Sky Harbour Group Corp Q4 FY2023 Earnings Call

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.

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. He 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, where he was last COO of the New York region. We're very glad to have Will in our leadership team. We have a few slides we want to review with you before we open up to questions. 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 website after this call. As the operator stated, you may submit written questions during the webcast using the 4Q platform, and we'll address them shortly after our prepared remarks. Let's get started. Next slide, please. This is a summary of our financial results in the context of the trend of the past 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 exciting ground lease and operation. Second, our operating expenses and SG&A are semi-fixed to fixed, and we continue watching our expenses and maintaining frugality whenever possible. Lastly, looking ahead, our consolidated cash flow from operations continues to move toward 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 to 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 cash 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; rather, it is based on 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 more news about our new airports. Will?

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: the yellow bar indicates the 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.

Thank you, Will. The 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 sufficiency at the construction front of the obligated group. The pro forma cash and U.S. treasury bills at the obligated group currently stand close to $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 at the time of the bond offering in August 2021. This commitment continues to be sacrosanct for us. Back to Will for a discussion of ramping up our development activities.

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 are 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 will 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. Lastly, process integration from choosing sites with our site acquisition team through development and construction, and 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 '24 and '25.

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 above 95% occupancy, which, if you subtract the assumed vacancy rates in our original PABs filing, represents what we've called full occupancy. A 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, where we can achieve somewhat higher than 100% occupancy. A couple of other points: 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 have had our first renewals, which have come in the 20% to 30% range. So we do believe there's significant upside once we are fully leased. And I think we'll probably save this for a separate call on additional revenue streams, but we're 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. Our operation start date is April 1, which is next week. We're already pre-leased to the tune of almost 60% and hope to be fully occupied sometime in the 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 is opening right now, and we're looking at about a $5 million revenue opportunity. Phase 2, which will add to that, will add another just over $2 million. Again, it's a very established airport and metro market 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 hangared. 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. Again, I think most people who followed us have heard us talk about our growth in terms of the number of airports or square footage of hangars; those are both proxies for what we're really pursuing, which is available revenue. 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. 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 the Sky Harbour equivalent rent that we apply to each airport. With that measure is of available revenue. 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. 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. We will go after the best fields and 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.

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

Your first question comes from Philip Ristow. Regarding the 40 to 50 locations mentioned in the last call, what are your thoughts on announcements for 2024? Additionally, how many of the future locations might be existing ones like San Jose rather than new constructions?

This is Tal. For the rest of this year, we've indicated three new leases in the first half, and we've completed two, with one remaining. We're also looking at three more leases by the end of the year and aiming for six in 2025. Regarding greenfield versus brownfield, we were initially quite focused on greenfield projects, which still represent the majority of our plans. However, there are instances like San Jose and Nashville where we've taken over existing structures that we believe are better to renovate than to demolish. I expect to see more of this approach in the future, especially considering the immediate cash flow benefits. Additionally, we haven't encountered many attractive opportunities to purchase brownfield sites, but that seems to be changing now, and we're starting to see more options. The company will remain primarily focused on greenfield development, as that's our core model. Thank you for your question; I appreciate it.

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

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 you're pointing that out. Regarding the obligated group, which as a reminder, recovers those phases one on the first six airports 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 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 one-time 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.

Your next question comes from 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?

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.

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 hangars?

I think 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 mind just reading the question one more time?

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

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?

Sure. In addition to myself, we have another senior development construction individual that started with us that is solely dedicated to our due diligence pre-development pipeline to help push through some of these fields that we've signed leases on to get permitted and entitled to be able to start construction. And secondly, we have another individual starting with us next week that is a long-time construction individual that is joining us that will be solely dedicated to the execution of the construction of these fields as we move forward. We'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.

Your next question comes from Francisco Ferreras. There's been quite a few filings today and recently. Can you please put the recent filings into context for the market?

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. As you know, we did a pipe transaction common stock last November with $57 million-plus warrants, and those had registration rights to be registered with the SEC, and we fulfilled 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 an S3 shell registration program of equal or similar size. 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. Again, housekeeping; we don't intend to use the ATM program unless it's opportunistic for market opportunities that may arise in the future.

