Good morning, ladies and gentlemen, and welcome to the Pure Cycle Corporation year-end 2022 earnings call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Mark Harding. Sir, the floor is yours.
Thank you. Good morning, everyone. I'd like to welcome you to our year-end earnings call. Just a few housekeeping items. We do have a deck for this call. If you log in to our website at purecyclewater.com, there'll be a link over to the investor page, and then there'll be a tab on that page that allows you to join.
Click that Join button, and then I'll be able to advance the slides through the presentation, and you'll have the deck on there. The deck will also be a PDF of the presentation on the website for reference or if you wanna get into reading it in a little bit more detail.
With me today is both Kevin McNeill, who's feeling a little under the weather, so he's gonna take a listen-only mode on that, as well as Dirk Lashnits, who handles all of our land development activities. Other than hearing from me, you'll have a chance to hear from Dirk on some of the land activities and our successes in that area as well.
With that, I'd like to just start with the presentation. The first thing we need to do is talk about our safe harbor statement, which is that historical facts not contained or incorporated by reference in this presentation are forward-looking statements. I think you all are familiar with the forward-looking statements and the safe harbor statement, so we can get the lawyers out of the room.
I'm gonna just really kind of breeze through some of the overview of the company. I mean, most of you are gonna be familiar with the company, and if you're not, certainly you can go back and take a look at this portion of the presentation in a little bit more detail.
There's a ton of information about the company on our website, so I encourage you to spend some time there and take a look at the resources that we have on the website to give you a little bit more specificity to what it is that we do. Really, we have three operating segments, and they're all very complementary. Really, at the foundational level, we are a water and wastewater resource company.
We own a large portfolio of water in a valuable part of the country where you can own water. We develop that water, cradle to grave to provide water service to customers. We have land, that's in the right location in the Denver metropolitan area along the I-70 corridor that we're developing a master planned community on.
We hold back some of those, lots that we develop for our home builder customers, and we keep them for an opportunity to build homes on them and enter into the single-family rental market, where we, continue to have an ongoing cash flow from an appreciating asset that provides terrific margins for us because we're able to carry forward the equity value that we have both in the land and the water utility segment.
I'll just briefly talk a little bit about each of the segments. As I mentioned, the water, the wastewater segment, we develop the wells, diversions, all the water supply. We treat that water supply. We distribute that to our customers. We get two fee instruments for this. We get a connection fee, which is referred to here in Colorado as a tap fee, and our water tap fees are right around $28,000.
Our sewer tap fees are right around $5,000. We have the capacity to provide water and wastewater service to approximately 60,000 connections. As we have those connections signed up to the company, we get ongoing water and wastewater revenues each month. We have monthly water, wastewater service bills to that. That generates about $1,500 per connection per year on that side.
We collect that wastewater back. We process that wastewater into usable water supply for our outdoor irrigation or our industrial water supply customers. Really, we have a water, you know, a very tight water balance system where we're taking our water supplies, whether they're groundwater supplies, surface water supplies, bringing them into a treatment system, sending that into the customer.
We have some of that use that's gonna be outdoor irrigation, which results in a bit of a loss, but we do have mechanisms for recapturing that in terms of the water rights systems. Then we also take and reuse that system and then are able to reuse that into our industrial customers. Really, are investing into a sustainable water balance system for the company and for our customers. We continue to grow our infrastructure asset base.
Over the last five years, you see almost a doubling of our investments in our water investments and water infrastructure, really across the board with wells, transmission lines, storage, treatment facilities, all of the distribution facilities, and then the wastewater treatment facilities that reclaim that water supply.
Water growth. We have, you know, existing areas where we're growing our customer base. One of those is new residential connections, whether that's gonna be in our master-planned community of Sky Ranch, whether that's gonna be commercial users, both in Sky Ranch as well as another service area that we have a little bit south of the Sky Ranch area called the Wild Pointe service area, and then existing industrial customers. We continue to grow our customers year-over-year.
We're right around 1,000 connections to the systems today. Another important customer that we have is our industrial customers. We happen to be on a very prolific oil and gas field that sits right on top of where our water supplies are. We have multiple operators that are developing the field in this area, multiple formations. We distribute raw water and reclaim water sources to our oil and gas customers and generate high volume of water supply as well as a high volume for selling that water to our customers.
Really had a record year this year in selling water to the oil and gas segment, and that's largely a function of the price of oil, the regulatory climate in Colorado kind of settling down, operators being more comfortable with how they're operating within the heightened regulatory climate that Colorado offers them.
One of the things I like to highlight is kinda where we are geographically in Denver metropolitan area. As most of you know, we're along the foothill areas, and we might as well be along an ocean, 'cause we really can't grow to our west. The mountains, and we have a geologic barrier there that prohibit really any substantive growth in the Denver area. Really, we're constrained to really a 180-degree semicircle for growth activity in the Denver metropolitan area.
If you look at the map over on the right side of this, the difference between the orange and the green there, you see a really green line there, that's Interstate 70. That's the east-west transportation corridor in the Denver metropolitan area.
We have belt loops. You can see the 470 belt loop. Right at the top of that's gonna be the Denver International Airport. Our Sky Ranch project is 4 miles directly south of that. Our Lowry Range service area, which is that large pink area.
