Sky Harbour Group Corporation (AMEX:SKYH) Q4 2023 Earnings Call Transcript

Sky Harbour Group Corporation (AMEX:SKYH) Q4 2023 Earnings Call Transcript March 29, 2024

Sky Harbour Group Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon. My name is Krista, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Sky Harbour 2023 Year End Earnings Conference Call and Webinar. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. If you’d like to ask a question during this time, simply submit the question online using the webcast URL posted on our website. Thank you. Francisco Gonzalez, Chief Financial Officer, you may begin your conference.

Francisco Gonzalez: Thank you, Krista. I’m Francisco Gonzalez, CFO at Sky Harbour. Hello, and welcome to the 2023 full year earnings equity investor conference call and webcast for the Sky Harbour Group Corporation. We’ve also invited our bondholder investors and our borrowing subsidiaries, Sky Harbour Capital to join and participate on this call as well. Before we begin, I’ve been asked by counsel to note that on today’s call, the company will address certain factors that may impact this year’s earnings. Some of the information that we will be discussing today contains forward-looking statements. These statements are based on management’s assumptions, which may or may not come true and you should refer to the language on slides 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 statement. So now let’s get started. The team with us this afternoon, you know, from our prior webcast, Tal Keinan, our CEO and Chairman of the Board; Mike Schmitt, our Chief Accounting Officer; Tim Herr, our Treasurer; and Tori Petro, our Accounting Manager. Joining us today is Will Whitesell, our COO since the beginning of the year. We will came to Sky Harbour after a successful career in the construction industry having spent 15 years at Turner Construction, four years at the related companies, and more recently, six years at Suffolk Construction when 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. These slides have been filed with a few minutes ago in a Form 8-K with the SEC and will also be available on our web site 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 three years for selected metrics. In the interest of time, I would like to highlight just a couple of items. First, our revenues in the last quarter were in line sequentially with the prior quarter, if one adjusts for the previously disclosed and non-recurring items of Q3, and now we’re ready for the next step function related to the opening of a new campus, something that now is expected to occur starting next week with the opening of our new facility at the San Jose Mineta International Airport, and Tal will shortly discuss more details on this great exciting ground lease and operation.

Second, our operating expenses and SG&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 in our three campuses currently under construction. Next slide. Similarly, the financial results of Sky Harbour Capital and its operating subsidiaries that form the obligated group of our outstanding bonds track similar results that the holding public company except for the SG&A, which is mainly at the parent company and the employee stock based compensation expenses also at the parent company.

Sky Harbour 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 the approval by the Greater Land 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. 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 Addison and later to Tal for a more on this exciting news about our new airports.

Will?

Will Whitesell: Thank you, Francisco. This slide represents the individual field’s cost and schedule impacts from our three month forensic engineering study. The root cause analysis has been determined to be a one-time structural design defect with our prototype hangar. Through a rigorous study, we’ve developed a comprehensive remediation plan and cost that after completion, we will never have to look back again at these fixes in these fields. A brief explanation of the 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 indicated cost after remediation and at project completion. The delta between the two is the magnitude of the impact per field.

Also indicated in the notes above are the target completion dates for each of the fields after the remediation plan and completion. With that, I’ll turn it back to Francisco to discuss the financial implications.

Francisco Gonzalez : 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 million in additional cash equity from the holding company to Sky Harbour Capital to ensure full insufficiency at the construction front of the obligated group. The pro-forma cash and U.S. treasury bills at the obligated group currently now stand close to a $127 million, as depicted on the right hand side pie. I want to reiterate that as a matter of company policy, we will continue to protect our borrowing tax 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 on 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.

Will Whitesell: Thank you. As Francisco gave a quick introduction on my background, I spent 25 years in my career in two key areas, managing multiple large projects and moving organizations from walking to running. With that being said our key objectives as we move forward, higher quality, lower cost, shorter delivery times and performing all of these above at greater scale. This is exactly what our pipeline is demanding of us moving forward. How do we get there? One, team integration of our development and construction members. These three groups have to be fully integrated, ensuring we have enough bandwidth, disciplined experts with proven results. Two, prototype refinement, as we move forward, we standardize our hangar design and configuration.

