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Operator
Good day, everyone. My name is Lisa, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Sky Harbor 2023 Second Quarter Earnings Call-In Webinar. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, you may submit a question by logging into the webcast URL at events.q4inc.com forward slash attendee forward slash one five zero five zero seven three one six once again everyone that is events dot q4inc.com forward slash attendee forward slash one five zero five zero seven three one six i will now turn the call over to francisco gonzalez cfo please go ahead sir
Lisa
Thank you, Lisa. Hello, and welcome to the second quarter earnings results investor conference call and webcast for the Scar Harbor Group Corporation. I'm Francisco Gonzalez, CFO of Scar Harbor. 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. Introducing the team with us this afternoon Tal Kanin, our CEO and chairman of the board, Mike Smith, our chief accounting officer, Tim Herr, our treasurer, and Tori Petro, our accounting manager. We have prepared a few slides we want to review with you before we open up to questions. As the operator stated, you may submit within questions during this webcast using the Q4 platform, and we'll address them shortly after our prepared remarks. So let's get started. Next slide. This is a summary of our Q2 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 progress surpassed the $100 million mark in the second quarter. With our two recently opened campuses in Nashville and Miami, Q2 revenues reflect the step function increase in our rental revenues as new hangar campuses open. We expect the step function phenomenon to continue as we open new campuses. Our operating expenses and SG&A are semi-fixed to fixed, and we're being very frugal and attentive to these. When Phoenix and Denver campuses open next year, Our revenues are projected to grow and generate positive cash flows at the consolidated operating level. Net cash flow from operating activities reflect the one-time cost last year of the D-SPAC in Q1 2022 and the acquisition of our ground lease in Opa-Loka, Miami in Q2 of 2022. Again, with Phoenix and Denver campuses expected to open next year, the resulting cash flows will turn us into positive on a consolidated operating cash flow basis by the end of next year. With that summary, let me pass it to Tal Keenan, our CEO, for a review and update on our unit economics, pipeline of new campuses, and operational update. Tal?
Tal Keenan
Thanks, Francisco. So we look at our business and the way we create value really in two ways. What are the unit economics looking like and how does scale look? And that's framework. we use for creating value here. What you'll see on this slide is a snapshot of where unit economics are coming in. You see our two large campuses today, which is Miami and Nashville. What you see on the left of each bar chart is the original revenue per square foot estimate that CBRE produced in their report for the bond market. which is not far from our original underwriting, and then what the actual rents that have come in are on those two campuses. So you'll see that we're tracking it, you know, significantly higher revenues than originally projected. What that boils down to is a return on assets in the range of 15%. That number 15 assumes that the remainder of leasing of those campuses will take place at the same per square foot rents as what we're currently seeing. So when those campuses fill up, if it is at the same rate that we're talking about, the 15% return on assets. And as I think some of the people on the call know, and we'll get into a little bit later, the financing that we have in place, which is quite attractive, turns that into a return on equity in the 30s. So that's our unit economics. That's something that we continue to obviously refine and work on as we go, but we do see that this first batch of campuses, we see that as a validation of the unit economic assumptions. So the next question is, okay, how do you scale this and at what rate? So we can show what's happened to date in the next slide. So the way to read this is, The left side of that slide is rentable Sky Harbor hangar square footage that is actually online. And you see that, like Francisco said, that the step function correlates directly to the step up in revenues. Every time you open a campus, a new revenue stream comes online. And then it's the same scale that you'll see on the right side of the page, which is rentable square footage that's actually in development. Okay, so that's Denver, Phoenix, Dallas, phases two for the existing campuses in the red. And then in the last bar, this is a snapshot from right now, as of end Q2, 2023, is the square footage of, of hanger in airports that are under exclusive ground lease negotiation. This is typically after an RFP process where we've been selected as the winner. We're now negotiating the final terms of ground lease on those airports. So if you add those, then we're looking at about two and a half million additional rentable square feet. One thing that I want to highlight here As you look at Sky Harbor as a business and what our objectives are from scale, it's not just a question of getting more airports. It's not even just a question of getting more square footage of hangar, because remember, there are airports that will accommodate 150,000 square feet of hangar, and there are airports that will accommodate 500,000 square feet of hangar. It's a question of high-quality square footage. What we're really pursuing is NOI. And I think what's important to note is that's primarily a function of location, right? Our construction costs vary somewhat, but within a relatively tight range. Our OPEX varies somewhat, but within a relatively tight range. The primary determinant of an airport being, in our parlance, Tier 1, Tier 2, or Tier 3, is the prevailing hangar rents in that location before we even get into that market. That is the most sensitive component of all this. The first five airports that Sky Harbor targeted were chosen somewhat arbitrarily. There are certain metro areas that we wanted to stay away from, particularly because, again, there were going to be a lot of lessons learned at the beginning of the business. We understood that. What we're doing right now, that entire pipeline, what we're targeting is the top tier airports in the country, where the highest rents are in the country. So our hope, if we do this right, is to have return on assets on the next airports come in higher than what we're seeing on the original airports. That is the ambition. So let me get into kind of some of the challenges and opportunities that we're facing on the next slide. And this is how we think of our company in