(SKYH)
Q2 2023 Earnings-Transcript
Operator: Good day, everyone. My name is Lisa and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Sky Harbour 2023 Second Quarter Earnings Call and Webinar. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I will now turn the call over to Francisco Gonzalez, CFO. Please go ahead, sir.
Francisco Gonzalez: Thank you, Lisa. Hello and welcome to the second quarter earnings results investor conference call and webcast for the Sky Harbour Group Corporation. I’m Francisco Gonzalez, CFO, Sky Harbour. Before we begin, I’ve been asked by counsel to note that on today’s call, the company will address certain factors that may impact this year’s earnings. Some of the information that we will be discussing today contains forward-looking statements. These statements are based on management’s assumptions which may or may not come true, and you should refer to the language on slides one and two of this presentation, as well as our SEC filings for a description of the factors that may cause actual results to differ from our forward-looking statements.
All forward-looking statements are made as of today and we assume no obligation to update any such statement. So now let’s get started introducing the team with us this afternoon Tal Keinan, our CEO and Chairman of the Board. Mike Schmitt, our Chief Accounting Officer;; Tim Herr, our Treasurer, and Tori Petro, our accounting manager. We have prepared a few slides we want to review with you before we open up to questions. As the operator stated, you may submit written questions during this webcast using the Q4 platform and we’ll address them shortly after our prepared remarks. So let’s get started. Next slide. This is a summary of our Q2 results in the context of the trend of the past two years for selected metrics. First, in terms of capital invested in hard assets, our three completed campuses and construction in progress surpassed the 100 million mark in the second quarter.
With our two recently opened campuses in Nashville and Miami, Q2 revenues reflect the step function increase in our rental revenues as new hangar campuses open. We expect this step function phenomenon to continue as we open new campuses. Our operating expenses and SG&A are semi-fixed to fixed and we’re being very frugal and attentive to these. When Phoenix and Denver campuses opened next year, our revenues are projected to grow and generate positive cash flows at the consolidated operating level. Net cash flow from operating activities reflect the one-time cost last year of the DeSPAC in Q1 2022 and the acquisition of our ground lease in Opa Locka Miami in Q2 of 2022. Again with Phoenix and Denver campuses expected to open next year. The resulting cash flows will turn us into positive territory on a consolidated operating cash flow basis by the end of next year.
With that summary, let me pass it to Tal Keinan and our CEO for a review and update on our unit economics pipeline of new campuses and operational update. Tal?
Tal Keinan: Thanks, Francesco. So we look at our business in the way we create value really in two ways. What are the unit economics looking like and how to scale? Look, and that’s a framework we use for creating value here. What you’ll see on this slide is a snapshot of where unit economics are coming in. You see our two large campuses today, which is Miami and Nashville. What you see on the left of each bar chart is the original revenue per square foot estimate that CBRE produced in in the report for the bond market, which is not far from our original underwriting. And then what the actual rents that have come in are on those two campuses. So you’ll see that we’re tracking at significantly higher revenues than originally projected.
What that boils down to is a return on assets in the range of 15%. Now, that number 15 assumes that the remainder of leasing of those campuses will take place at the same per square foot rents as what we’re currently seeing. So when those campuses fill up, if it is at the same rate, then we’re talking about 15% return on assets. And as I think some of the people on the call know and we’ll get into a little bit later, the financing that we have in place, which is quite attractive, turns that into a return on equity in the 30s. So that’s our unit economics. If that’s something that we continue to obviously refine and work on as we go. But we do see that this first batch of campuses, we see that as a validation of the unit economic assumptions.
So the next question is, okay, how do you scale this and at what and what rate? So if you can show what’s happened to-date in the next slide. So the way to read this is. The left side of that slide is rentable square Sky Harbour hangar square footage that is actually online. And you see that, you know, like Francisco said, that’s a step function correlates directly to the step up in revenues. Every time you open a campus, a new revenue stream comes online. And then it’s the same scale that you’ll see on the right side of the page, which is rentable square footage that’s actually in development. Okay. So that’s Denver, Phoenix, Dallas, phases two for the existing campuses in the red. And then in the last bar, this is a snapshot from right now as of end Q2 2023 is the square footage of hangar in airports that are under exclusive ground lease negotiation, right.
This is typically after an RFP process where we’ve been selected as the winner. We’re now negotiating the final terms of ground lease on those airports. So if you add those, then we’re looking at about 2.5 million additional rentable square feet. One thing that I want to highlight here as you look at Sky Harbour as a business and what our objectives are from scale. It’s not just a question of getting more airports. It’s not even just a question of getting more square footage of hangar, because remember, there are airports that will accommodate 150,000 square feet of hangar and there are airports that will accommodate 500,000 square feet of hangar. It’s a question of high quality square footage. What we’re really pursuing is NOI. And I think what’s important to note is that’s primarily a function of location, right?
