Sky Harbour Group Corporation (SKYH) Earnings Call Transcript & Summary

Good day, and welcome to the IAccess Alpha Virtual Best Ideas Fall Investor Conference 2025. The next presenting company is Sky Harbour Group Corporation. [Operator Instructions] I'd now like to turn the floor over to today's host, Tal Keinan, Chief Executive Officer of Sky Harbour Group Corporation. Sir, the floor is yours.

Thank you, Ali. Hello, everyone. I'm Tal Keinan, CEO of Sky Harbour. Why don't we jump straight to the presenters and we'll introduce ourselves. I'll start with myself, Tal Keinan, I grew up in military aviation, like a lot of us at the company, I had a second career on Wall Street in the asset management industry. The Sky Harbour story starts when I came into aircraft ownership in 2015 and realized firsthand that there is a acute shortage of business aviation hangar space in the New York area. Quickly came to understand that it's not just in New York area, it's most major metro centers in the United States. And that is really kind of the germ of the idea of Sky Harbour. We'll get into a little bit more later, but let me hand it to Francisco, our CFO.

Yes. Hi, and good afternoon, everybody. I'm Francisco Gonzalez, CFO of Sky Harbour. I have been a banker by training for several decades, and then I joined Tal, now has been amazingly 4 years at Sky Harbour. And my experience in banking was really a lot of things that came to support what I'm doing here now in terms of experience with bond financings, with airport transportation, P3s and the like and so on. Let me pass it on to Tim Herr, our Treasurer for -- so he can introduce himself. Tim?

Good afternoon. Tim Herr, Treasurer and SVP here at Sky Harbour. Like Tal started my career in military aviation, was a Navy pilot for 10 years, ended up going to business school and then joined Tal out of business school and been with Sky Harbour ever since. Back to you, Tal.

