Sky Harbour Group Corporation (AMEX:SKYH) Q4 2024 Earnings Call Transcript

Sky Harbour Group Corporation (AMEX:SKYH) Q4 2024 Earnings Call Transcript March 28, 2025

Operator: 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. [Operator Instructions] Thank you. And 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: Thank you, Abby. Hello, and welcome to the 2024 fourth quarter and full year results investor conference call and webcast for the Sky Harbour Group Corporation. We have also invited our bondholder investors in our borrowing subsidiary, Sky Harbour Capital to join and participate on this call. 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 contain 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 1 and 2 of this presentation as well as our SEC filings for a description of the factors that may cause actual results to differ from our forward-looking statements.

All forward-looking statements are made as of today, and we assume no obligation to update any such statements. So 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, Tori 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 to questions. These were filed with the SEC about an hour ago in Form 8-K, along with our 10-K and will also be available on our website later this evening. We also filed our fourth quarter Sky Harbour Capital Obligated Group unaudited 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. So let’s get started. In the fourth quarter, on a consolidated basis, assets under construction and completed construction continued 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 3 operating campuses and had 3 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 2 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 noncash 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 3 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 hanger apron and parking because of these existing buildings or facilities 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. And we also would like to reaffirm our prior guidance that we expect Sky Harbour to reach cash flow breakeven 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 channel leases as those represent also contracted revenues in a sense.

Said simply, if a tenant does not fly or doesn’t consume the minimum amount — 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 wholly owned 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 3 projects under construction in Denver, Phoenix and Allison 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 3 campuses are leased up and rent revenues and revenues commence to flow.

Operating expenses increased, but I should note, as we have discussed in the past, that this includes ground lease payments or accruals as per U.S. GAAP in all 6 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 have 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 third quarters of this year when Denver, Phoenix and Dallas campuses ramp up in lease rental and field 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 bond indenture, and we were in compliance in terms of those ratios for the 2024 and forward 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?

Michael Schmitt: 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 noncash items that we have discussed both in Francisco’s commentary as well as our previous call, including the noncash 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 noncash 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.

And with that, I’ll pass it back to Tal.

Tal Keinan: Thank you, Mike. So 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 in just shy of $190 million of realized revenue. The — I think important thing to look at on this chart is, I would advise anyone look at the company, let me remind people of the methodology here. This is the number of square footage — the amount of square footage of hanger capacity that is billable on each site according to our site layouts times the Sky Harbour equivalent 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, we are — our actual revenues have significantly exceeded the shares. So that, I think, is a good starting point. Now then anyone who’s analyzing us will want to discount for development risk, lease-up risk, operating risk that goes with that. But that fundamentally is the foundation of value creation at Sky Harbour. On the right side, you can see the current status of the various air fields that have been announced. With that, let’s move to the next slide. Okay. So I won’t dwell on this other than to highlight in the under construction section; DVT is Deer Valley, Phoenix; we actually have our first 2 certificates of occupancy at Deer Valley, and we’ve begun flight operations at that airport.

We continue with construction with the rest of the campus. And at ADS at Addison Dallas, we have our first certificate of occupancy. And again, construction continues at the rest of the campus. Other than that, I’m not going to go through the rest of the items on that chart, and let me hand it back to Francisco.

Francisco Gonzalez: Thank you, Tal. On the left-hand side, we show that we continue to enjoy strong liquidity with about $127 million of cash and U.S. Treasury bills. We continue our cash management strategy, led by our Treasurer, Tim Herr, of growing our cash in short-term 1- and 3-month U.S. Treasury bills, pending their use in construction. These cash balances exclude the approximately $32 million in cash we used in December to acquire and pay certain liabilities of CloudNine and Skyro 5 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 we’ll be reporting on that exercise by this summer ahead of our next debt financing. And we also want to take the opportunity to reiterate our expectation that the future debt service coverage ratios for these bonds would exceed those that forecast — that we forecasted at the time of the bond issuance 3 years ago. And that — and 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 fourth quarter 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 1 and various projects outside the existing Obligated Group. Let me turn it back to Tal to discuss those — some of those new campuses and ground leases that we have secured in the past quarter.

Tal Keinan: 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 — sorry, primary airports and repositioning airports. Primary airports are airports where the airplane lives at the same place that passengers board and de plane, okay? So if you take an aircraft that’s based at Peterborough that is a primary airport. Repositioning airports or airports where the airplanes live, but the passengers do not always board and deplane. So 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.