Our construction costs vary somewhat, but within a relatively tight range. Our OpEx varies somewhat, but within a relatively tight range. The primary determinant of an airport being in our parlance, Tier one, Tier two or Tier three is the prevailing hangar rents in that location before we even get into that market, that is the most sensitive component of all this. The first five airports that Sky Harbour targeted were chosen somewhat arbitrarily. There are certain metro areas that we wanted to stay away from, particularly because, again, there were going to be a lot of lessons learned at the beginning of the business. We understood that. What we’re doing right now, that entire pipeline is what we’re targeting is the top tier airports in the country where the highest rents are in the country.
So our hope, if we do this right, is to have return on assets on the next airports come in higher than what we’re seeing on the original airports. That’s — that is the ambition. So let me get into kind of some of the challenges and opportunities that we’re facing on the next slide. And this is how we think of our company in terms of business units, right? The site acquisition, development, leasing and operations. And while I won’t go through the whole slide, there we go. Thank you. While I won’t go through the whole slide, I’ll zoom in on a couple of points in each of those. So as we disclosed yesterday, there are six new airports that are now in exclusive lease negotiations. We expect three of those to close signed leases we enter permitting by the end of this year and another three in the first half of next year.
These are airports that are in Tier 1 rent markets. Again, we expect each of these to be higher than the rents that we’re seeing in the current portfolio. On site acquisition, to zoom in on one headwind is the there is a gestation period from the time that we target an airport until a ground lease is signed. What we’ve been finding is that this is a 12 to 24 month process with a lot of variability. And again, most of these airports are owned by municipal government. There’s not too much uniformity in the way this process works in different places. So that that’s been a challenge is that you do have a long gestation period. And again, it varies quite significantly. What I’d put kind of on the tailwind side of that is we started dozens of these processes last year.
What we’re seeing right now is the first the first of those coming to fruition. This is a very specific kind of strategy for targeting airports and growing that pipeline. And again, we certainly don’t put pencils down with the next six airports. I think what you’ll see if that if chart went out is the ambition is to constantly be broadening the pipeline as we go, right. That’s I think you could think of it sort of as a funnel from identification of an airport as attractive to Sky Harbour till the day revenue starts flowing. That funnel should constantly be getting wider, if we’re doing this right. That’s on site acquisition. On development, you could see what we have, what we have going on right now in terms of airports under construction and airports that are in permitting.
We have airports that are in pre-construction right now. That’s diligence and planning in those six airports that we just that we just mentioned. Headwind that I want to highlight is construction costs has definitely come up since we started the business. I think we probably saw the steepest increase in construction costs over the course of 2022. That seems to have tapered in 2023, but not retreated. So that’s a headwind that we’ve been dealing with. And I think everybody in the metal building space in general has contended with that. What we’re doing to mitigate that, I think that’s a big part of the rapid growth story. We saw that we’re paying a lot of margin to pre-engineered metal building manufacturers and hangar door manufacturers. Also, the fact that there was no company that did both meant that we were spending a lot of time and consequently money on coordinating that fit, which is probably the most fraught architectural feature of our designs.
It’s a metal building, relatively simple metal building, but it’s a 12 ton vertical lift hangar door that that’s mounted on that building. The fact that those are two separate manufacturers is a place that’s been fraught with issues for us. So the rapid build acquisition not only over time should reduce our costs. We’re no longer paying out margin, but we think also increase the quality of what we’re doing, which we’ve had to be kind of hit and miss in this industry. We have the company that we think has the best engineering in the space in house now. We think that’s going to be a big deal for us and also a differentiator in terms of just the quality of the physical offering. Moving onto leasing. So you see where we are right now on lease up on the various facilities.
The main headwind I think is kind of stood out for us is it does take a little bit longer than we expected to lease up these campuses. It is a lot of hangar inventory to present to a new market in one shot. That’s certainly something that takes a little longer than we thought. Also, just the process of negotiating a lease with the type of tenants we have is a little bit more protracted than we originally expected. Um, on the other hand, what we’re seeing is, as we discussed in two slides ago, is that the rents that we’re achieving are significantly higher than what we originally underwrote. I think part of that is due to the fact that the airport is a very inflationary environment. We expect that trend to continue. There’s just a limited amount of land on airports around the country and that’s part of why we’re in this business.
And I think perhaps another part of it and I’m speculating here is that we are becoming recognized in the industry as a distinct and differentiated offering from what the FBOs have. We’re quite different from an FBO. And increasingly I think we’re being sought out and that’s reflecting in the rents that we’re able to achieve. And then lastly operations. The one of the areas that I think we’ve been trying to differentiate ourselves I think somewhat successfully is in operations. We are trying to provide the shortest time to wheels up in business aviation. If your company owns a $50 million business jet. We think most people are in that situation place a very high premium on time. And we are extremely quick, not necessarily because we’re so good at ground operations, but because we don’t have a transient business.
