Sky Harbour Group Corporation

Good evening, my name is Tiffany and I will be your conference operator today. At this time, I would like to welcome everyone to the Sky Harbor 2025 Year End Earnings Call and Webinar Conference. 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 a question online using the webcast URL posted on our website. Thank you. Francisco Gonzalez, Chief Financial Officer, you may begin your conference.

Thank you, Tiffany. I'm Francisco Gonzalez, CFO of Sky Harbor. Hello and welcome to the 2025 Full Year Results Investor Conference Call and Webcast for the Sky Harbor Group Corporation. We have also invited our bondholder investors in our powering subsidiary, Sky Harbor Capital, and now also our lenders in Sky Harbor Capital II and the 2026 series bondholders of Sky Harbor Capital III to join and participate on this call. Before we begin, I have 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. Some of the information that we'll discuss 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 of 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 social statements. So now, let's get started. The team with us this afternoon, you know from our prior webcast, our CEO and chair of the board, Tal Kanan, our treasurer, Tim Herr, our Chief Accounting Officer, Mike Schmidt, our Accounting Manager, Tori Petro, and Andreas Frank, our Assistant Treasurer. We have a few slides we will want to review with you before we open into questions. These were filed with the ACC about an hour ago in Form 8K, along with our 10K, and will also be available on our website later this evening. We also filed our February construction report one day early today, this afternoon, with the MSRP EMA. and the fourth quarter's capital obligated financials that were filed a couple weeks ago. As the operator stated, you may submit written questions during the webcast using the Q4 platform, and we'll address them shortly after our prepared remarks. Let's now get started. We turn to the first slide. On a consolidated basis, assets under construction and completed construction continue to increase, reaching over $328 million on the back of construction activity at phase two in Miami, the new campus well in construction in Bradley International, and phase two in Addison in the Dallas area. Please note this graph is soon to accelerate its upward trajectory as we broke ground already in Salt Lake City Airport, and also soon we'll be doing that at New York and Orlando Executive Airport in Florida, Trenton, New Jersey, and Dulles International later this year. On the revenue front, we increased year-over-year at 87%, reaching record $27.5 million for 2025, reflecting the acquisition of Camarillo in December of 2024, as well as higher revenues from existing and new campuses that opened last year. Sequentially, revenues have a natural progression of occupancy, increasing at the three new campuses. Operating expenses for the year increased to 27, almost $28 million, reflecting increasing campuses operation. The higher number of ground leases, remember we expense ground leases open accrual, so our large number of ground leases impact our operating expenses. mostly non-cash, and something that Mike, our chief accounting officer, will cover shortly. One of our goals in 2026 is to achieve higher efficiencies at the campus level, especially as we open second phases in Miami and Dallas. In Q4, you will notice a slight dip in SG&A. This relates to reduction in the cash component of compensation for our senior management team. We're working to keep SG&A as stable as possible. As we have discussed in prior public conversations, we look to peak at no more than 20 million SG&A on a cash basis and obviously enjoy the operating leverage that that will entail. This line item, in terms of operating results, includes a lot of non-cash items, again, that Mike will discuss shortly. On a cash flow from operations basis, we're pleased to report that we reached positive territory on a consolidated basis for the first time in our history. But I need to point out that this is mostly driven by the realization of $5.9 million from rent as part of an extension of an existing tenant that closed in December of last year. That tenant went to 12 years and is now our longest tenant lease in our portfolio of developed campuses. We're also pleased to report that on an adjusted EBITDA basis that Mike will discuss shortly, we also reached breakeven on a run rate basis in December. Next slide, please. This is a summary of our financial results of our wholly-owned subsidiary, Skyward Capital, that formed the obligated group. This basically incorporates the results of Houston, Miami, Nashville campuses, along with the campuses that opened during the year in Phoenix, Dallas, and Denver. Revenues for the year increased 49% year-over-year, and in Q4, 18% sequentially. We expect a moderate increase in Q1 of 2025, and then A step up in Q2 and Q3 of 2027 on the back of the opening of phase two in Miami. And then the last step up in Q1 and Q2 of 2027 on the back of the completion of our last project that forms the obligated group First Vintage in Addison Airport in Texas. Operating expenses increase year over year given the higher number of operating campuses in operation. Let's turn now our attention to our chief accounting officer for a breakdown of adjusted EBITDA for the year Q4.

Thank you, Francisco. As with prior quarters, I'd like to take this opportunity to provide some additional context regarding elements of our reported results. Adjusted EBITDA is utilized by our management team to evaluate our operating and financial performance. It is supplemental in nature and a financial measure not calculated in accordance with U.S. GAAP. We define adjusted EBITDA as gap net income or loss before the add-backs and subtractions that are enumerated on the left of this slide, which consists entirely of non-cash or non-operating elements of both income and expense, including in the fourth quarter and for the year ending December 31st, 2025, the significant unrealized gain on our outstanding war. We have provided a reconciliation from our gap net income results for the year and quarter ended December 31st, 2025. The primary item worth highlighting here is the general trend of adjusted EBITDA as we conclude in fiscal 25. While slightly down on a year-over-year basis, adjusted EBITDA improved for the third consecutive quarter to a negative EBITDA of approximately $1 million in Q4. This was driven by increased occupancy and rental rates at each of our campuses, particularly during the latter half of the fourth quarter as our run rates improved and turned positive. With that, I'd like to take the opportunity to pass the towel.

