Sky Harbour Group Corporation (NYSE:SKYH) Q4 2023 Earnings Conference Call March 27, 2024 5:00 PM ET
Company Participants
Francisco Gonzalez – Chief Financial Officer
Tal Keinan – CEO and Chairman
Mike Schmitt – Chief Accounting Officer
Tim Herr – Treasurer
Tori Petro – Accounting Manager
Will Whitesell – COO
Operator
Good afternoon. My name is Krista, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Sky Harbour 2023 Year End Earnings Conference 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. If you’d like to ask a question during this time, simply submit the question online using the webcast URL posted on our website. Thank you.
Francisco Gonzalez, Chief Financial Officer, you may begin your conference.
Francisco Gonzalez
Thank you, Krista. I’m Francisco Gonzalez, CFO at Sky Harbour. Hello, and welcome to the 2023 full year earnings equity investor conference call and webcast for the Sky Harbour Group Corporation. We’ve also invited our bondholder investors and our borrowing subsidiaries, Sky Harbour Capital to join and participate on this call as well.
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. The team with us this afternoon, you know, from our prior webcast, 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. Joining us today is Will Whitesell, our COO since the beginning of the year. We will came to Sky Harbour after a successful career in the construction industry having spent 15 years at Turner Construction, four years at the related companies, and more recently, six years at Suffolk Construction when he was last COO of the New York region. We’re very glad to have Will in our leadership team.
We have a few slides we want to review with you before we open up to questions. These slides have been filed with a few minutes ago in a Form 8-K with the SEC and will also be available on our web site after this call. As the operator stated, you may submit written questions during the webcast using the 4Q platform, and we’ll address them shortly after our prepared remarks. Let’s get started.
Next slide, please. This is a summary of our financial results in the context of the trend of the past three years for selected metrics. In the interest of time, I would like to highlight just a couple of items. First, our revenues in the last quarter were in line sequentially with the prior quarter, if one adjusts for the previously disclosed and non-recurring items of Q3, and now we’re ready for the next step function related to the opening of a new campus, something that now is expected to occur starting next week with the opening of our new facility at the San Jose Mineta International Airport, and Tal will shortly discuss more details on this great exciting ground lease and operation. Second, our operating expenses and SG&A are semi fix to fix and we continue watching our expenses and maintaining frugality whenever possible.
Lastly, looking ahead, our consolidated cash flow from operations continues to move towards the breakeven point, which we expect now to occur at the beginning of 2025 after the opening of commercial operations in our three campuses currently under construction.
Next slide. Similarly, the financial results of Sky Harbour Capital and its operating subsidiaries that form the obligated group of our outstanding bonds track similar results that the holding public company except for the SG&A, which is mainly at the parent company and the employee stock based compensation expenses also at the parent company.
Sky Harbour Capital is forecasted to be casual positive throughout 2024. In terms of rentable square footage, we continue to make significant progress in securing new ground leases with the newest executed at the San Jose Mineta International Airport and at the Orlando Executive Airport following the approval by the Greater Land Aviation Authority. As we have stated in the past, the value of our business is not backward looking when the projects in the pipeline in front of us. Once the ground lease is executed, the value creation for our shareholders is effectively locked in, and it’s all about execution thereafter.
With that summary of results, let me turn to Will to discuss the previously disclosed remediation at some of our construction projects in Phoenix, Denver and Addison and later to Tal for a more on this exciting news about our new airports. Will?
Will Whitesell
Thank you, Francisco. This slide represents the individual field’s cost and schedule impacts from our three month forensic engineering study. The root cause analysis has been determined to be a one-time structural design defect with our prototype hangar. Through a rigorous study, we’ve developed a comprehensive remediation plan and cost that after completion, we will never have to look back again at these fixes in these fields.
A brief explanation of the slide of the bars below, starting with the yellow bar indicates the cost — anticipated cost to complete, pre-design defect awareness and the gray bar on the right represents the indicated cost after remediation and at project completion. The delta between the two is the magnitude of the impact per field. Also indicated in the notes above are the target completion dates for each of the fields after the remediation plan and completion.
With that, I’ll turn it back to Francisco to discuss the financial implications.
Francisco Gonzalez
Thank you, Will. Implementation of the remediation has increased and extended the life of the obligated group’s construction funds as illustrated on the graph on the left hand side of the deck slide. Having identified, corrected and now implementing the remediation, we injected $27 million in additional cash equity from the holding company to Sky Harbour Capital to ensure full insufficiency at the construction front of the obligated group. The pro-forma cash and U.S. treasury bills at the obligated group currently now stand close to a $127 million, as depicted on the right hand side pie.