terms of business units, right? There's site acquisition, development, leasing and operations. And while I won't go through the whole slide, Tim, there we go. Thank you. While I won't go through the whole slide, I'll zoom in on a couple points in each of those. So as we disclosed yesterday, there are six new airports that are now in exclusive lease negotiation. We expect three of those to close signed leases. We enter permitting by the end of this year and another three in the first half of next year. These are airports that are in tier one rent markets. Again, we expect each of these to be higher than the rents that we're seeing in the current portfolio. On site acquisition, zoom in on one headwind, there is a gestation period. From the time that we target an airport until a ground lease is signed. What we've been finding is that this is a 12 to 24 month process with a lot of variability. And again, most of these airports are owned by municipal government. There's not too much uniformity in the way this process works in different places. So that's been a challenge is that you do have a long gestation period. And again, it varies quite significantly. What I put kind of on the tailwind side of that is we started dozens of these processes last year. What we're seeing right now is the first of those coming to fruition. This is a very specific kind of strategy for targeting airports and growing that pipeline. And again, we certainly don't put pencils down with the next six airports. I think what you'll see if that chart went out is the ambition. is to constantly be broadening the pipeline as we go. I think you could think of it sort of as a funnel from identification of an airport as attractive to Sky Harbor until the day revenue starts flowing. That funnel should constantly be getting wider if we're doing this right. That's on-site acquisition. On development, you can see what we have going on right now in terms of airports under construction and airports that are in permitting. We have airports that are in pre-construction right now. That's diligence and planning in those six airports that we just mentioned. Headwind that I want to highlight is construction costs. It has definitely come up since we started the business. I think we probably saw the steepest increase in construction costs over the course of 2022. That seems to have tapered in 2023, but not retreated. So that's a headwind that we've been dealing with, and I think everybody in the metal building space in general has contended with that. What we're doing to mitigate that, I think that's a big part of the rapid growth story in that we saw that we were paying a lot of margin to pre-engineered metal building manufacturers and hangar door manufacturers. Also, the fact that there was no company that did both meant that we were spending a lot of time and consequently money on coordinating that fit, which is probably the most fraught architectural feature of our designs. It's a metal building, relatively simple metal building, but it's a 12 ton vertical lift hanger door that's mounted on that building. And the fact that those are two separate manufacturers is a place that's been fraught with issues for us. So the rapid build acquisition not only over time should reduce our costs, we're no longer paying out margin, but we think also increase the quality of what we're doing, which we found to be kind of hit and miss in this industry. We have the company that we think has the best engineering in the space in-house now. We think that's going to be a big deal for us and also a differentiator in terms of just the quality of the physical offering. Moving on to leasing, so you see where we are right now on lease up on the various facilities. The main headwind I think has kind of stood out for us is it does take a little bit longer than we expected to lease up these campuses. It is a lot of hanger inventory to present to a new market in one shot. Certainly, something takes a little longer than we thought. Also, just the process of negotiating a lease with the type of tenants we have is a little bit more protracted than we originally expected. On the other hand, what we're seeing is, as we discussed in two slides ago, is that the rents that we're achieving are significantly higher than what we originally underwrote. I think part of that is due to the fact that the airport is a very inflationary environment. We expect that trend to continue. There's just limited amount of land on airports around the country. And that's part of why we're in this business. And I think perhaps another part of it, and I'm speculating here, is that we are becoming recognized in the industry as a distinct and differentiated offering from what the FBOs have. We're quite different from an FBO. And increasingly, I think that we're being sought out, and that's reflecting in the rents that we're able to achieve. And then lastly, operations. One of the areas that I think we've been trying to differentiate ourselves in, I think somewhat successfully, is in operations. We are trying to provide the shortest time to wheels up in business aviation. If your company owns a $50 million business jet, we think most people in that situation place a very high premium on time. And we are extremely quick, not necessarily because we're so good at ground operations, but because we don't have a transient business. So our campuses are very quiet, very controlled. It's relatively simple for us compared to an FBO to get a flight airborne. That said, we do invest a lot in getting it more than right and in turning our current tenants into evangelists for the entire model and certainly for the company. And I think the main headwind that we face there, which the FBOs and airlines have all faced, is there's definitely a human resources deficit in aviation line services. We're fighting that just like everybody else. What we found, though, is with a few, I think, key hires, we're able to get great leadership in place on the ground operations side and start pulling in a crew of really outstanding line service technicians. We put on top of that a training program that we think is working for us very well, and I think the results have been very satisfactory for us. And when we do tenant surveys, we're getting that feedback from the tenants as well. But I think that human resources deficit in the industry will continue to be a headwind for us as we go forward. The next slide, we just wanted to share a little bit of what all this looks like, you know, from development to leasing to operations and site acquisition. This is kind of what Q2 has looked like for Sky Harbor. And again, that will be available to everybody on the call. With that, let me hand it back to Francisco to talk a little bit about our cash position.
