Sky Harbour Group Corporation Class A

Good afternoon. My name is Sarah and I'll be your conference operator today. At this time, I would like to welcome everyone to Sky Harbor 2024 Third Quarter Earnings Call and 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, simply submit your question online using the webcast URL posted on our website. Thank you. Mr. Francisco Gonzalez, you may begin your conference.

Thank you, Sarah. I'm Francisco Gonzalez, CFO of Sky Harbor. Hello and welcome to the 2024 Third Quarter Investor Conference call and webcast for the Sky Harbor Group Corporation. We have also invited our bondholder investors in our Barons of Ceres, Sky Harbor Capital to join and participate in this call as well. Before we begin, I've been asked by council to note that on today's call, the company will address certain factors that may impact this and next year's earnings. So all 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 one and two of this presentation, as well as our FCC 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 may know from prior webcasts, our CEO and Chairman of the Board, Tal Kanan, our COO, Will Whitesell, our Chief Accounting Officer, Mike Smith, our Treasurer, Tim Herr, and our recent addition to our team, Marty Kretschmann, our Head of Airports. We have a few slides that we want to review with you before we open into questions. These were filed with the SEC an hour ago in the form of 8K, along with our 10Q, and they will also be available in our website in a few hours. We also filed our capital obligated group financials with MSRP EMA. As the operator stated, you may submit within questions during the webcast using the Q4 platform, and we'll address them shortly after our prepared remarks. Let's get started. Next slide. In the third quarter, on a consolidated basis, Assets on the construction and completed construction continue to accelerate as we continue to advance towards completion of the three campuses in Dallas, Denver, and Phoenix. And we'll update on those and other projects shortly. The revenues experience an increased step function given the San Jose campus that began on Q2, but also the optimization of our three other campuses. Even if we don't open any new campuses, we expect revenues to continue to grow as we exceed 100% occupancy, achieve higher rental rates on renewals, and enter into other types of arrangements that allow us to take advantage and monetize the various houses, including our apron. The operating expenses in Q3 increased mainly from two factors. First, as we discussed in the last quarter, the ground lease payments in San Jose are significantly higher than our typical greenfield projects is because, in essence, that ground lease includes the payment for the fact that we control and took over a large hangar, aprons, and related parking. And because of these existing facilities, it's being amortized through the ground lease as part of our grant expenses. Second, and very importantly, and Mike will be covering a bit on this, As we sign more ground leases, we end up starting to recognize operating expenses ahead of any actual cash payments on those ground leases. And Mike will go into more detail on that. And obviously, as we sign more ground leases, the impact of that becomes bigger and bigger in our results. Lastly, on SG&A, we continue to work to maintain our SG&A as fast as possible, and as we scale, that will drive the operating cash flow and profitability on a consolidated basis. And as you can see here, we continue to move to parity in terms of our cash flow from operations, and we reiterate our guidance that we expect to be at breakeven at this time next year on the back of the opening of our three campuses and the leasing of those in the spring and summer of next year. Next slide. Sky Harbor Capital, which is, again, the obligated group where we have all our campuses right now except San Jose. San Jose is not here because it was not financed with bond proceeds. Obviously, we have the same movement in construction, constructed assets, given that everything that we're constructing and will be completing in the next year or so are obligated group projects. Quarterly revenues don't have the step function from San Jose, but continue to show as I mentioned earlier, incremental revenues as we optimize. When this comes for renewal and the renewal rate is 20, 30, or 40% higher, you're going to continue seeing increasing revenues even though we are at or higher than 100% occupancy. And it's good to show that operating results are positive and operating cash flow continues to move north at Sky Harbor Capital. ON THE BACK OF NEXT YEAR, THIS WILL BE SUFFICIENT TO OBVIOUSLY PAY DEBT SERVICE ON OUR BONDS, AND AS WE SCALE, PRODUCE POSITIVE CASH FLOWS THAT WILL SUPPORT, AGAIN, LOOKING TO GET, BREAK EVEN ON A CONSOLIDATED BASIS. ON THE NEXT SLIDE, PASS IT ON TO MIKE TO GO DEEPER INTO THIS NONCASH impact that we are experiencing to do a deeper dive on our ground leases and also non-cash expenses. Mike. Thank you, Francisco.