So Camarillo is both of those and a number of airports that serve both of those purposes. It’s a primary airport for aircraft owners that live roughly in the quarter between Calabasas and Montecito, California. It’s a secondary airport that serves Van Nuys, which is the top primary airport for the L.A. Basin. What we foresee happening, this is a little bit future looking from our perspective, but really not that 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 — 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 0 capacity.

Van Nuys is fully, fully booked with waiting list across the entire airport. Similar situations exist in Burbank. So L.A. 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. So 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. And we would say, I’d 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. You’d say maybe a dozen, probably fewer than a dozen. So we’re 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, a lot of the pharmaceutical industry that’s based in that area. So exciting development for us. And then lastly, Boeing Field, which we’ve been at for about 5 years now.

And 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’s 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 that seeds that we planted 5 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 rent. And Boeing Field is the reigning king of Seattle, no pun intended because its 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 our — one of our Phoenix hangers in the photograph. I’d like to bring things into the site acquisition, development, leasing and operations. Increasingly, people who study the company closely have seen that these 4 silos are increasingly integrated. It’s really one fluid effort increasingly as we go. But in terms of framing and understanding the scope of our activities, it’s still, I think, useful to break it into those 4 areas. So on the fed acquisition side, we discussed those — the 3 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. But 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 look at us a little bit closely understand we do have kind of an interesting period where flight operations have begun, but construction is still not finished on the rest of the campus. And 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.

And 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 2 and Dallas Phase 2. And we have another 14 projects in various phases of development. Not to jump ahead, but the Sky Harbour 37 is the name of the — 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?

So we have a version that is compliant with wind load requirements in Florida, one that’s compliant with snow load requirements in Connecticut and one that’s compliant with seismic loads on the West Coast, but those are minor adaptations in the prototype. I call it 95% the same hangar in each of those locations. But possibly, I’ll say possibly, it is 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-ed. They’ve been leased in Phoenix and Denver. We hope to continue that. We think in the next 4 to 6 months, we should get close to full capacity on those campuses. Again, Denver under LOI, pending certificate of occupancy in the coming months.

We are — I think there’s a line of questioning that we’ve gotten over the last year or 2, both on these calls and offline regarding pre-leasing and why doesn’t Sky Harbour do any kind of pre-leasing. And a lot of that comes from our bondholders, which we understand. And our answer has always been that our pricing leverage really peaks when we actually have a static product that’s move-in ready. This industry is not really one that looks 2, 4 years ahead and as an industrial or office tenant might. Aircraft owners tend to look for hanger capacity when they need hanger capacity. We’re starting to see a few exceptions to that. And I think that has to do with the brand that we’ve been making a really conscious effort at building this brand yet, but it is spreading and it’s not a huge community, the business aviation community.

People who understand the unique value proposition that Sky Harbour brings, they are often existing residents who are looking to expand. And we are entertaining our first pre-leases, specifically in Miami and Denver. We’ve begun to talk with people on other campuses that are not quite as far along in development. Again, if a very good anchor tenant who understands the value proposition and is comfortable with the rents that we’re putting forward, I think that’s something that we will increasingly experiment with. I don’t see us ever try to pre-lease an entire campus, but one or 2 hangars is probably not a bad thing to do. So we’ll stay tuned for how that goes. And then finally, again, if you’re following our results, you could see it, and 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 square feet of hangar and its 150,000, 200,000 square feet of vacancies. You’re negotiating with very sophisticated prospective residents that are coming in. So the leverage is such that from our perspective, let’s get them leased up as quickly as possible. But as you see, the second term 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. And then fourth, operations, an increasingly important part. We had a big thrust in the fourth quarter 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 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. But fundamentally, staffing, training and equipping these campuses in our specific way is a key to the entire value proposition. And 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 that’s — we want to keep it that way and grow it. And lastly, a look ahead to the next 12 months, again, in the same 4 categories. Site acquisition, so again, we have a lot of seeds sprouting as we go. And I don’t want to say that happens on autopilot, but it increasingly requires, I call it, a more routine effort.

So our kind of innovative aggressive efforts are increasingly focused on the best fields in the country. And fundamentally, we’re still waiting for a competitor to come in and join us in the space. But for the time being, as we’re alone here, our focus is really capturing the best revenue-producing fields in the country and 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. And if there are questions on it, we’re happy to get into some detail. But for now, just I’ll leave it at this. Our #1 ambition is quality. We want the best hanger 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.

And we want to — 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. And then lastly, operations. So the focus will remain on the Sky Harbour resident. I know a lot of people who 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 is 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. So we’ve spoken about additional revenue-producing services in the past. I want to reiterate that’s not — 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. And with that, we have to — with that, why don’t we open questions?

