SKYH - NYSE

Good afternoon. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sky Harbour 2024 Second Quarter Earnings Call and Webinar. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions]. I would now like to turn the call over to Francisco Gonzalez, Chief Financial Officer. Please go ahead.

Thank you, Regina. Hello everyone, and welcome to the 2024 second quarter investor conference call and webcast for the Sky Harbour Group Corporation. We have also invited our bondholder investors in our borrowing subsidiary Sky Harbour Capital 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. Some of the information that will be discussed today contains forward-looking statements. These statements are based on management assumptions which may or may not come true and you should refer to the language on Slides 1 and 2 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 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 COO, Will Whitesell, our Chief Accounting Officer; Mike Schmitt, our Treasurer, Tim Herr, and Tori Petro, our Accounting Manager. We have a few slides we want to review with you before we open it to questions. These were filed with SEC an hour ago in Form 8-K, along with our 10-Q and will also be available on our website. You may submit written questions during the webcast using the Q4 platform, and we'll address them shortly after our prepared remarks Let's get started. Next slide. These are summary of the financial results of our wholly-owned subsidiary Sky Harbour Capital and its operating subsidiaries that formed the obligated group in the context of the trend of the past three years on selected metrics. This basically incorporates the results of our Houston, Miami and Nashville campuses, along with the CapEx and operating costs of our three projects currently under construction in Denver, Phoenix and Addison, Texas. As you may see, the harbor construction activity in Q2 has picked up again, and we expect that trend to continue as we ramp up construction. Revenues moved higher in Q2 from two main factors: First, there were a couple of tenant leases that kicked in during the quarter. And second, we also benefited from some tenant renewals of our first lease expirations and some tenant replacements, both at higher rental rates. Operating expenses increased, but I should note that this includes the ground lease payments or accruals as per US GAAP in all six ground leases in the obligatory group. Said in other words, we do not capitalize ground lease payments or accruals during construction. Even with that, we have firmly crossed into positive cash flow from operations, as you may see in the lower right-hand quadrant. We expect this trend to continue and accelerate in the first half of next year when Denver, Phoenix and Dallas campuses open and begin to cash flow. Next slide. On a consolidated basis, the second quarter revenues exhibited the step function of the incorporation of our new campus in San Jose International Airport. As previously reported, San Jose was roughly 58% leased during Q2. And with the new tenant leases signed in recent days, we expect another step revenue increase in Q3 as that campus approaches full occupancy. The operating expenses in Q2 increased mainly from two factors. First, the incorporation of the ground lease payments of San Jose, which are significantly higher than our typical greenfield projects. Let me explain this a little further. In essence, because of San Jose ground lease came with a large hanger, existing hanger, apron and parking, because of these facilities is basically amortized through the ground lease payments as part of our operating expenses. Second factor, similarly as the obligatory group, we accrue in the consolidated operating cost for ground lease payments at the 12 airport locations that we had signed by Q2. And we will begin to have in Q3 another ground lease that will be accruing in terms of the expense with the addition of Salt Lake City a week ago. That non-cash accrual of ground lease expense amounted to approximately $1.1 million in Q2, and reflected within operating expenses. The SG&A, which is mainly at the parent holding company reflect the impact of non-cash employee stock-based compensation expenses, which amounted to a similar figure of about $1.1 million during Q2. We reaffirmed our prior guidance that we expect Sky Harbour to reach cash flow positive on a consolidated basis in the full 2025 as we reach sufficient scale with the new campus openings to cover our holding company expenses. Let us turn to Tal Keinan, our CEO for an update on-site acquisitions.

Thanks, Francisco. So you can see here reflects our announcement last week of the Salt Lake City International ground lease in addition to some expansion that we've been able to achieve on existing ground leases. We've begun presenting it in this fashion over the last couple of quarters, because this is really how we look at it is what is the total revenue capture of land that we have under ground lease at Sky Harbour today, so as of August of 2024, you could see it's in the kind of $125 million, $130 million range. What that number is, to remind people is the total square footage of buildable hanger on each of these campuses times the Sky Harbour equivalent rent, which is our proxy for our revenue on each of these campuses. That's what that capture number equals. Just to remind people, and I think we have some numbers that we'll share later, is on the campuses that we've -- that we're operating at this point we are significantly exceeding our Sky Harbour Group brands. So we do think that's a conservative number to use as an estimate for what revenue capture to control is on these campuses. Let me hand it over to Will to talk about development.

Thanks, Tal. This slide really represents the next phase of development and construction for Sky Harbour on an accelerated growth plan, starting with the three projects that are currently in progress. They are on track or ahead of schedule to be completed in Q1 of 2025 as per our announcement in our Q1 statements. Below -- second half of the page below in the bar graph, it really represents our growth plan over the next two years focusing on 2025 and 2026. 2025, you have a combination of eight projects starting in construction with three completing for a total of 11 projects -- into 2026 of 15 project starts and a completion of seven projects for a total of 22. So over the next two years between 2025 and 2026, we are ballparking 33 projects between starts and finishes, which is definitely an accelerated growth plan. Now, I'll turn it back to Francisco.

