2024 | 2025 | ||||||
Price: | 8.50 | EPS | 0 | 0 | |||
Shares Out. (in M): | 70 | P/E | 0 | 0 | |||
Market Cap (in $M): | 591 | P/FCF | 0 | 0 | |||
Net Debt (in $M): | 13 | EBIT | 0 | 0 | |||
TEV (in $M): | 0 | TEV/EBIT | 0 | 0 |
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Sky Harbour Group (ticker: SKYH)
Summary
Sky Harbour is the first scaled builder of private jet hangars in the United States. Here is a summary of the main attributes we find compelling about Sky Harbour:
This is a fantastic business that is earning sustainable unlevered returns of 15%+ with the ability to raise rental rates faster than inflation over time (due to pricing power). These economics are unheard of in Class A real estate.
Demand for Sky Harbour’s hangars far outstrip supply and is driven by the top 1% of private jet owners who are price insensitive. This business has pricing power.
The supply/demand dynamic is highly favorable for Sky Harbour. There is a large shortage of private jet hangars, and the hangars that do exist typically do not accommodate the higher tail height of the latest private jets. This supply/demand imbalance will continue to become more constrained, benefiting Sky Harbour.
Hangar supply is constrained because no new airports are being built. Once Sky Harbour signs a ground lease at an airport, additional space is typically limited or unavailable for a potential future competitor to build hangars.
At today’s share price, we are paying nothing for future growth based on the value of the first fourteen airports at maturation.
Sky Harbour’s medium-term goal is to get to fifty airports. We believe this is conservative for various reasons and that the company’s growth runway is much longer than this. At fifty airports, the stock is worth at least $40 to $80.
The stock remains undiscovered and is undervalued due to several common misconceptions.
Business Description
Sky Harbour is a straightforward business. Founded in 2017 by Tal Keinan, Sky Harbour is the first scaled builder of luxury private jet hangars in the United States. They sign ground leases at key airports and then construct luxury private jet hangars which are leased to private jet owners. They currently have ground leases signed at fourteen airports across the United States.
This is a High-Quality Business
There is a massive supply/demand imbalance for private jet hangars: The number of private jets in the United States has been growing at a rapid pace, yet the amount of suitable hangar space to accommodate those jets is constrained because of limited land at airports. For example, in the New York metropolitan area, there are over three million square feet of private jets yet only one million square feet of private aircraft hangars.
Sky Harbour has pricing power: Their customers are the top 1% of private jet owners and are typically billionaires. These are the wealthiest private jet owners. They value privacy, quick time into the air, and they dislike dealing with the FBOs (fixed-based operators). They are price insensitive and want the very best. These conditions give Sky Harbour pricing power.
Their customers, many of whom are celebrities, are very happy with their Sky Harbour hangars: Sky Harbour already has several high-profile tenants including: Rick Ross, DJ Khaled, Lane Bess, Jeff Bezos, Netjets and Chevron. Rick Ross has posted quite a few pictures and videos of himself in his Sky Harbour hangar on Instagram. Additionally, Rick Ross recently filmed two music videos in his Sky Harbour hangar: "Champagne Moments" and “Shaq & Kobe”. We take this as confirmation that he is a happy Sky Harbour tenant. We personally know one Sky Harbour tenant (a prominent billionaire) and to say he is a happy tenant would be an understatement.
Sky Harbour is the first mover, and this provides a competitive advantage: Sky Harbour has no direct competition, which allows them to acquire ground leases at prime airports without interference. It typically takes five years to convince a municipality to give them a ground lease, so any competitor entering the industry today faces a five-year effort to secure a ground lease at an airport, followed by several more years to complete construction and leasing. By the time a viable competitor emerges, Sky Harbour will likely already be at fifty airports.
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. Sky Harbour is pursuing excellence in everything they do and building a brand. As time goes by this will make them increasingly tough to compete with.
Once Sky Harbour signs a ground lease at an airport, the value creation is effectively locked in: The majority of the airports that Sky Harbour operates in have limited to no additional space for hangars. This means that once Sky Harbour can convince a municipality to let them build hangars at an airport, it is unlikely that any future competitor (remember, they don’t yet have any direct competition) could compete with them at that airport. Due to these factors, our view is that the value creation occurs at the point they lock down a ground lease at a new airport.
Sky Harbour’s unit economics are fantastic: Sky Harbour is investing capital at approximately $300 per rentable square foot and earning $50+ per square foot in annual net operating income for a 15%+ unlevered return. This is among the best returns we have ever seen for Class A real estate.