Francisco Gonzalez: Yes, this concludes our prepared remarks. We look forward now to your questions. Operator, please go ahead with the queue.

Q&A Session

Operator: [Operator Instructions] And your first question comes from Alex Bert [ph].

Unidentified Analyst: In a recent podcast interview with Ben Klerman [ph], Tal mentioned it’s absolutely possible to have 50 campuses in 3 to 5 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: Yes. 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. And as you 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. And 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. So we see a very strong case for accelerating and significantly beating our projections, and we don’t — we’re not quite ready to make any plans for the end of this year yet. But certainly for the next 3 to 5 years, I think 50 may end up having looked conservative.

Operator: And your next question comes from Philip Row [ph].

Unidentified Analyst: Congrats on the new BFI lease. I’m assuming this is the second brownfield location. If so, what is the expectation on price per square foot? Of the 6 new locations for this calendar year, are any of those 6 also brownfield? Finally, what does the time line look like for additional revenue streams to start to materialize?

Tal Keinan: Okay. Thanks, Philip. So 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? So 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 is part of rent. And again, 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 we — 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 6 locations that we’re set to announce for the coming year, well, all of them are greenfield. That said, the nature of the brownfield opportunities is such that they — 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. So 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. So I wouldn’t be surprised if we — 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 — move to the next.

Operator: And your next question comes from Randy Binner.

Unidentified Analyst: Great quarter. It is positive to see the ’23 campus guide confirmed. Can you give us a sense of how campus development will progress in 2026?

Tal Keinan: Okay. Thanks, Randy. So based on the first part of the question, I assume you mean by development, site acquisition in 2026. So we’re not providing guidance quite yet for 2026. But I would say we should continue at least apace with 2025, possibly significantly more than that. So if you want to put a range, I think the bottom of that range would be, call it, 6 airports. I don’t want to say what the top of the range would look like.

Operator: Your next question comes from Alex Bosart [ph].

Unidentified Analyst: You mentioned that the average step-up in rents when you 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 re-lease space?

Tal Keinan: All right. Thank you. That’s a good question. Look, I’d say this, the — I don’t know that we’ve had a third lease on a hanger 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. So that’s 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. And then from the second round on — or sorry, third row 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. So we think inflation is going to be a pretty major factor. But that’s what I think. There’s just one kind of hint to where that goes is that our multiyear leases feature annual escalators of CPI with a floor of 4%. And there’s very little pushback in the industry. And again, we’re dealing primarily with most sophisticated flight departments in aviation. The fact that there’s a little pushback, I think, constitutes some recognition among those who are experienced in business aviation operations that significant airport inflation is inevitable.

Operator: And your next question comes from Tom York [ph].

Unidentified Analyst: Slide 10 indicates you are funded for 800,000 square feet, assuming you receive the full $150 million of PAB funding. Your square foot 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: Yes. Tom, it’s Francisco. Again, thanks for the question. Indeed, we are very deliberate of our capital raising plan. And one of our objectives is always to be at least 12 to 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. So come 2026, we should be then — so on a consolidated basis, a positive cash flow in company from the standpoint of the operations, which then leads to the question, do we redeploy that excess cash as the equity into the new fields thereafter? Or do we, at some point later in ’26 or ’27, 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 market 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 ’27 will not likely be sufficient to meet that time schedule. We have been approached in the past couple of years by between 4 to 6 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. So we also have been wrestling with those more asset light business models as a way of thinking about the right deployment of our capital and versus the dilution to existing equity holders.

So again, we’re going to be deliberate about this going forward and stay tuned for that. Thank you, Tom, for the question.

Operator: And your next question comes from Randy Binner.

Unidentified Analyst: Can you please provide an update on the process for raising $150 million?

Francisco Gonzalez: Yes. Thank you, Randy, for your question. We just came earlier this week from a muni bond conference in Midtown Manhattan, sponsored by a large investment bank. And we’re 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 deal, past deal 3 years ago and some new faces and so on. And it’s clear that there’s 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 a third-party consultant. So that is underway and should be ready by May, late April, early May. We also are in the process of starting the [indiscernible] process with — to seek investment grade with our existing bonds.

And that’s 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. So we are obviously paying attention to market interest rates and credit spreads and all 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 5-year term financing in lieu of bonds, which is also an alternative that we have in place to the extent that we don’t like the bond market at the time that we come to market this summer.

Operator: And your next question is from Alex Bosart.