Thank you, Will. We continue to enjoy strong liquidity with $150 million in cash and US treasury bills. We continue our cash management strategy of rolling our cash in one to three month treasury bills and notes pending their use in construction. During the past quarter, we continued to earn more in our cash than the interest cost of our bonds. As many of you know, our debt is permanent fixed rate bonds with the first principle maturity coming up in eight years and capitalized interest through the July payment of next year. The expected cash flows from operations at the obligatory group in 2025 is continues to -- we continue to expect to amply covered net debt service of $5.6 million due next year without in to touch the ramp-up reserve we put in place just in case back at the time of the issuance of bonds. And that ramp of reserve will get released once the construction is completed at the obligatory group. Next slide. Yes. One more comment on our bonds. Our longest 30-year maturity during 2054, traded a few weeks ago at $535. And just yesterday, our 12-year maturity bond traded yesterday at 5% flat. These levels are a testament to the credit quality and investor demand for our bonds. We reiterate our expectation that future debt service coverage ratios will exceed those forecasted at the time of the bond issuance three years ago and our solid commitment to protect such coverage. We continue on a path to seek investment-grade ratings next year as campuses ramp up with cash flow generation, at accretive fields to the portfolio in a de-risked way, and we use interim financings in order to protect the current bondholders of the obligatory group. Next slide, please. Yes, we have shown this slide before, but I wanted to reiterate that we continue to approach capital formation deliberately and opportunistically to act in the best interest of our company, its bondholders and shareholders. We have continued to receive funding proposals both equity and debt to meet our growth capital needs, but we're disciplined in our consideration of these. On the debt front, we conducted a limited market outreach and have received proposals from five major US financial institutions for a $150 million bond or loan facility at attractive interest rates. We plan to select one or two banks to lead such effort after Labor Day and expect to complete the financing subject to market conditions early next year. Over two days during the early part of this past quarter, we test drive our ATM program and sold 7,407 shares over two days at an average price of $12.42 without impacting the trading price of our stock. We will keep this as a tool, but don't plan to use it on as our stock significantly higher than current levels. As we passed, our conservative balance sheet and liquidity allow us to be delivered. We're fully funded for the first airports and can reach cash flow breakeven without any additional capital raise. Of course, if we can accelerate growth with the right new funding will take advantage of opportunities as they arise. Back to Tal for a brief review of our achievements during Q2 and areas of focus for the next 12 months.

