Sky Harbour Group - Earnings Call - Q4 2024

Executive Summary

• Sky Harbour reported record full-year 2024 results, with consolidated revenues up 95% YoY and strong liquidity of $127 million in cash and U.S. Treasuries at 12/31/24; management reiterated guidance to reach run-rate breakeven operating cash flow/Adjusted EBITDA by Q4 2025.
• Q4 2024 sequential revenue increased 13% vs Q3, driven by lease optimization across operating campuses and three weeks of Camarillo operations; operating expenses rose on pre-opening staffing and noncash ground lease accruals ($1.4 million in Q4).
• Strategic expansion continued: new ground lease at Seattle’s Boeing Field (BFI; ~90,000 RSF), Phoenix campus opened in Q1 2025, with Denver (APA) and Dallas (ADS) openings imminent, and strong leasing momentum (first leases signed in Phoenix and Dallas; 4–6 month lease-up expected).
• Financing runway: completed ~$75 million PIPE equity in late 2024; pursuing ~$150 million private activity debt issuance in summer 2025 with active investor interest and a path to investment-grade ratings; obligated group DS coverage tests in compliance.
• Estimates context: S&P Global consensus EPS and revenue estimates for Q4 2024 were unavailable; comparisons vs Street cannot be provided (see Estimates Context section).

What Went Well and What Went Wrong

What Went Well

• Strong top-line momentum and liquidity: full-year consolidated revenues +95% YoY; cash and U.S. Treasuries at $127 million; obligated group revenues +51% YoY and positive operating cash flow of $6.5 million.
• Strategic expansion and operational ramp: executed BFI ground lease (~90,000 RSF); Phoenix opened in Q1; Denver and Dallas opening in Q2; first tenant leases signed in Phoenix and Dallas; active pre-leasing in Denver; 4–6 month lease-up targeted.
• Management reaffirmed breakeven timeline and articulated scalable cost/speed improvements with RapidBuilt and standardization (“Sky Harbour 37” prototype); CEO emphasized focus on best airports and growing brand with premier residents.

What Went Wrong

• Limited quarter-specific disclosure: Q4 did not provide GAAP quarterly revenue/EPS figures; only directional sequential growth and noncash expense drivers, constraining precise margin and EPS analysis.
• Operating expenses elevated by pre-opening staffing and noncash ground lease accruals ($1.4 million in Q4; higher San Jose ground lease burden), pressuring near-term profitability until campus ramp offsets.
• Minor disclosure inconsistency: March 27 press release references a PIPE “In Q4 2025,” while the equity raise second closing occurred December 23, 2024; investors should rely on the December 2024 release for timing and proceeds (~$75.2 million).

Transcript

Operator (participant)

Ladies and gentlemen, good afternoon. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sky Harbour 2024 Year-End 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 that time, simply submit a question online using the webcast URL posted on our website. Thank you. I would now like to turn the call over to Mr. Francisco Gonzalez, Chief Financial Officer. Mr. Gonzalez, you may begin your conference.

Francisco Gonzalez (CFO)

Thank you, Abby. Hello and welcome to the 2024 Q4 and full year results investor conference call and webcast for the Sky Harbour Group Corporation. We have also invited our borrowing holding investors in our borrowing subsidiary, Sky Harbour Capital, to join and participate on this call. Before we begin, I've been asked by counsel to note that on today's call, the company will address certain factors that may impact this and next year's earnings. Some of the information that will be discussed today contains forward-looking statements. These statements are based on management assumptions, which may or may not come true, and you should refer to the language on slides 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 webcast, our CEO and Chair of the Board, Tal Keinan, our Treasurer, Tim Herr, our Chief Accounting Officer, Mike Schmitt, our Accounting Manager, Tory Petro. We also have Andreas Frank, our recently promoted Assistant Treasurer. We have a few slides we will want to review with you before we open it to questions. These were filed with the SEC about an hour ago in Form 8-K, along with our 10-K. It will also be available on our website later this evening. We also filed our Q4 Sky Harbour Capital Obligated Group Annuity Financials with MSRB EMMA a few days ago.

As Abby mentioned, you may submit written questions during the webcast through the Q4 platform, and we'll address them shortly after our prepared remarks. Let's get started. In the Q4, on a consolidated basis, assets under construction and completed construction continue to accelerate, reaching over $250 million as of year-end on the back of construction activity at Phoenix, Dallas, and Denver. Revenues experienced an increase of 13% sequentially over Q3 as we realized more leases in San Jose, optimized in the other three operating campuses, and had three weeks of operations from the acquisition of the Camarillo, California campus on December 6. For the full year, consolidated revenues doubled over those from 2023. Operating expenses in Q4 increased mainly from two factors.

We began to hire general managers and staff for the new campuses coming online this quarter and next in order to do the adequate onboarding and training at our existing campuses. Second factor, as we have explained in the past, we accrue for ground lease payments at 13 airport locations, even if we're not actually making cash payments to the airport or municipal owner of our sites. That non-cash accrual of ground lease expense amounted to over $1.4 million in Q4 and is reflected within operating expenses. Also worth repeating that the increase over the last three quarters in ground lease expense is due principally to the ground lease payments at San Jose, which are significantly higher than our typical greenfield projects, as ground lease payments incorporate the leasing of an existing large hangar, apron, and parking.