Thanks, Mike. Good to be with everyone again. I'm not going to run through this entire leasing update, but I will point your attention to a few items. First, on the stabilized campuses, we've been talking for a while about greater than 100% potential occupancy, and we are, on a number of campuses, starting to break into Greater than 100% territory. There's still a long way to go on those, but we were there on a number of campuses already. On campuses in initial lease up, the blue, so you'll see Phoenix and Dallas going quite nicely. They're actually moving a little bit faster than we expected. And Denver moving a bit slower than we expected. And again, we're not going to nail the timing on all of these, but Denver is now coming along nicely. We also, I think, encountered some seasonal effects in Denver opening up in the winter season. That plays in your favor in Phoenix and Dallas, less so in Denver. In addition, have a look at the last three lines of that main chart, the high, average, and low rents. And a couple things that you'll see in there. First of all, in the blue campuses, campuses that are initially set, you'll see a significantly larger discrepancy between the highest and the lowest rents. The reason for that is, as some of you will probably remember, our leasing strategy on these campuses is to achieve 100% occupancy or greater as soon as possible. which means we do very short-term leases, including some six-month leases at very low rents with the idea of beginning to negotiate in earnest on the basis of 100% occupancy. That's the strategy that we've seen work in the previous Air Force. We're doing it now in a much more deliberate way. So what you'll see, for example, if you look at, the Denver column, APA 1, you'll see that the highest rent is $41. So that's somebody who is actually on a long-term lease. We're only doing long-term leases, meaning a year or more, at or above our target rents. And that $14.36 lease, the lowest is a short-term, right? That's somebody who will either be cycled out or will agree to come up to the terms, to the target rates once we're in, call it, full or long-term lease up. And then lastly, on the main chart, call your attention to the pre-leasing activities, which again, after we finish Denver Phoenix and Dallas, we moved to that pre-leasing strategy. Again, it's already in place. It has to be. In order to do that, you'll see significantly higher average rents. And remember, just to make everything apples to apples, that $44.85, that is rent alone. That does not include fuel revenue on those campuses, whereas the other the numbers for the green and blue sections include rent and fuel. In the case of blue, it's contracted fuel. We could get, you know, more fuel flowage than that. But the pre-leasing numbers do not include fuel at all. And what that is beginning to point to, we think, is what we've been maintaining for, you know, for a while now. is our first campuses were chosen on a, call it somewhat arbitrary, basis. We're now targeting the best airports of the country, and we expect to see that trend continue of rents coming up as we go. The last thing I want people to look at on this page is the bottom left, the release update. We promised to give numbers on this. I think we've alluded to the fact that it's been quite robust. But what we're talking about is in 2025 leases that came to term, remember these were all mature leases. This is not that initial lease up exercise that I just referred to where we try to get to 100% occupancy. No, these are mature leases in Miami and Nashville where the lease comes to term, 22% is the average markup from the last year of the previous lease to the first year of the new lease. So what we think that's pointing to is, again, our thesis on airports being essentially Manhattan or beachfront property. There is a fundamental supply-demand mismatch, and supply cannot grow because of the limited number of airports at the rate that demand is growing. say that we're going to see 22% escalations for the next 50 years of these ground leases, that we do expect a very robust release rate. Reminding everybody on the call, the multi-year tenant leases feature annual escalators of CPI. It used to be with a floor of 3%. Today it's a floor of 4%. So on top of those CPI with a floor of 4% escalators, we're seeing an average 22% jump. when one lease comes to term and a new one is signed. Next slide. Thank you. Okay. So, on site acquisition, a couple things to call everyone's attention to. So, I'm looking at the chart on the right first. The green bar, that 1,096,000 square feet, that is airports that are in operation, right, starting in Houston, running all the way to Denver. The orange, the 1,149,000 square feet, that is airports that we have underground lease that are fully funded. And we'll go through the funding a little bit further, but those are airports where we're now developing, and we'll give you a list of which airports are coming online in what order. So the green is in operation. The red is secured and fully funded. The yellow is secured and not yet funded. Again, we're not really in a rush to fund these yet because we're in a permitting process on all those airports. It will take some time. And there's phasing. There are airports where we're going to do phase one and perhaps wait a bit before we do phase two. In some cases, there's also a phase three on those airports. If you sum up all of the square footage of hanger buildable on airports on which we have ground leases, That's 4,160,000 square feet. Calling your attention to the left side of the slide, the map speaks for itself. The bottom of the slide is something that we want to try to get people used to a little bit, is that we've been defining our site acquisition goals in terms of number of airports. That is a proxy, a not so close proxy, of what we're really going for. And it's virtue that it's simple and easy to communicate, a number of airports. But as you saw, we met our guidance for 23 airports last year. We also secured new land at two existing airports last year. And I can say that in the case, for example, of Stewart International in New York, securing that extra, whatever it was, 240, 250,000 square feet of that 240, 250,000 square feet of hanger constructible on that new land. That's worth a lot more to us than almost any new airport in the entire portfolio. So those expansions mean something, but they're obviously not captured if all you're doing is counting the number of airports. A closer proxy of what we're really going for is square footage of revenue-producing hanger. An even closer proxy is the total revenue available Because the square foot of anger in the New York area is going to be worth more than a square foot of anger in most other parts of the country. And then finally, and we're going to find a way to communicate this simply, we don't have it yet internally. We do, but we don't have something simple enough, I think, to put out on these earnings goals, but we will. Is what is the total NOI available? because there are airports where our OPEX per square foot is higher and airports where it's lower. Fundamentally, that is really what we're going after. We're trying to capture as much NOI as we can, assuming we're above a certain yield on cost threshold. So, again, we'll find good and simple ways to communicate these things better. We're not releasing guidance yet. We'll do that in the next earnings call for guidance for 2026. But expect that guidance to come in in these terms, not really a number of airports because, again, we just don't think that's a close enough proxy to what we're actually trying to achieve. Next slide is development. So, we spent a lot of 2025 really reconfiguring our development effort to go from something that's a little bit more sporadic and on fewer airports to a really significant program that's operating at scale. So we're seeing that happen right now. Just to make sure everyone understands what these numbers mean, starting at the top of the slide, rentable square feet under construction. You can see the timeline of what's going up as we enter 2026. It's about 750,000 square feet That's actually under construction and that will continue to ramp up. Important to say we're talking about, we're only talking about construction on existing ground leases, which is why you'll see the 2027 square footage under construction that 819,000 square feet is likely to be low, meaning airports that we secure now that we enter construction in 2027 are not captured here. And 2028 is very low, right? In fact, it's going down on this chart. And again, that's because most of the construction that's going to be conducted in 2028 is on airfields that we haven't secured yet. And then based on our construction timeline, the next line is rentable square feet that's actually built and ready for occupancy. And again, you can see how that grows. I think everything through 2026 is probably pretty accurate. 2027, we might start to see a little bit of a bump up on that $2.35 million million square foot number. In 2028, we expect something significantly higher than the 3.17 that you see here. Shifting to the bottom, I'm not going to take you through the eye chart on the right, but on the left, you'll see our schedule of deliveries of campuses. We expect to deliver Miami Phase II toward the end of next month. Then in September of this year, Bradley, Connecticut, our first New York area campus. At the end of this year, Addison II, our second phase in Dallas. And you can see, as we go down the list, leading all the way to Dallas international at the bottom of the list. Uh, the pace of deliveries is obviously starting to wrap up. All right. So we, we, I think we've, we've. We've gotten our development program to a place that we feel very comfortable right now. In our ability to deliver on our 2026 and early 2027 schedule. there's still more ramp up of our development resources required for the surge that's coming in 2027. With that, let me hand it back to Francisco. Tim.