Lisa
Thank you, Tal. Quick review of our liquidity and capital position. We closed the second quarter with about $150 million in cash and U.S. treasuries. Our portfolio of U.S. treasuries is very short and is managed by our treasurer, Tim Herr, actually sitting here next to me, we're now earning north of 5% as we roll our cash in three- and six-month U.S. Treasury bills as we wait to invest these into new hangar construction. The right-hand of the slide depicts our bonded debt, composed of $166 million in 4% and 4.25% coupon fixed-rate private activity bonds. These bonds have no principal amortization for the next eight years, and we have prepaid into escrow the interest due through the middle of 2025. With a final maturity in 31 years and an average life of over 20 years, these bonds constitute permanent capital for the company. In summary, we are fully funded to complete our existing portfolio of hangar campuses at our first six airports, and a few more if we decide to redeploy projected excess cash flow into the business in place of dividends. Next slide. This strong liquidity and capital position provides us with significant runway and flexibility to pursue our growth capital opportunistically. First, we can reinvest our expected positive free cash flow once we complete our next few campuses. It is not our preferred route, given that our goal is to cash flow as dividends our operating earnings to the benefit of our shareholders. So our second approach will be to raise additional equity at the Sky Harbor public company level through pipes or at the market or market public offerings, but only at prices that make sense for the company and its current shareholders. Let me be clear, we will not issue new equity if not at a significant premium to the current market price. Alternatively, as a third option, we could fund a few of our next campuses as project level partnerships. We have been approached by five real estate and infrastructure funds interested in doing so over the past six months. If we were to pursue that, we will be investing a lower amount of equity into new fields, but generating significant development, asset management, and operating management fees, and thus enhance our return. Lastly, We will marry any of these equity sources with additional private activity tax exempt debt, either in bond, note, or bank debt format. Our current bonds are trading with a 6% handle. We will rather be opportunistic and wait until overall level of interest rates stabilize. If 18 to 24 months pass and we need to issue debt to combine it with the equity for new campuses, we will do it thoughtfully with a view of maintaining callability to refinance once rates come down again, or if and when we achieve investment grade ratings, something we will pursue towards the end of next year. This concludes our prepared remarks. We now look forward to your questions. Operator, please go ahead with the queue.
Operator
Thank you. At this time, I would like to remind everyone, in order to ask a question, please submit it online using the webcast URL. Pause for a moment to compile the Q&A roster. Our first question comes from Francisco Brugueras. Existing properties are 64% to 94% leased. What rental rates per square foot have you been able to realize versus previous expectations? How is the obligated group performing? Please comment on your upcoming capital needs.
Francisco Brugueras
Thank you.
Francisco
Todd, you want to take the leases, and I'll take the obligated group and the capital?
Tal Keenan
Yeah. So, yeah, Francisco, thank you for the question.
Francisco
I would say on the... Sorry, hang on.
Tal Keenan
I'm looking for the... Yeah, so in terms of rental rates versus what was expected, so we started leasing in Miami at about a little over $32 a foot, and... The most recent leases, there's still a few hangers left to go, but the most recent leases are signed in the mid-40s. So significant increase in Miami. I'd say at Nashville, we started at $28 a foot, and we're now in the mid-30s. We think Miami is close to representative of what we call a good, like a solid tier two market in the country. So we're happy when we kind of look forward, our hope is to get that type of rent going forward. I think one of the things you'll see is over time there is inflation at the airports. And like I said earlier, I think that's one of the things we've been benefiting from here. If we do what we set out to do, there should also be increasing recognition of the specific value proposition to aircraft owners of the Sky Harbor offering.
