Good morning, everyone. My name is William Schellmeyer. I'd like to thank you all for joining us this morning. Up next, we have presenting from Pure Cycle Corp ( Nasdaq: PCYO) . Presenting on behalf of the company today is President and Chief Executive Officer Mark Harding. Mark?
Just listening. This is the advance, I'm assuming. I'm going to bet that's the case. Good morning, Mark Harding. Delighted to be here. Back to the IDEAS Conference. Nice, bright and early for the morning. I'm going to poll the room. How many have heard of Pure Cycle before? Okay. So a couple of new folks here. So we are a kind of what I'll describe as a vertically integrated asset management company. We have water in a water-short area. So those of you that are from the West understand and appreciate the value of water. Holding water in Colorado is a little bit unique just because there's no way for us to change the equation. We can't make water. If you live on a coast, there is the ability at some price where you can make water. We don't have that as an inland area.
And so one of the inspirations, and just a little bit of background about me, this has been the bulk of my career. I've been with Pure Cycle 35 years. So when I was nine years old, I joined the company. I'm a Denver native. And one of the inspirations for the company was the fact that inland, you have a fixed supply of water, right? There is just no way to change how much water you have. And if you have a growing demand and a fixed supply, right? I just got out of business school, and somebody said, "That's where you want to be," right? The price is always going to increase if you cannot meet the demand through creation of that supply.
That's one of the things that's really the value proposition behind the company is that we were very early on in acquiring water resources. I got to first start my deck here and get the lawyers out of the room, right? Everybody understands what a forward-looking statement is and the forecasts because we have some forecasts in here, which will be exciting for everybody. For those of you who have been following the company, and then also just to give you guys that are learning about the company a little bit of a foreshadow of how things are going to roll out for us. One of the things that all good companies do is they build great teams. And so I will say I'm privileged to get to work with just a talented group of folks.
If you take a look at our headcount, we're right around 45 professionals. They kind of divide themselves up into various disciplines between engineering, water, wastewater, land development, and then with our most recent segment, single-family rentals. My bosses, our board of directors, we punch above our weight on the talent that we have on the board. We have a great talent. If you look up any of these candidates, they bring that expertise from real estate development with Patrick Byrne, who was a 40-year veteran at Pulte Homes. We have commercial expertise, water, SEC counsel, investment management, retired KPMG partner because you're public, and that's a real pain in the butt. It's great to have a talented board to help me not make all the mistakes or not make the same mistakes twice, at least.
So let me really give you a quick overview of the company. I foreshadowed water because it's really the DNA of the company and particularly the value of the company where we have a large portfolio of water in a water-scarce area. If you quantify that, we have about 30,000 acre-feet of water. That's our unit of metric. It literally is what you think it is. It's one acre, one foot deep, 326,000 gal of water. And it typically is enough water to provide service to three single-family houses a year. And when you take a look at our overall portfolio, we do the math on that to say we can serve about 60,000 single-family connections. We probably can serve a little bit more than that just because of how the use of water continues to go down as a result of conservation.
But we get two fee instruments from that. We get a large capital fee, which is a system development or tap fee at the time that our home builder partners apply for a building permit. And that's incorporated in the cost of the house. And then we get that customer, right? We get that permanent customer paying their monthly water and wastewater bill in perpetuity. Land development. So along the way, one of the things that we learned was what water can do. Not only does water increase in value, but what it can do for other assets. And so what it's doing for us and really all land values in the water-short regions is you can't develop land unless you have water. And Colorado has a very strict relationship on zoning and water availability, right? They don't want to give land zoning unless it has water.
And so it's sort of a chicken and egg. You can't get water unless you have land. But really, the value proposition is water is far more valuable than the land itself. If you take a look at how land trades, land that doesn't have water availability, that trades at maybe $15,000, $20,000 an acre. When you add water to that, where you can now get zoning, it can trade at $50,000, $60,000, so more than two and a half times the value of the land itself. And so we like that land development business. We like buying land that doesn't have water, knowing that we have that portfolio, bringing our water to that portfolio, increasing the value, and then also being able to do something with the land, controlling that opportunity. And I'll talk a little bit about that. And then most recently, single-family rentals.