Thanks, Al. As we announced last quarter, we finalized the five-year tax-exempt drawdown facility with J.C. Morgan that will provide debt funding for our next projects in the development pipeline. We expect to draw on the facility over the next two years as our airfields become ready for construction. To cover Sky Harbor's required corporate contribution to the facility, we closed last month on $150 million of tax-exempt subordinate bonds. The pricing was three times oversubscribed with 18 distinct institutional investors coming into the credit. These bonds have a five-year maturity with a 6% fixed interest rate and a call-out from starting in year four as we plan for an investable takeout of both the bank facility and the subordinate bonds with long-term tax-exempt bonds once the projects are completed and cash flowing. Quickly, these charts highlight the recent trading in our credit. Our long bond from the original 2021 issuance has been trading higher as we approach the completion of our first obligated group project later this year. Our newly issued 2026 series bonds have also been trading higher following issuance last month. Now let me turn it over to Francisco for discussion on future capital relief.

Thank you, Tim. You know, the 2026 series that Tim mentioned of subordinate bonds represent a fundamental rethinking of how we think of our unit economics and capital formation. We always knew we were going to issue subordinate bonds, but not this early in the life of our portfolio, and not while still unrated on our senior obligated group credit. In this slide, we illustrate what the unit economics of a new campus looks like on average. We aim to target campuses across the US where we believe we will earn $40 per square foot in rent and $5 in fuel margin. After $9 per square feet of operating expenses, we're left with, again, it's an illustration, with $36 per square foot of NOI. Before the issuance of the subordinate bonds, we have been assuming 70% leverage on the program or on the projects resulting in a return on equity at the unit economics level close to 30%. With the increased use of our debt, specifically subordinate bonds, replacing the use of equity, the same campus can now be expected to generate return on equities higher than 60%. Of course, we're going to be deliberate and cautious of our level of leverage and look forward to refinancing, as Tim mentioned, the subordinate bonds and the JP Morgan facility way in advance of their five-year maturities. On a pro forma basis, the expected coverage of social refinancing will still support investment grade ratings for those bonds, given the projected coverage of all the existing and future projects under construction. Next slide. We closed the year with $48 million in cash and U.S. treasuries, which now are enhanced with $150 million in gross proceeds from the 2026 series bonds, which closed last February, last month, and 200 million of JPMorgan facility late last year, which was undrawn at year end, but which we now start to use here in the current quarter to fund capital expenditures at the Bradley campus. We now feel that we have created a fortress of liquidity at the company and are fully funded to double the size of our campuses and reach over 2 million in rentable square feet, as Tom mentioned earlier. In terms of future capital formation, we'll continue to be deliberate, prudent on our debt management, and opportunistic in monetization of assets. As previously noted or disclosed, we received 5.9 million in an upfront rent payment last December as part of our lease extension of one of our hangars. in our portfolio. We also continue to negotiate and have now actually brought in the number of potential partners for the previously announced joint venture of one of our hangers in Miami and likely to include more hangers throughout the portfolio. We also have received interest from tenants who also like to acquire hangers rather than lease them. These type of asset monetizations, either in the form of hanger sales or hanger lease prepayments, is a prudent way to generate capital, equity capital, to fund our future growth, only if evaluation is supported and the alternatives are less attractive from a dilution and cost of capital perspective. Let me now turn back to Paul for end of year highlights and for common initiatives in the four pillars of our business.

