Sky Harbour Group Corporation

Thank you for standing by. My name is Kate and I will be your conference operator today. At this time, I would like to welcome everyone to the Sky Harbor 2026 first 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. In order to ask a question, you can send via webcast in the Q&A box. Thank you. I would now like to turn the call over to Francisco Gonzalez, CFO. Please go ahead.

Thank you, Kate. And hello and welcome to the 2026 First Quarter Investor Conference Call and webcast for the Scar Harbor Group Corporation. We have also invited our bondholder investors and lenders in our borrowing subsidiaries, Scar Harbor Capital, Scar Harbor Capital II, and Scar Harbor Capital III to join and participate on this call. 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. 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 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 know from our prior webcast, our CEO and Chair of the Board, Tal Kanin, our Treasurer, Tim Herr, our Chief Accounting Officer, Mike Schmidt, our Accounting Manager, Tori Petro, and our Assistant Treasurer, Andreas Frank. We have a few slides we will want to review with you before we open into questions. These were filed with the SEC an hour ago in Form 8 along with our 10Q, and will also be available on our website later this evening. We also filed our first quarter skyrocket capital obligated group financials with MSRB an hour ago. As Kay mentioned, you may have submitted written questions during the webcast during the Q4 platform, using the Q4 platform, and we will address them shortly after our prepared remarks. Let's get started. At the end of the first quarter, on a consolidated basis, assets under construction and completed construction reached over $352 million. That is a $75 million increase from a year ago. Let me highlight that the pace of investment and new construction at Sky Harbor is accelerating, and this column will continue to grow at a higher rate. Revenues experienced an increase of 56% year-over-year and 8% sequentially, given the new campus openings in the past year and increases in occupancy and rental rates. Operating expenses in Q1 continue to increase in tandem with new campus openings, impacted in particular by increases in campus headcount and the cash and non-cash expense accruals of new ground leases entering into the past year, which are not yet in construction or in operations. More than half of the increase in OPEX in quarter over quarter or quarter sequentially is related to the signing of these new ground leases at the end of the year And within that expense, more than half of that is non-cash accruals of payments that will be made in the future. We look forward to benefiting from the operating leverage of our Phases II, both in Miami and Opa-Loca, we just opened, and in early 2027 with the opening of Addison II Phase II. We expect gross profit margin expansion with these two Phases IIs, with the same people and fuel trucks basically serving a doubling of Hangar campuses. In terms of SG&A, we strive to keep this in check as we grow, keeping frugality front and center in our expense and cost management initiatives. Cash flow used in operations moved higher than last quarter of 2025, which usually happens in each of our first quarters. Given the seasonality of our cash performance, Bournemouth says pay to our employees in February, the annual increases in base salaries that occur as of January 1st, and also some minor items related to 401 corporate matches, social security employer contributions, and the like that they all tend to be concentrated in Q1. If you look historically, that pattern has been the case in terms of Q1, prior Q1 quarters in prior years. Also, the figure in Q4 had the non-recurrent benefit of the $5.9 million off from payment we received by one tenant in terms of a lease renegotiation in Miami. On a normalized basis, as we have disclosed previously, we have reached cash flow breakeven at the operating level. More on this when we talk about our guidance for 2026 shortly. Next slide, please. This slide is a summary of the financial results of our wholly owned subsidiary Sky Harbor Capital and its operating projects that formed the obligated group. Assets under construction are still growing as we complete Opa Loca phase two and will only stabilize once we complete Addison phase two at the end of the year. This will constitute the last project of the obligated group's first vintage of campuses that were financed primarily by the 2021 series bonds. Revenues at the obligated group in Q1 increased 76% year over year and 15% sequentially. we expect another step function increase in revenues in Q2 and Q3 of this year, following the opening of phase two in the Poloca, and then Q1 and Q2 of 2027, after the opening of phase two in Addison. As I mentioned earlier, we expect a significant increase in the obligated groups, cross-profit and EBITDA margins, given the additional revenues of these two phases, with limited increases operating costs given the ability to use the same personnel and equipment with an expanded campus doubling in size, both in Dallas and in Miami. Cash flow from operations of the ability group reached $2.9 million, almost tripling of the same amount of, I'm sorry, of $1 million a year ago, and a 14% increase from the prior quarter after adjusting for that non-recurrent $5.9 million influx in the prior quarter. with the prepaid rent that we discussed also earlier. So at this point, let me pass it on to Tal to provide a leasing and development update. Tal? Thanks, Francisco.