So we also like the fact that on those communities where we're the master plan developer, we're adding value every day by what we're doing. And we're adding value to those lots. And so we're holding back some of those lots, and we're partnering with our home builder partners that we sell the lots to to build the lots for ourselves. And that's, again, a terrific asset. It's a great tax advantage situation because we carry forward the equity value of the land and the water utility within that. And so we have a tremendous amount of equity in every unit that we bring online. Let me drill down a little bit on the water. Takeaway from here is we have had this portfolio for a very long time. It was one of the first things I did.
We went out and acquired a water asset in the Denver metropolitan area. Everybody looked at me and said, "You're an idiot. They're not going to need that water for 30 years." They were right. Now, having a $14 million basis in the water rights portfolio, we have a top-line revenue of almost $2.5 billion on that asset. That's about a 50% margin business for us. When you look at us putting up the results that we're putting up, and we've had some very good results in the last few years, you'll be able to get an appreciation for how does this company that's got a $100 million asset pull down these 70% margins in this. It's really just because we were early. We've owned it. Water is a thing that is very cheap to own.
It doesn't cost you a lot to own it, but it's very hard to get. You take a look at how we continue to invest each year into the systems. Those are the pumps, the motors, the pipes that distribute that water out. We have also a wastewater segment associated with that. This will be a little bit about that system capacity. We do expand that system each year and currently are using a little over half of that capacity. We have plenty left on being able to supply water and then also being able to supply water to our residential customers, continuing to grow that high-margin. When you take a look at the overall capacity of our tap portfolio, very, very small, right? We've only allocated about 2% of that. The runway on that is just tremendous.
And the Denver metropolitan area has kind of grown out to where we are to give us the opportunity to be able to monetize that asset. Let me talk a little bit about our land development segment. That's where we have water. We can bring that water to a master plan community. And then we jumped into that pool and saying, "Can we manage being a master plan community?" So we bought a piece of property. And part of what we do well is a very disciplined acquisition approach. We bought about 1,000 acres of land at the bottom of the market, right, when nobody wanted land. It was in 2010. The world was on fire and never going to come back.
And one of the things that we said, "Look, we were more right than we ever have been about water and the value that water brings to land." But the opportunity was when we were down in that great recession, what were we going to do? And I said, "Look, let's go in the burning building. Let's buy this land." So we bought a piece of property. It was 930 acres. It was right along Interstate 70. We bought it out of bankruptcy. Our basis in that land, takeaway from this, our basis in the land is $4 million. To date, we've got over almost $80 million in lot sales, and we've only developed 15% of that land. And so you'll see later on in the presentation kind of a little roll forward of what that's going to look like. But that's an opportunity for us. Denver's kind of unique.
We live on an ocean in Denver. Our ocean happens to have big hills on it, but you can't grow to the west. You can only grow to the east, and so this is ideally positioned. This is in the best segment of the Denver metropolitan area for land development activities, and because of our acquisition costs, our gross margins are just astronomical, right? Almost 80% gross margins on our land because we have less than a $900 a lot basis in our land, so tremendous opportunity on monetizing that. Currently, we have about 700 homes. Ultimate build-out for this will be about 3,200 homes, so we're just getting started. We just delivered phase II-A, which was about 229 homes, and the interesting thing about this is, as we established ourselves in the market, we wanted to partner with the best-in-class builders, right?
We were very deliberate about wanting to make sure that we got national home builders as our home builder partner. So when you're taking a look at who we're developing these for, we're developing for Lennar, Horton, KB, Pulte, Taylor Morrison, Richmond Homes. I mean, those are our home builder customers. I mean, these guys are best in class. They put out a great product. And Denver, when you take a look at real estate values, the unique opportunity for us at Sky Ranch, just our master plan community, is our entry point. We are what I liberally define as an entry-level product. And it's embarrassing to say an entry-level product in Denver is anything that starts less than $500,000, but that's true.