Thanks, Francisco. OK, so on site acquisition, Our 2025 guidance of 23 airports underground lease has been met. Like I said before, from our perspective, it's exceeded substantially through the two new ground leases on existing airports. And like I said as well, we are refining our guidance metrics. Again, internally, we already use a metric that is much closer to targeting total available NOI rather than number of airports or square footage. But again, we'll get back in the next earnings call with guidance and with some clearly understandable metrics. On development, again, 2025 was a year of great investment in our development program. What I can say right now is in the short term, things are looking good. We're on time, on budget in all projects. Our scale up, for the next big surge in development activity is underway. And hopefully in our Q2 call, we'll be able to say we're ready to go with the program that will carry us through 2027. And as we continue to grow, it's not just economies of scale, it's our vertical integration, first into steel manufacturing, now into general contracting, Our prototype improvements, the constant value engineering of that prototype has gotten our cost per square foot down lower and lower. As I think a lot of people on the call appreciate, that not only impacts our unit economics, it impacts our total addressable market. Because the number of airfields on which you can get a double-digit yield on cost goes up dramatically as your cost of construction goes down. I think I could say the same thing for cost of capital as well. on leasing, so we continue to increase our revenue run rate every quarter, and that's, again, I think something to be expected. Every time a new campus comes online, that is a ratchet up in our revenue run rate. Again, once these things are stabilized, they are long-term leases. Again, just to avoid any confusion, we do have a period where we have a mix of long-term and short-term leases in order to achieve 100% occupancy. But then we release for the long term. Once that happens and stabilize, that is a ratchet up in your revenue run rate. It's stable. These are multi-year leases, again, with escalators. And when they do come to maturity, the trend has been a very significant jump in revenue each time. So I think we can expect to see that continue. Talked about releasing. And we talked about the pre-leasing program, which is in place. I think the first airport we'll see dramatic wins on pre-leasing months before we actually open our doors is going to be Bradley, Connecticut. On operations, so our first phase two campus is ready to go operationally. We open our doors late next month. That's Miami phase two. One of the things to look at here, is, you know, we talk about the power of phasing, and so far I think we've already seen the leasing dynamics, right? Opening up 160,000 square feet of hanger at once in Miami is a challenge on its own. If we had opened up 350,000 square feet at once, that would have been that much bigger a challenge. I think we're already seeing the benefits of phasing in that respect, but it's also an OpEx question, is that we will be able to operate the combined campus in Miami with the same headcount or almost the same headcount that we are already operating just phase one in Miami. So very significant efficiency gains as we do that. The next place we'll see that is going to be Dallas phase two. We'll come up with a metric that is kind of objective for measuring the quality of our service offering, right? The best we've been able to do so far is give some testimonials from the top flight departments in the country that base at Sky Harbor. There's a metric that we're going to put out hopefully by the next earnings call because it is increasingly important to us. It's a big differentiator. the time to wheels up, the efficiency, the access to the aircraft, the security, the privacy, the customizable space. All of these things are a very big deal in aviation. We know it, we see it, we live it every day. We want to find a kind of objective way to communicate that to our investors. So hopefully we'll have that by the next earnings call. And then our big thrust in 2026 if construction, the construction program was sort of the big thrust in 2025, getting our OpEx efficient is the big thrust in 2026. What I can say today is that we're effective, and that is by design. We said, listen, we're going to overinvest, make sure if we have an equipment shortage, there's no equipment shortage, we might have an equipment surplus. We're going to have a headcount surplus. We're going to do everything a little bit over to make sure that we have the absolute absolutely bulletproof service offering and really the best the best service in business aviation. We're paying more than we need to pay to have that, though. So we're now in the process of very carefully, very deliberately finding the efficiency that we can find. I alluded to one of those, which is when you open phase two, for example, or if you have multiple airports in a single metro center, which you can see on our map we're having now, you can find all sorts of very exciting efficiencies. So I think part of that is kind of free money. There are things that we can do that we are doing. that will, without any sort of risk or any significant effort, increase the efficiency. And then there are certain things that we have to be, again, very deliberate, and it'll be a bit of an effort to get it down. But that is our big kind of strategic focus for 2026. Looking forward, last slide. So site acquisition, again, our focus is on maximizing our NOI capture. I'm going to preempt any questions. We are, you know, feeling the rumblings of competition in our industry. You know, I think we've talked about it on pretty much every earnings call. We're seeing it. It's still kind of anecdotal. We don't see a player like Sky Harbor coming and doing exactly what we do, but we think that's on the way. And again, the deepest moat we can dig around this business is capturing the last available land at the best airports in the country. So the focus this year is on max NOI capture, the best geographies in the country. Secondarily is same metro center expansion. And one of the things that we've learned is knowing the markets that we know intimately is a massive advantage. The fact that those markets know us intimately is a maximum advantage. You can't get space in Sky Harbor, San Jose. You cannot get space. And we love that. That's great. It'd be great if we could expand in that market because we know the specific people because we're talking to them who would like to be based in Sky Harbor and camp because we've run out of space. So look to that trend happening as well in 2026. On the development side, so the prototype program continue. Again, we have a biannual refinement of the prototype. Uh, so it gets better each time we go higher quality, lower lifecycle costs, lower development costs of the, of the flagship 37 anger. And like we said, we'll prepare for the big surge in development that will happen with this big search this year. The biggest bigger search beginning in early 2027. On the leasing side, a big challenge, right? Square footage is coming online very fast. As you can see, we are stressed a little bit then. On the leasing side, we're looking to grow that team early this year. So, short term is kind of. Our objective is to meet that surge. The order of operations is get those new campuses up to 100%. Then go back and get those new practices to market rent. And then third is take the legacy campuses. We're talking about that 22% jump in rents between lease terms. Get those enhanced in Miami and in Nashville and in all of the legacy markets. And then long-term, like I said, we are growing the leasing team. It's always been a little bit too small, and I think it's one of the areas that we've been a little bit behind the eight ball, but we're growing it now. And lastly, operations, defense, I never want to forget it. I don't know if our investors are particularly interested in this. We definitely are. A boring quarter in operations is a victory, right? Zero safety incidents, zero service lapses. That's a very big deal. I don't think any other provider in business aviation can make that claim, and we continue to be able to make it. We don't take it for granted. There's a lot of work that goes on to deliver that. What I consider offense is continuing to add services. We're working in conjunction with our residents to define the areas where we can really ratchet up our level of service. We're not looking at our competition. It doesn't bother us what our competition does. We're looking at our residents and understanding their needs. And then lastly, our 2026 OPEX efficiency program, and we'll hope to have, you know, good numbers to report by the end of this year on OPEX.

