Sky Harbour Group - Q4 2023
March 27, 2024
Transcript
Operator (participant)
Good afternoon. My name is Krista, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Sky Harbour 2023 year-end earnings conference 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, simply submit a question online using the webcast URL posted on our website. Thank you. Francisco, Francisco Gonzalez, Chief Financial Officer, you may begin your conference.
Francisco Gonzalez (CFO)
Thank you, Krista. I'm Francisco Gonzalez, CFO of Sky Harbour. Hello, and welcome to the 2023 full year earnings equity investor conference call and webcast for the Sky Harbour Group Corporation. We have also invited our bondholder investors in our borrowing subsidiary, Sky Harbour Capital, to join and participate on this call as well. Before we begin, I have 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 will be discussed today contains forward-looking statements. These statements are based on management assumptions, which may or may not come true, and you should refer to the language on slide one and two 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. Now let's get started. The team with us this afternoon, you know from our prior webcasts. Tal Keinan, our CEO and Chair of the Board, Mike Schmidt, our Chief Accounting Officer, Tim Herr, our Treasurer, and Tori Petro, our Accounting Manager. Joining us today is Will Whitesell, our COO since the beginning of the year. Will came to Sky Harbour after a successful career in the construction industry, having spent 15 years at Turner Construction, four years at the Related Companies, and more recently, six years at Suffolk Construction, where he was last COO of the New York Region. We're very glad to have Will in our leadership team. We have a few slides we'll want to review with you before we open it to questions.
These slides have been filed a few minutes ago in a Form 8-K with the SEC, and will also be available on our website after this call. As the operator stated, you may submit written questions during the webcast using the Q&A platform, and we'll address them shortly after our prepared remarks. Let's get started. Next slide, please. These are summary of our financial results in the context of the trend of the past three years for selected metrics. In the interest of time, I would like to highlight just a couple of items. First, our revenues in the last quarter were in line sequentially with the prior quarter, if when adjusted for the previously disclosed and nonrecurrent, current, nonrecurring items of Q3.
And now we're ready for the next step function related to the opening of a new campus, something that now is expected to occur starting next week with the opening of our new facility at the San José Mineta International Airport, and Tal will shortly disclose more details on this great exciting, you know, ground lease and operation. Second, our operating expenses at SG&A are semi-fixed to fixed, and we continue watching our expenses and maintaining frugality whenever possible. Lastly, looking ahead, our consolidated cash flow from operations continues to move towards the break-even point, which we expect now to occur at the beginning of 2025, after the opening of commercial operations in our three campuses currently under construction. Next slide.
Similarly, the financial results of Sky Harbour Capital and its operating subsidiaries that form the obligated group of our outstanding bonds track similar results than the holding public company, except for the SG&A, which is mainly at the parent company, and the employee stock-based compensation expenses, also the parent company. Sky Harbour Capital is forecasted to be cash flow positive throughout 2024. In terms of rentable square footage, we continue to make significant progress in securing new ground leases, with the new, newest executed at the San José Mineta International Airport and at the Orlando Executive Airport, following approval by the Greater Orlando Aviation Authority. As we have stated in the past, the value for business is not backward-looking on the projects in the pipeline in front of us.
Once a ground lease is executed, the value creation for our shareholders is effectively locked in, and it's all about execution thereafter. With that summary of results, let me turn to Will to discuss the previously disclosed remediation at some of our construction projects in Phoenix, Denver, and Addison, and later to Tal for more on these exciting news about our new airports. Will?
William Whitesell (COO)
Thank you, Francisco.
... This slide represents the individual field's cost and schedule impacts from our three-month forensic engineering study. The root cause analysis has been determined to be a one-time structural design defect with our prototype hangar. Through a rigorous study, we've developed a comprehensive remediation plan and cost, that after completion, we will never have to look back again at these fixes in these fields. A brief explanation of the bars below. Starting with the yellow bar, indicates the cost, anticipated cost to complete pre-design defect awareness, and the gray bar on the right represents the indicated cost after remediation and at project completion. The delta between the two is the magnitude of the impact per field. Also indicated in the notes above are the target completion dates for each of the fields, after the remediation plan and completion.
.With that, I'll turn it back to Francisco to discuss the financial implications.
Francisco Gonzalez (CFO)
Thank you, Will. The implementation of the remediation has increased and extended the life of the obligated group's construction fund, as illustrated on the graph on the left-hand side of the deck slide. Having identified, corrected, and now implementing the remediation, we injected $27 million in additional cash equity from the holding company to Sky Harbour Capital to ensure funding sufficiency at the construction fund of the obligated group. The pro forma cash and U.S. Treasury bills at the obligated group currently now stand close to $127 million, as depicted on the right-hand side pie.
I want to reiterate that as a matter of company policy, we will continue to protect our borrowing PABs program, not just in terms of our ability to pay the debt service on time, but to manage the program with the objective to exceed the debt service coverage we projected at the time of the bond offering in August of 2021. This commitment continues being sacrosanct for us. Back to Will for a discussion on ramping up our development activities.