I'd like to take this opportunity to provide additional context, as Francisco said, regarding the differences between our actual cash payments on operating leases and the reported expense. This slide includes a visualization of the cash payments and reported expense of a ground lease within our portfolio. Beginning with our ground lease at Addison, all of our ground leases for Greenfield developments generally defer cash rent payments until the completion of construction. Our ground leases at each of our airport development sites are accounted for as operating leases under US GAAP, which requires us to begin recognizing reporting expense on a straight line basis upon execution. Even though we may not be making cash payments for years under the terms of the ground lease, As easily demonstrated by the graph on this slide. As Francisco indicated, the non cash portion of our ground lease expense is quite significant in terms of our overall operating expenses and amounts to approximately 1.3 million and 3.3 million for the three and nine month periods presented here. This represents 36% of our reported operating expense for both of the periods presented. Next slide, please. Moving on, we also believe it is important to illustrate other significant non-cash components of our reported net loss to the three and nine months ended September 30th, 2024. For both of the periods presented, the most significant component of our reported net loss was the non-cash expense recognized associated with the changes in fair value of our outstanding warrants. For the three months ended September 30th, 2024, this non-cash expense accounted for approximately $16 million percent of our total reported net loss as a reminder these warrants are liability classified and are required to be marked to market each reporting period this this slide also illustrates our depreciation expense which is non-cash and amounted to 0.6 and 1.9 million for the quarter in year respect a key part of our ongoing employee compensation strategy is selling, gelling, general, and administrative expenses, and totaled $0.9 million and $3.0 million for the three and nine months ended September 30th. Lastly, we have the non-cash lease expense, which we discussed on our previous slide. And when adjusted for these non-cash items, our reported net loss for the three and nine months ended September 30th, 2024, was approximately $1.9 and $5.6 million respectively. that and I'll pass it on to Tal.

Thank you, Mike. So viewers are accustomed to seeing this slide from previous earnings calls. So we continue to ramp up. As you can see, just to remind people, what this slide represents is Land under lease, under binding lease with Sky Harbor, multiplied by square footage of hangar that is going to fit on that land, multiplied by the Sky Harbor equivalent rent, which is what aircraft owners are currently paying on a per square foot basis for hangar at that specific airport. And it's, in our view, a conservative estimate of what the revenue capture is from the current portfolio that's under lease. And as I've explained in previous earnings calls, we have significantly exceeded the sky harbor equivalent rent on every single campus that we have so far, which is why we believe it's a conservative estimate. And if you're looking at the company from a valuation perspective, I believe this is the place to start. Figure out how much revenue is available and then discount that for various risk factors that you want to apply, like construction risk, Lease-up risk, operating risk, that sort of thing. That's how we look at it. The last airfield we announced was Salt Lake City in August. We revised our guidance up last quarter to an additional nine airports by the end of 2025. Sorry, additional eight airports by the end of 2025, which would take us to a total of 22 airports in the portfolio by the end of 2025. And today we are going to revise that estimate up again to nine airports by the end of 2025, which would take us to a total of 23 airports by the end of 2025. With that, let me hand it over to Will to talk about development.

Thanks, Tal. On this slide, top portion, we have DVT phase one APA and ADS As we issued guidance in the first quarter, these three projects remain on schedule. Both ADS and APA remain on track with actually DVT trending a little bit ahead of schedule prior to in relationship to our guidance in the first quarter. In regards to the $27 million budget for remediation, that also remains on track. as we sit here today. Snapshot below the bar graph really represents a picture of our accelerated growth for 2025 and 2026. Last quarter, we previously had starts of eight new fields. This quarter, we're announcing nine starts. And in lieu of finishing three last quarter, we have five finishing five in 2025. We've added two fields, both OPF phase two and Addison phase two as a targeted completion in fourth quarter 2005. So kind of in summary, we have 14 fields in some state of either completion or starting construction in 2025 and a total of 20 fields either starting or finishing in construction in 2026. With that, I'll turn it over to Tim, our treasurer.

Thanks, Will. Just a quick review of our current cash and investments. The bar chart on the left is our September 30th cash and treasuries amounts. You'll notice that the $110 million is the combined Sky Harbor capital uh amount of about 85 million and about 20 the remainder 25 million uh is up at the holding company level uh so that 85 million is dedicated to our fields at the obligated group so that'll be the uh the uh the fields that will just touched on that are being completed in uh in the next few months uh as well as uh the remaining phases at opelika and at Centennial Airport in Denver. We also on the right hand side have a pro forma balance sheet of cash and investments following the completion of the pipe that we announced in October. We closed the first 37.6 million of that at the end of October, and we plan to execute the second closing of that pipe, which will be an additional 37.6 million for a total of just over 75 million in additional pipe proceeds that will be used to be the equity portion to fund the additional fields beyond the obligated group. That will also just mentioned in 25 and 26. Just one more note on our bond debt service on the right hand side. We are approaching the end of our debt capitalization period in 2025, but with the completion of Addison, Centennial, and Deer Valley in Phoenix in the next few months, we'll be leasing those up and have more than enough coverage to start our interest payments in 2025. Passing along to Francisco.