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

Tal Keinan: Yes. Thanks, Alex. So 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 don’t 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 feet of airplane into that 37,000 square feet hanger, right? And you’ll wonder if that sounds counterintuitive. When we put up on the website, you understand exactly how that works. If you’re a busy FBO, you could probably get to a lot more than that. So the answer is yes. I just want to 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 1 shift now at RapidBuilt. We’re soon going to go up to 2 shifts where we’re not going to be filling our 2-shift capacity entirely. And we can go to 3 shifts ultimately in that factory as well. So 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, and that might be a time. It’s a pressure question because we are actually getting quite a bit of interest from third parties to manufacture middle buildings for them and people who understand the Sky Harbour 37 and are happy to take exactly that for their own uses.

So I’d say probably not in the next couple of quarters, but ultimately, that is an opportunity.

Operator: And our next question is from Pat McCann [ph].

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

Francisco Gonzalez: Yes. So our — 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. But in the last trade, our long bond was about 5.38% in yield and our shortest bond, which is the 11-year traded last at 4.65%. So call it, on average, roughly around 5% 5 and one eights in terms of secondary market level trading. A new issue sometimes likely comes at a discount to that, meaning a slightly higher yield. So in the current market, one could speculate a little bit that issuance like ours will come there in the low 5s. 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 and then that might have a halo effect on our new issuance. So stay tuned for that. And our goal, obviously, is to get the lowest cost and value out there in the marketplace for the next financing.

Operator: And your next question comes from Doug Johnston.

Unidentified Analyst: Are you going to publish publicly, the projected 2025 DF coverage for the PAB Obligated Group?

Tal Keinan: 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, and the audited financials will be coming up in the next few days. And you will see in the last page, the calculation for 2024 and the calculation for 2025. The other thing I’ll note in our website, we posted already — or we’re about to post the presentation that we provided this week in the municipal bond conference, and we showed the projected level of debt service for this kind of capital bonds and pro forma for — or updated, I will say, better for the rents that we have been receiving in the past 3 years and that we expect to receive in the places that are still under construction or in development. And you can see our expectation of that service coverage in the presentation.

Operator: And your next question is from Tom York.

Unidentified Analyst: In 2023, you projected debt service coverage of over 3x in 2025, but have lowered this to 1.36 on EMMA. What are the moving pieces here?

Francisco Gonzalez: 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 the indenture. But we have to remember that we still are halfway or actually less than halfway of the revenue potential of the Obligated Group. So as we open Denver, Phoenix and Dallas in the coming months and then later on in early 2026, Opa Locka Phase 2 and later then Denver Phase 2, all those things together will result and our expectation is that the debt service coverage once all those things stabilize, a couple of years from now, will be higher than the 3x that we expected 3 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.

And you will see that our expectation is that instead of 3x as we projected 3 years ago at the time of the bond issue, we are looking to be at 4 to 5x the debt service coverage of our debt service in the future years. So please look into that.

Operator: And your next question is from Peyton Skel [ph].

Unidentified Analyst: 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 cost, RSF, i.e., PWK?

Tal Keinan: Yes. Thanks, Peyton. So let’s start with all the macro factors are pushing costs up. And that’s obviously not specific to Sky Harbour. That’s across the board. The efforts that we’ve been talking about for the last several quarters on the development side have started to bear fruit. So I’ll 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 square foot, right? That’s what we’d be paying a pre-engineered metal building margin to third-party suppliers if we had to purchase from them. We’ve taken a lot of the ability to control the feedback loop between manufacturing and construction. And I’m talking about the extreme end of the construction envelope, which is the subcontractors and 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 haven’t seen this yet, but we’re 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, right? These buildings are going to go up a lot faster than the previous buildings went up, and that’s time savings. On the other side of that, and we don’t exactly put this into cost cutting, but if you figure that a fully leased campus generates, call it, $0.5 million to $700,000 a month in net operating income, shaving a month or 2 off of a construction time frame is very significant in terms of when revenues get turned on again. Another example, and I won’t provide too many of these, but another example is national procurement, right?

So the way we’ve built all of the campuses to date has been, let’s say, you’re 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. So that means building each campus as though it’s the only campus that we’re ever going to build. What we’re doing is starting now on the campuses that are coming in is that we’re prepurchasing everything that we can for the next 6, 7, 8 campuses at once. And we’re already realizing really significant cost savings by that procurement. And so there’s all sorts of interesting kind of hedging and procurement means that we can take. But look, some of them, I think we could have done earlier.