William Whitesell (COO)
Thank you. As Francisco gave a quick introduction on my background, I spent 25 years of my career in two key areas: managing multiple large projects and moving organizations from walking to running. With that being said, our key objectives as we move forward: higher quality, lower cost, shorter delivery times, and performing all of these above at greater scale. This is exactly what our pipeline is demanding of us moving forward. How do we get there? One, team integration of our development and construction members. These three groups have to be fully integrated, ensuring we have enough bandwidth, discipline experts with proven results. Two, prototype refinement. As we move forward, we standardize our hangar design and configuration. This will allow us to drive both costs and execution as we move forward. Three, manufacturing capacity.
We continue to retool and increase our internal fabrication capacity with rapid build and develop multiple external fabrication sources to ensure we have plenty of supply to meet our future demand of PEMB structures. Lastly, process integration. From choosing sites with our site acquisition team through development and construction, finally, with our hangar operations, both our processes and interface points have to be seamless. Which leads us to our next slide. This slide, otherwise known as a Gantt chart, is a snapshot of our parallel development planning process. This is what we are gearing up for and responding to as our pipeline continues to grow, and this is what we'll be ready for as we move through the rest of 2024 into 2025. With that, I'll turn it over to Tal for a leasing update.
Tal Keinan (Chairman and CEO)
Great. Thank you, Will. Okay, so you can see the first three pie charts on the left are our existing campuses in Houston, Nashville, and Miami. You can see we're actually a little bit above 95% occupancy, which if you subtract the assumed vacancy rates in our original PABs filing, represents what, you know, we call full occupancy. A couple of points I'd want to make here. First of all, we're looking to achieve a little bit greater than 100% occupancy, due to the success we've seen in our semi-private hangar leasing, right? Where we can achieve somewhat higher than 100% occupancy.
Couple other points is, the escalators on all of these leases are a CPI with a hard floor of 3% or 4%. So they're escalating at a good rate. Our renewals, we, we have had our first renewals, which have come in in the 20%-30% range. So we, we do believe there's significant upside once you are, are fully leased. I think we'll probably save it for a separate call on, on additional revenue streams, but we are beginning to get non-rent revenue streams online. Again, we'll report on that in detail, as that becomes, more substantial. On the right side is our new campus in, San José, which is our, our first Tier 1 airport in the portfolio.
As I think a lot of people may have read already, there is an existing facility that we're inheriting, in addition to construction that we plan to do at that field. We're pre-leased. Our operation start date is April first, which is next week. We're already pre-leased to the tune of almost 60% and hope to be fully occupied, you know, sometime in the next few weeks in San José on the first phase of that. Next slide is San José itself. So well, I think, you know, as we go forward, you're gonna hear us talking more and more about revenue capture, which I'll describe in a little bit more detail in two slides. But it is essentially the available revenue to us at each location.
So our phase one in San José, what's opening right now, we're looking at about a $5 million revenue opportunity. Phase two, which we'll add to that, we'll add another just under $2 million. Again, very, you know, I'd say one of the more established airports and metro markets in the country, and, you know, based on OEM backlogs and orders to this market, it's also one of the faster-growing markets in the country. Next slide is our eleventh announced airport win, which is Orlando Executive. If San José is one of the more established airports in the country, Orlando is one of the fastest-growing metro centers.
So we're looking at about, just under $5 million of revenue capture in phase one, just over $3 million in phase two, and this is a market that we, we expect to see grow significantly. It already has very heavy demands, a big supply-demand mismatch, between hangars and business aircraft that need to be hangared. And this is all happening in, in the metro center with the second-highest GDP growth in the United States. So we're, we're quite optimistic about the future of, of Orlando Executive. The next slide is on, on revenue capture. And again, I, I think most people who followed us have heard us, talk about our growth in terms of number of airports or square footage of hangars. Those are really both proxies, for what we're really pursuing, which is available revenue.
What you can see on this slide is the left half of that bar chart is the first six airports. You can see all the way on the left what represents the obligated group that we discussed earlier. That's our original bond issuance. So that's the capture from those first six airports. And if you go to the right side of the chart where the arrow is, that's March 2024. As of today, 11 airports capturing about $95 million in available revenue. Okay, that's square footage times the Sky Harbour equivalent rent that we apply to each airport. Right? That's what that measure is of, available revenue.
And then if you take the chart to the right, that is the indicators that we've given to the market as to what we expect in the year ahead. I'm sorry, until the end of 2025. Next slide. I think we'll wrap it up here. I'm just gonna... The only thing I wanna stress on this slide is the company's current focus is site acquisition, right? We've got to do everything, and you can see on the slide kind of a snapshot of what's going on in each vertical center in the company. The primary focus, though, of management right now is revenue capture, and that's site acquisition. Go after the best fields, achieve the most square footage that we can, you know, in the shortest time possible.
As we see the questions coming in, I see that a lot of people are asking about that, and I think that's, that's exactly appropriate. Right, right now is where we go into high-growth phase. With that, let me hand it back to Francisco.
Francisco Gonzalez (CFO)
Thank you, Tal. 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 URL. We'll pause for a moment to compile the Q&A roster. Your first question comes from the line of Philip Rustow. The 40-50 locations that were mentioned on the last call, what are your thoughts on announcements for 2024? Lastly, how many of future locations could be existing, like San José, instead of de novo new construction?
