Earnings call: Sky Harbour reports growth and expansion plans

In the latest earnings call, Sky Harbour Capital (ticker: SH) revealed a strong performance with significant revenue growth, driven by the opening of its San Jose campus and high occupancy rates across its existing facilities. CFO Francisco Gonzalez expressed confidence in the company's financial trajectory, with plans to achieve breakeven on a consolidated basis by next year. Sky Harbour is expanding its airport portfolio and expects to raise additional funds through a second PIPE closing, aiming for investment-grade ratings for its bonds.

Key Takeaways

• Sky Harbour is on track with campus developments in Dallas, Denver, and Phoenix, expecting to drive revenue growth.
• The company reported $110 million in cash and Treasuries as of September 30.
• A second PIPE investment is expected to raise an additional $37.6 million.
• Sky Harbour is working towards an investment-grade rating for its bonds and aims to raise $150 million in additional debt.
• The company has completed the Sky Harbour 37 prototype and is focusing on process management and in-sourcing.
• Marty Kretchman has been appointed as Senior Vice President of Airports to improve tenant satisfaction.
• The company is more than halfway through raising equity for its $1.2 billion goal for the first 20 sites.
• Sky Harbour’s strategy now includes semi-private hangars, which have increased occupancy and revenue.

Company Outlook

• Sky Harbour plans to expand its portfolio to 23 airports by the end of 2025.
• The company anticipates beginning interest payments on bond debt in 2025, with several projects completing around the same time.
• There is a focus on enhancing the resident experience for aircraft owners and other aviation professionals.

Bearish Highlights

• Operating expenses rose due to higher ground lease payments and noncash recognition of lease expenses.
• The impact of post-COVID inflation has led to increased construction costs, particularly for the OPF Phase 2 project in Miami.

Bullish Highlights

• The San Jose campus opening in Q2 has significantly increased revenues.
• Development projects remain on schedule, with 14 fields under construction or completion in 2025.
• Sky Harbour is pursuing investment-grade ratings for its bonds, projecting improved debt service coverage.

Misses

• The company has not adjusted its revenue projections based on current pricing trends, preferring to wait for more data.

Q&A Highlights

• Discussions regarding lease pricing and competition from Signature Aviation in New York clarified that the companies operate in distinct market segments.
• Demand for hangar space in Miami remains strong, with a waiting list double the current capacity.
• Sky Harbour aims to charge an 80%-100% premium over baseline rents, which they have often achieved.

Sky Harbour Capital continues to capitalize on market opportunities, with a strategic focus on expanding its airport portfolio and optimizing revenue. The company maintains a prudent approach to capital formation and operational efficiency while enhancing its offerings to the business aviation community. The outlook for the company remains optimistic as it navigates the challenges of post-COVID inflation and competition within the aviation sector.

InvestingPro Insights

Sky Harbour Capital's (SKYH) recent earnings call paints a picture of robust growth and strategic expansion, which is further supported by data from InvestingPro. The company's impressive revenue growth of 177.73% over the last twelve months aligns with management's confidence in their financial trajectory. This growth is particularly noteworthy given the company's relatively small revenue base of $10.76 million, highlighting the significant potential for expansion as new campuses come online.

InvestingPro Tips reveal that analysts anticipate sales growth in the current year, which corroborates Sky Harbour's own projections and expansion plans. The company's liquid assets exceeding short-term obligations is a positive sign, especially as they pursue ambitious development projects across multiple airports.

However, investors should note that Sky Harbour is not currently profitable, with an operating income margin of -169.53% over the last twelve months. This aligns with the company's statement about aiming to achieve breakeven on a consolidated basis by next year. The stock's high revenue valuation multiple and Price/Book ratio of 14.05 suggest that investors are pricing in significant future growth expectations.

For those interested in a deeper analysis, InvestingPro offers 7 additional tips for Sky Harbour Capital, providing a more comprehensive view of the company's financial health and market position.

Full transcript - Sky Harbour Group Corp (SKYH) Q3 2024:

Operator: Good afternoon. My name is Sarah, and I'll be your conference operator today. At this time, I would like to welcome everyone to Sky Harbour 2024 Third Quarter Earnings Call and Webinar. [Operator Instructions] Mr. Francisco Gonzalez, you may begin your conference.

