Sky Harbour Group Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
March 27, 2024

There are 5 speakers on the call.

Operator

Good afternoon. My name is Christa, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Sky Harbor 2023 Year End Earnings Conference Call and Webinar. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer If you would like to ask a question during this time, simply submit a question online using the webcast URL posted on our website.

Operator

Thank you. Francisco Gonzalez, Chief Financial Officer,

Speaker 1

Thank you, Christa. I'm Francisco Gonzalez, CFO, Scott Harber. Hello, and welcome to the 2023 full year earnings equity investor conference call and webcast for the Sky Harbor Group Corporation. We have also invited our bondholder investors in our borrowing subsidiaries, Sky Harbor 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.

Speaker 1

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 12 of this presentation as well as our SEC filings for a description of the factors that may cause actual results to differ from our forward looking statements. All forward looking statements are made as of today, and we assume no obligation to update any such statements. So now let's get started. The team with us this afternoon you know from our prior webcast.

Speaker 1

Tal Kanan, our CEO and Chair of the Board Mike Schmidt, our Chief Accounting Officer Tim Herr, our Treasurer and Tory Petro, our Accounting Manager. Joining us today is Will Whitesell, our COO since the beginning of the year. Will came to Sky Harbor after a successful career in the construction industry, having spent 15 years at Turner Construction, 4 years at the related companies and more recently, 6 years at SoHo 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 want to review with you before we open up to questions.

Speaker 1

These slides have been filed a few minutes ago in the Form 8 ks 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 4Q platform and we'll address them shortly after our prepared remarks. Let's get started. Next slide please. This is a summary of our financial results in the context of the trend of the past 3 years SelectiveMetrix.

Speaker 1

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 one adjusts for the previously disclosed and non recurring items of Q3 and now we are 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 Jose Mineta International Airport and Tal will shortly disclose more details on this great exciting ground lease and operation. 2nd, our operating expenses and SG and A are semi fix to fix, 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 breakeven point, which we expect now to occur at the beginning of 2025 after the opening of commercial operations near 3 campuses currently under construction. Next slide.

Speaker 1

Similarly, the financial results of Sky Harbor Capital and its operating subsidiaries that form the obligated group of our outstanding bonds track similar results that the holding public company, except for the SG and A, which is mainly at the parent company and the employee stock based compensation expenses also at the parent company. Skyharbour Capital is forecasted to be casual positive throughout 2024. In terms of rentable square footage, we continue to make significant progress in securing new ground leases with the newest executed at the San Jose Mineta International Airport and at the Orlando Executive Airport. Following approval by the Great Orlando Aviation Authority. As we have stated in the past, the value of our business is not backward looking when the projects in the pipeline in front of us.

Speaker 1

Once the 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 Edison. And later to Tal for more on these exciting news about our new airports. Will? Thank you, Francisco.

Speaker 2

This slide represents the individual field's cost and schedule impacts from our 3 month forensic engineering study. The root cause analysis has been determined to be a one time structural design defect with our prototype Hanger. 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 slide 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 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.

Speaker 2

With that, I'll turn it back to Francisco to discuss the financial implications.

Speaker 1

Thank you, Will. Implementation of the remediation has increased and extended the life of the obligated group's construction funds, as illustrated on the graph on the left hand side of the deck slide. Having identified, corrected and now implementing the remediation, we injected $27,000,000 in additional cash equity from the holding company to Scarborough Capital to ensure fund insufficiency at the construction front of the obligated group. The pro form a cash and U. S.

Speaker 1

Treasury bills at the obligated group currently now stand close to $127,000,000 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 PAPS 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 of ramping up our development activities.

Speaker 2

Thank you. As Francisco gave a quick introduction on my background, I spent 25 years of my career in 2 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?

Speaker 2

1, team integration of our development and construction members. These three groups have to be fully integrated, ensuring we have enough bandwidth, disciplined experts with proven results. 2, prototype refinement. As we move forward, we standardize our hangar design and configuration. This will allow us to drive both cost and execution as we move forward.

Speaker 2

3, manufacturing capacity. We continue to retool and increase our internal fabrication capacity with RapidBuild and develop multiple external fabrication sources to ensure we have plenty of supply to meet our future demand of Penby structures. And 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.

Speaker 2

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 into through the rest of 'twenty four into 'twenty five. With that, I'll turn it over to Tal for a leasing update.

Speaker 3

Great. Thank you, Will.