Because of these existing buildings or facilities, it is basically amortized through ground lease payments as part of our operating expenses. On SG&A, we strive to keep it in check as we grow our business. We also would like to reaffirm our prior guidance that we expect Sky Harbour to reach cash flow break-even on a consolidated basis in Q4 of this year as we reach sufficient scale with the new campus openings to cover our holding company expenses. One last thing to note as you review the 10-K just filed is that for the first time, we're reporting fuel revenues apart from rental revenues. Fuel revenues are mostly margin we get from providing the fuel delivery service, as we don't take ownership of fuel in most of our existing campuses.

As this line item grows in importance, we will break down further to show how much of these fuel revenues correspond to minimum amount guarantees we embed in most of our tenant leases, as those represent also contracted revenues in a sense. Said simply, if a tenant does not fly or doesn't consume their minimum guaranteed amount, it's like additional contracted rents that get added to their rental invoice. Next slide, please. This slide summarizes the financial results of our holding on Sky Harbour Capital subsidiary that forms the obligated group. This basically incorporates the results of our Houston, Miami, and Nashville campuses, along with the Capex and operating costs of our three projects under construction in Denver, Phoenix, and Addison as of Q4. Two of those are now open. Revenues were basically flat from Q3 to Q4.

We expect a step function increase in revenues in Q2, Q3, and Q4 of this year as these three campuses are leased up and rent revenues and fuel revenues commence to flow. Operating expenses increased, but I should note, as we have discussed in the past, that these include ground lease payments or accruals as per years GAAP in all six ground leases in the obligated group. In other words, we do not capitalize ground lease payments or accruals during construction. As may be seen in the bottom right-hand chart, we've firmly crossed into positive cash flow from operations at the project level. We expect this trend to continue and to accelerate, as I mentioned, in the second and Q3s of this year when Denver, Phoenix, and Dallas campuses ramp up in lease, rental, and fuel revenues.

One last thing to note at the Sky Harbour Capital level is that at the end of 2024, we were required to begin the compliance testing as per our funding indenture, and we were in compliance in terms of those ratios for 2024 and for looking for 2025. Next slide. Let us now turn to Mike Schmitt, our Chief Accounting Officer, for a review of the introduction of the presentation of Adjusted EBITDA in our reporting. Mike?

Mike Schmitt (Chief Accounting Officer)

Thank you, Francisco. I would like to take this opportunity to provide and highlight a key business metric that we began presenting within the management discussion and analysis section of our annual report. Adjusted EBITDA is utilized by our management team to evaluate our operating and financial performance, which is supplemental in nature and a financial measure not calculated in accordance with U.S. GAAP. We have provided a reconciliation from our GAAP net loss in fiscal years 2022 through 2024 on the right-hand portion of this slide. We define Adjusted EBITDA as GAAP net income or loss before the add-backs and subtractions that are enumerated on the left portion of the slide, which I encourage you to review.

Amongst these items are a few significant non-cash items that we have discussed both in Francisco's commentary as well as our previous call, including the non-cash portion of our ground lease expense, share-based compensation, and the change in fair value associated with our liability classified warrants. We began including Adjusted EBITDA in our filings as we believe it is a potentially useful metric for investors, analysts, and other interested parties as it provides a view of our operating performance, analyzes our ability to meet debt service obligations, and facilitates company-to-company operating performance comparisons by excluding potential differences caused by various factors, including items that are non-cash or volatile in nature. Lastly, it's important that I note that our method of calculating Adjusted EBITDA may differ than similar measures utilized by other companies, and therefore its comparability may be limited. With that, I'll pass it back to Tal.

Tal Keinan (CEO)

Thank you, Mike. We've been sharing this chart on all of the last quarterly earnings calls. I think this is fundamentally where value is driven at Sky Harbour. This is the realizable revenue from ground leases that have already been signed. We are currently at the second to last from the right chart. That's BFI. That's our Boeing Field in Seattle, our most recent acquisition, which puts us at just under $140 million of realizable revenue. By the end of this year, if we meet our guidance, we will be coming into shape $190 million of realizable revenue. The, I think, important thing to look at on this chart is, you know, I would advise anyone looking at the company, let me remind people of the methodology here.

This is the number of square footage, the amount of square footage of hangar capacity that is buildable on each site according to our site layouts, times the Sky Harbour accruement rent or share, which is what aircraft are currently paying on those airports in rented fuel. We think that's a conservative estimate because on every airport, our actual revenues have significantly exceeded the shares. That, I think, is a good starting point. Now, anyone who's analyzing us will want to discount for development risk, lease-up risk, you know, operating risk that goes with that. That fundamentally is the foundation of value creation at Sky Harbour. On the right side, you can see the current status of the various airfields that have been announced. With that, let's move to the next slide. Okay.

I will not dwell on this other than to highlight in the under construction section, DVT is Deer Valley, Phoenix. We actually have our first two certificates of occupancy at Deer Valley, and we have begun flight operations at that airport. We continue with construction with the rest of the campus. At ADS, that is Addison, Dallas, we have our first certificate of occupancy. Again, construction continues with the rest of the campus. Other than that, I am not going to go through the rest of the items on that chart. Let me hand it back to Francisco.

