Sky Harbour Group Corporation

Good afternoon. My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Sky Harbor 2023 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'd like to ask a question, simply submit the question online using the webcast URL posted on our website. Thank you. Francisco Gonzalez, Chief Financial Officer. You may begin.

Thank you, operator. I'm Francisco Gonzalez, CFO of Sky Harbor. Hello, and welcome to the third quarter earnings equity investor conference call and webcast for the Sky Harbor Group Corporation. We have also invited our bondholder investors in our borrowing subsidiary, Sky Harbor Capital, to join and participate on this call as well. Before we begin, I've been asked by counsel to note that on today's call, the company will address certain factors that may impact this year's earnings. Some of the information that will be discussed today contains forward-looking statements. These statements are based on management assumptions which may or may not come true, and you should refer to the language on slides one and two of the presentation, as well as our SEC filings for 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 introducing the team with us this afternoon, Tal Kanan, our CEO and Chairman of the Board, Mike Schmidt, our Chief Accounting Officer, Tim Herr, our Treasurer, and Tori Petro, our Accounting Manager. We have a few slides we'll want to review with you before we open it to questions. These slides have been filed in Form 8K with the SEC this afternoon and will also be available on our website after this call. You may submit written questions during the webcast using the Q4 platform, and we will address them shortly after our prepared remarks. So let's get started. Next slide. This slide is a summary of the Q3 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 in progress in Phoenix and Denver surpassed the 120 million mark in the third quarter. With our two recently opened campuses in Nashville and Miami nearing full leasing, Q3 revenues reflect the step function increase in our rental and fuel commission revenues. I should note that, as disclosed in our thank you filing, Q3 revenues included about $400,000 in non-recurrent revenues, primarily arising from a negotiated settlement with one tenant who had leased two hangars in Miami. We will discuss more on this shortly when reviewing our leasing activities. We're looking ahead, we expect this step function revenue phenomenon to continue as we open new campuses and the next step is expected to occur in Q2 and Q3 of next year as Phoenix and Denver campuses open and tenant leases there start cash flowing. Our operating expenses and SG&A are semi-fix to fix and we continue watching our expenses and maintaining frugality whenever possible. Consolidated net cash flow from operating activities is approaching break even, as you can see in the lower right-hand quadrant, something that we expect to surpass next summer after Phoenix and Denver campuses open. This is earlier than our original indication of reaching and surpassing breakeven at the end of next year. Next slide. In terms of rentable square footage, we continue to make significant progress in securing new ground leases. Last one announced last month at Chicago Executive Airport, a great location, by the way, for our home-based services. As we have previously disclosed, we expect to execute another two grant leases before the end of the year, and another three by the end of the second quarter of 2024. The value of our business is not backward-looking, but in the projects in the pipeline in front of us. Once a grant lease is executed, we believe the value creation for our shareholders is effectively locked in, and it's all about execution thereafter. With this summary of results, let me pass it to Tal Kanan, our CEO, for an operating update. Tal.