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

So we rank markets and airports around the country in terms of their specific attractiveness to Sky Harbour. The primary component of that metric is available revenue, as I alluded to 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 the same goes for our OpEx. 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. I can refer you, if you 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 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, 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.

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

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. 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 should be reached towards early Q1 or Q2 of 2025. 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 and early next year, and that is pushing the breakeven point of EBITDA again towards the first half of 2025.

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

I receive questions about warrants every week. To clarify, we inherited the warrant program when we went public two and a half years ago, and we have been managing it since. It's noteworthy that our stock has now exceeded the strike price of $11.50. Over the past year, some holders have chosen to exercise their warrants and purchase stock. To give you an idea, approximately 250,000 warrants have been exercised recently, generating around $3 million in proceeds for the company, which we plan to use for new fields, hangars, and future growth. Regarding the warrants and any potential actions, we are currently monitoring the markets, our stock price, and the situation with the warrants. We do not have any immediate plans to alter our approach to the warrants, and they will remain outstanding for now.

Your next question comes from Alan Jackson. Can you please explain the process of what a lease is signed and when it enters the obligation group? Is it the idea that most properties will enter the obligation group?

This is a very new one, but very important. One of the pillars of the business model of Sky Harbour is our ability to borrow tax-exempt fixed-rate municipal debt at attractive low-interest rates. Thus, we created in our first bond issuances with the first six airports this obligated group. Now, it is not a one-time bond issue; it's a program. Meaning, in the future, we can do further bond issuances, and they will join the existing bond issue and be part of the affiliated group at that point. It's when you do the bond transaction that you basically make it part of the obligated group. Now, in theory, it doesn't mean necessarily that when we do a new field, we're going to merely finance it as part of the obligated group. We might do interim financings. We may even do some long-term money issues outside the obligated group and wait to collapse them at a later time. So that's something that depends on market conditions. Maybe one critical thing that I will say is that we'll always be thinking from the standpoint of the current bondholders and the obligated group that we do things that are credit accretive as we grow the program.

Your next question comes from Jordan Mullins. You have indicated you expect three new ground leases in the first half of the year. You announced two today. Are you able to provide an update on ground lease negotiations, especially in top-tier markets? And have you found those top-tier markets tend to take longer? Appreciate any color you can provide here.

So our policy is to announce agreements only when they become binding. We can't provide specific names. What I think is okay to say is look, the site acquisition team has grown a lot over the past year. We're working a lot smarter and a lot faster than we did a year ago, and still the amount of work on each of our places is growing fast. So we're quite enthusiastic about what the pipeline looks like. And again, specific names will come out as the binding ground leases get signed. With regard to your question on whether those Tier 1 markets take longer, I don't think we've observed a correlation there. There's a gestation period; it varies a lot. I don't think it necessarily correlates to the attractiveness of the market. Some take a long time; some take a little time, which is why we found the best approach is to be in process in many, many airports simultaneously. And they come through when they come through. This is an exercise in throughput rather than cycle time.

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

If you have 12,000 feet of hangar space and you lease it to a single tenant who might operate multiple aircraft, the specific details of what goes into the hangar aren't as important to us. We've seen great success, especially in Nashville and somewhat in Miami, with what we refer to as semi-private leasing. For those with midsize aircraft, like a Challenger or Falcon 900, it might not make sense for you to occupy an entire Sky Harbour 16 hangar. Therefore, we offer private office and lounge space while accommodating one or two or three other aircraft in the hangar. We price the hangar slots similarly to how FBOs do, based on the square footage of the aircraft, defined by its length and wingspan, which is standard in the industry. Not every part of that space is utilized, leaving some corners empty, which allows us to achieve slightly over 100% occupancy. The Sky Harbour 16 was initially meant to be a private hangar, but due to changes in the NFPA 409 fire code governing hangar construction, we've introduced a new flagship hangar called the Sky Harbour 34, which is essentially two Sky Harbour 16s. From an aerial view, it resembles two Sky Harbour 16s. You can divide a Sky Harbour 34 into two completely private hangars, similar to Sky Harbour 16s, but with a non-fire rated acoustic wall separating them. When opened for semi-private use, the space is much more efficient; you can fit two heavy aircraft into two Sky Harbour 16s or three heavy aircraft into one Sky Harbour 34 within the same ground footprint. We anticipate that as the new airports with Sky Harbour 34 come online, exceeding 100% occupancy will become a larger part of our business strategy. I appreciate your question.

