Sky Harbour Group Corp Q3 FY2023 Earnings Call

Good day, everyone. My name is Chris, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Sky Harbour 2023 Third Quarter Earnings 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, simply submit the question online using the webcast URL posted on our website. Thank you. Francisco Gonzalez, Chief Financial Officer, you may begin.

Thank you, operator. I'm Francisco Gonzalez, CFO at Sky Harbour. Hello, and welcome to the third quarter 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 in 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 statements. So now let's get started, introducing the team with us this afternoon: 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. We have a few slides we want to review with you before we open up to questions. These slides have been filed in Form 8-K with the SEC this afternoon and will also be available on our website after this call. You may submit written questions during the webcast using the Q4 platform and we'll address them shortly after our prepared remarks. So let's get started. Next slide. This slide is a summary of the Q3 results in the context of the trend of the past two years for selected metrics. First, in terms of capital invested in hard assets, our three completed campuses and construction in progress in Phoenix and Denver surpassed the $120 million mark in the third quarter. With our two recently opened campuses in Nashville and Miami nearing full leasing, Q3 revenues reflect the step function increase in our rent to own fuel commission revenues. I should note that as disclosed in our 10-Q filing, Q3 revenues included about $400,000 in nonrecurring revenues, primarily arising from a negotiated settlement with one tenant who had leased two hangars in Miami. We will discuss more on this shortly when reviewing our leasing activities. Looking ahead, we expect this step function revenue phenomenon to continue as we open new campuses, and the next step is expected to occur in Q2 and Q3 of next year as Phoenix and Denver campuses open and tenant leases there start cash flowing. Our operating expenses and SG&A are semi-fixed to fixed and we continue watching our expenses and maintain frugality whenever possible. Consolidated net cash flow from operating activities is approaching breakeven, as you can see in the lower right-hand quadrant, something that we expect to surpass next summer after Phoenix and Denver campuses open. This is earlier than our original indication of reaching and surpassing breakeven at the end of next year. Next slide. In terms of rentable square footage, we continue to make significant progress in securing new ground leases. The last one announced last month at Chicago Executive Airport is a great location, by the way, for our home basing services. As we have previously disclosed, we expect to execute another two ground leases before the end of the year and another three by the end of the second quarter of 2024. The value of our business is not backward-looking, putting the projects in the pipeline in front of us. Once the ground lease is executed, we believe the value creation for our shareholders is effectively locked in, and it's all about execution thereafter. With this summary of results, let me pass it to Tal Keinan, our CEO, for an operating update. Tal?

