Sky Harbour Group - Q2 2023

Transcript

Operator (participant)

Good day, everyone. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sky Harbour 2023 Q2 earnings call and webinar. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, you may submit a question by logging into the webcast URL at events.q4inc.com/attendee/150507316. Once again, everyone, that is events.q4inc.com/attendee/150507316. I will now turn the call over to Francisco Gonzalez, CFO. Please go ahead, sir.

Francisco Gonzalez (CFO)

Thank you, Lisa. Hello, welcome to the Q2 earnings results investor conference call and webcast for the Sky Harbour Group Corporation. I'm Francisco Gonzalez, CFO of Sky Harbour. 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 year's earnings. Some of the information that we will be discussing today contains forward-looking statements. These statements are based on management's assumptions, which may or may not come 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 statement. Now, let's get started.

Introducing the team with us this afternoon, Tal Keinan, our CEO and Chairman of the Board, Mike Schmidt, our Chief Accounting Officer, Tim Herr, our Treasurer, and Tori Petro, our Accounting Manager. We have prepared a few slides we want to review with you before we open up to questions. As the operator stated, you may submit written questions during this webcast using the Q4 platform, and we'll address them shortly after our prepared remarks. Let's get started. Next slide. This is a summary of our Q2 results in the context of the trend of the past two years for selected metrics. First, in terms of capital invested in hard assets, our three completed campuses and construction in progress surpassed the $100 million mark in the Q2.

With our two recently opened campuses in Nashville and Miami, Q2 revenues reflect the step function increase in our rental revenues as new hangar campuses open. We expect this step function phenomenon to continue as we open new campuses. Our operating expenses and SG&A are semi-fixed to fixed, and we're being very frugal and attentive to these. When Phoenix and Denver campuses open next year, our revenues are predicted to grow and generate positive cash flows at the consolidated operating level. Net cash flow from operating activities reflect the one-time cost last year of the de-SPAC in Q1 2022, and the acquisition of our ground lease in Opa-Locka, Miami, in Q2 of 2022. Again, with Phoenix and Denver campuses expected to open next year, the resulting cash flows will turn us into positive territory on a consolidated operating cash flow basis by the end of next year.

With that summary, let me pass it to Tal Keinan, our CEO, for a review and update on our unit economics, pipeline of new campuses, and operational update. Tal?

Tal Keinan (CEO and Chairman of the Board)

Thanks, Francisco. We look at our business and the way we create value, really, in two ways. What are the unit economics looking like and how does scale look? That, that's the framework we use for creating value here. What you'll see on this slide is a snapshot of where unit economics are, are coming in. You see our, our two large campuses today, which is Miami and Nashville. What you see on the left of each bar chart is the original revenue per square foot estimate that CBRE produced in their report for the bond market, which is not far from our original underwriting, and then what the actual rents that have come in are on those two campuses.

You, you'll see that we're, we're tracking at, you know, significantly higher revenues than originally projected. What that boils down to is a return on assets in the range of 15%. Now, that number 15 assumes that the remainder of leasing of those campuses will take place at the same per square foot rents as what we're currently seeing. When those campuses fill up, if it is at the same rate, then we're talking about a 15% return on assets. As I, I think some of the people on the call know, and we'll get into a little bit later, the financing that we have in place, which is quite attractive, turns that into a return on equity in the 30s. That's our unit economics.

That's something that we continue to obviously refine and work on as we go, but we do see that the, this first batch of campuses, we see that as a, as a validation of the unit economic assumptions. The next question is, okay, how do you, how do you scale this and at what, and, and what rate? We can show what, what's happened to date, in the next slide. The way to read this is. The left side of that slide is rentable squa- Sky Harbour hangar square footage that is actually online. You see that, you know, like Francisco said, that's a step function, correlates directly to the step up in revenues. Every time you open a campus, a new, a, a new revenue stream, comes online.

Then it's the same scale that you'll see on the right side of the page, which is rentable square footage that's actually in development. Okay? That's Denver, Phoenix, Dallas, phases two for the existing campuses in the red. Then in the last bar, this is a snapshot from right now, as of end Q2 2023, is the square footage of hangar in airports that are under exclusive ground lease negotiation, right? This is, it, it typically after an RFP process where we've been selected as the, as the winner, we're now negotiating the final terms of ground lease on those airports. If you, if you add those, then we're looking at about 2.5 million additional rentable square feet.

One thing that I want to highlight here, as you look at Sky Harbour, as a business and what our objectives are from scale, it's not just a question of getting more airports. It's not even just a question of getting more square footage of hangar, because remember, there are airports that will accommodate, you know, 150,000 sq ft of hangar, and there are airports that will accommodate 500,000 sq ft of hangar. It's a question of the of high-quality square footage. What we're really pursuing is NOI. I think what's, what's important to note is that's primarily a function of location, right? Our construction costs vary somewhat, but within a relatively tight range. Our OpEx varies somewhat, but within a relatively tight range.