Thank you, Tim. Just a quick comment on our existing outstanding 2022 PABs. First and foremost, we made it clear at the time of the issuance that we will be at the appropriate time seeking investment grade ratings. We plan to begin the process soon, and we'll be approaching the ratings during the course of 2025. For us, it's not a question of if or when we'll achieve investment grade ratings. Obviously, on the back of the completion of our consortium projects, as with the risk, that aspect of the ratings, we have been achieving, as you have seen, rents significantly higher than what we projected at the time that we did the bond deal, which means that our debt service coverage is going to be higher than what we projected at the time of the bond issuance. The market on the right-hand side seems to recognize this. This is the trading of our shortest bond and our longest bond in the past year and a half. And you can see the significant appreciation of the bonds or declining yields on both of those maturities. Obviously, part of this has been a declining rate in the past few months, overall market rates, but there's been a significant spread compression on our credit, and we believe there's still room to go as we approach investment grade for these to come further down. Next slide. Which takes us to the comments on our capital formation and growth. As we have discussed in prior calls, we continue being opportunistic. and being very prudent in our raising of equity and debt. We want to do these things always in advance for when we need the funds and take the opportunities that the market provides us. So first, you may have seen that in our closing announcement a few weeks ago of our first closing of our pipe, that we were able to upsize that by about $6 million. These are, again, long-term investors. that we have known, we have participated before, some were new long-term investors and so on. They're signing a lockup agreement and by their nature, they're people who are looking to be with us for a long time. We are cautiously optimistic that in early December, there'll be the exercise of those, expected exercise of those options that we granted those investors for an additional 38 million and that will be expected to close on December 20th. And so that basically will complete this exercise on common shares. In terms of internally generated cash flow, as we said earlier, we expect that to be available at this time next year, and that will help us either provide capital for our growth, equity capital, or at some point lead us to make a decision on a dividend policy but we have too many opportunities for us to be thinking about dividends at this point. On the ATM program, we have not sold any shares since our last disclosure on this subject, and we already spoke about the pipe offering. We continue to think about a sidecar platform that will be used only for existing hangar opportunities for M&A opportunities. The greenfield projects we obviously want to maintain and keep for our shareholders. Lastly, on the topic of the debt, as we mentioned prior disclosures, we're aiming to raise about $150 million of additional tax income debt. We're dual-tracking bank and bond solutions. We're still several months from implementing this, but we want to monitor markets and monitor both opportunities to seek what's most optimal for the company. And the critical balance here is one of balancing the cost of capital and our growth, and be prudent and deliberate about how we raise the capital to fund our growth. With that, let me pass it on to Tal for the Q3 highlights.