Thank you, Francisco. I will move through this quickly since the 8-K filings are available, and I want to leave time for questions. Our business can be categorized into the following areas: site acquisition, development—now including both manufacturing and construction—leasing, and airfield operations. I will provide a brief market overview, share some lessons learned from the last quarter, and then discuss our business strategy moving forward. Regarding site acquisition, it’s crucial to consider throughput versus cycle time. There is often a lengthy and variable gestation period from the start of work on our target airport to executing a ground lease. We have many in process, with significant progress seen in the last 18 months. Airports are starting to emerge, with current developments in Houston, Nashville, and Miami, and projects in Phoenix, Denver, and Dallas; we are also permitting in Chicago. We anticipate announcing two new ground leases this quarter and three more in the first half of next year. In development, which now includes manufacturing and construction following our acquisition of RapidBuilt, we are integrating RapidBuilt into our operations. The first two sites utilizing pre-engineered metal buildings from RapidBuilt will be in Denver and Phoenix, which are shown on the screen. Our goal for RapidBuilt is to enhance the quality of our builds continuously, which we believe to be the highest in business aviation. Our rapid prototyping capability is hastening this improvement while also helping to reduce costs as we expand. For leasing, at this stage, if you look at our roster of Sky Harbour members—our term for tenants—you’ll recognize many prominent names in business aviation. We are transitioning from needing to explain our value proposition to having a clear and understood one. Current occupancy is reflected here, and we are beginning a branding initiative with some early members who have been with us for over a year and are starting to promote our services. We will soon announce partnerships with some public figures to raise awareness of Sky Harbour among the business aviation community. Notably, we are seeing the first leases reach their term. Our staggered lease structure, ranging from one to ten years, has resulted in renewals or new tenants entering at significantly higher rates than original leases. For example, a new tenant recently signed at nearly a 20% premium over the previous rate. As for airfield operations, our top priority is safety. I am pleased to report that we did not have any safety incidents in Q3, nor did we experience any service gaps. We conduct thorough tenant surveys for service feedback, and our members are very satisfied with our services. We engage closely with many of our members to continually improve our offerings, and we expect ongoing refinement. A major focus right now is reducing the time to wheels up, which is already the shortest in business aviation and is essential for our members. We have started offering detailing services and plan to introduce a range of revenue-generating services in the future, although that is not our primary focus at the moment. Expanding our footprint is our main priority, and we’d be happy to discuss further in Q&A. Looking at the market landscape, we are experiencing strong tailwinds. We are not an FBO company but are concerned with the number of aircraft in the fleet and, more specifically, the square footage of that fleet. The backlogs at OEMs are at record levels, and the average aircraft delivered each year grows larger, increasing the total square footage of the fleet faster than the actual aircraft count. As technology advances, the lifespan of airframes also increases, leading to a growing hangar deficit that is becoming increasingly acute. Once an aircraft is delivered, it requires a place to stay regardless of usage. In the competitive landscape, no company currently matches what Sky Harbour offers. There has been considerable consolidation in the FBO industry, particularly with Atlantic and Signature Flight Support, which we believe positively influences our position. We are also witnessing rising demand from airports, shifting from our initial efforts to communicate our value to airports reaching out to us directly. We provide a unique service that is in high demand. Regarding lessons learned from the last quarter, we are increasingly focusing on throughput rather than cycle time in our corporate goals. We need to enhance our marketing and branding strategy, which is planned for 2024, to more effectively communicate our value proposition to airport sponsors and tenants. Our site acquisition team continues to grow and is predominantly composed of military veterans from MBA programs. On development, the integration of manufacturing and construction remains a challenge, but we expect substantial benefits once it is completed. In member leasing, we plan to enhance our branding efforts and clarify our value proposition for the right audience and will discuss recent investments from some members that will assist in our communications within that community. The staggering of lease terms has provided risk management benefits and has allowed us to reap significant premiums on re-leasing as market conditions dictate. In airfield operations, the primary metric we are currently optimizing is the time to wheels up, among other metrics. We can delve deeper into our differentiated service offerings if we have time in Q&A. Back to you, Francisco.