With that, thanks, everyone. This concludes our prepared remarks, and we now look forward to your questions. Operator, please go ahead with the Q&A.

At this time, I would like to remind everyone, in order to ask a question, please submit it online using the webcast URL. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Ryan Myers of Lake Street. Should we be expecting the signing of any new ground leases in 2026?

All right, Brian, this is . First, thanks for the coverage. Yeah, the answer is yes. Again, we'll be putting out guidance on the next earnings call for 2026. It's not going to come in the form of number of airports, like I said. It's going to come in the form of NOI capture. We'll have some clear metrics.

Next is a follow-up from Ryan Myers. Nice work on reaching operating cash flows slash adjusted EBITDA run rate break even by year end. How should we be thinking about that in 2026? Will you be break even going forward from here?

Thank you, Ryan, for the question, and again, also for your research coverage. Yes, so obviously our cash flows follows revenues, and revenues follow campus openings and leasing and lease rate increases. So Q1, you know, Q1 of this year, the current quarter, you know, it's a quarter where we have a little, you know, cash outflows with the annual compensation payments and so on, and we have no campus opening. So it should be relatively, you know, flat. And so, on Q2, you know, if we are on time as scheduled for the opening of the second phase in Miami or Paloca, we should, you know, be moving north from Breakeven. And then, similarly, Q3 and Q4. Then, as I mentioned earlier, with the, you know, with Bradley opening up later on in the fall, and then Addison phase two, we should then be deep in the black towards the end of this year. Next question.

Next question is from Michael Tompkins with BTIG. We noticed construction spend came in a little lighter in Q4 than prior quarters likely due to timing of deliveries and development starts. Now with the proper team and financing in place, how can we think about construction spend ramping as we move throughout 2026 and beyond?

Thank you, Michael, for the question. Yes, as I mentioned earlier, construction expenditures are ramping up. We are breaking ground now in a variety of projects, and we have raised the capital to be able to put the accelerator on a lot of these projects that we have been preparing for. Also, we need to note that we completed the onboarding of Ascend, our new subsidiary, doing in-house construction management and also general contracting of some, not all, but some of the campuses. With that and our liquidity being strong, you're going to see the acceleration of the construction spend in the coming quarters. Next question.

Next, our follow-up from Michael Tompkins. It looks like you made some great leasing progress this quarter, especially at Deer Valley. What are your expectations for when those rents starts to roll into earnings? And what are your expectations for stabilization across the three assets that were delivered in 2025?

Francis, do you want to start and I'll finish?