This kinda gives you a feel for where development has grown in the Denver metropolitan area, not only to the Sky Ranch property, which is our master planned community, but also opportunities for the Lowry service area and being able to take a look at new development activities in that Lowry service area.
That's kinda give you a perspective on kind of where we are positioned in the residential area. I'm gonna turn the call over to Dirk. He's gonna give you a bit of an update on our land development segments and all of the exciting activities that we have in there. Dirk, why don't you go ahead and take it over?
Right. Thanks, Mark. Good morning, everyone. Land development, this is the Sky Ranch project, our master planned community. This information's probably a little old, but it will stay the same for the duration of the project.
See this slide as information for the next several years to come. Sky Ranch is 930 acres. We can accommodate up to 3,200 residential lots, about 2 million sq ft of commercial development. Go to the next slide here. All right. Again, a little old. At our first phase, this phase of the project kicked off in earnest in 2018. I think it gives a pretty good frame of reference for the overall project and sort of a basis.
This phase encompassed 509 lots. This is wrapping up as we speak. If you can look at the top right-hand corner of the graphic on the page, you can see the last little bit of homes under construction right now. We're finishing this phase of the project off. We've sold all our taps.
All the homes have been started. Last few residents are moving in. We've turned over all the infrastructure to the respective jurisdictions. We've collected all our lot revenue, that's the $36.7 million that's for our lot sales. The $14 million for our taps. We also did a bond on this phase in 2019.
That was around 11, about $13 million, something like that. Then we have some reimbursable costs accruing out here on these for future. All right. We move over into our second phase. This is the most current phase right across the street to the east.
What you're looking at on the graphic, the lots are down in the right-hand corner, and then the upper right-hand corner is our school. The biggest difference on going into this phase is we really took a new look at our land plan out here. You can kind of see the layout of phase one versus phase two. It changes pretty significantly. We introduced some new product lines.
Our first phase had basically two product types. In this next phase, we went up to six. Our first phase, we inherited with the project, and in the second phase, we really took a deliberate look at how we wanted to plan this out. Our motivation was largely a density. Our first phase, we were looking at about three houses per acre. If you carried that through our whole project, we really would fall short of what the capacity for the whole project is. It would not get us up to that 3,500, 3,200 lots.
Trying to incorporate more density into the project going forward, we got that up to about 5 or 6 houses per acre. That density really helps us from a bonding standpoint and helps us on our water usage standpoint as well. We have, like I said, some new product lines in this neighborhood. We added a fourth builder. Trying to find the right balance of number of builders. Was it gonna be either 3 like our first phase, or was it gonna be 6? We ended up with 4 builders in this phase. We felt like that was a pretty good sweet spot.
In our analysis that was where we felt the best yield was. Four builders in this phase. It's D.R. Horton, they got the purple lots. Challenger Homes, they are in some of the light green. Lennar is the blue lots, and KB is the pink lots. Each one of those builders has at least one unique product segment, and then there's a little bit of overlap to get to the six.
They're competing on one product type. I think in the future, we'll carry this same concept through at least through the build-out of our second phase. What you're seeing here on the first page is the first quadrant of
This is one of four. This concept repeats itself three more times in this second phase. We have our future phases, and we'll analyze whether this is a good concept and whether we carry this through. There's some opportunities for some other product segments as we go forward in the overall community.
Those would be like a multifamily attached product, and then possibly some active adult. We've got lot revenues in here, $70 million. I think that's up from our first phase on a per lot basis by about 15%. Threw in reimbursables in here, and then we did another bond in 2022 on this phase two.
This was the 850 lots, and that was a $29 million bond on that. That again was up from our first phase. We saw some good appreciation going from phase one to phase two. This next slide just kinda shows a breakout of the four different quads that I mentioned. If you look at that center pie chart there, those different colors represent the six different product types that we're building.
The next pie chart over to the right, that's our builder segmentation. I think we got a good parity across there, good distribution of product types and a good distribution of builder lots. You can see the numbers of each phase.
2A was that on the previous slide, that represents that first quad that we're building there. These will roll out roughly year-over-year. 2A is underway right now. Actually that's nearing completion. We have received all our lot revenue, less a few little outstanding items here and there.
We'll move into our next phases as we move through that. Mentioned the school. This is a view looking towards the west. More towards the left-hand of the screen, you see the streets stage of completion for the phase 2A. There's one little model house in there. That's a Challenger house there. This is a few months old.
We got a significantly more amount of vertical construction going on there. On the right-hand side of the screen, you see the graphic layered in there for the academy, the charter school for Sky Ranch. In the center of the screen, there's the gray H-shaped object. That's going to be the elementary school that has started construction. They've built that foundation, and they're gonna go vertical on that here in just the next couple of weeks. That's pretty exciting. That'll open next fall, as a K through 7, and then they start to add years.
A year later we go over to the high school phase, which is the E-shaped gray structure, that'll come online subsequent years. All right. Real quick, talk about some market conditions that we're seeing. Everybody's pretty attuned to this right now.
