Sky Harbour Group Corporation ($SKYH)

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 Harbour 2025 Year-End Earnings Call and Webinar Conference. [Operator Instructions] Francisco Gonzales, Chief Financial Officer, you may begin your conference.

Thank you, Tiffany. I'm Francisco Gonzalez, CFO, Sky Harbour. Hello and welcome to the 2025 full year results investor conference call and webcast for the Sky Harbour Group Corporation. We have also invited our bond holding investors in our powering subsidiary, Sky Harbour Capital and now also our lenders in Sky Harbour Capital to and the 2026 Series bondholders of Sky Harbour Capital III to join and participate on this call. Before we begin, I have been asked by counsel to note that on today's call, the company will address certain factors that may impact this and next year's earnings. So all the information that we'll discuss today contains forward-looking statements. These statements are based on management assumptions, which may or may not come true and if you refer to the language on Slides 1 and 2 of this presentation as well as our SEC filings, 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 Keinan; our Treasurer, Tim Herr; our Chief Accounting Officer, Mike Schmitt; 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 SEC about an hour ago in Form 8-K, along with our 10-K 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 MSR BMA and the fourth quarter's capital of the GetGo financials that were filed a couple of weeks ago. As the operator stated, you may submit written questions during the webcast during -- using the Q4 platform, and we'll address them shortly after our prepared remarks. Let's now get started. I will turn to the first slide. On a consolidated basis, assets under construction and completed construction continued to increase, reaching over $328 million on the back of construction activity at Phase 2 in Miami the new campus well in construction in [ Bradley ] International and Phase 2 on [indiscernible] in the Dallas area. Please note, this graph is soon to accelerate its of our trajectory as we break around -- as we broke already in Salt Lake City Airport and also [indiscernible] will be doing that at New York and Orlando Executive Airport in Florida, Trenton, New Jersey and Dallas International later this year. On the revenue front, we increased year-over-year at 87%, reaching record $27.5 million for the 2025, reflecting the acquisition of [indiscernible] in December of 2024 as well as higher revenues from existing and new campuses that opened last year. Sequentially, revenues had the natural progression of occupancy increasing at the 3 new campuses. Operating expenses for the year increased to $27 million almost $28 million, reflecting increasing CapEx 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. These are mostly noncash and something that Mike, our Chief Accounting Officer, will cover shortly. One of our goals in 2026 is to achieve higher efficiencies at a campus level, especially as we open second phases in Miami and Dallas. In Q4, you will notice a slight step in SG&A. This relates to a 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 are discussing prior publicly 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 noncash items, again, that Michael discussed shortly. But our 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 when to 12 years and now is 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 reach breakeven on a run rate basis in December. Next slide, please. This is a summary of our financial results of our wholly owned subsidiaries, Sky [indiscernible] capital from the Obliger Group. This basically incorporates the results of Houston, Miami, Nashville campuses, along with the companies 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 mother increase in Q1 of 2025 and then a step up in Q2 and Q3 of 2027 on the back of the opening of Phase 2 in Miami. And then the last step up in Q1 and Q2 of '27 on the back of the completion of our last project, the pharmacy of the [indiscernible] Group first vintage in Adison Airport in Texas. Operating expenses increased year-over-year given the higher number of operating commences operation. Let's turn our attention to our Chief Accounting Officer, for a breakdown of adjusted EBITDA for the year upward 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 and a supplemental in nature and a financial measure now calculated in accordance with U.S. GAAP. We define adjusted EBITDA as GAAP net income or loss before the add-backs and subtractions that are enumerated on the left of this slide, which consists entirely of noncash or nonoperating elements of both income and expense. Including in the fourth quarter and for the year ending December 31, 2025, a significant unrealized gain on our outstanding [indiscernible]. We have provided a reconciliation from our GAAP net income results for the year and quarter ended December 31, 2025. The primary item worth highlighting here is the general trend of adjusted EBITDA as we conclude 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 in turn positive. With that, I'd like to take the opportunity to pass to Tal.

