Boston Omaha: A Steady Year Behind the Numbers
Taking a Look at Boston Omaha (BOC) & Announcement on Merger.
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Our coverage ecosystem currently includes more than 20 companies—ASML, AST SpaceMobile, Arrowhead Pharmaceuticals, Avita Medical, Boston Omaha, Coherus BioSciences, dLocal, Global Crossing Airlines, Lemonade, Lockheed Martin, MicroStrategy (Strategy), NVIDIA, Planet 13 Holdings, Relay Therapeutics, Rocket Lab, Sky Harbour Group, SoFi Technologies, STAG Industrial, Taiwan Semiconductor, TransMedics Group, Verses AI, and the S&P 500—and we plan to expand further as our internal bandwidth grows.
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As for this newsletter, it will remain active and free but be rebranded under PCR. In the meantime, I’ll continue releasing articles under my name until the merger is fully complete.
Boston Omaha 2024 Earnings Breakdown
Boston Omaha (BOC) closed out 2024 with solid revenue growth across its operating segments, tempered by a few unusual items that impacted its reported earnings. Below we break down the full-year and Q4 2024 results by segment (billboards, broadband, insurance, etc.), discuss the one-time charge and its effect on results, examine why book value per share dipped, and summarize management’s outlook for 2025.
One-Time Charge & Its Impact on Earnings
One standout item in 2024 was a one-time charge of approximately $4.1M related to the separation agreement with BOC’s former Co-CEO. This severance and stock repurchase cost is a non-recurring expense that significantly affected the company’s GAAP earnings for the year. In fact, it largely explains why BOC reported a slight net loss attributable to common shareholders of about $1.3M for 2024. Without this one-time $4.1M hit, the company would have essentially broken even or eked out a small profit for the year, as management noted. The annual earnings release explicitly highlighted these costs, so investors could understand that 2024’s bottom line was dragged down by an unusual severance expense rather than ongoing operational issues. It’s a classic case of a “clean-up” charge, taking a short-term loss to part ways with an executive, which does not reflect the core earnings power of Boston Omaha’s businesses going forward.
It’s also worth mentioning that as part of the former Co-CEO’s exit, BOC transferred some shares of an investment (Sky Harbour Group) to him, which actually resulted in a $2M non-cash gain in other income. This gain partially offset the cash severance costs. Overall, however, the net effect of the departure was a reduction in 2024 earnings. Investors should take comfort that these charges are one-off; however, going into 2025, those costs are behind the company.
Book Value Per Share Decline Explained
Despite growing revenues and improving cash flow, BOC’s book value per share (BVPS) dipped slightly in 2024, ending the year at $16.99 per share vs. $17.19 at the end of 2023. Management also indicated a couple of reasons for this slight decline:
Net Loss and Charges: The small net loss in 2024 (due largely to the one-time severance charge discussed above) directly reduced retained earnings and thus book value. All else equal, a $1.3M loss translates to a lower equity base and marginally lower BVPS. Had the company broken even or been slightly profitable (as it might have absent the severance costs), book value per share would likely have been flat to up.
Depreciation and Investment Accounting: BOC’s businesses (billboards and broadband especially) carry substantial assets that depreciate. Those depreciation expenses, about $22.18M in 2024, reduce book equity over time. Management noted that heavy depreciation in the Link billboards and fiber network, as well as the accounting losses from equity-method investments (like Sky Harbour), contributed to the book value dip. Under GAAP, the company must record its share of Sky Harbour’s losses (approximately $17M worth in 2024) which lowers its equity investment value on the balance sheet. These accounting losses dragged on book value, even as the market value of that investment is much higher than the carried value (BOC also pointed out that its Sky Harbour stock and warrants would be worth $170.5M at market prices, versus $94.5M on the books). In other words, GAAP book value is conservative here, & doesn’t fully reflect some hidden asset value, but the required accounting treatment made BVPS inch down.
Share Issuances/Repurchases: BOC did repurchase about 111,323 Class A shares in 2024 for $1.6M. Buying back stock below book value can actually increase BVPS, but this buyback was relatively small. The share count at year-end 2024 was roughly 30.83 million Class A shares (slightly higher than start of year due to some stock issuance earlier in 2024). The minor net increase in shares outstanding also diluted BVPS a bit. However, this factor was actually very minor in the $0.20 BVPS drop; the bigger drivers were the net loss and accounting adjustments as noted.
Management hasn’t sounded alarmed by the book value decline, it was small (about 1% drop) and due to deliberate long-term investments. In the 2024 shareholder letter, BOC’s leadership stated that they believe the intrinsic value of the company “has grown at a reasonable rate of return on a per share basis” even if GAAP book value hadn’t. They attribute this to scaling up the operating businesses (which temporarily depresses accounting returns with upfront costs but should drive higher future returns) and to holding some undervalued investments. The slight book value dip in 2024 seems to be a timing/statistical issue rather than an indicator of eroding economic value.
Segment Performance | Full-Year 2024 & Q4 by Segment
BOC is a unique holding company with four main business lines as we know: outdoor advertising (billboards, operated under Link Media), broadband services (fiber and wireless ISPs under Boston Omaha Broadband brands like AireBeam, InfoWest, Utah Broadband), surety insurance (under General Indemnity Group, featuring United Casualty & Surety), and an asset management arm (Boston Omaha Asset Management, which manages investment funds in real estate and other ventures). In addition, BOC holds minority stakes in various ventures (most notably Sky Harbour).
Here’s a breakdown of how each segment performed in 2024, with an eye on both the full-year results & Q4:
Billboards (Link Media Outdoor): BOC’s billboard advertising segment had a steady year, with 2024 revenue of $45.15M (up 5.2% from $42.94M in 2023) driven by higher rental rates and occupancy. Link Media posted record sales and Adjusted EBITDA of $17.6M (9.8% growth), reflecting improved operating leverage. Segment net income rose 21% to $6.9M, supported by cost management (like land acquisitions under signs). By year-end, Link operated 7,600 billboard faces, delivering consistent free cash flow. Q4 revenue came in around $11.5M, up mid-single digits from the prior year, showing solid performance for a mature ad business. Looking ahead, BOC will keep investing in land buys and digital sign conversions (now at 104 digital faces) to sustain growth.
Broadband Services (Fiber/Wireless ISPs): BOC’s broadband segment (including AireBeam in Arizona and InfoWest/Utah Broadband in Utah) led 2024 growth, with revenue up 10.6% to $39.10M from $35.34M in 2023. This jump stemmed from subscriber additions and a major network push, including 13,300 new fiber passings and 6,100 new fiber subscribers, bringing total customers above 46,000 by year’s end. The “Fiber Fast Homes” initiative, aimed at new housing developments, boosted expansion but also drove capex to $29.5M. Even so, Adjusted EBITDA nearly doubled to $5.8M (up 99% YoY), and would have been closer to $11.1M without FFH costs. Depreciation and interest kept net income slightly negative, though Q4 broadband revenue of around $10M (up 11% from $9M a year ago) shows solid traction. Management expects 2025 to bring more network builds online, improving returns as these fiber projects shift from heavy investment mode to revenue generation. While near-term margins remain tight, the underlying subscriber economics look promising for the long haul.
Insurance (General Indemnity Group – Surety Insurance): BOC’s insurance subsidiary, UCS (United Casualty & Surety), delivered pretty good results in 2024, focusing on niche surety bonds (small contractors, license/permit bonds). Gross Written Premium jumped 40.4%, with earned premiums rising to $19.76M in 2024 (a 41.8% jump from $13.93M in 2023), showing strong market share gains. Commission income also edged up to $1.96M, bringing total segment revenue to $21.7M, about 37% above last year’s $15.8M. Despite this rapid expansion, UCS maintained a healthy underwriting margin and bolstered capital reserves in December to handle the growing book of business. Adjusted EBITDA rose 54% to $2.8M, while net income increased 32% on a GAAP basis, reflecting robust profitability. Q4 2024 revenue of roughly $6.1M was 45–50% higher than Q4 2023, mainly as prior premium writings earned out. With a stronger capital base and solid demand for surety bonds, UCS heads into 2025 primed for continued growth and expanded capacity.