Francisco Gonzalez: Thank you, Sarah. I'm Francisco Gonzalez, CFO of Sky Harbour. Hello, and welcome to the 2024 Third Quarter Investor Conference Call and Webcast for the Sky Harbour Group Corporation. We have also invited our bondholder investors in our parent subsidiary Sky Harbour Capital to join and participate on this call as well. Before we begin, I've been asked by counsel to note that on today's call the company will address certain factors that may impact this and next year's earnings. Some of the information that will be discussed today contains forward-looking statements. These statements are based on management assumptions which may or may not become true, and you should refer to the language on Slides 1 and 2 of this presentation as well as our SEC filings for a description of the factors that may cause actual results to differ from our forward-looking statements. All forward-looking statements are made as of today, and we assume no obligation to update any such statements. So now let's get started. The team with us this afternoon you may know from prior webcasts: our CEO and Chairman of the Board, Tal Keinan; our COO, Will Whitesell; our Chief Accounting Officer, Mike Schmitt; our Treasurer, Tim Herr; and a recent addition to our team, Marty Kretchman, our Head of Airports. We have a few slides that we want to review with you before we open it to questions. These were filed with the SEC an hour ago in the Form 8-K, along with our 10-Q, and they will also be available in our website in a few hours. We also filed our Sky Harbour Capital obligated group financials with MSRP/EMMA. As the operator stated, you may submit written questions during the webcast using the Q4 platform, and we'll address them shortly after our prepared remarks. Let's get started, next slide. In the third quarter, on a consolidated basis, assets under construction and completed construction continue to accelerate as we continue to advance towards completion of the 3 campuses in Dallas, Denver and Phoenix, and Will will update on those and other projects shortly. The revenues experienced an increased step-function given the San Jose campus that began on Q2, but also the optimization of our 3 other campuses. Even if we don't open any new campuses, we expect revenues to continue to grow as we exceed 100% occupancy, achieve higher rental rates on renewals and enter into other types of arrangements that allow us to take advantage and monetize the various assets, including our airport. The operating expenses in Q3 increased mainly from 2 factors. First, as we discussed in the last quarter, the ground lease payments in San Jose are significantly higher than our typical greenfield projects. It's because, in essence, that ground lease includes the payment for the fact that we control and took over a [indiscernible] hangar, a large hangar apron and related parking and because of these existing facilities is being amortized through the ground lease as part of our operating expenses. Second, and very importantly, and Mike will be covering a bit on this, as we sign more ground leases, we end up starting to recognize operating expenses ahead of any actual cash payments on those ground leases, and Mike will go into more detail on that. And obviously, as we sign more ground leases, the impact of that becomes bigger and bigger in our results. Lastly, on SG&A, we continue to work to maintain our SG&A as flat as possible. And as we scale, that will drive the operating cash flow and profitability on a consolidated basis. And as you can see here, we continue to move to parity in terms of our cash flow from operations, and we reiterate our guidance that we expect to be at breakeven at this time next year, on the back of the opening of our 3 campuses and the leasing of those in the spring and summer of next year. Next (LON:NXT) slide. Sky Harbour Capital, which is, again, the obligated group where we have all our campuses right now, except San Jose. San Jose is not here because it was not financed with bond proceeds. Obviously, we have the same movement in construction and constructed assets, given that everything that we're constructing and will be completing in the next year or so are obligated group [indiscernible], but continue to show, as I mentioned earlier, incremental revenues as we optimize. When a lease comes for renewal and the renewal rate is 20%, 30% or 40% higher, you're going to continue seeing interesting revenues, even though we are at or higher than 100% occupancy. And then -- and it's good to show that the operating results are positive and operating cash flow continues to move north at Sky Harbour Capital. On the back of next year, this will be sufficient to obviously pay debt service on our bonds and, as we scale, produce positive cash flows that will support, again, looking to get breakeven on a consolidated basis. On the next slide, I'll pass it on to Mike to go deeper into this noncash impact that we are experiencing, to do a deeper dive on our ground leases and also the noncash expenses. Mike?

Michael Schmitt: Thank you, Francisco. I'd like to take this opportunity to provide additional context, as Francisco said, regarding the differences between our actual cash payments on operating leases and the reported expense. This slide includes a visualization of the cash payments and reported expense of a ground lease within our portfolio. Beginning with our ground lease at Addison, all of our ground leases for greenfield developments generally defer cash rent payments until the completion of construction. Our ground leases at each of our airport development sites are accounted for as operating leases under U.S. GAAP, which requires us to begin recognizing and reporting expense on a straight-line basis upon execution, even though we may not be making cash payments for years under the terms of the ground lease, as easily demonstrated by the graph on this slide. As Francisco indicated, the noncash portion of our ground lease expense is quite significant in terms of our overall operating expenses. It amounts to approximately $1.3 million and $3.3 million for the 3- and 9-month periods presented here. This represents 36% of our reported operating expense for both of the periods presented. Next slide, please. Moving on, we also believe it is important to illustrate other significant noncash components of our reported net loss for the 3 and 9 months ended September 30, 2024. For both of the periods presented, the most significant component of our reported net loss was the noncash expense recognized associated with the changes in fair value of our outstanding warrants. For the 3 months ended September 30, 2024, this noncash expense accounted for approximately $16 million, or 77% of our total reported net loss. As a reminder, these warrants are liability classified and are required to be marked to market each reporting period. This slide also illustrates our depreciation expense, which is noncash and amounted to $0.6 million and $1.9 million for the quarter and year, respectively. A key part of our ongoing employee compensation strategy is the inclusion of stock-based compensation. This noncash expense associated with our equity compensation programs is reported as a component of selling, general and administrative expenses and totaled $0.9 million and $3.0 million for the 3 and 9 months ended September 30. Lastly, we have the noncash lease expense, which we discussed on our previous slide. And when adjusted for these noncash items, our reported net loss for the 3 and 9 months ended September 30, 2024, was approximately $1.9 million and $5.6 million, respectively. With that, I'll pass it on to Tal.