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 a greater than 100% potential occupancy. And we are on a number of gaps that starting to break into greater than 100% territory. There's still a long way to go on those, but we were there on the number of caps 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 of 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 3 lines of that main chart, the high average and low rents. And a couple of things that you'll see in the -- first of all, in the blue as captives that are an initial lease-up, 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 6-month leases at very low rents with the idea of beginning to negotiate in earnest on the basis of 100% occupancy. That's a strategy that we've seen work in the previous airport. So we're doing it now in a much more deliberate way. So what you'll see, for example, if you look at -- take 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 target rates once we're in, call it, full or long-term lease-up. And then lastly, on the main chart, I 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 CapEx, 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 more fuel flow 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 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 to able to look at on this page is the bottom left, the release update. We promised to give numbers on this. And 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. We try to get to 100% occupancy. Now 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 first -- 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 Beach run 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. I want to 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 multiyear 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, the floor of 4% escalators, we're seeing an average 22% jump. One when lease comes to term and the new one is signed. Next slide. Thank you. Okay. So on site acquisition, A couple of things to call everyone's attention to. So the -- 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 under ground 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 quarter. 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 I and perhaps wait a bit before we do Phase II. In some cases, there's also a Phase III 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 virtuous that it's simple and easy to communicate in 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, 240,000, 250,000 square feet of -- that 240,000 to 250,000 square feet of hangar 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 anger. And even closer proxy is the total revenue available because the square foot of hanger in the New York area is going to be worth more than a square foot of hanger 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 calls, but we will, is what is the total NOI available because the -- 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 have -- 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 time line 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 into 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 airfield that we haven't secured yet. And then based on our construction time line, 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 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 towards 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, the pace of deliveries is obviously starting to ramp up, right? So we -- I think 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 the -- of our development resources regard to the surge that's coming in 2027. And with that, let me hand it back to Francisco -- Tim?

Thanks, Tal. As we announced last quarter, we finalized a 5-year tax-exempt drawdown facility with JPMorgan that will provide debt funding for our next projects in the development pipeline. We expect to draw on the facility over the next 2 years as our airfield become ready for construction. To cover Sky Harbour's required corporate contribution to the facility, we closed last month on $150 million of tax exempt subordinated loans. The pricing was 3x oversubscribed with 18 distinct institutional investors coming into the credit. These bonds have a 5-year maturity with a 6% fixed interest rate and a call out in starting in year 4 as we plan for an event that we'll take out of both the bank facility and the subordinate bonds with long-term taxes bonds once the projects are completed and cash line. Next slide. 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 projects later this year. Our newly issued 2026 Series bonds have also been trading higher following issuance [indiscernible]. Now let me turn it over to Francisco for a discussion of future capital.

Thank you, Tim. 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 their life of our portfolio and non [indiscernible] on our senior obligated Group credit. In this slide, we illustrate what the uneconomic of a new campus looks like on average. We aim to target campuses across the U.S., where we believe we will earn a $40 per square foot in rent and $5 in fuel margin. After $9 per square feet of operating expenses were left with, again, is an illustration with $36 per square foot of NOI before the issuance of the superior 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 super dear 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 JPMorgan facility weigh in advance of their 5-year maturities. On a pro forma basis, we expect the coverage of source refinancing will still support investment-grade ratings for those bonds given the predictive 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 response, which closed last February last month and $200 million of the committed [indiscernible] facility late last year, which was undrawn at year-end, but which we now start to use here in the current quarter, the for 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 have reached over 2 million in [indiscernible] square feet, as Tal mentioned earlier. In terms of future capital formation, we'll continue to be delivered prudent in our debt management and opportunistic demonization of assets. As previously noted or disclosed, we received $5.9 million in an front 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 broadened the number of potential partners for the previously announced joint venture of one of our hangers in Miami and likely to include more hangers to the portfolio. We also have received interest from tenants who also like to acquire hangers, [indiscernible] them. This type of asset monetizations, either in the form of hanger sales or hangar lease prepayments is a pulling way to generate capital, equity capital to fund our future growth only if evaluation supported and the alternatives are less attractive from a dilution and cost of capital perspective. Let me now turn it back to Tal for end of the year highlights and forthcoming initiatives in the four pillars of our business.