Francisco Gonzalez (CFO)

Thank you, Tal. On the left-hand side, we show that we continue to enjoy strong liquidity with about $127 million of cash and US Treasury bills. We continue our cash management strategy led by our Treasurer, Tim Herr, of rolling our cash in short-term one and three-month US Treasury bills pending their use in construction. These cash balances exclude the approximately $32 million cash we used in December to acquire and pay certain liabilities of Cloud 9 and Sky 805 at Camarillo Airport in Ventura County, California. On the right-hand side, I wanted to show the latest trading of our long bond, which continues to rally over the past year. We have been in constant touch with our bondholders who continue to exhibit interest in our bonds and look forward to our next offering.

We have begun the process to approach the rating agencies to aim to secure investment-grade ratings for our existing bonds and will be reporting on that exercise by this summer ahead of our next debt financing. We also want to take the opportunity to reiterate our expectation that the future debt service coverage ratios for these bonds will exceed those that we forecasted at the time of the bond issuance three years ago. Supporting and protecting that coverage is a solemn commitment that we have as a firm. Next slide, please. As many of you know, we completed our second PIPE equity placement of common stock in the Q4 of last year, raising approximately $75 million from a group of existing and new qualified investors.

Those proceeds, along with cash in hand, will support our next debt issuance in anticipation of the start of construction of phases one at various projects outside the existing obligated group. Let me turn it back to Tal to discuss some of those new campuses and ground leases that we have secured in the past quarter.

Tal Keinan (CEO)

Thanks, Francisco. Okay, briefly on each campus, we're starting with Camarillo, California. This is our first brownfield acquisition at Sky Harbour. The reasoning behind it is pretty straightforward. As many of the people on the call know, we split our airport target list into what we call primary airports and secondary airports, or primary airports and repositioning airports. Primary airports are airports where the airplane lives at the same place that passengers board and deplane. Okay? If you take an aircraft that's based at Teterboro, that is a primary airport. Repositioning airports are airports where the airplanes live, but the passengers do not always board and deplane. If you take Bradley, Connecticut, or Oxford, Connecticut, that's a place where a lot of aircraft live that reposition to, let's say, Teterboro or White Plains for passenger operations.

Camarillo is both of those, and there are a number of airports that serve both of those purposes. It's a primary airport for aircraft owners that live roughly in the corridor between Calabasas and Montecito, California. It's a secondary airport that serves Van Nuys, which is the top primary airport for the LA basin. What we foresee happening, this is a little bit future-looking from our perspective, but really not by much, is that Santa Monica Airport is in the process of closing. It has been for a number of years now. It's already been cut in half in terms of runway length, forcing most of the large jets off of the airport.

When it does finally close, a lot of the or all of the aircraft that are based there will be looking for new homes in California, and there's going to be a crowding-out phenomenon into a market where there is already zero capacity. Van Nuys is fully, fully booked with waiting lists across the entire airport. Similar situations exist in Burbank. LA is definitely one of the top markets for us in the country, capturing an existing facility that is already cash-flowing that is really on the migration path. It has to pass through Camarillo is an important move for us. I will say, Francisco noted, we closed that transaction in December. You're not really going to see any of the cash flow from Camarillo in our Q4 earnings. You'll begin to see those captured starting in Q1 of this year. Next one is Trenton, New Jersey.

Again, I've said it before on this call, Sky Harbour could be a New York-only company, and it'd be a pretty exciting company if we were only based in New York. Almost any square foot of land that we can get in the New York area, we want to get. I say in general, the repositioning airports in the New York area feature higher rents than the primary airports in almost every other major metro center in the United States, save maybe a dozen, probably fewer than a dozen. We are very excited with Trenton, New Jersey.

It is, again, I would say, first and foremost, a repo airport for Teterboro and White Plains, although there is a significant amount of activity from, call it the Philadelphia suburbs all the way to Princeton, New Jersey, and a lot of the pharmaceutical industry that's based in that area. Exciting development for us. Lastly, Boeing Field, which we've been at for about five years now. Just a reminder to people, our site acquisition features a much longer gestation period than we originally appreciated. I think that was bad news for us for the first few years. It is very good news for us today that I think people are seeing there's a bit of a hockey stick moment going on right now on the site acquisition side, as seeds that we planted five years ago are beginning to sprout today.

Seattle is one of the best markets in the country. It's one of those, call it dozen exceptions where you can exceed New York repositioning rents. And Boeing Field is the reigning king of Seattle, no pun intended because it's King County. This is our first foray into Boeing Field. There are additional targets for us on that field, and we hope this is the beginning of a very long and fruitful relationship with King County. A couple of highlights from Q4. By the way, I'll call out the photographs. That is from, somebody help me, Phoenix. That's one of our Phoenix hangars in the photograph. I like to bring things into site acquisition, development, leasing, and operations. Increasingly, people who study the company closely have seen that these four silos are increasingly integrated. It's really one fluid effort increasingly as we go.

In terms of framing and understanding the scope of our activities, it's still, I think, useful to break it into those four areas. On the site acquisition side, we discussed the three airports that have come on board. On development, the biggest theme is our really foundational effort to turn this into a major construction company with the associated benefits of speed and cost control. I'll talk about that a little bit in the next slide. More tactically, DVT and ADS, that's Phoenix and Dallas, have both commenced operation. We have leases in both campuses with flight operations having commenced. Something that people who look at us a little bit closely understand, we do have a kind of an interesting period where flight operations have begun, but construction is still not finished on the rest of the campus.