So the slide is self-explanatory, and it's the same format we've been using in the last few earnings calls. So I think I'm just going to highlight a few specific rubrics here for people's attention, starting with the campuses that are in initial lease-up. We'll speak specifically about Opa-locka Miami phase two in a later slide. I think what I just call attention to is Denver APA phase one, where we're only 44% leased at this point. Sometimes they go a little bit slower than others. This one has definitely lagged a bit. But again, I think Nashville looked quite similar six months after it opened. We don't really we don't really attach that much significance to it and obviously we wish everything moved a little bit faster and then on the left side, you can see the economic occupancy which now on all but one campus is at 100% or above. You what what's the upper limit of that i'm going to have. Going on limits, San Jose is probably somewhere near the upper limit of that. We might find a few more creative ways to increase obviously beyond 130%, but it's probably not going to go much beyond that. However, what I really want to point out is the lower left-hand corner of the slide, that release update. So in the last 12 months, we have released about 119,000 square feet of hanger, meaning leased leases that have come to term and either been renewed by the existing resident or taken over by a new resident. The average escalation between one lease and the next is 23%. By the way, that's up from 22% in the last quarter. All of this is on top of the annual escalators, the contractual escalators, that feature in all of our leases, which escalate at CPI with a floor of 4%. Anyone who is running a model for Sky Harbor knows that your inflation assumption is one of the most sensitive inputs in the entire model. I don't want to make a claim here that we'll always be getting 23 percent escalations, but for the time being at least, I think what we're seeing is more or less what we forecast a couple years ago on these calls, which is that hanger inflation has nothing to do with CPI. We are on the island of Manhattan from a real estate perspective. You just cannot build new airports. And we think that this scarcity is what is one of the key components of driving the value on a macro level in this company going forward. Next slide. A little bit of kind of forecast versus actual. So again, things that I'll point out, you've got two rows here of third party forecasts for revenue per square foot on different campuses. What we're showing right now is whatever is gray is going to be within the range of those forecasts. Whatever is green is going to be above both forecasts. Whatever is red is going to be below both forecasts. So, you know, what you see at first blush might look like a mixed bag. To us, it does not because that high range, if you look, you know, we've got high, average, and low. in the campuses that are in lease up. So look at DVT, APA, and ADS. The high range are the long-term leases. And I think as people might remember, our strategy on initial lease up, this is before we moved to the pre-leasing strategy, which we'll get to soon, has been to get these campuses to 100% as quickly as possible. So if somebody wants to come in on a six-month lease at some very low introductory rate, we're fine with that. We want to start actually negotiating in earnest with our long-term tenants on the basis of 100% occupancy or higher. So rather than let these hangers ride empty for the month that it takes to get to 100% and surpass it, we rent them out like this, which skews your averages. So all of those higher, the green numbers on those lease-up campuses are long-term leases. That's what that looks like. And then another thing I'll call everyone's attention to is if you look at the legacy campuses, you know, we call those stabilized campuses, so BNA, that's Nashville, OPF1, that's Miami Phase 1, even Camarillo, TMA at the end, what you'll see is the lows are the first leases that we signed. In fact, if you take BNA, that might actually be the very first lease we signed at BNA. And the highs tend to be the last leases that we signed, which, again, I think corroborates the trend that we're talking about, that 23% release rate. As time goes by, these leases go up, which is why we're getting a lot of demand from new residents especially long-term residents, to maximize the term of their leases because there's an increasing appreciation that this inflation trend is here to stay in business aviation. Okay, next slide. A little bit about pre-leasing. So Miami Phase II is the first campus that we've the first campus on which we've applied this pre-leasing strategy, where we're going out and offering people certain incentives to sign leases before we even open the doors, which has resulted in what we consider pretty significant success. We're 68% leased in Miami Phase II the day we open the doors. That means we're leaving some money on the table, no question. We think, all things