Thanks Francisco. So, as people now I'd like to think of our company in these four pillars set acquisition being the first, as we discussed, we're excited about getting underway at Salt Lake City and that expansion on existing fields is something that we're going to continue to be working on. All the fields that we're on, by definition are attractive to us. If we get more square footage on those fields that is equivalent to winning new fields. On the development side, this is where I think we're going to see a lot of the action over the next couple of quarters. We're really in a phase shift in this company where we were working in cereal. We've got to work in parallel now. It's a really kind of massive ramp up on the development side. And I think you'll see in the press release the introduction of a few people -- key people who've joined the team in the last quarter or so to help us meet that challenge. So, we've got three projects set for delivery by the first quarter of 2025. That's Denver, Phoenix, and Dallas, but we've got 10 additional projects in development now. That number is only going to grow, right? We -- as challenging as it is, there is no intention to stop accelerating on site acquisition. That's what this company is about fundamentally. We're going to have the resources in place to process it as we grow. So, right now, we're at 10%, but our -- the intention has actually increased that quite significantly over the next few quarters. As part of that effort, we are institutionalizing this is becoming a much more process-driven construction effort, a lot less reinvention of the wheel as we go. We have finally completed the design of the Sky Harbour 37 prototype. We think this is a breakthrough hanger. We think it's the best hanger in business aviation by far. I don't think anything comes even close to it in terms of the capacity to hold aircraft, but also the utility of the hangar. I mean it's -- again, we've seen a lot of hanger designs over the years, this is by far the most thoughtful we've been able to come up with, and we don't think anything comes close to touching it. We have rapid build our [indiscernible] manufacturer configured to pump exactly this model of hanger out, and we expect to achieve very significant economies of scale as we do that. On the leasing side, we're under NDA with many of our tenants, and we're seeing the questions come in already, and there's some questions about privacy. That's definitely a big piece of it. So, we're never going to disclose our tenants identities. They're, of course, free to do it themselves. We don't do that. But what we can say is the premier flight departments in the United States are residents of Sky Harbour. The best flight departments of the country are residents of us. And I think we have perhaps reached a certain threshold in terms of brand awareness within our specific industry where the most sophisticated decision-makers and business aviation understand the utility of the homebasing solution versus, for example, living at an SPO. The second thing I think is worth pointing out is the actual revenues from airports where we're exceeding our projections by about 32%, 33%. I'll say that's in the initial lease-up of all of these properties. What we're also beginning to see, and we discussed it a little bit in the press release, is that we're seeing a significant step up in revenue when we renew a lease or replace an existing resident. Again, we haven't had that many of those. It's a little more than a handful at this point. But the numbers have been pretty consistent. We're marking up at a little over 20%, right? So if you're getting $1 in rent when that term ends, then you release the hanger to a new tenant or to the same tenant, you're getting $1.20. And I think that is the first -- and we'll put out numbers at some point when we can -- we have enough to make it statistically valid, but we can already see it. We see this as probably the first empirical demonstration of our thesis on inflation on airports, right? There's a finite number of airports. You're not going to build new airports in the United States. They're already space constrained. We think we're in one of the most inflationary segments of the U.S. economy. And I think we're beginning to see that in our renewals. Operations. So San Jose was a quick effort to get it staffed equipped and up and running. We did that very quickly. We're accommodating many tenants right now. We've got a very robust operation there, and we've got three fields that we've got to staff equipped and get standard operating procedures for in the next two quarters. So we're already well underway on that. We'll talk about some of the new members of the team on the operations side. But just as I go, I think I used this analogy in the last -- on the last call, this is an exercise like any growing company, it's an exercise in shifting bottlenecks. I said acquisition was the primary bottleneck for a very long time. Today, we think it's primarily in development and construction. Operations is next. And we're looking 24 or 36 months ahead in terms of staffing and putting processes in place to accommodate that growth. The last thing I'll say on operations is this has been a quarter where we've spent a lot of time and gleaned a lot of insights on what makes our service special. Why is it that we're commanding such a premium versus FBOs on our rents, and why do we have a waiting list on all of our campuses, right? We're in a position where we're turning people away, which is where we had hoped to be. A lot of that has to do with the fact that when you don't have a transient business, there are all sorts of service attributes that you can create and that we think really add tangible value for our residents. I won't get into them now, but if there are questions on it, we'll be happy to talk about it. Looking ahead, so kind of our radar, at least for purposes of this call, is pushed out about 12 months. On the site acquisition side, the metric that we're targeting is revenue capture, right, which is a -- as I discussed earlier, that's rentable square feet times Sky Harbour equivalent rent, which focuses you by necessity on specific locations in the country. We are looking to pull down the best airports in the country right now. I think we have a very good sense of who they are, and we're well underway on a lot of those airports. So expect announcements in the near future. Salt Lake City is airport number 14 for us. It also is satisfies our guidance of 4 new ground leases for 2024 in -- we did that in July. So we kind of sat down and looked at that together with the pipeline, where we see airports that are in process and decided that we're going to update our guidance. Right now, we -- up until now, we've been on course for six additional airports, right, up to airport number 20. By the end of 2025, we're going to raise that now to eight airports. So 22 airports by the end of 2025 is our new guidance. Moving on to development. Right now, it's about standardization and really maximizing the benefits of economies of scale. Right now, we're the largest hangar developer in the country, perhaps in the world. There are some real opportunities that come with that. I don't think we're quite at the place where we've maximized the efficiencies that can be gained from that, but that's the objective right now. And we'll be looking for opportunities to introduce Steve Martinez and Dave Sherman, they’re both mentioned in the press release as key leaders on the development and construction team that are going to push that effort of standardization forward. On the leasing side, so that brand awareness is a key thing for us. We don't have a marketing department. We haven't really engaged in active marketing. We've just done what we do. And I think word of mouth has probably been our strongest competitor. Our aircraft owners take off before anybody. The firm arrival to the airport to wheels up, you will have the shortest time at Sky Harbour. And there are a lot of reasons behind that. But if you're flying a $50 million, $60 million, $70 million jet, that time is quite critical. I think for many people, you can look at your airplane as a time machine, it really is that, why wouldn't you house it in a way that you can maximize its utility. And I think that's been one of the key attributes. Again, I see in the questions that are coming in questions about privacy and security. I mean, these are all attributes that we can deliver in a way that nobody else can. But what we've been focusing on up until now is that time to wheels up. And I think we're -- that's showing. And again, I think it's part of the appeal of Sky Harbour’s new residents. There's also a lot of unmet need on the airport sponsor side and that we are taking a box that I think other types of developers or tenants on airports are not ticking. And again, we haven't really marketed this in any deliberate or a proactive way. But I think awareness of Sky Harbour in the airport community is exactly where we'd hoped it would be. And then lastly on operations, for a while, things are growing fast on from three campuses to four campuses it's about to be seven campuses operating simultaneously, the focus is 100% on the Sky Harbour resident. If we maybe thought three or four years ago that we're a real estate developer, yeah, we're also a real estate developer, but we're an operator, and it's very important that we don't lose sight of that. We're delivering value to Sky Harbour residents if we don't think anybody else can deliver, and we keep coming up with better ways to do that and to do it at scale. With that, we don't have them on the call yet. He will be on the next earnings call. Really excited to announce Marty Kretchman as our Senior Vice President of Airports, Marty spent most of his career at Signature, just a fantastic addition to the team and his focus is specifically on airports and partnerships with FBOs with other people in the innovation community. And then finally, something that we've been, I think, has kind of been a peripheral activity for us, which is additional revenue streams, where up until now, the vast majority of our focus has been on putting more dots on the map. We're not taking our foot off the gas at all on that. But now that we have Marty on board, we are looking to start developing those additional revenue streams through services that we're going to provide on the campuses. With that, I think we've got the questions.

