Sky Harbour Group Corporation (SKYH) Q2 2025 Earnings Call Transcript

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Overview

The earnings call summary indicates strong revenue growth and strategic developments, such as new ground leases and vertical integration, which are positive. The Q&A section reveals management's strategic approach to financing and cost management, further supporting a positive outlook. Despite some uncertainties in timelines and specific financial impacts, the overall sentiment is optimistic with expectations of increased revenue and operational efficiency. The stock price is likely to react positively, driven by strong financial performance, strategic initiatives, and management's confidence in future growth.

Key Financial Performance

Assets under construction and completed construction Reached close to $300 million, driven by construction activity at new campuses in Phoenix, Dallas, and Denver.

Consolidated revenues Increased 82% year-over-year and 18% sequentially, reaching $6.6 million for the quarter. This growth was due to the acquisition of Camarillo last December and higher revenues from existing campuses. However, only $200,000 of revenues came from the 3 new campuses that just opened.

Operating expenses Increased moderately due to the purchase of fuel at Camarillo and expenses related to payroll and other costs for the 3 new campuses, which are not yet generating significant revenue.

Cash flow used in operating activities Improved significantly to less than $1 million for the quarter, compared to $5 million used in Q1. This improvement is attributed to operational efficiencies and preparation for ramping up leasing and cash flow from the 3 new campuses.

Revenues of Sky Harbour Capital Obligated Group Increased 20% sequentially from Q1, driven by the onboarding of personnel and preparation for campus openings.

Cash flow from operations (Sky Harbour Capital Obligated Group) Generated a positive $2.2 million in the quarter, expected to increase further as the 3 new campuses are leased.

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Operating Highlights

New Campuses: Three new campuses opened in Phoenix, Dallas, and Denver, contributing to a projected $14 million annualized revenue.

Pre-Leasing Pilot: Initiated pre-leasing at Dulles International and Bradley International airports, with promising results and potential integration into future leasing strategies.

Vertical Integration in Construction: Implemented in-house construction and manufacturing capabilities to improve quality, accelerate timelines, and reduce costs.

Revenue Growth: Consolidated revenues increased by 82% year-over-year and 18% sequentially, reaching $6.6 million for Q2.

Expansion to Tier 1 Airports: Focus on acquiring sites at Tier 1 airports to maximize revenue capture.

Operational Efficiency: Cash flow used in operating activities improved significantly, reducing from $5 million in Q1 to less than $1 million in Q2.

Service Differentiation: Enhanced service offerings to improve customer satisfaction and loyalty, contributing to pre-leasing success.

Debt Facility: Secured a $200 million warehouse bank debt facility to fund the next 5-6 capital developments, offering flexibility and reduced financial risk.

Focus on Revenue Capture: Shifted strategy to prioritize maximum revenue capture over sheer number of airports or square footage.

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Risk or Challenges

Operating Expenses: Operating expenses increased due to onboarding personnel and preparing new campuses for operations without associated revenues, leading to financial strain.

Cash Flow: Cash flow used in operating activities improved but remains a concern as the company is not yet cash flow positive.

Debt Issuance: The company is pursuing a $200 million warehouse bank debt facility, which introduces risks related to floating interest rates and refinancing in the future.

Construction and Supply Chain: The company has faced supply chain interruptions in the past and is now vertically integrating to mitigate risks, but this transition carries execution risks.

Pre-Leasing Strategy: The new pre-leasing strategy for campuses not yet constructed is untested and may pose risks if commitments are not met.

Site Acquisition: Focus on Tier 1 airports may limit opportunities in Tier 2 markets, potentially reducing growth flexibility.

Operational Challenges: The company is expanding its operational focus, which may strain resources and require significant investment to maintain service quality.

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Guidance & Outlook

Cash Flow Breakeven: Sky Harbour expects to reach cash flow breakeven on a consolidated basis by the end of 2025, driven by the ramp-up of leasing and cash flow from three new campuses.

Revenue Projections: The three new campuses are projected to generate $14 million in annualized revenues. Overall revenue capture potential is expected to approach $200 million by the end of 2025.

Future Revenue Growth: A step function increase in revenues is expected in Q3 and Q4 of 2025 and into 2026 as the three new campuses are leased and operational.

Pre-Leasing Strategy: Sky Harbour has initiated a pilot project to pre-lease hangars at campuses not yet under construction, with initial success at Dulles International and Bradley International airports. This strategy may become a key component of future leasing activities.

