Earnings Call Transcript - SKYH Q2 2025

Operator, Operator

Good afternoon. My name is Sarah, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sky Harbour Second Quarter 2025 Earnings Call and Webinar. Thank you. I would now like to turn the call to CFO, Francisco Gonzalez. You may begin your conference.

Francisco X. Gonzalez, CFO

Thank you, Sarah. Welcome, everybody. I'm Francisco Gonzalez, CFO of Sky Harbour. Welcome to the 2025 second quarter investor conference call and webcast for the Sky Harbour Group Corporation. We have also invited our bondholder investors in our parent subsidiary Sky Harbour Capital to join and participate in this call. Before we begin, I have been asked by counsel to note that on today's call, the company will address certain factors that may impact this and next year's earnings. Some of the information that will be discussed today contains forward-looking statements. These statements are based on management assumptions, which may or may not become 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; and our Assistant Treasurer, Andreas Frank. We have a few slides we want to review with you before we open it to questions. These were filed with the SEC an hour ago in Form 8-K, along with our 10-Q, and we also filed our second quarter Sky Harbour Capital Obligated Group financials with MSRB/EMMA an hour ago. As stated by the operator, you may submit written questions during the webcast during the Q4 platform, and we'll address them shortly after our prepared remarks. So let's get started. In the second quarter, on a consolidated basis, assets under construction and completed construction continue to increase, reaching close to $300 million on the back of construction activity at the new campuses in Phoenix, Dallas, and Denver. Consolidated revenues experienced an increase of 82% year-over-year and 18% sequentially, reaching $6.6 million for the quarter, reflecting the acquisition of Camarillo last December and also higher revenues from our existing campuses. It is important to note that Q2 had roughly only $200,000 of revenues from our 3 new campuses that just opened. Operating expenses in Q2 increased moderately, reflecting the purchase of fuel at Camarillo and the expenses of bearing the payroll and others of these 3 new campuses without associated revenues as we have been preparing in the past 6 months to open and commence operations there. In terms of SG&A, we strive to keep our expenses in check as we grow, keeping costs as low as possible. Cash flow used in operating activities improved and stood at less than $1 million for the quarter, a significant improvement from the $5 million used in Q1. This is a key metric we pay attention to. We reaffirm our guidance that we expect Sky Harbour to reach cash flow breakeven on a consolidated basis at the end of this year as we ramp up the leasing and cash flowing of these 3 new campuses over the fall. I need to note that the potential revenues for the 3 new campuses total a projected $14 million annualized, which is why mathematically, we feel confident of our profitability expectations in the near-term, given the operating leverage of our business. Next slide, please. This is a summary of the financial results of our wholly owned subsidiary, Sky Harbour Capital that form the Obligated Group. This incorporates the results of our Houston, Miami, and Nashville campuses, along with the CapEx and operating costs and revenues that came in the quarter for the 3 projects in Denver, Phoenix, and Addison, Texas. Revenues increased 20% sequentially from the first quarter. As just discussed, we expect a step function increase in revenues in Q3 and Q4 and into the new year as these 3 campuses are leased up and rent and fuel revenues commence to flow. Operating expenses increased as we just discussed, given the onboarding of all the line personnel and Harbour masters in Q1 and Q2 in anticipation of the campus opening in Q2 and Q3. Cash flow from operations generated a positive $2.2 million in the quarter, and we expect this number to continue to increase with the higher cash flows from operations as the 3 new campuses are leased.

