Description

Overview

SP Plus Corporation (“SP Plus”, “SP” or the “Company”) has historically been a leading provider of parking management, ground transportation and other ancillary services.

However, in the past three years, accelerated by the pandemic, SP has transitioned to a tech-enabled service provider with an asset-light business model, that has been consistently taking share from traditional and non-traditional competitors in a consolidating industry. The Company has successfully branched into adjacent verticals (aviation) and it has right-sized its management/lease contract base – some of this achieved through aggressive re-negotiations with landlords during COVID. 

The parking industry has historically been characterized by a handful of large, national players, a larger set of regional competitors, and then numerous mom and pop single location operators. With the rise of technology adoption in the industry over the past eight years, there are only a handful of players that have the scale to profitably invest in technology, SP being the best positioned amongst them. And with the pandemic shutting down operations (SP saw 45% decline in gross profit and had to amend their credit agreement as leverage spiked over 10.0x in the middle of 2020) many of the small competitors have been washed out. Which has allowed SP to aggressively take share in their core business from these former competitors.

The Company produces ~$60-80mm of FCF annually ($3.00-$4.00 per share) which it has been using to support its share repurchase program (the Company spent $49.3mm in 2022 to repurchase 1.5mm shares; and the Board authorized an additional $60.0mm buyback at year-end) and finance its tuck-in acquisitions to further bolster its technological offerings.

The Company is forecasting 2023E Adj. EBITDA of ~$130mm meaning that today the company trades for 10.0x EV/2023E EBITDA. With that the Company is forecasting to grow gross profit 11% this year and high-single digits annually through 2025, EBITDA is anticipated to grow in line with gross profit this year as the Company has stated they are investing in additional technology investments that will elevate OpEx in 2023, but would anticipate operating leverage increasing in 2024-2025.

Furthermore, the Company has only recently started introducing a software-only product offering (as opposed to traditional management of parking areas which required staffing and day-to-day management of facilities) that management projects to account for 10% of the Company’s gross profit by 2025. Assuming a 10.0x multiple on the core business and a 20.0x multiple on the software portion, combined with the continued repurchasing of shares I believe SP will be worth $75 per share by the end of 2025, that represents 85% upside from today and a ~30% IRR.

Company History

SP Plus began as Standard Parking in 1929 in Chicago. The Company listed on the Nasdaq in 2004. 

In 2012, SP completed the acquisition of Central Parking, a previously publicly traded parking company that was bought out by Kohlberg in 2008. The acquisition went very poorly for Kohlberg, as you could probably surmise from the timing. But a key distinction between SP and Central was that whereas SP had traditionally relied on management contracts (lower risk contracts where the provider is paid a flat spread over their costs), Central had relied on lease contracts (where providers lease the parking area from landowners for a fixed fee and then absorb all costs/profits).  Upon completion of the merger, SP had a substantially different footprint and risk profile than it had had previously.

SP management spent the next several years digesting the acquisition and churning through unprofitable leases (as well as getting embroiled in an indemnification fight with Kohlberg about unfunded CapEx liabilities). The business was losing locations each year until 2019, largely due to this known churn that they were working through. The Company had also began to expand its product offering by entering into ancillary services, specifically into ground transportation. The Company generally experienced stagnating revenue/gross profit (gross profit is the better metric to track the business because management contracts are recorded as net revenue with minimal costs associated, but lease contracts are recorded with gross revenue and have substantially more costs associated with them, so it is easier to just apples to apples compare the business on a gross profit basis) as increases in pricing or ancillary services were largely offset by location reduction.

At this point in its corporate history the Company provided parking management services (largely the collection of payments at a parking facility, maintenance and upkeep of facilities, security) as an outsourced provider for property owners. They themselves had very little exposure to property ownership prior to the Central merger. They competed against a number of regional and local players across the United States. While they were typically employed through management contracts, most contracts could be cancelled with 30 days notice. 

In December 2018, SP acquired its next major investment, Baggage Airline Guest Services, Inc. and Home Serv Delivery, LLC (collectively, “Bags”). Bags was a leading provider of baggage delivery, remote airline check in and other related services primarily to airline and hospitality clients. SP had been providing parking management and shuttle bus services to airports already. Bags had contracts with the seven largest commercial airlines, accounting for over 90% of annual air miles traveled, in the United States that allowed them to check-in bags for customers and print boarding passes from remote locations. This could be from a hotel front desk, a parking lot or any other convenient place that decongests Airport Check-in areas. 