So our campuses are, you know, very quiet, very controlled. It’s relatively simple for us compared to an FBO to get a flight airborne. That said, we do invest a lot in getting it more than right and in turning our current tenants into evangelists for the entire model and certainly for the company. And I think the main headwind that we faced there was the FBOs and airlines have all faced is there’s definitely a human resources deficit in aviation line services. We’re fighting that just like everybody else. What we found, though, is with a few, I think, key hires, we’re able to get great leadership in place on the ground operations side and start pulling in a crew of really outstanding line service technicians. We put on top of that a training program that we think is working for us very well.
And I think the results have been the results have been very satisfactory for us and what we do tenant surveys, we’re getting that feedback from the tenants as well. But I think that human resources deficit in the industry will continue to be a headwind for us as we go forward. The next slide, we just wanted to share a little bit of what all this looks like from development to leasing to operations and site acquisition. This is kind of what Q2 has looked like for Sky Harbour. And again, that’ll be available to everybody on the call. With that, let me hand it back to Francisco to talk a little bit about our cash position.
Francisco Gonzalez: Thank you, Tal. Quick review of our liquidity and capital position. We closed the second quarter with about $150 million in cash and US treasuries. Our portfolio of US treasuries is very short and is managed by our treasurer Tim Herr actually sitting here next to me. We’re now earning north of 5% as we roll our cash in three and six month US treasury bills as we wait to invest these into new hangar construction. The right hand of this slide depicts our bonded debt composed of $166 million in 4% and 4.25% coupon fixed rate private activity bonds. These bonds have no principal amortization for the next eight years and we have prepaid into escrow the interest due through the middle of 2025 with a final maturity in 31 years and an average life of over 20 years.
These bonds constitute permanent capital for the company. In summary, we are fully funded to complete our existing portfolio of hangar campuses at our first six airports and a few more if we decide to redeploy projected excess cash flow into the business in place of dividends. Next slide. These strong liquidity and capital position provides us with significant runway and flexibility to pursue our growth capital opportunistically. First, we can reinvest our expected positive free cash flow once we complete our next few campuses. It is not our preferred route, given that our goal is to cash flow as dividends, our operating earnings to the benefit of our shareholders. So our second approach will be to raise additional equity at the Sky Harbour public company level through pipes or at the market or market at public offerings, but only at prices that make sense for the company and its current shareholders.
Let me be clear we will not issue new equity if not at a significant premium to the current market price. Alternatively, as a third option, we could fund a few of our next campuses as project level partnerships. We have been approached by five real estate and infrastructure funds interested in doing so over the past six months. If we were to pursue that, we will be investing a lower amount of equity into new fields, but generating significant development as a management and operating management fees and thus enhance our return. Lastly, we will marry any of these equity sources with additional private activity tax exempt debt, either in bond note or bank debt format. Our current bonds are trading with a six handle 6% handle. We will rather be opportunistic and wait until the overall level of interest rates stabilize.
If 18 to 24 months passed and we need to issue debt to combine it with the equity for new campuses, we will do it thoughtfully with a view of maintaining ability to refinance once rates come down again, or if and when we achieve investment grade ratings something we could. We will pursue toward the end of next year. This concludes our prepared remarks. We now look forward to your questions. Operator Please go ahead with the queue.
Q – Unidentified Analyst: Thank you. [Operator Instructions] Our first question comes from Francisco Brugueras. Existing properties are 64% to 94% leased. What rental rates per square foot have you been able to realize versus previous expectations? How is the obligated group performing? Please comment on your upcoming capital needs. Thank you.
Francisco Gonzalez: Tal, you want to take the leases and I’ll take the obligated group and the capital.
Tal Keinan: Yeah. So, yeah. Francisco, thank you for the question. I would say on the, sorry, hang on. I’m looking for the — yeah so in terms of rental rates versus what was expected, so we started leasing in Miami at about a little over $32 a foot. And the most recent leases, there’s still a few hangars left to go, but the most recent leases are signed in the kind of mid 40s. So significant increase in Miami. I’d say Nashville, we started at $28 a foot and we’re now in the mid-30s. We think Miami is close to representative of what we call it, a good like a solid Tier 2 market in the country. So we’re happy when we kind of look forward. Our hope is to get that that type of rent going forward. But I think one of the things you’ll see is, over time, there is inflation at the airports.
And like I said earlier, I think that’s one of the things that we’re we’ve been benefiting from here. If we do what we set out to do, there should also be increasing recognition of the specific value proposition to aircraft owners of the Sky Harbour offering.