Timeline
The table below shows select information on Sky Harbour’s first fourteen campus developments:
Here is how we see property level net operating income ramping as these first fourteen campuses come online:
Undervalued Based on First Fourteen Projects
Sky Harbour currently has signed ground leases at fourteen airports. Below you will find our valuation and free cash flow estimates for Sky Harbour based solely on their first fourteen projects:
Please see Appendix #2 for accompanying notes to this spreadsheet.
The key point that the above figures demonstrate is that, at the current share price, we are not paying anything for future growth.
Long Growth Runway
Sky Harbour currently has signed ground leases at fourteen airports. Their medium-term goal is to get to fifty airports. Here is what we expect Sky Harbour to look like once they have a presence at fifty airports and those projects are at full stabilization:
In the figures above, it should be clear that Sky Harbour’s stock has significant upside if they are able to achieve their medium-term goal of expanding to fifty airports. However, the figures above exclude several upside possibilities:
Growth beyond fifty airports in the United States and expansion to wealthy destinations such as oil-rich Middle Eastern countries, Europe, etc.
The above figures assume that annual net operating income per square foot stays flat for the next ten years (even though each tenant lease has rent escalators tied to CPI). We assume that they can raise annual rents a total of $7 to $15 per square foot over ten years which adds another $8.75 to $18.75 to per share fair value.
Free cash flow accumulation over the next ten years. We expect Sky Harbour to become profitable by mid-2025 and produce at least $600 million of free cash flow in total over the next ten years (adds another $6 to per share value).
Cash received for equity issuances and warrant exercises. We assume that they issue 33 million shares at just $10 which adds an additional $3.30 to per share value.
Sky Harbour is currently working on one to two dozen add-on ancillary services they can offer to their customers, including catering and aircraft detailing. Based on conversations with management, we believe this could add another $5 - $10 to annual per square foot income over time which adds an additional $6.25 to $12.50 in per share value.
If we add the items mentioned above to our base case of $46 per share, these upside possibilities bring our future fair value to $70 to $87 per share (10x the current share price). We believe this is a realistic outcome to be achieved within the next ten years.
Additional notes on the figures in the spreadsheet above: (i) They will be issuing shares over time to fund growth, which is why we use a higher share count. This includes shares from both warrant exercises and future secondary offerings. We wanted to account for future dilution to be conservative. (ii) We used a 6% cap rate in our base case. We believe this is a reasonable estimate. Even if one uses a higher cap rate (say 8%), the upside remains very substantial.
Once growth eventually slows down Sky Harbour intends to convert to a REIT and begin paying out large dividends.
Common Misperceptions And Reasons Why Sky Harbour Is Undervalued
The first six airports are not representative of the future and existing tenant leases are below market. Investors who look at Sky Harbour tend to extrapolate the economics of their initial airports. That is the wrong way to look at it because the airports they are signing are getting better over time. Not a single airport in their first six is tier one. In airports seven – fourteen, at least five are tier one. Annual rent for the initial tenant leases at San Jose (their first tier one airport) are over $80 per rentable square foot (source: Q1 2024 earnings press release). We expect annual net operating income per rentable square foot at their tier one airports to be over $50. Investors are looking at Sky Harbour based on the economics of the first six airports. That's wrong because it's not representative of the future. Here are a few recent statements from the management team highlighting this fact:
"If you can look back at the leasing slide that we just put up or just refer to it in the 10-K, you'll see that the rents that we're achieving, for example, in San Jose are approximately double what we're achieving at some of our other airports."
- Sky Harbour Q4 2023 Conference Call
"SJC [San Jose] tenant rents are reflective of Sky Harbour’s tier one target markets, with revenues from certain initial tenants exceeding $80 per rentable square foot."
- Sky Harbour Q1 2024 Press Release
We also believe that many of the existing tenant leases are below market. This is confirmed by our conversation with one of Sky Harbour’s tenants who told us that he believes many of Sky Harbour’s tenant leases are below market and by this comment from the management team:
"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
The growth runway is longer than people believe. Sky Harbour CEO Tal Keinan has said publicly that their medium-term goal is to reach fifty airports. The stock will be a home run if they achieve this goal. However, we think it may turn out to be conservative and they may be able to grow beyond fifty airports. One reason we believe this is conservative is because in the Q1 2024 conference call Tal mentioned that they are already in conversations with over one hundred airports. Sky Harbour has signed new ground leases at four airports so far in 2024, with their guidance anticipating four more by the end of the year.
The design flaws disclosed in late 2023 are one-time and have already been fully rectified. Investors are right to raise questions about this issue, but after thorough investigation, we have concluded this is a non-event and merely a one-time blip.