The primary determinant of an airport being, in our parlance, tier one, tier two, or tier three, is the prevailing hangar rents in that location before we even get into that market. That is the most sensitive component of all this. The first five airports that Sky Harbour targeted were chosen somewhat arbitrarily. There are certain metro areas that we wanted to stay away from, particularly because, again, there were going to be a lot of lessons learned at the beginning of the business. We understood that. What we're doing right now, that entire pipeline is what we're targeting is the top-tier airports in the country, where the highest rents are in the country.

Our hope, if we do this right, is to have return on assets on the, the next airports, come in higher than what we're seeing on the, on the original airports. That's, that's, that is the ambition. Let me get into kind of some of the challenges and opportunities that we're facing on the next slide. This is how we think of our company in terms of business units, right? There's site acquisition, development, leasing, and operations. While I won't go through the whole slide, Tim, there we go. Thank you. While I won't go through the whole slide, I'll zoom in on a couple of points in each of those. As, as we, as we disclosed yesterday, there are six new airports that are now in exclusive lease negotiation.

We expect three, three of those to close, side leases. We enter permitting by the end of this year and another three in the first half of next year. These are airports that are in tier one rent markets. Again, we, we, we expect each of these to be higher than the, than the, rents that we're seeing in the current portfolio. On-site acquisition, zoom in on one headwind is the. There is a gestation period. From the time that we target an airport, until a ground lease is signed, what we've been finding is that this, this is a 12-24-month process with a lot of variability, and again, most of these airports are owned by municipal government. There's not too much uniformity in the way this process works in different places.

That, that's been a challenge, is that you do have a long gestation period, and again, it, it varies quite significantly. On the-- what I put kind of on the tailwind side of that, is we started dozens of these processes last year. What we're seeing right now is the first, the first of those coming to fruition. This is a very specific kind of strategy for targeting airports and growing that pipeline. And again, we, we, we, we certainly don't put pencils down with the next six airports. I think what you'll see if that chart went out is the ambition, is to constantly be broadening the pipeline as we go.

All right, that's, you know, that, I think you could think of it sort of as a funnel from identification of an airport is attractive to Sky Harbour till the day revenue starts flowing. That funnel should constantly be getting wider if we're doing this right. That's on-site acquisition. On development, you can see what we have going on right now in terms of airports under construction and airports that are in permitting. We have airports that are in preconstruction right now. That's diligence and planning in those six airports that we just mentioned. Headwind that I want to highlight is construction costs. It has definitely come up since we started the business. I think we probably saw the steepest.

Increase in construction costs over the course of 2022. That seems to have tapered in 2023, but not retreated. That, that, that's a headwind that we've been dealing with, and I think everybody in the, you know, in the metal building space in general has, has contended with that. What we're doing to mitigate that, I think that's a big part of the RapidBuilt story. In that, you know, we, we saw that we were paying a lot of margin to pre-engineered metal building manufacturers and hangar door, hangar door manufacturers. Also, the fact that there was no company that did both meant that we were spending a lot of time, and consequently money, on coordinating that fit, which is probably the most fraught architectural feature of our designs.

You know, it's, it's a metal building, relatively simple metal building, but it's a 12-ton vertical lift hangar door that, that's mounted on that building. The fact that those are two separate manufacturers is, is, is a place, you know, that's, that's in fraught with issues for us. So the RapidBuilt acquisition, not only over time, should reduce our cost, we're no longer paying out margin, but we think also increase the quality of what we're doing. Which we've tried to be kind of hitting this in, in this industry. We have the company that we think has the best engineering in, in the space in-house now. We, we think that's going to be a big deal for us and also a differentiator in terms of just the quality of the physical offering.

Moving on to leasing. You see where we are right now on lease up on, on the, the various facilities. The, the main headwind, I think that's kind of stood out for us, is it does take a little bit longer than we expected to lease up these campuses. It is a lot of hangar inventory to present to a new market in one shot. That's, you know, certainly, it certainly takes a little longer than we thought. Also, just the process of negotiating a lease with the type of tenants we have is a little bit more protracted than we than we originally expected. On the other hand, what we're seeing is, as, as we discussed, in two slides ago, is that the rents that we're achieving are significantly higher than, than what we originally underwrote.

I, I think part of that is, is due to the fact that the airport is a very inflationary environment. We, we expect that trend to continue. There's just limited amount of land on airports around the country, that's, that's, that's part of why we're in this business. I think perhaps another part of it, and I'm speculating here, is, is that we are becoming recognized in the industry as a distinct and differentiated offering from what the FBOs have. We're, we're quite different from, from an FBO, increasingly, I think that we're, we're being sought out, and that's reflecting in, in the rents that we're able to achieve. Then lastly, operations. The, o- one of the areas that I think we, we've been trying to differen- differentiate ourselves in, I, I think somewhat successfully, is in operations.

We are trying to provide the shortest time to wheels up in business aviation. If, you know, if your company owns a $50 million business jet, you know, we, we think most people in that situation place a very high premium on time, and we are extremely quick, not necessarily because we're so good at, at, at, at ground operations, but because we don't have a transient business. Our campuses are, you know, very quiet, very controlled. It's, it's relatively simple for us, compared to an FBO, to get a flight airborne. That said, we do invest a lot in, in, in getting it more than right and in turning our, our current tenants into evangelists for, for the entire model, and certainly for the company.