Asset Management & Investments: BOC’s fourth “segment” revolves around its investment and asset management operations. In 2024, Boston Omaha Asset Management (BOAM) distributed about $18M to the parent, fueled by real estate fund sales and fair value gains (including $7.8M from property transactions). Investment and other income rose to $2.3M from $2.16M in 2023, with additional gains appearing below the operating line. BOC’s largest holding is a 16.4% stake (plus warrants) in Sky Harbour Group (SKYH), where it recorded a $17.3M equity-method loss but also a $17.0M unrealized warrant gain, mostly offsetting each other. BOC sold a portion of its SKYH shares for a $1.1M gain. Altogether, these moves pushed net other income to $11.56M (compared to a $(0.3)M expense in 2023), helping offset the consolidated operating loss. Q4 results were quieter, with around $0.36M in investment/other income (down from roughly $0.75M in Q4 2023), reflecting fewer major asset sales late in the year. Sky Harbour remains a startup that contributes ongoing losses, but BOC views its stake as a potential long-term upside.
Outlook & Guidance for 2025
Looking ahead, management is optimistic about 2025 and beyond, though they have not issued formal earnings guidance (in keeping with Boston Omaha’s long-term, value-oriented approach). On the qualitative front, the company provided several signals about its future plans in the shareholder letter and filings:
Continued Growth in Core Businesses: Management believes that as the billboard, broadband, and insurance units scale, they can start contributing greater earnings. They noted that a lot of the foundational investment has been made, and going forward “the returns we can now obtain internally via incremental capital within our controlled businesses” are attractive. This suggests 2025 will see BOC reinvesting in these segments to fuel further growth. For example, more billboard acquisitions or land lease buyouts, ongoing fiber network expansion, and supporting the insurance subsidiary’s underwriting capacity. The company’s “tone” indicates confidence that intrinsic value per share will keep compounding through organic growth.
Fiber Fast Homes and Broadband Focus: Management called out 2025 as an “important year for Fiber Fast Homes”, the new-home fiber initiative. By the time of the next annual report, they aim to demonstrate where the broadband segment stands in terms of cash flow from these investments. Investors can expect Boston Omaha to push for subscriber growth in its new fiber markets, potentially partner with more home builders or communities, and improve broadband margins now that a lot of upfront build cost has been incurred. The backlog of projects in broadband sets the stage for subscriber adds in 2025, & if growth continues 10%+ with scaling efficiencies, we could see the broadband segment move toward profitability.
Insurance Expansion: With the additional capital injected into UCS (insurance) at the end of 2024, the insurance segment has more “ammo” to grow in 2025. Management has essentially opened the door for UCS to write larger bonds and enter new states or higher bond limits. There’s no explicit premium target given, but given the momentum (GWP +40% in 2024), even a conservative outlook would be double-digit premium growth in 2025. They will be careful to maintain underwriting discipline, but they clearly see opportunity to continue scaling this business. They also hinted that surplus capital in the insurance subsidiary can support this growth without needing additional infusions, meaning future written premiums will translate into earnings (assuming losses remain low).
Capital Deployment and Shareholder Returns: We have all heard that BOC has a capital allocation mindset similar to a young Berkshire Hathaway (the company is often compared to a mini-Berkshire given its multi-industry holdings, which I’m not a fan of this comparison). They reiterated that they will allocate capital to wherever it sees the best returns, whether that’s internal projects, acquisitions, or buying back BOC stock. They did authorize a $20M share repurchase program in 2024 and used ~$1.6M of it (solid move). With shares trading around the mid-teens (below book value), management signaled that buybacks could continue if the stock remains undervalued. They view repurchasing shares as an attractive use of excess cash “during periods of negativity”, as it boosts per-share intrinsic value for remaining shareholders. So, in 2025, if BOC’s stock price stays low and the company generates extra cash (from operations or investment sales), further share buybacks are on the table.
No Formal Earnings Guidance: BOC traditionally does not give quarterly or annual earnings forecasts, and 2025 is no exception. Investors should not expect management to project revenue or EPS. Instead, management will likely update on operational metrics, number of new billboard sites, fiber miles laid or subscribers gained, premium written, etc. The company did decide to schedule its 2025 Annual Meeting for late August (rather than spring), explicitly to allow discussion of mid-year results. This implies they want to provide a more informed update with half of 2025 in the books, I think maybe hinting that the first half of 2025 results will illustrate the growth story more clearly. I personally, interpret that as a subtle confidence, they think the trajectory in 2025 will be positive, & they want shareholders to see it by mid-year.
Other Investments Outlook: Outside of the main segments, BOC will continue to nurture its minority investments. For Sky Harbour, any improvement in Sky’s results (or stock price) would favorably impact BOC. Sky Harbour itself raised equity in 2024 to fund its expansion of aviation hangars, and if that business matures (which I believe heavily), BOC could start seeing either equity income or could monetize more of its stake at attractive values. The company also holds stakes in a bank and some other ventures (the letter mentioned a community bank investment showing improvement in 2025). While small, these could provide additional upside or cash that can be redeployed. Management’s general outlook is that their mix of controlled businesses and external investments gives them multiple avenues for growth, a few might underperform, but others could outperform. In 2024 most things went right (except the stock price! LOL), and 2025 will be about executing on the opportunities they’ve built.
BOC enters 2025 on solid footing. The one-time CEO separation cost is behind it, operating segments are scaling, and cash generation is on the rise (operating cash flow hit $21.2M in 2024, up 32%). Management projects a steady, long-term approach, focusing on growing the businesses and being opportunistic with investments and buybacks, though no formal valuation targets are offered.
The 2024 results reflect patient, incremental growth: investing in fiber, surety bonds, and real estate, while gradually lifting earnings power. A minor book value dip isn’t alarming if intrinsic value keeps climbing. Investors will want to see broadband inch toward breakeven and insurance maintain profitability at a larger scale. Given BOC’s track record, there’s reason for optimism in 2025 but there has to be real value creation to shareholders soon.
Valuation
We had to update our sum-of-the-parts (SOTP) valuation for Boston Omaha (BOC) using full-year 2024 financial results, which still aligns with our original model. BOC’s business spans Billboard Advertising, Broadband Internet, Insurance, and a portfolio of Investment Holdings. Below, we will summarize each segment’s 2024 performance and apply appropriate valuation multiples.
Billboard Advertising (Link Media Outdoor)
BOC’s Link Media Outdoor division (billboard advertising) achieved record revenues of $45.2M in 2024, a 5.2% increase YoY. Adjusted EBITDA for the billboard segment was $17.6M (≈39% EBITDA margin), up 9.8% YoY, reflecting improved operating leverage. Land lease expenses were 18.3% of revenue in 2024, slightly lower than the prior year, as Link continues to purchase easements and renew leases at favorable rates to lower its land costs. Link Media’s footprint remained at 4,000 billboard structures (7,600 faces, of which 104 are digital) with a modest 2.0x debt/EBITDA leverage at year-end.
Valuation – Billboard Segment: Public outdoor advertising REITs trade in the high-single to low-double digit EV/EBITDA range (Lamar Advertising at 11.6×, Outfront Media 6.3× EV/EBITDA). Given Link Media’s smaller scale but steady cash flows, we apply a 9× EBITDA multiple to its $17.6M of 2024 EBITDA. This yields an enterprise value of $158M for the billboard segment. (For reference, 9× is a discount to Lamar’s multiple, reflecting BOC’s smaller size, but above deeply discounted peer Outfront.)
Broadband Internet (Fiber and Wireless Services)
Boston Omaha Broadband (AireBeam, Utah Broadband, InfoWest, and Fiber Fast Homes) generated $39.1M in revenue for 2024, up 10.6% from 2023. The segment’s Adjusted EBITDA was $5.8M including start-up losses at Fiber Fast Homes (FFH), or $11.1M excluding FFH. This implies that the core broadband businesses (fixed wireless and fiber ISPs in AZ/UT) operate at 30% EBITDA margins, while FFH (which builds fiber-to-the-home networks in new housing developments) is currently in investment mode (FFH alone had a -$5.3M EBITDA in 2024).
Operationally, BOC’s broadband subsidiaries ended 2024 with 46,900 customers, of which 15,600 are on fiber connections. Approximately 39,800 fiber passings (homes/businesses passed) were completed by year-end, positioning the segment for future organic subscriber growth. During 2024, the company added 13,300 new fiber passings & 6,100 new fiber subscribers across its networks, doubling fiber subscribers year-on-year. Notably, legacy fixed-wireless subscribers declined slightly to ~31k as some customers transitioned to fiber, but overall broadband customer count grew with fiber expansion.
Valuation – Broadband Segment: Given the segment’s growth (fiber subscribers +93% YoY) and improving economics, a revenue-based valuation is appropriate (since current consolidated EBITDA is muted by FFH expansion costs). Small rural broadband providers often transact around ~2× revenue, which for BOC’s $39.1M in 2024 sales implies ~$78 million enterprise value (approximately $1,600 per subscriber). This multiple is in line with recent telecom M&A for fiber-rich networks and reflects the high growth potential of BOC’s fiber deployments. We believe this valuation fairly balances the profitable core ISP operations with the early-stage FFH build-out.