Tim Herr: Thank you, Tal, and thank you, Francisco for the question. On the obligatory group, and just to remind our investors, the obligatory group is the joint and several portfolio of an operating subsidiaries of Sky Harbour capital that are the collateral package for our bonds. And it’s important to note that it’s not a one-off one-time bond deal. It’s a program. It’s a programmatic approach. As we issue new bonds into the future, they become part of the obligated group and joint and several. So which is why as we grow the strength and credit profile of our borrowing entity becomes stronger. Last year, about this time last year, a little bit later, call it, about a year ago when we started realizing that construction costs were higher than expected given inflation, we went about and recapitalized the obligated group to make sure that it was fully funded for the properties within it.
And we also performed the pivot, which we allowed a Addison Phase 1 in Dallas to come into the obligated group in lieu of the Phase 2 at Phoenix and Sugarland. But net-net, to answer the question, you know, rental rates as Tal mentioned are higher than expected. Construction costs continue to be in line with the higher levels that we, you know, recalculated at the time of the recapitalization. Projects are taking a little bit longer. So you have seen from our discussion in terms of construction schedule. As I mentioned, as our cash continues to earn higher than 5%, that mitigates somewhat that that delay. So net-net, we believe that the projected debt service coverage that was put out by CBRE in the feasibility study this past February that shows improved projected debt service coverage ratios for our debt holders remains a in place.
Um, let’s see the last part of the question. Yes, a capital funding for future capital needs. Okay. So one important thing to remember is that once signed a ground lease, one has some flexibility in terms of when to start constructing that project. You know, there’s always the need for permitting and so on and so forth and, you know, site design and so on. And even within that, you know, six, 9 or 12 months period, one could decide to postpone and sequence the right way, one’s investment and the beginning of construction a particular campus. And I say this because that translates into flexibility in terms of matching our capital funding of new ground leases as we sign them. Now, rule of thumb, rule of thumb, on average a new campus, depending on average, it tends to be 15 to 20 hangars.
And on average a hangar is roughly about $3 million per hangar. So when you do the math, you’re looking at each new campus is within $45 million to $60 million each. So a six new airport campuses will be roughly between $275 million and $350 million roughly, assuming again, that we’re doing 65, 70% leverage. You’re looking at about $100 million of equity and $175 million to $250 million of additional paths. So, you know, this is kind of like the a summary or overview in the context of the six ground leases that Tal mentioned earlier. We have, as I said, flexibility in terms of how we go about funding the $100 million of equity. As I mentioned in the remarks earlier, in terms of internally generated cash flow, a holding company equity, if the price makes sense or project level partnerships at the airport level.
Um, okay. So back to the operator for the next question.
Unidentified Analyst: Thank you. Our next question comes from DJ Megan. Your monthly report shows 82.2 million spent to date, about one third of total project costs. Are you on budget and on schedule? And do you expect to tap into the 15.9 million project contingency?
Tal Keinan: Yeah, let me take that. Take that up. So, yes, as part of our obligated group, we file every month a monthly construction report which gives not only, you know, some photographs of how things are going, but also updates on, you know, the cost of all these various files projects at the obligated group level. I think the short answer is right now, we’re not expecting to hit, you know, we have several buffers. We have the product contingency buffer. We have a ramp up reserve buffer. We and we have a maintenance buffer. So right now, we don’t expect to hit any contingency buffers right now in the obligated group, you know, at this juncture. Next question?
Unidentified Analyst: And one moment while we assemble the queue. Our next question comes from Rasmus Agerskov. What age or what age does rapid built give you versus your competitors?
Tal Keinan: Yeah. This is Tell. Thank you, Rasmus. So first, I don’t know that we have a direct competitors today in this business. So the other people or kind of the other industry that builds hangars at any kind of scale is the FPO industry dominated by kind of the duopoly of signature and atlantic. And the way those guys operate is really each project is its own sort of blank sheet design build project. What we do is really a prototype, right? It’s the same, the same hangar on every airport, which even before the RapidBuilt acquisition gave us certain advantages in, you know, in terms of a design that is optimized for exactly what we need. And, you know, constantly gets refined and whatever refinement works into the prototype, you know, find the findings to every subsequent project.
So bringing rapid built in rapid built into the picture, it, you know, aside from what I mentioned earlier about reducing our construction costs, by cutting out the pre-engineered metal building and hangar door margin is a significant design advantage in that your rapid bill is an integral part of our prototyping process today. So that’s not only accommodating changes in regulation. So for example, the NFPA 409 Group 3 standard the fire code that governs our type of aviation hanger, which is updated every 4 years. The most recent addition had changes that opened up opportunities for us to, you know, further refine the design, make a hanger that’s, you know, significantly more usable for our tenants, and that feeds in immediately. And rapid build is part of that design process.