I want to reiterate that as a matter of company policy, we will continue to protect our borrowing tax program, not just in terms of our ability to pay the debt service on time, but to manage the program with the objective to exceed the debt service coverage we projected on the time of the bond offering in August of 2021. This commitment continues being sacrosanct for us.
Back to Will for a discussion of ramping up our development activities.
Will Whitesell
Thank you. As Francisco gave a quick introduction on my background, I spent 25 years in my career in two key areas, managing multiple large projects and moving organizations from walking to running.
With that being said our key objectives as we move forward, higher quality, lower cost, shorter delivery times and performing all of these above at greater scale. This is exactly what our pipeline is demanding of us moving forward. How do we get there? One, team integration of our development and construction members. These three groups have to be fully integrated, ensuring we have enough bandwidth, disciplined experts with proven results. Two, prototype refinement, as we move forward, we standardize our hangar design and configuration. This will allow us to drive both cost and execution as we move forward. Three, manufacturing capacity. We continue to retool and increase our internal fabrication capacity with RapidBuilt and develop multiple external fabrication sources to ensure we have plenty of supply to meet our future demand of 10-B structures.
And lastly, process integration from choosing sites with our site acquisition team through development and construction, finally with our hangar operations, both our processes and interface points have to be seamless, which leads us to our next slide. This slide, otherwise known as a Gantt chart, is a snapshot of our parallel development planning process. This is what we are gearing up for and responding to as our pipeline continues to grow, and this is what we’ll be ready for as we move into through the rest of ’24 into ’25.
With that, I’ll turn it over to Tal for a leasing update.
Tal Keinan
Great. Thank you, Will. Okay. So you can see the first three pie charts on the left are our existing campuses in Houston, Nashville and Miami. You can see we’re a little bit — actually a little bit above 95% occupancy, which if you subtract the assumed vacancy rates in our original PABs filing represents what we’ve called full occupancy. Couple of points I want to make here. First of all, we’re looking to achieve a little bit greater than 100% occupancy due to the success we’ve seen in our semi private hangar leasing, right, where we can achieve somewhat higher than 100% occupancy. Couple other points is the escalators on all of these leases are CPI with a hard floor of 3% or 4%. So they’re escalating at a good rate.
Our renewals, we have had our first renewals, which have come in the 20% to 30% range. So we do believe there’s significant upside once you are fully leased. And I think we’ll probably save it for a separate call on additional revenue streams, but we are beginning to get non-rent revenue streams online. Again, we’ll report on that in detail, as that becomes more substantial.
On the right side is our new campus in San Jose, which is our first Tier 1 airport in the portfolio. As I think a lot of people may have read already, there is an existing facility that we’re inheriting in addition to construction that we plan to do at that field. We’re preleased our operation start date is April 1, which is next week. We’re already preleased to the tune of almost 60% and hope to be fully occupied sometime in the next few weeks in San Jose on the first phase of that.
Next slide is San Jose itself. So, I think, as we go forward, you’re going to hear us talking more and more about revenue capture, which I’ll describe in a little bit more detail in two slides. But it is essentially the available revenue to us at each location. So our Phase 1 at San Jose was opening right now, we’re looking at about a $5 million revenue opportunity. Phase 2, which will add to that — will add another just north of $2 million. Again, very — I’d say, one of the more established airports and metro markets in the country. And based on OEM backlogs and orders to this market, it’s also one of the faster growing markets in the country.
Next slide is, our 11 announced airport win, which is Orlando Executive. San Jose is one of the more established airports in the country. Orlando is one of the fastest growing metro centers. So we’re looking at about just under $5 million of revenue capture in Phase 1, just over $3 million in Phase 2, and this is a market that we expect to see grow significantly.
It already has very heavy demands, a big supply demand mismatch between hangars and business aircraft that need to be hangered. And this is all happening in the metro center with the second highest GDP growth in the United States. So we’re quite optimistic about the future of our ladder executive.
The next slide is on revenue capture. And, again, I think most people who followed us have heard us, talk about our growth in terms of number of airports or square footage of hangars, those are really both proxies for what we’re really pursuing, which is available revenue. And so, what you can see on this slide is the kind of the left half of that bar chart is the first six airports. You can see all the way on the left what represents the obligated group that we discussed earlier, that’s our original bond issuance.
So that’s the capture from those first six airports. And if you go to the right side of the chart where the arrow is that’s March 2024 as of today. 11 airports capturing about $95 million in available revenue. That’s square footage times discuss Sky Harbour equivalent rent that we apply to each airport, right? With that measure is of available revenue. And then if you take the chart to the right, that is the indicators that we’ve given to the market as to what we expect in the year ahead. I’m sorry, until the end of 2025.