Tal Keinan: Thank you, Mike. So viewers are accustomed to seeing this slide from previous earnings calls. So we continue to ramp up. As you can see, we're -- just to remind people, what this slide represents is land under lease, under binding lease, with Sky Harbour, multiplied by square footage of hangar that is going to fit on that land, multiplied by the Sky Harbour equivalent rent, which is what aircraft owners are currently paying on a per square foot basis for a hangar at that specific airport. And it's, in our view, a conservative estimate of what the revenue capture is from the current portfolio that's under lease. And as I've explained in previous earnings calls, we have significantly exceeded the Sky Harbour equivalent rent on every single campus that we have so far, which is why we believe it's a conservative estimate. And if you're looking at the company from a valuation perspective, I believe this is the place to start. Figure out how much revenue is available and then discount that for various risk factors that you want to apply, like construction risk, lease-up risk, operating risk, that sort of thing. That's how we look at it. The last airfield we announced was Salt Lake City in August. We revised our guidance up last quarter to an additional 9 airports by the end of 2025 -- sorry, additional 8 airports by the end of 2025, which would take us to a total of 22 airports in the portfolio by the end of 2025. And today, we are going to revise that estimate up again to 9 airports by the end of 2025, which would take us to a total of 23 airports by the end of 2025. With that, let me hand it over to Will to talk about development.

Will Whitesell: Thanks, Tal. On this slide, top portion, we have DVT Phase 1, APA and ADS. As we issued guidance in the first quarter, these 3 projects remain on schedule. Both ADS and APA remain on track, with actually DVT trending a little bit ahead of schedule prior to -- in relationship to our guidance in the first quarter. In regards to the $27 million budget for remediation, that also remains on track as we sit here today. The snapshot below the bar graph really represents a picture of our accelerated growth for 2025 and 2026. Last quarter, we previously had starts of 8 new fields. This quarter, we're announcing 9 starts. And in lieu of finishing 3 last quarter, we have finishing 5 in 2025. We've added 2 fields, both OPF Phase 2 and Addison Phase 2, as a targeted completion in fourth quarter 2025. So kind of in summary, we have 14 fields in some state of either completion or starting construction in 2025 and a total of 20 fields either starting or finishing in construction in 2026. With that, I'll turn it over to Tim, our Treasurer.

Tim Herr: Thanks, Will. Just a quick review of our current cash and investments. The bar chart on the left is our September 30 cash and Treasuries amounts. You'll notice that the $110 million is the combined Sky Harbour Capital amount of about $85 million, and about the remainder $25 million is up at the holding company level. So that $85 million is dedicated to our fields at the obligated group. So that will be the fields that Will just touched on that are being completed in the next few months as well as the remaining phases at Opa-Locka and Centennial Airport in Denver. We also, on the right-hand side, have a pro forma balance sheet of cash and investments following the completion of the PIPE that we announced in October. We closed the first $37.6 million of that at the end of October, and we plan to execute the second closing of that PIPE, which will be an additional $37.6 million, that will be used to be the equity portion to fund the additional fields beyond the obligated group that Will also just mentioned in '25 and '26. Just one more note on our bond debt service on the right-hand side. We are approaching the end of our debt capitalization period in 2025. But with the completion of Addison, Centennial and Deer Valley in Phoenix in the next few months, we'll be leasing those up and have more than enough coverage to start our interest payments in 2025. Passing along to Francisco.

Francisco Gonzalez: Thank you, Tim. Just a quick comment on our existing outstanding 2022 [indiscernible]. First and foremost, at the appropriate time, seeking investment-grade ratings. We plan to begin that process soon and will be approaching rating agencies during the course of 2025. For us, it's not a question of -- we'll achieve investment-grade ratings. Obviously, on the back of the completion of our construction projects, as we derisk that aspect of the ratings, we have been achieving, as you have seen, rents significantly higher than what we projected at the time that we did the bond deal, which means that our debt service coverage penetration is going to be higher than what we projected at the time of the bond issuance. The market, on the right-hand side, seems to recognize this. This is the trading of our shortest bond and our longest bond over the past 1.5 years. As you can see, the significant appreciation of the bonds, or declining yields, on both of those maturities. Obviously, part of this has been a decline in rates in the past few months, overall market rates, but there's been a significant spread compression on our credit, and we believe there's still room to go as we approach investment-grade for this to come further down. Next slide. Which takes us to the comments on our capital formation and growth. As we have discussed in prior calls, we continue being opportunistic and being very prudent in our raising of equity and debt. We want to do these things always in advance of needing the funds and take the opportunities that the market provides us. So first, you may have seen that in our closing announcement a few weeks ago of the first closing of our PIPE that we were able to upsize that by about $6 million. These are, again, long-term investors that we have known who have either participated before, some were new long-term investors and so on, signing a lockup agreement. And by their nature, they are people who are looking to be with us for a long time. We are cautiously optimistic that in early December there will be the exercise of those -- expected exercise of those options that we granted those investors, for an additional $38 million, and that will be expected to close on December 20. And so that basically will complete this exercise on PIPE common shares. In terms of internally generated cash flow, as we said earlier, we expect that to be available at this time next year, and that will help us either provide capital for our growth, equity capital, or at some point lead us to make a decision on our dividend policy. But we have too many growth opportunities in front of us to be thinking about dividends at this point. On the ATM program, we have not sold any shares since our last disclosure on this subject. And we already spoke about the PIPE offering. We continue to think about a sidecar platform that will be used only for existing hangar opportunities or M&A opportunities. The greenfield projects, we obviously want to maintain and keep for our shareholders. Lastly, on the topic of the debt, as we mentioned in prior disclosures, we're aiming to raise about $150 million of additional tranches of debt. We are dual-tracking bank and bond solutions. We're still several months from implementing this, but we want to monitor markets and monitor both opportunities to seek what's most optimal for the company. And the critical balance here is one of balancing the cost of capital and our growth and be prudent and deliberate about how we raise the capital to fund our growth. With that, let me pass it on to Tal for the Q3 highlights.