Lisa
Thank you, Tal, and thank you, Francisco, for the question. On the obligated group, and just to remind our investors, the obligated group is the joint and several portfolio of operating subsidiaries of Sky Harbor Capital that are the collateral package for our bonds. And it's important to note that it's not a one-off, one-time bond deal. It's a program. It's a programmatic approach. As we issue new bonds into the future, they become part of the obligated group and join in several, which is why, as we grow, the strength and credit profile of our borrowing entity becomes stronger. Last year, about this time last year, a little bit later, about a year ago, when we started realizing that construction costs were higher than expected given inflation, we went about and recapitalized the obligated group to make sure that it was fully funded for the properties within it. And we also performed the pivot, which we allowed Addison Phase 1 in Dallas to come into the obligated group in lieu of the Phase 2 at Phoenix and Sugar Land. But net-net, to answer the question, rental rates, as Tal mentioned, are higher than expected. construction costs continue to be in line with the higher levels that we recalculated at the time of the recapitalization. Projects are taking a little bit longer, as you have seen from our discussion in terms of construction schedule. But fortunately, as I mentioned, as our cash continues to earn higher than 5%, that mitigates somewhat that delay. So net-net, we believe that the projected debt service coverage that was put out by CBRE in the disability study this past February that shows improved projected debt service coverage ratios for our debt holders remains in place. Let's see, the last part of the question, yes. funding for future capital needs. Okay, so one important thing to remember is that one signs a ground lease, one has some flexibility in terms of when to start constructing that project. You know, there's always the need for permitting and so on and so forth and, you know, site design and so on. And even within that, you know, six, nine, or 12 months period, one could decide to postpone and sequence the right way one's investment at the beginning of construction at a particular campus. And I say this because that translates into flexibility in terms of matching our capital funding of new ground leases as we sign them. Now, rule of thumb, rule of thumb on average, A new campus, on average, it tends to be 15 to 20 hangars. And on average, a hangar is roughly about $3 million per hangar. So when you do the math, you're looking at each new campus is within $45 to $60 million each. So six new airport campuses will be roughly between $275 and $350 million, roughly. Assuming, again, that we're doing 65%, 70% leverage, you're looking at about $100 million of equity and $175 to $250 million of additional PABs. So, you know, this is kind of like a summary or overview in the context of the six ground leases that Tom mentioned earlier. We have, as I said, flexibility in terms of how we go about funding that $100 million of equity, as I mentioned in the remarks earlier. in terms of internal generated cash flow, holding company equity, if the price makes sense, or project-level partnerships at the airport level. Okay, so back to the operator for the next question.
Operator
Thank you. Our next question comes from DJ Megan. Your monthly report shows $82.2 million spent to date, about one-third of total project costs. Are you on budget and on schedule, and do you expect to tap into the $15.9 million project contingency?
Francisco
Yeah, let me take that up.
Lisa
So yes, as part of our obligated group, we file every month a monthly construction report, which gives not only some photographs of how things are going, but also updates on the cost of all these various a project at the obligated group level. I think the short answer is right now we're not expecting to hit, you know, we have several buffers. We have the project contingency buffer, we have a ramp-up reserve buffer, and we have a maintenance buffer. So right now we don't expect to hit any contingency buffers right now in the obligated group at this juncture.
Francisco
Next question.
Francisco Brugueras
And one moment while we assemble the queue. Our next question comes from Rasmus .
Operator
What age or what edge does rapid build give you versus your competitors?
Francisco
Yeah, this is Tal. Thank you, Rasmus.
Tal Keenan
So first, I don't know that we have direct competitors today in this business. So the other people or kind of the other industry that builds hangers at any kind of scale is the FBO industry, dominated by kind of the duopoly of Signature and Atlantic. And the way those guys operate is really each project is its own sort of blank sheet design build project. What we do is really a prototype, right? It's the same hanger on every airport. which even before the rapid build acquisition gave us certain advantages in terms of a design that is optimized for exactly what we need and constantly gets refined, and whatever refinement works into the prototype finds its way into every subsequent project. So bringing rapid builds into the picture, aside from what I mentioned earlier about reducing our construction costs by cutting out the pre-engineered metal building and hangar door margin is a significant design advantage in that your rapid build is an integral part of our prototyping process today. So that's not only accommodating changes in regulations, for example, the NFPA 409 Group 3 standard, the fire code that governs our type of aviation hangar, which is updated every four years, the most recent addition had changes that opened up opportunities for us to further refine the design, make a hanger that's significantly more usable for our tenants. And that feeds in immediately. And rapid build is part of that design process. There's also all sorts of value engineering changes as new technologies become available or become aware of them. It's a pretty quick integration cycle. What I mentioned earlier, again, having the hangar door and the pre-engineered metal building manufactured at the same facility all under our roof is a very big deal. We, along with almost everybody else in Hangarland, have had all sorts of challenges with those hangar doors. And that's something that we intend to mitigate, if not eliminate. by having all of that integrated. And then lastly, in this development cycle, as we get more and more coordinated with our general contractors in the field, we'll be bringing as much as possible from the field to the manufacturing facility with the idea of minimizing welding, minimizing assembly, making a very quick and straightforward assembly process in the field. And that includes things like running conduit, in the factories and shipping out our pre-engineered metal building components with you know with electricity and plumbing already run so you really have kind of an erector set uh in in the field versus what's done today and that'll manifest not only the quality of the product that we bring out but our construction times which which again translate directly into uh into savings for us
Francisco Brugueras
All right, and our next question comes from Matthew Howlett.