Next slide. I think we’ll wrap it up here. I’m just because the only thing I want to stress on this slide is the company’s current focus is site acquisition. We’ve got to do everything and you could see on the slide kind of a snapshot of what’s going on in each vertical center in the company. The primary focus though of management right now is revenue capture and that’s site acquisition. Go after the best fields, achieve the most square footage that we can in the shortest time possible. And as we see the questions coming in, I see that a lot of people are asking about that. I think that’s exactly appropriate. Right now is where we go into high growth phase.
With that, let me hand it back to Francisco.
Francisco Gonzalez
Thank you, Tal. This concludes our prepared remarks. We now look forward to your questions. Operator, please go ahead with the queue.
Question-and-Answer Session
Operator
[Operator Instructions] Your first question comes from the line of [Philip Ristow]. The 40 to 50 locations that were mentioned on the last call, what are your thoughts on announcements for 2024? Lastly, how many of future locations could be existing like San Jose instead of de novo new construction?
Tal Keinan
This is Tal. For the write of this year, I think we indicated three new leases in the first half of the year. So we’ve got two down, one to go. We’ve indicated three more going forward to the end of the year. We’re always going to be trying to beat that, but we’re looking at three more for the end of this year and then six in 2025.
In terms of the greenfield versus brownfield, it’s an astute question. We were a little bit dogmatic about greenfield, early on in the company and that still is the lion’s share of what we intend to do. There are, first of all, a few cases like San Jose. If you remember, Nashville was similar where we inherited a good structure that we have — it’s better to keep and refurbish than to demolish and build new. So I do think there will be more of that going forward. And obviously, the kind of the immediate cash flow implications of that are convenient as well.
And secondly, I think we’re in a period where we were not seeing any sort of interesting deals to actually purchase ground field. That’s something that we also think might be changing right now. We are seeing a number of opportunities like that. The company will always be primarily a greenfield developer. That is the model, but, yes, thanks for the question. I think it’s a precious question.
Operator
Your next question comes from [Elliot Ruda]. Your remediation costs, particularly at the Phoenix location have a significant effort on the first obligation bond group. How do you see the effects on the business at large?
Tal Keinan
So a significant effect on the bond group. First of all, [Elliot], thanks for the question. You’re right to highlight Phoenix in particular. Phoenix definitely represents the bulk of the remediation cost. The reason is that we were furthest along in construction at that airport. So the design flaw manifested most significantly there. So good that’s what you’re pointing out. Regarding the obligated group, which as a reminder, recovers those phases one on the first six airport and phases two just at Opelika, Miami and Denver Centennial.
As Francisco said, we’ve taken action to fully protect the group as we always will. With regard to the business at large, I’d say it depends on your view of how many fields Sky Harbour will ultimately reach, right? If we were to stall out on-site acquisition tomorrow, let’s say, that impact would be tangible. Figure just to put it in numbers.
The cost of capital for 15 airports is around $850 million so that remediation would represent a little over a 3% impact in development cost. But if we prosecute the business plan that we’re committed to prosecuting then I think we will see that design flaw in the context of, look, the many challenges we faced already as a business and the many that we’re sure to face going forward.
So if you put the same numbers on that let’s say we hit 20 airports that’s about $1.1 billion in capital deployed, 30 airports would be about $1.7 billion, 50 airports which is our goal, would be about $2.7 billion. That’s the capital deployed, the development cost. The value of the airport portfolio in each of those scenarios, I mean, that really depends on the assumptions that you or any observer can make independently. But if we’re doing our job right, the value of those portfolios is considerably higher than the capital deployed, which makes this a pretty small fraction.
And as Will was discussing earlier, the way we have remediated that our intention for this to be a onetime fix, something that we never look back from. Remember, we deploy a prototype model. It’s the same hangar at every airport. You fix it once and it’s fixed.
So looking at the business at large to your question, I think that’s the appropriate perspective to take. Right now, it’s about site acquisition. If we’re successful there, this becomes unimportant and if not, it is important.
Operator
Your next question comes from the line of [Connor Kim]. What would be the upper range of lease agreements you would be comfortable signing in 2024? What about 2025? Is there anything that would make you want to limit your lease signings such as growing too fast?
Tal Keinan
Yes. I mean, the answer, Connor is no. I mean, the faster we can grow the better. We do believe that we’ve got a good financing plan that will be aided. I think we’ve got a kind of a virtuous cycle here to finance these fields. One thing that I think is important to note, we may have noted this originally when we went public, is that our ground leases usually do not feature performance clauses. And when they do, they’re quite flexible.
So you don’t really have a gun to your head to start development right away when you’ve signed a ground lease. Of course, our intention is to develop right away and to get to cash flow from those fields as quickly as possible. But it’s actually difficult to paint yourself into a corner where you don’t have the capital to execute on the business plan. So there really is no upper limit. The more fields that are in the money, so to speak, for us that we can get, the more we’ll take.