It's a bit of a dance to make them coexist in a safe and efficient way. We're there right now, and I think the overlap is several months. I don't think that's something that's going to go away. That's how we will operate probably forever because we do think we have a good handle on how to conduct those parallel operations safely and efficiently. There's no reason to forgo the revenue in the meantime as you're waiting for lease-up. APA is Denver. That is set for delivery next month. We are under LOI for a good number of hangars in Denver already. Again, we can't move people in until we have certificate of occupancy, but that is in the next month or so. Two new projects slated for delivery end of this year, beginning of next is Miami phase two and Dallas phase two.

We have another 14 projects in various phases of development. Not to jump ahead, but the Sky Harbour 37 is the name of what we hope, at least for the next few years, will be the final prototype in Sky Harbour. A lot of our cost-cutting and speed-enhancing exercises have to do with the fact that it is the same hangar, same prototype on every airport with minor adjustments, right? We have a version that is compliant with wind load requirements in Florida, one that is compliant with snow load requirements in Connecticut, one that is compliant with seismic loads on the West Coast. Those are minor adaptations in the prototype, and you will call it at 95% the same hangar in each of those locations. Possibly, I will say possibly, the major effort right now at Sky Harbour is getting that program perfected and running.

On the leasing side, I noted we've started leasing as soon as hangars are CO. They've been leased in Phoenix and Denver, and we hope to continue that. We figure the next four to six months, we should get close to full capacity on those campuses. Again, Denver under LOI, pending certificate of occupancy in the coming months. I think there's a line of questioning that we've gotten over the last year or two, both on these calls and offline, regarding pre-leasing and why doesn't Sky Harbour do any kind of pre-leasing. A lot of that comes from our bondholders, which we understand. Our answer has always been that our pricing leverage really peaks when we actually have a standing product that's move-in ready. This industry is not really one that looks two, four years ahead.

As an industrial or office tenant might, aircraft owners tend to look for hangar capacity when they need hangar capacity. We are starting to see a few exceptions to that, and I think that has to do with the brand that we have been making a really conscious effort at building. This brand, yet, it is spreading, and it is not a huge community, the business aviation community. People who understand the unique value proposition that Sky Harbour brings.

There are often existing residents who are looking to expand. We are entertaining our first pre-leases specifically in Miami and Denver. We have begun to talk with people on other campuses that are not quite as far along in development. Again, a very good anchor tenant who understands the value proposition and is comfortable with the rents that we are putting forward. I think that is something that we will increasingly experiment with.

I don't see us ever trying to pre-lease an entire campus, but one or two hangars is probably not a bad thing to do. We'll stay tuned for how that goes. Finally, again, if you're following our results, you can see it. I mentioned it earlier. The actual revenues continue to exceed, actually by increasing margins, our forecast revenues. That is particularly, again, if you're studying us closely, that's particularly the case on the second round of lease-ups, okay? The second round. The first time you lease up a campus, you've got 150,000-200,000 sq ft of hangar, and it's 150,000-200,000 sq ft of vacancies. You're negotiating with very sophisticated prospective residents that are coming in. The leverage is such that, from our perspective, let's get them leased up as quickly as possible.

As you see, the second turn of the lease is where we really start establishing what we think is the market rate. Again, something you can track if you're studying us closely. Fourth operations, increasingly important part. We had a big thrust in the Q4 of last year, including the onboarding of Marty Kretchman, our Senior Vice President of Airports, to really codify what seems to be the special sauce that's driving value for residents at Sky Harbour, and it's really in the operations. The real estate is a platform. The real estate has to be put down in a very specific way in order to be able to serve that operational level that we've been serving. Fundamentally, staffing, training, and equipping these campuses in our specific way is a key to the entire value proposition. Increasingly, we're seeing that recognized in the industry.

There are a number of flight departments that will do everything they can to be at Sky Harbour, and we want to keep it that way and grow it. Lastly, a look ahead to the next 12 months, again, in these same four categories. Site acquisition. We have a lot of seeds sprouting as we go. I do not want to say that happens on autopilot, but it increasingly requires, I call it, a more routine effort. Our kind of innovative, aggressive efforts are increasingly focused on the best fields in the country. Fundamentally, we are still waiting for a competitor to come in and join us in this space. For the time being, as we are alone here, our focus is really capturing the best revenue-producing fields in the country. The growing site acquisition team is focused primarily on that.

That is the ambition for 2025, is the best airports in the country. On the development side, right now, it's all about that scaling program. If there are questions on it, we're happy to get into some detail. For now, I'll leave it at this. Our number one ambition is quality. We want the best hangar in business aviation, full stop. Time, we want to put these up quicker than anybody knows how to put them up, a lot faster than we're doing it today. We want to be doing it at an increasingly attractive cost to Sky Harbour. On the leasing side, there is a growing brand for Sky Harbour, and that's something that we're looking to capitalize on.

We have opened a marketing department at Sky Harbour for the first time, and we will be looking to articulate our message and our value to the market in a more deliberate way going forward. Lastly, operations. The focus will remain on the Sky Harbour resident. I know a lot of people have called in to ask about additional revenue-producing services, which are certainly in the works, but we're introducing those things, things like our new security service, really as a value-enhancing service at the beginning rather than a revenue-producing service, with the idea that, again, we want to put as many good dots on the map as we can right now.