Insurance (General Indemnity Group)
General Indemnity Group (GIG), BOC’s surety insurance subsidiary, continued its strong growth. Gross Written Premiums (GWP) reached $26.4M in 2024, a 40.4% YoY increase, as the company expanded its surety bond business. Revenues (earned premium and fees) grew 34.7% to $23.9M for the year. Operating leverage improved with scale, driving 2024 net income of $2.7M (up 32% from $2.1M in 2023). Adjusted EBITDA was $2.8M for 2024, up 54% YoY, reflecting GIG’s profitable growth trajectory. The combined ratio improved as expense ratios declined with higher premium volumes (implied by the EBITDA margin expansion).
Valuation – Insurance Segment: We value GIG using a price-to-earnings approach. Specialty insurance carriers of similar size often trade around 10–15x earnings. Given GIG’s 40% premium growth and $2.7M in net income, a multiple at the higher end of this range is warranted. Applying 15x P/E to GIG’s 2024 earnings yields an equity value of approximately $40M for the insurance segment. This multiple reflects GIG’s rapid growth and niche profitability, while acknowledging its relatively small scale (premium base ~$26M). As GIG continues to grow, this valuation could prove conservative if earnings scale further in 2025.
Investment Holdings Portfolio
BOC’s investment portfolio provides additional hidden value. Key holdings include:
Sky Harbour Group (NYSE: SKYH): BOC owns 12,401,589 Class A shares of Sky Harbour (a 16.4% stake) plus 7,719,779 warrants exercisable at $11.50. Sky Harbour’s stock traded around $12-$14 as of March 27, 2025. At that price, BOC’s equity stake is worth ~$161.2M (12.4016M * using midpoint $13 even) and the warrants (which expire Oct 2025) have significant additional value. The warrants were carried at a $22.54M fair value on BOC’s balance sheet as of 12/31/2024 (approximately $2.92 per warrant, consistent with SKYH.WS trading around $2.5–$3). Market Value: In total, BOC’s Sky Harbour investment is roughly $180M+ (we use ~$160M for shares + ~$20M for warrants for SOTP purposes). We note BOC recorded a $17.2M equity-method loss from Sky Harbour in 2024 (as SKYH builds out its airport hangar campuses), but Sky Harbour’s book value and long-term prospects continue to grow. BOC retains a board seat and strategic influence over SKYH.
Crescent Bank (CB&T Holdings): BOC holds a 15.6% ownership of Crescent Bank & Trust’s parent company, acquired for $19.1M in 2018. This stake is carried at $19.06M (cost basis) on BOC’s books. Crescent is a profitable private bank (focused on subprime auto lending) and has grown since BOC’s investment, suggesting the fair value likely exceeds book cost. We conservatively value this stake at $19M (cost) until more information on Crescent’s current earnings or valuation is available.
Real Estate Investments (24th Street & Build-for-Rent): Through its asset management arm, BOC has investments in real estate projects via the 24th Street Fund I & II and the Build-for-Rent (BFR) Fund (BFR they are winding down). In May 2023, BOC acquired full ownership of 24th Street Asset Management, and it now consolidates these real estate funds. As of Dec 31, 2024, BOC’s balance sheet includes $46.94M of investments in real estate special purpose entities (primarily residential and commercial properties held for sale or development). During 2024, these funds distributed $18M of cash to BOC, reflecting profitable asset sales or refinancings. Management has stated its intent to monetize these real estate assets over time (“sell the assets at the highest price the market will bear” while executing on business plans). We value the Real Estate holdings at $47 million (equal to carrying value) given the eventual liquidation strategy, additional upside or timing adjustments are possible, but book value is a reasonable for now.
MyBundle (Digital Media): In July 2023, BOC invested $3M in MyBundle.TV, a startup in the streaming/broadband services space. BOC holds convertible preferred stock in MyBundle (one vote per share, convertible to common). This stake is recorded at $3M (cost). Given the early-stage nature of MyBundle (and lack of new valuation data), we carry it at cost in our valuation. This could prove conservative if MyBundle gains traction in the market.
Other Assets: BOC also holds $2.39M in marketable equity securities (public stocks) in its insurance segment portfolio and a small preferred stock investment ($0.35M). These are minor in the context of BOC’s overall value, so we include them as part of “Investments/Other” at book value. BOC’s deferred tax assets ($91M of NOLs) are also noteworthy, though we implicitly account for their value through higher post-tax earnings in future segments rather than a separate line item.
Valuation – Investment Portfolio: Summing the major holdings above, Investment Holdings contribute roughly $250Mof value to BOC (dominated by Sky Harbour). This includes $180M for Sky Harbour, $19M Crescent Bank, $47M real estate, $3M MyBundle, and $2M other. We note that market fluctuations (especially for SKYH) can impact this total. Our valuation assumes Sky Harbour near current trading levels; any significant appreciation in SKYH would directly increase BOC’s SOTP value. Conversely, successful sales of the real estate assets could unlock value in excess of carrying value if market conditions are favorable.
Net Cash & Equivalents
As of year-end 2024, Boston Omaha maintains a net cash position on its balance sheet. The company held $28.3M in unrestricted cash (excluding $2.93M of cash inside consolidated funds). In addition, BOC’s insurance subsidiary holds U.S. Treasury securities to back its reserves, $22.4M in short-term Treasuries (maturing <12 months) and $4.7M in longer-term Treasuries. We treat these Treasuries as cash equivalents given their liquidity and risk profile. Total cash & Treasury assets available was therefore about $55.4M at 12/31/2024 (28.3 + 22.4 + 4.7).
BOC does carry some debt, primarily at the operating-subsidiary level: Link Media had $36.1M drawn on its credit facility (including a $26.5M term loan and $9.6M revolver) and Broadband had $3.4M in debt at year-end. In total, $39.6 million of debt was outstanding (with only $1.2M due within one year). Netting out this debt, BOC’s net cash (cash + Treasuries – debt) is approximately $15.8M. However, it’s important to note that $9.97M of the cash is restricted as collateral for insurance operations (and thus not freely usable). If we exclude restricted cash, the net unrestricted cash position is about $26–27M. For SOTP valuation, we conservatively use $27M net cash available to the parent (after debt). This reflects BOC’s healthy liquidity, which can support further acquisitions or expansion initiatives.
(Breakdown: $28.3M unrestricted cash + ~$33.4M Treasuries – $39.6M debt = ~$22.1M; then adding back $4.0M of insurance collateral freed after year-end events yields ≈$26M. For simplicity we round to $27M net cash.)
Sum-of-the-Parts Valuation
Bringing together the valuations of each component, we arrive at BOC’s total equity value and implied per-share fair value. Our SOTP estimates are as follows:
Link Media (Billboards): ~$158 million
Broadband Internet: ~$78 million
GIG Insurance: ~$40 million
Investment Holdings: ~$250 million (Sky Harbour, Crescent, real estate, MyBundle, etc.)
Net Cash: ~$27 million
Total Estimated Equity Value: ≈ $553 million.
BOC has ~31.45 million total shares outstanding (Class A + B). Dividing the total equity value by shares yields a ~$17.50 per share intrinsic value. This represents our updated fair value estimate for BOC’s stock based on sum-of-the-parts analysis using 2024 financials.
At around $14–15 per share in the market currently, BOC trades at a material discount to this SOTP-derived value. The discount likely reflects the conglomerate structure and early-stage nature of certain businesses (broadband FFH, real estate ventures). As these segments mature and generate cash, we would expect the valuation gap to narrow. Our SOTP framework suggests significant upside if BOC’s management continues to execute and if market conditions remain favorable for its operating subsidiaries and investments.
Conclusion: Boston Omaha’s diversified model produced record results in 2024 across its operating segments. Using conservative multiples, we derive a per-share value of roughly $17.5, implying that BOC’s current stock price does not fully reflect the intrinsic value of its billboards, broadband, insurance, and investments. We will continue to monitor each segment’s performance – particularly the high-growth broadband and Sky Harbour holdings – as these will be key drivers of BOC’s SOTP value going forward. Overall, the company remains well-capitalized (net cash positive) and is positioned to deploy capital into its growth opportunities while the market gradually recognizes the value of its sum-of-the-parts.
Q4 2024 Earnings Call Transcript
This will be Sky Harbour Group’s (SKYH) earnings call transcript for replica premium report purposes. BOC doesn’t hold earnings calls. Since this is an AI-generated transcript there will be small spelling errors.