I think the main headwind that we face there, which the FBOs and airlines have all faced, is there's definitely a human resources deficit in aviation line services. We're fighting that just like everybody else. What we've found, though, is, you know, with, with a few, I think, key hires, we're able to get great leadership in place on the, on the ground operations side, and start pulling in a crew of really outstanding line service technicians. We've put on top of that a training program that we think is working for us very well, and I think the results have been, the results have been very satisfactory for us. When we do tenant surveys, we're getting that feedback from the tenants as well.

I think that human resources deficit in the industry will continue to be a headwind for us as we as we go forward. The next slide, we just wanted to share a little bit of what all this looks like, you know, from development to leasing to operations and site acquisition. This, this is kind of what Q2 has looked like for for Sky Harbour. Again, that, that'll be available to everybody on the call. With that, let me hand it back to Francisco to talk a little bit about about our cash position.

Francisco Gonzalez (CFO)

Thank you, Tal. Quick review of our liquidity and capital position. We closed the Q2 with about $150 million in cash and U.S. Treasuries. Our portfolio of U.S. Treasuries is very short and is managed by our treasurer, Tim Herr, who's actually sitting here next to me. We're now earning north of 5% as we roll our cash in three and six-month U.S. Treasury bills as we wait to invest these into new hangar construction. The right hand of this slide depicts our bonded debt composed of $166 million in 4% and 4.25% coupon, fixed-rate private activity bonds. These bonds have no principal amortization for the next 8 years, we have prepaid into escrow the interest due through the middle of 2025.

With a final maturity in 31 years and an average life of over 20 years, these bonds constitute permanent capital for the company. In summary, we are fully funded to complete our existing portfolio of hangar campuses at our first 6 airports, and a few more if we decide to redeploy projected excess cash flow into the business in place of dividends. Next slide. This strong liquidity and capital position provides us with significant runway and flexibility to pursue our growth capital opportunistically. First, we can reinvest our expected positive free cash flow once we complete our next few campuses. It is not our preferred route, given that our goal is to cash flow as dividends our operating earnings to the benefit of our shareholders.

Our second approach will be to raise additional equity at the Sky Harbour public company level through PIPEs or at-the-market or market public offerings, but only at prices that make sense for the company and its current shareholders. Let me be clear, we will not issue new equity if not at a significant premium to the current market price. Alternatively, as a 3rd option, we could fund a few of our next campuses as project-level partnerships. We have been approached by 5 real estate and infrastructure funds interested in doing so over the past 6 months. If we were to pursue that, we will be investing a lower amount of equity into new fields, but generating significant development, asset management, and operating management fees, and thus enhance our return.

Lastly, we will marry any of these equity sources with additional private activity, tax-exempt debt, either in bond, note, or bank debt format. Our current bonds are trading with a 6 handle, 6% handle. We will rather be opportunistic and wait until overall level of interest rates stabilize. If 18-24 months pass and we need to issue debt to combine it with the equity for new campuses, we will do it thoughtfully with a view of maintaining call ability to refinance once rates come down again, or if and when we achieve investment-grade ratings, something we will pursue towards the end of next year. This concludes our prepared remarks. We now look forward to your questions. Operator, please go ahead with the queue.

Operator (participant)

Thank you. At this time, I would like to remind everyone, in order to ask a question, please submit it online using the webcast or I'll pause for a moment to compile the Q&A roster. Our first question comes from Francisco Brugueras. Existing properties are 64%-94% leased. What rental rates per square foot have you been able to realize versus previous expectations? How is the obligated group performing? Please comment on your upcoming capital needs. Thank you.

Francisco Gonzalez (CFO)

Tal, you want to take the, the leases, and I'll take the obligated group and the capital?

Tal Keinan (CEO and Chairman of the Board)

Yeah, yeah, Francisco, thank you for the question. I would say on the... Sorry, hang on. I'm looking for the- Yeah, in terms of rental rates versus what was expected, we started leasing in Miami at about a little over $32 a foot, and the most recent leases, there, there's still a few hangars left to go, but the most recent leases are signed about in the kind of mid-$40s. Significant increase in Miami. I, I'd say at Nashville, we started at $28 a foot, and we're now in the mid-$30s. We think Miami is, is, is close to representative of, of we call it a good, like a solid tier two market in the country. We're happy.

You know, when we kind of look forward, our hope is to get, you know, that, that, that type of rent going forward. I, I think one of the things you'll see is, is over time, there is inflation at the airports, and like I said earlier, I think that's one of the things that we're, we've, we've been benefiting from here. If we do, you know, what we, what we set out to do, there should also be increasing recognition of, of the specific value proposition to aircraft owners of, of, of, the Sky Harbour offering.