This slide's a little funky here. So we're in a contracting market. Some experts are calling it a housing recession. So some quick indicators, you see these all over the internet. But I pulled out a couple of key metrics here. Our new home sales across the country are down 17% year-over-year.
Mortgage applications are down 40% year-over-year, and our builder confidence levels are down for a 10th month in a row. I'm watching those sort of sentiments. To talk about interest rates, we had a pretty abrupt uptick in 2022.
It went from basically 3% to 7%. Looking at those interest rates kind of across historically, we're not... they're not crazy out of line. If you go back through the decades, from the 1970s, we had about an average interest rate of 7.76% since 1970. You know, in the 1980s, if some of us remember, we hit that 18% mark in the early 1980s.
Though they've been right around that 7% for the last half century or so. Then our material and labor costs, we're seeing so typically we would see probably a couple of percentage points increase year-over-year. That's something that we build into our contracts and anticipate.
That's pretty typical. Just the last year, our material and labor costs have been up 20% over last year and up 40% since the start of the pandemic. Those are affecting our builder partners and how they can sell a house. Kind of the net of that is our product costs are up and our customers' buying powers are down.
That's kind of on the bad side. On the good side, you know, we still are seeing a strong demand for new home sales. Just as a comparison, we peaked in the like 2005, 2006 time period.
We were producing about 1.4 million units a year, new houses per year. In 2021, you know, this last little run up, we were only hitting about 600,000. There would appear to still be some pretty good capacity in the market there. A couple other positive indicators are average days on the market for a home.
You know, typically we see like a 60-90 days on the market, so that's seasonal. In 60 days in the high selling season, which is summer, and then 90 days takes a little longer in the winter. And just to know, we are on the downward trend on that right now going into the winter.
Our current sales cycle is on the way down, and then it starts ticking back up late winter, early spring. That's typical, but we're currently seeing like a 30-60 days on the market. That's going in a positive direction. We are still seeing positive home appreciation.
It's less than what it was, but you know, I think a lot of us we're seeing or inclined to think that appreciation was probably pretty unsustainable. That coming down a little bit, it could be seen as a pretty positive thing. Short-term mortgage options, we're starting to see some creativity on the lending side to help compensate for the other increased costs.
Doing these 2-1 buydowns now. Figuring out other creative ways to help our buying customer. Still seeing the low unemployment, especially here in Colorado. Our takeaway is that a correction is necessary and hoping it's not gonna be a collapse.
Market's kind of recalibrating on all fronts for that correction. Out at Sky Ranch, what we're looking at doing is reevaluating the timing on the next set of lots that we deliver to our builders. As those builders see a slowdown in their sales and when they'll need to take the lots on from us for that next phase, that'd be our phase two B.
Next slide, just a little bit more graphic representations of some of the market stats. First ones are our housing supply, you know, lending standards, hopefully significantly different from like the 2008 recession. Some of those loose lending standards there. Not seeing any foreclosures really at this point, so another good sign, and that unemployment rate is a function of that. I think that's it from my development. I'll turn it back over to Mark.
Great. Appreciate that. Thanks, sir. So I wanna talk about our last business segment, single-family rentals. More recently, we've added this new business really through retaining lots in our master-planned community. We wanna develop these lots into single-family rentals. The appreciation that we're getting and seeing in the master-planned community, we're actually causing that appreciation.
As we do what we do well on the development side, creating a nice place for homes on that, we see a significant increase in value for those. It's a great opportunity for us to continue to invest in the company and provides ongoing cash flow. We really like that complement to our water and land development activities, and we're gonna continue to see some more activity there.
Some of the specifics on this are, you know, the trends in the consumer preferences, home versus apartments. We have a significant recalibration of consumers seeking more space rather than location. Affordability is a key driver in this area, and as Dirk mentioned, we've really concentrated on a broader product class. We've got paired homes, we've got townhomes.
Those are all gonna be delivering at an entry-level price point that's gonna be more flexible for the consumer, as well as for the renter. We have a number of different product offerings so that when somebody comes to us with an interest to rent on a single-family home level, we have everything from a large four-bedroom home with a den to maybe a two-bedroom home that would be in a townhome-type product.
Those price points will be flexible for all sorts of customers in there. Really a continuing strengthening of the market for home rentals. We like that on both a local and national trend for the single-family rental market.
This is just some of the statistics on our single-family rentals and how those cash flows come to us. If you take a look at it on an average home, you know, we're generating about $33,000 in annual revenue income. This is a little bit of our operating costs, which are gonna be our taxes and our dues, and then interest cost, depreciation expense. When you're adding back those cash flows, we end up getting very high margins in this thing.
We are able to carry forward the equity value of the land and water in the rental segment to provide those free cash flows to us. We really like this segment. We're gonna continue to invest in that. We have currently 4 rentals up and available. We had 3 last year. We just added 1 this week, actually. We have another 10 under construction.
To give you a bit of metrics on what we're looking for on carrying forward that into this next phase. Again, the diversity of the product mixes. This is phase 2A, so if you look at what we're getting in terms of our products on what we've sold to our builder customers, we're also retaining some of those for our own purposes.
We have duplex homes, we have small, 35-foot alley-loaded product, and then we also have more of the same product that we had in the first phase. Our rents are gonna range anywhere from, you know, slightly less than, you know, $2,400 a month to $30,000 a month. Great opportunities for us on the single-family rental market.