Francisco Gonzalez, Chief Financial Officer, Sky Harbor Group Corporation: Thank you, Avi. And hello, and welcome to the twenty twenty four fourth quarter and full year results investor conference call and webcast for the Scarborough Group Corporation. We have also invited our bondholder investors in our borrowing subsidiary, Scarborough Capital, to join and participate on this call. 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 and next year’s earnings. Some of the information that will be discussed today contain 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 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 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 Canan our Treasurer, Tim Herr our Chief Accounting Officer, Matt Smith our Accounting Manager, Torrey Petro we also have Andreas Frank, our recently promoted Assistant Treasurer. We have a few slides we’ll want to review with you before we open it to questions.
These were filed with the SEC about an hour ago in Form eight K along with our 10 K and will also be available on our website later this evening. We also filed our fourth quarter Scarborough Capital obligated group on OIBDA financials with MSRP EMA a few days ago. As Avi mentioned, you may submit written questions during webcast through the Q4 platform and we’ll address them shortly after our prepared remarks. So let’s get started. In the fourth quarter, on a consolidated basis, assets under construction and completed construction continued to accelerate, reaching over $250,000,000 as of year end on the back of construction activity at Phoenix, Dallas and Denver.
Revenues experienced an increase of 13% sequentially over Q3 as we realized more leases in San Jose, optimized in the other three operating campuses and had three weeks of operations from the acquisition of the Camarillo, a California campus on December 6. For the full year, consolidated revenues doubled overdose from 2023. Operating expenses in Q4 increased mainly from two factors. We began to hire general managers and staff for new campuses coming online this quarter and next in order to do the adequate onboarding and training at our existing campuses. Second factor, as we have explained in the past, we accrue for ground lease payments at 13 airport locations even if we’re not actually making cash payments to the airport or municipal owner of our sites.
That noncash accrual of ground lease expense amounted to over $1,400,000 in Q4 and is reflected within operating expenses. Also worth repeating, that increase over the last three quarters in ground lease expense is due principally to a ground lease payment at San Jose, which are significantly higher than your typical greenfield projects. As ground lease payments incorporate the leasing of an existing large hangar, apron and parking, the cost of these existing buildings or facilities is basically amortized through ground lease payments as part of our operating expenses. On SG and A, we strive to keep it in check as we grow our business. And we also would like to reaffirm our prior guidance that we expect Sky Harbor to reach cash flow breakeven on a consolidated basis in Q4 of this year as we reach sufficient scale with new campus openings to cover our holding company expenses.
One last thing to note as you review the 10 K just filed is that for the first time we’re reporting fuel revenues apart from rental revenues. Fuel revenues are mostly margin we get from providing the fuel delivery service as we don’t take ownership of fuel in most of our existing campuses. As this line item grows in importance, we’ll break down further to show how much of these fuel revenues correspond to minimum amount guarantees. We embed in most of our channel leases as those represent also contracted revenues in a sense. So simply, if a tenant does not fly or doesn’t consume the minimum amount guaranteed amount, it’s like additional contracted rents that get added to the rental invoice.
Next slide, please. This slide summarizes the financial results of our wholly owned Scarborough Capital subsidiary that forms the Old Vicente Group. This basically incorporates the results of our Houston, Miami and Nashville campuses along with the CapEx and operating costs of our three projects under construction in Denver, Phoenix and Allison as of Q4. Two of those are now open. Revenues were basically flat from Q3 to Q4.
We expect a step function increase in revenues in Q2, Q3 and Q4 of this year as these three campuses are leased up and rent revenues and fuel revenues commenced to flow. Operating expenses increased, but I should note as we have discussed in the past that these include ground lease payments or accruals as per U. S. GAAP in all six ground leases in the obligated group. In other words, we do not capitalize ground lease payments or accruals during construction.
As may be seen in the bottom right hand chart, we are firmly crossed into positive cash flow from operations at the project level. We expect this trend to continue and to accelerate, as I mentioned, in the second and third quarters of this year when Denver, Phoenix and Dallas campuses ramp up in lease rental and field revenues. One last thing to note at the Scarborough capital level is that at the end of twenty twenty four, we were required to begin the compliance testing as per our voluntary denture and we were in compliance in terms of those ratios for the 2024 and forward looking for 2025. Next slide. Let us now turn to Mike Schmid, our Chief Accounting Officer, for a review of the introduction of the presentation of adjusted EBITDA in our reporting.
Mike? Thank you, Francisco.
Mike Schmid, Chief Accounting Officer, Sky Harbor Group Corporation: I would like to take this opportunity to provide and highlight a key business metric that we began presenting within the management discussion and analysis section of our annual report. Adjusted EBITDA is utilized by our management team to evaluate our operating and financial performance,
Tal Canan, CEO and Chair of the Board, Sky Harbor Group Corporation: which is supplemental in
Mike Schmid, Chief Accounting Officer, Sky Harbor Group Corporation: nature and a financial measure not calculated in accordance with U. S. GAAP. We have provided a reconciliation from our GAAP net loss in fiscal years 2022 through 2024 on the right hand portion of this slide. We define adjusted EBITDA as GAAP net income or loss before the add backs and subtractions that are enumerated on the left portion of the slide, which I encourage you to review.
Amongst these items are a few significant non cash items that we have discussed, both in Francisco’s commentary as well as our previous call, including the noncash portion of our ground lease expense, share based compensation and the change in fair value associated with our liability classified warrants. We began including adjusted EBITDA in our filings as we believe it is a potentially useful metric for investors, analysts and other interested parties as it provides a view of our operating performance, analyzes our ability to meet debt service obligations and facilitates company to company operating performance comparisons by excluding potential differences caused by various factors, including items that are non cash or volatile in nature. Lastly, it’s important that I note that our method of calculating adjusted EBITDA may differ than similar measures utilized by other companies and therefore its comparability may be limited. And with that, I’ll pass back to Kyle.
Tal Canan, CEO and Chair of the Board, Sky Harbor Group Corporation: Thank you, Mike. So we’ve been sharing this chart on all the last quarterly earnings calls. I think this is fundamentally where value is driven at Sky Harbor. This is the realizable revenue from ground leases that have already been signed. We are currently at the second to last from the right chart.
That’s BFI. That’s our Boeing field in Seattle, our most recent acquisition, which puts us at just under $140,000,000 of realizable revenue. By the end of this year, if we meet our guidance, we will be coming in just shy of $190,000,000 of realizable revenue. The I think important thing to look at on this chart is, I would advise anyone to look at the company. Let me remind people of the methodology here.
This is the number of square footage, the amount of square footage of hangar capacity that is buildable on each site according to our site layouts times the Sky Harbor equivalent rent or share, which is what aircraft are currently paying on those airports in rented fuel. We think that’s a conservative estimate because on every airport, we are our actual revenues have significantly exceeded the shares. So that I think is a good starting point. Now then anyone who’s analyzing us will want to discount for development risk, lease up risk, operating risk that goes with that. But that fundamentally is the foundation of value creation at Sky Harbor.
On the right side, you can see the current status of the various airfields that have been announced. With that, let’s move to the next slide. Okay. So I won’t dwell on this other than to highlight in the under construction section, DBT is Deer Valley Phoenix. We actually have our first two certificates of occupancy at Deer Valley, and we’ve begun flight operations at that airport.
We continue with construction with the rest of the campus. And at ADS at Addison Dallas, we have our first certificate of occupancy. And again, construction continues with the rest of the campus. Other than that, I’m not going to go through the rest of the items on that chart. And let me hand it back to Francisco.
Francisco Gonzalez, Chief Financial Officer, Sky Harbor Group Corporation: Thank you, Tal. On the left hand side, we show that we continue to enjoy strong liquidity with about $127,000,000 of cash and U. S. Treasury bills. We continue our cash management strategy led by our Treasurer, Tim Herr, of rolling our cash in short term one and three month U.
S. Treasury bills pending their use in construction. These cash balances exclude the approximately $32,000,000 cash we used in December to acquire and pay certain liabilities of Cloud Nine and SkyDrive5 at Camarillo Airport in Ventura County, California. On the right hand side, I wanted to show the latest trading of our long bond, which continues to rally over the past year. We have been in constant touch with our bondholders, continue to exhibit interest in our bonds and look forward to our next offering.
We have begun the process to approach the rehances to aim to secure investment grade ratings for existing bonds and we’ll be reporting on that exercise by this summer ahead of our next debt financing. And we also want to take the opportunity to rate trade our expectation that the future debt service coverage ratios for these bonds would exceed those that forecasted that we forecasted at the time of the bond issuance three years ago. And that and supporting and protecting that coverage is Solan a commitment that we have as a firm. Next slide, please. As many of you know, we completed our second pipe equity placement of common stock in the fourth quarter of last year, raising approximately $75,000,000 from a group of existing and new qualified investors.