Yes. So you're correct. personally received the increase in occupancy at Deer Valley. And then, you know, we have noticed that, again, it's market by market, very specific to the situation, but we're seeing that it takes us from six to nine months to reach stabilization. And then we're doing more pre-leasing, as Tom mentioned earlier, in some of our upcoming campuses. It's great to see, from the finance perspective, some hard leads assigned for projects that we have not even broken ground. or even get current permits, like in dollars. So, that goes well for future stabilization and the speed at which we reach that after opening. So, we expect stabilization for the three assets that are opening 2025, basically in the coming two quarters.

Yeah. By the way, Michael, I appreciate that you asked specifically about those three assets delivered in 2025. Because like Francisco just said, we are transitioning to a different lease-up strategy where we start a lot earlier. Just to remind everybody, even though you see, for example, Phoenix and Dallas at roughly 80% lease now, remember that when we hit 100%, we don't call that stabilization. A, because some of those are short-term leases that need to be recycled into long-term leases at our true market rates. And B, because we don't really stop at 100%. We can get beyond 100% as we're showing in the legacy accounts.

Your next question is from Gaurav Mehta with Alliance Global Partners. How many additional ground leases do you expect in 2026?

That's Tal. Gaurav, thank you. Thank you for the question. Thanks for the coverage. So we are going to put out guidance, formal guidance, at the next earnings call. Again, expect it to come not in the form of number of ground leases, but some metric that is much more specific to how much NOI are we generating. That fundamentally is the metric we should be pursuing.

Next is a follow-up from Gaurav Mehta. Why is the average rent at pre-leasing campuses higher than stabilized and in initial lease-up campuses?

Yep. Thanks for that as well. It's Tal again. So it's what I alluded to in my earlier remarks, which is, you know, when we, not to disparage Houston, but when we showed up at our first airports, it was very much, hey, stay away from New York City, because we know that's the best metro center of the country for us, and we know we're going to make mistakes at the beginning. Other than that, we were not that particular about which metro centers we targeted at the beginning. Some are better than others, as you can see. Our targeting is much more precise today. The airports are getting better and better. We know what we're looking for at those airports. So when we lease a hangar, you know, literally 18 months out, and we're talking about hard cash deposits in the bank binding contract on those leases, and they're coming in at higher numbers than our existing campuses, that's the reason.

Your next question is from Timothy D'Agostino with B Reilly. Quarter over quarter, multiple facility had their projected construction start and completed dates changed to TBD, APA Phase 2, DVT Phase 2, HIO Phase 2, IAD Phase 2, ORL Phase 2, or POU Phase 2. Can you walk us through what led to those changes shown in the 10-K?

Thank you, Tim, for the question. It looks clear that you're reading the details, and thank you for your coverage. So I'm glad of this question because, you know, we have, We obviously have at the margin to decide where do we go and do a phase two and where do we do a phase one of the ground leases that we have secured. And the ground leases will continue to be generated every year. So we decide to put TBD on phases two to give us the flexibility in terms of when we actually go ahead and implement that. It's going to depend on, of course, how phase one went, how the leasing went, how we feel in terms of making sense of adding that capacity to that particular market. Let me also note that having our funding of construction now through a drawdown facility in the bank, gives us even more flexibility to do that type of optimization in terms of where we do if it's phases two versus a phase one on our campus, which is not something you get if you're doing it with senior bonds from the get-go where you almost have to determine exactly what you're doing from the get-go. Next question.

Your next question comes from Pranav Mehta. Can you explain the unit economic slide more? The most recent feasibility study has NOI around $20 per square foot for both obligated groups. Why do you think it would be $36? Only two properties have rent above $45 per square foot.

Thank you for the question. And again, let me remind that this was an illustration, but something that illustration that we believe we're going to meet or likely surpass. Right now, we are entering into leases, and we have leases higher than $40 of rents in Miami, in San Jose, in Bradley, and in Dulles, the ones that we have pre-leased. So we feel very comfortable that, as Sal mentioned, the airports that we're in construction now and are still forthcoming, on average, are better airports than our first business in the obligated group. So we're likely to see rents. and overall revenues per square foot trending higher in our new campus.

Your next question is from Pat McCann with Noble Capital Markets. At this point, how much of new campus do you ideally want pre-lease before construction begins? And how do you balance early visibility against the opportunity to push rents higher closer to delivery?

Okay, it's just reading the question. At this point, how much of a new campus do you ideally want to pre-lease before construction begins? And how do you, okay. Great question, Pat. And again, thank you as well for the coverage. So, first of all, it's not really before construction begins per se. We are, yes, we are pre-leasing now before construction begins in a lot of these campuses, but that's not really the threshold moment. It's probably the right time is about nine months before we intend to open those campuses. How much do you tend to, your question is very elegant. The first part ties to the last part very well. You are leaving some money on the table, of course, when you do that, when you pre-lead so far in advance. So I think a good number, and we'll experiment with this as we go and optimize it, but a good number is 50%. When you open up, you're going to leave the 2nd, 50% and you're right. Our expectation is you'll see somewhat higher rents on the 2nd, 50%. But the fact that we go in cash flowing remember 50% we're, we're meeting our, our, our, our debt obligations handily already. I think it's probably the right way to do it. And remember, we're not doing, you know. The average lease term is significantly less than five years. You're not, whatever money you're leaving on the table, you're not leaving it on for a very long time. But I think it's a good question. And, you know, again, I think that the real answer will come over time as we optimize that.