Thank you, Tal. This concludes our prepared remarks. We now look forward to your questions. Operator, please go ahead with the queue.

[Operator Instructions] Our first question is from Philip Bristow. Great quarter. What are your thoughts about broadening the float to mitigate against future potential selling from Boston Omaha and Altai? [Technical Difficulty]

And we are not able to hear a response. Speakers are you on the line? I apologize, but there is a slight delay in today's meeting. Please hold and the line will resume momentarily. Please do not disconnect. Thank you so much for your patience. [Technical Difficulty]

We will now resume the meeting. And our first question is from Philip Bristow. Great quarter. What are your thoughts about broadening the flow to mitigate against future potential selling from Boston Omaha and Altai?

Hey, thank you Phil for participating on your question. Yes. We are conscious of the little float of our stock and our plans to address that are driven by the fact that over time, as we do -- we hit the right milestones in terms of our progress, the right time will come to address that through organized equity offerings that will increase the float of our trading. And we don't expect -- we will do that over quite some time and definitely one within the next 12 months. In the meantime, though as some of the investors who have participated in our equity stock in the past, trader stock obviously float will increase. Now let me just comment, we don't really want to comment on what some of our shareholders do. They actually were a preview to what some of our shareholders do in terms of their stock trading. In the case of “Altai, we know that “Altai led the PIPE that we did last November, the lead through an SPV, Special Purpose Vehicle, and I think the sales that was reported in the marketplace was just the breaking up of that SPV and the allocation of the shares to all the participating PIPE investors. So that was not truly a sale, was just a distribution to the ultimate investors. Some of them who continue something – I see participating on this call and who have expressed interest to consider investing in Sky Harbor. So we'll work on that. In terms of Boston Omaha, we did see a small sale by them. We are being in discussion with them, and they have reiterated to us their stature as long-term investors and holders of a Sky Harbor. So any further questions on their day-to-day activities with our shares should be directed to them. But again, they have reiterated to us their view and long-term interest of the shareholder of the company. Next question.

Our next question is from John Blaise. Is the SJC lease profitable today, given the high rent, is it profitable at 100% occupancy?

Hey, John, it's Tal. Thank you for the question. Yes, it is profitable today. We don't really think in terms of 100% occupancy. There is no -- there's no specific cap to the revenue potential of an airport. Remember, we're also taking fuel margins with our residents. We have all sorts of -- I think we discussed on the last earnings call, semi-private hangar arrangements, where we achieved significantly greater than 100% occupancy. So yes, San Jose is significantly profitable already today, and there is still upside potential at that airport. The last thing I'll say on that is, again, we're starting to quantify this 20% average markup or premium on a renewed lease or replace lease. That's one of the places where we're there. It's not -- we're staggering our lease terms. So it's not like everybody is on a five-, seven-, 10-year lease. We have people now on one- and two-year leases as well. And what we're finding is when those come to term, we have a significant opportunity to raise revenue from that effort.

Our next question is from Alan Radlo. In Signature and Atlantic and other large FBOs compete against Sky Harbor by offering tenants a hangar price combined with a fuel discount, how does Sky Harbor plan to compete with just a hangar and having to negotiate with a major FBO for a fuel discount. Airport commissions are not handing out fuel farms, offering hangars without owned fueling places Sky Harbor at a disadvantage, especially a Signature offers their tenants a discounted price at every Signature location.

Question, Alan. Thanks for the question, Alan. It's Tal, again. A couple of things. First, we do or for fuel. So in that sense, what distinctions between us and an FBO, primarily is that we don't have transient customers, who are only based tenants, but we do provide them with fuel. And you're right to assume that total basin cost should be the metric that guides at least your price analysis, your cost analysis of being in an airport. The two biggest components of which are rent and fuel. But we're -- both us and the FBOs are in that game. There's not a lever that we have that they don't have and vice versa. What I will say, though, is the FPO business is fundamentally a fuel business, and it's about transient customers. Yes, there are base tenants at net view and there are base tenants who should be at an FPO. We're not the right fit for every tenant. We are the premier offering of business aviation. We are the front row, we kind of floor seats at the NBA game. There is only one front row, and it's us. So, I think the market shakes out kind of naturally between us and the FPO industry. They've got their focus. They've got us. We do compete at the margins, but it's not one-for-one competition with the FPOs. And I think you can recognize that or see that it's demonstrated quite well in our multiple joint ventures and cooperations with the FPOs. We do work well quite well with the FPO, specifically with Signature. So, I think there's some natural synergies to be found there as well. But again, the offering is fundamentally different between Sky Harbour Homebasing and an FPO offering.

