving PKT a total NAV of $0.52 per share.

Revenues at Canopy have grown rapidly since the facility opened and continue growing at a 20%+ pace:
Q2 2014 +24%
Q1 2014 +27%
FY 2013 +21%
FY 2012 >+50%

This revenue growth has in turn driven even faster NOI / EBITDA growth due to the largely fixed cost structure inherent in operating a parking lot. The 20%+ revenue growth that they’ve maintained has been driven by a combination of 10%+ occupancy growth (the lot is under capacity still) and 10%+ average daily rate growth (less discounting, higher valet mix).

As of last quarter, Canopy is now running around $9.0 M in revenues, $3.0 M in NOI and $2.0 M in FCF. Another 20% revenue growth with 70% incremental margins would get Canopy up to $4.3 M in NOI and $3.3 M in FCF, which is in line with the NOI levels that management has previously stated Canopy would be able to achieve once stabilized. $3.3 M in FCF annually at Canopy translates into over $0.06 per share to PKT shareholders, which I think highlights the conservatism inherent in valuing this asset at only $0.48 per share.

Canopy has been very successful at Denver International Airport and continues to take market share for a number of reasons, including:

• They are priced at a substantial discount to on-airport parking. Open air/covered/valet parking at Canopy is $9/$15/$20 per day vs. $12/$23/$32 at DIA. It’s also often even more convenient to park at Canopy despite being off-airport as the shuttle service picks you up right at your vehicle whereas depending on where exactly you are parked at DIA you could have to walk over half a mile with your luggage.
• Priced comparably to other off-airport lots despite having an at least slightly better service (car side pickup, more frequent shuttles, etc)
• “World’s greenest parking facility” -- uses solar, geothermal, and wind power + CNG and biodiesel shuttle busses -- which makes travelers feel better about parking there vs the competition.
• Facility is only 4 years old so it benefits from looking cleaner and more modern than other lots.
• Managed by Propark, a top tier operator

When the company raises LP money for their first investment fund next month, the plan is to vend their interest in Canopy into the fund to more fully align the interests of the GP with the other limited partners. As a result I don’t want to dwell on Canopy too much as very shortly Parkit’s interest in this asset will be exchanged for an interest in a diversified portfolio of parking facilities. I did, however, want to provide enough detail to make clear how attractive the fundamentals at Canopy are, and as a result justify the conservatism of the NAV valuation that I’ve provided (which has already been further corroborated by 3rd party valuations provided by the top two commercial real estate brokerages as mentioned previously).

I would further note that the exact valuation at which Canopy will be vended in at is of course subject to negotiation with the prospective LP investors, and so it is possible that this facility will be sold at a modestly lower priced than what I have modelled to serve as an inducement for the investors. That said, any such discount is obviously a rounding error relative the massive valuation creation that will result when the first LP fund is raised concurrently and, furthermore, the valuation I have provided already allows the LPs room to reap significant upside from a purchase of Canopy (the fund would be buying at a 10.0% cap rate on stabilized NOI and ultimately would be sold at a 6.0% cap rate as part of a larger portfolio).

Asset Management

Parkit is in the process of raising an LP fund with their Canopy partner, Propark America. Propark is the 8th largest parking lot operator in the US and they also have ownership interests in 11 facilities, although Canopy is apparently by far the largest for them. Propark originally wanted to raise an investment fund in 2007 and they had secured JP Morgan as an equity investor, but those plans were ultimately done in by the economic crash and a fund was never formed. While Propark has a lot of experience with evaluating and optimizing parking assets, they are not really capital markets people, and so this time around they decided to partner with Parkit in the investment management business, who they already had a strong relationship with through Canopy.

The plan is to raise a total of around $150 M USD in equity for the first fund and use that to acquire $500 M USD in parking assets over the next three years. They have already identified a first close portfolio of $85 M USD that they are prepared to close on that consists of 7 different parking facilities, and they have secured commitments from non-recourse debt lenders at a 70% LTV. Furthermore, they have already contracted to purchase the first of these assets, Expresso in Oakland, which they expect to close on next month.