Tal Keinan, CEO

Thanks, Francisco. I believe everyone is now familiar with the chart on the left, which is self-explanatory. The chart on the right, which we've presented over the last few quarters, has been updated to provide more detail due to inquiries about its derivation. The bar chart displays the rentable square footage of site plans based on Sky Harbour's current ground leases multiplied by the Sky Harbour equivalent rent, representing the available revenue per square foot on each campus. Currently, we estimate the revenue capture potential to be around $140 million, and if we achieve our guidance by year-end, we anticipate it reaching nearly $200 million. I want to reiterate, in response to last quarter's questions about the methodology depicted in the embedded chart above the bar chart, that the 2022 CBRE projected revenues closely align with the Sky Harbour equivalent rent we used in our airport assessments. The average expected revenue encompasses our contracted lease revenue plus additional fuel margins. The highest expected revenue reflects the weighted average of the highest-paying tenants at each campus to illustrate the significant increase in rents when campuses transition from initial to fully leased states. This methodology of using share as a multiplier against rentable square footage is conservative. Moving on to leasing updates, we have divided this slide into two sections: the first shows actual results from Q2 for the first five airports, while the second includes contracted airports without actual results yet, indicating the agreed rent in leases. In some cases, we have a guaranteed minimum fuel uplift, which is included, while in other cases it isn't accounted for here. A noteworthy pilot project we launched this quarter focuses on pre-leasing hangars at campuses not yet under construction. We believe that Sky Harbour has built a strong reputation within the business aviation community, allowing aircraft owners to confidently commit to leases a year or more in advance, which requires substantial trust in our ability to deliver as promised and on schedule. We initiated pre-leasing efforts at Dulles International and Bradley International in Connecticut, resulting in our first signed leases there, with more expected. This initial success from the pilot project may influence our leasing strategy moving forward, potentially allowing us to secure pre-leases for upcoming campuses without significantly decreasing revenue per rentable square foot. The average rent of $47 at those two airports reflects contracted signed leases, excluding any excess fuel margins in line with our targets. Now, regarding manufacturing and construction, last quarter we began detailing our plans to scale up Sky Harbour's construction capabilities. We have transitioned from being a small player in airport land to a major construction entity, likely the largest hangar developer. This shift aims to enhance quality, speed up construction, and reduce per square foot costs through vertical integration. Our wholly owned development subsidiary, Ascend Aviation Services, manages this, led by Phil Amos, who has decades of airport construction experience. The subsidiary is entirely focused on constructing the Sky Harbour 37 hangars nationwide. We now possess in-house general contracting capabilities, which we will utilize selectively alongside construction management. This evolution will provide several advantages, as we have a continuously refined design process and are less vulnerable to supply chain disruptions previously faced. This significant undertaking over the last three quarters positions us well for future developments. With that, I'll turn it back to Francisco.

Francisco X. Gonzalez, CFO

Thank you, Tal. As many of you know from prior webcasts and disclosures, we have been dual tracking our next debt issuance. We have settled in pursuing a warehouse bank debt facility with a major U.S. financial institution. The indicative terms are listed here, $200 million, 5-year tax exempt with an expected floating rate equal to 80% of 3-month SOFR plus 200 basis points, which in the current market is approximately 5.47%. We expect to close subject to final documentation and approvals on or about August 28. With this facility and associated equity, we will have over $300 million in funding to finance the next 5 to 6 capital developments. Please note that we're contributing at cost our CloudNine complex at Camarillo, which we acquired last December in an all-cash 100% equity transaction as our first equity contribution to this portfolio of projects. Next slide, please. We illustrate here the sources and uses of this facility over time with red being equity contributions, beginning with Camarillo on the left side and the gray being debt drawdowns. We closed the quarter with approximately $75 million in cash and U.S. treasuries, which will be enhanced with this $200 million committed facility upon closing. Why do we like this warehouse facility versus a bond issued now? First, it's tax exempt. Second, we can draw as needed, reducing significantly the negative arbitrage if we were doing a bond deal upfront. We like being in a floating rate in the current market given expectations coming out of D.C. for potentially lower short-term rates. We're also comfortable with refinancing and going to the bond market in 3 or 4 years from now ahead of the 5-year term. We also like that we can optimize the timing of our contracts with our general contractors and subcontractors given that asking the construction industry for hard pricing too far in advance of groundbreakings often leads to gaps in cost. This warehouse facility also provides flexibility if we decide to entertain an offer to sell any individual hangar. We have been approached recently a couple of times by potential tenants that prefer to own rather than rent and would like to enter into a long-term tenant lease in exchange for an upfront payment. The warehouse facility provides flexibility that is not easily available in a bond setting. Let me turn it back to Tal for Q2 highlights and forthcoming initiatives in our business.