Thanks, Francisco. Okay. So on site acquisition, our 2025 guidance of 23 airports under ground lease has been met. Like I said before, from our perspective, it 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. We first had to 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 their 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 multiyear 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. We talked about re-leasing. And we talked about the pre-leasing program, which is in place. I think the first airport will see dramatic wins on pre-leasing, really months before we actually open our doors is going to be Bradley, Connecticut. On operations. So our first Phase 2 campus is ready to go operationally. We opened our doors late next month. That's Miami Phase II. One of the things to look at here is we talk about the power of phasing. And so far, I think we've already seen the leasing dynamics, right? You're opening up 160,000 square feet of hanger 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 challenge. So 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 1 in Miami. So very significant efficiency gains as we do that. The next place we'll see that is going to be Dallas Phase 2. The second, we'll come up with a metric that is kind of objective for the -- measuring the quality of our service offering, right? The best we've been able to do so far is give some testimonials from kind of the top flight departments in the country that face at Sky Harbour. 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 of 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 an 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 is 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 tell you 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 is 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 absolutely bulletproof service offering and really 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 II, for example, or if you have multiple airports in a single metro center, which you can see in our map, we're having now, you can find all sorts of very, 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 to increase the efficiency. And then there are certain things that we have to be, again, very deliberate and will be a bit of an effort to get it down. But that is our big kind of strategic focus for '26. 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 feeling the rumblings of competition in our industry. 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 Harbour 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 that -- knowing the market 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 at Sky Harbour, 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 at Sky Harbour and can't because we're -- 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. So it gets better each time we go, higher quality, lower life cycle costs, lower development costs of the flagship SH-37 hanger, and like we said, we're preparing for the big surge in development that will happen with this big service issue, the biggest -- bigger surge than beginning in early 2027. On the leasing side, 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 the kind of -- our objective is to meet that surge. The order of operations is get those new campuses up to 100% and then go back and get those new crisis to market rents. And then third is take the legacy campuses. We saw -- 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 8 ball, but we're growing it now. And then lastly, operations, the 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. We don't really -- 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 good numbers to report by the end of this year on OpEx. With that, [indiscernible].

This concludes our prepared remarks, and we now look forward to your questions. Operator, please go ahead with the queue.

[Operator Instructions] Your first question comes from Ryan Meyers of Lake Street. Should we be expecting the signing of any new ground leases in 2026?

All right. Brian, this is Tal. First, thanks for the coverage. Yes, 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 a number of airports. Like I said, it's going to come in the form of NOI capture, and we'll have some clear metrics.

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

Thank you, Ryan, for the question. And again, also for your coverage [indiscernible]. Yes. So obviously, our cash flow follows revenues and revenues follow capital openings and leasing and lease rate increases. So Q1 of this year, the current quarter, it's a quarter where we have a lot of cash outflows with the annual compensation payments and so on, and we have no campus opening. So it should be relatively flat and so we are on time as scheduled for the opening of the second phase in Miami or [indiscernible], we should be moving north from breakeven. And then similarly Q3 and Q4. And then as I mentioned earlier, we're broadly opening up later on in the fall. And then [ Addison ] Phase 2, we should then be deep in the back towards the end of this year.

Next question is from Michael Tomkins 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 the -- we have raised the capital to be able to print the accelerator on 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 strong, not all, but some of the campuses with that and our liquidity being strong, you will see the acceleration of the construction spend in the coming quarters.

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 rent starts to roll into earnings? And what are your expectations for stabilization across the 3 assets that were delivered in 2025.

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

Yes. So you're correct. We have presently received the increase in occupancy at [ Deer ] Valley. And then we have noticed that, again, market by market, very specific the situation, but we're seeing that it takes us from 6 to 9 months to reach stabilization. And then we're doing more pre-releasing, as Tal mentioned earlier, in some of our upcoming campuses. It's great to see from the finance perspective, some hardly aside for projects that we have not even broken around even get a permit like in dollars. So that bodes well for future stabilization and the speed at which we have reached that after opening. So we expect some reflation for the 3 assets that are opening 5, basically in the coming 2 quarters.

