Magazine

Wall Street Wants a Lot in Parking

Tom Lombardi Jr.

Investors cannot buy parking lots on stock exchanges. Traders do not swap synthetic options on parking management contracts. Commodity dealers normally refrain from extrapolating the intrinsic value from a straddled swap in a collateralized default obligation on parking spaces. Get the idea? The parking industry remains unscathed from the complexities and perils inherent of public securities markets.
As the parking industry’s older brother, commercial real estate continues to be sliced, diced, packaged and synthesized into complex investment securities, parking companies operate much like they did when the concrete was laid decades ago – a time when life was much more simple.
“Mr. Buffett, Line 1”
So why is this relevant? With all the confusing forces in the stock market and the near illiquidity of various debt markets, why is Wall Street after the parking industry?
Warren Buffett recently released his widely read letter to the shareholders of Berkshire Hathaway. In addition to the presentation of undeniably superior investment returns, Mr. Buffett reminds investors of his simple acquisition criteria that have become the hallmark of his unmatched success. He looks for large companies with economies of scale, consistent earnings, solid returns, low debt levels, and a business concept that he can understand. Most, if not all of those investment characteristics exist throughout the parking industry today.
Holy Grail
Parking management companies are an attractive investment for institutional capital, namely private equity firms, due to the consistent cash-flow stream, economies of scale, market fragmentation and opportunities for growth. Management contracts are based mainly on a cost-plus basis where operators collect a fee above all parking expenses.
As long as the contracts are retained by the existing operator (more than 90% retention for Standard Parking, for example), these contracts provide visibility of future earnings – the holy grail of private equity investments. The sheer size of a large parking operator can increase operating margins substantially by recognizing economies of scale in the back-office, information systems, regional marketing and staffing expenses.
Standard Parking’s ratio of G&A expenses to gross profit decreased by more than 20% over the past seven years by means of acquisition growth and operational synergies. Private equity firms commonly purchase a “platform company” and “roll-up” additional facilities to recognize these value-added savings. Market fragmentation – the existence of many competitors in a particular industry – is alive and well in the world of parking due to the localized nature, specialization of services and large number of facility operators.
According to Standard Parking’s most recent investor presentation, the top three operators – Central, Standard and Ampco – represent only 16% of the entire U.S. parking management industry. Growth and value are usually two different camps in the investment community, but parking investors can have their cake and eat it, too.
The consistent cash flow recognized today will only become more predictable as the technology of information systems, revenue controls, and consolidating management contracts develop in the United States. Both the equipment and hardware, along with the know-how to manage this new frontier of operations, will provide growth opportunities never seen before in the parking “space.”
Cash is King
Most business-to-business companies do not receive cash payment for services until the customer receives payment from the end-user. This causes a shortage of funding sources to pay for near-term expenses. As an example, when an automobile manufacturer sells a car, it sends the car to the dealership that sends the title to the bank that collects payment from the consumer. The manufacturer does not receive cash until the consumer gets the loan, the bank pays the dealer, and the dealer pays the manufacturer.
Parking management companies found a way to collect the cash from the consumer, pay themselves a fee, and then provide the customer (facility owner, in this case) with receipts. Cash collections provide for sufficient working capital to run the company on a day-to-day basis. Taking the trade accounts and credit risk out of a business model creates short-term liquidity and more simplified operations. At a time when lenders won’t lend, structure finance is unstructured, and bond insurers can’t even insure their own bonds, cash is truly king.
Finance 101
There are enough acronyms, buzz words and investment slang to make your head spin, so let’s try to simplify a couple of key concepts to understand the Wall Street lingo when the bankers come knocking. The most common type of private acquisition is the leveraged buyout, or “LBO,” which was conceived back in the 1980s during the coveted RJR Nabisco takeover. Such transactions involve a private investor raising debt capital to fund the purchase of a target investment. This method aims to maximize returns using low-cost debt to take majority control of a firm’s undervalued assets.
Central Parking, the nation’s largest parking operator, underwent an LBO last year from Kohlberg & Company, which acquired the parking operations, and Chrysalis Capital Partners with Lubert-Adler Partners, which is controlling the real estate assets. Investors use enterprise value, or “EV,” as a measure of a firm’s valuation. This includes the existing equity, a purchase premium and debt to be assumed at the transaction.
Central Parking sold for an EV of approximately $850 million, representing a 30% premium to the market price. Earnings before interest, taxes, depreciation and amortization, or “EBITDA,” is used as a measure of cash flow the operations generate. Those two terms put together create EV to EBITDA, the most widely referenced valuation measure of a potential investment.
After the Central Parking transaction, Standard Parking is the only “pure-play” publicly traded parking management company that trades at an EV to EBITDA of around 11 times or 11x. Central Parking sold for a similar amount in the LBO. Smaller transactions tend to change hands in the mid to high single-digit range due to the higher cost structure of their behemoth peers. With these general terms and the holy grail of value investing, you’ll be prepared to speak with any investment banker who sneaks into your office.
When asked why institutional capital is attracted to the parking industry, Emanuel Eads, CEO of Central Parking, stated at the 2007 NPA conference: “Well, it’s three simple words: earnings, cash, growth.” Those three items make the parking industry ripe for the picking as investors look to diversify away from volatile stocks and vulnerable bonds.
Consolidation in parking will continue to occur due to financial and technological resource constraints of under-capitalized companies and public entities as high-priced real estate requires technologically advanced systems to control revenue across a global client base. With the investment insights and financial lingo, you’ll be well equipped to meet and negotiate with Wall Street’s best. Just make sure to have enough Cherry Cokes on hand when Warren Buffett pays you a visit.

Tom Lombardi Jr. is an Associate at West Partners, a Carlsbad, CA, private investment firm. He can be reached at
tlombardi @westpartners.com.

Article Abstract from April, 2008




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