Francisco Gonzalez (CFO)

Thank, thank you, Tal, and thank you, Francisco, for the question. on the obligated group, and just to remind our, our, our, our investors, the obligated group is the joint on several portfolio of operating subsidiaries of Sky Harbour Capital that are the collateral package for our bonds. It's important to note that it's not a one-off, one-time bond deal, it's a program. It's a programmatic approach. As we issue new bonds into the future, they become part of the obligated group and join in several. which is why as we grow, the strength and credit profile of our borrowing entity becomes stronger.

Last year, about this time last year, a little bit later, yeah, about a year ago, when we started realizing that construction costs were higher than expected given inflation, we went about and recapitalized the obligated group to make sure that it was fully funded for the properties within it. We also performed the pivot, which we allowed a Addison Phase one in Dallas to come into the obligated group in lieu of the Phase two at Phoenix and Sugar Land. net, net, to answer the question, you know, rental rates, as Tal mentioned, are higher than expected. Construction costs continue to be in line with the higher levels that we, you know, recalculated at the time of the recapitalization.

Projects are taking a little bit longer, as you have seen from our discussion in terms of construction schedule. Fortunately, as I mentioned, as our cash continues to earn higher than 5%, that mitigates somewhat that delay. Net-net, we believe that the projected debt service coverage that was put out by CBRE in the feasibility study this past February, that shows improved projected debt service coverage ratios for our debt holders, remains in place. Let's see, the last part of the question. Yes, a capital funding for next future capital needs. One important thing to remember is that once signs a ground lease, one has some flexibility in terms of when to start constructing that project.

You know, there's always the need for permitting, and so on and so forth, and, you know, site design, and so on. Even within that, you know, 6, 9, or 12 months period, one could decide to, you know, postpone a, a, and, and, and sequence the right way, once investment at the beginning of construction a particular campus. I say this because that translates into flexibility in terms of matching our capital funding of new ground leases as we sign them. Now, rule of thumb, rule of thumb, on average, a new campus, it depends, you know, on average, it tends to be 15-20 hangars, and on average, a hangar is roughly about $3 million per hangar.

When you do the math, you're looking at each new campus is within $45 million-$60 million each. a six new airport campuses will be roughly between $275 million and $350 million, roughly. Assuming again that we're doing 65%-70% leverage, you're looking at about $100 million of equity and $175 million to $250 million of additional pads. You know, this is kind of like the a summary or overview in the context of the six ground leases that Tal mentioned earlier.

we have, as I said, flexibility in terms of how we go about funding that $100 million of equity, as I mentioned in the remarks, earlier, in terms of internal generated cash flow, a holding company equity, if the price makes sense, or project level partnerships at the, at the, at the, at the, you know, the airport level. Okay, so, back to the operator for our next question.

Operator (participant)

Thank you. Our next question comes from DJ Magan. Your monthly report shows $82.2 million spent to date, about one-third of total project costs. Are you on budget and on schedule, and do you expect to tap into the $15.9 million project contingency?

Francisco Gonzalez (CFO)

Yeah, let, let me take that, take that up. Yes, as part of our obligated group, we file every month a monthly construction report, which gives not only, you know, some photographs of how things are going, but also updates on, you know, the, the, the, the cost of all these various files, projects at the obligated group level. I think the short answer is right now, we're not expecting to hit. You know, we have several buffers. We have the project contingency buffer, we have a ramp-up reserve buffer, we, and, and we have a maintenance buffer. Right now, we don't expect to hit any contingency of buffers right now in the obligated group, you know, at this juncture. Next question.

Operator (participant)

One moment while we assemble the queue. Our next question comes from Rasmus Agerskov. What age or what edge does RapidBuilt give you, give you versus your competitors?

Tal Keinan (CEO and Chairman of the Board)

Yep. This is Tal. Thank, thank you, Rasmus. so first, I, I don't know that we have direct competitors today in this business. The, the, the other people or kind of the other industry that builds hangars at any kind of scale is the FBO industry, dominated by kind of the, it's a duopoly of, of Signature and Atlantic. The way those guys operate is really each project is its own sort of blank sheet design build project. What we do is, is really a prototype, right? It's, it's the same, the same hangar on every airport, which even before the RapidBuilt acquisition, gave us certain advantages in, you know, in terms of a, a de, a design that is-...

optimized for exactly what we need and, you know, constantly gets refined, and whatever refinement works into the prototype, you know, finds, finds its way into every subsequent project. So bringing RapidBuilt into, RapidBuilt into the picture, it, aside from what I mentioned earlier about reducing our construction costs by cutting out the pre-engineered metal building and hangar door margin, is, is, is a significant design advantage in that your RapidBuilt is an, an integral part of our prototyping process today. So that's not, not only accommodating changes in regulations, so for example, the NFPA, NFPA 409 Group III standard, the fire code that governs our type of aviation hangar, which is updated every four years.

The most recent addition had changes that opened up opportunities for us to, you know, further refine the design, make a hangar that's, that's, that's, you know, significantly more usable for our tenants, and that, that, that feeds in immediately. RapidBuilt is, is part of that design process. There's also all sorts of value engineering changes as, as new technologies become available or we become aware of them. It's a pretty quick integration cycle. The, what I mentioned earlier, again, having the hangar door and the pre-engineered metal building manufactured at the same facility all under our roof is, is a very big deal.