Thank you, Tal. Let's review our liquidity and capital position. We ended the third quarter with approximately $130 million in cash and US treasuries, which represents a $20 million decrease from the previous quarter due to our ongoing investment in CapEx. Our US treasury portfolio is very short-term and managed by our Treasurer, Tim Herr, who is here with me. We continue to earn over 5% as we roll our cash into three- and six-month US treasury bills, waiting to invest in new hangars. In the meantime, we generated more cash than the debt that funded it, and we're preparing the necessary rebate analysis as required by the IRS. The right side of the slide shows our bonded debt, which consists of $166 million in 4% and 4.25% fixed-rate private activity bonds. These bonds have no principal repayment for the next 80 years, and we have pre-paid the interest due through mid-2025. With a final maturity of 31 years and an average life of over 20 years, these bonds represent permanent capital for the company. On November 2nd, we closed on a $42.8 million pipe of common stock with participation from over 40 accredited investors through Altai Capital. This investor group includes notable names in investment management and family offices of ultra-high net worth individuals. In addition to providing us with growth equity, many new investors are users of business aviation, and we look forward to potentially having them as tenants in the future. The next slide illustrates the capital and unit economic scenarios for various potential sizes of the company's airfield portfolio. Prior to the recent pipe, we were fully funded for our existing six announced campuses. With the expected close on the additional up to $50 million from the second closing of the pipe by the end of the month, we will be fully funded for 12 campuses, as shown in the lower column of the chart. We typically categorize campuses into Phase 1 and Phase 2; we can undertake an additional six airports or 10 to 12 airports just in Phase 1. This also assumes we pair the new equity with anticipated debt financing as outlined here. We aim for a 13% to 15% unlevered NOI yield or yield on cost, which, combined with our tax-exempt leverage, results in pre-tax levered returns on project-level equity of approximately 30% or more. As we expand from 12 to 20 airport scenarios, we expect the unit economics to improve, as the next 12 airports are projected to be more profitable than our first six. Over the next couple of years, as we grow from 20 to 40 and 50 airports, we anticipate slight compression in margin yields as we operate in lower-yielding markets. Nevertheless, assuming other factors remain constant, the strength of our borrowing program and the potential for achieving investment-grade bond ratings in 2025 will facilitate increased leverage and lower debt costs. This will help mitigate the recent rise in overall market interest rates, while still allowing for 30% or more levered project pre-tax ROEs despite the anticipated lower NOI yields of these fields in the future. Moving on to bonds, here is a breakdown of the liquidity at Sky Harbour Capital, our private activity bond borrower subsidiary. We remain fully funded for the remaining phases of the original project as amended. Next, we present a summary of revenues and cash flows at Sky Harbour Capital, also known as the obligated group. These figures closely align with our consolidated results, excluding holding company SG&A and the impact of outstanding warrants and employee stock award expenses. The obligated group turned cash flow positive in the last quarter and is expected to maintain this positive trend as new campuses open. I want to emphasize, particularly to our bondholders on this call, that we will consistently protect our borrowing program. This is a commitment to exceed the projected debt service coverage established during the bond offering in August 2024, which we regard as sacrosanct. As discussed in our previous webcast, we will prudently manage our funding and seek permanent growth capital when opportunities arise. We will utilize our internally generated resources as needed, raise additional equity at favorable share prices, partner with real estate infrastructure funds when suitable, and continue issuing productivity bonds to timely support our accelerating growth.

Thank you, Francisco. Yes, we can go back to these Q3 and pictures during the Q&A. You can put up the business strategy slide. Yes, there we go. So again, very briefly and we can get into anything in more detail during Q&A. Site acquisition, we feel like we're in a very good position; the pipeline is much more robust than we expected it to be, and we're quite excited about that. On the development side, it's time to go from effective to efficient. We've been getting these up safely and with a very good level of quality. We believe we can do it much more quickly and less expensively, and that's a big part of our acquisition for RapidBuilt and a lot of what we're doing here. We also have a challenge ahead as the pipeline materializes to scale up on the HR side for development; we’ll be running far more projects in parallel than we are today very soon. Member leasing, we discussed brand strategy and member ambassadors. So stay tuned in 2024 for a rollout of a real branding strategy for Sky Harbour. On airfield operations, so I'd say near term, medium term, and long term, the number one priority is going to be safety, and it always will be. We're in an industry where that's in demand with no compromises on that. We feel we have very robust programs, both training and monitoring programs to ensure that we operate safely. We're, as we said, targeting specific metrics now on the service side. Time to wheels up is the number one, there are others, but time to wheels up is what we believe matters most to Sky Harbour members. And then in the medium term, we will begin rolling out third-party services. I alluded to one earlier. The first one that we've rolled out now, again, in partnership with a national provider, is aircraft detailing, which is going to be in-house, in-hangar on all of the campuses with a permanent two-person crew on each campus to perform detailing services. Again, there's a whole roster of services that we will be rolling out, but it's not the top priority right now. Scaling is the number one priority. In general, I think this is a moment in Sky Harbour's history where we've done a lot of experimentation, a lot of learning. We've put methods and procedures in place, established a culture that I think is very palpable to every crew member and everybody who interacts with Sky Harbour. It's now time to scale, and that is what we're about in the year or two ahead. Functional integration is one of the areas where we have a lot to improve. We've looked at those areas of site acquisition, development, leasing, and operations as silos. It is very important for us to understand the interaction between them. There are all sorts of efficiencies that we can gain through integration between those functions, and that's part of what we're doing right now. We talked a little bit, and Francisco spoke a little bit about our growth capital strategy. We're in a position where we feel lucky to be able to attract very specific investors into our cap table who can really push the company forward, and those are both new tenants and prospective tenants. And with that, I think we're good to go to Q&A.

