Description

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

Monthly Construction Reports

Link To Construction Reports On EMMA

2021 Investor Presentation

Q4 2023 Investor Presentation

Q1 2024 Investor Presentation

Q2 2024 Investor Presentation

Q2 2024 Earnings Release

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. 

1. “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: 

2. 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.

Catalyst

• Sky Harbour should become FCF positive within the next year.
• The superior unit economics of Sky Harbour's tier one airports will become more evident in the near future. 
• We expect Sky Harbour to continue signing additional ground leases at tier one airports.