This will allow us to drive both cost and execution as we move forward. Three, manufacturing capacity. We continue to retool and increase our internal fabrication capacity with RapidBuilt and develop multiple external fabrication sources to ensure we have plenty of supply to meet our future demand of 10-B 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. 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 ’24 into ’25.

With that, I’ll turn it over to Tal for a leasing update.

Tal Keinan : Great. Thank you, Will. Okay. So you can see the first three pie charts on the left are our existing campuses in Houston, Nashville and Miami. You can see we’re a little bit — actually a little bit above 95% occupancy, which if you subtract the assumed vacancy rates in our original PABs filing represents what we’ve called full occupancy. Couple of points I 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%. So they’re escalating at a good rate.

Our renewals, we have had our first renewals, which have come in the 20% to 30% range. So we do believe there’s significant upside once you are fully leased. And 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. On the right side is our new campus in San Jose, which is our first Tier 1 airport in the portfolio. As I think a lot of people may have read already, there is an existing facility that we’re inheriting in addition to construction that we plan to do at that field. We’re preleased our operation start date is April 1, which is next week. We’re already preleased to the tune of almost 60% and hope to be fully occupied sometime in the next few weeks in San Jose on the first phase of that.

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 two slides. But it is essentially the available revenue to us at each location. So our Phase 1 at San Jose was opening right now, we’re looking at about a $5 million revenue opportunity. Phase 2, which will add to that — will add another just north of $2 million. Again, very — I’d say, one of the more established airports and metro markets in the country. 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 11 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 million of revenue capture in Phase 1, just over $3 million in Phase 2, 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 hangered. And this is all happening in the metro center with the second highest GDP growth in the United States. So we’re quite optimistic about the future of our ladder executive. The next slide is on revenue capture. 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 six airports. And if you go to the right side of the chart where the arrow is that’s March 2024 as of today. 11 airports capturing about $95 million in available revenue. That’s square footage times discuss Sky Harbour equivalent rent that we apply to each airport, right? With that measure is of available revenue. And then if you take the chart to the right, that is the indicators that we’ve given to the market as to what we expect in the year ahead. I’m sorry, until the end of 2025.

Next slide. I think we’ll wrap it up here. I’m just because the only thing I want to stress on this slide is the company’s current focus is site acquisition. We’ve got to do everything and you could see on the slide kind of a snapshot of what’s going on in each vertical center in the company. The primary focus though of management right now is revenue capture and that’s site acquisition. Go after the best fields, achieve the most square footage that we can 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.

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

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Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of [Philip Ristow]. 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?

Tal Keinan: This is Tal. For the write of this year, I think we indicated three new leases in the first half of the year. So we’ve got two down, one to go. We’ve indicated three more going forward to the end of the year. We’re always going to be trying to beat that, but we’re looking at three more for the end of this year and then six in 2025. In terms of the greenfield versus brownfield, it’s an astute question. We were a little bit dogmatic about greenfield, early on in the company and that still is the lion’s share of what we intend to do. There are, first of all, a few cases like San Jose. If you remember, Nashville was similar where we inherited a good structure that we have — it’s better to keep and refurbish than to demolish and build new.

So I do think there will be more of that going forward. And obviously, the kind of the immediate cash flow implications of that are convenient as well. And secondly, 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. That is the model, but, yes, thanks for the question. I think it’s a precious question.

Operator: Your next question comes from [Elliot Ruda]. Your remediation costs, particularly at the Phoenix location have a significant effort on the first obligation bond group. How do you see the effects on the business at large?

Tal Keinan: So a significant effect on the bond group. First of all, [Elliot], thanks for the question. You’re right to highlight Phoenix in particular. Phoenix definitely represents the bulk of the remediation cost. The reason is that we were furthest along in construction at that airport. So the design flaw manifested most significantly there. So good that’s what you’re pointing out. Regarding the obligated group, which as a reminder, recovers those phases one on the first six airport and phases two just at Opelika, Miami and Denver Centennial. As Francisco said, we’ve taken action to fully protect the group as we always will. With regard to the business at large, I’d say it depends on your view of how many fields Sky Harbour will ultimately reach, right?