Tal Keinan: Thanks, Francisco. So as people know, we like to think of the business in 4 discrete but, obviously, linked buckets. The first is site acquisition. I'm going to start with -- we only report binding site acquisition wins. And the nature of this process is such that progress is difficult to gauge until we've actually made an announcement. And we haven't been able to find a better way to keep the public appraised of our progress on site acquisition, which has been a bit of a frustration because it is the key value driver of the entire business. For the time being, we're sticking to our policy. We only announce site acquisition wins when they're done, binding, irreversible. So stay tuned for that. There's been quite a bit of progress in the last quarter. But again, it's not something that we really are able to measure in a way that can be shared publicly. What we can say is that we've had significant success in expansion on existing airports. And those who watch us closely perhaps saw the example of the acquisition of the Ramada hotel adjacent to Chicago Executive Airport, which we have been able to merge into the airport property and effectively not only expand the square footage, but significantly increase the efficiency of our site plan in Chicago. So those from our perspective are as good, if not better, than new airport wins, is the ability to expand accretive investment on an existing airport and make a site plan more efficient. So there's been quite a bit of that going on, on the site acquisition side. In development, as Will said, we've got 3 projects set for delivery between now and the end of the first quarter of 2025. Leasing has already commenced on those projects, and we hope to see the cash flows from those projects begin sometime in the first or second quarter of next year. We have another 2 projects slated for delivery in 2025. That's Miami Phase 2 and Dallas Phase 2. And as Will described, 11 new project phases now in development. The Sky Harbour 37 prototype design is complete. This is the hangar that you'll be seeing on all future airports. Of course, we're always going to be working to refine it, but it's the same hangar everywhere, which ties into the last bullet under development, is that RapidBuilt has now been fully and finally configured as a pure-play Sky Harbour production facility. That means the shop has been entirely retooled with equipment. The welding team has been retrained to stamp out exactly the same product day after day. And we plan to capture very significant cost efficiencies and quality gains through that vertical integration. On the leasing side, again, it's perhaps a bit of a frustration, but we're under NDA with our residents. What we can say is, number one, these are the most visible individuals and corporations in the country. We have definitely caught the attention of the most discerning aircraft owners that there are. This is the model of choice. And I think we can say that I think we've been kind of conservative up until now about making any claims about this, but we're in a position today where if there is a Sky Harbour location in your metro center, that's where you want to be. Even though it's much more expensive than any other basing solution, that's where you want to be as a jet owner. And I think that imprimatur from those specific residents has been very powerful. We don't share names. However, I think the industry is quite small, and that brand recognition has caught on and I think increasingly is. In addition, as Francisco said, we used to think in terms of percentage occupancy. I don't think in those terms at all anymore, because 100% is meaningless to us. We've blown through 100% everywhere and found ways to drive revenues significantly beyond any kind of a ceiling, as you can see in the release. Actual airport revenues are exceeding forecast revenues by a very substantial margin, not 10%. On the operations side, as Francisco alluded to earlier, we have our new airport fully up and running, cash flowing, functioning in a very, very satisfactory way. We're measuring our time to wheels up. We are the fastest time to wheels up at San Jose, as we are in all of our other airports, and that means a lot to us. It's also been a very good testing facility for some of the additional services that we've begun to roll out to residents. We have 3 additional fields in advanced staffing and equipping in anticipation of opening. That's Denver Centennial, Phoenix Deer Valley and Dallas Addison. Now let's look at the next 12 months on the next slide. Again, looking at the 4 pillars of the business, on the -- again, we are, as of this earnings report, revising our estimate of new sites from 8 to 9, which would put us at a total of 23 airports at the end of 2025. Please stay tuned for announcements as they come. Our focus today, again, as I've described on previous earnings calls, is the best airports in the country. Revenue per square foot is the highest-standard deviation metric in our business. If we're targeting yield on cost, the denominator of that formula is relatively static, varies within a relatively finite range. The numerator is where the action is, the numerator being revenue per square foot, and that is primarily a function of location. We are in the real estate business after all. So our focus is on the best airports in the country. Moving on to development. The theme for the next 12 months is handling this very dramatic scale-up, which, again, has accelerated at a faster pace than we anticipated, which, of course, we welcome and we aim to continue accelerating. It is a scaling challenge, and we're doing that while we continue working to reduce our per square foot cost, hopefully by a dramatic margin. We're doing that through prototyping. Again, as I noted, the Sky Harbour 37 prototype is done, fully processed and issued. Mass scale process management and in-sourcing. That's not just the vertical integration of RapidBuilt, but bringing a lot of the engineering and architecture functions that we can in house and spreading -- essentially, again, it is the same prototype, same hangar at every airport and printing those out across the country. And looking to realize economies of scale in other areas. We've made provisions for, for example, holding significant steel inventory. It's not like we're exactly going out and hedging in the open market, but really looking for every advantage that we can have. Right now, as far as I know, we're the largest hangar developer in the country, perhaps in the world, and there are real economies to be gained from that scale. On the leasing side, again, it's really -- we do feel that there is an established brand today. Again, this time last year, I would have said people in Nashville who know about Sky Harbour probably think about it as a local Nashville play. Same for Miami. Same for Houston. I think today in the business aviation community, Sky Harbour and home basing are absolutely known quantities. They're very sought after. We hope to enhance that, increase it, increase the recognition of it, but we feel that there is definitely a brand today. That's reinforced by the fact that, again, the top, the most sought-after aircraft owners in the country are Sky Harbour residents. We're increasingly looking to include flight departments, pilots, mechanics, schedulers and dispatchers, security teams into our leasing process. There are a lot of boxes that we tick for those particular players. It's not just for the aircraft owners. It allows -- if you provide the facilities and service to allow pilots, maintenance professionals, schedulers, dispatchers, security teams to work the way they want to work, the net result is a completely different and completely enhanced service for the aircraft owner that frankly can't really be matched as far as we can see by any other model. We're, for the time being, the only players here. So what's really shifting in the next 12 months is an increased focus on facilities and services, catering specifically to pilots, maintenance professionals, schedulers and dispatchers and security teams. And then lastly, operations. We are absolutely fanatically focused on the resident experience, allowing aircraft owners to maximize the utility of what's for anybody a very, very significant investment. And with that, we had a really wonderful opportunity to be able to attract Marty Kretchman to join our team as the Senior Vice President of Airports. It's very difficult to think of anybody, anybody on the planet, who's better suited to that role and to increasingly surprising our tenants, delighting our tenants in a way that we could not have anticipated 6 months ago, and I don't think our tenants could have. And that is an absolute fanatical focus of the company today. That expresses itself in a spotless safety record, a security offering that we don't think can be matched anywhere in aviation, efficiency that we're beginning to measure and share with our residents in time to wheels up and an increasing array of value-enhancing services and partnerships that, again, our focus is on deliver value that nobody else can deliver in aviation. With that, I think...