Speaker 1

Okay. So you can see

Speaker 3

the first three pie charts on the left are our existing campuses in Houston, Nashville and Miami. You can see we're a little bit actually a little bit above 95% occupancy, which if you subtract the assumed vacancy rates in our original PABSS filing represents what we've called full occupancy. 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 CPI with a hard floor of 3% or 4%.

Speaker 3

So they're escalating at a good rate. Our renewals, we have had our first renewals, which have come in, in the 20% to 30% range. So we do believe there's significant upside once you are fully leased. I think we'll probably save it for a separate call 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.

Speaker 3

On the right side is our new campus in San Jose, which is our 1st 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 1, which is next week. We're already pre leased to the tune of almost 60% and hope to be fully occupied sometime in the few weeks in San Jose on the first phase of that.

Speaker 3

Next slide is San Jose itself. So I think as we go forward, you're going to hear us talking more and more about revenue capture, which I'll describe in a little bit more detail in 2 slides. But it is essentially the available revenue to us at each location. So our Phase 1 at San Jose, what's opening right now, we're looking at about a $5,000,000 revenue opportunity. Phase 2, which will add to that, will add another just north of $2,000,000 Again, very, I'd say, one of the more established airports and metro markets in the country.

Speaker 3

And 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 11th announced airport win, which is Orlando Executive. San Jose 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 $5,000,000 of revenue capture in Phase 1, just over 3,000,000 dollars in Phase 2.

Speaker 3

And this is a market that 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 the metro center with the 2nd highest GDP growth in the United States. So we're quite optimistic about the future of our Lighter Executive. The next slide is on revenue capture.

Speaker 3

And again, 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. And so what you can see on this slide is the kind of 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 6 airports.

Speaker 3

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 $95,000,000 in available revenue. Okay. That's square footage times the Sky Harbor 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.

Speaker 3

Next slide. I think we'll wrap it up here. I'm just going to the only thing I want to 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.

Speaker 3

Go after the best fields, achieve the most square footage that we can in the shortest time possible. And As we see the questions coming in, I see that a lot of people are asking about that. I think that's exactly appropriate. Right now is where we go into high growth phase. With that, let me hand it back to Francisco.

Speaker 1

Thank you, Tal. This concludes our prepared remarks. We now look forward to your questions. Operator, please go ahead with the queue.

Operator

Thank you. At this time, I would like to remind everyone in order to ask a question, please submit it online using the webcast Your first question comes from the line of Philip Russo. The 40 to 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 Jose instead of de novo new construction?

Speaker 3

This is Tal. Thanks, Philip, for the question. For the right of this year, I think we indicated 3 new leases in the first half of the year. So we've got 2 down, 1 to go. We've indicated 3 more going forward to the end of the year.

Speaker 3

We're always going to be trying to beat that, but we're looking at 3 more for the end of this year and then 6 in 2025. In terms of the greenfield versus brownfield, it's a astute question. We were a little bit dogmatic about greenfield early on in the company and that still is the lion's share of what we intend to do. There are, 1st of all, a few cases like San Jose, if you remember Nashville was similar where we inherited a good structure that 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.

Speaker 3

And obviously, the kind of the immediate cash flow implications of that are convenient as well. And secondly, I think we're in a period where we were not seeing any sort of interesting deals to actually purchase ground field. 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.

Speaker 3

That is the model. But yes, thanks for the question. I think it's a special question.

Operator

Your next question comes from Elliot Roda. Your remediation costs, particularly at the Phoenix location, have a significant effort on the 1st obligation bond group. How do you see the effects on the business at large?

Speaker 3

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.

Speaker 3

Phoenix definitely represents the bulk of the remediation costs. The reason is that we were furthest along in construction at that airport. So the design flaw manifested most significantly there. So good that that's what you're pointing out. Regarding the obligated group, which as a reminder recovers it covers those phases 1 on the first six airport and phases 2 just at Opelika, Miami and Denver Centennial.

Speaker 3

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 Harbor will ultimately reach, right? If we were to stall out on-site acquisition tomorrow, let's say, that impact would be tangible, right? Figure just put it in numbers. Figure the cost of capital for 15 airports is around $850,000,000 So that remediation would represent a little over a 3% impact in development cost.

Speaker 3

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 $1,100,000,000 in capital deployed, 30 airports would be about $1,700,000,000 50 airports, which is our goal would be about $2,700,000,000 That's the capital deployed, the development cost. The value of the airport portfolio in each of those scenarios, I mean, that really depends on the assumptions that 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.