Operator
Can you go over the synergies from the consolidation of rapid build? How much do you think it can lower your construction costs and speed up your construction times? Any other advantages it provides?
Tal Keenan
Okay, so I think most of this is probably answered by what I just said to the previous question. And I don't think we want to speculate as to exactly how much you know, savings we see from that. I think it's early days. I think it's quite clear to all involved that the savings will be significant, both in time and in money.
Francisco
But I think it might be a little bit premature to try to quantify that exactly.
Francisco Brugueras
Thank you.
Operator
Our next question comes from Christine Kimming-Thomas. Do you need to make more acquisitions to achieve your target level of vertical integration? If so, what types of companies, capabilities, and or technologies do you need to acquire?
Tal Keenan
So I can take a crack at that, and then Francisco, Tim, if you guys have anything to add. Thanks, Christine. So first of all, rapid build itself is quite central to what we're doing. Again, you would only do something like that if you intended to go to really significant scale in this industry. So I think answer number one is more rapid build. We, you know, again, if our pipeline continues to materialize at the pace that we're hoping, we will need additional manufacturing capacity at some point in the not too distant future. The current intention is to expand that facility, you know, if and when we get to that point, but we will need more, just more manufacturing capacity. Again, there is room on site in Weatherford, Texas to do that. Other capabilities, so we are – our tenants manage their space with an app that we designed and fielded and are constantly – looking to refine. What the app does today is really kind of control the physical aspects of the hangar. Temperature, humidity, lighting, it's got security, monitoring, motion control, motion detection, all that sort of thing is in the app today. The next version of the app will include service procurement. And that's a set of capabilities that the app itself is something that we're doing in-house, but that will require a set of partnerships. And our intention is for these to be revenue-producing partnerships because what we have is a physical platform for administering all sorts of aviation services to our tenants. And for many of those services, we can and should be the conduit. So being able to procure all of those through the app, I think, will be a real service to the tenants. but also create value, I think, for you, the shareholders. Francisco, Tim, anything you wanted to add on vertical integration?
Lisa
No, that's good. Thank you, Christine, for the question.
Operator
We'll take our next question. Thank you. We'll take our next question from Philip Bristow. Once the next locations are confirmed and new capital has to be raised, Are you able to issue convertible instead of straight equity until the common has a chance to get into the teens? Thank you.
Lisa
Okay, I'll take that. And thank you, Phil, for the question. And also for your continued, you know, an active interest in Sky Harbor. I think you're one of the investors that ask us routinely most questions during the year. So thank you for your interest. I think the short answer is yes, we could issue convertible equity if we wanted to, but let me explain why in our case, in particular circumstances, we prefer to issue straight common. And it has to do, it has twofold. First, remember that most of the debt that we issue is tax exempt debt. It comes at an attractive fixed rate long-term basis. A convertible equity instrument tends to be three to five years, It may have immaturity at that time, which is basically almost like a put. And also it's really taxable in nature, taxable. So we will be basically overpaying in terms of as an issuer if we were to issue convertible equity rather than be doing common and our low interest cost fixed rate bonds that we do at the project level. So that's kind of like a general view of that. Although again, we are, not dogmatic. We are opportunistic. If we find equity transactions that make sense, that protects, and I get, we get your point, that protects common shareholders until, to higher valuations, we totally get where you're coming from. Okay, back to you.
Operator
Thank you. We have another question from Philip Ristow. For warrant holders that have a high-cost basis, can you hold off on exchanging common once share prices exceed $10? Ideally, the warrants can be called exchange once the common reaches the upper teens. Thanks.