Yes. Fair Michael, I appreciate that you asked specifically about those -- the assets delivered in 2025 because like Francisco just said, we are transitioning to a different lease-up strategy where we started a lot earlier. Just to remind everybody, even though you see, for example, Phoenix and Dallas at roughly 80% leased now, remember that when we hit 100%, we don't call that stabilization. A, because we -- 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?

It's Tal, Gaurav. 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, expected to come not in the form of number of ground leases, but 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?

Yes, thanks for that as well. It's Tal, again. So it's what I alluded to in my earlier remarks, which is when we -- not to disparage Houston, but we showed up at our first airports, it was very much stay way from New York City because we know that's the best metric center of the country for us, and we know we're going to make mistakes at the beginning. Other than that, we're 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, right? We know we're looking for at those airports. So when we lease a hanger 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. Riley. Quarter-over-quarter, multiple facility had their projected construction start and completed dates changed to TBD, APA Phase II, DVT Phase II, HRO Phase II, IAD Phase II, ORL Phase II or POU Phase I. Can you walk us through what led to those changes shown in the 10-K?

Thank you, Tim, for the question. It looks -- it's clear that you're reading the details, and thank you for your coverage. So I'm glad of this question because we have we obviously have at the margin to decide where do we go and do a Phase 2, where do we do a Phase 1 of the ground leases that we have secured. And the a will continue to be generated every year. So we decided to put TBD on Phase 2 to give us the flexibility in terms of when we're actually going to go ahead and implement that. It's going to depend on, of course, how Phase 1 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 these 2 versus a Phase 1 on our campus, which is not something you get if you're doing with senior bonds from the get-go where you almost have to determine exactly the way you're doing from the get-go.

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 2 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 like to surpass. Right now, we have -- we are entering to leases, and we have leases higher than $40 of rent in Miami, in St. Jose, in Bradley and in Dallas, the ones that we have pre-leased. So we feel very comfortable that, as Tal mentioned, the airports that we're in construction now and are still forthcoming. On average, better airports than our first fitness in the [indiscernible] Group. So we are likely to see in rents and overall revenues per square foot trending higher in our new companies.

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?

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 McCann. 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 camps that's not really the threshold moment. It's probably the right time is about 9 months before we intend to open those campuses. How much do you tend to -- your question is very elegant. It's 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-lease 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%. And when you open up, you're going to lease the second 50%. And you're right, our expectation is you'll see somewhat higher rent on the second 50%. But the fact that we go in cash flowing remember, 50% we're meeting our debt obligations handily already. I think it's probably the right way to do it. And remember, we're not doing -- the average lease term is significantly less than 5 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 you're -- it's a good question. And again, I think the realized will come over time as we optimize that.

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

Thank you, Don, for the question. We -- as [indiscernible] we are very data driven. And we are -- we have a data and we're going to be looking back with passage time at all our projects by face and crunch all numbers in terms of looking back and keep track of profitability by campus and by vintages and so on. Of course, if you look back, we face in our first portfolio on the public construction inflation that we certainly underestimated. And then we had the design issue that we addressed a year ago that obviously resulted also having to put more equity into the [ Obligate ] Group that we really expected. So the yield on cost at the outset is not going to be what we hope of the campus, [indiscernible] though rents have been coming higher than we really 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 funds on those first renewals. So there's another calculation that happens, I will say, 2 years after the first stabilization of a second stabilization when you have market rates of those leases that particular campus or that particular petite. And then lastly, in terms of IRRs, IRR is going incorporate that increasing rents that we experienced with the inflation. And remember, we have a CPI with a floor of 3% or 4% all the new leases at 4% and in those bonds. And if the IRRs should offset some of those increased costs that we experienced. So stay tuned for those vintage and portfolio calculations and when we complete the [ Obligate ] Group at the end of this year.

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?