And so before that great recession, when you took a look at land developers delivering lots, 50% of the market was delivering lots that would be meeting that entry-level criteria. Today, that number's down to 4%. So we have an affordability problem. And Denver's no different than anywhere else. I mean, and the reason that we're so attractive is we have a very low land basis, which allows us to meet that entry-level product, allows us to do well with that land value, allows our home builder partners to do well. So 700 homes currently. And now we have 700 homes under production. We just delivered phase II-B. That's another 230 lots. Phase II-C, we're at the wet utility phase. We've done the grading. We've done the overlot. We're in the middle of the water, sewer, stormwater. And then in phase II-D, we just started overlot grading on that.
700 units under production. We're really looking to double that housing portfolio over the next 18 months. This will be a little bit about kind of the overall opportunity of just this one asset. Taking a look at the residential component, we're about 20% done. If you take a look at 700 homes at 3,200 units, we have frontage along the interstate. We have an interchange right at the interstate. Again, very attractive land values. We have about 150 acres that we're setting aside for commercial development. Very high margin, very high value property. Have not started that yet. Need a little bit more critical mass on that, but tremendous opportunity on the commercial. The way we calculate sort of this is equate it out to a single-family lot. That's not necessarily how the commercial rolls.
But if you look at how you would look at the build-out of the property, we look at about 5,000 single-family equivalents. So we're only about 15% built out there. And these are kind of the value proposition. We have more than $600 million worth at today's prices—what we're delivering those lots today for. So this is kind of an opportunity for us to foreshadow really what the appreciation of the assets are over time. Talk a little bit about our single-family rental. We hold back some of these lots and then partner with our home builder partners to build on those. It's a terrific opportunity for us to maximize the value of these highly appreciated assets. You have land that's increased enormously over the last 14 years. We bought the land in 2010. So we've got tremendous value in that as well as the water utility side.
So when we take a look at partnering with a builder, XYZ builder, who will build us a house that would sell in the market for $500,000-$525,000. They're building that house for us for around $325,000, right? They make money. They make all their margins building for that. And so I carry forward that $150,000-$180,000 of equity value in the home just by virtue of the basis that I have in the land. And then we rent that out as a $500,000 home. And so it gives us tremendous cash flow opportunities, free cash flow. And this is a highly leverageable business segment for us. We're able to get all the money. Our bank and our credit facilities out there. Anytime you can go 60% loan to value with a residential house, that money's fully available.
We look at using our leverage to continue to grow this segment for us. And that's a great opportunity for us to provide. This is some of the metrics on the units that we've got up already. We've got about 14 units to date, filing five. We're doubling that in II-B and then doubling that again in II-C. So over the next 18 months, you're going to see us go from 14 to closer to 100 units in that segment. There's a little bit about the metrics on it. You can get this presentation on site. I'm sure you can get this through III part as well. But the free cash flows for us on this and the ability to kind of control that product. And we have best-in-class builders building that product for us. So these are tested models.
We're able to work with them and really like this business segment. One of the other great advantages for us is our balance sheet. Terrific balance sheet, right? I mentioned we have no debt, very high liquidity, large cash position. And then as we build out the communities, we get reimbursed from the local municipality for the roads, curbs, and gutters, right? We build their roads for them. They reimburse us through the tax base. And so periodically, we get these bond refinancings from the local municipality that reimburses this $30 million receivable. We just did one of those in October, which netted us out another $10 million of that liquidity. So you take a look at it, and we're about $57 million, highly liquid balance sheet, and really no debt. We have very limited debt, and that debt is really only from our single-family rental segment.
I want to talk a little bit about, for those of you that have been following the company, talk a little bit about our most recent year-end. So we just reported, and it was a record year-end for us. I mean, nothing but terrific results. Fourth quarter was a record fourth quarter. If you take a look at kind of year-over-year performance in that, if you take a look at it on an annual basis, almost a little more than $28 million in top-line revenue. And then gross profit, again, this is a highly profitable business for us. And yeah, I'll say we're great at it, but not because we're great, but because we did really good acquisitions, very disciplined acquisition. We were able to hold those. We were able to invest in those and monetize those. So putting up 70% gross margins, net income, earnings per share.