Tal Keinan, CEO

Thanks, Francisco. On Q2 highlights, I'm just going to focus on the bolded lines. These are the ones that we think are most noteworthy. On site acquisition, our targeting now is on what we call Tier 1 airports. I think we're beginning to see that reflected in the rents, and the pre-leasing numbers might give a hint as to the direction we're trying to head with that, focusing on the best airports in the country. It is not that we will ignore Tier 2 airports. We are very deliberate about preparing to scale on the construction side. We're very excited and confident in the leadership that we have in place. We've been very deliberate in building the machine that we have now. On leasing, I want to call attention to that pre-leasing pilot which, again, based on initial results, may end up being a key component of our leasing strategy going forward. And then lastly, on the operations side, it’s becoming increasingly clear that operations are not just a necessity but actually a key differentiator. The level of service provided can’t be offered anywhere else in business aviation. We'll continue to invest there, as that’s perhaps one of the most noteworthy areas for us.

Operator, Operator

Your first question is from Gaurav Mehta with Alliance Global Partners. Can you provide details on actual revenues compared to forecasted revenues? What is the percentage variance between actual revenue and forecasted revenues? Are there any airports where you are seeing higher variance?

Francisco X. Gonzalez, CFO

Yes. This is Francisco. Thank you, Gaurav, for the question and for your work at AGP covering the company. We don't put out projections, but we do track how we've been doing, especially in the first group of campuses with the projections that were put together at the time of the bond offering by the consultants, and those were updated a year later as part of the bond program. We are tracking to indeed exceed those projections for the campuses that form the Obligated Group #1, which are basically Houston, Nashville, Miami, Dallas, Denver, and Phoenix. In terms of any areas where we see higher variance, I would say Miami has proven to be a very strong market. Our first lease was at $32 per square foot and our last lease or one of the last leases was around $46. We're expecting and feeling that those leases will be at higher rates than our highest in the Phase 1 per square foot.

Tal Keinan, CEO

By the way, Tim put up that slide while Francisco is going through this.

Francisco X. Gonzalez, CFO

Yes. The actuals are expected to exceed those projections, which means this is important because the opening of these 3 campuses will have a significant impact on our revenues and cash flows in the next 2 to 3 quarters. This will also help to ensure coverage on the bondholders to be at or exceed what we forecasted at the time of the bond deal 3 years ago. Given the significant demand, I think we can expect higher variances during these times.

Operator, Operator

As a follow-up, can you provide details on the pre-leasing hangar space at Bradley and Dulles Airports? Is there an opportunity to do more of these at other airports? And how much is the intro pricing advantage?

Tal Keinan, CEO

Yes, it's Tal. It's a good question. Look, we haven't made any decision yet as to whether this is going to be adopted as our main strategy. What we can say is we've been receiving positive indications. We've signed leases with deposits, and we like the pricing. On the one hand, we think we're offering advantageous introductory pricing to the first residents who are very blue-chip tenants we want anchoring these campuses. On the other hand, they're above our target revenues for those campuses. So while we might be leaving something on the table, I think it's looking like a good approach. Achieving certification of occupancy with a strong roster of residents is a definite plus.

Operator, Operator

The next question is from Ryan Meyers with Lake Street. Congrats on the continued progress. If we think about the 9 campuses in operation and the operating expenses associated with them, do you feel like you're seeing the scale gains in line with expectations?

Francisco X. Gonzalez, CFO

Thank you, Ryan, for the question and for the coverage from Lake Street of our company. Yes, our first set of campuses took us a little bit longer than originally planned, even though the revenues have exceeded expectations. This is a scale business. Now with these 3 campuses starting to cash flow, we will all feel and see the operating leverage of our business model. SG&A will remain fairly constant, and as revenues come in, they will flow directly to profitability on our run rate. From an accrual perspective, we've incurred expenses even though they're not cash. As we scale, those fixed costs will lead to improvements in profitability in our financial statements.

Tal Keinan, CEO

By the way, I'm going to add on that, Ryan. The biggest benefit from scale will be in development costs. I think we will see more significant gains on the development side than on the operating side.