That is the primary focus of the company, is grow and grow in the right places, put out the best offering in aviation, and then we'll have time later to circle back and see which revenue line items we can capture later in a way that enhances value for our residents. We have spoken about additional revenue-producing services in the past. I want to reiterate that it's important, but it's certainly not the most urgent item right now. It's not where we're allocating most of our resources. With that, we have that. Oh, yeah. Okay. Yeah. With that, why don't we open to questions? Yeah. This concludes our prepared remarks. We look forward now to your questions. Operator, please go ahead with the queue.

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. Your first question comes from Alex Bossert .

Operator (participant)

In a recent podcast interview with Ben Clareman, Tal mentioned it's absolutely possible to have 50 campuses in three to five years. I'm not giving any spoilers, but I think it might be possible to exceed that as well. Could you provide more color on this statement and expand on what is leading to the potential of a significant acceleration in the pace of ground lease signings?

Tal Keinan (CEO)

Yeah. Thank you, Alex. Look, if we just meet our guidance and don't exceed it, then by the end of this year, we're already halfway there. As you've probably noticed, I know you're somebody who follows us quite closely, the pace of site acquisition wins is growing exponentially.

It's not linear. That has to do with what I mentioned earlier, is that a lot of that is seeds that were planted years ago that have been cultivated over the last years and are now beginning to sprout. We see a very strong case for accelerating and significantly beating our projections. Again, we're not quite ready to make any plans for the end of this year yet, but certainly for the next three to five years. I think 50 may end up having looked conservative.

Operator (participant)

Your next question comes from Philip Ristow. Congrats on the new BFI lease. I'm assuming this is the second brownfield location. If so, what is the expectation on price per sq ft of the six new locations for this calendar year? Are any of those six also brownfield?

Finally, what does the timeline look like for additional revenue streams to start to materialize? Thanks.

Tal Keinan (CEO)

Okay. Thanks, Philip. There are a couple of questions in there. Starting with the last, it's what I closed on at the end of my remarks, is that those additional revenue streams, we're not in a rush to put them in place, right? Right now, almost all of our revenues are from rent and fuel. Services that we have rolled out, like the security service we're offering right now, really as part of rent.

The idea is let's focus our efforts on claiming more marquee airport sites around the country and creating the best possible offering that we can for Sky Harbour residents, with the idea that there'll be plenty of time to circle back and optimize the revenue streams and get into some of the other, call it OPEX line items of an aircraft owner. So important, but less urgent than the others. On the six locations that we're set to announce for the coming year, all of them are green fields. That said, the nature of the brownfield opportunities is such that it's difficult to predict when they're going to materialize. Happily, Francisco and team have us in a place where, from a liquidity perspective, we've been able to capitalize on those quickly. I think that's part of what allows us to win.

I don't know if any of those will materialize this year. I will say that the kind of informal pipeline of brownfield opportunities that are being shown to us seems to be getting more robust. I wouldn't be surprised if there are some brownfield opportunities, but my guess is they'll be on top of the greenfield opportunities, not instead of. Anything else in there? No, I think that answers it. I'm going to move to the next.

Operator (participant)

Your next question comes from Randy Benner. Great quarter, and thank you for taking the question. It is positive to see the 23-campus guide confirmed. Can you give us a sense of how campus development will progress in 2026? Okay.

Tal Keinan (CEO)

Thanks, Randy. Based on the first part of the question, I assume you mean by development, site acquisition in 2026.

We're not providing guidance quite yet for 2026, but I would say we should continue at least a pace with 2025, possibly significantly more than that. If you want to put a range, I think the bottom of that range would be, call it six airports. I do not want to say what the top of the range would look like.

Operator (participant)

Your next question comes from Alex Bossert. You mentioned that the average step-up in rents when you've had a vacancy has been 28%. Do you believe that your existing tenant leases are below market, and do you believe you can continue to achieve large step-ups when you release space?

All right. Thank you. That's a good question. Look, I'd say this. I do not know that we've had a third lease on a hangar yet in the portfolio.

My guess is that the step-up from the second lease to the third lease is not going to be quite as dramatic as the step-up from the first to the second lease. That is more or less how I see this going down, is you have a significant compromise, let's call it, on your first round of lease-up in an airport, a significant step-up to what I would consider market rates on the second round that you lease up. Then from the second round on, or sorry, third roll on, I would say inflation should more or less be our guide. Again, this is barring establishing a more solid brand and better recognition in the industry that if you are a premier jet owner, you want to be at Sky Harbour. If we put that aside for now, I think inflation should be our guide.

Now, to be clear, we think inflation at airports is going to outstrip CPI by a very, very significant margin. It's beachfront property. There are no new airports coming up. There's limited additional land at existing airports. We think inflation is going to be a pretty major factor. That's what I think. Just one kind of hint to where that goes is that our multi-year leases feature annual escalators of CPI with a floor of 4%. There's very little pushback in the industry. Again, we're dealing primarily with most sophisticated flight departments in aviation. The fact that there's little pushback, I think, constitutes some recognition among those who are experienced in business aviation operations that significant airport inflation is inevitable.

Your next question comes from Tom York.

Slide 10 indicates you are funded for 800,000 sq ft, assuming you receive the full $150 million of PAB funding. Your sq ft in development outside of the obligated group is obviously more than double 800,000. How do you expect to bridge this gap funding-wise?

