Sky Harbour Group Corporation

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.