Those proceeds, along with cash in hand, will support our next debt issuance in anticipation of the start of construction of Phase I at various projects outside the existing obligated group. Let me turn it back to Tal to discuss those some of those new campuses and ground leases that we have secured in the past quarter.
Tal Canan, CEO and Chair of the Board, Sky Harbor Group Corporation: Thanks, Francisco. Okay. Briefly on each campus, we’re starting with Camarillo, California. This is our first brownfield acquisition at Sky Harbor. The reasoning behind it is pretty straightforward.
As many of the people on the call know, we split our airport target list into what we call primary airports and secondary airports or sorry. Primary airports and repositioning airports. Primary airports are airports where the airplane lives at the same place that passengers board and deplane. Okay. So if you take a, an air aircraft that’s based at Teterboro, that is a primary airport.
Take sorry. Repositioning airports are airports where the airplanes live, but the passengers do not always, board a deplane. So if you take, Bradley, Connecticut or Oxford, Connecticut, that’s a place where a lot of aircraft live, that reposition to, let’s say, Teterboro or White Plains for passenger operations. So Camarillo is both of those, and there are a number of airports that serve both of those purposes. It’s a primary airport for aircraft owners that live, you know, roughly in the quarter between Calabasas and Montecito, California.
It’s a secondary airport that serves Van Nuys, which is the, the top primary airport for the LA Basin. What we foresee happening, this is a little bit future looking from our perspective, but really not by much, is that Santa Monica Airport is in the process of closing. It has been for a number of years years now. It’s already been cut in half in terms of runway length, forcing most of the large jets off of the airport. When it does finally close, a lot of the or all of the aircraft that are based there will be looking for new homes in California.
And there’s going to be a crowding out phenomenon into a market where there is already zero capacity. Van Nuys is fully, fully booked with waiting lists across the entire airport. Similar situations exist in Burbank. So LA is definitely one of the top markets for us in the country, capturing an existing facility that is already cash flowing, that is really on the migration path. It has to pass through Camarillo is an important move for us.
I will say Francisco noted we closed that transaction in December. So you’re not really going to see any of the cash flow from Camarillo in our Q4 earnings, you’ll begin to see those captured starting in Q1 of this year. Next one is Trenton, New Jersey. Again, I’ve said it before on this call, Sky Harbor could be a New York only company, and it’d be a pretty exciting company if we were only based in New York. Almost any square foot of land that we can get in the New York area, we want to get.
And we would say, I’d say in general, the repositioning airports in the New York area feature higher rents than the primary airports in almost every other major metro center in The United States. You’d say maybe a dozen, probably fewer than a dozen. So we’re very excited with Trenton, New Jersey. It is, again, I would say, first and foremost, a repo airport for Teterboro and, White Plains. Although there is a significant amount of activity from, call it, the Philadelphia suburbs all the way to Princeton, New Jersey, a lot of the pharmaceutical industry that’s based in that, in that area.
So exciting development for us. And then lastly, Boeing Field, which we’ve been at for about five years now. And, you know, just a reminder to people, our our said acquisition features a much longer gestation period than we originally appreciated. I think that was bad news for us for the first few years. It’s very good news for us today that, hey, I think people are seeing there’s a bit of a hockey stick moment going on right now on the site acquisition side is that seed that we planted five years ago are beginning to sprout today.
Seattle is one of the best markets in the country. It’s one of those call it dozen exceptions where you can exceed New York repositioning rents. And Boeing Field is the reigning king of, Seattle, no pun intended because it’s King County. This is our first foray into, Boeing Field. There are additional targets for us on that field and we hope this is the beginning of a very long and fruitful relationship with King County.
A couple highlights from q four. By the way, the folks I’ll call out the photographs. That is from somebody help me. Phoenix. That’s our one of our Phoenix, hangars in in the photograph.
I’d like to bring things into site acquisition, development, leasing, and operations. Increasingly, people who study the company closely have seen that these four silos are increasingly integrated. It’s really one fluid effort increasingly as we go. But in terms of framing and understanding the scope of our activities, it’s still, I think, useful to to to break it into those four areas. So on the site acquisition side, we discussed those the the the three airports that have come on board.
On development, the biggest theme is our, really foundational effort to turn this into a major construction company with the associated benefits of speed and cost control. I’ll talk about that a little bit in the next slide. But more tactically, DVT and ADS, that’s that’s Phoenix and Dallas, have both commenced operation. We have, leases in both campuses with flight operations having, commenced. Something that people look at us a little bit closely understand, we do have a kind of an interesting period where flight operations have begun, but, construction is still not finished on the rest of the campus.
And it’s a bit of a dance to make them coexist in a safe and, and efficient way. We’re there right now, and I think the overlap is, you know, is several months. I don’t think that’s something that’s gonna go away. That that’s how we will operate, probably, forever because we we do think we have a good handle on, on how how to conduct those parallel operations safely and, and efficiently. And there’s no reason to forgo the revenue in the meantime as you’re waiting for lease up.
APA is Denver. That is set for delivery next month. We are under LOI for a good number of hangars in Denver already. Again, we can’t move people in until we have certificate of occupancy, but that is in the next month or so. Two new projects slated for delivery end of this year, beginning of next is Miami Phase II and Dallas Phase II.
And we have another 14 projects in various phases of development. Not to jump ahead, but the Sky Harbor 37 is the name of, the what we hope at least
Francisco Gonzalez, Chief Financial Officer, Sky Harbor Group Corporation: for the next few years will be
Tal Canan, CEO and Chair of the Board, Sky Harbor Group Corporation: the final prototype in Sky Harbor. A lot of our cost cutting and speed enhancing exercises have to do with the fact that it is the same hangar, same prototype on every airport with minor adjustments. Right? So we have a version that is, compliant with wind load requirements in Florida, one that’s, you know, compliant with snow load requirements in Connecticut, one that’s compliant with seismic loads, on the West Coast, but those are minor minor adaptations in the prototype when you have colors at 95% the same anchor, in each of those locations. Possibly I would say possibly, it is the major effort right now at Sky Harbor, is getting that program perfected and running.
On the leasing side, I noted we’ve started leasing as soon as hangars are CO ed, they’ve been leased in Phoenix and Denver. We hope to continue that. We figured the next four to six months, we should get close to full, full capacity on those campuses. Again, Denver under LOI pending certificate of occupancy in the in in the coming months. We are I think there’s a line of questioning that we’ve gotten over the last year or two, both on these calls and offline regarding pre leasing and why doesn’t Sky Harbor do any kind of pre leasing.
And a lot of that comes from our bondholders, which we understand. And our answer has always been that our pricing leverage really peaks when we actually have a standing product that’s move in ready. This industry is not really one that looks two, four years ahead, and as an industrial or office tenant might. Aircraft owners tend to look for hangar capacity when they need hangar capacity. We’re starting to see a few exceptions to that.
And I think that has to do with the brand that, you know, we not that we’ve been making a really conscious effort at building this brand yet, but it is spreading and it’s not a huge community, the business aviation community. People who understand the unique value proposition that Sky Harbor brings, there are often existing residents who are looking to expand. And we are entertaining our first pre leases specifically in Miami and, and, Denver. We’ve begun to talk with people on other campuses that are not quite as far along in development. Again, we’ve got a very good anchor tenant who understands the value proposition and is comfortable with the with the rents that we’re we’re putting forward.
I think that’s something that we we will increasingly, experiment with. I don’t see us ever, try to prelease an entire campus, but, one or two hangars, it it it’s probably not a bad thing to do. So we’ll we’ll stay tuned for how that goes. And then finally, again, if you’re following our results, you could see it. And I I mentioned it earlier, the actual revenues continue to exceed actually by increasing margins, our forecast revenues.
That is particularly, again, if you’re studying us closely, that’s particularly the case on the second round of lease outs. Okay? The second round. The first time you lease up a campus, you’ve got 150,000 to 200,000 square feet of hangar. And it’s
Francisco Gonzalez, Chief Financial Officer, Sky Harbor Group Corporation: 150,000
Tal Canan, CEO and Chair of the Board, Sky Harbor Group Corporation: to 200,000 square feet of vacancies. You’re negotiating with very sophisticated prospective residents that are coming in. So the leverage is such that, you know, from our perspective, let’s get them leased up as quickly as possible. But as you see, the second turn of the lease is where we really start establishing what we think is the market rate. Again, something you can track if you’re studying this closely.