We just didn’t — we hadn’t gotten around to it. Some of them are really a function of the scale that we’re building it right now and that we’re able to realize it. So stay tuned for that. If we do this right, you’ll see our development costs continue to come down as we go forward.

Operator: And your next question is from Dave Storms.

Unidentified Analyst: One, as you are procuring materials and labor for development, are you seeing any impact from tariffs? And two, 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: Yes. All right. Thanks, Dave. I’ll start with the second one. The short answer is no. First of all, what — 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. So 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. So the answer to that one is no. On the first one, look, there have been 2 hikes in steel prices this month. So the short answer is yes. We are seeing some materials and labor, materials changes. I’m not going to talk about labor quite yet.

But — so yes, those are directly the result of tariffs. Luckily, we were able to preempt that just out of abundance of caution, put some pretty large preorders in place before those happen, and we’re able to capture some savings. So we’re feeling pretty lucky to have gotten that in place. And then going forward, we don’t want to speculate on macro developments, the night is on. We’ll see how the whole tariff situation unfolds for us. But for the coming projects, we’re actually covered. We were — Sky Harbour itself was actually not impacted by those 2 increases in steel prices.

Operator: [Operator Instructions] And your next question is from Jacob Robinson [ph].

Unidentified Analyst: Hi, Sky Harbour team, a student from the University of Michigan here. I was wondering if you had a solid outlook on the CapEx financing plan well into the next 5 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?

Francisco Gonzalez: Thank you, Jacob, for the question. It reminds me that there are always college students looking to invest early in their careers. Also I have to say go blue for those 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 6 or 9 months, and then we have like a 12-month construction period. So 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.

So we basically have a good idea well in advance. I’d say actually, as I mentioned, like about a year or 2 years in advance on when we actually need funding, which is important because it allows us to plan, be opportunistic and so on. And 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. So as you look out into the future that translates into a capital plan and a financing plan that we obviously opportunistic situations that lend themselves in the marketplace, either in the debt side or on 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’s 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 a couple of financings in the past 1.5 years.

And we — as I mentioned earlier, we have — 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. And also, as I said in another — 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. So there’s a lot of alternatives here that we see in front of us. And so we’re going to be deliberate as we go forward in our deployment and obviously being conscious of cost of capital and dilution to our equity investors.

Operator: And your next question is from Brad Thomas.

Unidentified Analyst: Curious as to Sky Harbour’s customer sentiment as it relates to reshoring announcements and Trump tax cuts.

Tal Keinan: So I think by customers, I mean our residents, 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 improvement, post-delivery improvement the tenants put into their hangars. And in some cases, we’re talking about like literally $1 million on 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 anyone around the table, Francisco, about — bonus depreciation.

Francisco Gonzalez: Yes, I was going to add that. First of all, thank you, Brad, for the question, and it’s great to see the king of REITs following our stock. Yes, I was going to mention that it has been rumored that the tax plan is 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. So if that were to happen, we basically depreciate the entire purchase of your — of a plane within a year, that should accelerate the people purchasing planes or upgrading their planes to bigger planes. And remember, in our business model, it’s not just the demand on business aviation, it’s the demand for business aviation on larger planes cannot be serviced by the existing legacy hanger real estate out there.

Operator: And your final question is from Alex Bosart.

Unidentified Analyst: In a recent podcast interview with Ben Klerman, Tal mentioned that recent M&A transactions of hanger 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: We avoid having discussions of our view of our value. We let that to the pundits and the 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. And more — I think more comparable than an MPO because we’re 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 are beachfront properties, clearly beachfront properties. And they sell fuel and you can really replicate or be — there’s no more marinas being dredging and environmental issues make it very scarce real estate.

And obviously, they serve a very diverse clientele of high net worth individuals. So a lot of similarities. And we saw a recent M&A transaction when Blackstone, I think, acquired safe harbour marinas from a REIT out there called Sun Communities. And that was at a hefty multiple, I think it was 21x EBITDA or something like that. Anyway, but — so we keep track of the M&A activity out there. But truthfully, we’re very focused on our business and execution on 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: And with no further questions at this time, I would like to turn the call back to Mr. Francisco Gonzalez for closing remarks.

Francisco Gonzalez: 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’s at www.skyharbour.group. And you can always reach us directly with any additional questions through the e-mail investors@skyharbour.group. So thank you again for your participation. And with this, we have concluded our webcast, Operator. Thank you.

Operator: Thank you. And ladies and gentlemen, this concludes today’s call. We thank you for your participation. You may now disconnect.