Your next question comes from Peyton Skill. The new airfield average RFS/hangar is in the 30,000 RFS range rationale for moving to larger sizes. Do larger hangars bring additional complexities/costs?

That's more or less what I was talking about now when I was answering Michael's question about the utility of the Sky Harbour 34. By the way, particularly at the Tier 1 airports where we just can't get enough space. The more space we get, the happier we are. So the ability to create a higher revenue density at those airports is key. So the Sky Harbour 34 is far superior to the Sky Harbour 16 in that respect. In terms of complexity and cost, not really. I can say that there is more steel that goes into it because we have a longer free span on the Sky Harbour 34 than you have on the Sky Harbour 16. So, yes, I'd say in terms of the amount of steel that goes into it, a bit more, it's not something that's going to move the needle dramatically in terms of total cost of a new airfield. And complexity, it's actually, I would say, slightly simpler than the Sky Harbour 16 in that we don't have to use vertical lift doors. Because, remember, one of the more expensive components of our current construction is those vertical lift doors. We use vertical lift today because the hangars demise into each other, right? We want maximum revenue density on each campus. So there's no space between the hangars; they adjoin each other, so to speak. So you can't really have sliding doors. That's why we use vertical lift doors today, which is expensive and adds a bit of complexity. In the Sky Harbour 34, you can have sliders without sleeves for the sliders, and maybe we'll put out something that kind of shows what that looks like at some point. But in terms of operations, it's actually slightly less complex.

Your next question comes from Lucas Horton, a four-part question. One, do you have any longer-term margin profit targets? Two, where do you expect to expand your headcount? What divisions do you see opportunities for headcount growth? Three, could you discuss your expectations for capital requirements for the foreseeable future? And four, how often are you competing with another provider when bidding for new contracts? What is the average number of competitors you see when bidding for new builds?

A lot of questions here, but let me go quickly here in order. A long-term margin profile target. Yes, our margin really comes from the difference between our tenant leases and our operating expenses, our ground lease payments, and our cost of capital of the overseas are capital intensive and we borrow a lot of money, in terms of debt to be capital equity and debt to finance it. So it is that margin that drives a long-term profile for our business. So, obviously, it's interest rate sensitive; it's sensitive also to the construction cost and so on. So, once stabilized, we will have attractive margins from an operating perspective. It's when you look at the totality of net margins that you have to bring all these first elements into account. So, project by project, each project is profitable; it could be that, right now, as a business, we have to grow so that the contribution of those projects surpasses the semi-fixed cost of our SG&A. We expect that to happen in the near future. In terms of headcount, we're keeping it very tight. Every time we open a campus, we have three or four full-time equivalents. So you can do the math there in terms of the expenditure as we open campuses. And in terms of capital requirements, I think the rule of thumb to use is that on average, every campus with these various spaces will mean a deployment of between $50 million to $60 million. So that gives you a sense of capital formation for us as we continue to grow. In terms of how... obviously, the business is very competitive, and we find. Let me let Tal address that in terms of competitive dynamics, but we are in a competitive business. At the same time, though, we have a differentiated product that allows us to be very successful. The recent past has shown us again and again be able to be selected among others.

I agree with that. I think what you said is exactly right. You may be on top of that. I'd say that the place where we've probably created the most proprietary knowledge in the entire company is on-site acquisition. To be clear, we love our hangars; they're Taj Mahals for us. But fundamentally, it is a metal box. Leasing is leasing; operations are not very different from what you'd see, for example, in FBO operations. In fact, it's simpler because we don't have transient business. The real smarts, the kind of the deepest bag of tricks in the company is on-site acquisition. Even implied in the question is when you use the word 'bids,' in many cases, it's us initiating these discussions with an airport. We're often alone in these discussions. We try to stay two or three steps ahead of where the market's going. I don't know that we'll be alone forever; I don't want to assume that's the case. But for now, we are the only people doing what we're doing anywhere in the country. This is the Sky Harbour unique model for now. In the cases where it is competitive, as Francisco just mentioned, we do come with a differentiated offering, where this is not an FBO offering. In pretty much every case where we've made a concerted effort and it has been competitive, we've won, and hopefully, we continue.