Thanks, Tim. So our company is a real estate platform. That's how we think of ourselves. The -- what we're going to try to show in this presentation is it's a platform that's going to give you very robust project returns, much more than you'd see in other areas of real estate, real scalability. There are hundreds of airports in the country that suit our model, some very deep competitive moats, both around the individual projects that we're doing. Those are really the deepest moats, but also around the entire business model, and we'll explain why we feel that way. Some real resilience in the face of the economic cycle. We are -- our business is real estate. We're on long-term leases with high credit tenants that will tend to pay their rents whatever phase we're in, in the economic cycle and some real upside optionality because there are multiple revenue streams that you can tap into once you are a provider of the real estate. The photographs that you see here, by the way, are all taken from our various campuses around the country to give you a sense of what it looks like. But let's go to the next slide, and we'll give you just a snapshot of the business which conceptually is very simple. We secure land at airports. We develop the campuses that you see in these pictures, campuses of private business aviation hangers. We lease them out to high credit tenants on a long-term basis and manage them. That's it. That's the business. Our goals are to, on a unit economics basis, achieve mid-teens stabilized yield on cost, and we're already demonstrating that, which translates after leverage, which is an important part of our model, we've got a very elegant leverage structure, to returns on equity in the 30s. Our ambition is to exceed 50 airports across the country. We currently have 18 airports under ground lease. We expect to announce another 5 by the end of this year. And third, although we don't believe we're going to be the only player in this space for -- in the long term, we do think it's a realistic ambition to remain the largest and best player in this space. And again, we'll try to convince you over the course of this presentation that there are some very significant first-mover advantages in this space. The team, you've met a little bit of the team, but we are, I think, a very unique blend of professionals from different industries. You got to have the real estate development and construction chops to do this right. You really need to understand aviation and the aviation system in the United States. And you'll see also there's quite a bit of capital market sophistication that goes into doing this right in a way that serves our equity holders the best. Next slide, please. Again, we'll just a brief pause just to show you again what some of the campuses look like. Thanks, Andreas. Okay. What are the macro forces that really create the opportunity for us and sustain the opportunity for us? What I observed empirically 10 years ago is really driven by what you see in the chart, which is that the square footage of the United States business aviation fleet grows every single year. It grows both in terms of number of aircraft in the fleet, okay, meaning new entrants into the fleet minus retirements from the fleet and also in terms of the average size of an aircraft, okay? So every year, the average length, average wing span and average tail height of the business jet goes up every single year. We multiply one by the other to get the total square footage of the U.S. business aviation fleet. And what you'll see is in the period in the chart, we have close to 37 million square feet of net growth in business aviation. And I will call your attention to the red bars at the bottom of the chart, which show you that almost half of that growth is -- belongs to aircraft that have a tail height that is higher than 24 feet. The reason I'm emphasizing that is that when most of the hangars in the United States were built, a 24-feet door threshold height accommodated the tallest business jets. As business jets have gotten taller, what we're seeing now is approximately half of what's coming into the fleet, has a tail height that doesn't allow it to physically fit into much of the installed base of hangers, which shows you really what the heart of the envelope of our market is where the supply-demand mismatch is the most acute, and that is large business jets. That's why you'll see in the pictures from our campuses, Sky Harbour Caters, first and foremost, to the largest business jet in the country. So that's about demand. Supply is a lot more difficult to measure. How much hanger space is there in the United States, how much hanger space is there where it's actually needed. And although Sky Harbour does very precise mapping on its target airports of all available hangar space, today, it is very difficult to get in inventory. But we can say a couple of things. One is empirically, if you track the biggest developers of hangars, right now, we are the biggest developer of hangers, but the FBO industry is, as a whole, dominated by 2 large players, Signature and Atlantic, have traditionally been the largest developers of hangars. You'll see that we're nowhere near keeping up with that, call it, 3 million, 3.5 million square feet of demand growth per year. We do not put up 3.5 million square feet of hangar per year, not even close. What's also important, I think, and very easily observable is we're not building new airports. There is really no need for an airport where there's land available for an airport, and there's no land available where there's need for an airport. So we're just not building new airports. We are stuck with the current supply of airports. So what you have is a story of a constantly growing demand with a static and perhaps dwindling supply as people like us develop more and more of the developable land on airports, which is why we feel and kind of central to our thesis is that hangar rent inflation is going to outstrip CPI by a very significant margin over the coming years. And this is without getting into other users of airport real estate that are coming online. Increasingly, that's e-commerce providers. It soon will be electric aviation, eVTOL. All of these are going to be consumers of airport real estate, which is, again, a static supply. So moving on. Picture from our Dallas campus. We'll get into -- the way we look at our business is really in 3 verticals. In reality, they're quite fused, but as just a framework for understanding the business, I think it's quite useful to think that in terms of -- sorry, 4 verticals. The first is site acquisition. The second is development, which includes everything from architecture, manufacturing to construction. The third is leasing and the fourth is service and operations. By far, the most specialized of those skills is site acquisition in that there isn't anybody. I mean we've looked -- we tried to hire people who have done this. There isn't anybody who really does this kind of massive serial acquisition of land at airports across the United States. You have a lot of localized players who in, I don't know, I'd say, in the city of Tucson, Arizona, might look to secure land and develop hangers. So there are local efforts like that. We've studied those as well. And you have the large players, particularly the FBO industry, but they primarily grow through M&A, right? These are not -- their default growth model is not greenfield development like ours. So the only people who are out kind of serially knocking doors across the country and you're trying to convince the city of Phoenix to lease us a parcel of land at a given airport is Sky Harbor. So because we're time limited, I'm not going to get into all of the different avenues that we've developed to actually acquiring that land. Suffice it to say, I think it's perhaps the most specialized skill set that we have in the company, and it's one that we continue to develop. By the way, while we're on that slide -- sorry, Andreas, just to kind of give you -- I think there is a legend there, but just to give you a sense, the green airports on that slide, the green dots, are currently operating, cash flowing Sky Harbour facilities. The yellow ones are at the end of their development phase and the blue are in development. Okay. Moving on to our business model. We call ourselves a home-base operator. At some point, there will be some regulatory implications to being a home-based operator. The fact that there are already, and it is a distinct category from a fixed base operator, which has a well-established set of kind of regulatory guidelines within which it works. It's the closest thing we have to a competition. But again, we think we compete really at the periphery of our businesses in that the FBOs are fundamentally hotels for aircraft in that they cater primarily to transient traffic. If you're flying from Boston to Miami, you live in Boston, you're visiting Miami, you need an FBO. That's where you're going to park. That's where you'll get fuel and terminal services and perhaps overnight hangar, if you're interested in that. You will have at that same FBO tenants who are based in Miami, and that's where the airplane lives, and they're treated the same, right? They're going to be using the same hangar, same fuel trucks, same services. That is not necessarily optimal to every user of the aviation system. We think just like in the residential world, there is a distinction between the qualities of a good hotel and the qualities of a good home. And we are fundamentally a home for the aircraft in that you can conduct essentially all of the activities required to manage an aircraft in your hangar. You have a space that is engineered specifically and then staffed and served specifically to maximize the utility of the space. So for example, there really is no such thing as waiting for service. There's no such thing as having to preplan to get, for example, fueling service far in advance. You can be as spontaneous as you want to be. Everything you need is going to be delivered on a pretty much immediate basis, which significantly increases the utility of your aircraft. To give you an example, if you take a very busy airport like Teterboro serving New York City at a very busy time, say, Friday afternoon in the winter, you are going to have a crush of aircraft, all looking because we all tend to use the system at the same time, right? Nobody is flying on Wednesday, midnight, everybody is flying on Friday afternoon. So that is when the system is -- the resources are stretched to their limits. And if you have not preplanned and got your resources in place very early on, you can't be spontaneous, right? There is no way of saying, hey, you know what, it's 4:00. Why don't we all fly to Miami at 6:00? We're going to call the FDO. That's not going to work. That just simply impossible. Whereas at Sky Harbour, it absolutely is. And so for people who are flying, again, particularly the larger, more expensive aircraft, if you or your company has paid $60 million for an airplane, presumably your time is very valuable to you. That's one of the benefits of being with Sky Harbour. Again, we'll wait for Q&A if people want to get into more of those, but I'm going to leave it at that and hand it off to Francisco to talk about our unit economics.