And then fourth, operations, increasingly important part. We had a big thrust in the fourth quarter of last year, including the onboarding of Marty Kretschman, our Senior Vice President of Airports, to really codify what seems to be the special sauce that’s driving value for residents at Sky Harbor and it’s really in the operations. The real estate is a platform. The real estate has to be put down in a very specific way in order to be able to serve that operational level, that we’ve been serving. But fundamentally, staffing, training and equipping these campuses in our specific way is a key to the entire value proposition.
And increasingly, we’re seeing that recognized in the industry. There are a number of flight departments that will do everything they can to be at Sky Harbor. And that’s we want to keep it that way and grow it. And lastly, a look ahead to the next 12, again, in these same four categories. Site acquisition, so again, we have a lot of seeds sprouting as we go.
And I don’t want to say that happens on autopilot, but it increasingly requires, they call it a more routine effort. So our kind of innovative aggressive efforts are increasingly focused on the best fields in the country. And we’re still waiting for a competitor to come in and join us in this space. But for the time being, as we’re alone here, our focus is really capturing the best revenue producing fields in the country. And the growing Fed acquisition team is focused primarily on that.
That is the ambition for 2025 is is the best airports in the country. On the development side, right now it’s all about that scaling program. And, if there are questions on it, we’re happy to get into some detail. But for now, just I’ll leave it at at this. Our number one ambition is quality.
We want the best hangar in business aviation, full stop. Time, we wanna put these up quicker than anybody knows how to put them up a lot faster than we’re doing it today. And we want to keep doing it at increasingly attractive cost to Sky Harbor. On the leasing side, there is a growing brand for Sky Harbor and that’s something that we’re looking to capitalize on. We have opened a marketing department at Sky Harbor for the first time, and we we will be looking to articulate our our message and our value to the market in a more deliberate way, going forward.
And then lastly, operations. So the focus will remain on the Sky Harbor resident. I know a lot of people have called in to ask about additional revenue producing services, which are, you know, certainly in the works, but we’re introducing those things. You know, things like our our, you know, our new security service, really is a value enhancing service at the beginning rather than a revenue producing service with the idea that, again, we want to put as many good dots on the map as we can right now. That is the primary focus of the company is grow and grow in the right places.
Put out the best offering in aviation and then we’ll have time later to circle back and see which revenue line items we can capture later in a way that enhances value for our residents. So we’ve spoken about additional revenue producing services in the past. I want to reiterate that’s not it’s important, but it’s certainly not the most urgent item right now. It’s not where we’re allocating most of our resources. And with that, Juan, we have that Yes.
Okay. Yes. With that, why don’t we open the questions?
Francisco Gonzalez, Chief Financial Officer, Sky Harbor Group Corporation: Yes. This concludes our prepared remarks. We look now forward we look forward now to your questions. Operator, please go ahead with the queue.
Q&A Section
Abby/Avi, Conference Operator: Thank you. And your first question comes from Alex Bocert. In a recent podcast interview with Ben Clareman, Tal mentioned it’s absolutely possible to have 50 campuses in three to five years. I’m not giving any spoilers, but I think it might be possible to exceed that as well. Could you provide more color on this statement and expand on what is leading to the potential of a significant acceleration in the pace of ground lease signings?
Tal Canan, CEO and Chair of the Board, Sky Harbor Group Corporation: Yes. Thank you, Alex. Look, if if we just meet our guidance and don’t exceed it, then by the end of this year, we’re we’re already halfway there. And as as you you probably noticed, I know you’re somebody who follows us quite closely, the pace of site acquisition wins is growing exponentially. It’s not linear.
And that has to do with what I mentioned earlier is that a lot of that is seeds that were planted years ago that have been cultivated over the last years and are now beginning to sprout. So we see a very strong case for accelerating and significantly beating our projections. Again, we don’t we’re not quite ready to make any plans for the end of this year yet, but certainly for the next three to five years. I think 50 may end up having looked conservative.
Abby/Avi, Conference Operator: And your next question comes from Philip Ristau. Congrats on the new BFI lease. I’m assuming this is the second Brownfield location. If so, what is the expectation on price per square foot? Of the six new locations for this calendar year, are any of those six also Brownfield?
Finally, what does the time line look like for additional revenue streams to start to materialize? Thanks.
Tal Canan, CEO and Chair of the Board, Sky Harbor Group Corporation: Okay. Thanks, Philip. So there are a couple of questions in there. Starting with the last, it’s a lot what I closed on at the end of my remarks is that those additional revenue streams, we’re not in a rush to put them in place, right? So right now, almost all of our revenues are from rent and fuel.
Services that we have rolled out like the security service, we’re offering right now really as part of rent. And and again, the idea is let’s let’s focus our efforts on claiming more marquee airport sites around the country and creating the best possible offering that we can for Sky Harbor residents. With the idea that we that there’ll be plenty of time to circle back and optimize the revenue streams and get into some of the other, call it, OpEx line items of an aircraft owner. So, important but less urgent than than than the others. On the six locations that we’re set to announce for the coming year, well, all of them are greenfield.
That said, the nature of the brownfield opportunities is such that they it’s difficult to predict when they’re going to materialize. Happily, Francisco and team have us in a place where from a liquidity perspective, we’ve been able to capitalize on those quickly. I think that’s part of what allows us to win. So I don’t know if any of those will materialize this year. I will say that the kind of informal pipeline of brownfield opportunities that are being shown to us seems to be getting more robust.
So I wouldn’t be surprised if we if there are some brownfield opportunities, but my guess is they’ll be on top of the greenfield opportunities, not instead of. Anything else in there? No, I think that answers it. I want to move to the next.
Abby/Avi, Conference Operator: And your next question comes from Randy Binner. Great quarter and thank you for taking the question. It is positive to see the 23 campus guide confirmed. Can you give us a sense of how campus development will progress in 2026?
Tal Canan, CEO and Chair of the Board, Sky Harbor Group Corporation: Okay. Thanks, Randy. So based on the the first part of the question, I I assume you mean by development, site acquisition in 2026. So we’re we’re not providing guidance quite yet for 2026. But I would say we should continue at least a pace with 2025, possibly significantly more than that.
So if you want to put a range, I think the bottom of that range would be, call it, six airports. Don’t want to say what the top of the range would look like.
Abby/Avi, Conference Operator: And your next question comes from Alex Bostart. You mentioned that the average step up in rents when you’ve had a vacancy has been 28%. Do you believe that your existing tenant leases are below market? And do you believe you can continue to achieve large step ups when you release space?
Tal Canan, CEO and Chair of the Board, Sky Harbor Group Corporation: All right. Thank you. That’s a good question. Look, I’d say this, the I don’t know that we’ve had a third lease on a hangar yet in the portfolio. My guess is that the step up from the second lease to the third lease is not going to be quite as dramatic as the step up from the first to the second lease.
So, that’s more or less how I see this going down. You have a significant compromise, let’s call it, on your first round of lease up in an airport, a significant step up to what I would consider market rates on the second round that you lease up. And then from the second round on, sorry, third, the third role on, I would say inflation should more or less be our guide. Again, this is barring establishing a more solid brand and better recognition in the industry that if you are a premier jet owner, you want to be at Sky Harbor. If we put that aside for now, I think inflation should be our guide.
Now to be clear, we think inflation at airports is going to outstrip CPI by a very, very significant margin. It’s beachfront property. There are no new airports coming up. There’s limited additional land at existing airports. So we think inflation is going to be a pretty major factor.
But that’s what I think I it’s just one kind of hint to where that goes is that our multi year leases feature, annual escalators of CPI with a floor of 4%. And there’s very little pushback in the industry. And again, we’re dealing primarily with most sophisticated flight departments in aviation. The fact that there’s little pushback, I think, constitutes some recognition among those who are experienced in business aviation operations, that significant airport inflation is inevitable.
Abby/Avi, Conference Operator: And your next question comes from Tom York. Slide 10 indicates you are funded for 800,000 square feet assuming you receive the full $150,000,000 of PAB funding. Your square foot in development outside of the obligated group is obviously more than double $800,000 How do you expect to bridge this gap funding wise?
Francisco Gonzalez, Chief Financial Officer, Sky Harbor Group Corporation: Yes, Tom, it’s Francisco again. Thanks for the question. Indeed, we are very deliberate of our capital raising plan. And one of our objectives always to be at least twelve to eighteen months in terms of having the capital versus the time that we need to deploy it, making sure that we can then navigate any market environment and so on on a timely basis. So come 2026, we should be then on a consolidated basis, a positive cash flow in company from the standpoint of the operations, which then leads to a question, do we redeploy that excess cash as the equity into new fields thereafter?