Parkit and Propark executives will co-manage the investment fund with the GP split 50/50 between the two. The fund will be focused on acquiring parking assets which they will then optimize and ultimately sell as part of a larger portfolio. Through a combination of asset optimization and cap rate compression they are targeting impressive 20-35% IRRs, net of fees. The model will generally have them buying facilities at a 7-8% cap rate, improving performance to get the asset up to a 10% cap rate, and then eventually selling them as part of a large diversified portfolio at a 6% cap rate. The parking industry in North America is large and extremely fragmented and Propark already has excellent off-market deal flow, which should provide the fund with a steady stream of undermanaged parking assets to acquire at attractive cap rates and optimize. The improvements that will be implemented post-acquisition will of course vary, but they are often simple technology/automation investments that mom-and-pop parking lot owners are unwilling to make as they’d rather just milk the asset for its cash flow.

The exact fee structure will of course be subject to negotiation but they are targeting 2% management fees, 0.5% net acquisition fees, and a 20% carry that escalates alongside investor returns up to 35% at the highest tier. Importantly they are not seeing any pushback from investors on their proposed fee structure.

While the value of the asset management platform will ultimately depend on the amount of LP money that is raised and the returns that they generate on their investments, the upside from current levels is staggering. Consider that management has projected $50 to 85 M in pre-tax profits in 5 years from incentive fees and gains on their LP interest. When you add to that the recurring management fees, earnings from their LP investment, and subtract out around $1 million in corporate expenses and 25% for taxes you’re left with average annual earnings of $10 M over the next 5 years, and that’s at the low end of the $50 - 85 M range. Under that scenario the average annual earnings work out to $0.35 per share, which is not bad for a $0.51 stock! If the market values the company at 20x these average annual after-tax earnings, the company will be valued at $200 M. Spread that across 39.2 M shares (to account for warrant and option exercises) and you get a value of $5.00 per share, which is 10-bagger upside from current levels.

It of course goes without saying that if the first fund is even moderately successful they will begin raising a 2nd fund three years from now that is probably double the size of this first fund.

You could haircut even the low-end of management’s projections quite a lot and still get to a value that is multiples of the current share price. When the fund is finally formed next month to buy Expresso I think investors are going to start doing this sort of math and figure out how outrageously undervalued PKT is.

From my discussions with management it appears that there is substantial investor interest in the fund, including from several larger entities that could arguably handle the entire equity raise on their own. I’ve also been able to independently verify some of this interest so I believe that management is being genuine on this matter. As a result I am very confident in management’s ability to raise the LP money for the first fund, which is really the key value driver here, and why I feel very confident that Parkit is worth many multiples of the current share price.

Heavy Insider Buying

In advance of the transformational launch of the asset management business the entire management team has not surprisingly been purchasing shares extremely aggressively on the open market. Since last fall, the top three execs have purchased almost $700,000 of PKT stock in over 70 different transactions. The CEO in particular has been buying every single month, including as recently as a few weeks ago at $0.47.

Catalysts

The fund will be formed and raise its first capital next month to close on Expresso which will demonstrate to investors that the asset management business is real and growing.

Closing on the entire first close portfolio will happen likely not too long after this.

An aggressive investor relations campaign in both Canada and the US is apparently planned for once they raise the initial LP money. The company has stayed very under-the-radar to date so I think this should be a fairly meaningful catalyst for the stock.

Continued strong performance from Canopy.

The fund will be formed and raise its first capital next month to close on Expresso which will demonstrate to investors that the asset management business is real and growing.

Closing on the entire first close portfolio will happen likely not too long after this.

An aggressive investor relations campaign in both Canada and the US is apparently planned for once they raise the initial LP money. The company has stayed very under-the-radar to date so I think this should be a fairly meaningful catalyst for the stock.

Continued strong performance from Canopy.