I wanna drill down on some of the specific financial highlights. We've had a fantastic year. As you saw from some of our press releases, you know, continued execution, continued growth in the water and the wastewater segment. We continue to invest in that, so we have around $67 million in water asset capitalized cost. Again, we continue to grow that segment.
We have had a little opportunistic acquisitions in that area, so we purchased a little more water that was regionally in an area that was located for some other water rights that we had. Water has never been more relevant. I know that many of you, I'm sure, have seen all of the press about western water and the supplies on the Colorado River. Most of our supplies are not on the Colorado River.
They're more on the Platte River. We've had a relatively normal water year, but water continues to be one of those high-value investments and those highly sought-after opportunities. We continue to look at that. Water deliveries, we had a record year in water deliveries, over 400 million gallons of water deliveries, generating record revenue for us in that segment.
Excuse me, I got a frog in my throat. Continuing with our land development activities, as Dirk was highlighting, we've delivered 100% of the phase 1, both in terms of the water and the land development revenues. On phase 2A, we're about 76% complete on that, maybe a wee bit more than that, and really have delivered all of those lots to our home builder customers.
As we also highlighted, we had another bond reimbursements to recover some of those public improvements that we continue and invest in, not only carrying forward some of those from phase 1, but also some of those in phase 2.
We continue to generate very nice gross margins on our lot sales when you take a look at both the lot sales as well as the reimbursables that come back to us on that. Very high opportunity on the land development side that has generated record liquidity for us. We've had some outstanding execution and really very low exposure.
You know, our business model here is allowing us to be able to develop this infrastructure and deliver that in real time. Neither we nor our home builder customers are exposed to anything other than what we've delivered. The opportunity for us is really to continue to partner with them on market demand forces on that. The single-family rentals again continued growth in the home rental market.
We like very much delivering more homes in that area. Take some highlighting some financial metrics. Again, you know, revenue, we have about $23 million in revenue. $8 million of that came from water and wastewater, and then $15 million of that came from primarily our land development segment. Great growth in our net income, as you can see, from, you know, very modest means as we started this endeavor in 2018.
You know, the big highlight in 2021 was kind of an accounting recognition issue of being able to be comfortable with recurring or recapturing those public improvement investments. Those are more real-time recognized revenues as opposed to accrue those, and then recognize some of those in previous years into that 2021 area.
Then our margins continue to improve. We're very proud of our team and the ability to continue to execute on both the water utility, the land development segment, and we look forward to continuing to highlight as it becomes more material, the single-family rental segment.
Again, more asset growth. You know, we continue to invest in our assets, water, wastewater, water rights, and then ultimately showing you record liquidity right around that $35 million of cash and cash equivalents for year-end. An outstanding year for us, and we're really proud of kinda how this has timed out for us. We're in a very good position as we're taking a look at being opportunistic on some of the investment side. Do wanna talk a little bit about our ESG initiatives.
We've hired an ESG initiative specialist who continues to really develop our documentation for ESG activities. We want you to be on the lookout for that. We'll have our first annual ESG report coming up later this month. We'll post that to our website, so be on the look for that.
We wanna be on the forefront on some of this disclosure and this documentation, both from an SEC guidance standpoint as well as what the Nasdaq exchange are gonna be looking for. You will see significant documentation and really how the company perceives that. It's you know a high initiative for us. Things to look for specifically are assessing, tracking, and disclosing energy management uses, network efficiency, water usage, water recycling, wastewater collection data, those sorts of things.
We can track and assess employee satisfaction, water affordability and access, staff diversity, all those sorts of highlighting issues, you know, and then continue the board diversity matrix, as required by Nasdaq. You'll continue to see more on that. A little bit on some of the highlights here. Balance sheet, you know, terrific balance sheet. $35 million in cash.
Very low debt position. Low debt position at some favorable interest rates, so we locked in a lot of that financing at those 4.5% interest rates. Those have worked well for us. Total revenues, if you take a look at the income statement, again, $23 million for 2022.
You know, $9 million, almost $10 million in net income, $0.40 per share on a diluted basis. Also want to talk a little bit about some other tools. We are adding a new tool to our box through a board authorization for a share repurchase program.
Really looking at this as being kind of the anti-dilutive nature of it, we are very as many of you know, we're very hawkish on our denominator and our capital currency. We have not raised capital through the sale of stock since, well, since we acquired Sky Ranch back in 2010. We're very modest on our stock option plans. We do want to incentivize our employees to be owners of the company, so this is an important component of that.
You know, we're also being opportunistic to invest in ourselves. This is an authorization that the board took as an opportunity for us to take a look at some of our liquidity and take a look at some of the market valuations and the disconnects that maybe we believe that the market may perceive compared to what our intrinsic value is.
You'll see a little bit of that, and you'll see that disclosure as we take advantage of that through the next several quarters. A couple of upcoming important dates. Proxy statements and proxy cards will be mailed out on December second. We'll have an annual shareholder meeting in January. This year's meeting will be January eleventh. The ESG report initiatives will be later this month.