Thanks, Francisco. So as people know, we like to think of the business in four discrete but obviously linked buckets. The first is site acquisition. I'm going to start with it. We only report binding site acquisition wins. And the nature of this process is such that progress is difficult to gauge until we've actually made an announcement. And we haven't been able to find a better way to keep the public appraised of our progress on site acquisition, which has been a bit of frustration because it is the key value driver of the entire business. For the time being, we're sticking to our policy. We only announce that acquisition wins when they're done binding irreversible. So stay tuned for that. There's been quite a bit of progress in the last quarter, but again, not something that we really are able to measure in a way that can be shared publicly. What we can say is that we've had significant success in expansion on existing airports, and those who watch us closely perhaps saw the example of the acquisition of the Ramada Hotel adjacent to Chicago Executive Airport, which we have been able to merge into the airport property and effectively not only expand the square footage but significantly increase the efficiency of our site plan in Chicago. So those from our perspective are as good if not better than new airport wins is the ability to expand accretive investment on an existing airport and make a site plan more efficient. So there's been quite a bit of that going on on the set acquisition side. In development, as Will said, we've got three projects set for delivery between now and the end of the first quarter of 2025. Leasing is already commenced on those projects, and we hope to see the cash flows from those projects begin sometime in the first or second quarter of next year. We have another two projects slated for delivery in 2025. That's Miami phase two and Dallas phase two. And as Will described, 11 new project phases now in development. The Sky Harbor 37 prototype design is complete. This is the hangar that you'll be seeing on all future airports. Of course, we're always going to be working to refine it, but it's the same hangar everywhere. TAB, Mark McIntyre, which ties into the last bullet under development is that rapid bill has now been fully and finally configured as a pure play sky harbor production facility. TAB, Mark McIntyre, That means the the shop has been entirely retooled with equipment, the welding team has been retrained to to stamp out exactly the same product, day after day and we we plan to capture. very significant cost efficiencies and quality gains through that vertical integration. On the leasing side, again, it's perhaps a bit of a frustration, but we're under NDA with our residents. What we can say is, number one, these are the most visible individuals and corporations in the country. Uh, we have definitely caught the attention of the, the most discerning. Uh, aircraft owners that there are, this is the model of choice. You know, and I think we can say that, I think we've been kind of conservative up until now about making any claims about this, but we're at a position today where if there is a sky Harbor location in your Metro center, that's where you want to be. Uh, even though it's much more expensive than any other basing solution, that's where you want to be as a jet owner. And I think that imprimatur from those specific residents has been very powerful. We don't share names. However, I think the industry is quite small and that brand recognition has caught on and I think increasingly is. As Francisco said, we used to think in terms of percentage occupancy. I don't think in those terms at all anymore because 100% is meaningless to us. We've blown through 100% everywhere and found ways to drive revenues significantly beyond any kind of a ceiling, as you can see in the release. Actual airport revenues are exceeding forecast revenues by a very substantial margin, not 10%. On the operations side, as Francisco alluded to earlier, we have our new airport fully up and running, cash flowing, functioning in a very satisfactory way. We're measuring our time to wheels up. We are the fastest time to wheels up at San Jose as we are in all of our other airports, and that means a lot to us. It's also been a very good testing facility for some of the additional facilities. services that we've begun to roll out to residents. We have three additional fields in advanced staffing and equipping in anticipation of opening. That's Denver Centennial, Phoenix Deer Valley, and Dallas Addison. Now let's look at the next 12 months on the next slide. Again, looking at the four pillars of the business, on the Site acquisition side, again, we are, as of this earnings report, revising our estimate of new sites from eight to nine, which would put us at a total of 23 airports at the end of 2025. Please stay tuned for announcements as they come. Our focus today, again, as I described on previous earnings calls, is the best airports in the country. Revenue per square foot is the highest standard deviation metric in our business. If we're targeting yield on cost, the denominator of that formula is relatively static, varies within a relatively finite range. The numerator is where the action is, and the numerator being revenue per square foot. And that is primarily a function of location. We are in the real estate business after all. So our focus is on the best airports in the country. Moving on to development, the theme for the next 12 months is handling this very dramatic scale up, which again is accelerated at a faster pace than we anticipated, which of course we welcome and we aim to continue accelerating. It is a scaling challenge, and we're doing that while we continue working to reduce our per square foot cost, hopefully by a dramatic margin. We're doing that through prototyping, right? Again, as I noted, the Sky Harbor 37 prototype is done, fully processed and issued. Mass scale process management and insourcing. Right. That's not, not just the vertical integration of rapid built, but bringing a lot of the engineering and architecture functions that we can in house and spreading. Uh, essentially again, we're, it is the same prototype, same hanger at, uh, at every airport and printing those out across, uh, across the country and looking to realize economies of scale in other areas, right? We we've made provisions for, for example, holding significant steel inventory. It's not like we're exactly going out and hedging in the open market, but really looking for every advantage that we can have. Right now, as far as I know, we're the largest hanger developer in the country, perhaps in the world, and there are real economies to be gained from that scale. On the leasing side, Again, it's really we do feel that there is an established brand today. Again, this time last year, I would have said, you know, people in Nashville who know about Sky Harbor probably think about it as a local Nashville play. You know, same for Miami, same for Houston. I think today in the business aviation community, Sky Harbor and home basing are absolutely known quantities. They're very sought after. We hope to enhance that, increase it, increase the recognition of it, but we feel that there is definitely a brand today that's reinforced by the fact that, again, the top, the most sought after aircraft owners in the country are Sky Harbor residents. We're increasingly looking to include flight departments, pilots, mechanics, schedulers and dispatchers, security teams into our leasing process. There are a lot of boxes that we tick for those particular players. It's not just for the aircraft owners. It allows, if you provide the facilities and service to allow pilots, maintenance professionals, schedulers, dispatchers, security teams to work the way they want to work, the net result is a completely different and completely enhanced service for the aircraft owner that frankly can't really be matched as far as we can see by any other model. We're, for the time being, the only players here. So what's really shifting in the next 12 months is an increased focus on facilities and services catering specifically to pilots, maintenance professionals, schedulers and dispatchers, and security teams. And then lastly, operations, we are, Absolutely fanatically focused on the resident experience, allowing aircraft owners to maximize the utility of what's, you know, for anybody, a very, very significant investment. Uh, and with that, we, we, we, you know, we had a, a really wonderful opportunity to be able to attract Marty Kretschmann, uh, to join our team as the senior vice president of airports. It's very difficult to think of anybody, anybody on the planet who's better suited to that role. and to increasingly surprising our tenants, delighting our tenants in a way that we could not have anticipated six months ago and I don't think our tenants could have. And that is an absolute fanatical focus of the company today. That expresses itself in a spotless safety record, a security offering that we don't think can be matched anywhere in aviation, Efficiency that we were beginning to measure and share with our residents in time to wheels up and an increasing array of value enhancing services and partnerships that again our focus is on deliver value that nobody else can deliver in in in aviation.