Tal Keinan (Chairman and CEO)
This is Tal. Thanks, Philip, for the question. For the rest of this year, I think we indicated three new leases in the first half of the year, so we've got two down, one to go. We've indicated three more going forward to the end of the year. You know, we're always gonna be trying to beat that, but we're looking at three more for the end of this year and then six in 2025. In terms of the greenfield versus brownfield, it's an astute question. We were a little bit dogmatic about greenfields early on in the company, and that still is the lion's share of what we intend to do.
There are, first of all, a few cases like San José, if you remember. Nashville was similar, where we inherited a good structure, that we have—that, you know, it, it's better to keep and refurbish than to demolish and build new. So I do think there will be more of that going forward. And obviously, the kind of the immediate cash flow implications of that are convenient as well. And secondly, you know, I think we're in a period where we were not seeing any sort of interesting deals to actually purchase ground lease. That's something that we also think might be changing right now. We are seeing a number of opportunities like that. The company will always be primarily a greenfield developer, that is the model. But yeah, thanks for the question.
I think it's a pertinent question.
Operator (participant)
Your next question comes from Elliot Ruda. Your remediation costs, particularly at the Phoenix location, have a significant effect on the first obligation bond group. How do you see the effects on the business at large?
Tal Keinan (Chairman and CEO)
Okay, so a significant effect on the bond group. Okay, so first of all, Elliot, thanks for the question. You're right to highlight Phoenix in particular. Phoenix definitely represents the bulk of the remediation cost. The reason is that we were furthest along in construction at that airport, so the design flaw manifested most significantly there. Good that that's what you're pointing out. Regarding the obligated group, which is a reminder, it covers those phases one on the first six airports and phases two just at Opa-locka, Miami, and Denver Centennial. As Francisco said, we've taken action to fully protect the group, as we always will. With regard to the business at large, I'd say it depends on your view of how many fields Sky Harbour will ultimately reach, right?
If, if we were to stall out on-site acquisition, you know, tomorrow, let's say, that impact would be tangible, right? Figure, just to put it in numbers, figure the cost of capital for 15 airports is around $850 million. So that remediation would represent a little over a 3% impact in development cost. But if we prosecute the business plan that we're committed to prosecuting, then I think we will see that design flaw in the context of, look, the many challenges we faced already as a business and the many that we're sure to face going forward. So if you—like, if you put the same numbers on that, let's say we hit 20 airports, that's about $1.1 billion in capital deployed. 30 airports would be about $1.7 billion.
50 airports, which is our goal, would be about $2.7 billion. That's the capital deployed, the development cost, the value of the airport portfolio in each of those scenarios. Well, I mean, that really depends on the assumptions you or any observer can make independently, but if we're doing our job right, the value of those portfolios is considerably higher than the capital deployed, which makes this a pretty small fraction. And as Will was discussing earlier, the way we have remediated that, our intention is for this to be a one-time fix, something that we never look back from. Remember, we deploy a prototype model. It's the same hangar at every airport. You fix it once, and it's and it's fixed.
So looking at the business at large, to your question, I think that's the appropriate perspective to take. You know, right now it's about site acquisition. If we're successful there, this becomes, you know, unimportant, and if not, it is important.
Operator (participant)
Your next question comes from the line of Connor Kim. What would be the upper range of lease agreements you would be comfortable signing in 2024? What about 2025? Is there anything that would make you want to limit your lease signings, such as growing too fast?
Tal Keinan (Chairman and CEO)
Yes. I mean, the answer, Connor, is no. Thanks for the question. I mean, the faster we can grow, the better. We do believe that we've got, you know, a good financing plan that will be aided. I think we've got a kind of a virtuous cycle here to finance these fields. One thing that I think is important to note, we may have noted this or originally when we went public, is that our ground leases usually do not feature performance clauses, and when they do, they're quite flexible. So you don't really have a gun to your head to start development right away when you've signed a ground lease.
Of course, our intention is to develop right away and to get to, you know, cash flow from those fields as quickly as possible. But it's actually difficult to paint yourself into a corner where you don't have the capital to execute on the business plan. So there really is no upper limit. You know, the more fields that are in the money, so to speak, for us, that we can get, the more we'll take.
Operator (participant)
Your next question comes from Michael Diana. How are your two new senior operations hires going to improve the speed and efficiency of your manufacturing of hangars?
Tal Keinan (Chairman and CEO)
Yeah, Michael, thank you for the question. Thank you also for the coverage. I think it's been very, very astute. You raised some very good points in your coverage, so thank you for that. So just to kind of rephrase the question, Crystal, would you mind just reading the question one more time?
Operator (participant)
Certainly. How are your two new senior operations hires going to improve the speed and efficiency of your manufacturing of hangars?
Tal Keinan (Chairman and CEO)
Yeah. So I tell you, we have one of them here in the form of Will Whitesell, and you know, this is really what he's done for the last 25 years. Will, anything you can comment on that will kind of get a little bit more specific on sort of the plan going forward and prototyping and all that?