We along with almost everybody else in Hangarland, have had, you know, all sorts of challenges with those hangar doors, and that's something that we, you know, we, we intend to mitigate, if not eliminate, by having, by having all of that integrated. Lastly, you know, in this development cycle, as we get more and more coordinated with our general contractors in the field, we'll be bringing as much as possible from the field to the manufacturing facility, with the idea of minimizing welding, minimizing assembly, making a very, very quick and straightforward assembly process in the field. That includes things like running conduit in the factory and shipping out our, our pre-engineered metal building components with, you know, with electricity and plumbing already run. You really have kind of an erector set, in the field versus what's done today.

That'll manifest not only the quality of, of the product that we bring out, but our construction times, which, which again, translate directly into savings for us.

Operator (participant)

All right, our next question comes from Matthew Howlett. Can you go over the synergies from the consolidation of RapidBuilt? How much do you think it can lower your construction costs and speed up your construction times? Any other advantages it provides?

Tal Keinan (CEO and Chairman of the Board)

Okay, I, I think most of, most of this is probably answered by what, what I just said to the previous question. I, I don't think we'd want to speculate as to exactly how much it, you know, savings we see from that. I think it's early days. I think it's quite clear to all, all involved, that the savings will be significant, both in time and in, in money. I think it might be a little bit premature to try to quantify that exactly.

Operator (participant)

Thank you. Our next question comes from Kristine Thomas. Do you need to make more acquisitions to achieve your target level of vertical integration? If so, what types of companies, capabilities, and/or technologies do you need to acquire?

Tal Keinan (CEO and Chairman of the Board)

I, I can take a crack at that, and then, Francisco, Tim, if you guys have anything to add. You know, thanks, Kristine. The... First of all, you know, RapidBuilt itself is quite central to what we're doing. Again, you, you, you would only do something like that if you intended to go to, you know, really significant scale in, in this, in this industry. I, I think answer number 1 is, is more RapidBuilt. We, we, you know, again, if, if our pipeline continues to materialize at the pace that we're, that we're hoping, we will need additional manufacturing capacity at some point in the, in the not too distant future.

Our, our, the current intention is to expand that facility, you know, if and when we get to that point, but we will need more, just more, more manufacturing capacity. Again, there is, there is room on, on site in Weatherford, Texas, to, to do that. Other capabilities, we, we are, our, our tenants manage their space with an app, that we, that we designed and, and fielded and are, are constantly, looking to refine. What the app does today is really kind of control the physical aspects of the hangar: temperature, humidity, lighting. It's, you know, it's got security, monitoring, motion control, motion detection, you know, all that sort of thing is in the app today.

The next version of the app will include service procurement, and that, that, that's a set of capabilities that, you know, the app itself is something that, you know, we're, we're doing in-house, but that will require a set of partnerships. These are your potential- our intentions for these to be revenue-producing partnerships, because what we have is a physical platform for administering all sorts of aviation services to our, to, to our tenants. You know, we, for many of those services, we, we can and should be the, the conduit. So being able to procure all of those through the app, I think will be, will be a real service to the tenants, but also create value, I, I think, for, for you, the shareholders. Francisco, Tim, anything you wanted to add on, on, vertical integration?

Francisco Gonzalez (CFO)

No, that's good. Thank you, Christine, for the question.

Operator (participant)

We'll take the next question. Thank you. We'll take our next question from Philip Bristow. Once the next locations are confirmed, and new capital has to be raised, are you able to issue convertible instead of straight equity until the common has a chance to get into the teams? Thank you.

Francisco Gonzalez (CFO)

Okay, I'll take that. Thank you, Phil, for the question, and also for your continued, you know, and active, interest in Sky Harbour. I think you're one of the investors that ask us, routinely, most questions, during the year. Thank you for your interest. I think, the short answer is yes, we could issue convertible equity, if we wanted to. Let me explain why, in our case, a particular circumstances, we prefer to issue straight common. It has to do, it has twofold. First, remember that most of the debt that we issue is tax-exempt debt. It comes at an attractive fixed rate, long-term basis. A convertible equity instrument tends to be, you know, three to five years.

It may have a maturity at that time, which is basically almost like a put, and also it's really taxable in nature. Taxable. We will be basically overpaying in terms of as an issuer, if we were to issue convertible equity, rather than be doing common and our low interest cost, fixed rate bonds that we do at the project level. That's kind of like a general view of that. Although, again, we are not dogmatic, we are opportunistic. If we find a equity transaction that makes sense, that protects, and I get, we get your point, that protects common shareholders until to higher valuations, we totally get where you're coming from. Operator, back to you.

Operator (participant)

Thank you. We have another question from Philip Bristow. For warrant holders that have a high cost basis, can you hold off on exchanging common once share prices exceed $10? Ideally, the warrants can be called exchange once the common reaches the upper teens. Thanks.