considered, this is probably the right way for us to continue. A few things that we learned from Opelika phase two. I'm starting at the top of the slide. Number one, this is the first, at least partial, trial of the Ascend integrated construction program that we have in place. We're using the prototype hanger. It's a derivative of the SH-37. It's the SH-34 hanger. We're using Stratus construction. That steel that you see in the picture is our Stratus steel. We're using Ascend Construction Management. What we don't have yet here is, number one, our GMP was priced before we implemented the program, before Ascend came in. So that budget construction cost is what it is. And number two, we're using a third-party general contractor in Miami. But other than that, this is the Ascend integrated construction program. We're very happy to demonstrate an on-time, on-budget delivery. The next thing I think it's worth understanding is you'll see this in some of the upcoming slides. Same campus expansion can be a lot more valuable than putting a new dot on the map in that we know the market. We'll take Miami in this case as sort of the first example of this. We know the market, and even more importantly, the market knows us. Okay, it's not like we're getting more speculative when we increase the size and you'll see when we talk about Stuart and Dallas. That's exactly what we're doing. It's just that we know the battle space a lot better. And again, our counterparties know us better. There's a lot of pent up demand in Miami. There's about to be a lot of pent up demand in Dallas. Once people experience the Sky Harbor model, the churn is extremely low. People tend not to leave us. Most of those 23% markups are to existing residents who just understand that there is a market. This is what people are paying now. If I want to stay, that's what I have to pay. And so the churn has been extremely low. So look out for a lot more of that going forward. And we'll show as people have already seen our press release. but the guidance that we're putting forward is based a lot more on that, meaning more dots on the map is not really what we're going after. And I'll explain more in the coming slides. Okay, next slide. Okay, so a few things that jump out on site acquisition. You'll start conspicuously to perhaps some of you up in Seattle, a dot has been removed. So you might remember we had a one year lease at Boeing Field in Seattle. We allowed that lease to lapse. We were not happy enough with the terms of the long term lease that was that was put in front of us. And as to that, some macro trends on wealth flight from Washington state made us say, listen, let's let's let's allow that lease to lapse. We can be on the fence for a little while. There are other opportunities, other avenues of attack at Boeing Field. We still like the airport a lot, but we don't think that that's the right entry point. So we will hopefully come back to that at some point, but it's not going to be right now. And then just to help people understand what we're looking at, and we've had a lot of questions about this over the last quarter or so, is tiering. Okay, what do we mean when we say Tier 1? Which I'm glad we got the questions because kind of for us it was a little bit less structured internally. So we put some pretty rigid criteria down. I think that that's going to work really well. What we call a Tier 1 airport is an airport that's going to deliver us $50 per square foot or better. That's Sky Harbor's internal underwriting. That's not what any third party is telling us. That's our internal underwriting. But again, if you can compare it to what we showed in some of the previous slides, we tend to undershoot on what we attribute to a field, meaning we're making more per square foot on the field than even we forecast. So we think it's a pretty solid number. It's the same methodology we've always used internally. Tier two is airports where we think we're going to be making $30 to $50 a square foot in revenue. And then tier three is below $30 per square foot. Just to be clear, Tier 2 is good. It's great. Like, you know, look at Miami, look at Nashville. These are, you know, healthy, double-digit, unlevered yield on cost airports, and they're Tier 2 airports. So that works really well. Tier 1 is great, obviously, right? Your denominator in yield on cost is relatively static. You know, it varies within a pretty tight range. Your denominator primarily being development costs. But your numerator, we're in the real estate business. It's really about location. There are jurisdictions where you're going to get a lot more per square foot, even for the same product that you put out. And then tier three, tier three can actually work pretty often, but it's not our focus right now. I think it will be down the road. As our construction costs, which we'll talk about soon, as our construction costs continue to come down as Francisco and the financing get our cost of capital down over time, Many, many more airports in the country