Francisco Gonzalez: With this, we conclude our prepared remarks, and we now look forward to your questions. Please submit your questions through the Q4 platform, and we'll answer them accordingly. Operator?

Operator: Your first question comes from [Cameron Giles]. Do you plan on contributing to Sky Harbour Capital again to help close the funding gap for the remaining construction? And when do you plan to raise the $300 million to $420 million equity portion of the $1.2 billion needed for the first 20 sites?

Francisco Gonzalez: Thank you, Cameron, for the 2 questions. Let me address the first -- them in order. Yes. So as you know, just as a refresher, we do project finance for our construction projects, which means that we put equity and we raise debt and we put a trustee dedicated to the projects that we look to put in place. And twice over the past 3.5 years, we had to go and inject additional equity into the construction fund to address what have been, my God, almost like generational inflation, construction inflation, given COVID, that everybody in the industry experienced and then some design corrections on our prototypes that we experienced. But we did not hesitate and immediately moved to plug those funding gaps whenever we realized that they existed. The good news is that we feel confident right now that the $87.3 million of cash that is currently at the trustee for these projects is more than sufficient to complete the projects that remain, which means the 3 that are opening in the Q1, the second phase at Opa-Locka in Miami that will start next year and then the second phase in Denver that will be coming up later. And obviously, this includes -- yes, that's the answer to that one. And second question, we are more or less halfway, more than halfway, in terms of our equity raises that we then pair with debt to complete the [20] airports. And it's important that now we talk about phases. Given the amount of real estate, of hangar real estate, at these campuses, we tend to do things in 2 phases, which means that -- and every dollar of equity that we raise, we pair that with about $2.30 of tax-exempt debt in terms of our capital formation. So again, answering your question, we're more than halfway through in terms of funding for our 20 airports, including both phases. Let me just take the opportunity to mention the following. Although we have some deadlines in our ground leases to start construction, we do have some flexibility on meeting those milestones. So in theory, we could tap dance a little bit here and wait until we have internally generated cash to be the equity contribution to some of these fields. The issue, though, is that we prefer and it's accretive to our shareholders to continue raising equity and pairing it with debt and accelerating those projects than waiting several years into the future to get the equity cash flows to fund those projects. And we have run the math on that many times. And again, the opportunities on these projects and to do them sooner outweigh the drawback of the dilution of additional equity issuances. Obviously, these are fact-specific, and we'll continue to be deliberate as we [indiscernible] funding and capital-raising decisions into the future.

Operator: Your next question is from [Shila Hendrickson]. How do you foresee the Trump administration's policies will affect your business?