Speaker 3

Remember, we deploy a prototype model. It's the same hangar at every airport. You fix it once and it's fixed. So looking at the business at large, to your question, I think that's the appropriate perspective to take. Right now, it's about site acquisition.

Speaker 3

If we're successful there, this becomes unimportant and if not, it is important.

Operator

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?

Speaker 3

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 a good financing plan that will be aided.

Speaker 3

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 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 cash flow from those fields as quickly as possible.

Speaker 3

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. The more fields that are in the money, so to speak, for us that we can get, the more we'll take.

Operator

Your next question comes from Michael Diana. How are your 2 new senior operations hires going to improve the speed and efficiency of your manufacturing of handguards?

Speaker 3

Yes. Michael, thank you for the question. Thank you also for the coverage. I think it's been very astute. You raised some very good points in your coverage.

Speaker 3

So thank you for that. So just to kind of rephrase the question, Christian, would you mind just reading the question one more time?

Operator

Certainly. How are your 2 new senior operations hires going to improve the speed and efficiency of your manufacturing of hangers?

Speaker 3

Yes. So I tell you, we have one of them here in the form of Will Whitesell and 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?

Speaker 1

Sure.

Speaker 2

In addition to myself, we have another senior development construction individual that started with us that is 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 will 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

Your next question comes from Francisco Bergara. There has been quite a filing today and recently. Can you please put the recent filings into context for the market?

Speaker 1

Yes. 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 Tore Petro. Yes, there was a variety of filings today, obviously, 10 ks with our full year results. But we as you know, we did a pipe transaction common stock last November with $57,000,000 plus warrants.

Speaker 1

And those had registration rights to be registered with the SEC, and we fulfilled that requirement this afternoon by filing an S3 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 S3 shell registration program of equal or similar size. And again, our thinking there is just to do housekeeping now probably back on the 10 ks with all the 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

Your next question comes from Elliot Roda. You refer to San Jose as Tier 1 market. Can you explain what that means?

Speaker 3

Yes, this is Tal. So we rank markets and airports around the country in terms of their specific attractiveness to Sky Harbor. So and the primary component of that metric is available revenue, as I alluded to in the 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 same for our OpEx, right?

Speaker 3

The OpEx at steady state around the country should vary within a 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 can look back at the leasing slide that we just put up or just refer to it in the 10 ks, you'll see that the rents that we're achieving, for example, in San Jose are approximately double what we're achieving at some of our other airports. When we originally set out, when Sky Harbor originally set out to acquire airport sites, our selection process was pretty close to arbitrary, right?

Speaker 3

The key role 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's where we are today. That's our focus.

Operator

Your next question comes from Arthur Monch. What is your what is projected EBITDA for 2024? Thanks and good work.

Speaker 1

Yes, Francisco, thank you for the question. We as a matter of policy, we we are tracking to EBITDA positive soon. The first place you're going to see EBITDA going positive is the Sky Harbor Capital, which is obviously the obligated group, the group of companies that are operating companies and so on. And as I just said earlier in my February March, EBITDA at the Scarborough Capital should be positive throughout 2024. On a consolidated basis, when you add our expenses, SG and A at the holding company, that breakeven level should be reached towards early Q1 and Q2 of 2025.

Speaker 1

And 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 early next year, and that is pushing the breakeven point of EBITDA again towards the first half of twenty twenty five.

Operator

Your next question comes from Michael Schafer. Considering the stock trading well above $11.50 have any warrants converted? Any thoughts on future conversion and money into SKYH?

Speaker 1

Thank you, Michael, for the question. I think I get a Warren question every week from someone out there. Just for everybody's benefit, we inherited this warrant program at the time of the BIS PAC 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 $1,000,000 of $0.50 And in the past year to date, certain holders have decided to exercise their warrants and basically purchase their stock.

Speaker 1

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 close to $3,000,000 of proceeds to the company, which obviously we're going to put to good use in terms of new fields, new hangars and more future growth for the company. In terms of conversion and what we're going to do with the warrants, because I get that question every week, we remain right now, we monitor markets, we monitor the warrants and situation with our stock price. And we don't 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

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?

Speaker 1

Yes. Thank you for the question, Alan. This is a very new one, but very important. One of the pillars of the business model of Sky Harbor is our ability to borrow tax exempt fixed rate municipal debt at attractive low interest rates. And thus we created in our first bond insurances with the first 6 airports this obligate group.

Speaker 1

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 obligated group at that point. It's when you do the bond transaction that you basically make it part of the over the air group. Now in theory, it doesn't mean necessarily that when we do a new field, we're going to nearly finance it as part of the obligate group. We might do interim financings.