become viable and those tier three airports start becoming interesting right there, there are plenty of scenarios that we can generate those double digit under unlevered yields on costs, even in tier three airports we're just not doing that right now, because they're juicier targets in front of us. A couple of things to point out. The green dots are currently open and operating airports. The flags represent the tiers. One thing that you'll see is on the yellow dots, meaning the airports that are in development, not operating yet. There is a much, much higher incidence of tier one airports. And this is exactly what we've been telling you from from the beginning. We started out with a relatively arbitrary portfolio of airports. We knew we wanted to stay out of the New York market because we knew we'd make some big mistakes, and we did in our early days. But once we became comfortable that the model is working and it's established, we could build these things at the cost that we thought we could build them, we could lease them at the rate that we thought we could lease them, we started expanding to the tier one markets. So as you can see, we actually tabulated it here. 48% of the rentable square footage that is currently fully funded and in the construction pipeline, either under construction or in pre-construction right now, 48% of that square footage is in Tier 1 markets. If you express that in dollars, it would be obviously a much, much higher level, right, because your dollar per square foot is higher. We didn't want to get into that. It's a tough calculation and that starts getting close to guidance. So we didn't want to put it out there. But you can you can kind of back into the math yourself. That will be increasingly the story, at least for the next two years, meaning our major focus is on tier one airports and some tier two airports. Occasionally there's going to be a tier three that just lines up very, very easily. And we'll we'll jump on that. But our primary focus for at least the two years ahead is Tier 1 airports. The only thing I think that bears a little explanation in this is Miami having the red and blue flag. To be clear, Miami Phase 1 is still solidly within Tier 2 territory. We've got a lot of legacy leases. Again, the latest leases signed in Miami Phase 1 are coming into Tier 1 territory, but on average, we're still Tier 2. But our second phase in Miami is a solid tier one. We think that entire kind of quarter in South Florida will continue accelerating on that same path. I think that's all I had on this slide. Next slide, please. Okay, so a little bit about development. we call it projected fully funded construction pipeline protected because the sequence might shift a bit as you know as conditions change again sometimes we want to put a an airport with those a we think there's a great leasing opportunity move it up a little bit in the in the chain but largely this is this is what it's going to look like A few things that should jump out at kind of some of the more astute observers of Sky Harbor. Number one, revenue run rate step ups are not linear. They're a step function. OK, that's how this company works. It almost doesn't matter what's going on month by month or quarter by quarter. It matters what's going on project by project. Bradley is going to get delivered in Q4. Addison, who is going to get delivered by the beginning of Q1. That's when you have your your big step ups. Again, we are releasing in the interim, right? There are natural hangers that are going for 23% higher than they were going for before, but your big quantum step ups are every time a project gets delivered. The. What you're seeing here as well, it shows the importance why we've invested so much over the last 18 months in the ascend integrated construction program. What you're seeing on the start is an order of magnitude increase in the square footage that's being parallel processed at this company. We've never had this much anywhere near this amount of construction underway in parallel. Let's let's hope it keeps up, but it's all going smoothly on schedule on budget and that that that is really a testament to the to the Ascend team. Just as a reminder, what that includes is prototype prototyping. in-house architecture and engineering, in-house manufacturing, and increasingly in-house general contracting. That's what that program constitutes. You can see also when that revenue really starts to fire, which you'll see a big, big bulge in revenues coming on in 2027, which should be clear to anyone who's watching how this company grows. And, you know, we're not going to make huge forecasts for the years ahead. Just understand that the intention is to do another order of magnitude leap in the volume of parallel processing going forward. You know, it's all a matter of getting these top tier airports into the portfolio, getting them financed, and now unleashing the Ascend team on those projects. I think that's all I had on this slide. Let me hand it back to Francisco.