Lisa
Okay, I'll take that also. Thank you for the question. You know, the warrants... As you know, the public warrants have a variety of features, redemption features and the like. You know, we'd rather not comment on what we will do or not do or commit to things at this juncture. You know, it's going to be a very situational basis. It's going to depend where we are, where our prices are, you know, what time to maturity of the warrants and so on and so forth. So at this juncture, I totally get the question, but we will do what is in the best interest of all our equity holders at the time that we face such a scenario. So again, thank you. Operator, next question.
Operator
Thank you, sir. Our next question comes from Matthew Howitt. Can you give us a trajectory of the six new airports under negotiations? How fast is this really happening?
Francisco Brugueras
would be the lead time to have them built and leased up?
Francisco
Yeah. Okay.
Tal Keenan
So, you know, I think one of the frustrations but also barriers, kind of protective barriers in this business is that there is really no template process that we've identified that, you know, all airports subscribe to. So, you know, it's different in each case. And like we said, those gestation periods can vary quite widely. The six airports that we're talking about right now where we've gone exclusive and we're, you know, in a bad stage of negotiation, like we said, we expect three of those to be signed by the end of this year and then an additional three by early next year. And of course, as you can imagine, we're not going to put out anything speculative in this call, but there's a a quite a robust pipeline behind that. And again, some of those end up moving faster than you think, some of them slower than you think. Once we have assigned ground lease, we go immediately into permitting. And when I was talking about pre permitting earlier during the during the slide presentation, that was that where we actually we have a finalized site layout with, you know, with full plans for everything, utilities, drainage, everything you would have in a full permit set by the time we get to a signed ground lease, so that there's really a pretty minimal amount of time between signing our ground lease and our submittal for permits. And then again, you know, you run into a process that has a gestation period. We've had Permits issued in a very short time, in a few months, and we've had permits taken significantly more than six months. It kind of really depends on the situation. One of the things that we're trying to do really through this prototyping design, I probably should have mentioned this in the question about the prototype, is the fact that we have the same design permitted in multiple airports. We hope should give, you know, fire officials, drainage officials, whoever it is in the various jurisdictions some comfort that this exact design, this is not blank sheet, this exact design has been permitted in multiple locations already. And, you know, of course, if it will facilitate communication between the various permitting authorities, we hope to compress that process as well. Once permits are issued, I think what we have underwritten, as Tim can probably tell us what we have underwritten on build time, whatever it is, our ambition, again, is to constantly be reducing our construction time. So the more that we can get done in the factory and the less in the field, the shorter we think our construction periods will go. And then the last part of your question is on lease up. So lease up. We still think that the right time to start leasing is when you actually open the doors of a fully functioning campus that has a certificate of occupancy, has gone through our own operational dry run period, and is ready to go. We just think the price of leverage is the highest there. And although the lease up period has been, again, longer than we expected, we feel that we've been more than compensated by the increase in rent. So I think your pricing leverage is the highest when you actually have a standing product that's ready to go. People in aviation tend not to kind of look out a year or two and see what their storage space needs are going to be. It tends to be kind of a right now sort of thing. So that's really where our leverage is the highest. That said, we are working on what we call an experiment that will roll out now in Phoenix for the first time, which is we're opening one hangar before the rest of the campus that will be kind of a fully, you know, a showroom with all of the optional features that we have in Hanger. And we might try to do a few pre-leases in that case and experiment. But this is all really an effort to kind of get the schedule that you're asking about, you know, compressed to the minimal time.
Francisco Brugueras
Thank you. Our next question comes from Janelle Alexander.
Operator
Do you expect further growth to be attained via additional acquisition or additional cost efficiencies, or both?
Francisco
Yeah, thank you, Janelle. I'd say both.
Tal Keenan
Site acquisition is the main driver, though. Again, we're always, it's what I mentioned over, we're always going to be trying to get our construction costs down without impacting the quality of the offering. We're always going to be getting our OPEX optimized. I don't want to say it necessarily has to be the lowest. We've got to put out the best service in aviation, but keep those under control. But those will vary in a relatively tight range. The big swing, the most sensitive factor in generating return on assets, which is the fundamental goal here, is is really location, right? Be in the best locations possible. So site acquisition is key.
Francisco
So both are important, but site acquisitions is really kind of the main event.
Francisco Brugueras
Thank you.
Operator
Our next question comes from Jared Kassar. How many B shares do you expect to convert to A shares in the next 18 to 24 months?