William Whitesell (COO)
Sure. You know, in addition to myself, we have another senior development construction individual that started with us, that is, you know, his resources are really dedicated to our due diligence, pre-development pipeline to help push through some of these fields that we've signed leases on to get permitted and entitled to be able to start construction. And secondly, we have another individual starting with us next week, that is a long time construction individual that is joining us, that will be solely dedicated to the execution of the construction of these fields as we move forward. We'll continue to increase the bandwidth of our team as our pipeline continues to grow and ensure that we have the right people in the right seats.
Operator (participant)
Your next question comes from Francisco Burgerras. There has been quite a few filings today and recently. Can you please put the recent filings into context for the market?
Francisco Gonzalez (CFO)
Yes, thank you. Thank you for the question. Indeed, we had a busy day today here at Sky Harbor, and we're here with our Chief Accounting Officer, Mike Schmidt, and Tori Petro. Yes, there was a variety of filings today, obviously, 10-K with our full year results. But, as you know, we did a PIPE transaction, common stock, last November, with $57 some million plus warrants, and those had registration rights to be registered with the SEC, and we fulfilled that requirement this afternoon by filing an S-3 to cover those. Also, we have had outstanding a stock purchase agreement with a broker-dealer that we've had for the past 2 years.
We actually have not sold any shares under that program, and we simply replaced that program with a S-3 shelf registration, a program, but of equal or similar size. And again, our thinking there is just to do housekeeping, you know, now on the back of the 10-K, with all these various filings, to do the registrations on the programs that we needed to do or that we had before. But again, housekeeping, we don't intend to use the ATM program, unless it's opportunistic for market opportunities that may arise in the future.
Operator (participant)
Your next question comes from Elliot Ruda. You refer to San José as Tier 1 market. Can you explain what that means?
Tal Keinan (Chairman and CEO)
Yeah, this is Tal. So we rank markets and airports around the country in terms of their specific attractiveness to Sky Harbour. And the primary component of that metric is available revenue, as I alluded to during the presentation. So think of it like this: our steady state construction costs around the country should vary within a pretty finite range, okay? And our same for our OpEx, right? The OpEx at steady state around the country should vary within a you know very finite range. The variable to which our business model is the most sensitive by far is rent, okay? Which varies within a very broad range, and that's really driven by location.
Okay, so I can refer you, if you, you know, can look back at the leasing slide that we just put up or just refer to it in the 10-K. You'll see that the rents that we're achieving, for example, in San José, are approximately double what we're achieving at some of our other airports. You know, when we originally set out, when Sky Harbour originally set out to acquire airport sites, our selection process was pretty close to arbitrary, right? The key rule we stuck to was steer clear of the markets with the highest rents, right? What we now refer to as Tier 1 markets. Because we knew we'd make mistakes early on. We did make mistakes early on.
We wanted to make those mistakes in locations where the stakes were relatively low, learn from them quickly, apply our learnings to a scalable, repeatable process, and then pursue scale aggressively, with a major focus on the country's Tier 1 airports. And that, that's where we are today. That's our focus.
Operator (participant)
Your next question comes from Arthur Match. What is projected EBITDA for 2024? Thanks and good work.
Francisco Gonzalez (CFO)
Yes, Francisco, thank you for the question. You know, we—as a matter of policy, we, we're not providing guidance at the company in terms of specific, targets. But what we can say, and I think we've seen in the past, you know, we are, tracking to, EBITDA, positive, soon. The first place you're gonna see EBITDA going positive is the Sky Harbour Capital, which is obviously the obligated group, the group of companies that are operating companies and so on. And, and as I just said, you know, earlier in my, in November remarks, you know, EBITDA, at the Sky Harbour Capital, should be possible, positive throughout 2024.
On a consolidated basis, when you add our expenses, you know, SG&A at the holding company, that break-even level should be reached towards early Q1, Q2 of 2025. It's driven by the fact that, as Will mentioned, our construction projects and the opening and the cash flow of those projects is now delayed towards later this year and early next year, and that is pushing the break-even point of EBITDA, again, towards the first half of 2025.
Operator (participant)
Your next question comes from the line of Michael Schaefer. Considering the stock trading well above $11.50, have any warrants converted? Any thoughts on future conversion and money into SKYH?
Francisco Gonzalez (CFO)
Thank you, Michael, for the question. I think I get a warrant question every week from someone out there. You know, just for everybody's benefit, you know, we inherited this warrant program at the time of the de-SPAC, you know, 2.5 years ago, and then we've been managing it. The interesting thing is, indeed, it is the case that our stock has now surpassed the strike price of $11.50. And, you know, in the past year to date, certain holders have decided to exercise their warrants and basically purchase their stock.
So roughly, to give you a sense, Michael, out of the warrants outstanding, there's been roughly 250,000 round numbers of warrants exercised in the past few months, and that has produced, on a cumulative basis, you know, close to $3 million of proceeds to the company, which obviously we're going to put to good use in terms of new, new fields, new hangars, and, and, and more, you know, future growth for the company. In terms of conversion and what we're gonna do with the warrants, because I get that question every week, you know, we, we remain, you know... Right now, we, we, we monitor markets, we monitor the warrants and, and relation with our stock price.