Take a look at kind of our leadership. You know, we continue to have very solid leadership, both at the staff level as well as the board level. You know, we have a we're highly complimented by just an outstanding intellectual capital within our board of directors, and so they provide great governance and great direction for us on an ongoing basis.
So I couldn't be more thrilled to have their continued leadership in Scout. Okay, before I finish with my closing remarks, let me just give you a bit of a recap here. You know, we had a terrific year delivering lots that really were on schedule and in budget.
We were able to generate significant liquidity through the sale of the CAB bonds, and really that was a direct result of our excellent credit quality. The opportunity for us to invest and then be reimbursed. That business model really paid dividends for us, not only delivering these next set of lots in a real-time fashion, but also being able to recapture some of that liquidity through a bond offering.
And really how do we know our business model is working? Because when you see markets shift like this, neither we nor our builders are overly exposed. Our builders have tightened their budgets for 2023, but we're one of the few developers that actually are providing finished lots in this market, providing them at the entry-level, where everybody wants to be.
I'll give you kind of a dynamic here. Prior to 2007, prior to the recession of 2007, the Denver market here, home starts, and entry-level home starts represented about 50% of the overall market. You really had a concentration of builders and developers really pursuing that first-time buyer market.
That number has fallen to closer to 5%. We have an affordability problem in Colorado, and that's primarily because of a number of reasons. Really, Sky Ranch is one of the few projects out there that's delivering lots for home builders in that starter home market. The demand for housing in Denver remains strong. We're well positioned at that entry-level market. We're selling, you know, homes.
Our home builders are selling homes to new buyers versus a trade-up buyer. You know, new buyers that, you know, will have to get comfortable with what is gonna be this recalibrated mortgage. The anomaly isn't 7%, the anomaly was, you know, 4%, 3% mortgage. I think that 7% number, as Dirk highlighted, is really more of a traditional average on that.
We're not really selling to buyers with an existing rate, right? They're not a trade-up buyer. These are new buyers in the market. We have a lot of optionality in this company and terrific balance sheet, great liquidity to make disciplined acquisitions, both in land and water. Now with our new tool in the box, we can invest in ourselves.
We're very delighted to have the liquidity that we have right now. You know, we'll continue to look at opportunities to continue to grow the company. With that, I think I'll turn it back over to Ally and see if y'all have some questions that we can drill down to and answer some specifics.
Thank you. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star one on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions. Thank you. Our first question is coming from William Miller, who is an investor. Sir, please go ahead.
Hi, Mark.
Good morning, Bill.
I congratulate you on a great quarter, and I'm just curious about a couple of things. One is your acquisitions that you alluded to, and where are you on any big further land acquisitions along I-70 or anywhere else? Secondly, the home rental market is obviously a home run for you.
Are you gonna expand beyond the 10 a year or whatever number you have? Because that's certainly your highest return investment opportunity you have. Will you reallocate resources there? Finally, are you gonna stop at 200,000, or are you gonna go beyond that? How aggressively do you plan to pursue that at this price?
Yep. Let me take them in the order presented, if I can remember them. On the land acquisitions, we certainly do have a high degree of interest for that. As we've talked in the past, you know, we're very well known in the market segment. You know, we have water which most of these surrounding land interests do not have water.
The intrinsic value of us being able to acquire a piece of land, add our water to it, does add value in the equation. You know, while we have not broken any of those three yet, we are seeing a lot of movement in this area. We're very interested to continue to pursue that.
We're very active in pursuing that, and we have a high degree of liquidity to pursue that with. We very much like that optionality and being able to do that. As you see, we can continue to try and do some tuck-in acquisitions on the water side.
You know, I'd say our preference would be more land than water, but when water is available that we have that's gonna be located near where our existing supplies are that make sense for us to add, we'll continue to do that. Taking a look at the single-family rental market, that's also a great opportunity for us. You know, what we're looking at with our builder partners, they've all done very well. You know, we're concentrated in the right market segment of that at the entry-level home.
Each of the builders did very well in phase 1. We're continuing to roll that forward. Really what we wanna try to do is if somebody finds themselves to be overweighted in that segment, that may be an opportunity for us to take some of those lots back and continue to invest in that single-family market. Yes, we are interested in doing that. Currently, all of our lots are under contract, but this is one of those opportunities. You may see us continuing to invest a little bit more in that area in phases 2B, C, and D. Those are opportunities for us.
As it relates to share buyback, you know, one of the things that the board's very cautious of is, you know, we wanna make sure that we have that optionality in investing in all elements of the company. You know, water, land, and our own currency. To the extent that, you know, the market continues to have a disconnect there, you know, can I attest to, you know, 200,000 shares?
200,000 shares was picked because it was an anti-dilutive number, but it's, you know, we'll wait and see. As you've seen and Bill, you've been with us a tremendous amount of time, you know, the stewardship and the governance that we have are very disciplined. You know, we take a look at these things incrementally.
We see if they're working, and then where they are working, we continue to reinvest in those areas. You know, this share buyback was, you know, very, very well thought through a number of quarters and, you know, it's an opportunity for us to continue to invest in our own currency. I can't give you any more specifics other than that.