There’s also all sorts of value engineering changes as new technologies become available or become aware of them. It’s a pretty quick integration cycle. What I mentioned earlier, again, having the hangar door and the pre-engineered metal building, manufactured at the same facility, all under our roof is a very big deal. We, along with almost everybody else in Hangerland have had, you know, all sorts of challenges with those hangar doors. And that’s something that we, you know, to intend to mitigate, if not eliminate by having, by having all of that integrated. And then lastly, you know, in this development cycle, as we get more and more coordinated with our general contractors in the field, we’ll be bringing as much as possible from the field to the manufacturing facility with the idea of as much as possible from the field to the manufacturing facility with the idea of minimizing welding, minimizing assembly, making it very, very quick and straightforward assembly process in the field.
And that includes things like running conduit in the factory and shipping out our pre-engineered metal building components with electricity and plumbing already run. So you really have kind of an erector set in the field versus what’s done today. And that’ll manifest not only in the quality of the product that we bring out, but our construction times which again translate directly into savings for us.
Unidentified Analyst: All right. And our next question comes from Matthew Howlett. Can you go over the synergies from the consolidation of RapidBuilt? How much do you think it can lower your construction costs and speed up your construction times? Any other advantages it provides?
Tal Keinan: Okay. So I think most of most of this is probably answered by what I just said to the previous question. And I don’t think we’d want to speculate as to exactly how much savings we see from that. I think it’s early days. I think it’s quite clear to all involved that the savings will be significant both in time and in money. But I think it might be a little bit premature to try to quantify that exactly.
Unidentified Analyst: Thank you. Our next question comes from Christine Kaming Tomas. Do you need to make more acquisitions to achieve your target level of vertical integration? If so, what types of companies capabilities and or technologies do you need to acquire?
Tal Keinan: So I could take a crack at that. And then Francisco, Tim if you guys have anything to add. Thanks, Christine. The so first of all, RapidBuilt itself is quite central to what we’re doing. And you would only do something like that if you intended to go to really significant scale in this in this industry. So I think answer number one is more RapidBuilt. We you know, again, if our pipeline continues to materialize at the pace that we’re that we’re hoping we will need additional manufacturing capacity at some point in the not too distant future. Are the current intention is to expand that facility if and when we get to that point. But we will need more, just more manufacturing capacity. Again, there is there is room on site in Weatherford, Texas to do that.
Other capabilities. So we are our tenants manage their space with an app that we that we designed and fielded and are constantly looking to refine what the app does today is really kind of control the physical aspects of the hanger. Temperature, humidity, lighting. It’s got security monitoring, motion control, motion detection, all of that sort of thing is in the app today. The next version of the app will include service procurement and that that’s a set of capabilities that the app itself is something that we’re doing in house, but that will require a set of partnerships and these are our intentions for these to be revenue producing partnerships, because what we have is a physical platform for administering all sorts of aviation services to our to our tenants.
And we for many of those services, we can and should be the conduit. So being able to procure all of those through the app, I think will be a real service to the tenants, but also create value, I think, for you, the shareholders. Francisco, Tim, anything you wanted to add on the vertical integration?
Francisco Gonzalez: No, that’s good. And thank you, Christine, for the question. Operator?
Unidentified Analyst: Thank you. We’ll take our next question from Philip Bristow. Once the next locations are confirmed, a new capital has to be raised. Are you able to issue convertible instead of straight equity until the common has a chance to get into the teens? Thank you.
Francisco Gonzalez: Okay, I’ll take that. And thank you, Phil, for the question and also for your continued, you know, an active interest in Sky Harbour. I think you’re one of the investors that that ask us routinely most questions during the year. So thank you for your interest. I think the short answer is yes, we could issue convertible equity if we wanted to. But let me explain why. In our case, a particular circumstances, we prefer to issue straight common and it has to do it has to twofold. First, and remember that we most of the debt that we issue is tax exempt debt. It comes at an attractive fixed rate, long term basis. A convertible equity instrument tends to be, you know, three to four years. It may have a maturity at that time, which is basically almost like a put and also it’s really taxable in nature taxable.
So we will be basically overpaying a in terms of as an issuer, if we were to issue convertible equity rather than be doing common and our low interest cost fixed rate bonds that we do at the project level. So that’s kind of like a general a view of that, although again, we are not dogmatic, we are opportunistic. If we find an equity transaction that makes sense, that protects, I get we get your point that protects common shareholders until to higher valuations and we totally get where you’re coming from. Operator, back to you.
Unidentified Analyst: Thank you. We have another question from Phillip Bristow. For warrant holders that have a high cost basis. Can you hold off on exchanging Commonwealth share prices exceed $10? Ideally, the warrants can be called exchange once the common reaches the upper teens. Thanks.