With that, I think yeah, with this we conclude our prepared remarks and we now look forward to your questions. Please submit your questions. Q4 platform and we'll answer them accordingly. Operator?

Thank you. Thank you. Your first question comes from Cameron Giles. Do you plan on contributing to Sky Harbor Capital again to help close the funding gap for the remaining construction? And when do you plan to raise the $300 to $420 million equity portion of the $1.2 billion needed for the first 20 sites?

Thank you, Cameron, for the two questions. Let me address them in order. Yes, so as you know, just as a refresher, we do project finance for our construction project, which means that we put equity and we raise debt and we put a trustee dedicated to the project that we look to putting in place. And twice over the past three and a half years, we had to go and inject additional equity into the construction fund to address what have been, my God, almost like generational construction inflation given COVID that everybody in the industry experienced. and then some design corrections on our prototypes that we experienced, but we did not hesitate and immediately moved to plug those funding gaps whenever we realized that they existed. The good news is that we feel confident right now that the $87.3 million of cash that is currently the trustee for these projects is more than sufficient to complete the projects that remain, which means the three that are opening in the Q1, the second phase at Opa Loca in Miami that will start next year, and then the second phase in Denver that will be coming up later. And obviously this includes, yeah, that's the answer for that one. And second question, you know, more or less halfway, more than halfway in terms of our equity raises that we then pair with debt to complete the 21st Air Force. And it's important that now we talk about phases. You know, given the amount of real estate, of hangar real estate on these campuses, we tend to do things in two phases, in two phases, which means that And every dollar of equity that we raise, we pair that with about $2.3 of tax exempt debt in terms of our capital formation. So again, answering your question, we're more than halfway through in terms of funding for our 20 airports, including both phases. Let me just take the opportunity to mention the following. Although we have some deadlines in our ground leases to start construction. We do have some flexibility on those milestones. So in theory, in theory, we could, you know, tap dance a little bit here and wait until we have internally generated cash to be the equity contribution to some of these fields. The issue, though, is that we prefer and it's accretive to our shareholders to continue raising equity and parent ed with debt and accelerating those projects than waiting several years into the future to get the equity cash flows to fund those projects. And we have brought the math on that many times. And again, the opportunities of these projects and do them sooner await the drawback of the delusion of additional equity issuances. Obviously, these are fact-specific and will continue to be deliberate as we advance funding and capital-based investment into the future. Next question.

Thank you. Your next question is from Shaila Hendrickson. How do you foresee the Trump administration's policies will affect your business?

Thanks, Shayla. As you know, we view ourselves as relatively insensitive to the economic cycle, right? Once an airplane exists, once it's born, it's got to live somewhere. The fleet is only growing. It's not shrinking. The backlog of the OEMs is robust. And that's going to remain the case. you know, no matter who's running the country. At the margins, there are potentially some benefits here. I mean, again, it's very early to say, but there's a lot of speculation in the industry about reinstating bonus depreciation, you know, 100% bonus depreciation on aircraft, which is obviously a boon to the aircraft manufacturers and, you know, encourages people to cycle aircraft. That will precipitate growth in the fleet. We don't need growth in the fleet for the Sky Harbor model to succeed, but it's a welcome tailwind. But in general, I'd say the answer to the question is we're, as a business, more or less agnostic to the political environment.

Thank you. Your next question comes from Peyton Skill. Can you talk about the shift to the semi-private hangers versus original thesis of fully private? Has the company run into any scenarios where there is not enough demand for fully private?