Our next question is from John Blaze [ph]. With your goal of IG and DSCR test beginning in 4Q, how would it raising an additional $150 million be possible?

Thank you, John, for your question. It's a very nuanced question, but I'm glad you asked this. We are very protective of our one holder investors that participated in the first issuance in 2021. It is a program, meaning the obligate group is a program. There are a couple of older programs out there by like two or three other issuers in the -- mostly in the cargo space, and we intend over time to make that program. But to be able to accelerate the investment-grade ratings, trimming these ratings for the existing senior bondholders, our goal and strategy is to do the next issuance outside and apart from the senior bonds. And that way, protect the current bondholders from, call it, the credit dilution of adding or construction projects to the portfolio. And only a few years from now, when the new projects that are financed with our next debt offering reach standardization, then that will be the appropriate time to collapse everything into the growing program and sustain those investing rate ratings and coverage ratios that we see. But again, very nuanced point, but a very important point, especially for our bondholders who are participating also on this call. Next question.

Our next question is from Matthew Howlett. With the bond deals you're contemplating, how should we be thinking about leverage going forward? Prior framework suggested a 70/30 debt-to-equity split, should we be thinking about less equity capital needs going forward and consequentially higher ROEs longer term?

Yes, Matt, thanks for your question and for your following of Sky Harbour. This 70/30 is still the right way of thinking about our leverage target. And especially if we do what we mention in terms of having the next set of debt to be outside the existing obligated group. But I think over time, back to my earlier comment about this being a program, I will say that the third issuance when that comes, a couple of years down the road, is likely to be higher than 70%. One of the critical things of this obligated group program, and as it achieves its more civilization, more maturity that will provide adequate coverage to existing bondholders and allow us to ever increase the leverage. To give you an example, some of the programs that are in existence out there that are BBB rated, one comes to my mind that did their last issuance at 95% leverage. Why? Because over time, as all these properties that we're constructing cash flow, there's an inherent credit strength these borrowing programs that will allow you to then incrementally do financings at ever-increasing leverages. And thus have the impact on our ROEs. Anyway keeping the relationship between return on assets, our leverage and return on equity, we'll understand how important our borrowing program is to achieve the 30% plus ROEs on the union economics that we continue to pursue. Next question.

Our next question comes from Connor Kay [ph]. How do you see the life cycle of lease signing through stabilized revenue as you increase the number of campuses? For example, do we expect the permitting and construction time line to be quicker for campus number 15 versus campus number 8?

Yes. It's Tal. Connor, great question. Thanks for that. The -- let me start with this, all of our projections, everything you see does not take on investor same to account, because we don't know exactly how effective it's going to be. However, that is absolutely the objective is to constantly work on A, getting our construction cost down; and B, getting a time frame that you're identified here down as much as possible. Some of the steps that we're taking here, first of all, we've been looking at site acquisition and development as two discrete activities with a handoff. That's not how we look at it anymore. As we progress the entitlements process starts significantly before we actually sign a ground base. That's one thing. And we haven't seen the fruits of that quite yet. We'll see how effective that is over time. We have key people who -- we have key roles that didn't exist before in Sky Harbour. For example, pre-construction, pre-development roles were working for our head. And then perhaps most importantly, there's no rocket science to what we do here. It's a very simple business, but there's 1,000 little, I'll call it tricks of the trade that as far as I've seen the only way you can learn them through experience. So each time we go through another one of these entitlement processes, we get a little bit sharp, or a little bit better of what we're doing. And then the last thing I'll say on that is we think one of the benefits of the prototype hanger design is it gives the approval process, a real boost in that if you've got exactly the same design approved by 15 different fire departments across the country, the 16th one has, I think, an easier time to adjust in exactly what it is. We also get much better at communicating exactly what the features of our hangers are. So kind of put all of those together and maybe a few other efforts that we have underway. Again, none of that is really accounted for in the projections that we've put out, but it's certainly the ambition. So thanks for the question. It's exactly definitely a focus for us today.

Our next question comes from Peyton Skill [ph]. What is the steady state capacity for a number of phases in development at once?