Francisco Gonzalez (CFO)

Okay, I'll take that also. Thank you. Thank you for the question. You know, the warrants, as you know, the public warrants, have a variety of features, redemption features, and, and the like. You know, we rather not comment on what we will do or not do or, or, or commit to things at this juncture. You know, it's gonna be very situational basis. It's gonna depend where we are, where our prices are, you know, what time to maturity of the warrants, and so on and so forth. You know, at this juncture, you know, I totally get the question, but, but we'll do what is in the best interest of, of all our equity holders, at the time that we face such a, such a scenario.

Again, thank you. Operator, next question.

Operator (participant)

Thank you, sir. Our next question comes from Matthew Howlett. Can you give us a trajectory of the 6 new airports under negotiations? How fast is this really happening? Would be the lead time to have them built and leased up?

Tal Keinan (CEO and Chairman of the Board)

Yeah. Okay, so, you know, I, I think one of the, one of the frustrations, but also barriers, in, kind of protective barriers in this business, is that there is really no template process that we've identified that, you know, all airports subscribe to. You know, it, it, it's different in each case, and like we said, those gestation periods can vary quite widely. The six airports that we're talking about, right now, where we've gone exclusive and we're, you know, in advanced stages of negotiation, like we said, we expect three of those to be signed by the end of this year, and then an additional three by early next year.

Of course, as you can imagine, we're, we're not gonna put out anything speculative in this call, but there, there's, there's a, a quite a robust pipeline behind that. Again, some of those end up moving faster than you think, some of them slower than you think. Once we have assigned ground lease, we go immediately into permitting. When I was talking about pre-permitting earlier during the, during, during the slide presentation, that was that, where we actually, we have a, a, a finalized site layout, with, you know, with, with full plans for everything, utilities, drainage, everything you would, you would, you would have in a, in a full permit set by the time we get to a signed ground lease.

That there's really a pretty minimal amount of time between signing our ground lease and our submittal for permits. Then again, you know, you run into a process that has a gestation period. We've, we've had permits issued in, in a very short time, you know, in, in a few months, and we've had, you know, permits take significantly more than 6 months. It kind of really depends on the situation.

One of the things that we're trying to do, really through this, prototyping design, I probably should have mentioned this when, in the question about the, about the prototype, is the fact that we have the same design permitted in multiple airports, we hope should give, you know, fire officials, drainage officials, whoever, whoever it is in the, in the various jurisdictions, some comfort that this, this, this exact design, this is not blank sheet, this exact design has been permitted in multiple locations already. And, you know, of course, it will facilitate communication between the various permitting authorities, and we hope to compress that process as well. Once permits are issued, I think what we have underwritten, Tim can probably tell us what we have underwritten on build time.

Whatever it is, our ambition, again, is to constantly be, be reducing our, our construction time. The more that we can get done in the factory and the less in the field, the shorter we think our, our, our construction periods will go. The last part of your question is on lease-up. Lease-up, we still think that the, the right time to start leasing is when you actually open the doors of, of, of a fully functioning campus that is, you know, has a certificate of occupancy, has gone through our own operational dry run period, and is ready to go. We just think the pricing leverage is the highest there.

You know, although the lease-up period has been, again, longer than we expected, we feel that we've been more than compensated by the increase in rents. I think your pricing leverage is the highest when you actually have a standing product that's ready to go. People in aviation tends not to kind of look out a year or two to see what their, what their storage space needs are gonna be. It tends to be kind of a right now sort of thing. That's really where our leverage is the highest. That said, we are working on, okay, we call it an experiment that we'll roll out now in Phoenix for the first time, which is we're opening one hangar before the rest of the campus.

That will be kind of a fully, you know, a, a showroom with all of the optional features that we have in a hangar. We'll we might try to do a few pre-leases in that case, and experiment. This is all really in an effort to kind of get, get the schedule that you're asking about, you know, compressed to the minimal time.

Operator (participant)

Thank you. Our next question comes from Janelle Alexander. Do you expect further growth to be attained via additional acquisition or additional cost efficiencies, or both?

Tal Keinan (CEO and Chairman of the Board)

Yes. Thank you, Janelle. I, I'd say both. Site acquisition is the main driver, though. Again, we're, we're always, it's what I mentioned over. We're always gonna be trying to get our construction costs down, without, without impacting the quality of the offering. We're always gonna be, you know, getting our OpEx optimized. I, I don't want to say it necessarily has to be the lowest. It's, we've got to put out the best service in aviation, but, you know, keep those under control. Those will vary in a relatively tight range. The big swing, the most sensitive factor, in generating return on assets, which is the fundamental goal here, is, is really location, right? Be in the best, best locations possible. Site acquisition is, is key.

both are important, but site acquisitions is really kind of the main event.

Operator (participant)

Thank you. Our next question comes from Jared Kassar. How many B shares do you expect to convert to A shares in the next 18 to 24 months?