Francisco Gonzalez (CFO)

Yes. Tom, it's Francisco. Again, thanks for the question. Indeed, we are very deliberate of our capital raising plan. One of our objectives always to be at least 12-18 months in terms of having the capital versus the time that we need to deploy it, making sure that we can then navigate any market environment and so on on a timely basis.

Come 2026, we should be then, on a consolidated basis, a positive cash flowing company from the standpoint of the operations, which then leads to the question, do we redeploy that excess cash as the equity into new fields thereafter, or do we, at some point later in 2026 or 2027, start thinking about the dividend policy, if any, for the company? There's been a lot of school of thought in our board, in our investor base, and that's a debate that we'll continue having internally over the course of the next 18 months. Do we dividend out most of our free cash flow, but then that will require us to raise growth equity in the markets, or do we reinvest our cash?

Now, given our accelerating level of ground leases, it's fair to say that those free cash flows for 2026 and 2027 will not likely be sufficient to meet that time schedule. We have been approached in the past couple of years by between four to six real estate infrastructure funds who have been interested in potentially partnering with us in some type of sidecar vehicles to prosecute our business plan, where we will be needing to put just a small amount of equity and be able to extract a significant amount of the economics of our business model. We also have been wrestling with those more asset-light business models as a way of thinking about the right deployment of our capital versus the dilution to existing equity holders. Again, we're going to be deliberate about this going forward, and stay tuned for that.

Tal Keinan (CEO)

Thank you, Tom, for the question.

Operator (participant)

Your next question comes from Randy Benner. Can you please provide an update on the process for raising $150 million?

Francisco Gonzalez (CFO)

Oh, yes. Thank you, Randy, for the question. We just came earlier this week from a Muni Bond Conference in Midtown Manhattan, sponsored by a large investment bank. We were pleasantly happy to see we had about 11 one-on-ones with institutional investors, some of them who have been with us since the original PABs deal three years ago, and some new faces and so on. It is clear that there is an interest in our bonds in terms of the existing bonds and the potential debt financing this summer. In terms of the process, we have commissioned the feasibility and marketing study with the third-party consultant. That is on the way and should be ready by May, late April, early May.

We also are in the process of starting the renewal process to seek investment grade with our existing bonds. That is something that also, as I said in my remarks a few minutes ago, we look to also update everyone by the beginning of the summer. We are obviously paying attention to market interest rates and credit spreads and all of that, and working with our various relationship bankers in terms of our strategy. Simultaneously, we have received several proposals from some large commercial banks to basically provide five-year term financing in lieu of bonds, which is also an alternative that we have in place to the extent that we do not like the bond market at the time that we come to market this summer.

Operator (participant)

Your next question is from Alex Bossert.

Does RapidBuilt have the opportunity to expand to clients outside of Sky Harbour? If so, how material could this be?

Tal Keinan (CEO)

Yeah. Thanks, Alex. The answer is yes. It turns out that the Sky Harbour 37 prototype is actually a pretty good design, not just for Sky Harbour's uses. The way that's shaped, and I do not know if it's made its way to our website yet. If it hasn't, it will be soon. You can actually comfortably fit about 70,000 ft of airplane into that 37,000 sq ft of hangar, right? That sounds counterintuitive. When we put it up on the website, you'll understand exactly how that works. If you're a busy FBO, you could probably get to a lot more than that. The answer is yes. Sort of remind people that the purpose of the RapidBuilt acquisition was to increase the quality, speed, and reduce the cost of Sky Harbour development. That's really what that company is about.

We're not seeking to turn it into a profit center for Sky Harbour. That said, we're working one shift now at RapidBuilt. We're soon going to go up to two shifts. We're not going to be filling our two-shift capacity entirely. We can go to three shifts ultimately in that factory as well. There will come a point where we're very comfortable that we're supplying ourselves adequately and doing exactly what we need for Sky Harbour at RapidBuilt. That might be a time. It's a pressing question because we are actually getting quite a bit of interest from third parties to manufacture metal buildings for them, and people who understand the Sky Harbour 37 and are happy to take exactly that for their own uses. I'd say probably not in the next couple of quarters, but ultimately, that is an opportunity.

Operator (participant)

Your next question is from Pat McCann.

Can you give any expectations for the interest rate you might get with the upcoming private activity bond issuance?

Tal Keinan (CEO)

Yes. Thank you, Pat, for the question. The secondary market trading of our current bonds, and you can actually follow this by logging into the MSRB EMMA website of the municipal industry. In the last trade, our long bond was about 5.38% in yield. Our shortest bond, which is the 11-year, traded at last at 4.65%. Call it, on average, roughly around 5%, 5.18% in terms of secondary market level trading. A new issue sometimes likely comes at a discount to that, meaning a slightly higher yield. In the current market, one could speculate a little bit that issuance like ours will come there in the low fives.

Now, our plan, though, is first to seek investment grade ratings for existing bonds, which should obviously impact those secondary market level of those bonds. That might have a halo effect on our new issuance. Stay tuned for that. Our goal, obviously, is to get the lowest cost and value out there in the marketplace for the next financing.

Operator (participant)

Your next question comes from Doug Johnston.

Are you going to publish publicly, excuse me, the projected 2025 DS coverage for the PAB obligated group?

Tal Keinan (CEO)

Yes. Thanks for the question. We actually did. If you look at the quarterly financial unaudited of the Sky Harbour Capital that was filed with MSRB a few days ago, March 1. I have been March 1. The audited financials will be coming up in the next few days.