If we were to stall out on-site acquisition tomorrow, let’s say, that impact would be tangible. Figure just to put it in numbers. The cost of capital for 15 airports is around $850 million so that remediation would represent a little over a 3% impact in development cost. But if we prosecute the business plan that we’re committed to prosecuting then I think we will see that design flaw in the context of, look, the many challenges we faced already as a business and the many that we’re sure to face going forward. So if you put the same numbers on that let’s say we hit 20 airports that’s about $1.1 billion in capital deployed, 30 airports would be about $1.7 billion, 50 airports which is our goal, would be about $2.7 billion. That’s the capital deployed, the development cost.

The value of the airport portfolio in each of those scenarios, 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 for this to be a onetime fix, something that we never look back from. Remember, we deploy a prototype model. It’s the same hangar at every airport. You fix it once and it’s 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. 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?

Tal Keinan: Yes. I mean, the answer, Connor is no. I mean, the faster we can grow the better. We do believe that we’ve got a good financing plan that will be aided. I think we’ve got a kind of a virtuous cycle here to finance these fields. One thing that I think is important to note, we may have noted this 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. 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 two new senior operations hires going to improve the speed and efficiency of your manufacturing of hangers?

Tal Keinan: I think it’s been it’s been very, very astute. You raised some very good points in your coverage, so thank you for that. So just to kind of rephrase the question, Krista, would you would you mind just reading the question one more time?

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

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

Will Whitesell: Sure. 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 predevelopment pipeline to help push through some of these fields that we’ve signed leases on to get permitted and entitled to be able to start construction. And secondly, we have another individual starting with us next week that is a long time construction individual that is joining us that will be solely dedicated to the execution of the construction of these fields as we move forward. We’ll continue to increase the bandwidth of our team as our pipeline continues to grow and ensure that we have the right people in the right seats.

Operator: Your next question comes from [Francisco Ferreras]. There’s been quite filings today and recently. Can you please put the recent filings into context for the market?

Tal Keinan: Indeed, we had a busy day today here at Sky Harbour and we’re here with our Chief Accounting Officer, Mike Schmitt and Tori Petro. There was a variety of filings today, obviously, 10-K with our full year results. But we, as you know, we did a pipe transaction common stock last November with 57 some million plus warrants, and those had registration rights to be registered with the SEC, and we fulfill the 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 two years. We actually have not sold any shares under that program and we simply replaced that program with S3 shell registration program that of equal or similar size.

And again our thinking there is just to do housekeeping, now probably back on the 10-K 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 Ruda]. You referred to San Jose as Tier 1 market. Can you explain what that means?

Tal Keinan : So we rank markets and airports around the country in terms of their specific attractiveness to Sky Harbor. And the primary component of that metric is available revenue, as I alluded during the presentation. So think of it like this. Our steady state construction costs around the country should vary within a pretty finite range and our same for our OpEx. The OpEx at steady state around the country should vary within very finite range. The variable to which our business model is the most sensitive by far is rent, which varies within a very broad range and that’s really driven by location. So I can refer you, if you can look back at the leasing slide that we just put up or just refer to it in the 10-K, you’ll see that the rents that we’re achieving, for example, in San Jose are approximately double what we’re achieving at some of our other airports.

When we originally set out when Sky Harbour originally set out to acquire airport sites, our selection process was pretty close to arbitrary. 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 March]. What is your — what is projected EBITDA for 2024? Thanks and good work.

Francisco Gonzalez: As a matter of policy, we’re not providing guidance at the company in terms of specific targets. But what we can say and I think we’ve seen in the past, we are tracking to EBITDA positive soon. The first place you’re going to see EBITDA going positive is the Sky Harbour Capital, which is obviously the obligated group, the group of companies that are operating companies and so on. And as I just said earlier in my prepared remarks, EBITDA at the Sky Harbour Capital should be positive throughout 2024. On a consolidated basis, when you add our expenses SG&A at the holding company that breakeven level, it should be reached towards early Q1, Q2 of 2025. 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 2025.