Thank you, Tal. This concludes our prepared remarks. Operator, please go ahead with the queue.

Our first question is from Michael Diana of Maxim Group, who asks about the ranking of Chicago based on rental rates compared to your existing airports and the other five that are currently under negotiation.

I can take that. It's Tal Keinan. Michael, first of all, thank you for your coverage. I've been reading yours and find it very rigorous and insightful, and I appreciate that, appreciate the question as well. Chicago will rank number one out of the first seven airports in terms of revenues per square foot. Relative to the airports that are coming online, I'd say we'd still rank near the top but there are two airports that we hope to be announcing soon that will actually exceed Chicago.

Okay. Our next question is from Kevin Amirsaleh, who asks, can you give us updates about the lease-up rates per foot?

So what we can say in general is, I think you may have noted that we've introduced fuel revenues in the last year or so at Sky Harbour. Although we're not in the fuel business, we're in the rent business, we understood that it's important for us to be able to control the entire basing cost of a Sky Harbour tenant, so we're looking at blended rates right now. It’s very difficult to say what the average rent was a year ago, what it is today. What I can say is if you take an airport like Miami where we began leasing in, call it, the low 30s per square foot, we're now leasing in the low to mid 40s per square foot, that should give some indication.

The next question is from Peyton Skill, who asks, can you discuss construction delays historically at OPF and currently at ADS, APA? What are the biggest factors in construction delays and how are you mitigating this risk?

So I can say one of our biggest issues in 2022 was access to materials. By the way, that's become a little bit looser. But as you know, we're in the pre-engineered metal building space; it's not just hangars that use the pre-engineered metal building components, it’s warehouses, data centers, a lot of other types of construction. We had real challenges with lead times on orders and things like that. I would say the biggest step we've taken to address that problem has been RapidBuilt, so we now manufacture ourselves. As I said earlier, there are integration challenges going forward; a lot of that will be ameliorated by having a kind of constant flow of projects, which is about to happen. We have a ramp-up challenge ahead of us. But once we're at a steady state of processing projects in parallel, we believe that gets our cost down.

We have another question from Michael Diana of Maxim Group. You referred to your new investors as some of the savviest players in business aviation. Can you elaborate?

Tal, it’s Francisco, I’ll take that. And again, I'll reiterate Tal's comments, Michael, we are very appreciative of the thoroughness of your research coverage on the company. Indeed, the pipe that just closed led by Altai Capital brought together a group of investors that are well known in the technology space and also now that our focus on infrastructure as well. As we disclosed at the time of the closing of the pipe, 8VC, Raga Partners, and certain other family offices that prefer to remain private, very ultra-high net worth individuals became part of the pipe. They're joining our original investors, Boston Omaha, Center Capital, and Due West Partners. Again, we are creating a group of long-term holders of very savvy investors who are also very close to business aviation, either because they have planes of their own or their relationships and friends also are active in business aviation. We look forward to continuing to grow this group of investors as we continue to grow the capital base of the company.

Our next question is from Peyton Skill. How do construction costs vary across markets? And what are current and foreseeable initiatives to bring down construction costs and improve ROIC?

I think it's actually an astute question. What really varies across markets is revenue, right? It's like any real estate business; it's location-driven. So construction costs don't actually vary that much across markets. Now that we manufacture everything that goes above ground, we have much tighter control over that. By the way, that was an issue of timing. There's a cycle driving construction costs or components for pre-engineering metal buildings, so less about geography but more about timing. We are not finding very meaningful variability in actual construction costs across markets. What does drive construction costs is site work. We have facilities; one facility that comes to mind that we actually walked away from, in retrospect perhaps a mistake. There was just so much grading to do that it looked to us like it'd be difficult to pencil. Again, in retrospect, the revenues are so high in that market that I think it possibly would have absorbed it. Things like grading and drainage can affect construction costs, again, not so much a function of which market you're in but just what does a site look like. Once you get above ground, though, they're all quite tight. What can you do? Again, we talked about RapidBuilt a little bit, but I think your question is alluding to this. Fundamentally, it's about location. The real question is site acquisition. If you're not going to have much variability in development costs, it's really about revenue and now targeting the richest markets in the country.