Take a look about how this looks on a kind of a three-year basis. 2023 was a little bit of an off year for us, and that was because in that January timeframe, end of 2022, beginning of 2023, interest rates went from nothing to something. And our home builder partners, and again, one of the things that is advantageous about us in this market segment is we own everything, and so they came back to us and said, "Hey, listen, can we delay this for 90 days?" And so that kind of gapped out some of that revenue, but you're going to see much more consistent deliveries over time. Again, this is earnings per share net income. So you can do the math on all that stuff. And this is a little bit about how that performance works by segment, taking a look at that.
In addition to providing domestic water, water and wastewater service for residential units, we also have a great opportunity to use some of the excess capacity that we have in the water for industrial customers. We happen to have a great oil and gas play right on top of where our water is, and so this is the Southern Wattenberg Field. Oil and gas companies pay you to be at their beck and call, so they pay a premium to make sure that they have enough water for fracking, and we're one of those unique companies that have excess water, and where I'm allocating a portion of my water supply for oil and gas use does not take away from that allocation to my residential customers, so it's a great relationship both for them and for us.
We had a record year for oil and gas revenues, and that outlook looks terrific, right? I mean, the election could not have been better for us in terms of that outlook in oil and gas and the regulatory climate on oil and gas development. A little bit more about how that sector has in comparison to our peers. One of the things we try to do and how we measure ourselves is how do best-in-class companies measure up to what we're doing in the same industry? This is a comparison against American Water, York Water, some of the other publicly traded water utility companies. A little bit about oil and gas. This is, as I mentioned, it was a record year for us. It was pretty consistent throughout the year. They do develop their operations year-round.
And so we'll continue to see terrific opportunities here. And as you saw from my first slide in water, we have a little bit of excess capacity that we can meet this demand. So it doesn't require us to put a whole bunch of capital into it. We've already got that capital invested. Land development. So this will be a little bit of the land development revenues. You can see how that had a little bit of gap in 2023 just due to the increase in the interest rates. And I think that's really resolved itself out. The builders were having to offer a lot of buy-down incentives, and that's really no longer the primary thing. I think everybody's gotten used to the fact that that was the anomaly. 2% interest rate was the anomaly. And so interest rates, again, those are moderating.
Again, that's continuing to help that housing market. Again, this is kind of a comparison to some of the peers in land development. So we take a look at, again, that's a land basis opportunity for us. And if we're generating those margins and we still have 85% of the project to go, you have lots more opportunity in that. And then single-family rentals, we're just starting out. We've got 14 homes. We'll have another 17 homes deliver from the next sub-phase and then another 40 homes. So we're growing that portfolio very rapidly. And it really does give you a feel for margins in that business as well. And then again, comparing ourselves to some of our peers in that business as well. Nobody can compete with us. We're just getting started here.
But delivering these lots with that kind of equity in there, I mean, we're not actually out buying homes at fair market value. We've got just a tremendous opportunity in this single-family market segment. So for those of you that are familiar with the company or those that have listened to this, that know a little bit, we did something unique. We'll give a little bit of guidance this year. If you take a look at some of where we think things are going to go for 2025, we had a great year, record year this year, but we look to continue to build on that. We're going to be delivering. We've got three phases of the land development business going on at the same time. So we're going to continue to deliver those results in the land development segment.
And then that also builds into our water utility segment by adding new tap connections. And that also builds into our single-family rental segment. So continuing to look at delivering great results on that for coming year. And then again, on net income and earnings per share. So that's a little bit of forecast for fiscal 2025. And then take a little bit about how does this play out in the short term and then build out. So in the short term, short term being maybe three years. What are we going to look like in 2028? Well, we're going to start to see some of the commercial come online. We're going to start to see continued development of the residential. And then long term, this is just long term as it relates to what's on the balance sheet. Sky Ranch alone, this is just the land development side.
How is that going to produce as we build that out? Sky Ranch, we've got a great opportunity on increasing our lot counts as well as bringing on that commercial opportunity and then pairing that out within the single-family rental. I got ahead of myself. On the single-family rentals, in short term, we'll look to go to about 100 homes. At build-out, we're probably going to stretch closer to 300 units, get about 10%. If you look at 3,000 units, about 10% of that portfolio we like in the single-family rental segment. So maybe even a little bit stronger than our guidance here. Let me give you kind of an analysis of how a single-family lot looked in the first phase when we were breaking into the market, right? We wanted to make sure that we established ourselves as a good partner that we attracted the national home builders.