Other than you kind of see our past performance and our history of how we do things thoughtfully, carefully, and then we continue where we see successes. Those are gonna be our metrics that we continue to roll forward.
Mark, how big a portion of your company do you want the rental business to be?
It's a good question. You know, if you take a look at the 3,200 single-family lots out there, you know, a good growth target would be somewhere around that 12%-15% of that market can be in our portfolio.
Okay. That's gonna be a big business for you.
That is gonna be a good business for us. Much to your point, you know, I mean, it is one of those things where that asset continues to appreciate. You know, our customer is paying down the vertical cost of that through the mortgage rentals on that, and then it also provides cash flow to us. It's gonna be one of those.
You know, it is a win-win segment, and it's one that we actually have a reason to be in. You know, if you take a look at us being in the business just to be in the business, you know, I would say it's a good business to be in, and a lot of money is going towards that segment.
Given the fact that we are able to carry forward the equity value that we have in the land and the equity value that we have in the water, it's a highly tax-efficient mechanism for us to invest in. So we're carrying that forward, and it's appreciating.
You know, if it turns out that we find a great acquisition and we've got a few hundred homes that are out there, that can be an opportunity for us to spin that off and use that as monetizing for another land acquisition that might be a bit above our punching weight at the time, and then continue to grow that back. So there's a real flex there for us on that business segment.
Sounds terrific. Thank you.
Well, thank you.
Thank you. Our next question is coming from Geoffrey Scott with Scott Asset Management. Please go ahead.
Hi, Mark. How are you?
I'm great, Geoff. Good to hear from you.
Two questions. You didn't mention much about the commercial side. Can you talk about the development and potential timing of that?
Great question. You know, we have, you know, we're continuing to build up on that residential side. You know, the commercial segment, I'd say still a bit out. You know, I think they're looking for about... Most of what we would be putting up there would be looking for about 1,000 rooftops in and around the area.
You know, we do have neighboring developments that do provide a lot of density to the equation on this thing. Really, we're looking for the higher value commercials there. We're looking for the big boxes. We're looking for the big, you know, not just a small grocery store. We want a big grocery store. We want big retail centers out there that are really high volume stuff.
We also want to be opportunistic to be able to maybe partner on some of that, where we're able to bring the utilities and bring the land to the venture, much like we're doing in the single-family rental segment, carrying forward some of that equity value.
We're not gonna go vertical on the commercial unlike we are in the residential, but we do have opportunities to take a look at that and high value margins for us being able to do that. You know, it's still a bit off, and I think that our patience here is gonna be well rewarded by bringing in some of that big commercial.
Not just, you know, some small retail commercial that usually does like to lead that, and then they end up getting in some preferred positions because people really pull that trigger a little too early. Then a lot of times those sites get redeveloped. We wanna really kind of be patient and develop that out as a big commercial opportunity.
Mostly because of our location, right? Where we're located right off the interstate, right next to the belt loop on it. We're just south of the interstate, sorry, just south of the airport. That does portend its high value use for, you know, large commercial. I know I've said, you know, we're being patient on that and we continue to be patient on that. I don't have, you know, a start date on that, but, you know, we continue to be very active on pursuing market opportunities for that.
If I understood correctly, you know, the big box kind of people want a lot more houses built, right? They wouldn't be in a community of multiple thousands. We're talking about development kind of 4-5 years away from now.
Yeah, that's a hard one for me to say it's that far out. You know, I'd say it might be a couple years out, but not 4 or 5 years out.
Okay. Next question, on page, whatever it is, 26, you said you had 404.9 million gallons delivered. If my math is correct, that's kind of 1,200 acre feet, 1,300 acre feet, and you have 30,000. You know, you're selling what, 3%-4% of the acre feet that you currently have.
Right.
Why additional water acquisitions?
It's really just where we can. Once the water is purchased by a city municipality, you know, it's gone forever. What we're looking at is not necessarily expanding the portfolio just anywhere. We're expanding our acquisitions where it's next to areas that we're already vested with. You know, it's an opportunity for us to continue to build that portfolio.
We do know we're long on water. We don't want to be overly invested in that area, but, you know, where it's a strategic acquisition, we'd look to consider those. It's, you know, it's a function of price. Is it a good price? Are we able to bring value with our infrastructure and our other water rights to that particular asset that really builds value beyond the acquisition cost of it?
If I hear you correctly, it's really a defensive move to keep it out of governmental control?
Not necessarily out of governmental control. I mean, the other water providers, so it's very competitive. You know, we have 70 different water providers who are all out scouring opportunities for water supplies. You have diminishing acquisition opportunities and an increasing number of folks that are looking for those acquisition opportunities. We're looking at making sure that we can continue to grow that side of the business through, you know, logical acquisitions.
Okay. Anything happening down on the reservoir?
No. You know, we still look to partner with other regional interests on the reservoir assets that we have and, you know, whether that's with our neighbors or with our partners that we have in WISE, with the South Metro Group, all of those studies, evaluations, and, you know, smart consultants continue to take a look at that, but nothing really exciting to update you on.
Okay. I'll let somebody else jump in. Thanks.
Thanks, Geoff.
Thank you. Our next question is coming from Greg Malachowski with Benchmark. Please go ahead.