Operator
Your next question comes from [Michael Diana]. How are your two new senior operations hires going to improve the speed and efficiency of your manufacturing of hangers?
Tal Keinan
I think it’s been it’s been very, very astute. You raised some very good points in your coverage, so thank you for that. So just to kind of rephrase the question, Krista, would you would you mind just reading the question one more time?
Operator
Certainly. How are your two new senior operations hires going to improve the speed and efficiency of your manufacturing of hangers?
Tal Keinan
Yes. So I tell you, we have one of them here in the form of Will Whitesell and, yes, this is really what he’s done for the last 25 years. Will, anything you can comment on that will kind of get a little bit more specific on sort of the plan going forward and prototyping and all that?
Will Whitesell
Sure. In addition to myself, we have another senior development construction individual that started with us that is his resources are really dedicated to our due diligence predevelopment pipeline to help push through some of these fields that we’ve signed leases on to get permitted and entitled to be able to start construction.
And secondly, we have another individual starting with us next week that is a long time construction individual that is joining us that will be solely dedicated to the execution of the construction of these fields as we move forward. We’ll continue to increase the bandwidth of our team as our pipeline continues to grow and ensure that we have the right people in the right seats.
Operator
Your next question comes from [Francisco Ferreras]. There’s been quite filings today and recently. Can you please put the recent filings into context for the market?
Tal Keinan
Indeed, we had a busy day today here at Sky Harbour and we’re here with our Chief Accounting Officer, Mike Schmitt and Tori Petro. There was a variety of filings today, obviously, 10-K with our full year results. But we, as you know, we did a pipe transaction common stock last November with 57 some million plus warrants, and those had registration rights to be registered with the SEC, and we fulfill the requirement this afternoon by filing an S3 to cover those.
Also, we have had outstanding a stock purchase agreement with a broker dealer that we’ve had for the past two years. We actually have not sold any shares under that program and we simply replaced that program with S3 shell registration program that of equal or similar size. And again our thinking there is just to do housekeeping, now probably back on the 10-K with all the various filings to do the registrations on the programs that we needed to do or that we had before. But, again, housekeeping, we don’t intend to use the ATM program unless it’s opportunistic for market opportunities that may arise in the future.
Operator
Your next question comes from [Elliot Ruda]. You referred to San Jose as Tier 1 market. Can you explain what that means?
Tal Keinan
So we rank markets and airports around the country in terms of their specific attractiveness to Sky Harbor. And the primary component of that metric is available revenue, as I alluded during the presentation. So think of it like this. Our steady state construction costs around the country should vary within a pretty finite range and our same for our OpEx. The OpEx at steady state around the country should vary within very finite range. The variable to which our business model is the most sensitive by far is rent, which varies within a very broad range and that’s really driven by location.
So I can refer you, if you can look back at the leasing slide that we just put up or just refer to it in the 10-K, you’ll see that the rents that we’re achieving, for example, in San Jose are approximately double what we’re achieving at some of our other airports. When we originally set out when Sky Harbour originally set out to acquire airport sites, our selection process was pretty close to arbitrary.
The key role we stuck to was steer clear of the markets with the highest rents, right, what we now refer to as Tier 1 markets, because we knew we’d make mistakes early on. We did make mistakes early on. We wanted to make those mistakes in locations where the stakes were relatively low, learn from them quickly, apply our learnings to a scalable, repeatable process and then pursue scale aggressively, with a major focus on the country’s Tier 1 airports. And that’s where we are today. That’s our focus.
Operator
Your next question comes from [Arthur March]. What is your — what is projected EBITDA for 2024? Thanks and good work.
Francisco Gonzalez
As a matter of policy, we’re not providing guidance at the company in terms of specific targets. But what we can say and I think we’ve seen in the past, we are tracking to EBITDA positive soon. The first place you’re going to see EBITDA going positive is the Sky Harbour Capital, which is obviously the obligated group, the group of companies that are operating companies and so on. And as I just said earlier in my prepared remarks, EBITDA at the Sky Harbour Capital should be positive throughout 2024.
On a consolidated basis, when you add our expenses SG&A at the holding company that breakeven level, it should be reached towards early Q1, Q2 of 2025. And it’s driven by the fact that as Will mentioned our construction projects and the opening and the cash flow of those projects is now delayed towards later this year early next year, and that is pushing the breakeven point of EBITDA again towards the first half of 2025.
Operator
Your next question comes from the line or comes from [Michael Schaeffer]. Considering the stock trading well above $11.50 have any warrants converted? Any thoughts on future conversion and money into SKYH?