The stock doesn’t screen well because the company not yet profitable but that will change soon. Sky Harbour is not yet profitable because they have only opened three campuses. We expect Sky Harbour’s profitability to inflect soon as they open new campuses at which point investors will take more notice and the stock will begin to screen better.
Sky Harbour is not an FBO. FBOs are like hotels for aircraft and their number one revenue source is fuel sales. Sky Harbour is a home base for private jets and does not serve transient traffic. Sky Harbour does not compete with FBOs. The wealthiest private jet owners do not like FBOs because service levels are declining due to their ownership by private equity firms. At the top fifty airports in the country, the FBOs are out of space for additional private jets, and there are waiting lists.
Quality Management Team
We have known Sky Harbour’s CEO Tal Keinan for several years and are very impressed by him. Prior to founding Sky Harbour, Tal was a lieutenant colonel in the Israeli Air Force who piloted F-16 fighter jets. He then went to Harvard Business School. After graduating, he founded Clarity Capital, a successful private equity firm. Tal is an incredibly passionate and ambitious leader. He will run circles around any private equity firm that attempts to compete with Sky Harbour. Tal owns 17,943,792 shares of Sky Harbour, which aligns his interest well with outside shareholders.
Risks
Sky Harbour will need to raise a significant amount of capital to construct hangar campuses at fifty airports:
As it stands today, Sky Harbour is fully funded for the first ten campuses. However, over $2 billion in additional capital will be required to get to fifty airports. Our view is that with unit economics this compelling, there will be plenty of parties willing to fund Sky Harbour. Going forward, we expect them to use a combination of equity issuances, public activity bonds and free cash flow, to fund growth. A modest amount of share dilution will be necessary to achieve this growth, and we have included that dilution in our assumptions.
In September 2021, Sky Harbour issued $166 million of public activity bonds at a fixed rate of interest of 4% and 4.25% with an average remaining duration of 20 years. They intend to issue more of these bonds. However, we expect the interest rate to be higher on subsequent debt issuances. We also expect they will supplement this debt with equity offerings. Sky Harbour’s debt is currently transacting at just over a 5% yield. To us, this low yield indicates that the debt markets view Sky Harbour as a strong credit. This further supports our confidence that sky Harbour will continue to be able to raise capital at attractive rates.
In November 2023, Sky Harbour raised $57 million as part of a secondary offering from a group of prominent VC and private equity firms. This group of investors has deep pockets and has expressed interest in investing more in Sky Harbour. One of these investors is a tenant of Sky Harbour (former Palo Alto Networks CEO, Lane Bess).
The majority of Sky Harbour’s capital expenditures are discretionary. Therefore, if capital markets are not amicable to raising capital for a period of time, they can simply delay construction at new campuses. There is nothing in their ground leases that forces them to begin construction right away. However, if they do not begin construction by a certain point (typically five years after signing the ground lease) they will have to turn over the ground lease to the municipality.
With unit economics this compelling, we expect a competitive response at some point:
It has been an incredible advantage for Sky Harbour to be able to expand under the radar since its founding in 2017. At some point, a deep pocketed competitor will emerge. However, the following reasons make us less worried about this risk:
We do not believe any new entrant will have much luck competing head-to-head with Sky Harbour at the airports they are already operating in, given the limited availability of additional land. However, a new competitor could make it harder for Sky Harbour to obtain new ground leases.
Given the long lead time to obtain ground leases at an airport followed by construction and leasing – a new entrant will be at a big disadvantage to Sky Harbour, who will likely be at fifty airports before any potential competitor can get to scale.
As Sky Harbour continues to build a reputation, it will increasingly be a challenge for a new entrant to gain a foothold as potential tenants and airports will prefer to work with the proven incumbent.
This market opportunity is large enough for multiple players to do well in this space. We do not believe the emergence of a strong competitor will prevent Sky Harbour from continuing to grow.
Tal Keinan is extremely impressive and will run circles around any private equity firm that attempts to compete with them.
In December 2023, Sky Harbour disclosed that they discovered a design flaw at three airports costing $26 - $28 million to remediate:
We see this as just a one-time blip. Growing pains are hardly surprising given how recently Sky Harbour was founded and how quickly they are scaling. They addressed this issue quickly, and it is not something we are worried about. Sky Harbour is pursuing legal remedies against the firm that caused the design flaws which may result in them getting reimbursed for the remediation costs.
Appendix #1: Additional Information
Sky Harbour Investor Relations
Here is the prospectus for Sky Harbour's private activity bond issuance from 2021. It's a long document (530 pages!) and has an incredible amount of detail on the private jet hangar industry.