Francisco Gonzalez (CFO)

Okay, I'll take that, Francisco. Thank you for, for the question. Maybe I should start by, by reminding people that we have two classes of shares, As and Bs. They both have, you know, a, a one vote, so we all, you know, we don't have super voting shares. The Class A is the shares that trade in the New York Stock Exchange, is the one that public investors received, also, that were part of the SPAC, is the one that underlies the warrants and so on. Class B shares are the shares that were received by the, you know, the founder here on the phone, our CEO, and some of the legacy early investors in the company.

Then we, with this SPAC, we did it through a structure called the Up-C structure, that basically keeps the legacy shareholders still at the original LLC level. The moment that they were to decide to sell shares, they will first convert their LLC interest into Class A, then forfeit their Class B share. The question then that you're posing is another way of asking, do we expect legacy shareholders to be converting and selling their shares? There have been a few small legacy investors, this is all public information, that for their personal tax position, they decided to convert their LLC interest and Class Bs into As, and realize whatever capital gain they will have, because they will offset it against capital losses. This is very small amounts.

I think in general, the, the, the bulk of the legacy shareholders are likely not to be sellers unless the price is, is significantly higher than current levels. I hope that that answered the question. Operator, next question.

Operator (participant)

Thank you. Our next question comes from Doug Johnston. When does Cap I end on the muni bonds? Is it September of 2024?

Francisco Gonzalez (CFO)

Okay, I'm gonna ask Tim, our treasurer, to, to answer this question.

Tim Herr (VP of Finance and Treasurer)

Hi. Thanks, Francisco, and thanks, Doug, for the question. If you refer to page 19 of our private activity bond prospectus, which can be found in the MSA, you'll see a full schedule of the capitalized interest and net debt service annually. Capitalized interest continues through the middle of 2025, and really it's July 2025 when the first interest payment kicks in. As Francisco noted before, it's all interest for the first 10 years, so interest only for the first 10 years, and then principal payments kick in in 2032.

Francisco Gonzalez (CFO)

.Thank you, Tim. Let me just add one comment. When we did the bond deal, short-term rates were so low that we assumed no interest earnings during the life of all these funds. Obviously, with the increase in interest rates, we have been able to benefit of the interest income from, you know, our debt service reserve fund, which is about, you know, $11 million, these $14 million on the Cap I fund, another $4 million in the ramp-up reserve, plus obviously the construction funds. Those are additional interest income that, you know, is benefiting the obligated group, as we wait to deploy that cash, either in terms of in paying interest, expense on the bonds, or the construction expenditures. Operator, back to you.

Operator (participant)

Thank you. Our next question comes from Jorge Roberts. In the future, what are your plans to accommodate advanced air mobilities such as eVTOLs?

Tal Keinan (CEO and Chairman of the Board)

Thanks. Thanks, Jorge. This is Tal. Yeah, we, we, we wrestled with this for a while, you know, because we, we did get a lot of inbound interest from the various eVTOL manufacturers, whose focus has, you know, understandably been getting FAA certification for their vehicles versus ensuring that, that adequate infrastructure is in place to actually accommodate eVTOL at scale. This is, you know, I, I, I think it got, it took us a while to get focused on this. What we, what we decided and implemented is as follows: eVTOL is happening. That, I think, is clear to us. We're, I think, way, way past the point of no return in terms of the kind of the technology, the funding, the regulatory environment for it.

This thing is coming. We're not sure exactly when, though. You know, I, I, I know a lot of the eVTOL providers are projecting, you know, 2024, 2025, which, you know, we hope this happens, but, you know, don't know for sure. What we found is we are in a kind of a special position as, you know, probably the biggest greenfield developer in business aviation, today. That by going greenfield, it's, it's much less expensive to put down the kind of infrastructure that's gonna accommodate electric aviation than it is to, kind of rework or redevelop existing infrastructure. We found a, a way to, I, I think, economically, provide for a, a kind of a, an option to go electric at any point. That means, internal organic generation of electricity, primarily through solar panels.

You know, we're off the largest rooftop at an airport, we do have a lot of ability to generate solar electricity. On-site, but sorry, on top of that, also sufficient cabling to augment that from the grid. Second is on-site electricity storage. You need transformer capacity to pull from the grid. You want the organic electricity generation. In many cases, both of those together are not going to be sufficient if we're going to be achieving anything near the scale that the eVTOL industry is forecasting. We're going to need on-site power storage, which we've made provisions for. Then finally, a transmission mechanism, you know, where we have... Again, I, there's no patent around this or anything like that. I think it's pretty straightforward.

The, the, you know, the current transmit- power transmission method, which is the aircraft pulls up to a, to a power source that's fixed somewhere on the tarmac, is, is good for this kind of prototyping phase that, you know, places like Joby, Beta, Archer, the, the, the manufacturers. We think that when this thing goes to commercial scale, the power is going to come to the aircraft, much in the same way that the, you know, fuel comes to the aircraft today, on, on trucks. We've, we've put that all together conceptually, designed all of our campuses to accommodate that with a kind of an easy flip of the switch down the road. We don't see the case for making the investment of actually flipping the switch, today. It's just an easy option, you know, for, for when this comes online.