Francisco Gonzalez: Okay, I’ll take that also. Thank you. Thank you for the question. You know the warrants. As you know, the public warrants have a variety of features, redemption, features and the like. You know, we’d rather not comment on what we will do or not do or commit to things at this juncture. You know, it’s going to be very situational basis. It’s going to depend where we are, where our prices are, you know, what time to maturity of the warrants and so on and so forth. So, you know, at this juncture, you know, I totally get the question. But we will be we will do what is in the best interest of all our equity holders at the time that that we face such a such a scenario. So, again, thank you. Operator, next question.
Unidentified Analyst: Thank you, sir. Our next question comes from Matthew Howitt. Can you give us a trajectory of the six new airports under negotiations? How fast is this really happening? Would be the lead time to have them built and leased up.
Francisco Gonzalez: Yeah. Okay. So, you know, I think one of the one of the frustrations, but also barriers in kind of protective barriers in this business is that there is really no template process that we’ve identified that all airports subscribe to. So, you know, it’s different in each case. And like we said, those gestation periods can vary quite widely. The six airports that we’re talking about right now where we’ve gone exclusive and we’re in advanced stages of negotiation, like we said, we expect three of those to be signed by the end of this year and then an additional three by early next year. And of course, as you can imagine, we’re not going to put out anything speculative in this call, but there’s a quite a robust pipeline behind that.
And again, some of those end up moving faster than you think. Some of them slower than you think. Once we have a signed ground lease, we go immediately into permitting. And when I was talking about pre permitting earlier during the during the slide presentation, that was that where we actually we have a finalized site layout with full plans for everything utilities, drainage, everything you would you would have in a full permit set by the time we get to a signed ground lease so that there’s really a pretty minimal amount of time between the signing of a ground lease and our submittal for permits. And then again, you run into a process that has a gestation period. We’ve had permits issued in in a very short time, in a few months, and we’ve had permits take significantly more than six months.
They’re kind of really depends on the situation. One of the things that we’re trying to do really through this prototyping design that probably should have mentioned this in the question about the prototype is the fact that we have the same design permitted in multiple airports we hope should give, you know, fire officials, drainage officials, whoever, whoever it is in the various jurisdictions, some comfort that this this exact design, this is not blank sheet. This exact design has been permitted in multiple locations already and of course, facilitate communication between the various permitting authorities. We hope to compress that process as well once permits are issued. I think what we have underwritten, Tim, can probably tell us what we have underwritten on build time.
Whatever it is. Our ambition again is to constantly be reducing our construction time. So the more that we can get done in the factory and the less in the field, the shorter we think our construction periods will go. And then the last part of your of your question is on lease up. So lease up. We still think that the right time to start leasing is when you actually open the doors of a fully functioning campus that has, you know, has a certificate of occupancy, has gone through our own operational dry run period and is ready to go. We just think the pricing leverage is the highest there. And, you know, although the lease up period has been again longer than we expected, we feel that we’ve been more than compensated by the increase in rents. So I think you’re pricing leverage is the highest when you actually have a standing product that’s ready to go.
People in aviation tend not to kind of look out a year or two to see what their what their storage space needs are going to be. It tends to be kind of a right now sort of thing. So that’s really where our leverage is the highest. That said, we are working on call it, an experiment that will roll out now in Phoenix for the first time, which is we’re opening one hangar before the rest of the campus. That will be kind of a fully, you know, a showroom with all of the optional features that we have in a hangar. And we might try to do a few pre leases in that case and experiment. But this is all really in an effort to kind of get the schedule that you’re asking about compressed to the minimal time.
Unidentified Analyst: Thank you. Our next question comes from Janelle Alexander. Do you expect further growth to be attained via additional acquisition or additional cost efficiencies or both.
Francisco Gonzalez: Yeah. Thank you, Janelle. I’d say both site acquisition is the main driver, though. Again, we’re always it’s what I mentioned. We’re always going to be trying to get our construction costs down without impacting the quality of the — of the offering. We’re always going to be getting our OpEx optimized. I don’t want to say necessarily has to be the lowest. We’ve got to put out the best service in aviation. But, you know, keep those under control. But those will vary in a relatively tight range. The big swing, the most sensitive factor in generating return on assets, which is the fundamental goal here is really location being the best, best locations possible. So site acquisition is key. So both are important. But site acquisitions is really kind of the main event.
Unidentified Analyst: Thank you. Our next question comes from Jared Cassar. How many B shares do you expect to convert to A shares in the next 18 to 24 months?
Tal Keinan: Okay. I’ll take that, Francisco, thank you for the question. And maybe I should start byreminding people that we have two classes of shares A’s and B’s. They both have, you know, a one vote. So we all, you know, have a — we don’t have super voting shares, but the Class A is the shares. That trade in the New York Stock Exchange is the one that a public investors received. Also that that were part of the DeSPAC is the one that’s underlying the warrants and so on. A Class B shares are the shares that were received by the, you know, the founder here on the phone, the CEO, and some of the legacy early investors in the company. And then we were dispatched. We did it through a structure called the OBSI structure that basically keeps the legacy shareholders still at the original LLC level.