Operator, Operator

As a follow-up, you mentioned that you're seeing higher than forecasted revenue at campuses in operation. Can you walk us through and highlight what the drivers are?

Francisco X. Gonzalez, CFO

Yes. Thank you, Ryan for the follow-up. Several drivers contribute to this. Firstly, our rents secured were higher than originally expected due to scarcity for hangars at these airports. Our ability to secure fuel margin as part of our revenue stream has been important. When we moved to having not just private hangars, but also semi-private ones, we increased occupancy levels and thus revenue per rentable square foot. This combination has significantly impacted revenues beyond our original forecast for operations at our campuses.

Tal Keinan, CEO

I agree with all those points. The biggest variance is generally between the first round of leases and the second round. When renewing or replacing a tenant in the second term, a lot of factors come into play; there’s a high demand, and it’s advantageous to Sky Harbour because residents want to stay. This is a great place to be, and our reputation is that we're increasingly the first choice for many.

Operator, Operator

The next question comes from Alan Jackson. Are you seeing any changes to the electric aviation industry since the Trump administration was elected? Will this impact the electric optionality on current Sky Harbour campuses? Does Sky Harbour have any intention of acquiring any construction trades that are currently not in-house?

Tal Keinan, CEO

Yes, I think that the Trump administration has probably removed some regulatory hurdles for electric aviation. There are still many hurdles to cross. We think it is coming, perhaps not quite as fast as the market does, but we do pre-wire our campuses to support electric aviation at scale. We believe we have laid out the necessary infrastructure in a very economical way. On the second question, we are currently satisfied with our existing setup in manufacturing and general contracting, but are open to exploring specific trades as we grow.

Operator, Operator

The next question comes from Alex Bossert. What aspects of your product offerings, service, and training differentiate Sky Harbour from what a tenant would receive at an FBO? Also, have you considered ways to utilize the vacant land for Phase 2 to generate income while awaiting suitable timing for construction?

Tal Keinan, CEO

Thanks, Alex. On the product and service offerings, it’s difficult to separate the two. The service we provide requires specific infrastructure. We have developed our own approach to service offerings that significantly improves time to wheels up and minimizes delays, especially during peak travel times. We have also invested in training our line crew on equipment that simulates actual aircraft. We believe all of these factors create significant value that differentiate Sky Harbour from traditional FBOs. Regarding the Phase 2 land, we don't usually generate revenue before development, as it often requires significant investment. However, we have utilized land tactically in the past for events, but generally, we plan for development as the primary objective.

Operator, Operator

The next question comes from Andy Binner. What is your estimate of timing for DVT Phase 1, ADS Phase 1, and BFI to be fully leased? Any one-timers in the ground lease expense line this quarter? Or is this representative relative to ongoing square footage build-out?

Michael Weber Schmitt, Chief Accounting Officer

Andy, this is Mike. Thank you for your question. Our estimate for the timing on DVT Phase 1, Addison, and BFI to be fully leased is within the next 6 months. The impact you see in the quarter is just the recognition of the Hillsboro and Stewart International leases signed during the second quarter. We recognize expenses under GAAP as soon as we sign the leases, even if we are not paying cash yet.

Operator, Operator

The next question comes from Pat McCann with NOBLE Capital Markets. Can you talk about how you expect to finance new campuses over the long term? How might new long-term PABs fit into the picture relative to options like the warehouse facility?

Francisco X. Gonzalez, CFO

Pat, this is Francisco, thank you for the question. We are flexible and deliberate, meaning ultimately we'll end up in the bond market like we started 3 years ago with a programmatic approach. With long-term rates having spiked recently, we decided to pursue financing through a tax-exempt facility. We plan to announce further details when we close in a couple of weeks. In year 3 or 4, we will look toward a long-term offering to take out the warehouse facility. Depending on market conditions at that time, we could do more bonding and pre-fund our ongoing projects. This strategy is designed to shift construction risk away from our permanent bond program and further strengthen our credit profile with existing bondholders.

Operator, Operator

The next question comes from Buck Hartzell from The Motley Fool. You've done a lot of work on scaling and vertically integrating construction activities. Can you provide an update on the impact this might have on future build costs per square foot?