Construction and Development: The company has vertically integrated its construction efforts to improve quality, accelerate timelines, and reduce costs. This includes in-house general contracting and manufacturing capabilities dedicated to building Sky Harbour hangars.

Debt Facility: Sky Harbour plans to close a $200 million, 5-year tax-exempt warehouse bank debt facility by August 28, 2025, to finance the next 5-6 capital developments. This facility offers flexibility in project sequencing and reduces construction risk.

Site Acquisition Focus: The company is targeting Tier 1 airports to maximize revenue capture, with a focus on high-revenue potential sites.

Operational Enhancements: Sky Harbour is investing in service quality and operational efficiency to differentiate its offering and enhance customer satisfaction, which is expected to support long-term growth.

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Shareholder Return Plan

The selected topic was not discussed during the call.

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Key Q&A

Q:Can you provide details on actual revenues as compared to forecasted revenues? What's the percentage variance between actual revenue and forecasted revenues? Are there any airports where you are seeing higher variance?

A:Management stated that they do not release projections but track performance against projections made during the bond offering. Actual revenues are expected to exceed projections, especially for campuses in Houston, Nashville, Miami, Dallas, Denver, and Phoenix. Miami showed strong performance with lease rates increasing from $32 to $46 per square foot, and Phase 2 leases are expected to be even higher. The biggest variance is between the first and second round of leases, with significant jumps in revenue per square foot.

Q:Can you provide details on the pre-leasing hangar space at Bradley and Dulles Airports? Is there opportunity to do more of these at other airports? And how much is the intro pricing advantage?

A:Management has not decided if pre-leasing will become a main strategy but noted initial success with signed leases and deposits. Introductory pricing is advantageous for first residents, who are blue-chip tenants, but still above target revenues. Pre-leasing helps achieve occupancy with a significant roster of residents, partially offsetting any value left on the table.

Q:If we think about the 9 campuses in operation and the operating expenses associated with them, do you feel like you're seeing the scale gains in line with expectations?

A:Management acknowledged that the first set of campuses took longer than planned but revenues exceeded forecasts. They expect operating leverage to improve as SG&A remains constant while revenues from new campuses flow directly to profitability. Non-cash expenses related to ground leases and employee compensation will remain fixed, further improving profitability.

Q:You mentioned that you're seeing higher than forecasted revenue at campuses in operation. Just wondering if you can walk us through and highlight what these drivers are?

A:Higher rents due to scarcity of hangars, fuel margin revenues (not initially included in projections), and semi-private hangars allowing for higher occupancy rates (up to 140%) are key drivers. Additionally, second lease terms often yield higher rates due to supply-demand dynamics, and Sky Harbour's reputation and premium service also contribute to higher revenues.

Q:Are you seeing any changes to the electric aviation industry since the Trump administration has been elected? Will this have any impact on the electric optionality on current Sky Harbour campuses? Does Sky Harbour have any intention of acquiring any construction trades that are currently not in house?

A:Management noted that regulatory hurdles for electric aviation have been reduced but the industry is not advancing as quickly as some expect. Sky Harbour prewires campuses for electric aviation to be ready when needed. They do not plan to acquire trades but may consider specialization in certain areas like erection due to their unique construction processes.

Q:What aspects of your product offerings, service, and training differentiate Sky Harbour from what a tenant would receive at an FBO? Have you considered ways to utilize vacant land for Phase 2 construction to generate income?

A:Sky Harbour offers faster service with no delays due to lack of transient traffic, specialized training for line crew to reduce hangar rash, and premium infrastructure. Vacant land for Phase 2 is generally not used to generate income due to high costs of paving, but it has been rented tactically for events like NBAA conferences.

Q:What is your estimate of timing for DVT Phase 1, ADS Phase 1, and BFI to be fully leased? Any one-timers in the ground lease expense line this quarter?

A:Management estimates these phases will be fully leased within the next 6 months. The ground lease expense impact this quarter is due to the recognition of Hillsboro and Stewart International leases signed during Q2, which are recognized under GAAP even if not paid in cash.

Q:Can you talk about how you expect to finance new campuses over the long-term? How might new long-term PABs fit into the picture relative to options like the warehouse facility?

A:Management plans to use a flexible approach, initially utilizing a tax-exempt warehouse facility to shift construction and early leasing risks to banks. They aim to refinance with long-term PABs in 3-4 years, potentially prefunding new campuses or using another warehouse facility. This strategy strengthens the credit profile for bondholders.