And the moment that they were to decide to sell shares, they will first convert their LLC interest into Class A and then forfeit their Class B share. So the question then that you’re posing is another way of asking do we expect a legacy shareholders to be converting and selling their shares? And there have been a few small legacy investors. This is all public information that for their personal tax position, they decided to convert their LLC interest and Class B’s into A’s and realize whatever capital gain they will have because they could offset it against capital losses. It was a very small amount. I think in general, the bulk of the legacy shareholders, A, are likely not to be sellers unless the price is significantly higher than current levels.
So I hope that answers the question. Operator. Our next question.
Unidentified Analyst: Thank you. Our next question comes from Doug Johnston. When does Cappai end on the muni bonds? Is it September of 2024?
Tal Keinan: Okay. I’m going to ask Tim, our Treasurer, to answer this question.
Tim Herr: Hi. Thanks, Francisco, and thanks, Doug, for the question. If you refer to page 19 of our private Activity Bond prospectus, which can be found in the site, you’ll see a full schedule of the capitalized interest and net debt service annually. Capitalized interest continues through the middle of 2025. And really it’s July 20th, 25 when the first interest payment kicks in. So as Francisco noted before, it’s all interest for the first ten years, so interest only for the first ten years and then principal payments kick in in 2032.
Tal Keinan: Thank you, Tim. And let me just add one comment. When we did the bond deal, short term rates were so low that we assumed no interest earnings during the life of all these funds. And obviously with the increase in interest rates, we have been able to benefit of the interest income from our debt service reserve fund, which is about, you know, $11 million, these 14 million and change on the fund, another 4 million in ramp up reserve plus obviously the construction funds. So and those are additional interest income that, you know is benefiting the obligatory group as we wait to deploy that cash either in terms of paying interest expense on the bonds or the construction expenditures. Operator, back to you.
Unidentified Analyst: Thank you. Our next question comes from Jorge Roberts. In the future, what are your plans to accommodate advanced air mobility such as eVTOLs?
Tal Keinan: Thanks, Jorge. This is Tal. Yeah, we did get an inbound interest for a while. You know, because we did get a lot of inbound interest from the various eVTOLs manufacturers whose focus has, you know, understandably been getting FA certification for their vehicles versus, ensuring that that adequate infrastructure is in place to actually accommodate eVTOLs at scale. So this is, you know, I think it got took us a while to get, to get focused on this. And what we what we decided and implemented is as follows, the eVTOLs is happening. That that I think is clear to us. We’re, you know, I think way past the point of no return in terms of kind of the technology, the funding, the regulatory, environment for it. This thing is coming.
We’re not sure exactly when, though. I know a lot of EV talk providers are projecting, you know, 2024, 2025, which, you know, we hope this happens, but, you know, don’t know for sure. And what we found is we are in a kind of a special position as, you know, probably the biggest greenfield developer in business aviation, today that by going greenfield, it’s much less expensive to put down the kind of infrastructure that’s going to accommodate electric aviation. Than it is to, kind of re rework or redevelop existing infrastructure. So we found a way to, I think, economically, provide for a kind of an option to go electric at any point. And that means internal organic generation of electricity primarily through solar panels. You know, we’re off of the largest rooftop at an airport we do have a lot of, ability to generate solar electricity, on-site, but, by the, sorry, on top of that, also a sufficient cabling to augment that from the grid.
Second is on-site electricity storage. You need transformer capacity of pull from the grid. You want the organic, electricity generation. In many cases, both of those together are not going to be sufficient, if we’re gone achieving anything near scale that the eVTOLs industry is forecasting. So we’re going to need on-site, power storage, which we’ve made, provisions for. And then finally, a transmission mechanism, you know, where we have, again, there’s no patent around this or anything like that. I think we think it’s pretty straightforward. You know, the current transmit power transmission method, which is the aircraft pulls up to a to a power source that’s fixed somewhere on the tarmac, is good for this kind of prototyping phase that, you know, placed like [indiscernible], beta archer, the manufacturers, we think that when this thing goes to commercial scale, the power is going to come to the aircraft, much in the same way that the, you know, fuel comes to the aircraft today, on, on trucks.
So we put that all together conceptually designed all of our campuses to accommodate that with a kind of an easy flip of the switch down the road. But we don’t see the case for making the investment of actually flipping the switch, today. It’s just an easy option, you know, for when this comes online. I do understand where the question is coming from. And, I think, you know, it sounds like you you’ve got the same presupposition we do, which is that the vast, vast majority of the infrastructure for electric aviation is going to be on FA regulated air fields. We think it’s going to be very difficult. You know, we, we, we know the heliport space think it’s going to be very difficult to do, kind of significant off airport operations for eVTOLs. That includes, you know, not just flat operations, but the charging, storage, servicing, all of that.