Tal Keinan: Thanks, [Shila]. As you know, we view ourselves as relatively insensitive to the economic cycle. Once an airplane exists, once it's born, it's got to live somewhere. The fleet is only growing. It's not shrinking. The backlog at the OEMs is robust. And that's going to remain the case no matter who's running the country. At the margins, there are potentially some benefits here. I mean, again, it's very early to say, but there's a lot of speculation in the industry about reinstating bonus depreciation, 100% bonus depreciation, on aircraft, which is obviously a boon to the aircraft manufacturers and encourages people to cycle aircraft. That will precipitate growth in the fleet. We don't need growth in the fleet for the Sky Harbour model to succeed, but it's a welcomed tailwind. But in general, I'd say the answer to the question is we're, as a business, more or less agnostic to kind of the political environment.

Operator: Your next question comes from Peyton Skill. Can you talk about the shift to the semiprivate hangars versus original thesis of fully private? Has the company run into any scenarios where there is not enough demand for fully private?

Tal Keinan: Thanks for that, Peyton. The way we got into semiprivate originally was exactly that. It was in Nashville. And I wouldn't say exactly not enough demand, but Nashville has become in the last 2 or 3 years a large jet market. And we've captured a very significant, if not most, of the heavy business jets in Nashville as residents. But when we started leasing in Nashville, it was mainly a mid- and, to some extent, super mid-market. So that's Challengers, Falcons, aircraft like that, for whom it doesn't necessarily make sense to pay for 12,000 square feet of hangar space if you've only got 5,000 or 6,000 square feet of airplane. We understood that and, at some point, realized we're turning away a major part of the market and perhaps we can accommodate these aircraft owners and sat down and realized there's plenty of demand for people to come in with 1 or 2 other aircraft in the hangar with them as long as they have privacy in their office and their car parking. And that's how semiprivate was born. Very quickly, we realized we could exceed 100% occupancy in those hangars. There's a lot more fuel that gets consumed. So you're making more money on the fuel as well in those hangars. And frankly, it's a better model, on average, than fully private hangars. The reason we landed on the specific size and shape of the Sky Harbour 37 prototype is that that is the size and shape of hangar that can accommodate the most square footage of aircraft; meaning, the highest ratio of aircraft square footage to hangar square footage. So I can say that a Sky Harbour 37 can accommodate 70,000 feet of airplane comfortably. Like, we're never going to pack them in. This is never going to be a tight fit. That's not our business. You can comfortably house 70,000 feet of airplane in 37,000 feet of hangar. So to us, that's a real design breakthrough. The revenue density is obviously much higher on that. But it sounds from your question that, yes, you're implying something that is true, that some people do want total privacy. And look, some people have fleets of aircraft, corporations or individuals have fleets of aircraft, that require a full 37,000 square feet, and they'll take down the whole piece. But what we -- one of the features of the Sky Harbour 37 prototype design is that it's demisable. It's demisable with a regular acoustic wall that runs down the middle. The new NFPA 409, Group III fire code allows us to go up to 40,000 square feet of firewall space, contiguous firewall space; we're using 37,000 of those. But very easy to divide it. And by the way, very easily afterwards to undivide it if you want to go back to a more efficient semiprivate model. I will say that the semiprivate is really a breakthrough for Sky Harbour. The revenues go up so significantly when you can put more -- we'll give you kind of an example, is if you check out the revenue run rate at San Jose, which is a purely semiprivate situation. We didn't build that facility; we inherited it. One of the reasons that we're exceeding our projections by such a large margin is because it's all semiprivate.

Operator: Your next question is from Greg Gibas. How is visibility on pricing looking for the 3 new fields expected to commence operations in Q1 of 2025? And how do you expect them to compare to the existing weighted average?

Tal Keinan: So I would say on those fields, Denver, Phoenix and Dallas all compare nicely to Nashville and Miami, perhaps slightly more favorable than Nashville and Miami. We also -- maybe to combine this with the last question is we've made provisions for significant semiprivate occupancy. So although the per square foot rate for each aircraft might not change, the total revenue from the campus goes up quite significantly. So as you know, we don't actually begin leasing in earnest until a campus is up and running. We find that our pricing leverage is the highest when there's actual standing product that people can walk through and see. Also for those on the call who've been inside Sky Harbour hangars, it is a dramatic experience. It's not what you might expect if you're accustomed to housing your aircraft at an FBO, let's say. So we find that that's really the time to strike. I know some of the bondholders on the call, and they've been very patient with us in Miami and in Nashville and in Houston, allowing us to bear out that model, not prelease all of the space 6 or 12 months in advance, but really wait until we've got a product that's visible. I think that's what we're going to see in Denver, Phoenix and Dallas as well.

Operator: Your next question comes from Franklin Ross. What is the average weighted-average lease term on your hangar tenant leases?

Tal Keinan: Anybody have the average?

Tim Herr: This is Tim Herr. Our weighted-average lease term is 3.2 years, but that's a mix of tenant lease terms. Remember, our goal is a geographically diverse, tenant-diverse and lease term-diverse portfolio of contracted revenues, with CPI increases with generally a floor of 3% or 4%. And so we focus our lease terms to be staggered so that we can take advantage of those increases when the tenant leases come up. So on the shorter end, we do have some shorter leases, like a year, essentially, to get tenants in, get them -- hook them on our service and offering. So those, we do have a few of those. We do have a couple of longer-term leases. We have up to 10 years for kind of the strategic tenants who we want to keep on our campus long term. But again, kind of our sweet spot is 3 to 5 years, and that's where we end up in the average of a little bit over 3 years.

