Sky Harbour Group Corp quarterly report, Q1 FY2022

Business context and reporting period

Sky Harbour Group Corporation filed this unaudited Form 10-Q for the quarter ended March 31, 2022. It develops, leases and manages hangars for business aircraft. The January 25, 2022 Yellowstone business combination reorganized the business as an Up-C; the 2021 comparison reflects Sky Harbour LLC before the transaction, so the periods are not fully comparable.

Key financial metrics

Unless otherwise noted, amounts are in millions of dollars.

At March 31, 2022, cash was $48.610, restricted cash $18.036 and restricted investments $166.560. Restricted investments were U.S. Treasury securities held to maturity and generally committed to bond-financed projects and reserves. Net bonds payable were $160.756; operating lease liabilities were $61.516. Total assets were $347.773 and total equity $91.506. Revenue was too limited for a meaningful operating-margin assessment.

Material changes versus the prior comparable period

• Revenue increased only $0.007 million, primarily from rental of open ramp space at Opa-Locka.
• General and administrative expense rose to $4.683 million from $0.591 million, reflecting higher staffing and incentive costs, public-company legal and accounting fees, governance costs, and growth-related activity.
• Net loss widened substantially, principally because of a $13.938 million non-cash mark-to-market loss on warrants. Operating cash use increased, while construction payments and purchases of Treasury investments drove a large increase in investing cash use.
• The January 2022 transaction generated approximately $47.960 million of net proceeds, including a $45 million BOC PIPE investment and net trust proceeds. The business combination also resulted in a new public-company capital structure and non-controlling interests.

Outlook, commentary, risks and unusual items

• Management expects ongoing operating losses in the near term and states that liquidity is sufficient to continue operations for more than one year after issuance of the financial statements. The company expects to pursue additional bonds and equity to fund growth; availability and terms are not assured.
• Management estimated annual general and administrative expense of approximately $15 million as a public company. Its stated long-range plan targets 20 airport campuses, with an estimated cumulative cost of approximately $930 million, anticipated to be funded about 75% with long-term private activity bonds. These are plans and estimates, not assured outcomes.
• Five airport campuses were in development or operation. The company reported an estimated $192.4 million of direct construction costs for listed projects. Construction schedules, permits, costs and tenant demand may change.
• Approximately 90% of quarterly revenue came from two tenants, whose leases expire in December 2023 and November 2025. The company identifies tenant leasing, construction cost increases, labor and supply delays, access to financing and rising borrowing costs as important risks.
• Bond debt is fixed-rate, with $166.340 million principal outstanding and maturities in 2036, 2041 and 2054. Debt-service coverage testing begins with the period ending December 31, 2024; the company reported covenant compliance at March 31, 2022.
• Ground leases include development and spending requirements. Examples include a $17 million BNA improvement commitment by July 2023 and SGR Phase II commencement and completion milestones; failure may trigger penalties, additional rent or lease termination. The filing reports no material legal proceedings.
• After quarter-end, on April 29, 2022, the company acquired the underlying Opa-Locka ground lease for approximately $8.5 million and paid approximately $1.0 million in assignment fees. Management said the 10-year extension is expected to reduce undiscounted ground-lease payments by at least $30 million over the lease term.
• The warrant liability was remeasured at $21.924 million at quarter-end, producing the $13.938 million non-cash loss. The company reported effective disclosure controls and was implementing internal-control processes following the business combination.

Most important facts for investors to verify

• Whether signed tenant leases and occupancy support the planned campus build-out, given the very low current revenue and tenant concentration.
• Whether construction costs, permitting and delivery schedules remain consistent with management’s project estimates and lease milestones.
• How much of reported cash and investments is restricted, and whether additional financing is available on acceptable terms to fund expansion.
• Whether the company can meet future bond coverage requirements and other bond and ground-lease obligations as projects enter service.
• The impact of warrant fair-value movements, public-company costs and the Up-C structure on reported earnings, dilution and cash needs.