Speaker 1

We may even do some long term bond issues outside the obligated 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 obligatory group that we do things that are credit accretive, credit accretive in terms of as we go grow the progress.

Operator

Your next question comes from Jordan Mullins. You have indicated you expect 3 new ground leases in the first half of the year. You announced 2 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?

Operator

Appreciate any color you can provide here. Thanks.

Speaker 3

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.

Speaker 3

So we can't provide specific names. What I think is okay to say is 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 places 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.

Speaker 3

With regard to you asked if those Tier 1 markets take longer. I don't think we've observed a correlation there. There's a gestation period. It varies a lot. I don't think it necessarily correlates to market.

Speaker 3

Some take a long time, some takes 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

Your next question comes from Michael Diana. How do you get more than 100% occupancy?

Speaker 3

Yes. Thank you, Michael. It's Tal. I can take that as well. So 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.

Speaker 3

However, we've had a lot of success, particularly in Nashville and to maybe a lesser extent in Miami, in what we call semi private leasing, right? If you have a midsized aircraft, you're flying a Challenger or Falcon 900 or something like that, it's not necessarily justified for you to take a full Sky Harbor 16 Hangar. So what we've done is provide private office and lounge space, but you have 1 or 2 or 3 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.

Speaker 3

The corners are empty. So you can get to slightly higher than 100% occupancy. Now the Skyharbor 16 is okay for that. It was really intended originally as a private hangar. We've moved 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 Harbor 34, which is essentially 2 Sky Harbor 16s, right?

Speaker 3

If you look at it kind of from an aerial shot, it looks like 2 Sky Harbor 16s. You can demise a Sky Harbor 34 and create 2 fully private hangars, 2 fully private Sky Harbor 16s. It's just that the demising wall is now not fire rated. It's just an acoustic all between those two hangars. However, when you open it up and use it for semi private use, it's much more stackable.

Speaker 3

So for example, you can get 2 heavy aircraft into 2 Sky Harbor 16s. You can get 3 heavy aircrafts into 1 Sky Harbor 34 for the same footprint on the ground. So what we expect is when the new airports come online with Sky Harbor 34s that the occupancy above 100% will be, I think, a bigger part of the business plan. Maybe a bit of a nuanced question, but I think that's where you're going. So appreciate the question.

Operator

Your next question comes from Peyton Skil. The new airfield average RFFHanger is in the 30 ks RFF range rationale for moving to larger sizes. Do larger hangers bring additional complexitiescosts?

Speaker 3

Okay. So, Peyton, thanks for the question. Tal, again. Yes, so that's more or less what I was talking about now when I was answering Michael's question about the utility of the Sky Harbor 34s, right? By the way, particularly at the Tier 1 airports, where we just can't get enough space.

Speaker 3

The more space we get, the happier we are. So the ability to create higher revenue density at those airports is key. So the Sky Harbor 34 is far superior to the Sky Harbor 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 Harbor 34 than you have on the Sky Harbor 16.

Speaker 3

So yes, I'd say in terms of the amount of steel that goes into it a bit more, it's not something 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 Harbor 16 in that we don't have to use vertical lift doors. Because remember, one of the more expensive components of our current construction is those vertical lift doors. We use vertical lift today because the hangers demise into each other, right. We want maximum revenue density on each campus.

Speaker 3

So there's no space between the hangers. They adjoin each other so to speak. You can't really have sliding doors. That's why we use vertical lift doors today, which is expensive and adds a bit of complexity. In the Sky Harbor 30 fours, you can have sliders without sleeves for the sliders and maybe we'll put out something that kind of shows what that looks like at some point.

Speaker 3

But in terms of operations, it's actually slightly less complex.

Operator

Your next question comes from Lucas Horton, a 4 part question. 1, do you have any longer term margin profit targets? 2, where do you expect to expand your headcount? What divisions do you see opportunities for headcount growth? 3, could you discuss your expectations for capital requirements for the foreseeable future?

Operator

And 4, how often are you competing with another provider when bidding for new contracts? What is the average number competitors of competitors you see when bidding for new builds?

Speaker 1

Thank you, Lucas, for any questions, Francisco. A lot of questions here, but let me go quickly here in order. Long term margin profile target. Yes. So our margin really comes from the difference between our tenant leases and our operating expenses, our ground lease payments and our cost of capital of the overseas are capital intensive and we borrow a lot of money in terms of debt to be a use of capital equity and debt to finance it.