Hey, Mark. How are you?
I'm good.
Good. Just a couple, mainly one general question, and that kind of involves the single-family rental business. Has your approach to financing that changed at all? I know the mortgage rates you mentioned were in the high 3% or low 4%. Has there been any change in approach to how the company is anticipating funding future ones, with the rise in mortgage rates, or how are you guys evaluating that?
That's a good question. It has. You know, the opportunity for us, you know, we did lock in, you know, maybe that $4 million at some very attractive rates, and so we like that, and we will continue to keep those out there.
You know, as mortgage rates have gone up to 7%, because we have such strong equity value in that, you know, we may look at instead of financing 80% of that, drop that down a bit and finance maybe 50% of that. We will still use that financing mechanism and, you know, I'd say we're gonna be in line with everybody else. It was better for it to be at 3%-4%.
It is not awful for it to be at 7%, and it's not always gonna stay at 7%, right? This is the type of financing activity, and I think that that's where, you know, the millennials that are gonna really be looking at buying a house, and they may be making the decision to buy a house for other reasons other than, you know, it's an investment or it's that, you know, there's a significant utility value in owning a house.
So, you know, taking a 7% mortgage on a house is more traditional and more in line with the long-term projection of that. I'd say yes, we do have an appetite for continuing to finance those out, you know, to the extent that we're getting 4.5% on that.
You know, we may be able to get a better return by financing some of those ourselves because that's gonna provide more cash flow to the bottom line and when we have those opportunities to do that. We're not gonna be overweighted in it either. You know, we like to continue to grow that segment.
You know, our board has said that this is a great segment for us, but, you know, we want to be able to leverage the vertical cost of that. We're gonna carry forward the equity value, but we wanna leverage some of that vertical cost. 7% is still a very good rate for us to do that. It's some of the cheaper money because of the mortgage type lending activities there. You're gonna still see us pursue 50%-60% of that into the mortgage side.
Okay. How do you see the overall rental market right now and maybe projecting going forward, what is the strength or weakness associated with that versus kind of what you guys loosely would underwrite when you're looking at picking up additional homes?
It's a great question, and it is strengthening. What you're seeing is, you know, to the extent that those former buyers that would be out there and maybe they lose the ability to qualify for the same house that they would have wanted at 4% compared to 7%, you know, we're really getting a lot of referrals from our home builders to say, "Well,
If you like the community, you know, why don't you go talk to the developer who's got some units that are coming online for rental?" Because it puts them, it locks them into the market, right? There's that as a component of it. And then the second component of it that I think we're really excited about is really bringing online our school, right? That's a sense of community.
That's a sense of place. That's a sense of, you know, education being the initiative of every new subdivision, new community. That's a strong driver for new families, particularly because we're opening up this K-7. It'll be a full K-8 facility.
You know, we may not open all those grades all at once, but, you know, that's what the capacity of that is. We find that to be some good traffic flow on the single-family rental business, which is kind of putting a little bit of wind in our sail on why we may partner with some of our builders to claw back a few of those lots themselves.
Okay. Yeah, because that's what I was thinking. You're saying the financing is still favorable, the rental market is robust. I guess if I can float something that maybe I'm sure you guys have thought of, but something that looks really attractive, you know, you look at capital allocation and you've talked about the land.
The problem with land is, one, land still is by no means cheap at all. Two, as you guys are obviously aware, you know, you buy the land and one, it requires a lot of capital to develop, and two, it takes a lot of time. With what you know kind of is already on our plate, I'm not really sure land is the best use of capital at this point.
You look at the water rights and, similar to the previous caller, you know, it's nice, but when you're a public company and the market just gives you no credit for the water assets you have, that might not be the best use of capital either.
We've been over the buybacks and, you know, one thing I think, you know, just in terms of looking at how you guys are approaching this, you know, you mentioned investing in your own currency, but really I think the correct way to view that is if you put the for sale sign up and the company is worth, say, $25 a share, if you're capitalizing on an $8 print, you know, you're creating immense value for the shareholders that continue to, you know, stay along for the ride.
You're doing that now, which I commend, and I think that's great, and I think you guys should be, you know, aggressive at these prices. But then you get into the single family rental business and again, it's like buying back stock where you're basically able to create a $400,000-$500,000 asset at a fraction of that cost.
You own the land, keep the developer margin, and then on top of that you have tremendous optionality with the, you know, the financing. Let's call it if you can put one of these things up for let's say $250,000-$300,000, and most of that you can finance with bank money, you know, you're able to not only create value, but you're also keeping the momentum at Sky Ranch moving.
I think one of the biggest and most important things in an environment like right now is keeping things moving in an efficient manner and, you know, even leading into the commercial, keep, you know, keep the rooftops coming. If there is a slowdown like you've mentioned, and maybe some of the builders they're not selling as many homes or whatever, you know, you guys could realistically take down, you know, 100 homes.
If you break out what that would actually cost you guys, and then you back out the financing, you know, even something like that wouldn't be that expensive, wouldn't cost that much money. You build the water business, you'd keep the roofs coming, and you'd also be making money doing that.