Thank you, Tal. And I'm very aware that we have very limited time and we want to get to Q&A. Some of you may have seen this graph before. We basically aggregate our unit economics on a price basis into a kind of like a consolidated view. In a nutshell, as Tal mentioned earlier, we're looking to -- we target airports where we believe we'll achieve north of 13% yield on cost on a levered basis. And when you combine that with our tax-exempt attractive interest cost that gets you into ROEs in the 30s. Obviously, as we grow, capital formation is critical both on the debt and equity side. And that's something that obviously, we're being very deliberate about in terms of putting it in the most efficient way possible so that we can continue to achieve these returns to our investors. As time goes by and we move from 12 air fields in the first column to 20 airfields and then to 50 air fields, although we think about this now in terms of phases, not necessarily airfields. You'll see that as we grow, we're probably going to be emphasizing more Phase 1 in a new field than Phase 2 in an earlier airport as a way to increase our network faster and so on. And maybe I don't want to call it land banking, but try to protect some of that Phase 2 for later. But again, this chart tells you kind of like the progression that we expect to see in our -- on an aggregate basis. Next slide, please. Very quickly here, this is just a depiction again from our last quarter's results showing how we're early stage in terms of growth and asset formation as we continue building our portfolio. A critical thing that we're giving guidance to the marketplace is that we intend to -- and we plan and expect to be cash flow positive on an operating basis by -- on a run rate basis by the end of this year, meaning in December. And that will be seen when we report Q4. And again, this is on the back of the openings of 3 campuses recently in Denver, Phoenix and Dallas. And as we lease those up in the current quarter and in the fourth quarter, we're going to see that moving towards breakeven cash flow on an operating basis. And then when we get to Opa-locka Phase 2 in Miami, which is one of our leading campuses, and that second phase will open for kind of like April of 2026. That will take us deep into the [indiscernible] on a profitability basis at the operating level. Next slide, please. Okay. Back to Tal. This is probably our most important slide of the entire presentation. Tal?

Yes. I think this is just a good framework for understanding how to value our business. And what this is, is the total square footage on a site plan basis of hangars at airports that we currently have under ground lease times the Sky Harbour equivalent rent at each of those airports. The Sky Harbour equivalent rent is what aircraft pay today to park at an FBO. And because we have 9 examples, 9 airports where Sky Harbour collects a very significant premium up to 100% from the FBOs -- above the FBOs, we feel like this is a conservative estimate of what is the total revenue capture, what is the revenue that's available to us on these airports. And it's not -- the chronology here is just when those ground leases were signed. So you can see that up until where we are today, we're at just over $140 million. Again, that -- this is the hangar square footage under ground lease times the Sky Harbour equivalent rent. And by the end of this year, we expect to be in the $180 million range. So to me, this is how you start valuing this company and then begin discounting for several risks. We've got execution risk, all right? The ground lease is signed, but you still have to develop it. Lease-up risk, did we misestimate the lease rates that we're going to get at these campuses, execution risk on operations afterwards, there's going to be some operational issue that we didn't foresee on those campuses and also discount for time because it does take, call it, up to 2 years from the ground lease to actually get a campus built and ready to occupy. So that's why Francisco says this is the most important slide here in terms of understanding the value of the company, I think that's the best way to do it. Next slide.