We're not planning. We have no current plans to do anything with our warrants right now, and have them remain outstanding for now.
Operator (participant)
Your next question comes from Alan Jackson. Can you please explain the process of what a lease is signed and when it enters the obligation group? Is it the idea that most properties will enter the obligation group?
Francisco Gonzalez (CFO)
Yes. Thank you for the question, Alan. This is very nuanced, but very important. One of the pillars of the business model of Sky Harbour is our ability to borrow tax-exempt, fixed-rate, municipal debt at attractive, low interest rates. And thus, we created, in our first bond issuances with the first six airports, this obligor group. Now, it is not a one-time bond issue, it's a program, meaning in the future, we can do further bond issuances, and they will join the existing bond issue, and be part of the obligor group at that point. It's when you do the bond transaction, that you basically make it part of the obligor group.
Now, in theory, it doesn't mean necessarily that when we do a new field, we're gonna immediately finance it as part of the obligor group. We might do interim financings, we may even do some long-term bond issues outside the obligor group and wait to collapse them at a later time. So that's something that depends on market conditions. The one critical thing that I will say is that we'll always be thinking from the standpoint of the current bondholders and the obligor group, that we do things that are credit accretive, credit accretive in terms of as we go grow the program.
Operator (participant)
Your next question comes from Jordan Mullins. You have indicated you expect three new ground leases in the first half of the year. You announced two today. Are you able to provide an update on ground lease negotiations, especially in top-tier markets? And have you found those top-tier markets tend to take longer? Appreciate any color you can provide here. Thanks.
Tal Keinan (Chairman and CEO)
Oh, sorry, it's Tal. We're on mute. Sorry about that. Thank you, Jordan. So our policy is to announce agreements only when they become binding, so we can't provide specific names. What I think is okay to say is, look, the site acquisition team has grown a lot over the past year. We're working a lot smarter and a lot faster than we did a year ago, and still the amount of work on each of our plates is growing fast. So we're quite enthusiastic about what the pipeline looks like. And again, specific names will come out as the binding ground leases get signed. With regard to... You asked if those Tier 1 markets take longer. I don't think we've observed a correlation there.
You know, there's a gestation period; it varies a lot. I don't think it necessarily correlates to, you know, the attractiveness of the market. Some, you know, some take a long time, some take a little time, which is why we found the best approach is to be in process in many, many airports simultaneously, and they come through when they come through, right? This is an exercise in throughput rather than cycle time.
Operator (participant)
Your next question comes from Michael Diana. How do you get more than 100% occupancy?
Tal Keinan (Chairman and CEO)
Oh, yeah. Thank you, Michael. It's Tal. I can take that as well. So, you know, if you have 12,000 feet of hangar and you lease it, as we do in most cases, to a single tenant who might have multiple aircraft, it doesn't really matter to us what actually goes into the hangar. However, we've had a lot of success, particularly in Nashville and to a maybe lesser extent in Miami, in what we call semi-private leasing, right? If you have a mid-size aircraft, you're, you know, you're flying a Challenger or Falcon 900 or something like that, it's not necessarily justified for you to take a full Sky Harbour 16 hangar. So what we've done is provide private office and lounge space, but you have, you know, one or two or three other aircraft with you in the hangar.
And there we price the hangars in the, or the hangar slots in the same way that FBOs do, which is by square footage of aircraft, which is defined as length times wingspan. It's the industry convention. And of course, that entire rectangle is not occupied. The corners are empty, so you can get to slightly higher than 100% occupancy. Now, the Sky Harbour 16 is okay for that. It was really intended originally as a private hangar. We've moved as a, as, as a consequence of the change in the NFPA 409 fire code that governs hangar construction to a new flagship hangar, which is the Sky Harbour 34, which is essentially two, two Sky Harbour 16s, right? If you look at it kind of from an aerial shot, it looks like two Sky Harbour 16s.
You can demise a Sky Harbour 34 and create two fully private hangars, two fully private Sky Harbour 16s. It's just that the demising wall is now not fire-rated. It's just an acoustic wall between those two hangars. However, when you open it up and use it for semi-private use, it's much more stackable. So for example, you can get two heavy aircraft into two Sky Harbour 16s. You can get three heavy aircraft into one Sky Harbour 34 for the same footprint on the ground. So what we expect is when the new airports come online with Sky Harbour 34s, that the occupancy above 100% will be, I, I think, a bigger part of the business plan. It may be a bit of a nuanced question, but, I, I think that's where we're going, so appreciate the question.
Operator (participant)
Your next question comes from Peyton Skill. The new airfield average RSF/hangar is in the 30K RSF range. Rationale for moving to larger sizes. Do larger hangars bring additional complexities/costs?