Speaker 1

So it is that margin that really drives a long term margins for our business. So obviously, it's interest rate sensitive, it's sensitive also to the construction cost and so on. So once stabilized, we aim 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.

Speaker 1

It could be that thing right now as a business that we have to grow so that the contribution of those projects surpasses the semi fixed cost of our SG and 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 3 or 4 full time equivalents. So you can do the math there in terms of the expenditure as we open campuses.

Speaker 1

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 cost will mean unemployment of between $50,000,000 to $60,000,000 So that gives you a sense of capital formation for us as we continue to grow. And in terms of how obviously the business is very competitive and we find a let me let Tal address that in terms of competitive dynamics, but we are in a competitive business. And at the same time though, we have a differentiated product that allows us to be very successful. And the recent past has shown us again and again be able to be selected among others.

Speaker 3

Yes, I agree. I think what you said is exactly right. Maybe on top of that, I'd say, I think the place where we're probably we've created the most proprietary knowledge in the entire company is on-site acquisition, right? To be clear, we love our hangers. They're Taj Mahals for us.

Speaker 3

But fundamentally, it is a metal box. Leasing is leasing operations is not very different from what you'd see, for example, in FDO 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 even implied in the question is when you use the word bids, in many cases, it's us initiating these discussions with an airport.

Speaker 3

We're alone in these discussions. We try to stay 2 or 3 steps ahead of where the market is going. I don't know that we'll be alone forever. I don't want to assume that that's the case. But for now, we are the only people doing what we're doing anywhere in the country, right?

Speaker 3

This is the Sky Harbor 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. This is not an FBO offering. And I think in pretty much every case where we've made a concerted effort and it has been competitive, we've won. And hopefully we continue.

Operator

Your next question comes from Andrew Sardoni. 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 $27,000,000 in remediation costs DVT, APA and ADS and whether that is one time?

Speaker 3

Thank you. This is Will.

Speaker 2

I'll take that one, right, Andrew's question. Andrew, a couple of things. 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 3 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? And then from there, detail a remediation plan that is optimized 1st and foremost for certainty of result, right, and make this a once and final fix, right?

Speaker 2

Secondly, this has been a thorough and rigorous process and we feel very confident in our estimates, right? And lastly, I would note, we've learned a tremendous amount from this process and this engineering study, right, which has been key for us to carry over into our new prototype Sky Harbor 34 that we're really landing on moving forward as our main stay offering.

Operator

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?

Speaker 3

Yes. So we have this is Tal. We have 6 months budgeted. I think one of the things you can see is on our original campuses, it took us more than that. We part of what we were doing is, I think you again if you've been following you see that the per square foot rents go up as the supply goes down.

Speaker 3

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 Jose is we actually haven't opened yet. We're already at about 60%. So we expect that one to go quite quickly.

Speaker 3

So going forward, one of the objectives is to have it look more like San Jose than the first projects.

Operator

Your next question comes from Peyton Skil. Is the 2 millimeter Q4 operating expenses all attributable to existing airports?

Speaker 4

Thank you, Payton. This is Mike. In terms of our Q4 operating expenses, look at the allocation as about 45% related to the operations at our 3 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

Your next question comes from Robert Sliysak. As financing needs increase with growth, how do you think about ranking sources of capital, bond insurances versus pipes versus potential add on public stock offering?

Speaker 1

Robert, it's Francisco. Very good question. We look into this and we think about this all the time. And obviously, it's and we're capital intensive and we have needs. Important thing for us is always to be ahead of the game.

Speaker 1

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. 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.

Speaker 1

And that's something that we will entertain if the opportunity arises. In terms of the bond market, we track it, we follow it and so on. And one important thing that we have discussed in the past is, should we wait given increasing interest rates overall for when we achieve investment grade ratings? Because once we achieve investment grade ratings, you're looking at saving of about 200 basis points to 2 50 basis points in your fixed rate cost of debt. So 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.

Speaker 1

One last point I will make is 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 flows in the right way. But again, we do not do this by looking at market opportunities and doing it on a timely basis, not to and right now in terms of our capital needs, we're covered for the next 18 to 24 months, and thus we have plenty of time to entertain these various alternatives of capital.

Operator

Your next question comes from Jamie Fortino. In hindsight, was going public the right strategy?

Speaker 3

Do you want to take this?

Speaker 1

Yes, please. So I'll take it. Some people are laughing in the room here because we are a CEO of North Public Company. As you know, we're real estate. 2 years ago, we're probably early stage company, but and I was probably most reluctant to go this path.