You will see in the last page the calculation for 2024 and the calculation for 2025. The other thing I will note, in our website, we posted already, or we are about to post, the presentation that we provided this week in the municipal bond conference. We showed the projected level of debt service for the Sky Harbour Capital bonds and proforma for, or updated, I will say better, for the rents that we have been receiving in the past three years and that we expect to receive in the phases that are still under construction or in development. You can see our expectation of that debt service coverage in that presentation. Thank you.

Your next question is from Tom York.

In 2023, you projected debt service coverage of over three times in 2025, but have lowered this to 1.36 on EMA. What are the moving pieces here?

Yes. Thank you, Tom, for the question. It's actually like a follow-up to the prior question. Yes, the debt service coverage ratio calculated for 2025 is 1.36, which is higher than the 1.25 maintenance requirement in indenture. We have to remember that we still are halfway, or actually less than halfway, of the revenue potential of the obligated group. As we open Denver, Phoenix, and Dallas in the coming months, and then later on in early 2026, Sky Harbour Opa-Locka, phase two, and later then Denver, phase two, all those things together will result. Our expectation is that the debt service coverage, once all those things stabilize a couple of years from now, will be higher than the three times that we expected three years ago.

Actually, again, referencing that illustration that we provided in that presentation filed with MSRB EMMA, actually that we're going to file later tonight or tomorrow, you will see that our expectation is that instead of three times as we projected three years ago at the time of the bond issue, we are looking to be at four to five times the debt service coverage of our debt service in the future years. Please look into that. Thank you. Your next question is from Peyton Skill. Based on the 10-K, estimated some airfield construction costs, RSF, have changed quarter over quarter in both directions. Can you provide some color on initiatives that have reduced costs, RSF, i.e., BDL, and challenges that have increased costs, RSF, i.e., PWK? Yeah. Thanks, Peyton. Let's start with all the macro factors are pushing costs up.

That is obviously not specific to Sky Harbour. That is across the board. The efforts that we have been talking about for the last several quarters on the development side have started to bear fruit. I will give you some examples. Just the manufacturing of pre-engineered metal buildings by ourselves is saving us today on the most recent projects between $32 and $33 a sq ft, right? That is what we would be paying in pre-engineered metal building margin to third-party suppliers if we had to purchase from them. We have taken a lot of the ability to control the feedback loop between manufacturing and construction. I am talking about the extreme end of the construction envelope, which is the subcontractors.

Take, for example, trades like erection and create a strong feedback loop between our manufacturing and what is now becoming a small group of regional and national erector partners with Sky Harbour who are putting up our campuses. That feedback loop is, we project, and we have not seen this yet, but we are going to have to live up to this as we put these next projects into construction, is going to result in significant time savings in the field. These buildings are going to go up a lot faster than the previous buildings went up. That is time savings.

On the other side of that, and we do not exactly put this into cost cutting, but if you figure that a fully leased campus generates, call it $500,000-$700,000 a month in net operating income, shaving a month or two off of a construction timeframe is very significant in terms of when revenues get turned on again. Another example, and I will not provide too many of these, but another example is national procurement, right? The way we have built all of the campuses to date has been, let us say you are looking at your lighting fixtures, of which there are thousands on a campus. We will purchase those on a per-campus, per-project basis, typically through our electrical subcontractor who takes a margin on that as well. That means building each campus as though it is the only campus that we are ever going to build.

What we're doing is starting now on the campuses that are coming in is that we're pre-purchasing everything that we can for the next six, seven, eight campuses at once. We're already realizing really significant cost savings by that procurement. There are all sorts of interesting kind of hedging and procurement means that we can take. Look, some of them I think we could have done earlier. We just didn't, or we hadn't gotten around to it. Some of them are really a function of the scale that we're building at right now and that we're able to realize it. Stay tuned for that. If we do this right, you'll see our development costs continue to come down as we go forward.

Your next question is from Dave Storms.

One, as you are procuring materials and labor for development, are you seeing any impact from tariffs?

Operator (participant)

You mentioned site acquisition has benefited from seeds planted a while ago. Are you seeing or expecting to see any impact on the pace or availability of site acquisitions coming from some of the uncertainty in the public sector following the government layoffs at the federal level?

Tal Keinan (CEO)

Yep. All right. Thanks, Dave. I'll start with the second one. Short answer is no. First of all, our exposure to the federal regulation is relatively static, right? Compliance with FAA guidelines, secondarily TSA guidelines, pretty much anything national is uniform. It can be complicated, but it's uniform and it's relatively unchanging. We don't see any significant change. Most of the unique hurdles that we have to cross on every project are local, right? Local and state. The answer to that one is no. On the first one, look, there have been two hikes in steel prices this month.

The short answer is yes. We are seeing some materials and labor, well, materials changes. I'm not going to talk about labor quite yet. Yes, those are directly resulting of tariffs. Luckily, we were able to preempt that just out of a bunch of caution, put some pretty large pre-orders in place before those happened, and we're able to capture some savings. We're feeling pretty lucky to have gotten that in place. Going forward, we don't want to speculate on macro developments. The night is young. We'll see how the whole tariff situation unfolds for us. For the coming projects, we're actually covered. Sky Harbour itself was actually not impacted by those two increases in steel prices. As a reminder, if you'd like to ask a question, please submit it on the webcast.

Operator (participant)

Your next question is from Jacob Robinson.

