Description

Yellowstone Acquisition Corp (YSAC) is a SPAC sponsored by Boston Omaha Corp (BOMN). Last week they announced their acquisition target, Sky Harbour, LLC, a relatively new business that builds “super premium” hangers for private jets. YSAC distinguished itself by being, perhaps, the only SPAC ever not to include any sales/EBITDA projections. That's right, no rosy 20x 2025 EBITDA valuation projections to make us feel all warm and fuzzy inside. This is not surprising given what BOMN CEO's have writen in their annual letter: "You are more likely to see your co-CEOs wearing the maillot jaune in the Tour de France than to catch us making quarterly or annual earnings forecasts."  However admirable this decision may have been, it caused the market to take a massive yawn on the deal sending the warrants down to an absurd price. I’ve looked at many SPAC deals and this has—by far--- the largest disconnect between the warrant price and the business quality and potential of the acquisition target.

YSAC Warrants (YSACW) currently trade at 87 cents. This pricing neighborhood for SPACs with announced or completed deals seems to be reserved for some of the worst of the worst. A busted SPAC like DOMA ($7.51) has warrants trading at $1.07 and even ATIP whose stock price has cratered to  $4.38 has warrants trading at the same price as YSAC! Or how about Lionheart Acquisition Corp (LCAPW) whose warrants are 84.5 cents. Not familiar with Lionheart Acquisition? Here’s Matt Levine’s take on this joke of a SPAC (or more accurately SPAC of a joke?):

Man, I don’t know what is going on here, but it’s too weird not to tell you about it. On Monday, a special purpose acquisition company called Lionheart Acquisition Corp. II announced a merger with a company called MSP Recovery LLC, a company “specializing in Medicare Secondary Payer recovery rights and the recovery of improperly paid Medicaid.” Basically someone gets in a car accident, they go to the hospital, Medicare pays their hospital bills, MSP hunts down the auto insurer of the person who hit them, it sues the auto insurer, the auto insurer settles, and MSP pays part of the settlement to its lawyers, gives part to the Medicare provider, and keeps part for itself. That sort of thing. This is more fully explained in the MSP/Lionheart investor presentation.

Here is a Bloomberg News article that captures much of the flavor of the deal. Let me select a few numbers from the article to give you a sense:

If the deal is completed, it will go down as one of the most unusual SPAC transactions yet. Aside from the disparate backgrounds of its principals, the company forecasts zero revenue this year, there are none of the traditional co-investors participating and three of Lionheart’s directors have resigned in recent months. And at a $32.6 billion valuation, it’s the second-biggest proposed SPAC transaction after Grab Holdings’ $40 billion merger scheduled for later this year.

Okay so the key numbers there are “zero revenue” and “at a $32.6 billion valuation, it’s the second-biggest proposed SPAC transaction.” You don’t see a lot of companies with zero revenue and a $32.6 billion valuation. But, you know, fine, some companies have zero revenue and enormous opportunities; maybe it is not that strange for a company with no revenue to raise billions of dollars at an enormous valuation.

YSAC’s warrant pricing is all the more egregious when you consider that Boston Omaha is also providing a $45 million backstop which essentially eliminates the risk that the deal won’t go through. By pricing the YSAC warrants at 87 cents, the market is basically saying that Boston Omaha made a terrible deal that will incinerate value. I don’t think that is the case at all. Here's why:

First of all, this is a huge swing for Boston Omaha. They invested $7.4 million at the inception of the SPAC (warrants), will make a $55 million equity investment in Sky Harbour prior to the closing of the deal, and as I mentioned, also committed another $45 million to backstop the deal in case SPAC redemptions drop the trust value below the $150 million closing condition. Assuming that comes into play, Boston Omaha will invest $107.4 million into Sky Harbour. This equates to 23% of their book value and is 77% of their current cash hoard even after they just did a secondary offering to raise $66 million in April. (I have to assume that this raise was done to fund the Sky Harbour deal.) They aren't quite betting the company, but a miss on Sky Harbour would undo ~5 years of success including a 10 bagger investment in Dream Finders Homes (DFH). When smart, successful people make big bets, it doesn't mean they are right, but you need to take a close look.

It should be noted that one of the CEOs of Boston Omaha is Alex Rozek who is Warren Buffett’s great nephew. The Buffett ethos of “Rule No.1: Never lose money. Rule No.2: Never forget rule No.1” is alive and well in Boston Omaha’s culture.  Note below from the 2020 annual letter:

“As your co-CEO’s, we have a considerable portion of our net worth invested in Boston Omaha, as do many friends and family members. Therefore, we are happy to trade a lower return on equity capital for increased certainty of surviving whatever the world throws at us. That doesn’t mean that we will not make mistakes and misjudge the risk of an investment. That is inevitable. What we mean is philosophically our intent is to focus just as much on risk as returns.”

I have to assume Boston Omaha sees some margin of safety in Sky Harbour. This is too big of a bet for Sky Harbour to be the low probability lottery ticket that the warrant pricing implies.