That's a good question. As I said in the prepared remarks, we're going to be very deliberate about entertaining this. There are so big some tenants out there that we just principally don't like to rent. They're just -- 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 for us a sale. It's an ultra-long 40-, 50-year tenant lease, where the tenant pay upfront for the right to basically have that hanger...

It's just conceptually your sale.

Conceptually your sale. So we can obviously pro numbers, and we are in the leasing business. We truly believe that on pressure abate basis, we'll maximize development 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 for acquiring and 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 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 conversation that we have with our residents who want these deals, are very explicit. They're coming to us saying, we agree with you under 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 had and willing to prepay, and I'm willing to pay at a premium to get that done because they don't want to be subject to escalations into 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 Busser. A recent sales size report from BTIG indicates that you are now seeing build cost closer to $250 per square foot on your active sites. 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 economic of scale as you shift into Phase 2 expansions. Finally, is $250 per square foot the right baseline to use? Or do you see room for even further cost compression as you scale.

Yes. Thanks for that question, Alex. Starting at the end, no, we're going to continue fighting, this is definitely not -- 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 or inventory of steel at our plant in Texas, means we're not subject to the much higher volatility and pre-engineered metal building component prices because we're -- 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 8 dining room chairs from IKEA, you're probably going to get something wrong in the first chair, you follow instructions, but you're going to make 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 year. Same thing in our business. The erection of these hangers comes at a very, very specific sequence. There's a lot of nuance 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 countries not working with the general contractor we're 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 list.

Yes, Christian, thanks. So it's not exactly wait list that we operate, meaning it's not first come first serve. If you're first on the list, you get a hanger first in your second, you get to hang your second. It's -- we keep list of interested parties, and they're dynamic list 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 semiprivate model that happens a lot more frequently, we reach out to all of those guys. What's important, I think, to understand in that is it's a flipping of the dynamic is that when we opened Miami Phase 1, you've got 160,000 square feet to lease, 160,000 square feet of vacancies everybody is true, everybody sophisticated in this business. They understand that they have the leverage in that negotiation. Once the 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 2 or 3 hangers coming to term at the same time. We stagger appropriately you can keep that dynamic. So it's not exactly waiting list. It's really interested [indiscernible] list.

Your final question is 2 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.

Yes. Two good questions, Alan. Thanks. So yes. 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 can be more efficient. And 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 common campus. So scale is your friend as you grow. With regard to door threshold height, so I don't know if you're watching it, but the NFPA409 Group 3 standards 2026 edition allows you to go up to 34 feet of threshold height. So we have adjusted the prototype up to 34 feet. Remember that NFPA409 is not mandatory. So the adoption rate is different in different geographies. 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 an NFPA409. And then once a jurisdiction adapts to the standards, you can remove the valid and how you're 34 feet because you're absolutely right. Falcon 10x is likely to certify this year. It's a 29-foot and change to all airplanes, not fit in 28-foot [indiscernible] hangers. So good question.

Operator, I think we have time for two more questions because we started a little late, just take some more questions and we close.

Your next question comes from Alan Radlo. Might a niche NetJets or a Flexjet decide to rent out an entire hanger for their clients to use where they are not able to build their own hanger. They seem to be moving away from always leaving jets on the ramp 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 re-leasing, 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 letters being pulled here? Or maybe where are we -- are you seeing easy wins?

Okay. Let's start with the second one. The easy one the things like just enforcing our triple nets on our leases, right? And we did not have good enough standardization on our tenant leases early on, and most of those are the leases that are in in fact, slightly different rules on each lease, which leads to kind of lax enforcement of triple net. So 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 win, 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% ongoing for the duration of these leases. If it were half that, if it were core that I think you have a very exciting story. Just throw that into the model, 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. What I can say is 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 $1,000 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, hanger rents have been a footnote in the annual OpEx of 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 precious asset in this entire industry, it should occupy a much higher level on your ranking of aircraft ownership OpEx, we think is 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 Gonzales, I'd like to turn the call back over to you.

Thank you, operator, and we'll any left our questions we're out of time, we'll answer directly. Also everybody again that you can by further information on our website, www.skyharbourgroup.com, and you can always reach out directly to questions to our e-mail [email protected]. 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.