Yeah, thanks for that, Peyton. The way we got into semi-private originally was exactly that. It was in Nashville and I wouldn't say exactly not enough demand, but Nashville has become in the last two or three years, a large jet market. And we've captured a very significant, if not most of the heavy business jets in Nashville as residents. But when we started leasing in Nashville, it was mainly a mid and some extent super mid market. So that's challengers, Falcons, you know, aircraft like that for whom, It doesn't necessarily make sense to pay for 12,000 square feet of hangar space. Uh, if you've only got five or 6,000 square feet of airplane, we understood that. And at some point realized, you know, we're, we're turning away a major part of the market. Um, and, uh, you know, perhaps we can accommodate these, you know, these aircraft owners and sat down and realized, you know, there's, there's plenty of demand for people to come in with one or two other aircraft in the hangar with them. as long as they have privacy in their office and their car parking. And that's how semi-private was born. Very quickly, we realized we could exceed 100% occupancy in those hangars. There's a lot more fuel that gets consumed, so you're making more money on the fuel as well in those hangars. And frankly, it's a better model on average than fully private hangars. The reason we landed on the specific size and shape of the Sky Harbor 37 prototype is that that is the size and shape of hangar that can accommodate the most square footage of aircraft, meaning the highest ratio of aircraft square footage to hangar square footage. So I can say that a Sky Harbor 37 can accommodate 70,000 feet of airplane comfortably. Like we're never going to pack them in. This is never going to be a tight, tight, tight fit. That's not our business. you can comfortably house 70,000 feet of airplane in 37,000 feet of hangar. So to us, that's a real design breakthrough. The revenue density is obviously much higher on that. But it sounds from your question that you're implying something that is true, is that some people do want total privacy. And some people have fleets of aircraft. Corporations or individuals have fleets of aircraft. that require a full 37,000 square feet, and they'll take down the whole piece. But one of the features of the Sky Harbor 37 prototype design is that it's demisable. It's demisable with a regular acoustic wall that runs down the middle, right? The new NFPA 409 Group 3 fire code allows us to go up to 40,000 square feet of firewall space, contiguous firewall space. We're using 37 of those. but very easy to divide it, and by the way, very easily afterwards to undivide it if you want to go back to a more efficient semi-private model. I will say that the semi-private is really a breakthrough for Sky Harbor, right? The revenues go up so significantly when you can put more. It will give you kind of an example. If you check out the revenue run rate at San Jose, which is a purely semi-private situation, We didn't build that facility. We inherited it. One of the reasons that we're exceeding our projections by such a large margin is because it's all semi-private.

Your next question is from Greg Gibbous. How is visibility on pricing looking for the three new fields expected to commence operations in Q1 of 2025, and how do you expect them to compare to the existing weighted average?

So I would say on those fields, Denver, Phoenix, and Dallas all compare nicely to Nashville and Miami, perhaps slightly more favorable than Nashville and Miami. We also, maybe to combine this with the last question, is we've made provisions for significant semi-private occupancy. So although the per square foot rate for each aircraft might not change the total revenue from the campus goes up quite quite significantly. So as you know, we don't actually begin leasing in earnest until the campus is up and running. We find that our pricing leverage is the highest when there's actual standing product that people can walk through and see. Also, for those on the call who've been inside Scarborough hangers, it is a dramatic experience. It's not what you might expect. if you're accustomed to housing your aircraft at an FBO, let's say. So we find that that's really the time to strike. I know some of the bondholders on the call have been very patient with us in Miami and in Nashville and in Houston, allowing us to bear out that model, not pre-lease all of the space six or 12 months in advance, but really wait until we've got a product that's visitable. I think that's what we're going to see in Denver, Phoenix, and Dallas as well.

Your next question comes from Franklin Ross. What is the weighted average lease term on your hangar tenant leases?

Does anybody have the average?

Yeah, thanks. This is Tim Hurd. Our weighted average lease term is 3.2 years. But that's a mix of tenant lease terms. Remember, our goal is geographically diverse, tenant diverse, and lease term diverse portfolio of contracted revenues with CPI increases with generally a floor of 3 or 4 percent. And so, you know, we focus our lease terms to be staggered so that we can take advantage of those increases when the tenant leases come up. So on the shorter end, you know, we do have some shorter leases, you know, like a year, essentially to get tenants in, get them, you know, hooked on our service and, you know, offering. So those, we do have a few of those. We do have a couple of longer term leases, you know, we have up to 10 years for kind of the strategic tenants who we want to keep on our campus long term. But again, kind of our sweet spot is the three to five years, and that's where we end up in the average of a little bit over three years.

I would add to that kind of two important things to look at. One is staggering, right? We don't want too many leases to come to maturity in the same period. That's just a risk management policy on our standpoint. So we do try to stagger the leases across the campuses. And the second is, you know, if you're the equity, you like the shorter-term leases, right? And I understand that the debt likes the longer-term leases. The equity should like the shorter-term leases. We're averaging a 20% markup between the first lease in a hanger and the second lease in a hanger, a 20% markup. Remember, this is on top of escalators, which are CPI with a floor of 3%. Annual escalators, CPI with a floor of 3%. We're seeing 20% average markups between first term and second term. But there are several cases more recently, which is significantly higher than 20%. But like Tim said, I think it's a good policy to get people in the door on shorter term leases, even if we compromise on revenue in the short term. Because again, people don't know what home basing is. Many people don't know what that is. But once you've experienced it, we're finding in almost all cases, you never want to go back. This is the way you want to keep an aircraft. going forward, even understanding that your introductory pricing is not necessarily going to carry forward. And I think we've had a lot of luck with that strategy.