Lisa
Okay, I'll take that, Francisco. Thank you for the question. And maybe I should start by reminding people that we have two classes of shares, A's and B's. They both have, you know, one vote. So we all, you know, we don't have super voting shares. But the class A is the shares that trade in the New York Stock Exchange, is the one that public investors received, also that were part of the D-SPAC, is the one that underlies the warrants and so on. Class B shares are the shares that were received by the founder here on the phone, the RCO, and some of the legacy early investors in the company. And then with this pact, we did it through a structure called the OPC structure that basically keeps the legacy shareholders still at the original LLC level. And the moment that they were to decide to sell shares they will first convert their LLC interest into Class A and then forfeit their Class B share. So the question then that you're posing is another way of asking, do we expect legacy shareholders to be converting and selling their shares? There have been a few small legacy investors, this is all public information, that for their personal tax position, they decided to convert their LSE interest and class Bs into As and realize whatever capital gain they will have because they go upset against capital losses. This is a very small amount. I think in general, the bulk of the legacy shareholders are likely not to be sellers unless the price is significantly higher than current levels. So I hope that answers the question. I'll put our next question.
Operator
Thank you. Our next question comes from Doug Johnston. When does CAPI end on the muni bonds? Is it September of 2024?
Francisco
OK, I'm going to ask Tim, our treasurer, to answer this question.
Tim
Hi, thanks, Francisco, and thanks, Doug, for the question. If you refer to page 19 of our private activity bond prospectus, which can be found on the MSA, you'll see a full schedule of the capitalized interest and net debt service annually. Capitalized interest continues through the middle of 2025, and really it's July 2025 when the first interest payment kicks in. So as Francisco noted before, it's all interest for the first 10 years, so interest only for the first 10 years, and then principal payments kick in in 2032. Thank you, Tim.
Lisa
And let me just add one comment. When we did the bond deal, short-term rates were so low that we assume no interest earnings during the life of all these funds. And obviously, with the increase in interest rates, we have been able to benefit of the interest income from, you know, our deficit reserve fund, which is about, you know, $11 million, these $14 million and change on the CAPI fund, another $4 million in the ramp up reserve, plus obviously the construction funds. So, and those are additional interest income that, you know, is benefiting the obligated group. as we wait to deploy that cash, either in terms of paying interest, expense on the bonds, or the construction expenditures. Operator, back to you.
Operator
Thank you. Our next question comes from Jorge Roberts. In the future, what are your plans to accommodate advanced air mobilities such as eVTOLs?
Francisco
Thanks, Jorge. This is Tal.
Tal Keenan
We wrestled with this for a while because we did get a lot of inbound interest from the various eVTOL manufacturers whose focus has understandably been getting FAA certification for their vehicles versus ensuring that adequate infrastructure is in place to actually accommodate eVTOL at scale. This is, you know, I think it took us a while to get focused on this. And what we decided and implemented is as follows. eVTOL is happening. That I think is clear to us. We're, I think, way past the point of no return in terms of the kind of the technology, the funding, the regulatory environment for it. This thing is coming. We're not sure exactly when, though. I know a lot of eVTOL providers are projecting 2024, 2025, which we hope happens but you know don't know for sure and what we found is we are in a kind of a special position as you know probably the biggest greenfield developer in business aviation uh today that by going greenfield it's it's much less expensive to put down the kind of infrastructure that's going to accommodate electric aviation than it is to kind of re rework or redevelop existing infrastructure so we found a a way to i think economically provide for a kind of an option to go electric at any point. And that means internal organic generation of electricity, primarily through solar panels. We're off of the largest rooftop at an airport, so we do have a lot of ability to generate solar electricity. On top of that, also sufficient cabling to augment that from the grid. Second is onsite electricity storage. So you need transformer capacity to pull from the grid. You want the organic electricity generation. In many cases, both of those together are not going to be sufficient if we're going to be achieving anything near the scale that the eVTOL industry is forecasting. So we're going to need onsite power storage, which we've made provisions for. And then finally, a transmission mechanism, you know, where we have, again, there's no patent around this or anything like that. I think it's pretty straightforward. The, you know, the current power transmission method, which is the aircraft pulls up to a power source that's fixed somewhere on the tarmac is good for this kind of prototyping phase that, you know, places like Joby, Beta, Archer, the manufacturers We think that when this thing goes to commercial scale, the power is going to come to the aircraft much in the same way that, you know, fuel comes to the aircraft today on trucks. So we put that all together conceptually, designed all of our campuses to accommodate that with a kind of an easy flip of the switch down the road. But we don't see the case for making the investment of actually flipping the switch today. It's just an easy option, you know, for when this comes online. I do understand where the question is coming from. And I think it sounds like you've got the same presupposition we do, which is that the vast, vast majority of the infrastructure for electric aviation is going to be on FAA-regulated airfields. We think it's going to be very difficult. We know the heliport space. We think it's going to be very difficult to do a kind of significant off-airport, operations for eVTOL. That includes not just flight operations, but charging, storage, servicing, all of that. We think the vast majority of that actually is going to have to take place for regulatory reasons on airport.