Tal Keinan wrote a book called God Is In The Crowd.
“The Sky Is The Limit” an interview with Tal Keinan from March 2024
Link To Construction Reports On EMMA
Sky Harbour Capital Private Aviation Hangar Campus Portfolio
Appendix #2: Notes To “Sky Harbour Valuation At Full Build Out and Stabilization of First Fourteen Projects”
We are providing notes to the spreadsheet above so that readers can understand all of our assumptions.
“The NOI From The First Fourteen Projects” is based on our property-by-property model for the first fourteen projects. The total annualized NOI in the following table matches the NOI used in our base case in the table titled, “Sky Harbour Valuation At Full Build Out and Stabilization of First Fourteen Projects”. In that table, our bear case assumes that NOI is 10% lower than our base case, and the bull case assumes that total NOI is 10% higher than our base case. Here is our full NOI model:
Spreadsheet detailing our assumptions for remaining construction costs and funding:
Appendix #3: Levered Returns
As discussed, Sky Harbour is earning highly attractive unlevered returns (yield on cost) of 14% to 18%. Below we detail their levered returns, which are extremely compelling at 50% to 70%.
Disclaimer
This has been prepared solely for informational purposes. Information herein is not intended to be complete, and such information is qualified in its entirety. This is not an offering or the solicitation of an offer to purchase an interest in any fund, and it is not an offer to buy or sell or a solicitation of an offer to buy or sell any security. Nothing herein should be construed as investment advice, an opinion regarding the appropriateness or suitability of any investment, on an investment recommendation. No representation is made that the objectives or goals of any investment or strategy will be met or that an investment or strategy will be profitable or will not incur losses. Past performance is no guarantee of future results. Reliable methods were used to obtain information for this presentation but the information herein cannot be guaranteed for accuracy or reliability; the information in this presentation may be out of date or inaccurate. The information contained in this summary is and may not be distributed without permission.
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32 | |
Thank you for your comments. I agree that the false accusations that I am a certain company insider were both odd and hilarious. However, I disagree with the rest of your points.
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31 | |
Thanks for posting, your identity shouldn't be that mysterious to anyone that has followed $SKYH on Twitter, so the accusations that you're a company officer were somewhat entertaining. Your assumptions seem optimistic, like assuming they can get debt a 5.5% now like their 2021 issuances, and their newer, smaller Vista loan is over 8%. Fortunately for them, the higher the stock price goes, the easier it will be to plug the funding holes. I think threading the needle on the funding they need to get to 50 airports, while also maintaining fantastic unit economics that seem like they should attract competition, will be much tougher than you present, but thanks for presenting a unique piece of research. | |
30 | |
Pat110,
Thank you for the kind comments. I appreciate it.
On August 15th Sky Harbour presented at the Sidoti conference. For anyone interested in Sky Harbour, this is well worth watching. Here is the link to the replay from Sky Harbour's presentation at the Sidoti Conference: https://tinyurl.
Thank you for your question regarding FBOs:
Sky Harbour is nothing like the FBO's. I do not see them as competitors. FBO's service the mass market (all of the transient traffic) whereas Sky Harbour is a home basing solution for billionaire private jet owners. FBOs are sorta like Toyota, who appeal to the mass market. Sky Harbour is like Ferrari who appeals to a very special niche in the ultra ultra high end. Toyota does not have interest in entering Ferrari's niche. And Ferrari would never dilute their brand by entering Toyota's nich. This is how I view Sky Harbour vs. the FBOs.
One of the commenters on VIC said "this is just a hanger complex". This is so wrong. I used to have this same misconception as well until I dug deeply and began talking to Sky Harbour's tenants. The amount of value one of these hangers adds to their billionaire tenants is immense.
One of Sky Harbour's tenants told me that he would keep his Sky Harbour hangar even if he sold his private jet because it offers so much value to him even when he is flying commercial. Tenants I have spoken to cite privacy, quick time into the air, protection for their aircraft and high touch service as additional reasons they lease a hangar from Sky Harbour. An FBO offers none of these advantages.
Someone else commented that, “All the money is in fuel sales.”. Again, this shows how much people misunderstand Sky Harbour's business model. Sky Harbour makes money on rental income (which is stable) whereas FBOs make money on fuel sales (which is cyclical because planes fly less during downturns). Additionally, Sky Harbour's quality of earnings is higher than the FBOs because maintenance capex is much lower.