Your next question comes from Andrew Sordoni. You had a significantly lower estimate of remediation cost when you first announced the design flaw in Denver and Phoenix in December. What has changed since December, and what can we expect in today's numbers to be final? Also, can you discuss why you needed to spend the $27 million in remediation costs, DVP, APA and ADS, and whether that is one-time?

This is Will. I'll take that one, Andrew's question. A couple of things. First, we conducted an extensive and exhaustive review of both Denver and Phoenix that were the furthest along in construction on the designs, right, really culminating in three different engineering firms, primarily with Thornton Tomasetti, whom I would consider world-class, maybe the best there is. The objectives were to diagnose the flaw and determine all the related issues with it, with a high level of precision. From there, we detailed a remediation plan that is optimized first and foremost for certainty of result and makes this a one and final fix. Secondly, this has been a thorough and rigorous process, and we feel very confident in our estimates. Lastly, I would note that we've learned a tremendous amount from this process and this engineering study, which has been key for us to carry over into our new prototype, the Sky Harbour 34, that we're really landing on moving forward as our mainstay offering.

Your next question comes from Connor Kim. When opening a new campus, what do you expect your average time to reach full occupancy to be?

This is Tal. We have six months budgeted. I think one of the things you can see is on our original campuses, it took us more than that. Part of what we were doing is, if you've been following, you see that the per square foot rents go up as the supply goes down. Again, that's not something that we invented. We have come up with a few methods on the leasing side to shorten that. One of the things you see, for example, in San Jose is we actually haven't opened yet; we're already in about 60%. So we expect that one to go quite quickly. Going forward, one of the objectives is to have it look more like San Jose than the first projects.

Your next question comes from Peyton Skill. Is the $2 million Q4 operating expenses all attributable to existing airports?

This is Mike. In terms of our Q4 operating expenses, look at the allocation as about 45% related to the operations at our three operating airports, and the remaining 55% is actually attributable to all of our ground leases at all airports, regardless of whether or not they are operating. As disclosed in our financial statements, we've adopted an accounting policies where we elect to expense those directly instead of capitalizing them during the construction period.

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

We look into this, and we think about this all the time. Obviously, it's capital intensive and we have needs. The important thing for us is always to be ahead of the game. At no point are we forced to go and get capital at terms that we don't find attractive for the company and for our shareholders. From our perspective, our goal is to have a capital structure that maximizes the use of permanent bond transactions at the lowest rate possible, which will provide leverage and augment your return on equity to their shareholders. So how do we accomplish that? As you've seen, we have been at the receiving end of proposals from family offices in terms of pipes as we did last November, and that's something that we will entertain if the opportunity arises. In terms of the bond market, we track it; we follow it, and so on. One important thing that we've discussed in the past is should we wait, given increasing interest rates overall, to achieve investment-grade ratings? Because once we achieve investment-grade ratings, we could save about 200 to 250 basis points in your fixed-rate cost of debt. We are always balancing the timing of our next bond issue relative to the timing of potential investment grade and the timing of further equity offerings. One last point I will make is that we're very conscious that we need to increase our float, so at the right time, the right market conditions will make sense for us to broaden our flow in the right way. But again, we do not do this by looking at market opportunities; we do it on a timely basis. Right now, in terms of our capital needs, we're covered for the next 18 to 24 months, and thus, we have plenty of time to entertain these various alternatives of capital.

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

Yes, I'll take it, and some people are laughing in the room here because we are a relatively new public company. As you know, we're real estate and two years ago, I was probably the most reluctant to go this path, and now I've turned around in my view of this, and now I've become supportive of being a public entity. It really has put us out there, internal web show with all the information available to the marketplace, which allows us to attract incoming inquiries of people who are interested in investing with us or trying to engage in transactions with us, showing us opportunities. It has also allowed us to attract talent, in terms of professionals that have joined us in the past few months, giving us a currency. Also, using our currency to potentially even do things in the M&A market, even again, if we're dealing with the right prices. I have come around full circle to support being a public company, and I appreciate your question. I also appreciate your following; I know you've been following us for a couple of years and I have the Harvard Business School, a contingent of people who invest in Sky Harbour.