Tal Keinan: I would add -- this is Tal. I'll add to that kind of 2 important things to look at. One is staggering. We don't want too many leases to come to maturity in the same period. That's just a risk management policy on our standpoint. So we do try to stagger the leases across the campuses. And the second is, if you're the equity, you like the shorter-term leases. And I understand that the debt likes the longer-term leases. The equity should like the shorter-term leases. We're averaging a 20% markup between the first lease in a hangar and the second lease in a hangar, a 20% markup. Remember, this is on top of escalators, which are CPI with a floor of 3%, annual escalators of CPI with a floor of 3%. We're seeing 20% average markups between first term and second term. There are several cases more recently which are significantly higher than 20%. But like Tim said, I think it's a good policy to get people in the door on shorter-term leases, even if we compromise on revenue in the short term, because, again, people don't know what home basing is. Many people don't know what that is. But once you've experienced it, we're finding, in almost all cases, you never want to go back. This is the way you want to keep an aircraft, going forward, even understanding that your introductory pricing is not necessarily going to carry forward. And I think we've had a lot of luck with that strategy.

Operator: Your next question is from Jim Jones. I was wondering what Francisco thought about the equity value at Sky Harbour given his current ownership and if he would participate in the December offering.

Francisco Gonzalez: Thank you, Jim, for the question. I always welcome more ownership bonuses at the end of the year. So I'm glad that you're asking the question here in front of our CEO and founder. But to answer your question, the proxy statements understate my ownership in the company because I precede the equity offering and so on and so forth. And there are 3 employees, myself, the Treasurer and our former COO, that have a participation that's really not reflected in the RSUs that began being granted post the SPAC. And I have not sold any shares, and I've said publicly on many occasions I don't plan to sell any shares in the foreseeable future and so on and so forth. But I will refrain from giving thoughts about our valuation and so on. I'll leave that to research analysts and to the market in general and so on. And we always, at conferences, guide people in terms of what to focus on in terms of our valuation and so on. But again, on a personal basis, I'm actually longer the stock than people will see from the RSUs.

Operator: Your next question is from [Cameron Giles]. Have you made any progress on renegotiating the below-market DVT leases? And what is the current and targeted price per square foot?

Tal Keinan: Thanks, Cameron, for the question. So we don't put out a price per square foot. We're in active talks with prospective tenants. We don't have any leases to renegotiate. There's no -- we gave indicative pricing early on in the project, but I think the market understands that a lot has changed in Phoenix. It sounds like you follow that market. Scottsdale is completely full and busting at the seams and experiencing very significant delays and congestion due to the crowding there. There's significant migration, particularly in the semiconductor industry, northwest to the Deer Valley area. So what was true of that market 24 months ago is no longer true today, and I think the market understands that.

Operator: Your next question is from [Peter Schoen]. Does the expansion plan for West Hampton Airport with Signature Aviation represent a sign of new competition for hangar space or FBOs in the New York area?

Tal Keinan: Can you repeat that question? I don't think we got it.

Operator: Yes. Does the expansion plan for West Hampton Airport with Signature Aviation represent a sign of new competition for hangar space or FBOs in the New York area?"

Tal Keinan: Okay. Very good. I don't know if it's directly linked. I'd say a couple of things. Number one, Signature, like us, sees that the New York area is -- this is the richest market for business aviation in the country. So both FBOs and Sky Harbour should be investing significantly in the New York area. Second, to point out, and it sounds from the question that you're quite plugged in to the business, we are in very, very separate, different businesses from Signature, which is what allows us to cooperate in so many areas. So effectively, they are an FBO, they're in the fuel business. They make their money outdoors. Sky Harbour makes its money indoors, from rent. So we are attacking different markets. There's certainly overlap between what we do. But again, I think it's narrow enough that the 2 companies have been able to cooperate extensively in ways that add value to each of us and to our respective customers. So I really see that West Hampton expansion primarily as an endorsement of the New York market, which, again, was not something we needed. We know the New York market is attractive.

Operator: Your next question is from Jim Jones. Can you please walk us through the BSCR calculation and where you are as of third quarter on a run rate basis?

Francisco Gonzalez: Thanks, Jim, for the question. Let me answer in the following way because you've got to look back to the original projections that we made at the time of the bond offering, and those were all subsequently updated at the time of the, we call it the pivot, when we added Addison in lieu of the second phase at Phoenix. And we also at that point also updated the projections. As a matter of course, we don't put out projections. Our research analysts put out in their updates consolidated projections, which obviously are different than obligated group. Obligated group does not include San Jose, for example, and so on. So I think the guidance we've been giving publicly has been that once stabilized, once we complete the projects, which are, I will say, about a year to 2 years delayed, remember, we had COVID, we had construction delays and so on, that once we get stabilized, and that will be about 2 to 3 years from now, in terms of being fully constructed on the obligated group and fully cash flowing, we will be at higher cash flow available for debt service than we projected 3 years ago. And those projections, if you go back to the CRA report and the bond issue, issuance were in the $25 million area. So you can compare that to the $6.9 million interest expense that we have on our debt between now and 2032. And basically, what we're saying is that we expect to be more than 3x debt service coverage in terms of our cash flow available for debt service and our debt service once stabilized. So that's basically the way I would think about this. If you look at the current run rate in Q3, when we are about to open 3 campuses in Q1 of next year, it's just not -- it's too early to be looking at it that way. And remember, we have capitalized interest through July of next year. So that means we have the money set aside and paying interest income to our bondholders from cash that we have invested in Treasuries at the trustee.