One of the biggest problems that an owner of a private jet worries about is hangar rash (a fender bender for a private jet). As the FBOs continue to cut corners to save on costs, hangar rash is becoming increasingly common. The average cost of damage for hangar rash is $1m. That's right, $1m! Not only that, but it decreases the resale value of the plane by $5m. And, on top of it, the plane is out of service for a while while it gets fixed. In the meantime, the plane owner is spending their time arguing with the insurance company, FBO, etc. Hangar rash is awful for all involved. Sky Harbour tenants are protected from hangar rash at their home airport because the plane is secured in a hangar. Also, Sky Harbour tenants save at least $100,000 per year on insurance because the chance of hangar rash is so much lower than if they were at the FBOs.
Private jet owners I speak to do not like the FBOs. The FBOs are owned by private equity firms and service levels are declining as they focus on maximizing EBITDA. This dynamic benefits Sky Harbour. Sky Harbour is getting rave reviews from the tenants I have spoken to.
I have done extensive due diligence on the FBOs. One of the two largest FBOs is managed to a planned exit in 5 years. They are not staffing to peak traffic, in an effort to boost EBITDA. This is angering all of their customers. This benefits Sky Harbour. The other large FBO attempted to compete with Sky Harbour and recently scrapped those plans because it would have required them to pivot too far from what they do. Again, great news for Sky Harbour. | |
29 | |
Thank you. I sincerely appreciate the upvote and the positive feedback! | |
27 | |
I'm in the camp that this is more of a VC investment than a VIC investment. That being said, it was interesting enough to make me read the full writeup and comment section. Though I agree with some of the push-back, I loved the fact that the author had a compelling answer to each question or concern. The DD is clearly showing. This is just too expensive for me - I'm cheap. You easily received my upvote and I hope to read more of your work. | |
26 | |
Thank you. I really appreciate your support. I promise to continue doing my best to add value to this wonderful community! | |
24 | |
I am not trolling you. I'm not going to go into it but I am in this world; you spoke to a couple guys. Good luck. | |
23 | |
Holland1945:
Your comments: “They're tenants because Sky Harbour happens to have a hangar available at the right time. That's it, there's nothing special going on here. Bezos wasn't passing on other hangars and leaving his plane on the ramp because he was like, "Durrr, those other hangars aren't pimped out enough for me. I mean, have you even seen what it takes to impress my girl???" It's a box, end of story, there is no moat or durable competitive advantage. This is WeWork for planes, where the company enters into decades-long commitments while tenants have leases that last a year or two or three. I don't think you appreciate how just a handful of jet owners that move locations (these folks are mobile) can wreck the economics of Sky Harbour. Oh well, I don't own it, not my problem.”
I do not agree with any of this.
“They're tenants because Sky Harbour happens to have a hangar available at the right time.”
I have spoken to multiple Sky Harbour tenants, and I can tell you this is absolutely not true. I have discussed the reasons billionaires lease from Sky Harbour in my write-up. This comes from what I have actually been told by multiple tenants.
“Bezos wasn't passing on other hangars and leaving his plane on the ramp because he was like, "Durrr, those other hangars aren't pimped out enough for me. I mean, have you even seen what it takes to impress my girl???"”
Again, this is false. We reached out to Bezos through someone in our network who knows him well. Once again, you are incorrect in your assumptions.
“This is WeWork for planes”
This is beyond absurd and I get it that you are just trolling me. As a WeWork tenant, I understand their model. WeWork had some of the worst unit economics I have seen in real estate. On the other hand, Sky Harbour has the best. They are polar opposites. WeWork has short term tenant leases. Sky Harbour has long-term tenant leases. The comparison to WeWork is beyond laughable.
“I don't think you appreciate how just a handful of jet owners that move locations (these folks are mobile) can wreck the economics of Sky Harbour.”
I do not agree with this statement. What evidence do you have to support this statement? Sky Harbour has waiting lists at every single one of their completed projects. Furthermore, each time a tenant lease has come up for renewal, Sky Harbour has raised rates on average by 20%. This was discussed in the most recent conference call. | |
22 | |
liverpoolstocks:
Thank you! I sincerely appreciate it. I take my VIC membership seriously and I hope to be able to continue adding value to the community. | |
21 | |
nha855:
Your Comment: “My issue is that you assume a 15% NOI yield on build and a 6.5% cap rate. Both seem wrong to me. The company is NOI negative at present and I personally don't think you can apply a low cap rate to assets that sit on leased land. You also assume the ability to replicate these economics over many locations. When I look at the company, it seems more like a startup than anything else.”