Tal Keinan
I think I get a warrant question every week from someone out there. Just for everybody’s benefit, we inherited this warrant program at the time of the destock, two and a half years ago, and then we’ve been managing it. The interesting thing is indeed, it is the case that our stock has now surpassed the strike price of $11.50. And in the past year-to-date, certain holders have decided to exercise their warrants and basically purchase their stock. So roughly to give you a sense, Michael, out of the warrants outstanding, there’s been a roughly 250,000 round numbers of warrants exercised in the past few months and that has produced on a cumulative basis close to $3 million of proceeds to the company, which obviously we’re going to put to good use in terms of new fields, new hangars and more future growth for the company.
In terms of conversion and what we’re going to do with the warrants, because I get that question every week, we remain, right now, we monitor markets, we monitor the warrants and situation with our stock price. We don’t — we’re not planning, we have no current plans to do anything with our warrants right now and have them remain outstanding for now.
Operator
Your next question comes from [Alan Jackson]. Can you please explain the process of what a lease is signed and when it enters the obligation group? Is it the idea that most properties will enter the obligation group?
Tal Keinan
This is a very new one, but very important. One of the pillars of the business model of Sky Harbour is our ability to borrow tax exempt fixed rate municipal debt at attractive low interest rates. And thus, we created in our first bond insurances with the first six airports this obligate group. Now, it is not a one time phone issue. It’s a program. Meaning, in the future, we can do further bond issuances and they will join the existing bond issue and be part of the affiliated group at that point. It’s when you do the bond transaction that you basically make it part of the obligated group.
Now in theory, it doesn’t mean necessarily that when we do a new field, we’re going to merely finance it as part of the obligated group. We might do interim financings. We may even do some long-term money issues outside the obligated group and wait to collapse them at a later time. So that’s something that depends on market conditions. Maybe one critical thing that I will say is that we’ll always be thinking from the standpoint of the current bond holders and the obligated group that we do things that are credit accretive in terms of as we go grow the program.
Operator
Your next question comes from [Jordan Mullins]. You have indicated you expect three new ground leases in the first half of the year. You announced two today. Are you able to provide an update on ground lease negotiations, especially in top tier markets? And have you found those top tier markets tend to take longer? Appreciate any color you can provide here.
Tal Keinan
So our policy is to announce agreements only when they become binding. So we can’t provide specific names. What I think is okay to say is, look, the site acquisition team has grown a lot over the past year. We’re working a lot smarter and a lot faster than we did a year ago and still the amount of work on each of our places is growing fast. So we’re quite enthusiastic about what the pipeline looks like. And, again, specific names will come out as the binding ground leases get signed.
With regard to you asked if those Tier 1 markets take longer. I don’t think we’ve observed a correlation there. There’s a gestation period. It varies a lot. I don’t think it necessarily correlates to the attractiveness of the market. Some takes a long time, some takes a little time, which is why we found the best approach is to be in process in many, many airports simultaneously. And they come through when they come through. This is an exercise in throughput rather than cycle time.
Operator
Your next question comes from [Michael Diana]. How do you get more than 100% occupancy?
Tal Keinan
If you have 12,000 feet of hangar and you lease it as we do in most cases to a single tenant who might have multiple aircraft, it doesn’t really matter to us what actually goes into the hangar. However, we’ve had a lot of success, particularly in Nashville and to maybe a lesser extent in Miami and what we call semi private leasing.
If you have a midsize aircraft, you’re flying a Challenger or Falcon 900 or something like that, it’s not necessarily justified for you to take a full Sky Harbour 16 hangar. So what we’ve done is provide private office and lounge space, but you have one or two or three other aircraft with you in the hangar. And there we price the hangars in the — or the hangar slots in the same way that FBOs do, which is by square footage of aircraft, which is defined as length times wingspan, the industry convention. And, of course, that entire rectangle is not occupied. The corners are empty. So you can get to slightly higher than 100% occupancy.
Now the Sky Harbour 16 is okay for that. It was really intended originally as a private hangar. We’ve moved as a consequence of the change in the NFPA 409 fire code that governs hangar construction to a new flagship hangar, which is the Sky Harbour 34, which is essentially two Sky Harbours 16. If you look at it kind of from an aerial shot, it looks like two Sky Harbours 16.
You can demise a Sky Harbour 34 and create two fully private hangars, two fully private Sky Harbour 16. It’s just that the demising wall is now not fire rated. It’s just an acoustic all between those two hangars. However, when you open it up and use it for semi private use, it’s much more stackable. So for example, you can get two heavy aircraft into two Sky Harbour 16. You can get three heavy aircraft into one Sky Harbour 34 for the same footprint on the ground. So what we expect is when the new airports come online with Sky Harbour 34 that occupancy above 100% will be I think a bigger part of the business plan. It may be a bit of a nuanced question, but I think that’s where you’re going to. Appreciate the question.