Again from Peyton Skill, it looks like there is more hangar supply coming online at OPF. How will this affect SKYH's rate upon tenant renewal?

I think you are likely talking about two new community hangars at one of the FBOs and a new FBO that opened last year in Opelika. We don’t see either of those as competition for our product. While the limited availability of hangars does benefit our business, our offering is fundamentally different from a community hangar at an FBO. We have customers who would choose to remain with Sky Harbour even if there were other hangar spaces available on the field at significantly lower prices. It’s simply a different offering.

Our next question is from Robert Slesak. In your comments about re-leasing, you mentioned additional tenants joining. Are some or most hangars multi-tenant instead of single-tenant?

We've done some experimentation in this area. The original idea was to have all private hangars, meaning one hangar per tenant, which is still the majority of our tenancy. Last year, we started trying out a concept we refer to as semi-private hangars, where your aircraft shares the hangar with one or two others. All the aircraft are stored together in one space, offering private parking and office space, but still sharing the hangar. This arrangement seems to work well for smaller aircraft, like a Challenger or Falcon 900, as it presents more opportunities for us. In Houston, we initially addressed this by constructing smaller hangars suitable for these aircraft, but that turned out to be a mistake. Most owners are perfectly fine sharing a hangar; it often doesn't make sense to dedicate an entire one just for a Falcon 900. You could fit three of those planes into one of our standard-sized hangars. Most owners are quite comfortable being with one or two others. These aren't transient hangars with constant movement; the doors remain closed to ensure privacy, allowing you to know your neighbors, which has worked out well. A benefit of this approach is that we can achieve over 100% occupancy in these hangars by applying the FBO standard of using the lifetime wingspan for an aircraft's space requirement. By manipulating the space effectively, it's possible to accommodate significantly more than 12,000 square feet worth of aircraft in a 12,000 square foot hangar.

The next question is from Alan Jackson. Last quarter you mentioned the potential of paying dividends with excess cash flow. Why not retain these cash flows within the business to compound as opposed to paying dividends? What is management's thoughts on how excess cash is deployed?

Indeed, we discuss this internally quite frequently. Currently, we are focused on retaining our cash and generating revenue as we expand. As we mentioned in the last conference call, we would eventually like to start paying dividends when the timing is appropriate, potentially transitioning to a REIT structure, which would be very beneficial for our investors. However, this depends on our ability to access the capital markets for additional equity at the right price, which is a critical factor. If we can achieve that, we will begin paying dividends and shift toward a REIT model. If those opportunities do not present themselves, we will use our cash flow to continue investing in campuses, given the appealing unit economics for our shareholders. This is essentially our strategy, and it's a question we consider regularly.

Our next question is from Robert Slesak. For the 10-Qs, properties and development fell from 56 hangars in June 2023 to 42 hangars as of September 2023. Were some projects abandoned or perhaps a change in configuration?

We should likely include additional notes in our disclosures about hangars. As Tal noted, we're testing larger formats, such as the Sky Harbour 30, which is about double the typical hangar size we are currently developing. Therefore, when we share hangar numbers, we don't distinguish between the Sky Harbour 16, which is approximately 14,000 square feet, and the Sky Harbour 30, which is now being developed in future campuses that will simply be twice the size. The reduction in the number of hangars is primarily due to a change in configuration. Interestingly, in terms of rentable square footage, we are actually increasing the total square footage in development. One key update is that, as mentioned in our disclosure, we allowed the lease for the second phase at Sugar Land to expire. As you might remember, that was our initial campus, where we experimented with many aspects that we are currently addressing. While it is generating cash flow, it does not present as appealing opportunities as those we currently have. As a result, we chose not to advance Phase 2 at Sugar Land, which accounts for a reduction of six hangars with that decision.

The next question is from David Pinoni. Can you please provide additional color surrounding the planned Chicago site? What was the price paid for the ground lease and how long is the term? How many hangars do you anticipate to build on that site? How do you anticipate the clientele to differ from Sugar Land, Opelika, and Nashville?