The Company began reporting through two segments: Commercial (with verticals in hospitality, office, municipality, sports and health) and Aviation.

2019 was a banner year for the Company and the stock rallied from $30 in January 2019 to $43 by February 2020.

Business Overview

At the onset of COVID, SP Plus was the largest provider in the market place. From April 2020:

The industry obviously struggled during COVID. SP’s gross profit (pre-impairments) was down over 45%. But management took this opportunity to substantially improve the business. They cut over 200 leases (~1/3 of the portfolio) and took the momentary weakness of landlords to re-negotiate the leases as management contracts. They pulled over $20mm (~20%) out of G&A. And they managed that even when continuing to invest in technology. 

Gross profit in the LTM period (ending 6/30/23) has now eclipsed gross profit in 2019, which was the highest in the history of the Company. SP has achieved this despite the fact that the Aviation segment is still operating at levels below what it achieved in 2019. This is largely due to the continued strength of the core parking business. Starting in 2022, management became particularly bullish on the parking business. 

First, due to the all-time high ownership of cars. Second, the Company had struggled (particularly in New York, which is a core market for them) with the rise of the gig/sharing economy and the impact of ride sharing apps on parking volumes (the impact of this on SP was largely due to the fact that a disproportionate number of the leases SP acquired from Central were located in NY, the Company holds all the risk of volumes in lease contracts but has minimal exposure to volumes in management contracts). The reversal trends in the adoption of ridesharing and mass transit during social distancing because of COVID helped the Company. Thirdly, a number of their competitors went out of business, a quick search of PACER for chapter 11s with “Parking” in the Debtor name returns 12 companies since mid-2020, four of whom filed in the Southern District of New York. This last fact was also much of the inspiration for management’s belief that they did not need to continue looking to inorganically expand their parking business, they felt they could now easily take share. This has been borne out by the Companies continued expansion in locations.

Q2 2023 represented the ninth consecutive quarter where the Company had grown net location numbers, and their location retention rate which had hovered in the mid-80’s post the Central merger hit a record 94%.

The other thing helping to drive growth in the parking business for SP has been the increasing emphasis on technology.  Since COVID there has been a push for additional contact-free options for parking garages. SP has been developing “gated” and “gateless” technology that allows drivers to purchase parking/access to parking lots through their phone. 

SP’s technology solutions have obvious value propositions for drivers, property owners and SP itself. SP’s “gated” solution has been replacing antiquated toll booths. SP offers the hardware and software to customers at moderate or no cost, and makes it up through charging transaction fees on each customer. In contrast, competing parking equipment providers require a significant upfront investment to acquire gating technology, and also charge recurring maintenance and leasing fees.  SP’s “gateless” solution is pitched to property owners that currently offer free parking, SP then puts up signs at a few premium parking spots closest to the venue (often spots historically parked in by staff) and offers “text-to-pay” or QR codes to pay modest fees for the convenience of a premium parking space. The low-cost offering creates a revenue stream for property owners and also allows SP to charge transaction fees.

During Q1 2023 42% of new commercial location resulted from these “gated” and “gateless” solutions.

Traditional parking competitors did not have the scale of operations or margins to invest in technology in the manner that SP did, and few, if any, really looked to develop technology as SP did. There were a number of tech companies that started to tackle these business needs but they did not have the customer relationships or distribution networks and they quickly realized that the parking industry is so disparate and segmented that it would be cost prohibitive to employ a sales organization to achieve necessary scale. This has allowed SP to acquire three separate parking technology companies in the last 12 months that they have folded into their technology offering (SP Sphere).

The aviation segment has also seen substantial tailwinds. The acquired business, Bags, used to go to market with a sponsor model, basically they sold to the airlines this convenience that airlines could then extend to their customers as a value-add. They then went to airports, over run post-COVID by demand and congestion and offered them their remote check in capabilities, and while airports saw the merits there became an issue of who would pay for it. The Company then test-piloted a consumer-based model where the customer paid convenience fees for this service (initially called Curbside Concierge). 

This business has picked up and is now offered at 40 airports across the US.

All of these tailwinds combine to lead management to forecast double digit gross profit growth in 2023, and high-single digit gross profit growth for the foreseeable future.