Operator
Your next question comes from [Peyton Skill]. The new airfield average RFS/hangar is in the 30,000 RFS range rationale for moving to larger sizes. Do larger hangars bring additional complexities/costs?
Tal Keinan
So that’s more or less what I was talking about now when I was answering Michael’s question about the utility of the Sky Harbour 34. By the way, particularly, at the at the Tier 1 airports where we just can’t get enough space. The more space we get, the happier we are. So the ability to create a higher revenue density at those airports is key. So the Sky Harbour 34 is far superior to the Sky Harbour 16 in that respect.
In terms of complexity and cost not really. I can say that there is more steel that goes into it because we have a longer free span on the Sky Harbour 34 than you have on the Sky Harbour 16. So, yes, I’d say in terms of the amount of steel that goes into it a bit more, it’s not something that’s going to move the needle dramatically in terms of total cost of a new airfield.
And complexity, it’s actually, I would say, slightly simpler than the Sky Harbour 16 in that we don’t have to use vertical lift doors. Because one remember one of the more expensive components of our current construction is those vertical lift doors. We use vertical lift today because the hangars demise into each other, right? We want maximum revenue density on each campus. So there’s no space between the hangars, they adjoin each other, so to speak. So you can’t really have sliding doors. That’s why we use vertical lift doors today, which is expensive and adds a bit of complexity.
In the Sky Harbour 34, you can have sliders without sleeves for the sliders and maybe we’ll put out something that kind of shows what that looks like at some point. But in terms of operations, it’s actually slightly less complex.
Operator
Your next question comes from [Lucas Horton], a four-part question. One, do you have any longer term margin profit targets? Two, where do you expect to expand your headcount? What divisions do you see opportunities for headcount growth? Three, could you discuss your expectations for capital requirements for the foreseeable future? And four, how often are you competing with another provider when bidding for new contracts? What is the average number competitors you see when bidding for new builds?
Francisco Gonzalez
A lot of questions here but let me go quickly here in order. A long-term margin profile target. Yes. So, our margin really comes from the difference between our tenant leases and our operating expenses, our ground lease payments and our cost of capital of the overseas are capital intensive and we borrow a lot of money, in terms of debt to be capital equity and debt to finance it.
So it is that margin that really drives a long-term margin for our business. So obviously, it’s interest rate sensitive, it’s sensitive also to the construction cost and so on. So once stabilized to have from an operating perspective attractive margins. It’s when you look at the totality of net margins that you have to bring all these first elements into account. So a project by project, each project is profitable. It could be that thing right now as a business that we have to grow so that the contribution of those projects surpasses the semi fixed cost of our SG&A as a business. And again, we expect that to happen in the near future.
In terms of headcount, we’re keeping it very tight. Every time we open a campus, we have three or four full time equivalents. So you can do the math there in terms of the expenditure as we open campuses.
And in terms of capital requirements, I think the rule of thumb here to use is that on average again, these are on average. Every campus with these various spaces will cost, will make mean a deployment of between $50 million to $60 million. So that gives you a sense of capital formation for us as we continue to grow.
And in terms of how — obviously, the business is very competitive and we find. Let me let Tal address that in terms of competitive dynamics, but we are in a competitive business. And at the same time, though, we have a differentiated product that allows us to be very successful. And the recent past has shown us again and again be able to be selected among others.
Tal Keinan
I agree with that. I think what you said is exactly right. You may be on top of that. I’d say, I think the place where we’re probably, we’ve created the most proprietary knowledge in the entire company is on-site acquisition. To be clear, we love our hangars. They’re Taj Mahal for us. But fundamentally, it is a metal box.
Leasing is leasing operations is not very different from what you’d see, for example, in FBO operations. In fact, it’s simpler because we don’t have transient business. The real smarts, the kind of the deepest bag of tricks in the company is on-site acquisition. So, even implied in the question is when you use the word bids, in many cases, it’s us initiating, these discussions with an airport. We’re alone in these discussions.
We try to stay two or three steps ahead of where the market’s going. I don’t know that we’ll be alone forever. I don’t want to assume that’s the case. But for now, we are the only people doing what we’re doing anywhere in the country. This is the Sky Harbour is a unique model for now.
And again, in the cases where it is competitive, as Francisco just mentioned, we do come with a with a very differentiated offering, where this is not an FBO offering. And I think in pretty much every case where we’ve made a concerted effort and it has been competitive, we’ve won and hopefully, we continue.
Operator
Your next question comes from [Andrew Sordoni]. You had a significantly lower estimate of remediation cost when you first announce the design flow in Denver and Phoenix in December. What has changed since December, and what can we expect in today’s numbers to be final? Also, can you discuss why you needed to spend the $27 million in remediation costs, DVP, APA and ADS, and whether that is one-time?