Q:Can you provide an update on the impact of scaling and vertically integrating construction activities on future build costs per square foot?

A:Management expects vertical integration and scaling to lower costs per square foot or mitigate construction inflation. They are leveraging a standardized prototype (Sky Harbour 37) and internal manufacturing (Stratos) to achieve efficiencies. They also plan to use external manufacturers and contractors as needed to manage capacity.

Q:How will future pre-leasing influence future debt offerings such as the timeframe for investment grade rating in the future?

A:Pre-leasing derisks projects by securing leases before construction, improving the credit profile for debt offerings. This strategy supports the goal of achieving an investment-grade rating by demonstrating strong pre-leasing activity and reducing risk for bondholders.

Q:Is the SH-37 hangar prototype now fully standardized? What's the impact on speed and unit economics?

A:Yes, the SH-37 prototype is fully standardized, allowing for increased speed, reduced costs, and improved quality. Standardization enables bulk procurement, value engineering, and consistent application of efficiencies across all future projects.

Q:Why did you choose a bank facility instead of a bond? Can you provide details on the 5-year drawdown? Is the structure like a credit facility?

A:Management chose a bank facility to benefit from flexible drawdowns, delayed equity contributions, and the ability to refinance without penalties. The 5-year drawdown structure is similar to a credit facility, allowing funds to be accessed as needed and later refinanced with a bond deal.

Q:Was there any cash or stock consideration involved in the creation of Ascend Aviation Services? How does this impact your approach to RFPs for greenfield development? Does this move help you play offense on brownfield situations? Does it impact your capacity for managing development projects?

A:Ascend was established without cash or stock consideration. It improves precision in cost estimation for greenfield projects and enhances capabilities for brownfield opportunities. Ascend allows for scaling development projects but will initially take a hybrid approach, using both internal and external resources.

Q:With OPF Phase 2 coming online next year, do you expect there to temporarily be lower step-ups in lease rates given the increased supply at the location?

A:Management is optimistic about demand at Opa Locka (OPF) despite increased supply from Phase 2. They expect high demand to continue, but the impact on lease rate step-ups will depend on market conditions and pre-leasing activity.

Q:Does the new debt facility alleviate your need to raise equity for the next few years? How do you plan to fund properties not addressed by the $200 million facility?

A:The new debt facility reduces the immediate need for equity by allowing for flexible drawdowns and equity contributions. Future properties may be funded by increasing the facility to $300 million, refinancing with a bond deal, or exploring private equity and asset sales.

Q:What's the expected quarterly pace for signing the remaining five ground leases by year-end?

A:Management is confident in signing the remaining ground leases by year-end but cannot provide a precise monthly or quarterly timeline due to the variability in the process.

Q:Review of Unclear Management Responses

A:Management avoided directly answering the question about the percentage variance between actual and forecasted revenues, instead providing qualitative insights. They also did not provide specific details on the impact of scaling construction activities on future build costs per square foot, stating that results will be demonstrated over time. Additionally, they did not give precise timelines for signing the remaining ground leases, citing variability in the process.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

SKYH Transcript

Sky Harbour Group Corporation (SKYH) Q3 2025 Earnings Call Transcript

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The earnings call summary and Q&A session reveal several positive elements: Sky Harbour is on track to reach cash flow breakeven by 2025, with significant revenue growth expected from new campuses. The company is successfully implementing a pre-leasing strategy and has a flexible debt facility to support future developments. While management avoided specifics on some queries, the overall tone was optimistic, and the potential for high valuations and demand for hangar space is promising. These factors suggest a positive stock price reaction in the short term.

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The earnings call summary and Q&A session reveal strong revenue growth, strategic expansions, and optimistic future guidance, despite some uncertainties. The company's focus on brand health, operational efficiency, and reinvestment strategies indicate a positive outlook. While some areas lack detailed quantification, the overall sentiment is upbeat, suggesting a likely positive stock price movement in the short term.

Sky Harbour Group Corporation (SKYH) Q2 2025 Earnings Call Transcript

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The earnings call presents mixed signals: strong revenue growth and optimistic future revenue expectations are offset by challenges in leasing team development and construction cost reduction. The absence of a share buyback program and increased operating expenses further balance the positive aspects. The Q&A reveals concerns about competition and financing needs, but management appears confident in their strategic approach. Overall, these factors suggest a neutral sentiment, with neither strong catalysts for significant stock price movement nor major red flags to suggest a decline.

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