There are a couple of questions in there; this is Tal, again. So David, first, we don't pay for the ground leases. One of the benefits of doing this greenfield is there is no upfront payment. It's very efficient from our perspective. The lease term is 50 years at Chicago. The number of hangars, I'm just following on Francisco's point, the mix is changing. We're using those larger, what we call, the Sky Harbour 34 hangar now. Happy to get into it at this time as to why we've made that shift, but more square footage under each hangar roof. We're talking about something on the order of 250,000 square feet of hangar in total for Chicago. In terms of the clientele, one interesting thing I can say is that, as I think most people on the call know, we do tend to attract the highest-end clientele. These are the newest, largest business jets in a metro center. Chicago Executive has a 5,000-foot runway. It’s got an EMAS, which is an emergency arrestor system on the runway. We used to filter out airports with runways shorter than 6,000 feet. One of the things that we learned, among other places in Chicago, is that there are certain conditions under which a 5,000-foot runway works very well. So the largest business jets, Bombardier Global 7500s, Gulfstream G650s, can operate out of that runway. There’s a lot of nuance that goes into our target selection criteria. We learned a lot from Chicago, but this is one of the airports where, again, I think, for example, a large jet owner in Houston might not locate at an airport with a runway that length. Each market has its own particularities, but that's one of Chicago's.

The next question is from DJ Meghan. Are you experiencing any construction cost overruns or labor issues as we are seeing with many airport projects? Please discuss the competitive environment at MIA or others offering hangar space.

Look, I think we experienced what everybody else is experiencing in the industry. As I think you've heard from both Francisco and me so far, we have taken a lot of initiatives to bring as much of the variability in construction under our own control. I think that's one of the key drivers of vertical integration for us in the business. We have seen a little bit of loosening. I don't know if that will continue or not. I would say late 2022 was probably the peak of the labor and materials shortage for us. Again, it feels a little bit looser now, but we'll see going forward. With regard to hangar space in Miami, Opelika is absolutely jam-packed. We are the most expensive basing solution at that airport, at every airport. So for us, it's really about achieving the premium that the market is willing to give us in that field. Like I said in one of the earlier questions, we just don't see a comparable offering. The alternative is to go to an FBO community hangar, which is a good fit for many aircraft owners, but not for the type of owner that tends to come to Sky Harbour.

The next question is from Philip Ristow. Will there be an option to refinance next year if rates decline if you raise for PABs before the year-end?

Thank you, Philip, for the question. I appreciate your close follow-up as an investor and the queries you send between conference calls. One of the advantages of private activity bonds is that the tax-exempt bonds include a 10-year pre-call. This allows us to develop a portfolio with various bonds over time. It's important to understand that this is a program, not just a separate bond deal. The upcoming bond issue will essentially join the obligated group, which brings several benefits. One major advantage is that it will provide a cash-flowing portfolio of collateral to back the next bond deal. We are optimistic that in 2025, when we approach the rating agencies, we can secure investment grade ratings. Ideally, we want to access the bond market then to achieve savings of 150 to 200 basis points compared to non-rated issues. This reduction in credit spread will help counterbalance the significant increase in interest rates we've faced recently. In the meantime, we will finance projects using our equity capital and may consider interim debt solutions, with more details to come later, to bridge the gap until we can obtain investment grade ratings. At that point, we believe it will be the right time to seek permanent capital in the bond market.

The next question is from Christine Thomas. How do you source your customers? What are your customer acquisition costs? Are there customer groups you've not yet targeted, which would be easy to target? Can your new investors help?

I think your question might stem from some of our original guidance on using brokers to get to customers, which we haven't really done. That was in the original plan. I think if you look at our financial models, we did have a pretty significant brokerage expense in there. So I don't know, maybe Francisco and Tim might be able to specifically discuss customer acquisition costs. I would say with very few exceptions, we've secured all of our members without brokers. We've gone direct. We don't have marketing yet. We do get some inbounds, but it tends to be local in terms of new groups and how it works with our new investors. Among our new investors are aircraft owners that actually own fleets of multiple aircraft and operate in more than one market. You might be based in Miami; that might be your hub. But there are people who are based in three or four or five different jurisdictions and have specific operating characteristics or might operate types of aircraft that are a little bit difficult to accommodate in kind of generic FBO situations. They are looking to create their own network of Sky Harbour hangars across the country. We haven't done that yet, but it's something we are looking at.