Answer: I clearly pointed out in my write-up that Sky Harbour is currently cash flow negative. That is temporary. The company is NOI negative because they are just getting started and have only opened three campuses.
I don’t agree with you that just because they have ground leases that means they shouldn’t trade for a low cap rate. This is highly attractive real estate, and the ground leases are very favorable. The most expensive ground lease is at $1 PSF, and the average remaining duration is 55 years. The FBOs are also on leased land and trade for even higher multiples than I am valuing Sky Harbour at (despite being inferior businesses).
Not only am I confident that Sky Harbour can earn these unit economics going forward, I think the unit economics will get better as they target more tier one airports and they exercise their pricing power.
You question my NOI yield calculations and call it “fiction”. However, they are currently earning a mid-teens or better yield on cost. A simple look at the actual figures supports my conclusion. Let’s take a look at each location:
SGR:
OPA:
BNA:
SJC:
Those figures are for actual projects that are complete or mostly complete. Now let’s look at Sky Harbour’s forecast for all of their first fourteen projects:
Source: page 6 of Q2 2024 investor presentation.
This chart shows that Sky Harbour expects revenue from their first six projects to be approximately $125 million. On a per square foot basis this is $52 in annual revenue PSF. So far, Sky Harbour’s expectations have always been conservative. Every single completed airport has outperformed their initial expectations (this was noted on the last conference call as well). Of course, that doesn’t mean that this will continue to be the case, but it is a good indication that their assumptions are likely reasonable. I know Tal Keinan and he is the type that wants to under promise and over deliver.
$52 in PSF revenue equates to $45 PSF in NOI. $45 in NOI PSF divided by $300 PSF in build costs equals a 15% NOI yield.
The bottom line is, they are proving out these unit economics. Not only that, but the unit economics should improve going forward because their newer airports are better. At the tier one airports, both the build costs and the operating costs are similar, so these better airports will generate much higher yield on cost due to the higher rents that they are getting. In other words, when calculating yield on cost at the tier one airports, the numerator is much greater, but the denominator stays the same. Sky Harbour is demonstrating a mid-teens yield on cost at the projects they have already completed even though these are not tier one airports. I expect their yield on cost to improve going forward as they begin opening campuses at the tier one airports and begin earning revenue from the ancillary services. | |
20 | |
Got my upvote for the slightly speculative but interesting opportunity. | |
19 | |
"Why should we take the attractive economics from SJC and the attractive lease terms from Tier 3 airports and mash them together to forecast future project economics?"
This is completely misguided. The lease terms are not shorter on average or in any way worse at the tier one airports. In fact, the opposite is true. The terms of Sky Harbour's ground leases are extremely favorable to shareholders, and they are getting better as they do more tier one airports. It's almost hard to believe. Their most expensive ground lease is $1 PSF and they are leasing that space out to tenants at $15 - $80 PSF!
Again, the weighted average remaining ground lease term for their first 12 airports is 55 years. This comes from the Q2 2024 10Q. The ground lease lengths are actually getting longer as they move towards signing more tier one airports as indicated on the Q2 2024 earnings call. Here are the ground lease lengths for the tier one airports that have been disclosed so far (the terms of the additional tier one airports will be disclosed soon):
Chicago Executive Airport (“PWK”): 50 years San José Mineta International Airport (“SJC”): 20 years plus one five-year extension Dulles International Airport ("IAD"): 50 years plus one ten-year extension Stewart International Airport (“SWF”): 45 years (I believe there is a renewal option as well) | |
18 | |
They're tenants because Sky Harbour happens to have a hangar available at the right time. That's it, there's nothing special going on here. Bezos wasn't passing on other hangars and leaving his plane on the ramp because he was like, "Durrr, those other hangars aren't pimped out enough for me. I mean, have you even seen what it takes to impress my girl???" It's a box, end of story, there is no moat or durable competitive advantage. This is WeWork for planes, where the company enters into decades-long commitments while tenants have leases that last a year or two or three. I don't think you appreciate how just a handful of jet owners that move locations (these folks are mobile) can wreck the economics of Sky Harbour. Oh well, I don't own it, not my problem. | |
17 | |
Holland1945:
I appreciate your pushback, but I strongly disagree with all of your of points.
First, as I describe in my report, Sky Harbour is not an FBO. It is a very different business than an FBO.
“This is just a hangar complex.”
No, this is not “just a hangar complex”. In my write-up I describe why this business has a moat and durable competitive advantages. To describe it as “just a hangar complex” is very misguided.