Your next question is from Don Kedick. With the first obligated group nearing completion, what is the actual IRR or yield on cost you think you achieved?

Thank you, Dawn, for the question. You know, we at Sky Harbor are very data driven. And, you know, we are, we have all the data and we're going to be looking back with passage of time at all our projects by phase and crunch all the numbers in terms of, you know, looking back and keep track of, profitability by campus and by vintages and so on. Of course, if you look back, we faced in our first portfolio the COVID construction inflation that we certainly underestimated. And then we had the design issue that we addressed a year and a half ago that obviously resulted in us having to put more equity into the obligated group that we originally expected. So the yield cost at the outset is not going to be what we have hoped of our campus. Having said that, though, rents have been coming higher than we originally forecasted. So yes, we're going to be lower in yield cost at the first point of stabilization. But then, as Tal mentioned, we are experiencing higher rents, and we are experiencing higher bumps on those first renewals. So there's another calculation that happens, I will say, two years after the first stabilization of a second stabilization when you have market rates of those leases in that particular campus or that particular vintage. And then lastly, in terms of IRRs, IRRs don't incorporate that increasing rents that we experienced with the inflation. Remember, we have a CPI with a plus of 3% or 4%. All the new leases have 4%. And then those bumps. And if the IRRs should offset some of those increased costs that we experienced. So, stay tuned for those vintage and portfolio calculations when we complete obligated group at the end of this year. Next question.

Your next is a follow-up question from Gaurav Mehta with AGP. Can you please provide details on your interest in selling hangers? Should we expect any sales this year?

Thanks for the question. You know, as I said, we're going to be very deliberate about entertaining this. There are some people, some tenants out there that really just increasingly don't like to rent. You know, they're just, you know, they may make their money in real estate, they just don't want to lease. So, of course, we will be deliberate in terms of, and for us, a sale is an ultra-long 40, 50-year period. a tenant lease where the tenant pays upfront for the right to basically have that hangar.

It's just conceptually a sale.

Conceptually a sale. So we've got obviously numbers and, you know, we are in the leasing business. We truly believe that on a present value basis, we maximize the value to our shareholders by keeping these assets and leasing them over time, but at the right price. And if that tenant will only participate in a particular campus. is by quote-unquote acquiring. We'll say that if it makes sense.

I would add to that, Gaurav, that those ultra-long-term prepaid leases, aka sales, should be looked at as a tool in the growing arsenal of cost of capital reduction mechanisms that Francisco and team have at their disposal. It's another one of these What is it worth to us today? From an NPV perspective, you never want to do these deals. And to be clear, the conversations that we have with our residents who want these deals are very explicit. They're coming to us saying, we agree with you on your inflation expectations. We want to protect ourselves. We think, in one case, I'm going to be flying for the next 15 years or so. Then I'm probably going to phase out. I want to lock in whatever I have. I'm willing to prepay, and I'm willing to prepay at a premium. to get that done because I don't want to be subject to escalations and to resets. So by definition, there is a zero-sumness to this whole exercise. So it's definitely not an exercise in trying to beat our NPVs on the leases. It's about cost of capital.

Next questions are from Alex Bossert. A recent cell size report from BTIG indicates that you are now seeing build costs closer to 250 per square foot on your active site. Could you unpack the primary drivers of this reduction in build costs? Specifically, how much of this efficiency is being driven by the vertical integration of Stratus and Ascend versus the natural economics of scale as you shift into phase two expansion? Finally, is 250 per square foot the right baseline to use, or do you see room for even further cost compression as you scale?

Yeah, thanks for that question, Alex. Starting at the end, no, we're going to continue fighting. This is definitely not, you know, when we hit our goals, we reset our goals. Again, this is very, very material. To get your hard costs below, 250 a foot not only improves your unit economics, it grows your total addressable market. If you can get that to 240, even more so. If you get that to 230, even more so. So we'll continue fighting to get it down. How are we doing it? Yes, vertical integration is definitely a big part of it. The fact that we are subject, for example, to volatility in steel prices, but we can manage that volatility because we have virtually limitless space for inventory of steel at our plant in Texas means we're not subject to the much higher volatility and pre-engineered middle-of-building component prices, because that's our output. So the vertical integration is a key piece of it. The vertical integration into construction management and general contracting is another big piece. Again, I think I've said on this, if you're going to assemble a set of you know, eight dining room chairs from Ikea, you're probably going to get something wrong in that first chair. You follow the instructions, but, you know, you're going to mix up left and right, and you're going to have to take it apart and put it back together again. Second chair, you're going to get it right. Third chair, you're not going to be looking at the instructions. Four through eight, you're going to be doing faster than you did the first chair. Same thing in our business. The erection of these hangers comes in a very, very specific sequence. There's a lot of nuance in it. Getting it right and getting it fast matters a lot here. The fact that we're now doing it over and over again across the country, not working with the general contractor who's seeing it for the first time, as we've done up until now, is a big deal. There's more to it, but put all of those together, that's where we're seeing the economies.