Or do we, at some point, later in ’twenty six or ’twenty seven, start thinking about the dividend policy, if any, for the company? There’s been a lot of school of thought in our board, in our investor base, and that’s a debate that we’ll continue having internally over the course of the next eighteen months. Do we dividend out most of our free cash flow, but then that will require us to raise a growth equity in the markets or do we reinvest our cash? Now given our accelerating level of ground leases, it’s fair to say that our those free cash flows already 2026 and 2027 will not likely be sufficient to meet that time schedule. We have been approached in the past couple of years by between four to six real estate infrastructure funds who have been interested in potentially partnering with us in some type of sidecar vehicles to prosecute our business plan, where we will be needing to put just a small amount of equity and be able to extract a significant amount of the economics of our business model.
So we also have been wrestling with those more asset light business models as a way of thinking about the right deployment of our capital and versus the dilution to existing equity holders. So again, we’re going to be deliberate about this going forward, and stay tuned for that. Thank you, Tom, for the question.
Abby/Avi, Conference Operator: And your next question comes from Randy Binner. Can you please provide an update on the process for raising $150,000,000
Francisco Gonzalez, Chief Financial Officer, Sky Harbor Group Corporation: Yes. Thank you, Randy, for your question. We just came earlier this week from a muni bond conference in Midtown Manhattan sponsored by a large investment bank. And we’re pleasantly happy to see we had about eleven one on ones with institutional investors, some of them who have been with us since the original deal, PABP’s deal three years ago, and some new phases and so on. And it’s clear that there’s an interest in our bonds in terms of existing bonds and the potential debt financing this summer.
In terms of the process, we have commissioned the feasibility of market install with a third party consultant. So that is underway and should be ready by May, late April, early May. We also are in the process of starting the re agency process with to seek investment grade with our existing bonds and that’s something that also as I said in my remarks a few minutes ago, we look to also update everyone by the beginning of the summer. So we are obviously paying attention to market interest rates and credit spreads and all of that and working with our various relationship bankers in terms of a strategy. Simultaneously, we have received several proposals from some large commercial banks to basically provide five year term financing in lieu of bonds, which is also an alternative that we have in place to the extent that we don’t like the bond market as time that would come to market this summer.
Abby/Avi, Conference Operator: And your next question is from Alex Boseert. Does Rapid Built have the opportunity to expand to clients outside of Sky Harbor?
Francisco Gonzalez, Chief Financial Officer, Sky Harbor Group Corporation: If so, how
Abby/Avi, Conference Operator: material could this be?
Tal Canan, CEO and Chair of the Board, Sky Harbor Group Corporation: It turns out that the Sky Harbor 30 7 prototype is actually a pretty good design, not just for Sky Harbor’s uses. The way that’s shaped and, I don’t know if it’s made its way to our website yet. If if it hasn’t, it will it will be soon. You can actually comfortably fit about 70,000 feet of airplane into that 37,000 square feet of hangar. Right?
And Yolanda, that sounds counterintuitive. When we put up on the website, Yolanda, exactly how that works. If you’re a busy FBO, you could probably get to a lot more than that. So the answer is yes. Sort of remind people that the purpose of the RapidBuild acquisition was to increase the quality, speed and reduce the cost of Sky Harbor development.
That’s really what that company is about. We’re not seeking to turn it into a profit center for Sky Harbor. That said, we’re working one shift now at RapidVille. We’re soon going to go up to two shifts where we’re not going to be filling our two shift capacity entirely. And we can go to three shifts ultimately in that factory as well.
So there will come a point where we’re very comfortable that we’re supplying ourselves adequately and doing exactly what we need for Sky Harbor at RapidBuild and that might be a time. It’s a prescient question because we are actually getting quite a bit of interest from from third parties to manufacture metal buildings for them. And people who understand the SkyRiver thirty seven and are happy to take exactly that for their own uses. So I’d say probably not in the next couple of quarters, but ultimately that is an opportunity.
Abby/Avi, Conference Operator: And your next question is from Pat McCam. Can you give any expectations for the interest rate you might get with the upcoming private activity bond issuance?
Francisco Gonzalez, Chief Financial Officer, Sky Harbor Group Corporation: Yes. Thank you, Pat, for the question. So are the secondary market trading of our current bonds and you can actually follow this by logging into the MSRB EMA website of the municipal industry. But in the last trade, our long bond was about $5.38 in yield and our shortest bond, which is the eleven year, traded last at $4.65 So call it on average roughly around $5.5.5 and oneeight in terms of secondary market level trading. A new issue sometimes likely comes at a discount to that meaning a slightly higher yield.
So in the current market, one could speculate a little bit that a issuance like ours will come there in the low 5s. Now our plan though is first to seek investment grade ratings for existing bonds, which should obviously impact those secondary market level of those bonds and then that might have a halo effect on our new issuance. So stay tuned for that and our goal obviously is to get the lowest cost and value out there in the marketplace for the next financing.
Abby/Avi, Conference Operator: And your next question comes from Doug Johnston. Are you going to publish publicly the projected 2025 DS coverage for the PAB obligated group?
Francisco Gonzalez, Chief Financial Officer, Sky Harbor Group Corporation: Yes. Thanks for the question. We actually did. If you look at the quarterly financial unaudited of the Sky Harbor Capital that was filed with MMSRP about a few days ago, March 1, sorry, I mean March 1. And the audited financials will be coming up in the next few days.
And you will see in the last page the calculation for 2024 and the calculation for 2025. The other thing I will note in our website, we posted already or we’re about to post the presentation that we provided this week in the municipal bond conference and we showed the predicted level of debt service for the Scarborough Capital bonds and pro form a for or updated, I will say better, for the rents that we have been receiving in the past three years and that we expect to receive in the phases that are still under construction or in development. And you can see our expectation that this has service coverage in that presentation.
Abby/Avi, Conference Operator: And your next question is from Tom York. In 2023, you projected debt service coverage of over three times in 2025 but have lowered this to 1.36 on EMA. What are the moving pieces here?
Francisco Gonzalez, Chief Financial Officer, Sky Harbor Group Corporation: Yes. Thank you, Tom, for the question. It’s actually like a follow-up to the prior question. Yes, the service coverage ratio calculated for 2025 is 1.36, which is higher than the 1.25 maintenance requirement in indenture. But we have to remember that we still are halfway or actually less than halfway of the revenue potential of the obligated group.
So as we open Denver, Phoenix and Dallas in the coming months and then later on in early twenty twenty six, Opeloca Phase II and later than Denver Phase II, All those things together will result and our expectation is that the debt service coverage once all those things stabilize a couple of years from now will be higher than the three times that we expected three years ago. Actually, again, referencing that illustration that we provided in that presentation filed with MSRB EMA, actually that we’re going to file later tonight or tomorrow, you will see that our expectation is that instead of three times as we projected three years ago at the time of the bond issue, we are looking to be at four times to five times a debt service coverage of our debt service in the future years. So please look into that. Thank you.
Abby/Avi, Conference Operator: And your next question is from Peyton Skil. Based on the 10 K estimated some airfields construction cost, RSF have changed quarter over quarter in both directions. Can you provide some color on initiatives that have reduced costs, RSF, I. E, BDL and challenges that have increased costs, RSF, I. E, PWK?
Tal Canan, CEO and Chair of the Board, Sky Harbor Group Corporation: Yes. Thanks, Peyton. So let’s start with all the macro factors are pushing costs up. And that’s obviously not specific to Sky Harbor. That’s across the board.
The efforts that we’ve been talking about for the last several quarters on the development side have started to bear fruit. So I’ll give you some examples. Just the manufacturing of pre engineered metal buildings by ourselves is saving us today on most recent projects between $32 and $33 a square foot. Right? That’s that’s what we’d be paying in pre engineered metal building margin to third party suppliers if we had to purchase from, from them.
We’ve taken a lot of the ability to control the feedback loop between manufacturing and construction. And I’m talking about the extreme end of the construction envelope, which is the subcontractors, and and take, for example, trades like erection, and create a a strong feedback loop between our manufacturing and what is now becoming a, a a small group of regional and national erector partners with Sky Harbor who are putting up our campuses. That feedback loop is is we project and we haven’t seen this yet. But this, you know, we’re we’re we’re we’re gonna have to, live up to this as we, as we put these next projects into construction is going to result in significant time savings for the field. And these buildings are going to go a lot faster than the previous buildings, went up and that’s time savings.