Additionally, if this is just a normal hangar complex, then why are people of the caliber of Jeff Bezos and Lane Bess tenants? I have spoken to some of Sky Harbour’s tenants, which has helped me understand the value they offer their customers. These billionaires want privacy, quick time into the air, exceptional service and protection for their $70m aircraft. This is not “just a hangar complex”. The billionaire tenant I recently spoke to would laugh at this assertion.
Sky Harbour is a fantastic high moat business.
“All the money is in fuel sales.”
That is true of the FBOs, but again, Sky Harbour is not an FBO and has a superior model to the FBOs. FBO’s rely on fuel sales which are lumpy, whereas rent is consistent and predictable income. I much prefer Sky Harbour’s model. FBOs are cyclical because in a downturn people will travel less. Sky Harbour is not cyclical. Regardless of economic conditions, these planes need to be housed. Jeff Bezos is not going to stop paying his lease during a recession.
“The price insensitive large jet owners could (and do) build their own hangar with their own ground lease, which is not terribly difficult for aircraft management companies to do.”
I strongly disagree. It is much more complex to build your own hangar than you assume. I know because I have spoken to corporate jet owners who have tried to do this. I have also spoken to several airports. You need to negotiate a ground lease, obtain all sorts of complicated approvals, design, build the hangar, then manage it and find a fuel source. It’s not easy. Nor is dealing with airports straightforward at all. One of Sky Harbour’s billionaire tenants told me that he attempted to build his own hangar at an airport in Florida, and it would have cost him twice as much (compared to renting from Sky Harbour) and it was a massive headache. So he gave up and then leased from Sky Harbour. This particular tenant is the former CEO of a Fortune 500 company. If someone of this caliber says it’s not easy, that confirms it’s not a simple endeavor. The second wealthiest man in the world is leasing a Sky Harbour hangar as opposed to building his own. That says something.
“It's not surprising that you call out dumb celebrities trying to flex as being the primary advocates for Sky Harbour like this is a representative customer testimonial - this is far from the typical target jet owner who mostly just shows up to the airport with the plane ready to go after he's told his pilot or management company the details of his flight.”
I am not sure you understand who the typical Sky Harbour tenant is. Sky Harbour is for the top 1% of private jet owners, not your typical corporate jet customer. Their tenants include Lane Bess (former CEO of Palo Alto Networks) and Jeff Bezos. I am not sure which testimonial you are referring to; I am not aware of a single Sky Harbour tenant who is out there publicly advocating for Sky Harbour (but I hope that changes!). The videos and pictures that Rick Ross has posted do not even identify that his hangar is Sky Harbour (I pieced that together on my own) nor is Sky Harbour paying him to promote it. Tenants at Sky Harbour’s Nashville campus are all of the whos who of country music stars. Sky Harbour’s tenants include celebrities, billionaires and large corporations (like Chevron and Netjets). Again, Sky Harbour is not an FBO, and they are not targeting the typical corporate jet owner.
“I also think it's awfully risky to extrapolate the comments about a single airport (San Jose) to every other tier one airport they intend on building at. Btw, that $80/sqft was only from "certain" tenants...probably a random piston owner using no space.”
You are incorrect about San Jose. Furthermore, I did not just pick out their best lease and extrapolate it. Sky Harbour’s average rents at San Jose are $73 PSF (source: Q1 2024 conference call and press release). So, no, it’s not just a single lease at those high rates (as you imply). San Jose is currently signing tenant leases at great than $80 PSF (source: Q1 2024 earnings press release). To be conservative I am assuming significantly lower rent than this at the other tier one airports ($50 in PSF NOI implies rent PSF of around $57). As discussed in my write-up, I believe $50 in NOI PSF is realistic across their tier one airports. I am comfortable with this assumption and believe it will become evident in coming quarters.
“If the hangar business was so good, the big FBO's would be building a lot more of them.”
Once again, I disagree. I’ve talked to the FBOs. They are aware of Sky Harbour and recognize it’s a very good business. One of the two largest FBOs seriously looked at competing with Sky Harbour because they clearly recognized that the economics are really good but scrapped those plans because it is very tough to pivot from what they do. What Sky Harbour is doing is very different than the FBOs. It’s a completely different business model. | |
14 | |
Light62:
I applied a 5.5% - 6.5% cap rate in my analysis. This is very high-quality real estate so it should garner a cap rate on the lower end of the market range. As mentioned in my write-up, you can apply a much higher cap rate, and the investment is still a home run. Apply your own cap rate, but any sensible number yields a great outcome given that the unit economics are so compelling. Once Sky Harbour is at fifty or more airports and growth has slowed, I expect that Tal Keinan will eventually sell Sky Harbour at an attractive time when cap rates are low.