Yes. It's Tal. Thanks for that. I don't know that there is a steady state capacity. We -- like I said before, the intention is never, never to slow down on-site acquisition. We never want to let the bottleneck, whatever the bottleneck is at the moment, dictate the pace of our growth. We're going to open the bottleneck. So right now, we're developing 10 airports in parallel, can we develop 20 airports in parallel today? No, I don't think we can. When that becomes the challenge, we will be able to develop 20 airports in parallel. That's exactly the analogy of moving bottlenecks that I've been using on all of these quarterly calls.

Our next question comes from Francisco Borges [ph]. Two questions. One, you mentioned development as your current bottleneck as a company. In general, do the ground leases you execute have a deadline, by which you must build out the improvements? And two, are you now targeting shorter leases due to the recent success in release renewals? How do you think about the trade-off between short-lease upside versus revenue visibility? Perhaps if you could put in context of leasing strategy for upcoming properties, such as APA and DBT. Thank you.

All right. Francisco, very insightful questions. And I know our own Francisco is going to want to take a crack at the second one as well, but I'll just say the following. In terms of deadlines, typically no, the performance requirements on ground leases at airports tend to be relatively lagged. That doesn't mean we ever want to slow down. But you're right, there is not -- I think if I understand your question right, there's not really a gun to our heads once we've signed a ground lease. So, there's plenty of time to develop. Again, it's in our interest and all of our shareholders' interest that we develop as quickly as possible, but that pressure is not coming from the airport. On the second piece, I mean, it's a -- and I know there are a lot of bondholders on the call and I think you're highlighting a very important tension perhaps between our bondholders and our stockholders. But I think that tension is pretty easily resolved here in that we stagger the lease terms of our tenants. We never want to be in a situation where we have one-third of a campus coming to maturity in a single year. We never want to be in that situation. I also kind of want to remind everybody, when we open a campus, we're putting more hanger square footage onto a market at a single moment than has ever been done before in most cases in most markets. FBOs don't open 200,000 square feet of hanger in one shot, which gives us a significant disadvantage on just pricing leverage. We've got a lot of product that comes on to the market in one time. I think there are ways for us to address that over time. But what it means is the first round of leasing is not really where you discover the market price of Sky Harbour ground basing. It's the second round. So I think airport inflation is one of the factors that led to that 20% markup, another factor is exactly that is that we're not trying to lease 150,000 or 200,000 square feet on the second round. And you do want -- we believe you do want in a certain number of cases on every campus to reach that second round earlier in the process. You don't want all your leases to be 10 years long. So while we do appreciate the revenue visibility of those 10-year leases with high credit tenants, that's great. It does not to be the entire campus. I also want to point out that the revenue performance on these campuses has been so much better than we projected. Francisco has alluded to the coverage ratios on our bonds that we're achieving those coverage ratios way before we're 100% leased at these campuses, which gives you a little bit of latitude to speak, have your cake eat it too, meaning, address the needs of our bondholders and our equity holders at the same time. So fundamentally, the short answer to your question is staggering, but Francisco Gonzalez might add something like to it.

I think that was a complete answer. Well, that is the following. I think when it then comes in next year, and we're facing the ratings, we're going to have to show them and prove to them that what's better for both bondholders, we definitely know it's better for equity holders, but also for bondholders, what's better to have a very few tenants with a very long lease or to have a diversification of tenants with shorter leases that we have -- we can show and prove to them that every time they get renewed and released the rate of growth as our recent experience action. And by the way, this is including in our recent press release that we just filed, the recent renewals and replacements, basically allowed us to increase our rents by 32%. Let me say that again, 32% on those handlers that were renewed or released or replaced, and that we just disclosed an hour ago. So over time, to Tal's earlier point, I think the range will determine that if we have the right diversification of sales, we have right tenors in terms of tenor decision that the -- well with higher coverage offset the fact that we have a shorter average life of 10 leases than it will be the case for other comparable bonding programs out there that may have 20, 30-year tenant leases, but they have been high concentration of tenants. Anyway, moving to the next question.

Our next question comes from John Blaise [ph]. Can you please explain the rationale for the New York and Connecticut area airports?

Yes. So when we talked about revenue capture, meaning square footage times, revenue per square foot location is the key driver. I mean kind of let's just dial back for a minute to just unit economics. The metric that we target for unit economics is yield on cost as any real estate developer should. What I would argue is that all of the action in yield on cost is in the numerator, okay? The denominator being development costs and OpEx. So development cost varies within a pretty finite range across the country, right? It's not like cost in California or triple, but the cost in Florida or something like that. It varies within a fire range. OpEx per campus varies within and even more on that range would argue. So the denominator is actually relatively static. The numerator revenue per square foot is really where the action occurs and that's about location. We are in the real estate business at the end of the day. The best metro area in the country for Sky Harbour is New York. It's the best in the country. All right. And then I'm not speaking -- I'm speaking specifically to Sky Harbour for home basing, right? There are places that are great FDO markets. I think on the square foot level, Aspen Picken is probably a fantastic market for an FBO. It wouldn't be for Sky Harbour. New York -- and again, we're very metro center focused. New York is the best metro center of the country. There is a 2 million square foot plus deficit of hangers serving the New York area, right? And again, remember, most Manhattan owned aircraft that operate in and out of Peterborough are not based at Peterborough. There's no room. There's no higher capacity at Peterborough. They're based at outlying airports and the repositioned into the country. Those outlying airports, the repositioning airports have higher rents per square foot than most primary airports in most metro centers in the country. So frankly, I'd say a lot of our focus, we're not too specific about airports, but a lot of our focus naturally is going to be in New York.