Next slide, please. Yes, very quickly here. This is in terms of our capital formation and our liquidity. As of June 30, on the bottom right-hand side pie, we had cash and treasuries close to $75 million. And then we also include the $200 million warehouse facility that we just announced 10 days ago through JPMorgan. And this warehouse facility is, from our perspective, a real milestone in terms of our debt formation. We are looking obviously to make this permanent debt over the course of the next 5 years. But in the meantime, it allows us full flexibility to draw down when we need it and not all upfront and save a lot of money in terms of cost of debt as we deploy through all our new campuses. The graph on the left shows the expected equity investments and debt drawdowns over the course of the next basically 2 years. The first equity investment, basically, as you -- some of you may recall, in December -- last December, we acquired the campus in CloudNine, Camarillo Airport in Ventura County, California, all cash, so $30-some million, all equity, all cash, and we basically are contributing that campus to the JPMorgan facility and then be able to draw thereafter until we get to the 65% leverage of this facility. And then we do a mix of equity and debt as we deploy this. One important thing is the current floating rate of this facility is about 5.6% -- 5.6%. But as we all know, we expect the Fed tomorrow to start lowering rates and there's an expectation that in the course of the next months and years, maybe floating rates will trend lower. If you follow that expectation in the current market, obviously, that floating rate will continue going down and the company is contemplating instead of just waiting it out to actually going ahead and swapping from floating to fixed, which will immediately in the current market take us to a 4.75% interest rate locked in for the next 5 years on this $200 million. So very attractive kind of like structure here for JPMorgan, which can be expanded to $300 million in the future if we so desire and with obviously their consent. And there's no prepayment penalty. So we're going to be paying attention in the course of the next couple of years to long-term rates and be looking for the opportunity, the windows to take this out and make it permanent and then probably start a new warehouse facility for the next set of projects after that permanent bond financing once we do that. So again, very attractive financing. And with this, we're leaving about 5 minutes to Q&A. Let's get going on Q&A at this juncture. Okay. So again, Tal, what do you think -- Tim just read the questions?

Yes, I'll read them out and then turn it over to you. So the first one is Miami Phase 2 is underway with strong demand. How should investors think about lease rate step-ups as Phase 1 contracts roll off?

Okay. Yes. Thanks. So Phase 2 is -- that's correct. It is under construction. We have begun the pre-leasing process in Phase 2. We've had our first meetings now. And we'll talk about pre-leasing if you have a little chance later on because we're doing that at Dulles International and Bradley, Connecticut as well. The lease rates, again, I think that's astute. They will step up. We signed our first lease in Miami Phase 1 at the, call it, $32 a square foot range. And the most recent leases are in the $46 per square foot range. So that trend should continue. Phase 2, look, it's newer. It's a better design. We've improved the product as we go. So we expect that trend to continue.

Great. Next question. What impact could electric aviation have on Sky Harbour's infrastructure planning? And how are you preparing campuses for this transition?

All right. Another good question. So we do -- every campus that we build is electric aviation ready, meaning we have the transformer capacity, the cable capacity, and we have a, call it, a blueprint for storage and transmission of electricity into electric aircraft. We don't know when that's going to happen. It's certainly not reflected in any of our financial models or anything like that. But we do think it is going to happen, and we want to be ready for it because right now, if you look at Joby and Archer and all of the Beta, all of the eVTOL companies, their focus has primarily been on regulatory certification with the FAA of the actual vehicle, and that's appropriate. There's going to be a lot of catch-up on infrastructure, and there's a lot of infrastructure required to actually conduct commercial scale eVTOL aviation. So we want to be in a position to capture a part of that if that -- if it's relevant. And we're not in any rush. It's not a very expensive thing to put into our campuses, but we are ready for it.

Next question is, as you scale up from 9 campuses in operation, what is the expected cadence of new ground lease signings through 2026?

Yes. So for 2025, we were -- the total, if we do achieve our goals will be 7 campuses in 2025. We'll reset our goals for 2026. The idea is to certainly for the next few years, be accelerating year-on-year, but we haven't released a specific target yet.

Great. And then I think our last question here will be, what's your mix of customers between businesses, individuals and fractional companies? Is NetJets and some of the other fractional companies, are they a customer?

Yes. So I'd say individual owners are the largest constituency among Sky Harbour residents. Those are actually almost always LLCs, but we're talking about private owners of aircraft. We do have significant corporate states that would be the second biggest. We have a little bit of government. And we do have a little fractional, not NetJets specifically, but some of the fractional operators are residents on Sky Harbour campuses. We try to keep that relatively small for now. And we're going to watch it as it goes, but to see just if there's enough operational compatibility between the fractional or the charter operators and the individual, what's called Part 91 operators, which is really the bulk of our resident fleet.

I think with that, we have completed all the Q&As. And again, I want to thank IAccess Alpha for the opportunity and our friends at Lake Street for also sponsoring us today. And anybody with follow-up questions, please reach out to us through [email protected] or through our website, www.skyharbour.group. Thank you.

Thank you. This concludes Sky Harbour Group Corporation's presentation. We'd like to thank you for joining us for the presentation portion of the IAccess Alpha Virtual Best Ideas Fall Investment Conference 2025. We'd also like to thank the investors and partners who help make these events possible by sharing ideas and supporting our vision. We hope to see you at our next virtual event, the IAccess Alpha Virtual Best Ideas Winter Investment Conference 2025, scheduled for December 9 and 10, 2025. Have a great evening, and you may now [indiscernible].