Tal Keinan (Chairman and CEO)
Okay. So Peyton, thanks for the question. Tal again. Yeah, so I. That's more or less what I was talking about now when I was answering Michael's question about the utility of these Sky Harbour 34s, right? By the way, particularly at the Tier 1 airports, where, you know, we just can't get enough space. The more space we get, the more, the happier we are. So the ability to create a, you know, higher revenue density at those airports is key. So the Sky Harbour 34 is far superior to the Sky Harbour 16 in that respect. In terms of complexity and cost, not really. I can say that there is more steel that goes into it because we have a longer free span on the Sky Harbour 34 than you have on the Sky Harbour 16.
So yeah, I'd say in terms of the amount of steel that goes into it, a bit more. It's not something that, you know, that's going to move the needle dramatically in terms of total cost of a new airfield. And complexity, it's actually, I would say, slightly simpler than the Sky Harbour 16, in that we don't have to use vertical lift doors because one, remember, one of the more expensive components of our current construction is those vertical lift doors. We use vertical lift today because the hangars demise into each other, right? We want maximum revenue density on each campus, so there's no space between the hangars. They adjoin each other, so to speak. So you can't really have sliding doors.
That's why we use vertical lift doors today, which is expensive and, you know, adds a bit of complexity. In the Sky Harbour 34s, you can have sliders, without sleeves for the sliders, and, you know, maybe we'll put out something that kind of shows what that looks like, at some point. But, in terms of operations, it's actually slightly less complex.
Operator (participant)
Your next question comes from Lucas Horton. A four-part question. One, do you have any longer term margin profit targets? Two, where do you expect to expand your headcount? What divisions do you see opportunities for headcount growth? Three, could you discuss your expectations for capital requirements for the foreseeable future? And four, how often are you competing with another provider when bidding for new contracts? What is the average number of competitors you see when bidding for new builds?
Francisco Gonzalez (CFO)
Thank you, Lucas, for the questions. Francisco, a lot of questions here, but let me go quickly here in order. A long-term margin profile target. Yes, so, you know, our margin really comes from the difference between our tenant leases and our operating expenses, our ground lease payments, and our cost of capital, obviously, these are capital intensive, and we, you know, borrow a lot of money in terms of debt, to be, and use a lot of capital, equity, and debt to finance it. So it is that margin that really drives a, you know, long-term margins for our business. So, you know, obviously, it's interest rate sensitive and it's sensitive also to the construction costs and so on.
So, you know, once stabilized, you know, we aim, you know, to have, from an operating perspective, attractive margins. It's when you look at the totality of net margins, that you have to bring all these various elements into account. So project by project, each project is profitable. The critical thing right now is, as a business, we have to grow so that the contribution of those projects surpasses the semi-fixed costs of our SG&A as a business, and again, we expect that to happen in the near future. In terms of headcount, we're keeping it very tight. Every time we open a campus, we have, like, three or four full-time equivalents. So you can do the math there in terms of the expenditure as we open campuses.
And in terms of capital requirements, I think the rule of thumb here to use is that on average, again, this is on average, every campus with these various phases will mean a deployment of between $50 million-$60 million. And so that gives you a sense of capital formation for us as we continue to grow. And in terms of how, you know, obviously, the business is very competitive, and we find a, you know, let Tal address that in terms of, you know, competitive dynamics. But we are in a competitive business, and but at the same time, though, we have a differentiated product that allows us to, you know, be very successful. And the recent past has shown us, again and again, be able to be selected among others.
Tal Keinan (Chairman and CEO)
Yeah, I agree with that. I think what you said is exactly right. You may be on top of that, yeah, I'd say, you know, I think the place where we're probably, we've created the most proprietary knowledge in the entire company is on-site acquisition, right? You know, to be clear, you know, we love our hangars. They're, you know, they're Taj Mahals for us. But fundamentally, you know, it is a metal box. Leasing is leasing, operations is not very different from what you'd see, you know, for example, in FBO operations. In fact, it's simpler because we don't have transient business. The real smarts, the kind of the deepest bag of tricks in the company is on-site acquisition.
So, you know, even implied in the question is, when you use the word bids, in many cases, it's us initiating these discussions with an airport. We're alone in these discussions. We, you know, we try to stay two or three steps ahead of where the market's going. I don't know that we'll be alone forever. I don't want to assume that that's, you know, that that's the case. But for now, we are the only people doing what we're doing anywhere in the country, right? This is, you know, the Sky Harbour is a unique model, for now. And again, in the cases where it is competitive, as Francisco just mentioned, we do come with a very differentiated offering, where, you know, this is not, you know, not an FBO offering.
I think in pretty much every case where we've, you know, we've made a concerted effort and it has been competitive, we've won, and, you know, hopefully, we continue.
Operator (participant)
Your next question comes from Andrew Serdoni. You had a significantly lower estimate of remediation costs when you first announced the design flow in Denver and Phoenix in December. What has changed since December, and what can we expect in today's numbers to be final? Also, can you discuss why you needed to spend the $27 million in remediation costs?... DVT, APA, and ADS, and whether that is one time?
William Whitesell (COO)
Thank you. This as well, I'll take that one, right? Andrew's question. Andrew, a couple of things, right? First, we conducted an extensive and exhaustive review of both Denver and Phoenix that were the furthest along in construction on the designs, right? Really culminating in three different engineering firms, primarily with Thornton Tomasetti, as I would consider world-class, maybe the best that there is. Right, and the objectives were to diagnose the flaw and determine all the related issues with it with a high level of precision, right? Then from there, detail a remediation plan that is optimized, first and foremost, for certainty of a result, right? And make this a once and final fix, right?