Will Whitesell
This is Will. I’ll take that one, Andrew’s question. Andrew a couple of things. First, we conducted an extensive and exhaustive review of both Denver and Phoenix that were the furthest along in construction on the designs, right, really culminating in three different engineering firms, primarily with Thornton Tomasetti as I would consider world class, maybe the best that there is. And the objectives were to diagnose the flaw and determine all the related issues with it, with a high-level of precision. And then from there detail a remediation plan that is optimized first and foremost for certainty of result, right, and makes this make this a once and final fix, right?
Secondly, this has been a thorough and rigorous process and we feel very confident in our estimates. And lastly, I would note, we’ve learned a tremendous amount from this process and this engineering study, which has been key for us to carry over into our new prototype Sky Harbour 34 that we’re really landing on moving forward as our mainstay offering.
Operator
Your next question comes from [Connor Kim]. When opening a new campus, what do you expect to your average time to reach full occupancy to be?
Tal Keinan
This is Tal. We have six months budgeted. I think one of the things you can see is on our original campuses, it took us more than that. Part of what we were doing is, I think, again, if you’ve been following, you see that the per square foot rents go up as the supply goes down. Again, not something that we invented. We have come up with a few methods on the leasing side to shorten that. So I think one of the things you see, for example, in San Jose is we actually haven’t opened yet. We’re already in about 60%. So we expect that one to go quite quickly. So going forward, one of the objectives is to have it look more like San Jose than the first projects.
Operator
Your next question comes from [Peyton Skill]. Is the 2 millimeter Q4 operating expenses all attributable to existing airports?
Mike Schmitt
This is Mike. In terms of our Q4 operating expenses, look at the allocation as about 45% related to the operations at our three operating airports, and the remaining 55% is actually attributable to all of our ground leases at all airports, regardless of whether or not regardless of whether or not they are operating. As disclosed in our financial statements, we’ve adopted an accounting policies, where we elect to expense those directly as opposed to capitalizing them during the construction period.
Operator
Your next question comes from [Robert Slasak]. As financing needs increase with growth, how do you think about ranking sources of capital? Bond insurances versus pipes versus potential add on public stock offering.
Francisco Gonzalez
We look into this and we think about this all the time. And, obviously, it’s and we’re capital intensive and we have needs. Important thing for us is always to be ahead of the game. So at no point, we are forced to go and get capital at terms that we don’t find attractive for the company and for our shareholders. So from our perspective, our goal is to have a capital structure that maximizes the use of permanent bond transactions at the lowest rate possible.
Well and then that will obviously provide leverage and then augment your return on equity to their shareholders. So how do we accomplish that? So far as you have seen, we have been at the receiving end of proposals from family offices, in terms of pipes as we did last November and that’s something that we will entertain, if the opportunity arises.
In terms of the bond market, we track it, we follow it, and so on. And one important thing that we have discussed in the past is, should we wait, given increasing interest rates overall, for when we achieve investment grade ratings? Because once we achieve investment grade ratings, you’re looking at saving of about 200 to 250 basis points in your fixed rate cost of debt. So, we are balancing always the timing of the our next bond issue, relative to timing of potential investment grade and the timing of further equity offerings.
One last point I will make is we’re very conscious that we need to increase our float, so at the right time, again, the right market conditions, it will make sense for us to broaden our flows in the right way. But, again, we do not do this by looking at market opportunities and do it on a timely basis, not to and right now, in terms of our capital needs, we’re covered for the next 18 to 24 months and thus, we have plenty of time to entertain these various alternatives of capital.
Operator
Your next question comes from [Jamie Fortino]. In hindsight, was going public the right strategy?
Tal Keinan
You want to take this?
Francisco Gonzalez
Yes, please. So I’ll take it and some people are laughing in the room here because we are a field not public company. As you know, we’re real estate and — two years ago, we’re probably early stage company and I was probably most reluctant to go this path. And now I’ve turned around in my view of this, and now I’ve become kind of like someone who’s supportive of being a public entity. It really has us out there internal web show with all information available to the marketplace, which allows us and we get incoming all the time of people who are interested in investing with us or trying to do some transaction with us, showing us of opportunities.
So, it’s something that also has allowed us to attract talent, in terms of the professionals that have joined us in the past few months in having a currency. Also, using our currency to potentially even do things in the M&A market, even again, if we’re dealing with the rises. So being a public company, I’ve come around full circle here. And so, [Jaime], I appreciate your question. I also appreciate your following. I know you’ve been following us for a couple of years from the Harvard Business School, a contingent of people who invest in Sky Harbour.
