As Americans flock to airports this Thanksgiving weekend, they may notice a lot of crowds — and, perhaps, construction. If they look beyond their travel plans, they may even spy an investment opportunity, according to Nuveen. The Transportation Security Administration is expecting one of the busiest Thanksgiving travel periods on record for the nation’s airports. It has projected it will screen 18.3 million people from Tuesday, Nov. 26, to Monday, Dec. 2. That is keeping pace with the increase in air travel demand in recent years. The TSA said passenger volumes reached record highs this year, rising 17% since 2022. Yet there hasn’t been a new commercial airport built in 50 years, according to Nuveen. That means upgrading airports by expanding terminals, as well as adding more runways, towers and gates, said Daniel Close, the firm’s head of municipals. The issuance of municipal bonds can help finance the work within the terminals, he said. Munis are favored by wealthy investors since the income earned is free from federal taxes and, if the bond is issued in the investors’ home state, free of state taxes. “Your terminals are now an Amex Lounge, a Chase Sapphire Lounge and all the different kinds of lounges, and it’s retail, and it’s a lot better restaurants and amenities,” Close said. “So as travel increases, a lot of what’s being financed is these amenities and lounges and better restrooms.” FAARX YTD mountain Nuveen All-American Municipal Bond Fund year to date Airports have issued about $18.2 billion in revenue bonds this year through October 2024, a 25% increase over 2023, he noted. Close expects issuance to remain elevated over the next few years. “Anytime you have this type of supply, it just cheapens the market a bit,” Close said. “Certainly with the projects and the funding that’s supposed to come online in ’25, we think that this sector will stay cheap for a bit, and I think that that’s a good entry point.” On top of that, airport revenue munis are subjected to the alternative minimum tax (AMT). The Tax Cuts and Jobs Act increased the AMT exemption amounts, and as a result not many people are paying the tax. However, several TCJA provisions — including the AMT — are set to sunset at the end of 2025. A Republican sweep of the House, Senate and White House means there is a greater probability the provisions will be renewed. That is good news for investors because they grab up extra yield by not paying the AMT, he explained. “Investors are picking up anywhere from 30 to 50 basis points by buying bonds that have AMT preference,” he said. Most airports are considered investment grade, with ratings in the A- to AA- range, Close said. They generally have a lot of cash on hand, plus a well-defined user base and revenue streams, he noted. However, many have leverage, which brings the ratings down from a higher investment-grade rating like AAA. While investors can buy the bonds when they are newly issued through their brokerage firm, most get exposure through muni bond mutual funds, he noted. What Nuveen looks for There are a number of airport revenue bonds within Nuveen’s muni funds. When choosing assets, the firm looks for strong demographics, such as airports in a growing area, Close said. He also likes airline carrier diversity at the airport and the ability to have debt service coverage. In addition, the airports should have significant liquidity and enough reserves to manage operational disruptions, as well as future plans for capital expenditures. Bonds from airports such as LaGuardia and John F. Kennedy International in New York, as well Dallas Fort Worth International are in its All-American Municipal Bond Fund . “For those that have capital plans that are going to continue on, I think it’s cheap,” Close said. “If you have the patience to buy it, hold it, close your eyes for a bit, those types that are issued new issue will begin to richen up once their issuance cycle is done,” he added.