Secondly, this has been a thorough and rigorous process, and we feel very confident in our estimates, right? And lastly, I would note, you know, we've learned a tremendous amount from this process and, you know, this engineering study, right, which has been key for us to carry over into our new prototype, Sky Harbour 34, that we're really landing on moving forward as our mainstay offering.
Operator (participant)
Your next question comes from Connor Kim: When opening a new campus, what do you expect to your average time to reach full occupancy to be?
Tal Keinan (Chairman and CEO)
Yeah, so we have... This is Al. We have six months budgeted. You know, I think one of the things you can see is on our original campuses, it took us more than that. We, you know, part of what we were doing is, I think you again, if you've been following, you see that the per sq ft rents go up as the supply goes down. Again, not something that we invented. We have come up with a few methods on the leasing side to shorten that. So I think one of the things you see, for example, in San José, is we actually haven't opened yet, we're already at about 60%. So we expect that one to go quite quickly.
Going forward, you know, one of the objectives is to have it look more like San José than the first projects.
Operator (participant)
Your next question comes from Peyton Skill. Is the $2 million Q4 operating expenses all attributable to existing airports?
Mike Schmidt (Chief Accounting Officer)
Thank you, Peyton. This is Mike. In terms of our Q4 operating expenses, look at the allocation as about 45% related to the operations at our three operating airports, and the remaining 55% is actually attributable to all of our ground leases at all airports, regardless of whether or not they are operating. As disclosed in our financial statements, we've adopted accounting policies, where we elect to expense those directly as opposed to capitalizing them during the construction period. Thank you.
Operator (participant)
Your next question comes from Robert Slezak: As financing needs increase with growth, how do you think about ranking sources of capital, bond issuances versus PIPEs versus potential add-on public stock offerings?
Francisco Gonzalez (CFO)
Robert, it's Francisco. A very good question. You know, we look into this, and we think about this all the time. Obviously, it's, and we're capital intensive, and we have needs. Important thing for us is always to be ahead of the game, so at no point we are forced to go and get capital at terms that we don't find attractive for the company and for our shareholders. So from our perspective, our goal is to have a capital structure that maximizes the use of permanent bond transactions at the lowest rate possible. While, you know, and then that will obviously provide leverage and augment the return on equity to benefit our shareholders. So how do we accomplish that?
So far as you've seen, we have been at the receiving end of proposals from family offices in terms of PIPEs, as we did last November, and that's something that we will entertain, you know, if the opportunity arises. In terms of the bond market, we track it, we follow it, and so on. One important thing that we have discussed in the past is, you know, should we wait, given increasing interest rates overall, before we achieve investment-grade ratings? Because, you know, once we achieve investment-grade ratings, you're looking at a saving of about 200-250 basis points in your fixed rate cost of debt.
So, you know, we are balancing always the timing of our next bond issue relative to the timing of potential investment grade and the timing of further equity offerings. One last point I will make is, you know, we're very conscious that we need to increase our float. So at the right time, again, the right market conditions, it will make sense for us to broaden our float in a, you know, in the right way. But again, we're gonna do this by looking at market opportunities and doing it on a timely basis, not, you know, to, to. And right now, in terms of our capital needs, we're covered for the next 18-24 months, and thus, we have plenty of time to entertain these various alternatives of capital.
Operator (participant)
Your next question comes from Jamie Fortuno. In hindsight, was going public the right strategy?
Tal Keinan (Chairman and CEO)
You want to take this?
Francisco Gonzalez (CFO)
Yes. So I'll take it. And, you know, some people are laughing in the room here because, you know, we are, as you all know, a public company. You know, as you know, we're a real estate, you know, we're-- You know, two years ago, we were probably, early stage company, but, you know, and I was probably the most reluctant to go this path. And now I've turned around in my view of this, and now I've become kind of like someone who's supportive of being a public entity. It really has us out there in a, you know, eternal virtual with all the information available to the marketplace, which allows us, and we get incoming all the time of people who are interested in co-investing with us or trying to do some transaction with us, showing us opportunities.
So, it's something that also has allowed us to attract talent, you know, in terms of the professionals that have joined us in the past few months in having a currency. Also gives us a currency to potentially even do, you know, things in, in the M&A market, if, again, the opportunity are right. So being a public company, I've come around full circle here. And so, Jamie, I appreciate your, your, your, your, question. I also appreciate your following. I know you've been following us for a couple of years, you know, from the, you know, Harvard Business School, you know, contingent of, of people who, who invest in Sky Harbour.
Tal Keinan (Chairman and CEO)
This is Tal. I'm gonna add, add to that. I think we have. We've been lucky enough so far that we run this company as though it's a private company, in that we, we do not. We, we've not sacrificed the long term for the short term in any case here. We're, we're running it so far exactly as we think it should be, it, it should be run. I think we've got, I think, a, a good following of major shareholders who understand what we're doing. By the way, many of them, tenants, who really understand the business model and the, and the value that we're, that we're bringing. So I, I agree with Francisco. On balance, I think this, this ended up being a good, a good decision.