Your next question comes from Christian Solberg. What percent of your airports that are operating

currently have wait lists yeah uh christian thanks we we so we it's not exactly wait lists that we operate meaning it's it's not first come first serve you know if you're you know first on the list you get a hanger first if you're second you get the hangar second it's uh we keep lists of interested parties and they're dynamic lists you know because somebody could come and say i really need a solution right now if we don't have room they might find a solution elsewhere and might become not relevant for a while. So we have a list of interested parties. When we come up with space, and particularly on the semi-private model that happens a lot more frequently, we reach out to all of those guys. What's important, I think, too, to understand in that is it's a flipping of the dynamic, is that when we open Miami Phase 1, you've got 160,000 square feet to lease, 160,000 square feet of vacancies. Everybody's shrewd, everybody's sophisticated in this business. They understand that they have the leverage in that negotiation. Once a campus is stabilized, it's really the mirror image of that, is that you have multiple parties interested in one space. And if you stagger appropriately, which we do, you don't want to have, you know, two or three hangers coming to term at the same time. You stagger appropriately, you can keep that dynamic. So it's not exactly waiting lists, it's really interested parties lists.

Your final question is two parts from Alan Jackson. First, is the gestation period shorter for the expansion of existing airports as compared to acquiring brand new ground leases? Are there any differences in the acquisition process between the two? Second, does management anticipate a need for hangers with a door threshold higher than 28 feet? Is the prototype able to be adjusted for airplanes as they become larger?

Yeah, two good questions, Alan. Thanks. So, yeah, look, there are a lot of advantages to expanding on an existing field. It's like I said earlier, you know the market, and the market knows you at those airports, so that's a very big deal. We can also typically achieve greater efficiencies on ground rent, right? If you have a larger plot, you have more options for, layout plans that could be more efficient. Again, revenue density is obviously critical to us, so the bigger plots lend themselves to that. And then lastly, your OpEx. Your OpEx per rentable square foot goes lower, right? There's a certain number of people that you need come what may on a campus, so scale is your friend as you grow. With regard to door threshold heights, so I don't know if you're watching it, but the NFPA 409 Group 3 Standards 2026 edition allows you to go up to 34 feet of threshold height. So we have adjusted the prototype to go up to 34 feet. Remember that NFPA 409 is not mandatory. So the adoption rate is different in different geographies. What we've come up with is a kind of a temporary solution where you have a balance, which takes you down to 28 feet, keeps you compliant with 2021 standards for NFPA 409. And then once the jurisdiction adopts those standards, you can remove the balance and now you're 34 feet because you're absolutely right. Falcon 10X is likely to be certified this year. It's a 29 foot and change tall airplane. Does not fit in 28 foot door threshold hangars.

Good question. I think we have time for two more questions because we started a little late. Let's take two more questions and we'll close it there.

Your next question comes from Alan Rodlow. Might a niche jet net jets or a flex jet decide to rent out an entire hangar for their clients to use where they are not able to build their own hangar. They seem to be moving away from always leaving jets on the ramps of airfields.

The short answer is yes.

All right. And your last two questions will come from Dave Storms. With regards to the step up of 22% following releasing, how sustainable is this kind of step up and are there any geographies that are running ahead of or behind this? With the OPEX efficiency program underway, can you talk more about any specific levers being pulled here

Okay, let's start with the second one. The easy ones are things like just enforcing our triple nets on our leases, right? And we did not have good enough standardization on our and most of those are the leases that are in effect. Slightly different rules on each lease, which leads to kind of lax enforcement of triple nets. So, you know, your insurance rates go up on an airport. We're covering a lot of what we don't really need to be covering today. That's an example of an easy one, right? It's just being compliant with our agreement. With regard to the sustainability of that 22% step up. Look, it's a good question. We don't want to make huge claims going forward. I mean, to be clear, I don't think it's going to be 22%, you know, ongoing for the duration of these leases. If it were half that, if it were a quarter of that, you know, I think the model of your inflation rate is probably the most sensitive item in the entire financial model of the whole business. So it is a very big deal. We're excited about it. What I can say is, you know, if you own a car in New Jersey, a $50,000 car, and you have a house in New Jersey, you park it for free in the driveway of your house. When you move into Manhattan, they're going to charge you a thousand bucks a month to garage your car. That's going to bother you for a little while, but at some point you just accept it as part of the cost of owning a car in Manhattan. Fundamentally, hangar rents have been a footnote in the annual op-ex of a large jet owner, a footnote. We don't think that should be the case. If anything is a commodity in this business, it's fuel. It's not real estate. Real estate is actually the most precious asset in this entire industry. It should occupy a much higher level on your ranking of aircraft ownership OpEx. We think it's going there, and there's a lot more to go on that. Thank you, Operator.

There are no further questions at this time. Mr. Francisco Gonzalez, I'd like to turn the call back over to you.

Thank you, operator. And we'll, you know, any leftover questions in the run of time, we'll answer directly. Also, everybody, again, you can find further information on our website at www.scarrabert.group. And you can always reach out directly with additional questions to our email investors at scarrabert.group. So thank you again for your participation. With this, we have concluded our webcast. Thank you all.

This concludes today's conference call. You may now disconnect.