Francisco Brugueras
Thank you.
Operator
We have a question from Rasmus Agerskov. How does Sky Harbor view business with the upcoming eVTOL business and potential housing of those vehicles?
Tal Keenan
Right. So I think same answer I gave to Jorge Rasmus. I think that's our position on that. And again, we do think that we're pretty well. And maybe the only thing I'll add is, you know, a lot of what people are looking at is FAA regulation around eVTOL. It sounds like there's a lot of interest in eVTOL on this call. What I encourage people to do is look at NFPA. And there are a lot of circulars that are out there as to how NFPA is looking at eVTOL. Lithium ion batteries burn hot. There's some complexity around that. That's something that we've integrated into that design concept that I put forward in answering Jorge's question. However these aircraft end up getting stored, NFPA is going to be, we think, a big factor in how all that gets regulated.
Francisco Brugueras
Thank you.
Operator
Our next question comes from Alan Jackson. What opportunities do you see with the electric aviation? How is Sky Harbor and its campus portfolio positioned to take advantage of electric aviation?
Tal Keenan
Yeah, thanks, Ellen. Again, same response I had to the previous two. Yeah, I'm glad to see there's a lot of interest in eVTOL. We agree. We think it's happening. We think it's an opportunity. Again, what we're trying to do here in – in many situations, not just with regard to eVTOL, is not to take a bet today as to what the highest and best use of Sky Harbor campuses is going to be 10 years from now, but to design for optionality so that, you know, if the eVTOLs are paying higher rents than business aviation in certain segments of the country, certain areas of the country, great, that's something that we potentially pursue, but not something that we have to, not something that we're committed to or investing a lot of capital in today. No need to do it if you can create the optionality inexpensively.
Francisco
That's what we've done.
Operator
Our next question comes from Matthew Howlett. Can you give us a trajectory of the six new airports under negotiations? How fast is this really happening? What would be the lead-up time to have them built and leased up?
Tal Keenan
Lisa, I think that one was already answered, if I'm not mistaken.
Francisco
Thank you.
Francisco Brugueras
Okay, one moment.
Francisco
Hold on one second.
Francisco Brugueras
All right, and this is from Matthew Hallett as well, if you're ready.
Tim
Yeah, sorry Lisa, that was the, I just put in the last and final question from Matt, if you can read that one.
Operator
Perfect, thank you. And again, this is from Matthew Howlett. How many potential sites would fall under the top metro markets?
Francisco
Okay, thanks Matt.
Tal Keenan
So I don't know if you're asking about the six airports that are now under exclusive negotiation or in general. What I would say for the six airports, five of the six are what we call tier one markets. One is in what we call a tier two market. We would call Miami a tier two market. That's for the six. If you were asking about the kind of the general map or the opportunity set in the country, so, you know, metro centers like New York or Los Angeles have, you know, multiple airports, in some cases more than a dozen airports that serve business aviation in that metro center. And our focus is, I think you may have seen in some interviews that we've done before, is really to start with the metro center and then drill down to the specific airports. This ties into the point that we made about, it's not exactly about number of airports. Number of airports is just kind of a good conceptual proxy for how this company grows. It's more about square footage of hangar And it's even more about available NOI. So if you take a market like New York, there are certain airports that accommodate a lot of hanger and we would go for that. And in certain cases, for example, a square footage of hanger that would be two or three times, for example, what we have in Nashville and in a metro center like New York or Los Angeles, we would certainly pursue that two or three times is fine. And what's particularly compelling to us is the rents in those jurisdictions, which is why we're so focused today on those tier one markets. So I answered it both. I hope that covers what you were looking for.
Operator
Thank you. And there are no further questions at this time. I'd like to turn the call back over to Francisco Gonzalez for closing comments.
Lisa
Thank you, Lisa. Thank you all for joining us this afternoon and for your interest in Sky Harbor. Additional information may be found on our website, www.skyharbor.group, and you can always reach out to us directly with any additional questions through the email investors at skyharbor.group. If you wish to visit a campus, please let us know and we'll arrange for a tour. Thank you again for your participation. With this, we have concluded our webcast. Thank you, operator.
Operator
Thank you, and that does conclude the presentation. Thank you for your participation. You may now disconnect.
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