Your next question is from Jim Jones. Hi, great quarter. I was wondering what Francisco thought about the equity value at Sky Harbor, given his current ownership, and if he would participate in the December offering.

Thank you, Jim, for the question. I always welcome more ownership bonuses at the end of the year. So I'm glad that you're asking the question here in front of our CEO and founder. But to answer your question, the proxy statements understate my ownership in the company because I precede the equity offering and so on and so forth. And there are three employees, myself, the treasurer, and our former CEO that that have a participation that's really not reflected in the RSUs that began being granted post-D-SPAC. And, you know, I have not sold any shares, and I've said publicly many occasions I don't plan to sell any shares in the foreseeable future and so on and so forth. But I will refrain from giving thoughts about our valuation and so on and leave that the research analysts and to the market in general to, you know, and so on. And, you know, we always at conferences, you know, guide people in terms of what to focus on in terms of evaluation and so on. But again, on a personal basis, I'm actually a longer than people will see from the RSUs. Next question.

Thank you. Your next question is from Cameron Giles. Have you made any progress on renegotiating the below-market DBT leases, and what is the current and targeted price per square foot?

Thanks, Cameron, for the question. So we don't put out price per square foot. We're in active talks with prospective tenants. We don't have any... leases to renegotiate. There's no, you know, we gave indicative pricing early on in the project, but I think the market understands that a lot has changed in Phoenix. You know, it sounds like you follow that market. Scottsdale is completely full and busting at the seams and experiencing, you know, very significant, you know, delays and congestion due to the crowding there. There's significant migration, particularly in the semiconductor industry, you know, northwest to the Deer Valley area. So, you know, what was true of that market, you know, 24 months ago is no longer true today, and I think the market understands that.

Your next question is from Peter Shawn. Does the expansion plan for West Hampton Airport with signature aviation represent a sign of new competition for hangar space or FBOs in the New York area?

Sorry, can you repeat that question? I don't think we got it.

Yes. Does the expansion plan for West Hampton Airport with signature aviation represent a sign of new competition for hangar space? or FBOs in the New York area or NY area?

Oh, okay. Very good. Thank you. I don't know if it's directly linked. I'd say a couple things. Number one, Signature, like us, sees that the New York area is, you know, this is the richest market for business aviation in the country. So both FBOs and Sky Harbor should be investing significantly in the New York area. Second, to point out, and it sounds from the question that you're quite plugged into the business, we are in very, very separate, different businesses from Signature, which is what allows us to cooperate in so many areas so effectively. They are an FBO. They're in the fuel business. They make their money outdoors. Sky Harbor makes its money indoors from rent. So we are attacking different markets. There's certainly overlap between what we do But again, I think that it's narrow enough that the two companies have been able to cooperate extensively in ways that add value to each of us and to our respective customers. So I really see that West Hampton expansion primarily as an endorsement of the New York market, which again, was not something we needed. We know the New York market's attractive.

Your next question is from Jim Jones. Can you please walk us through the DSCR calculation and where you are as of third quarter on a run rate basis?

Yes, thanks, Jim, for the question. Let me answer the following way, because you got to look back to the original projections that we made at the time of the bond offering And those were all subsequently updated at the time of the, I would call it the pivot, when we added Addison in view of the second phase at Phoenix. And we also, at that point, also updated the projections. You know, we, as a matter of course, we don't put out projections. Our research analysts put out, you know, in their updates, consolidated projections which obviously are different than obligated group. Obligated group does not include San Jose, for example, and so on. So I think the guidance we've been given publicly has been that once stabilized, you know, once we complete the projects, which are, I will say, about a year to two years delayed, remember we had COVID, we had construction delays and so on, that once we get stabilized, and that will be, about two to three years from now, in terms of being fully constructed on the obligated group and full cash flowing, we will be at higher, higher cash flow available for debt service than we projected three years ago. And those projections, if you go back to the CRA report on the talent bond issue, which was where in the $25 million area. So you can compare that to the 6.9 million interest expense that we have on our debt between now and 2032. And basically what we're saying is that we expect to be more than three times the service coverage in terms of our cash flow available for debt service and our debt service once stabilized. So that's basically the way I will think about this. Look at the current run rate in Q3. when we are about to open three campuses in Q1 of next year. It's just not, it's too early to be looking at it that way. And remember, we have capitalized interest through July of next year. So that means we have the money set aside and paying interest, interest into our own orders from cash that we have invested in treasuries at the trustee. Next question.