On the other side of that, we don’t exactly put into cost cutting, but if you figure that a fully leased campus generates, call it $500,000 to $700,000 a month in net operating income, shaving a month or two off of a construction timeframe is is very significant in terms of, you know, when when revenues get turned on again. And another example, and I I won’t provide too many of these, but another example is national procurement. Right? So the way we’ve built all of the campuses to date has been, you know, let’s say you’re looking at your, lighting fixtures, of which there are thousands, on a campus. We will purchase those on a per campus, per project basis, typically through our electrical subcontractor who takes a margin on that, on on that as well.
So that means building each campus as though it’s the only campus that we, you know, that that we’re ever gonna build. What we’re doing is starting now on the on the campuses that are coming in, is that we’re pre purchasing everything that we can for the next six, seven, eight campuses at once. And we’re already realizing really significant cost savings by that, procurement. And, you know, so there’s all sorts of interesting kind of hedging and, and and procurement, means that we can take. That look, some of them I think we could have done earlier, we just didn’t where we hadn’t gotten around to it.
Some of them are really a function of the scale that we’re building at right now, and that we’re able to realize it. So stay tuned for that. If we do this right, you’ll see our development costs continue to come down as we go forward.
Abby/Avi, Conference Operator: And your next question is from Dave Storms. One, as you are procuring materials and labor for development, are you seeing any impact from tariffs? And two, you mentioned site acquisition has benefited from seeds planted a while ago. Are you seeing or expecting to see any impact on the pace or availability of site acquisitions coming from some of the uncertainty in the public sector following the government layoffs at the federal level?
Tal Canan, CEO and Chair of the Board, Sky Harbor Group Corporation: Yep. Alright. Thanks, Dave. I’ll start with the second one. Short answer is no.
You know, first of all, what our exposure to the federal regulation is relatively static, right? Compliance with FAA guidelines, secondarily, TSA guidelines, pretty much anything national is uniform. It’s it can be complicated, but it’s uniform and it’s relatively unchanging. So, we don’t see any significant change. Most of the unique hurdles that we have to cross on every project are local, right, local and state.
So, so the answer to that one is no. On the first one, look, there have been two there have been two hikes in steel prices this month. So the short answer is yes. We are seeing some, materials and labor, materials changes. I’m not talking about labor quite yet, but so yes, those are directly results of tariffs.
Luckily, we were able to preempt that, you know, just out of a bunch of caution, put some pretty large preorders in place before those happens and we’re able to capture some savings. So we’re feeling pretty lucky to have, to have gotten that in place. And then going forward, you know, we don’t want to speculate on macro developments. The night is young. We’ll see how the the whole tariff situation unfolds for us.
But for the coming projects, we’re actually covered. We were, Sky Harbor itself was actually not impacted by those two increases in steel prices.
Abby/Avi, Conference Operator: And your next question is from Jacob Robinson. Hi, Sky Harbor team. A student from the University of Michigan here was wondering if you had a solid outlook on the CapEx financing plan well into the next five years and how the terms of that lending might gradually turn in your favor and when you might choose to instead turn to equity issuance and further dilution?
Francisco Gonzalez, Chief Financial Officer, Sky Harbor Group Corporation: Thank you, Jacob, for the question. It reminds me that there are always college students looking to invest early in their careers. Also I have to say go blue for those guys who follow Michigan. Listen, the interesting thing about our model is that we have a very modular business plan in terms of the moment we secure those ground leases, as Tom mentioned earlier, we then have a very deliberate plan in terms of getting the entitlements, the permits and so on that could range between six or nine months and then we have like a twelve month construction period. So we then have basically a lot of visibility ahead in the finance area of looking out at those ground leases as they’re coming together and those various construction plans and so on.
So we basically have a good idea well in advance, I say actually, as I mentioned, like about a year or two years in advance of when we actually need funding, which is important because it allows us to plan, be opportunistic and so on. And as I said earlier, our plan is always to be raising the funds twelve to eighteen months minimum ahead of when we need the funds. So as you look out into the future, that translates into a capital plan and a financing plan that we obviously will not take opportunistic situations that lend themselves in the marketplace either in the debt side or in the equity side. I think one important thing is always to have a plan B or plan C and so on just in case there’s market turbulence either in the equity markets or in the debt market. I think we have proven in terms of our pipe financings that we have been able to take advantage of reverse inquiry interest into the company as we have proven in our couple financings in the past one point five years.
We as I mentioned earlier, we’re dual tracking, for lack of a better word, between a bond deal and a bank financing for this upcoming bond deal or debt financing this summer. And also, as I said in another response to another question, we have also the opportunity to potentially co invest with existing large real estate or infrastructure funds in some projects, especially brownfield ones. So there’s a lot of alternatives here that we see in front of us. And so we’re going to be delivered as we go forward in our deployment, obviously being conscious of cost of capital and dilution to our equity investors. So thank you, Jacob, for the question.
Abby/Avi, Conference Operator: And your next question is from Brad Thomas. Curious as to Sky Harbor’s customer sentiment as it relates to reshoring announcements and Trump tax cuts.
Tal Canan, CEO and Chair of the Board, Sky Harbor Group Corporation: Thank you, Brad. So, I think by customers, you mean our residents. It’s a good question. I’m trying to think where we might have gotten a peek into that. I will say in general, we’re feeling significant optimism from our residents.
If you measure that in terms of the level of improvements, post delivery improvements that tenants, put into their hangars and in some cases, you know, we’re talking about like literally a million dollars at least space, right? It’s, often not not necessarily a very long term lease. There actually is quite a bit of optimism, in that group. Whether that has to do with reshoring or tax cuts, I don’t know. I’ll ask anyone around the table, Francisco, if you know about bonus depreciation.
Francisco Gonzalez, Chief Financial Officer, Sky Harbor Group Corporation: Yes. I was going to add that. First of all, thank you, Brad, for the question. And it’s great to see the king of REITs following our stock. Thank you, Brad.
Yes, I was going to mention that it has been rumored that as the tax plan is coming together in Washington that they may bring back what they had in the 2017 tax reform of the accelerated depreciation for new machinery equipment and that will include also business aviation aircraft. So if that were to happen, we could basically depreciate the entire purchase of your of the plane within a year, that’s to accelerate the people purchasing planes or upgrading their planes to bigger planes. And remember, in our business model, it’s not just the amount of visa aviation, it’s that the amount of visa aviation of larger planes cannot be serviced by the existing legacy hangar real estate out there. So thank you, Brad, for the question.
Abby/Avi, Conference Operator: And your final question is from Alex Bostart. In a recent podcast interview with Ben Clareman, Tal mentioned that recent M and A transactions of hangar space by peers in the industry imply a value for Sky Harbor a lot higher than the current share price. Could you mention what those comps are and their valuation?
Francisco Gonzalez, Chief Financial Officer, Sky Harbor Group Corporation: Thank you, Alex, for the question. We avoid having discussions of our view of our value. We led that to the pundits and our research analysts that cover us and so on. One thing we will note is that we have observed in the M and A market for FBOs, although again different model, but those continue being bought and sold at very hefty multiples. And more I think more comparable than an FBO because we’re infrastructure real estate business model is marinas.
Marinas, especially in The U. S, have have a lot of similarities to us in the sense that they’re fishfront properties, literally fishfront properties, and they sell fuel and you cannot really replicate A or B. There’s no more marinas being dredging and environmental issues making very scarce real estate and obviously they serve a very diverse clientele of high net worth individuals. So a lot of similarities and we saw every single MA transaction when Blackstone I think acquired a safe
Tal Canan, CEO and Chair of the Board, Sky Harbor Group Corporation: harbor, a
Francisco Gonzalez, Chief Financial Officer, Sky Harbor Group Corporation: marinas, from a fleet out there called, if I can remember here, some communities. And that was at a hefty multiple. I think it was 21 times EBITDA or something like that. Anyway, but so we keep track of the M and A activity out there. But truthfully, we’re very focused on our business and execution on our plan and so on and our funding needs and so on and let valuation be something that gets determined over time by the marketplace.
Abby/Avi, Conference Operator: And with no further questions at this time, I would like to turn the call back to Mr. Francisco Gonzalez for closing remarks.
Francisco Gonzalez, Chief Financial Officer, Sky Harbor Group Corporation: Thank you, Avi. Thank you, everybody, for joining us this afternoon and for your interest in Sky Harbor. We have, as I mentioned earlier, additional information at our website that we keep updating, and that’s at www.skyharbor.group. And you can always reach us directly with any additional questions through the email investors skyharbor. Group.
So thank you again for your participation. And with this, we have concluded our webcast. Operator, thank you.
Abby/Avi, Conference Operator: Thank you. And ladies and gentlemen, this concludes today’s call and we thank you for your participation. You may now disconnect.