Hi, Sky Harbour team. A student from the University of Michigan here was wondering if you had a solid outlook on the Capex financing plan well into the next five years and how the terms of that lending might gradually turn in your favor and when you might choose to instead turn to equity issuance and further dilution.

Tal Keinan (CEO)

Thank you, Jacob, for the question. This reminds me that there are always college students looking to invest early in their careers. Also, I have to say, Go blue for those of you guys who follow Michigan.

Listen, the interesting thing about our model is that we have a very modular business plan in terms of the moment we secure those ground leases, as Tom mentioned earlier, we then have a very deliberate plan in terms of getting the entitlements, the permits, and so on that could range between six or nine months. We then have like a 12-month construction period. We then have basically a lot of visibility ahead in the finance area of looking out at those ground leases as they're coming together and those various construction plans and so on. We basically have a good idea well in advance. I say actually, as I mentioned, like about a year or two years in advance of when we actually need funding, which is important because it allows us to plan, be opportunistic, and so on.

As I said earlier, our plan is always to be raising the funds 12 to 18 months minimum ahead of when we need the funds. As you look out into the future, that translates into a capital plan and a financing plan that we obviously will have to be opportunistic situations that lend themselves in the marketplace, either in the debt side or in the equity side. I think one important thing is always to have a plan B or plan C and so on just in case there is market turbulence, either in the equity markets or in the debt market. I think we have proven in terms of our pipe financings that we have been able to take advantage of reverse inquiry interest into the company, as we have proven in our couple of financings in the past year and a half.

As I mentioned earlier, we're dual tracking, for lack of a better word, between a bond deal and a bank financing for this upcoming bond deal or debt financing this summer. As I said in response to another question, we have also the opportunity to potentially co-invest with existing large real estate or infrastructure funds in some projects, especially brownfield ones. There are a lot of alternatives here that we see in front of us. We are going to be deliberate as we go forward in our deployment, obviously being conscious of cost of capital and dilution to our equity investors. Thank you, Jacob, for the question.

Operator (participant)

Your next question is from Brad Thomas.

Curious as to Sky Harbour's customer sentiment as it relates to reshoring announcements and Trump tax cuts. Thank you, Brad. I think by customers, you mean our residents?

Tal Keinan (CEO)

It's a good question. I'm trying to think where we might have gotten a peek into that. I will say, in general, we're feeling significant optimism from our residents. If you measure that in terms of the level of improvements, post-delivery improvements that tenants put into their hangars, and in some cases, we're talking about literally a million dollars on a leased space, right? It's often not necessarily a very long-term lease. There actually is quite a bit of optimism in that group. Whether that has to do with reshoring or tax cuts, I don't know. I'll ask if anyone around the table, Francisco, maybe you know about bonus depreciation.

Francisco Gonzalez (CFO)

Yeah. I was going to add that. First of all, thank you, Brad, for the question. It's great to see the King of REITs following our stock. Thank you, Brad. Yeah.

I was going to mention that it has been rumored that as the tax plans coming together in Washington, that they may bring back what they had in the 2017 tax reform of the accelerated depreciation for new machinery equipment, and that will include also business aviation aircraft. If that were to happen, where you basically depreciate the entire purchase of a plane within a year, that should accelerate the people purchasing planes or upgrading their planes to bigger planes. I remember in our business model, it's not just the amount of business aviation. It's that the amount of business aviation of larger planes cannot be serviced by the existing legacy hangar real estate out there. Thank you, Brad, for the question.

Your final question is from Alex Bossert.

Operator (participant)

In a recent podcast interview with Ben Clareman, Tal mentioned that recent M&A transactions of hangar space by peers in the industry imply a value for Sky Harbour a lot higher than the current share price. Could you mention what those comps are and their valuation?

Tal Keinan (CEO)

Thank you, Alex, for the question. We avoid having discussions of our view of our value. We let that to the pundits and our research analysts that cover us and so on. One thing we will note is that we have observed in the M&A market for FBOs, although again, different model, but those continue being bought and sold at very hefty multiples. I think more comparable than an FBO, because we're an infrastructure real estate business model, is marinas. Marinas, especially in the U.S., have a lot of similarities to us in the sense that they're beachfront properties, literally beachfront properties.

They sell fuel, and you cannot really replicate or be there's no more marinas being dredging and environmental issues make it very scarce real estate. Obviously, they serve a very diverse clientele of high net worth individuals. A lot of similarities. We saw a recent M&A transaction when Blackstone, I think, acquired Safe Harbor Marinas from a REIT out there called, if I can remember here, Sun Communities. That was at a hefty multiple, I think it was 21 times every dollar or something like that. Anyway, we keep track of the M&A activity out there. Truthfully, we're very focused on our business and execution and our plan and so on and our funding needs and so on, and that valuation be something that gets determined over time by the marketplace.

Operator (participant)

With no further questions at this time, I would like to turn the call back to Mr. Francisco Gonzalez for closing remarks.

Tal Keinan (CEO)

Thank you, Abby. Thank you, everybody, for joining us this afternoon and for your interest in Sky Harbour. We have, as I mentioned earlier, additional information at our website that we keep updating, and that is at www.skyharbour.group. You can always reach us directly with any additional questions through the email [email protected]. Thank you again for your participation. With this, we have concluded our webcast, operator. Thank you.

Operator (participant)

Thank you. Ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.