I will also point out that the most recent FBO buyout I saw (this was at an airport that Sky Harbour is also at) was at 22x EBITDA. Not only am I valuing Sky Harbour at a discount to this, but I view Sky Harbour to be a superior business to the FBOs. FBO’s are cyclical (Sky Harbour is not) and the FBOs have much higher maintenance capital expenditures.
I also disagree with your 13% IRR. You didn’t show your calculations so it’s hard for me to comment. In appendix #3 I demonstrate that they are earning a return on equity at the project level of 50%+. After deducting corporate level costs, I anticipate they will do better than a 40% ROE (at the parent level). A 13% IRR is not realistic at all and is far too low. They are earning returns far better than this.
And finally, you are questioning my fifty airport assumptions but aren’t providing the reasons why so it’s impossible for me to respond to that. I included plenty of strong supporting evidence to back up why I am confident that they can get to fifty airports. They have already added 4 new airports this year and their guidance calls for another 4 before the end of the year. Sky Harbour is well on their way. Furthermore, at today’s price we are not paying up for future growth so even if I am wrong about the growth runway, I will still have a good outcome on this investment. | |
13 | |
Light62:
You are incorrect about the lease terms. I am not sure where you are getting twenty years. Their first ground lease was 30 years long and their more recent ground leases are 60 years long (source: Q2 2024 conference call). Their average remaining ground lease is 55 years (source: Q2 2024 10Q). Their lease terms are far longer than what you stated and have extension options as well. Yes, you are right that airports could raise the rates when the ground leases are renewed, however this will not happen during my investable timeframe (this is 55 years away on average). I don’t spend too much time worrying about a potential risk that might occur in 2079. | |
11 | |
Light62:
Q: “Are you sure this disclosure is right? I do not hold a position with the issuer such as employment, directorship, or consultancy.”
A: My disclosure is correct. I am not sure what is making you question it. | |
10 | |
Ok. My mistake. I apologize for the snarky comment but remain of the view that this is more of a venture investment than a value one. | |
9 | |
No, I am not Alex Rozek and I have no affiliation with him in any way. | |
8 | |
I also wondered whether you were this person: | |
7 | |
My issue is that you assume a 15% NOI yield on build and a 6.5% cap rate. Both seem wrong to me. The company is NOI negative at present and I personally don't think you can apply a low cap rate to assets that sit on leased land. You also assume the ability to replicate these economics over many locations. When I look at the company, it seems more like a startup than anything else. | |
6 | |
nha855:
I am a fan of yours on VIC and have read all of your write-ups. I am quite disappointed by your comment. I have studied Sky Harbour for over 3 years and have done exhaustive work on this company and the industry. To completely dismiss my report without any reasoning is unfortunate. I would appreciate which data points or conclusions you have an issue with, and I would be happy to take the time to respond. All my assumptions and conclusions can be backed up with data and sources. I would appreciate it if you let me know why you have such an issue with my report, rather than bashing it with zero reasoning. Thank you. | |
5 | |
johny88:
Thank you for the thoughtful questions:
Q: “Where are all these private jets (=future customers) of SKYH currently? Parked in the open air? Or in other/worse hangars?”
A: They are primarily housed at FBOs. Typically out on the tarmac and sometimes in shared hangars.
Q: “What gives you confidence that they can actually fill up all their spaces and how fast? Is there any way to gauge this demand? (The CBRE feasibility study mentioned in the prospectus was commissioned by SKYH and therefore likely to agree with SKYH. What are other indicators?)”
A: Proof of the high demand is in the numbers. There are several indicators that demand is very robust:
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4 | |
I wonder if this is just another example of "more fiction is written in excel than in word" | |
2 | |
I've never understood this business model. This is just a hangar complex. All the money is in fuel sales. The price insensitive large jet owners could (and do) build their own hangar with their own ground lease, which is not terribly difficult for aircraft management companies to do. It's not surprising that you call out dumb celebrities trying to flex as being the primary advocates for Sky Harbour like this is a representative customer testimonial - this is far from the typical target jet owner who mostly just shows up to the airport with the plane ready to go after he's told his pilot or management company the details of his flight. On-site FBO's can always compete on price because they have fuel sales. Believe it or not, the vast majority of jet owners do actually care about costs. I also think it's awfully risky to extrapolate the comments about a single airport (San Jose) to every other tier one airport they intend on building at. Btw, that $80/sqft was only from "certain" tenants...probably a random piston owner using no space. If the hangar business was so good, the big FBO's would be building a lot more of them. |
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