Capital Allocation

The business is forecasted to produce $60-80mm of FCF annually. Management has stated that they are comfortable with the current leverage levels (2.00x – 3.00x) and have restarted their share repurchase program (the Company had been repurchasing shares in 2019, but had suspended the buyback in March 2020, the Board authorized a new $60mm buyback program effective Dec. 31, 2022).

Continuing to use ~$50mm annually of FCF allows the Company to continue to explore small tuck-in technology investments, while remaining debt neutral, and retiring 16% of outstanding shares by 2025.

Valuation

SP itself does not list a peer set in its proxy. However, Brightview (BV) listed SP as a peer. The following are outsourced service providers to property managers (although none are primarily in parking, a small portion of ABM’s business does compete with SP directly): 

SP has historically traded generally around 10.0x NTM EBITDA. However, it also historically targeted growth rates ~3% (and often failed to achieve that). Management is forecasting 11.0% growth in 2023 and high-single digits outwards. Let alone the introduction of the software-based business that is forecasted to account for 10% of gross profit by 2025.

Risks/Mitigants

Risk: Recent trends away from ride-sharing are transient and will start (have been) reversing.

Mitigant: The impact of ride-sharing on SP’s business was largely related to the inflated number of leased properties that the business had in the mid-2010’s related to the Central merger. SP’s locations with management contracts are not generally exposed to volumes. The business is now 87% management contracts, and the leases that remain are the most profitable from the merger.

Risk: Increased societal adoption of work from home trends will permanently step-function shift demand lower.

Mitigant: Similarly to the ride-sharing concern, SP revenue is not directly affected by volumes at their locations. However, obviously this is a concern for property owners. Management has commented that the impact of work from home on the parking industry has been significantly less than many would anticipate. Primarily because much of the lost traffic was in the form of monthly parking spots, which have historically been sold at large discounts to ensure higher utilization. In their place, SP has been working with their property owners to sell flexible parking packages (e.g. 10 daily parking spaces per week that are not tied to any particular vehicle) to Companies directly that can then apportion them out to employees.

Anecdotally, I have monthly parking in Manhattan that costs me $550 per month. The daily rate is $50 at my garage. Ignoring all other considerations (labor, insurance, security), the indifference point between monthly and daily given the above rates would be 2.75x daily parking purchases per week, which seems in line with the general 2-3 days in-office per week mandate that I have been hearing.

Risk: Rise of “aggregators” (e.g. SpotHero) will eat into traditional parking management providers share.

Mitigant: In the last decade there have been a number of technology companies that leverage publicly available data to aggregate open spots, prices, locations and create an offering where drivers can seamlessly leverage price discovery and convenience to change the way that consumers park.  SP has been thoughtful about the ways they have interacted with these aggregators. They created a revenue management team years before the pandemic that used the trove of data available to SP to test pilot dynamic pricing initiatives at a couple locations. This also informed the Company of when they should leverage the aggregators platform opportunistically and sell spots at a discount to capture the incremental revenue that they would have otherwise missed out on. Aggregators present far more of a risk to single location operators that have historically captured economic rents due to the paucity of information available to the average driver, rather than operators like SP that are often the largest provider in a market and have the scarce resource – a robust cross-sectional understanding of parking demand at all times in an urban location.

Risk: Long-term self-driving cars will present an existential threat to the parking industry.

Mitigant: Quite possible that this is true. However, I would point out that the Company will likely earn its current Market Cap in FCF over the next ten years, and if death is coming for parking I don’t foresee it happening in the next decade. Deloitte published an industry piece on parking at the end of 2018, it concluded: “As the future of mobility unfolds, the future of parking will likely be driven by those able to develop innovative solutions to manage demand, optimize supply, and better meet consumer needs with the support of digital technologies and processes…Real estate companies and management firms that operate parking facilities could look to maximize their competitive advantage by adding services to existing parking space. That could include electric-vehicle charging stations, enhanced security features, automated parking that uses sensors and lifts to place cars optimally and improve retrieval times, and vehicle servicing and maintenance—all of which provide opportunities for facilities to differentiate themselves and charge a premium.” I believe SP’s management decisions are completely consistent with this conclusion.

Catalyst

Strong Full-Year Earnings in 2023 Validate Management Guidance

Continued Share Repurchases