Operator: The next question is from Peyton Skill. What kind of project-level ROE is the company targeting on a project like OPF Phase 2, which should get similar rent, RSF, as OPF Phase 1, but significantly higher construction costs given the post-COVID inflation?

Tal Keinan: Thanks for that, Peyton. So yes, there has been significant inflation in construction costs. And Will's mission is to battle that and reverse it for us, but we'll see. The jury is out. That battle has not been fought and won yet. Hangar rent inflation has outpaced construction inflation by a massive margin. So I don't know if I agree with the assumption that Phase 2 rents in Miami will be similar to Phase 1 rents in Miami. I'd say right now, the current waiting list for aircraft in Phase 1 is about double the number of the entire aircraft -- the occupancy of aircraft that's currently in Phase 1. So there's massive demand for the product in Miami. Frankly, from my perspective, the leases can't end soon enough, because we think the replacement tenants are coming in at a much higher level. So we think there's -- and we think that's still ongoing. There's significant hangar price inflation, not just in Miami, but Miami is one of the areas where it's higher, I think, than the average in the country. The second point is that the revenue density in Opa-Locka Phase 2 -- I think it's a nuanced point, but I think it's worth understanding. When I talked about the semiprivate capacity in the Sky Harbour 37, you can get a lot more airplane into a 37, a lot more square foot of airplane into a square foot of hangar in a 37, than you can in a Sky Harbour 16, which is what Opa-Locka Phase 1 is. Now Opa-Locka Phase 2 is not the 37. It's an interim hangar. It's not the prototype yet. It's called the Sky Harbour 34. It's not quite as efficient as the 37 in terms of revenue density, but it's not far either. So you'll have a much higher revenue density in Opa-Locka Phase 2 than we did in Phase 1. That, combined with hopefully continued hangar price inflation, we think the yields are at least what we're seeing right now in Opa-Locka Phase 1.

Francisco Gonzalez: And Tal, if I may add, again without going into too much detail, given the confidentiality of our tenants, it's fair to say that we have 2 existing tenants at Opa-Locka Phase 1 that already have raised their hand for one of these larger Sky Harbour 34s at Opa-Locka 2 because they have significant fleet. And right now, they have some of their excess planes nearly sitting in our apron and so forth outside of Opa-Locka at the current pace. So that's good news. Before we even have started construction, have 2 of them basically spoken for. But we'll see how rents shake out between now and then.

Operator: Your next question comes from Greg Gibas. Given pricing seems to continue exceeding your initial expectations, with lease renewals and replacements stepping up nicely, do you see upside to your current potential revenue opportunity at stabilization presented in this figure? What level of pricing growth is assumed in those SHER projections?

Tal Keinan: Well, thank you, Greg. The last question is the easiest one to answer: 0. We're projecting 0 growth. To be clear, SHER, or Sky Harbour Equivalent Rent, is a pretty simple formula, the 2 major components of which are what are aircraft at a specific airport currently paying at the FBO in rent and what are they paying in fuel margin. So Sky Harbour Equivalent Rent is a proxy for the total basing cost of an aircraft currently at an airport. Now we use that as a floor because we want -- and the assumption behind using that as a floor is that if you were paying the same amount to Sky Harbour as you would be paying an FBO, you would almost certainly move to Sky Harbour, because everything about it is superior, as a home base. Remember, we can't do transient. We don't compete with the FBOs in the transient business. We don't have a transient business. We're a pure home base. But as a home base, I mean, there's 0 downside and only upside. So the assumption is if you were paying the same price, you would come to Sky Harbour. Of course, we aim to target 80%, 90%, 100% premium over what these people are paying, and that's what we've been hitting at these airports, in some cases even exceeding that, because we are putting out an offering that has very, very unique value to aircraft owners. So that's what Sky Harbour Equivalent Rent is. I want to be very clear. It has nothing to do with our projections. We use it as a risk management tool because we don't prelease these hangars. We only lease when they're up. We want something that gives us safety, particularly gives the bondholders safety, that these hangars will be leased at, at least, a certain rate. That's what Sky Harbour Equivalent Rent is. In terms of exceeding expectations, none of that has worked its way into our projections. I think some of the analysts might be looking at that and maybe revising their own models on the basis of the results. We haven't done that. I think just for our own purposes, we'd like to see that at many more airports over a much longer time period before we start making any kind of claims. But I might check in with the analyst community because they might be revising their models.

Francisco Gonzalez: Thank you, Tal. Operator, there seems not to be any additional questions. Thank you all for joining us this afternoon and for your interest in Sky Harbour. Additional information may be found on our website, www.skyharbour.group, and you can always reach out directly with any additional questions through the e-mail investors@skyharbour.group Thank you again for your participation. And with this, we have concluded our webcast. Operator, thank you.

Operator: Thank you. This concludes today's conference call and webcast. You may now disconnect.

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