Speaker 1

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 an internal roadshow with all 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 try to do some transaction with us, showing us opportunities. So it's something that also has allowed us to attract talent in terms of the professionals that have joined us in the past few months in having a currency. Also using our currency to potentially even things in the M and A market, even again, if we're doing it in the right way. So being a public company, I've come around full circle here.

Speaker 1

So, Jaime, I appreciate your question. I also appreciate your following. I know you've been following us for a couple of years from the Harvard Business School, a contingent of people who invest in Sky Harbor.

Speaker 3

This is Tal. I'm going to 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 do not we've not sacrificed the long term for the short term in any case here. We're running it so far exactly as we think it should be run. I think we've got, I think, a good following of major shareholders who understand what we're doing.

Speaker 3

By the way, many of them tenants who really understand the business model and the value that we're bringing. So I agree with Francisco on balance. I think this ended up being a good decision.

Operator

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?

Speaker 1

Thank you, David, for the question and also for your firm's participation in our bond issue back 2 years ago. Indeed, as I said earlier, reaching investment grade is one of our objectives. Obviously, we're going to do and have a little bit of more history to show the ranges and have a structure to get to investment grade. So we plan to I think the right timing when all those things will come together will probably be in the earlier or middle of next year, somewhere of 2025. And so that will be kind of like our timing of our goal to do that.

Speaker 1

And then again, in terms of the next bond issue, if we can wait till then and be able to we have not only breakeven analysis about forming ourselves through other means, entering debt, bank debt, equity financing and so on and then recapitalize ourselves and achieve and capture that 200 basis points to 250 basis points savings. I mean, anybody who has the calculators, we're looking in long term debt. Our first bond issue was 33 year final, 25 year average life. When you get 200 basis points, 2 50 basis points savings for investment grade versus non rated and you present value up to today, boy, that's a lot of money savings if you can capture them. And we're looking to we are objective to strike to capture that before we do our next permanent bond deal.

Operator

From Mike Nipp, in your recent interview with The Motley Foot Fool, you indicated no other type of real estate has unit economics nearly as attractive as this. Can you expand upon that statement?

Speaker 3

This is Tal. That was me. I don't know if 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 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.

Speaker 3

Your OpEx will vary within a pretty limited range. Rent is really what drives the unit economics of this business. We're very happy with airports where we're getting per square foot rents in the 30s 40s. But as you'll see, 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 real kind of afterburner of municipal bonds, that's kind of a very elegant and efficient form of leverage in this business.

Speaker 3

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

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 considering the market is now valuing it at double that price? Or did you place significant value on the partnership of the investors?

Speaker 1

Francisco? Yes. Thank you, Conor, for the question. It's important to know that even though we announced the pipe around October, November, call it November of last year, it was something that was being negotiated during the summer when our stock was trading in the $4 to $5 range. So it was a pipe that was coming actually at a premium to the observed equity price.

Speaker 1

And we did it in a limited amount of capital relative to our future needs. And we thought it made sense to seamlessly market our market access. Our market access has a common stock offering pipe with a 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.

Speaker 1

And I think the market reaction has proven that strategy. And I'll let Tal comment on the partnership of the investors because some have been publicly disclosed and we can talk about that in terms of your 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 people who are very significant in terms of investment community in the United States.

Speaker 3

Yes, I think that's right. That investment round or that pipe deal had some of the most sophisticated business jet owners in the United States in it. Again, like Francisco said, some of them disclosed, some of them not disclosed. I would say all of them have been extremely active since we closed that round in everything from site acquisition to introducing us to again some of the best residents we could possibly hope for in the business. So all told, no regrets.

Speaker 3

We don't look back. I think the we're very happy to have completed that at the size that we indicated. So we're quite pleased with that investment round.

Speaker 1

So operator, I know we have hit the 1 hour mark. I know there are many other questions to remain in queue. But at this juncture, to keep this tight to an hour, I'll ask we have people's questions. We're going to respond back to people individually via email. So at this juncture, we're going to close the webcast, but not before thanking everybody for joining us this afternoon and for your interest in Sky Harbor.

Speaker 1

Additional information may be found on our website, www.skyharbor.group. And if I always reach to us directly with any additional questions through the email investors at skyharbor.group. If you wish to visit a 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.

Speaker 1

And with this, we have concluded our webcast. Operator, thank you.

Operator

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation. And you may now disconnect.

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Earnings Conference Call
Sky Harbour Group Q4 2023
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