Description

Despite being a Canadian-listed microcap, PKT is not unknown to the VIC community. In 2014, devo791 posted the idea which has since generated 100 comments. I suggest you read devo791’s post and the comments. PKT trades at 64% of a conservatively marked book value.

Parkit is a real estate investment management firm focused on parking facilities in the US and Canada. The company manages and has a 24% stake in a JV with the real estate group of Och-Ziff. The initial US$82.6mm JV portfolio was created in 2015 and consists of 6 assets, of which off-airport parking facilities represent more than half of the value. Unfortunately, things got complicated after that. In 2016, there was a proxy fight, the company terminated the CEO and new management was installed. The initial goal was to acquire US$500mm of assets over a 3-to-5 year period but given the turmoil, it’s not surprising that, to date, no additional assets have been acquired by the JV. The company notes in a recent filing:

“To date none of the opportunities reviewed have met the investment objectives of the Company or its joint venture partners. However, OP Holdings continues its efforts to source and assess potential new investment opportunities, and potential sale opportunities for the existing portfolio.”

I recognize this does not look like a “fat pitch.” Och-Ziff has had its challenges but the firm had positive asset flows in Q1 (https://www.bloomberg.com/news/articles/2018-05-02/och-ziff-has-first-inflows-in-two-years-as-shafir-plan-pays-off) and on the recent earnings call the company noted they are trying to grow the real estate business. Further, parking facilities (off-airport in particular) are challenged by the rise of ridesharing. Nonetheless, I believe the valuation is compelling.

It’s worth noting that Leonite Capital LLC has built a position representing over 15% of the outstanding shares. Per LinkedIn, the firm is a single family office.

Valuation

PKT has a stated book value of C$17.1bn or C$0.53 (US$0.41) per share. The balance sheet is dominated by the JV with Och-Ziff but also includes working capital, an interest in a loss-making off-airport parking facility (Fly-Away, servicing Nashville International), contingent consideration and a loan receivable. We have a few data points related to the JV valuation that suggest stated book is conservative. First, the company notes it has improved the JV portfolio yield by 0.3% despite poor recent performance at one asset -- the Canopy parking facility (servicing Denver International) was negatively impacted by roadwork which was recently completed in December 2017. Second, the assets were appraised in July 2017 as part of a debt financing, which by my math suggests a mark roughly 20% higher. It’s worth noting performance at Canopy deteriorated following the appraisal (the company noted a portfolio yield improvement above 1% around the time of the appraisal). Lastly, the company’s most recent filing claims cap rates have declined since the JV’s formation (8% cap rate). Therefore, stated book seems like a reasonably conservative approach to valuation.

This simple book value analysis ignores a few critical items. First, the company earns investment management economics on the JV. Second, the business has G&A overhead. Asset management fee income is running about C$200k per quarter before a step down to 40 bps from 50 bps on the 2-year anniversary. G&A is running around C$800k, which results in a cash burn of around $600k per year. If you then add the JV cash distributions, the company should be roughly break-even.

If the company is able to acquire assets through the JV at attractive valuations, the asset management business would generate incremental revenue to help cover fixed costs and improve cash flow. To the extent management can scale the business further, the investment management business could have significant value. However, it’s unclear if the company will be able to deploy incremental capital.

Interestingly, after a long period of inactivity, there may be some portfolio changes afoot. The most recent quarterly filing notes there is a “purchase and sale agreement for one of the smaller properties.” A successful sale at an attractive price would be a positive but would reduce fee income. Further, the company notes it has made “considerable progress identifying opportunities” in the traditional parking asset class as well as “opportunities that function and have similar dynamics to parking.”

Catalyst

Potential asset sales -- last filing notes there is a purchase and sale agreement for one property

Potential acquisitions -- company notes it has made “considerable progress identifying opportunities”