Tal Keinan, CEO

The proof will be in the pudding. We've invested significantly in scaling our construction, and I believe this will allow us to meet ambitious targets for quality, time, and costs. Now it’s time to perform and demonstrate these efficiencies.

Francisco X. Gonzalez, CFO

Yes, the bottom line is that we expect lower costs per square foot by being vertically integrated in manufacturing and construction. Our LEGO set analogy applies here; with a clear prototype and processes, we should benefit from economies of scale which will minimize construction inflation effects. We will continue to track internal and external costs and do what is best for the company as we progress.

Operator, Operator

The next question comes from Philip Risto. How will future pre-leasing influence future debt offerings such as the timeframe for investment grade rating in the future?

Francisco X. Gonzalez, CFO

Thank you, Philip, for the question. Pre-leasing allows for some derisking of campuses, thereby supporting a better credit profile for projects. Having a hard lease on a project before ground-breaking strengthens our position for any future debt offerings, whether in the bond or bank market. This kind of activity will help support obtaining an investment-grade rating.

Operator, Operator

The next question comes from Robert Lynch. Is the SH-37 hangar prototype now fully standardized? What’s the impact on speed and unit economics?

Tal Keinan, CEO

Yes. The answer is yes. The intention is to increase speed, decrease costs, and enhance quality through the standardization of our prototype. Having a fully standardized hangar prototype allows us to maximize efficiencies, and we are committed to demonstrating these capabilities throughout our operations.

Operator, Operator

The next question comes from Gaurav Mehta. Why did you choose a bank facility instead of bonds? Can you provide details on the 5-year drawdown and its structure?

Francisco X. Gonzalez, CFO

Yes, as I said earlier, we see a lot of benefits by tapping a bank facility over a bond deal at this juncture. It allows us to draw as needed and helps us control cash contributions. The facility is structured as a committed drawdown being refinancing only with penalties when we find opportunities to move to a bond deal in the future.

Operator, Operator

The next question comes from Atul Joshi. Was there any cash stock consideration involved in the creation of Ascend Aviation Services? How does this impact your approach to RFPs for greenfield development?

Tal Keinan, CEO

No cash or stock consideration was involved in Ascend's establishment. It was created, not acquired. We are far more systematic on how we develop projects now. In terms of brownfield situations, having internal capability is a benefit that gives us a more decisive edge for existing projects versus new greenfield locations. We’ll always maintain an element of flexibility in how many projects we can handle simultaneously as needed.

Operator, Operator

The next question comes from Connor Keim. With OPF Phase 2 coming online next year, do you expect lower step-ups in lease rates than the 25% you've been seeing for lease renewals, given the increased supply at that location?

Tal Keinan, CEO

It's a good question, Connor. We’ll see. Opa Locka Phase 2 was not in the pre-leasing pilot, but we are seeing significant demand at Opa Locka. The waiting list for Phase 1 is still high. So while we have added supply, it will still be in high demand and we are optimistic about our ability there.

Operator, Operator

The next question comes from Gabe Owners. Does the new debt facility alleviate your need to raise equity for the next few years?

Francisco X. Gonzalez, CFO

Yes, the presentation suggests we will need about $75 million. We're controlling Camarillo, but $32 million will come from contributing Camarillo. We also expect to fund future properties beyond the $200 million facility. Our pace of growth may necessitate some equity in the future, but we feel very comfortable now with our resources and runway.

Operator, Operator

The next question comes from Robert Lynch. What's the expected quarterly pace for signing the remaining five ground leases by year-end?

Tal Keinan, CEO

I wish we could be more precise on this. We debated on whether even to give annual guidance on ground lease signing. While we are confident on an annual basis, it's difficult to break it out month by month as these projects can be unpredictable.

Francisco X. Gonzalez, CFO

I encourage everyone who has questions that we can’t get to, to submit those through investors@skyharbour.group, and we will be happy to answer them in the coming days. We want to thank you all again for joining this afternoon and for your interest in Sky Harbour.

Operator, Operator

Thank you. This concludes today's conference call and webcast. Thank you for joining. You may now disconnect.