As I mentioned, we don’t have projections nor a lot of information about the business economics to fall back on, but it doesn’t take a lot of work to see that Sky Harbour is a really interesting business with huge potential.

In a nutshell, Sky Harbour leases vacant land owned by airports and spends capital to build high end hangers for private jets. The hangers have all the trimmings including high gloss flooring, humidity controls, electric car charging ports as well as private suites for jet owners with office space, laundry and a kitchen. The advantages are many including privacy, shorter time to wheels up (your plane isn't blocked by other planes), and no damage from your plane bumping up against other planes (hanger rash). Nobody from the company has put this in writing yet, but I think they are also selling exclusivity (usually a great business!) For all this, Sky Harbour charges a premium price. Here is the CEO from a recent interview:

“We’re a premium product, we do charge much more than an FBO would charge for hangar space,” acknowledged Keinan. “I don’t think it is the right solution for everybody and it's not something I would even recommend to every aircraft owner, but there are certain profiles of aircraft owner for whom this makes a lot of sense.” He added, “I think there are a lot of benefits to driving straight into your hangar, park the car, load baggage, load passengers, push out, and go.”

There is a pretty large TAM here. Private jets are a growth industry and aircraft deliveries exceed retirements annually. Perhaps more importantly, the newest generation of ultra-large jets have a tail height which makes them too large to fit in much of the existing hanger facilities.  In summary: the richest people, buying the largest, most expensive jets are going to need a new generation of hangers to store their planes. It just so happens, that those are the type of people who will gladly pay a premium for the convenience and exclusivity that Sky Harbour provides.

It doesn’t take a big leap to think airports would love to take some of their vacant land and let Sky Harbour develop it and turn it into a revenue generating asset. And it also doesn’t take a big leap to think that some of America’s billionaires and corporations will be happy to pay a big premium for the convenience that Sky Harbour will provide.

Two months ago Sky Harbour went live at their first airport, Houston's Sugar Land Regional Airport. They are in the process of building out four more cities (Nashville, Miami, Denver and Phoenix) and plan to build out 50 airfields over time. They expect to be able to build out 20 sites with the capital from the SPAC transaction as well as a $80 million debt offering.  As I mentioned, we don't have the information to make any type of financial model, but we can read the following tea leaves:

1.     Houston was Sky Harbour’s prototype.

2.     1 Year ago (and 10 months before opening) Houston's available hangers were already half leased per a post on Linkedin

3.     Houston went well enough that Sky Harbour decided to start building at four more airports

4.     Boston Omaha got a good look at Houston and the progress at Nashville, Miami, Denver and Phoenix and decided to make Sky Harbour their single largest investment ever

Again, if you believe that there are smart people involved here and that they are acting rationally, everything suggests that this is a busines that is working and could grow very quickly. Adding to the growth story is the fact that this is a very replicable model. Also from the CEO:

“One of the advantages of this prototype design is the permitting process is typically quicker than a from-scratch design,” said Keinan, noting that the metal structures are built from company-designed components that are mass-produced and assembled in the field. “The fastest these things can go up is eight months, I’d love to say the slowest is 12 months. We’re kind of banking on a middle of the road 10-months build.” That would slate the opening of the two new hangar complexes in Summer 2021.

And here is what Boston Omaha wrote in their press release (emphasis mine)

“Boston Omaha’s largest business interests align behind building American infrastructure. We are attracted to the exceedingly high barriers to entry for additional, valuable hangar supply at key airports, all while being financed in an advantaged low-cost way. We believe Tal has built a best-in-class financial and operational team, creating considerable strategic value in the time we have known them. The team has refined a competitive business model that can scale and we are excited to partner with Sky Harbour,” said Adam Peterson and Alex Rozek, cochairmen of Boston Omaha.

It is clear to me that with the new capital, Sky Harbour is planning a blitzkrieg to build out as many hangers, as fast as they can. They plan to lock up the land and put up their hangers before any competitors wake up.  And it seems what is underlying this blitzkrieg strategy is a replicable model where the hangers can be built quickly and with attractive unit economics. The only shred of financial information in the deck was a great nugget: Development costs are $200 per square foot and annual target rent is $28 per square foot, targeting a NOI yield of 12%. It is clear to me that at maturity, this business could be a cash flow machine.

Finally, let’s not forget what company owns the largest fleet of private jets in the world. That would be NetJets, a Berkshire Hathaway subsidiary.  The CEOs of Boston Omaha likely got all the insights they needed through their close connection to Berkshire and NetJets. I think they have a big information advantage through their NetJets connection and that is what gave them confidence to make the big bet.

In conclusion, YSAC warrants are priced like Sky Harbour will be one of the worst SPAC investments of 2021. Yet all evidence suggests that risk averse, long term oriented investors are making a big bet in an area squarely in their circle of competence and where they have a significant informational advantage. Further, Sky Harbour appears to have a replicable business model with a large TAM, high margins, and huge cash generation potential at maturity.

Catalyst

Release of financials, Boston Omaha discussing why they did the deal, development and leasing at more airfields.