Operator (participant)
Your next question comes from David Pennoni. Could you please comment on the timing and structure of future bond issuance? And what does management expect to pursue an investment grade rating for the muni bonds?
Francisco Gonzalez (CFO)
Thank you, David, for the question and also, for your first participation in our bond issue back two years ago. You know, indeed, as I said earlier, reaching investment grade is one of our objectives. Obviously, we got to do and have a little bit of more history to show the ranges and have a structure to, to get to, investment grade. So we plan to... You know, I think the right timing when all those, things will come together will probably be in the earlier or middle of next year, summer of 2025. And you know, so that will be kind of like our timing of our goal, to do that.
And then again, in terms of the next bond issue, if we can wait till then, and be able to, you know, we have done all the break-even analysis about, you know, funding ourselves through other means, you know, entering debt, bank debt, equity financing, and so on, and then recapitalize ourselves, and achieve and capture that 200-250 basis points savings. I mean, anybody who has the calculators, you, you-- we're looking in long-term debt. Our first bond issue was, you know, 33-year final, 25-year average life. When you get 200-250 basis point savings, both going investment grade versus non-rated, and you present value that to today, boy, that's a lot of money savings if you can capture them.
We're looking to our objective to strive to capture that before we do our next permanent bond deal.
Operator (participant)
From Mike Knipp. In your recent interview with The Motley Fool, you indicated no other type of real estate has unit economics nearly as attractive as this. Can you expand upon that statement?
Tal Keinan (Chairman and CEO)
This is Tal. That was me. I don't know of no other type of real estate, but I'll say, look, I haven't seen too many asset classes where you're able to achieve consistent double-digit yield on costs, right? Unlevered yield on costs. And I think, you know, if just in case people miss the point, this is at non Tier 1 airports, okay? Again, your construction costs will vary within a pretty limited range, your OpEx will vary within a pretty limited range. Rent is really what drives the unit economics of this business. You know, we're very happy with, you know, airports where we're getting per sq ft rents in the $30s and $40s.
But as you'll see, as you know, as we get into more and more of these Tier 1 markets, where you're holding, again, your CapEx and your OpEx relatively constant, but increasing revenue significantly, those unit economics will respond correspondingly. Again, this is without what Francisco was alluding to earlier, which is this, you know, real kind of afterburner of municipal bonds. You know, a kind of a very elegant and efficient form of leverage in this business. I'm talking about unlevered returns in the double digits. Again, I don't know too many areas in real estate where that's readily achievable today.
Operator (participant)
Your next question comes from Connor Kim. During the capital raise in November, where you priced it at $6.50 per share, do you feel that this was an attractive price for you to raise capital at, considering the market is now valuing it at double that price? Or did you place significant value on the partnership of the investors?
Francisco Gonzalez (CFO)
Francisco? Yes. Thank you, Connor, for the question. It's important to know that even though we announced the PIPE around, you know, October, November, called November of last year, it was something that was being negotiated during the summer, when, you know, our stock was trading in the, you know, $4-$5 range. So it was a PIPE that was coming actually at a premium to the observed equity price. And, you know, we did it in a limited amount of capital relative to our future needs, and we thought it made sense to significantly market our market access. Our market access as a common stock offering PIPE, and without preference or things that you see out there. And again, we didn't need the cash right now.
It was the right thing to do for us, as a company, and I think the market reaction, you know, has proven that strategy. And I'll let Tal comment on the partnership of the investors, because, you know, some have been publicly disclosed, and we can talk about that in terms of, you know, being some of them are tenants, some of them are people with affinity to the aviation industry. And then others have wanted to remain private, but they're very, you know, people who are very significant in terms of investment community in the United States.
Tal Keinan (Chairman and CEO)
Yeah, I, I think that's right. Well, yeah, that, that, that investment round or that, that PIPE deal had some of the most sophisticated business jet owners in the United States in it. Again, like Francisco said, some, some of them disclosed, some of them not disclosed. I would say all of them have been extremely active since, since we closed that round, in everything from site acquisition to introducing us to, again, some, some of the best residents we could, we could possibly hope for in the business. So all told, you know, no regrets, we don't look back. I think the, you know, the-- we're, we're, we're very happy to have to have completed that at the size that, that, that we indicated. So we're, we're, we're quite pleased with that investment round.
Francisco Gonzalez (CFO)
So operator, I know we have hit the one-hour mark. I know there are many other questions still remaining in queue, but at this juncture, you know, to keep this tight for, to an hour, I will ask, you know, and we, you know, we have people's questions. We're going to respond back to people individually via email. So, at this juncture, you know, we want to close the webcast, but not before thanking everybody 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 to us directly with any additional questions through the email [email protected]. If you wish to visit our campus, please let us know, and we'll arrange a tour.
I know several of you took advantage of this opportunity in the last few months. So again, thank you for your participation, and with this, we have concluded our webcast. Operator, thank you.
Operator (participant)
Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation, and you may now disconnect.