Our next question comes from Matthew Howlett. Thanks for the update on the potential for ancillary revenue, fuel airport services in the model. Can you give us a sense of what the opportunity is for Sky Harbour, how much added revenue this could contribute per airport?

Yes. So I think there are a few ways to look at this. First, we're definitely not in position to give any numbers yet on this. I don't know if you have to look at it on a per airport basis. You've been than, for example, of partnerships with FBO companies for all sorts of on-the-road services where those can be revenue drivers for Sky Harbour as well. You don't have to think of that on a per airport basis. I can tell you, for example, on revenue producing service that we already have in place hasn't actually started kicking off revenues yet, but we think it will in the coming quarters is something simple and small, it's aircraft detailing, right? One of the things that we noticed is aircraft detailing is kind of a fragmented industry. It's opaque. There's a lot of exposure as an aircraft under that you can take by operating or working with a detailer that you don't know, right? There's all sorts of sense of equipment on airplanes, antennas that can be broken things like that. And a lot of our residents look to us sort of as the arbiter of what's quality in aviation. So we formed a partnership with one of the national aircraft detailing companies after conducting our own very extensive due diligence. And like we live and breathe business aviation. We know the answer to these questions, I think, as well as anybody does. We find a partnership to come to go private parents that has our endorsement on all of our campuses. They know how to operate from every aspect from where the utilities run on our campuses to security protocols, getting in and out of our campuses. So it becomes a very seamless arrangement to work with this company for your aircraft detailing. And we're talking about many tens of thousands of dollars of revenue per aircraft on a detailing basis. That's one of many, many examples that we -- again, we haven't really started working on most of these yet as Marty kind of footing in the company that is one of his mandates is to begin systematically taking down all of these drivers. At some point, we'll be able to, I think, answer your question in a more kind of quantitative manner is what do we think these different revenue streams add up to in relation to rent, but we're not in a position to say that yet.

Our next question comes from Connor Cai [ph]. Do you see the potential for signing more leases similar to SJC where there is an existing hanger and you can begin earning revenue on the property within a few months. If so, do you have any of these situations in your current pipeline?

Okay. I would look at that kind of -- I look at that more of an opportunistic scenario. It's not a strategy. Fundamentally, there's an arbitrage in our business. It's one of several arbitrages that we've been exploiting in our business, which is it's much better to build than to buy. It's much better to build than to buy, right? And there are all sorts of initiatives out there to either roll up FBOs or portfolios of hangers. And I think some of these might work nicely. I don't know. But fundamentally, the economies we've been able to achieve already before we to great scale. I think this becomes even more compelling at scale, really suggests that the plain vanilla Sky Harbor model is the best way to grow and that's where our strategic resources are arrayed, which is get the land and build it ourselves. There are situations, there are airports where like in many cases, this is a strategic decision where you're not really that interested in the short term, right? You might buy some hangar capacity at an airport or lease some hangar capacity as your first kind of beachhead at an airport where the intention is to really grow there fundamentally, again, and there's opportunistic situations that we don't want to rule these things out. But strategically, what we're actually proactively trying to do is just our plain vanilla model, get the land and build Sky Harbor hangars on that land.

Yeah. Let me just add to that financially in terms of target return on equity, as I mentioned earlier, we're continuing to target our core business of 30-plus percent ROEs. When you're looking at a situation -- special situation that usually comes in terms of an auction or so on because it's a third party of existing properties, you're likely going to be driven down to returns on equity in the teens, and obviously that's not something that we want to deploy our capital of our investor base to do. Now, we have been exploring various alternatives of show do we bring third-party capital to join us so that we are able to achieve through asset management fees, promote, and so on, get our 30% return on equity. And while at the same time though, leveraging someone else's capital that may have a lower threshold than ours given that we bring the expertise of running these type of campuses to bear. So, as Tom mentioned, we'll be opportunistic. We have been looking at a variety of things that some of them that we have passed on because, again, we're going to be very deliberate in terms of not overpaying or bidding for certain situations out there of existing assets. Next question.

Our next question comes from John Blaze. Can you outline your ROI calculation on SLC with $40 million of minimal capital improvements on 8.4 acres of total property?

Yeah. I don't know if we share that level of site-specific detail.