Yes, I would just add that we have paid very little in terms of brokerage fees. I think only $42,000 since inception and less than $20,000 this year. As Tal mentioned, by having our leasing group internal and having a good cadence on the opening of these campuses in a staggered fashion, it makes it very efficient for doing this internally. Again, it's probably easier at scale to run a national business in various markets at the same time.

The next question is from Kevin Amirsaleh. How are the markets for hangar space changing with the softening economy? How is absorption of new space in the industry, same as 2022?

I would say it's what I alluded to earlier: what really drives this market is the square footage of the US business aviation fleet, which doesn't fluctuate; it only grows. That would be a very different claim if we were in the fuel business because if you are in a soft economy, one of the levers that you can pull as an aircraft owner is to fly less and consume less fuel. But once an aircraft is delivered, it must find somewhere to live. I would argue that in a severe recession, even if the banks own the aircraft and it's not flying, the case for hangaring it goes up, not down. So we feel the demand gets locked in once the aircraft gets delivered. There's significant insulation we think from the economic cycle.

The next question is from Matthew Howlett. I think you said you expect to execute three ground leases in 2024. Is this about the pace you expect going forward?

We actually put out an estimate of three ground leases in the first half of 2024. I think one of the things that you’re seeing is if we do this right, this is not linear. We planted many dozens of seeds starting about 18 months ago, which are now starting to sprout. If we do it right, we should do this at an ever-increasing pace. Execution will be our biggest challenge here. We don't expect this to be a linear story.

The next question is from Connor Keim. What kind of timeline do you see for the conversion to a REIT structure? Is this something you think is a possibility in the next year or two, or do you anticipate it happening more along the lines of five or more years from now?

No, that's definitely something that will be more of a medium to long-term strategy. We're currently in a growth phase. Once we convert into a REIT, we’re required to cash flow and distribute a certain percentage of that cash flow. As we discussed earlier, we are focusing on growth, so we may need that cash flow to keep investing in new projects. This is definitely more of a medium to long-term outlook, not something we expect to happen in the next two years.

The next question is from Philip Ristow. Why was the phrase North America used in the press release? Will there be other airports outside the United States? Can the pipeline be close to 100 locations?

The short answer is yes, on airports outside the United States. We think about 60% of the world is right here in the United States, one regulatory jurisdiction to operate in. It is certainly the low-hanging fruit, but there are exceptions that are attractive enough to pursue. In terms of where the pipeline can go, I don't want to speculate right now on a number, but I understand the direction you're headed here. Number one, I can't think of many examples of airports that we thought were attractive to us and turned out not to be attractive. I can think of many examples of airports that we overlooked that we now understand are actually good target airports for Sky Harbour. I gave the example of the 5,000-foot runways which, under certain conditions, are completely fine for Sky Harbour and open up a lot of opportunities that we were not looking at a year ago. The last thing I'll say on this is, as you can understand, the denominator that we're using in yield on cost is development cost. To the extent that we can get our per square foot development costs down through vertical integration, value engineering, prototyping, all of the measures that we're taking and refining, not only do the unit economics on the existing airports get better, but the universe of airports that are viable for Sky Harbour gets larger. I don't want to put a number on that right now, but I understand where you're going with the question, and we're thinking in exactly the same terms.

We have no further questions at this time. I'll turn it over to Francisco Gonzalez for any closing remarks.

Thank you, operator. There have been no additional questions. I want to thank everybody for joining us this afternoon and for your interest in Sky Harbour. Additional information may be found on our website at www.skyharbour.group, and you can always reach out directly with additional questions through email at investors@skyharbour.group. If you wish to visit a campus, please let us know and we will arrange a tour. Thank you for your participation. With this, we have concluded our webcast. Operator, thank you.

Thank you. This will conclude today's conference call and webcast. You may now disconnect.