So we were selling lots at around $73,000, and that reimbursable that you heard me talk about, that liquidity element, as we developed that lot cost, about $55,000 of that investment comes back to us. That's the reimbursable component of it. We were able to, because of the strength of our balance sheet, we were able to put that money out there in advance of floating a bond offering for that, so we were actually earning revenue on that, so we got a little bit of interest on that, and then the non-reimbursable, so total land opportunity in our first 500 homes was about $110,000 per lot, and then the tap fees, that capital component that we get from allocating our water, so total on that was about $140,000. This is kind of how the utility component looks at it.
This gives you our tap fee rates compared to other water providers in the Denver area. You see when I got into this business 30 years ago, tap fees were around $5,000. They're getting close to $60,000. That's a function of the scarcity value of water. Our tap fees are currently right around that $40,000 number. If we've got 60,000 connections worth, that gives you kind of where that top-line revenue comes from. The lots, if you take a look at just the build-out of Sky Ranch, we're about 15%, 18% done. Original lot price at $73,000. That same size lots, we have multiple different categories of lots, but that same size lot, now that we're pricing it, it's around $125,000. You've seen about a 50% appreciation as we've now established ourselves in the market.
So this is where we're looking at for 2D. And as compared to where we were at $114,000, we're looking at $215,000 for the combined. So you've got the lot revenue reimbursables up a bit. The non-reimbursables are up a little bit as well, just over inflationary side. And then the tap fees are continuing to grow in their margin. So that's how those deliver now as compared to when we started. Single-family rentals, each home that we complete, again, carries about $150,000 worth of equity, and it generates recurring revenue of around $33,000-$34,000 a year. So great opportunity there. So this is a little bit about that short term, where are we going to look in three years? And then where are we going to look? I'll have some slides a little bit about where we're going to look in build-out.
So if you take a look at that, we continue to grow our top-line revenue. We continue to grow our earnings per share and our return on equity. So these are going to be great results for us. And really, this is continued execution, right? We are now, we're four, five years into delivering this land development business. We've got a great team assembly. We've got a great portfolio of contractors that we work with. And so carrying forward on this, we feel very good about that. This will look a little bit about what it's going to look like at build-out in terms of both. I can't see my screen. How the gross revenue as well as the total assets, when you take a look at what's this going to accumulate, we're looking at bringing Sky Ranch home and adding to the asset base closer to $700 million.
And for a company that currently trades at $250 million market cap, we're going to quickly exceed that in terms of both the asset side as well as the liquidity side on the balance sheet. So great opportunities for us ahead. This carryover from our year-end report, we did have a couple of subsequent events. We had an 831 year-end. And a couple of those were this bond event that we talked about. One of the things that really is a validation of our land development side is these typically are dirt bonds. And so we were able to get an investment-grade rating on this. And that's terrific for both the public that live out there, right? A lower borrowing cost, as well as the overall depth of the bond offerings and allows us to recover those reimbursables faster.
So really a validation of our business model is to get that investment-grade rating. We had another land and farm water acquisition, another small acquisition. Again, strategic here. We acquired the Blue Farm maybe five years ago. And sort of being a good neighbor and making sure that everybody knows who we are and what it is that we're doing, that if somebody's circumstances change and they have an interest in selling, we want to be their first call. And so this was a great add to our portfolio. All of the water was already in areas where we already had pipelines. So it was very advantageous for us. And we did get the water, the land, and the minerals on this. And then to walk the walk, we also believe that our shares are undervalued.
So given our liquidity position, we do have the opportunity to be in the market and continue to buy some of those shares just to continue to add value for the shareholders, so with that, I'm going to turn it over and see if anybody's got any questions that I can drill down on.
Yes. I first heard your presentation seven, eight years ago here , and it was telling then as it is now. You have a lot of things working in your favor. The stock price until this last month has not shared the same enthusiasm for the company that I have, and one of the observations I have is the company does have some development expenses. It's taking these great revenues that you're receiving, and then you have to reinvest into building the roads, which you get reimbursed for, and building the infrastructure, which you get reimbursed for. But there's a time lag in there. And as you're growing and doing more in the subsequent year than you did in the year before, oftentimes there's more development costs going forward. And one day, of course, this should all unwind, and this will be just this marvelous stream of cash coming back.