I think what we can say is that a couple of points here. First, we believe that our next set of airports, the ones that we have been signing in the past few -- six months and currently are on average have a -- we're underwriting two targets that are higher than what we underwrote three years ago for the current projects that we had in operation and were in construction. So, that's one key element to consider. We love Salt Lake City as an airport. It meets the criteria that we have, that we have outlined publicly in terms of thresholds for return assets and returns on equity. So we're looking forward. If we could get more land in Salt Lake City, we've gotten, but I think we've got as much as I think the airport will give for business aviation a hangar. I think that we have been able to secure that. One thing I will also note is we're getting better and better at getting the terms that we care about when we're securing ground leases. Our first ground lease was 30 years. I'm sure people are noticing that our recent ground leases are really 50 plus 10, 60 years. And there are many other terms that we've been able to secure that are important to us and that are important to our equity investors in terms of the value accretion of this enterprise. Next question.

Our final question comes from Alan Jackson. When pursuing a ground lease, what are the primary bottlenecks or pushbacks that occur from airport sponsors towards Sky Harbour to surrounding residents in a metro area pushback towards municipalities establishing a Sky Harbour campus?

Yes. Thanks, Alan. It's Tal. I think the term in the industry is you've seen one airport, you've seen one airport. We -- I think for the first three or four years of this venture, we were frustrated by our inability to find kind of one kind of one-size-fits-all model for this is how you acquire land at airports and just apply it across the country. I think that's actually become a real asset for us now. It's very hard to do this. It's very hard. I mean, I don't think -- I can't think of any two airport situations that were alike that we've experienced. And as you know, we're in process at many, many dozens of airports around the country as we speak. I don't know that any two situations are similar. The reason I think that's become a plus is it's become increasingly -- our feeling at the time was there's -- there are certain barriers to entry -- there are certainly good barriers to entry on airports or good moats around us at airports where we're already operating because we tend to take the last readily developable land at those airports. But there wasn't -- we didn't feel there was such a moat around the business model itself. Increasingly, I think there is. It is very hard to get land at airports. And however much money you spend on trying to figure it out, there is definitely a learning curve. And we we're certainly not done. We're on that learning curve somewhere, but we are lightyears ahead of where we were three or four years ago in terms of our acumen. How do we actually get land at airports. We're also in process at the airports that we want to be at, many, many airports around the country. So, I think it's a great question. It's something that we, I think, flowback for a long time. There was a time where I wished that notion of primary bottlenecks or pushbacks was a question we could answer kind of in one sentence. Today, I'm happy that we can't. And it's just -- it's a very complicated world, but we've got a great team. We've -- we train the team. We learned together exactly how to do this. And hopefully, we continue getting better at it. In terms of the surrounding residents and metro areas, I think kind of the same thing is it's sort of everywhere, but what we've done is everything from improving the environmental footprint of an airport. That is something that we do. If you think about airports, where there's not enough hangars and there's a lot of repositioning, take an airport like Chicago Executive Airport, where again, like a Teterboro, you have more airplanes operating in and out of Chicago executive than you can actually house on that airport. Do you have airplanes that live in Waukegan or elsewhere around the Chicago area repositioning. Just I understand that a repositioning airport, if you want to fly from Chicago to Miami and your airplane is not based to Chicago Executive. Chicago Executive has to accommodate four operations, right? They've got an empty leg landing at your airport. You've got a full leg taking off from Miami, a full leg lending from Miami and then an empty leg repositioning back to Waukegan where the airplane is based. By adding hangar capacity at that airport, we're cutting that in half, right, the number of operations. So from an environmental perspective, a noise perspective, all of that, that's great. Again, I won't get into every example, but think of environmental impacts of things like de-icing aircraft, right? Aircraft live and heated hangars. They don't need the icing. right? They only come out when they're ready to fly. They're not like an FBO with the airplanes, live on the ramp, outdoors. They're getting snowed on, frosted on, you can't take off an aircraft with frosted. By the way, that's a many, many thousand dollar operation to de-ice and airplane, and environmentally, it's not a great situation. That's something that we cut as well. The job that we create, the tax revenues that we create for airport sponsors I think fundamentally, we are plus for an airport in a way that no other airport tenant is. We've got a very specific set of values that we bring to an airport and to a community. Again, I'm happy to say today, there is no one guy that gets prioritized across the board. Every airport has its own sort of prioritization, and it's a matter of working with them to understand, how we create the most value together with them and kind of create that virtuous triangle of the airport sponsor, the business aviation operator and us.

And that will conclude our question-and-answer session. I'll hand the call back to Francisco Gonzalez for any closing remarks.

Thank you, operator, and thank you all for joining us this afternoon and for your interest in Sky Harbor. Additional information may be found in our website at www.skyharbour.group, and you can always reach us directly with any additional questions through the investor e-mail [email protected]. Thank you again for your participation. And with this, we have concluded our webcast. Thank you, operator.