I, I do understand where the question is coming from, and I, I think, you know, it sounds like you, you've got the same presupposition we do, which is that the vast, vast majority of the infrastructure for electric aviation is going to be on FAA-regulated airfields. We think it's going to be very difficult, you know, we, we, we know the heliport space. We think it's going to be very difficult to do a kind of significant off-airport operations for eVTOL. That includes, you know, not, not just flight operations, but the, the charging, storage, servicing, all of that. We, we think the vast majority of that actually is going to have to take place for regulatory reasons on airport.

Operator (participant)

Thank you. We have a question from Rasmus Agerskov: How does Sky Harbour view business with the upcoming eVTOL business and potential housing of those vehicles?

Tal Keinan (CEO and Chairman of the Board)

Right. I, I think same, same, same answer I, I, I gave to Jorge, Rasmus. That's. I think that's, that's our position on that. Again, we do think that we're, we're pretty well... Maybe the only thing I'll add is, you know, a, a lot of what people are looking at is, is FAA regulation around eVTOL. It sounds like there's a lot of interest in eVTOL on this call. What I encourage people to do is look at NFPA, and there are a lot of circulars that are out there as to how NFPA is looking at eVTOL. You know, lithium-ion batteries burn hot. There's some complexity around that. That's something that we've integrated into that design concept that I, that I put forward in answering Jorge's question.

You know, however, however these aircraft end up getting stored, NFPA is going to be, we think, a big, a big factor in, in, in how all that gets regulated.

Operator (participant)

Thank you. Our next question comes from Alan Jackson. What opportunities do you see with the electric aviation? How is Sky Harbour and its campus portfolio positioned to take advantage of electric aviation?

Tal Keinan (CEO and Chairman of the Board)

Yeah, thanks, Alan. Again, same, same, same response I had to the previous two. Yeah, I'm glad to see there's a lot of interest in eVTOL. You know, we, you know, we agree, we think it's happening. We think it's an opportunity. Again, what we're trying to do here in many situations, not just with regard to eVTOL, is not to take a bet today as to what the highest and best use of Sky Harbour campuses is gonna be 10 years from now, but to design for optionality. You know, if the eVTOLs are paying higher rents than business aviation in certain segments of the country, or certain areas of the country, great.

You know, that's something that we, you know, we potentially pursue, but not something that we have to, not something that we're committed to or investing a lot of capital in today. No need to do it if you, if you can create the optionality inexpensively. That, that's, that's what we've done.

Operator (participant)

Our next question comes from Matthew Howlett. Can you give us a trajectory of the six new airports under negotiations? How fast is this really happening? What would be the lead-up time to have them built and leased up?

Tal Keinan (CEO and Chairman of the Board)

Lisa, I think that one was already answered, if I'm not mistaken.

Operator (participant)

Thank you. Okay, one moment.

Francisco Gonzalez (CFO)

Oh, hold on one second.

Operator (participant)

All right. This is from Matthew Howlett as well. If you're ready.

Tal Keinan (CEO and Chairman of the Board)

Yeah, sorry, Lisa. That I, that was the... I just put in the, the last and final question from, from Matt, if you can read that one.

Operator (participant)

Perfect. Thank you. Again, this is from Matthew Howlett. How many potential sites would fall under the top metro markets?

Tal Keinan (CEO and Chairman of the Board)

Okay, thanks, Matt. I don't know if you're asking about the, the 6 airports that are now under exclusive negotiation or in general. What I would say, for the 6 airports, 5 of the 6 are in what we call Tier One markets. 1 is in what we call a Tier Two market. We, we would call Miami a Tier Two market. That's, that, that's for the 6. If you were asking about, the, kinda the, the general map or the opportunity set in the, in the country, you know, metro centers like, like New York or Los Angeles have, you know, multiple airports, you know, in some cases more than 12 airports that, that serve business aviation in that, in that metro center.

And our focus is, you know, I think you, you may have seen in some interviews that we've done before, is, is really to start with the metro center and then drill down to the, the specific airports. This ties into the point that we made about it, it's not exactly about number of airports. Number of airports is just kind of a good conceptual proxy for how this company grows. It's more about square footage of hangar, and it's even more about available NOI. If you take a market like New York, there are certain airports that accommodate a lot of hangar, and we would go for that. In, in certain cases, for example, you know, a square footage of hangar that would be two or three times, for example, what we have in Nashville.

In a metro center like New York or Los Angeles, we would certainly pursue that. You know, two or three times is fine. What's particularly compelling to us is the rents in those jurisdictions, which is why w-we're so focused today on those Tier One, on those Tier One markets. I, I answered it both. I, I hope that covers what you were, what you were looking for.

Operator (participant)

Thank you. There are no further questions at this time. I'd like to turn the call back over to Francisco Gonzalez for closing comments.

Francisco Gonzalez (CFO)

Thank you, Lisa. 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. You can always reach out to us directly with any additional questions through the email [email protected]. If you wish to visit a campus, please let us know, and we'll arrange for a tour. Thank you again for your participation. With this, we have concluded our webcast. Thank you, operator.

Operator (participant)

Thank you, and that does conclude the presentation. Thank you for your participation. You may now disconnect.