But do you see, and maybe this has happened within this last year, that you started to have the infrastructure built that you need and not needing to invest more into more water carrying capacity? Are we starting to get to a transition point?
That's a great question. If you didn't hear it, if you're listening online, really the question, if I summarize it, is land development and water development are very capital intensive, and you got to put a bunch of that money in the ground, and then you get that return over time. How does that translate into the reinvestment side and how you grow that asset base, how you grow that liquidity, and ultimately the stock price? I agree with you. The stock price has been crap. It's been great for the last, say, 60 days because we knew it was going to be great. But at the end of the day, it's still way undervalued. You look at if we're $250 million market cap and $700 million in just the one asset that we've on the portfolio, and that build-out isn't 30 years, right?
That build-out is six, eight years, right? If I'm starting to put up four, five hundred homes a year in that, that build-out comes very quickly, and to your question, though, it's more expensive to come out of the ground than it is to expand, right, so you're right. We built our water system, our sewer system. Those are built for 5,000 connections, and so no more, I mean, a little bit of capital ex, but not the substantial investment that you make when you start, and building the main offsite infrastructure, your six-lane arterials, those are all in the ground now, and so all that traffic, you get the benefit of that investment as you expand that capacity, so each incremental phase that we bring online, smaller offsite, smaller reimbursables, and then you build that tax base. That tax base goes up, you've got more bonding capacity.
That bonding capacity is able to reimburse those quickly, and so yes, I mean, every incremental phase is going to see higher and higher margins. That's why we're showing with confidence that we have a 69% margin, and we're going to be moving that needle up in the subsequent phases, and the demand, right? The demand for our lots, one, we build a good community, and we partner with good builders. One of the things that's underappreciated, and I don't really talk about, but one of my first charges was to get a charter school, so I've got a local neighborhood charter school that all the kids can walk uphill both ways going to school, but having all those assets in that community, you make all those investments upfront, and then you pay your first house costs you $20 million, and you make $50 million on your last house.
But yes, that's that phase that we're getting to. Good question.
Yes.
You can compare yourself to water utilities, but you're not really a water utility. But I guess one of my questions is, is there a regulator that you have to, or a city council or something like that? And then I guess my second question is, is there anybody else like you on a private basis that has done more or less the same thing in Salt Lake City or someplace else?
Yep. Good question. To repeat for those that didn't hear it online is, are we a water utility? Are we a regulated water utility? And then what are some of the peer companies, public or private, that do what we do? We are a water utility. We do do that. And we're regulated. We have all the water quality testing. We're going out there doing lab samples, taking that off, making sure that we meet primary, secondary water quality standards. Colorado's an oddly loosely regulated market. We have a public utilities commission. They have stronger oversight in that rate per thousand gallon that you have once you have the customer. But because of the scarcity value, they're not so sensitive about, well, you have in the Denver area, and for you think of Denver as four and a half million people. Denver's actually the city of Denver's only 600,000.
Four and a half million people, we have 60 municipalities with 60 different water providers, and so it's an abomination of water service. It really is, and so land developers have choice. They can get their water from ABC, XYZ, LMNO. It doesn't really matter. They can choose to get around. And all of them have different bases in acquiring water, depending on when they acquired it, what their water portfolio is, how far away it is. And so that's why that tap fee, you see some people charging $60,000, some people charging $20,000. People that are charging $20,000 don't have any more land, and they don't want any more land, right? They're like, you know what? I'm just going to stick to my nitty-gritty right here.
And so that fee is less regulated than, once you've got that customer and they have no choice, then that $1,500 per connection per year is much more scrutinized. And so our rates are based on we set our rates based on the comparable water providers around us. That's how we establish our rates. To the companies that are like us, each segment has their own peers, but there's very few companies that are as vertically integrated as we are. So I think we're going to run out of time. I'll be around if you want to bend my ear on something else, or if you listen to this and have a question, don't hesitate to give me a call. Happy to answer any questions. And then come out and see us. It shows way better than it presents, let me tell you. So thank you.