We think the vast majority of that actually is going to have to take place for regulatory reasons on airport.
Unidentified Analyst: Thank you. We have a question from Rasmus Agerskov. How does Sky Harbour view business with the upcoming eVTOLs business and potential housing of those vehicles.
Francisco Gonzalez: Right. So it’s I think same, same answer I gave to Jorge Rasmus. I think that’s our position on that. And, again, we do think that we’re pretty well And maybe the only thing I’ll add is, you know, a lot of what people are looking at is FAA regulation around eVTOL. What it sounds like there’s a lot of interest in eVTOL on this call, what I encourage people to is look at NFPA, and there are a lot of circulars that are out there as to how NFPA is looking at eVTOL. You know, lithium ion batteries burn hot. There’s some complexity around that. That’s something that we’ve integrated into that design concept that I that I or in answering Jorge’s question, you know, however these aircrafts end up getting stored, NFA is gonna be, we think, a big a big factor in in and how all that gets regulated.
Unidentified Analyst: Thank you. Our next question comes from Alan Jackson. What opportunities do you see with the electric aviation? How is Sky Harbour and eVTOL campus portfolio positioned to take advantage of electric aviation?
Francisco Gonzalez: Yeah. Thanks, Alan. Again, same, same response that I had to the previous tool. Yeah, I’m glad to see if there’s a lot of interest in eVTOL. We, you know, we agree. We think it’s happening. We think it’s an opportunity. Again, we what we’re trying to do here in in in many situations, not just with regard to eVTOL, is not to take a bet today as to what the highest and best use of Sky Harbour campuses is gonna be 10 years from now, but to design for optionality so that, you know, if the eVTOL are paying higher rents, than business aviation in certain segments of the country, certain areas of the country. Great. You know, that’s something that we, you know, we potentially pursue but not something that we have to, not something that we’re committed to or investing a lot of capital in today. No need to do it if you if you can create the optionality. it extensively, not that that’s what we’ve done.
Unidentified Analyst: Our next question comes from Matthew Howlett Can you give us a trajectory of the of the 6th new airports under negotiations? How fast is this really happening? What would be the lead up time to have them built and leased up?
Francisco Gonzalez: Lisa, I think that one was already answered. If I’m not mistaken.
Unidentified Analyst: Thank you. Okay. One moment.
Francisco Gonzalez: Hold on one second.
Unidentified Analyst: All right. And this is from Matthew Howlett as well. If you’re ready.
Francisco Gonzalez: Yeah, Sorry, Lisa. That was the, I just put in the last and final question from Matt. if you can read that one.
Unidentified Analyst: Perfect. Thank you. And, again, this is for Matthew Howlett? How many potential sites would fall under the top metro markets?
Francisco Gonzalez: Okay. Thanks, Matt. so I don’t know if you’re asking about the six airports that are, now order exclusive negotiation or in general, what I would say for the six airports, five of the six are in what we call tier 1 markets. 1 is in what we call a tier 2 market. We would call Miami a tier 2 market. That’s that that’s for the 6. If you were asking about, the, kind of, the general map of the opportunity set in the in the country, So, you know, Metro Centers like New York or Los Angeles have, you know, multiple airports, you know, in some cases, more than a dozen airports that that serve business aviation in that in that Metro Center. So and our focus is, yeah, I think you may have seen some interviews that we’ve done for is really to start with the Metro Center.
And then drill down to the specific airports. And this ties into the point that we made about it’s not exactly about number of airports. Number of airports is just kind of a good conceptual proxy. For how this company grows. It’s more about square footage of Hanger, and it’s even more about available NOI. if you take a market like New York, there are certain airports that accommodate a lot of anger, and we would go for that. And in, in certain cases, for example, you know, a square footage of hangar that would be two or three times, for example, what we have in Nashville. And in a Metro Center like New York or Los Angeles, we would certainly assume that, you know, 2 or 3 times is fine. And, what’s but what’s particularly compelling to us is the rents in those jurisdictions, which is why we’re so focused today on those tier 1, on those tier 1 markets.
So I answered it both. I hope that covers what you were you were looking for.
Operator: Thank you. And there are no further questions at this time. I’d like to turn the call back over to Francisco Gonzalez for closing comments.
Francisco Gonzalez: Thank you, Lisa. Thank you all for joining us this afternoon and for your interest in Sky Harbour. Additional information may be found on our website www.skyharbour. Group and you can always reach out to us directly with any additional questions through the email investors at skyharbor.group. If you wish to visit a campus, please let us know and we’ll arrange for a tour. Thank you again for your participation. With this, we have concluded our webcast. Thank you, operator.
Operator: Thank you. And that does conclude the presentation. Thank you for your participation. You may now disconnect.