Sky Harbour Group Corporation

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

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?

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.