Thank you, Francisco. I'm going to go quite quickly here because the 8K filings are available and I want to leave room for questions. Briefly, the way we think of our business is in the following silos, site acquisition, development, which now includes both manufacturing and construction. leasing and airfield operations. I'll give a brief overview of what's happening in the market, some of our lessons learned from the last quarter, and at the end, we'll talk a little bit about business strategy going forward. Next slide, please. So site acquisition, I think it's important, and you'll see when we get to lessons learned, think about site acquisition in terms of throughput versus cycle time. There is a relatively long gestation period, and it can be quite very high standard deviation of gestation period from beginning work on a target airport to actually executing a ground leaf. But we have many dozens of these in process, and that kind of big bulge began to be developed about 18 months ago. And I think one of the things that we're seeing right now is the fruits of that. So airports are starting to pop. As people know, sites in operation, Houston, Nashville, Miami, in development is Phoenix, Denver, Dallas. In permitting is Chicago. We've got two new ground leases that we expect to be announcing this quarter and an additional three ground leases in the first half of next year. Next slide, please. Okay. again now includes manufacturing and construction since the acquisition of rapid built we are in the process of integrating rapid build the first two fields which will feature pre-engineered metal buildings by rapid build are denver and phoenix you can actually see those pictured in the uh on the right side of the screen uh top and uh middle uh our ambition for rapid built is to continue improving on the quality of our build. We think we have the highest quality header of business aviation already, and that's improving all the time. The fact that we have a rapid prototyping loop with our own manufacturing capability, we think is accelerating that. And then secondly, bringing our costs down as we scale. I won't go through the chart at the bottom. Again, it's available in the filing, but happy to refer to it in Q&A if there's interest. Next slide, please. So leasing, I think where we are today, if you could look at the roster of Sky Harbor members, which is how we refer to our tenants, you'd see some of the savviest names in business aviation with us. We were at a stage where we feel like we're moving from an experimental concept that we have to explain a lot about our value proposition to something that has a very clear and understood value proposition. Current occupancy is what you can see here. We are now beginning a branding program, which starts with a few member evangelists, people who have been with us. Nobody's been with us for a long time. We're still relatively new, but members who have been with us for a year or more who are beginning to evangelize. You'll see some announcements soon, including some public personalities that we hope will will increase awareness in the business aviation community of Sky Harbor and of our offering. One of the things that you'll see if you look closely, we are experiencing the first leases coming to term. As you know, we stagger our lease terms from one year to 10 years. We're seeing our first leases coming to term. And the re-ups, whether it's a tenant staying with us or bringing in a new tenant into the hangar, have been occurring at a very significant premium to the original lease rate. So as people who have followed us closely know, we have CPI escalators in the leases. But when lease terms end and we release, we're experiencing much bigger jumps. In one case, a new tenant came in at a close to 20% premium to what the original tenant was paying. that's on leasing again we'll come back to that in q a next slide please airfield operations uh number one priority for us in operations is safety uh so happy to report we have not experienced any safety incidents in uh in in uh in q3 uh we also have had no service gaps we we do uh pretty rigorous tenant survey for service gaps and what we're finding is tenants are delighted we do have a very intimate relationship with many of our members and and that feedback is quite important to us we work with them to constantly improve the offering the service offering has been significantly refined as we go we expect for that to to continue but as we get to Lessons learned. We'll talk about it. The one attribute that we're focusing on right now is time to wheels up. We are already offering the shortest time to wheels up in business aviation, and that's something we want to make consistently shorter. It's something that's measurable, very, very critical to our members. Again, we can talk about that over time. New services as I think some people on the call know we began offering detailing services. We don't actually provide the services through a third-party partner, but there is a whole array of revenue-producing services that we intend to roll out over time. It's not our focus today. It'll happen at the pace that it happens right now. Growth is expanding our footprint is the focus, but happy to talk about that in Q&A if there's interest. Next slide, please. Briefly on the market. landscape. So we're still seeing very significant tailwinds. And remember, from our perspective, we're not an FBO company. We are really indifferent to fuel volumes. We don't care so much how much people fly. We care how many airplanes are in the fleet, or actually more precisely, we care about the square footage of aircraft in the fleet. And what we're seeing right now is record backlogs at the OEMs. remember each year the average aircraft that's delivered has a longer length a wider wingspan and a taller tail height so the square footage of the fleet is growing up is going up much faster than the actual number of aircraft in the fleet and as technology improves over time the useful life of an airframe also grows put those factors together and you have a hanger deficit that is getting much more acute I think we're not the only ones observing that, but I think we're the ones that, to them, it matters the most. Once an aircraft gets delivered, it is in the market. Whether it's flying a lot or not flying a lot, it needs a place to live. In terms of the competitive landscape, we still have not seen a company that does exactly what Sky Harbor does. There's been significant consolidation in the FBO industry under the umbrella of Atlantic and Signature Flight Support. which again, if we have time in Q&A, we'll talk about why we think that's been a positive for Sky Harbor. And importantly, increasing demand from airports. We are experiencing now pull from the airports. For the first couple of years of our company's existence, it was mainly us trying to communicate the value proposition of a Sky Harbor campus to an airport sponsor. Increasingly, we're seeing airport sponsors reach out to us We have a service that is differentiated. It doesn't exist, and it's something that's in high demand from airports. And just a couple quotes below, one from an airport sponsor and one from one of our members to give people a sense of how we see the value proposition kind of congealing.