The SPAC boom of the 2020-2022 era flooded the market with a ton of early stage businesses, and to put it mildly, many of them didn't work out well for investors. However, these blank check companies also brought some solid businesses to the market, and one that I've invested in is aviation infrastructure company Sky Harbour (SKYH 1.44%).
Sky Harbour's business consists of constructing and operating hangar campuses for the private aviation industry at airports throughout the United States. The business is starting to generate serious revenue from its initial campuses and has several more under construction and various stages of development. At a share price not too much higher than its initial valuation, Sky Harbour could be a smart stock to get on your radar now.
NYSE: SKYH
Key Data Points
Great growth progress
Sky Harbour currently has four airport campuses operational, including:
- Sugar Land Regional Airport (Houston)
- Nashville International Airport
- Miami Opa-Locka Executive Airport
- Mineta International Airport (San Jose)
These campuses allowed the company to generate about $11 million in revenue over the past four quarters. While this sounds small for a $785 million company, and it is, there are a few things to know.
There are currently campuses in development at nine additional airports, including three New York-area airports. Management recently announced the 14th airport campus, Salt Lake City International Airport. When all of Sky Harbour's campuses currently in development are completed, the company expects a portfolio of 2.4 million square feet.
Sky Harbour doesn't expect to stop there, aiming to build out a portfolio of about fifty airports in the not-too-distant future. In fact, by the end of 2025, the company aims to announce at least eight additional ground leases, which would bring the number of announced projects to 22.
In short, don't put too much emphasis on the current revenue number. It reflects just a small fraction of the company's active development pipeline. It certainly shows that there is demand for the product, but it doesn't reflect the earning potential of the company's invested capital yet. In fact, management believes that the 14 projects currently operating or in development will produce more than $120 million in annual revenue when completed, and that's not included any yet-to-be-announced projects.
Fantastic economics and a big opportunity
One important thing for investors to understand is the unique and fantastic economics of the private hangar business. It isn't well understood because, frankly, there aren't any other publicly traded developers of private aviation campuses.
For one thing, although revenue is low (for now), the business is already approaching profitability. In fact, management expects to produce positive operating cash flow beginning in fall 2025 as more of its campuses come online.
Sky Harbour expects unlevered 14% yields from its first 20 locations, which would become a 35% return on project equity when taking debt into account. Plus, management sees several adjacent revenue streams it could capitalize on as its real estate gets built out, including fuel, insurance, aircraft brokerage, maintenance, and more.
Another key differentiator is that because its projects are considered to be public infrastructure, it can take advantage of raising capital through tax-exempt municipal bonds. These have very low rates relative to most conventional borrowing options, and also have long terms, so Sky Harbour has no worries about near-term debt maturities whatsoever.
An under-the-radar stock, but for how long?
The opportunity here could be massive. Even 50 airports could be a conservative target from a long-term perspective. Hangar space is scarce at many business aviation hubs, and demand is growing much faster than new supply.
Sky Harbour is still an early-stage business as far as the numbers are concerned. But this is a company pursuing a massive untapped opportunity that has tremendous profit potential, and it could be worth a closer look before more on Wall Street start to take notice.