Thank you. Next question is from Peyton Skill. What kind of project-level ROE is the company targeting on a project like OPF Phase 2, which should get similar rent, RSF, as OPF Phase 1, but significantly higher construction costs given the post-COVID inflation?

Thanks for that, Peyton. So, yes, there's been significant inflation in construction costs, and Will's mission is to battle that and reverse it for us, but We'll see. The jury's out. That battle has not been fought and won yet. Hangar rent inflation has outpaced construction inflation by a massive margin. So I don't know if I agree with the assumption that phase two rents in Miami will be similar to phase one rents in Miami. I'd say right now the current waiting list for aircraft in phase one is about double the number of the entire aircraft, the occupancy of aircraft that's currently in phase one. So there's massive demand for the product in Miami. Frankly, from my perspective, the leases can't end soon enough because we think the replacement tenants are coming in at a much higher level. So we think there's, and we think that's still ongoing, right? There's significant hangar price inflation Not just in Miami, but Miami is one of the areas where it's higher, I think, than the average in the country. The second point is that the revenue density in Opelika phase two, I think it's a nuanced point, but I think it's worth understanding. When I talked about the semi-private capacity in the Sky Harbor 37, you can get a lot more airplane into a 37, a lot more square foot of airplane into a square foot of hanger in a 37 than you can in a Sky Harbor 16. which is what Opelika phase one is. Now Opelika phase two is not the 37. It's an interim hanger. It's not the prototype yet. It's called the Sky Harbor 34. It's not quite as efficient as the 37 in terms of revenue density, but it's not far either. So you'll have a much higher revenue density in Opelika phase two than we did in phase one. That combined with hopefully continued hanger price inflation we think the yields are at least what we're seeing right now in Opa-Locka Phase 1.

If I may add, again, without going into much detail, given the confidentiality of our tenants, it's fair to say that we have two existing tenants at Opa-Locka Phase 1 that already have raised their hand for one of the larger Skyward 34s, Opa-Locka Phase 2, because they have significant fleets. And right now, they have some of their exes A plane's literally sitting in our apron, and so is the Ford outside of the current phase. So, you know, that's good to know before we even start construction, have two of them basically spoken for. You know, we'll see how rates shake out now and then. Next question.

Your next question comes from Greg Gibbous. Given pricing seems to continue exceeding your initial expectations, with lease renewals and replacements stepping up nicely. Do you see upside to your current potential revenue opportunity at stabilization presented in this figure? What level of pricing growth is assumed in those sure projections?

Well, thank you, Greg. The last question is the easiest one to answer, zero. We're projecting zero growth. To be clear, shares or Sky Harbor equivalent rent is zero. a pretty simple formula, the two major components of which are what are aircraft at a specific airport currently paying at the FBO in rent and what are they paying in fuel margin? So Scarborough equivalent rent is a proxy for the total basing cost of an aircraft currently at an airport. Now, we use that as a floor because we want, the assumption behind using that as a floor is that if you were paying the same amount to Sky Harbor as you would be paying an FBO, you would almost certainly move to Sky Harbor because everything about it is superior. As a home base, remember, we can't do transient. We don't compete with the FBOs in the transient business. We don't have a transient business. We're a pure home base. But as a home base, I mean, there's zero downsides and only upside. So the assumption is if you were paying the same price, you would come to Sky Harbor. Of course, we aim to target 80%, 90%, 100%. premium over what these people are paying. And that's what we've been hitting at these airports, in some cases even exceeding that, because we are putting out an offering that has very, very unique value to aircraft owners. So that's what Sky Harbor equivalent rent is. I want to be very clear, it has nothing to do with our projections, right? We use it as a risk management tool. because we don't pre-lease these hangers. We only lease when they're up. We want something that gives us safety, particularly gives the bondholder safety that these hangers will be leased at at least a certain rate. That's what Scarborough Coal and Rent is. In terms of exceeding expectations, none of that has worked its way into our projections. I think some of the analysts might be looking at that and maybe revising their own models on the basis of the results. We haven't done that. I think just for our own purposes, we'd like to see that at many more airports over a much longer time period before we start making any kind of claims. But I might check in with the analyst community because they might be revising their models.

Thank you, Tal. Operator, there seems not to be any additional questions. 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 directly with any additional questions through the email investors at skyharbor.group. Thank you again for your participation. And with this, we have concluded our webcast. Operator, thank you.

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