This is Tal. I'm going to add to that. I think we've been lucky enough so far that we run this company as though it's a private company in that we've not sacrificed the long-term for the short-term in any case here. We're running it exactly as we think it should be run. I think we've got a good following of major shareholders who understand what we're doing, many of whom are tenants who really understand the business model and the value that we're bringing. So I agree with Francisco: on balance, I think this ended up being a good decision.

Your next question comes from David Penone. Could you please comment on the timing and structure of future bond issuance? And what does management expect to pursue an investment-grade rating for the muni bonds?

Thank you, David, for the question and also for participating in a bond issue back two years ago. Indeed, as I said earlier, reaching investment grade is one of our objectives. Obviously, we got to do and have a little bit more history to show the ranges and have a structure to get to investment grade. We plan to... I think the right timing, when all those things come together, will probably be in the early or middle of next year, somewhere in 2025. That will be kind of like our timing goal to do that. Again, in terms of the next bond issue, if we can wait till then and be able to... we have done all the breakeven analysis about forming ourselves through other means, entering debt, bank debt, equity financing and so on, and then recapitulate ourselves and capture that 200, 250 basis points savings. I mean, anybody who has the calculators knows we're looking at long-term debt. Our first bond issue was 33-year final, 25-year average life. When you get 200, 250 basis points savings, both going in best on investment grade versus non-rated, and you present value it up to today, that's a lot of money in savings if you can capture them. Our objective is to try to capture that before we do our next permanent bond deal.

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

I haven't observed many types of real estate that allow for a consistent double-digit yield on cost, specifically unlevered yield on cost. To clarify, this is in relation to non-Tier 1 airports. Construction and operational expenses vary within a limited scope, but rent significantly influences the unit economics of this business. We're pleased with the rents per square foot that we're achieving in the 30s and 40s. As we enter more Tier 1 markets, we are maintaining relatively constant capital expenditures and operational expenses while significantly increasing revenue. Consequently, the unit economics will respond positively. This is in addition to the efficient leverage that was mentioned earlier. I'm referring to unlevered returns in the double digits, which are not easily found in many areas of real estate today.

Your next question comes from Connor Kim. During the capital raise in November, where you priced it at $6.50 per share, do you feel that this was an attractive price for you to raise capital, considering the market is now valuing it at double that price? Or did you place significant value on the partnership of the investors?

It's important to know that even though we announced the PIPE around October or November of last year, it was something that was being negotiated during the summer when our stock was trading in the $4 to $5 range. So it was a PIPE that was coming actually at a premium to the observed equity price. We did it in a limited amount of capital with regard to our future needs, and we thought it made sense to seamlessly market our access to capital. Our market access has a common stock offering type vehicle for our preference over the things that you see out there. We didn't need the cash right now; it was the right thing to do for us, for the company, and I think the market reaction has proven that strategy. I'll let Tal comment on the partnership of the investors because some have been publicly disclosed, and we can talk about that in terms of your being some of them are tenants, some of them are people with an affinity for the aviation industry, and then others have wanted to remain private, but they're very significant people in the investment community in the United States.

I think that's right. Look, that investment round or that PIPE deal had some of the most sophisticated business jet owners in the United States in it. Again, like Francisco said, some of them disclosed, some of them are not disclosed. I would say all of them have been extremely active, since we closed that route in everything from site acquisition to introducing us to, again, some of the best residents we could possibly hope for in the business. So all told, no regrets; we don't look back. I think we're very happy to have completed that at the size that we indicated. So we're quite pleased with that investment round.

So, operator, I know we have hit the one-hour mark. I know there are many other questions to remain in queue. But at this juncture, we have to keep this tight for an hour. I'll ask, and we'll respond to people's questions individually via email. So, at this juncture, we're going to close the webcast, but not before thanking everybody for joining us this afternoon and for your interest in Sky Harbour. Additional information may be found on our website, www.skyharbour.group. You can always reach out to us directly with any additional questions through email at investors@skyharbour.group. If you wish to visit our campus, please let us know, and we'll arrange a tour. I know several of you took advantage of this opportunity in the last few months. So, again, thank you for your participation. And with this, we have concluded our webcast. Operator, thank you.

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