Tal Keinan
This is Tal. I’m going to add to that. I think we’ve been lucky enough so far that we run this company as though it’s a private company in that we’ve not sacrificed the long-term for the short-term in any case here. We’re running it so far exactly as we think it should be run. I think we’ve got, I think, a good following of major shareholders who understand, what we’re doing. By the way, many of them tenants to who really understand the business model and the value that we’re that we’re bringing. So I agree with Francisco on balance. I think this ended up being a good decision.
Operator
Your next question comes from [David Penone]. Could you please comment on the timing and structure of future bond issuance? And what does management expect to pursue an investment grade rating for the muni bonds?
Francisco Gonzalez
Thank you, David, for the question and also for your first participation in a bond issue back two years ago. Indeed, as I said earlier, reaching investment grade is one of our objectives. Obviously, we got to do and have a little bit of more history to show the ranges and have a structure to get to investment grade. So we plan to I think the right timing when all those, things will come together will probably be in the earlier or middle of next year, somewhere of 2025. And, so that will be kind of like our timing of our goal to do that.
And then again, in terms of the next bond issue, if we can wait till then and be able to you know, we have done all the breakeven analysis about forming ourselves through other means, entering debt, bank debt, equity financing and so on and then recapitulate ourselves and achieve and capture that 200, 250 basis points savings. I mean anybody who has the calculators, we’re looking in long-term debt. Our first bond issue was 33 year final, 25 year average life. When you get 200, 250 basis points savings both going in best in grade versus non-rated, and you present value up to today, boy, that’s a lot of money of savings if you can capture them. And we’re looking to — we our objective is to try to capture that before we do our next permanent bond deal.
Operator
From [Mike Nipp], in your recent interview with the Motley Fool, you in indicated no other type of real estate has unit economics nearly as attractive as this. Can you expand upon that?
Tal Keinan
I don’t know if no other type of real estate, but I I’ll say, look. I haven’t seen too many asset classes where you’re able to achieve consistent double-digit yield on cost — unlevered yield on cost. And I think, if just in case people, miss the point this is at non-Tier 1 airports. Again, your construction costs will vary within a pretty limited range. Your OpEx will vary within a pretty limited range. Rent is really what drives the unit economics of this business.
We’re very happy with airports where we’re getting per square foot rents in the 30s and 40s. But as you’ll see, as we get into more and more of these Tier 1 markets, we are holding again your CapEx and your OpEx relatively constant but increasing revenue significantly, that is unit economics will respond correspondingly.
Again, this is without what Francisco was alluding to earlier, which is this real kind of afterburner of municipal bonds, kind of a very elegant and efficient form of leverage in this business. I’m talking about unlevered returns in the double-digits. I don’t know too many areas in real estate where that’s readily achievable today.
Operator
Your next question comes from [Connor Kim]. During the capital raise in November, where you priced it at $6.50 per share, do you feel that this was an attractive price for you to raise capital, considering the market is now valuing it at double that price? Or did you place significant value on the partnership of the investors?
Francisco Gonzalez
It’s important to know that even though we announced the pipe around October, November, probably November of last year, it was something that was being negotiated during the summer when our stock was trading in the $4 to $5 range. So it was a pipe that was coming actually at a premium to the observed equity price.
And we did it in a limited amount of capital rapid to our future needs and we thought it made sense to seamlessly market our market access. Our market access has a common stock offering type with our preference, over the things that you see out there. And again, we didn’t need the cash right now. It was the right, thing to do for us, for the company and I think the market reaction has proven that strategy. And I’ll let Tal comment on the partnership of the investors because some have been publicly disclosed and we can talk about that in terms of your being some of them are tenants. Some of them are people with affinity to the aviation industry. And then others have wanted to remain private, but they’re very — people who are very significant in terms of investment community in the United States.
Tal Keinan
I think that’s right. Look, that investment round or that pipe deal had some of the most sophisticated business jet owners in the United States in it. Again, like Francisco said, some of them disclosed, some of them not disclosed. I would say all of them have been extremely active, since we closed that route in everything from site acquisition to introducing us to, again, some of the best residents we could we could possibly hope for in the business. So all told no regrets. We don’t look back. I think we’re very happy to have to have completed that at the size that we indicated. So we’re quite pleased with that investment round.
Francisco Gonzalez
So, operator, I know we have hit the one hour mark. I know there are many other questions to remain in queue. But at this juncture, you have to keep this tight for an hour. I’ll ask and we’ll, we have people’s questions. We’re going to respond back to people individually via email. So at this juncture, we’re going to close the webcast but not before thanking everybody 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 to us directly with any additional questions through email [email protected]
If you wish to visit our campus, please let us know, and we’ll arrange a tour. I know several of you took advantage of this opportunity in the last few months. So, again, thank you for your participation. And with this, we have concluded our webcast. Operator, thank you.
Operator
Ladies and gentlemen, this does conclude today’s conference call. Thank you for your participation and you may now disconnect.
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