I think that this is really an opportunity where you guys should heavily evaluate, you know, stepping up the rental business because as you said, it's a win-win. I was just curious if kind of, you know, with what I said you had thoughts on that or followed along or where maybe you would disagree with any of that. You know, I'm just curious about it because I've been thinking about that and it just looks like a no-brainer type of opportunity for you guys right now.
Yeah, no, I agree with everything you said. You know, what I do and what we are looking at is, you know, working with each of our builders to say, "Okay, let's take a look at this next takedown." You know, if we're ready to move forward on this next takedown and you guys find yourselves to be a little bit long on your lot inventory, longer than you think you'd want to be, then we can pull back. You know, we can not pull back on the start, but we'll pull back some of those lots.
You know, instead of having 10 in that next sub second section of that, maybe we have 50, you know, maybe we pull back some of those and we can develop those or we can have them build on them, you know, the same way they would be building right next door and then just deliver that house to us. It's never been more relevant for them to have a guaranteed buyer. That conversation is there, Greg, and we will take a look at something like that.
All right. Yeah, that's good. That's it for me. I just think it's awesome. I think, you know, right now is where having been a conservative company, being responsible with capital, you know, you're gonna win down the line by playing offense and being in a position to really capitalize on these things.
It's good to see you guys start looking that way. You know, the previous 12 months was excellent. You know, I'm excited about the new developments. I think, again, you can look at the overall macro situation, but, you know, I think given what you guys control, I think it matters a whole lot less than people might think. I'm happy to see you guys kind of looking at things through that lens as well. Take it easy, and I look forward to the next call.
Great. Thanks.
Thank you. Ladies and gentlemen, if there are any remaining questions or comments, please press star one on your phone at this time. Our next question is coming from Bill Cunningham, who is an investor. Sir, please go ahead.
Hi, Mark.
Hi, Bill. How are you?
Good. I actually have, for starters, just a very basic financial presentation question for you. You earned $0.40 a share in the most recent fiscal year. The first three quarters were $0.17 a share, which I think means you had an absolutely fantastic final quarter of $0.23 per share. It doesn't appear you actually lay out anywhere the actual numbers specifically for the fourth quarter, unless I'm missing something.
You're right, we don't. I apologize for that because it's always helpful for us to take a look at quarter-over-quarter. In this particular case, you know, one of the things that the fourth quarter did for us that really boosted that up was, liquidity-wise, the ability to get that next bond offering from the CAB, the delivery of all those finished lots, and so it was weighted into the finished lot category. When we take a look at our builder agreements, three of the four builder agreements are lot delivery agreements where they pay us on a third principal.
Mm-hmm.
The reason that fourth quarter, and it will always look like that on a quarterly presentation, it won't always be the fourth quarter, but it will always look like we get this huge weight because one of our builders is a finished lot delivery. They pay a premium for that.
Mm-hmm.
That's why it will always weigh in one of the delivery quarters.
I'm also looking at your Sky Ranch website, which it shows that two of the four builders in phase two are simply coming soon, D.R. Horton and Lennar. I'm wondering, is that actually updated that they're not selling homes there yet or what, you know, what's the situation with those two?
Lennar's probably got, I'd say, they've got 8... Is it 8 or are they in 4 packs or 6 packs or count?
4-5 packs.
4-5 packs?
4-5 packs.
Okay, they've got two. Call it 10 town homes under construction, and I would say 6 or 8 detached single-family homes under construction. They're just haven't opened yet as a, you know, for sale. They have, you know, they're not doing sales trailers. They're gonna be selling out of a model home. I think their model home will be open, you know, before, say, the holidays.
Okay.
D.R. Horton is really, they have yet to start out there. They were a little bit slow on getting their approvals for their home products through the county. I think that they're set to get out there within the next 2 or 3 weeks to start their product. Horton typically has a more aggressive build cycle on that. They build more spec homes than most, but we'll see what they do in this market.
With Lennar actually building homes, obviously they've purchased tap fees from you, but they haven't sold the homes yet. How many tap fees have you sold in phase two, I'm wondering about? It will-
Yeah. Of the 230 lots, I think we've sold about 110 taps.
Okay.
That'll give you an idea of the building permits that are in that.
Okay.
that subphase.
Is there likely to be a lull then with, you know, it sounds like you kinda got a, you know. You're ahead of the ball there with a lot of tap fees already being sold, and you know, for homes that have not yet been sold. I assume there might be a bit of a lull on tap fees the next couple of quarters. Is that?
Yeah. If you're looking at a quarter-over-quarter, I probably wouldn't disagree with that. You know, we.
Okay.
I try and caution you as well as the rest of the market that quarterly management of a company like ours is a little bit harder. But
Mm-hmm.
You know, we still look at a great year-over-year.
Yeah. Okay. Okay, very good. Thank you.
Great. Thanks, Bill.
Thank you. Our next question is coming from John Rosenberg, who is with Loughlin Water . Please go ahead.
Yeah, good morning. Hi, Mark.
Morning, John.
Most of my questions have been covered. Also, congratulations on your year and your results and your strategy. One of your last callers questioned you and talked about your flexibility in moving more towards the rental segment as market conditions demand. Well, first I wanted to congratulate you on that segment and also ask you, so drill in a little bit more. You have absolute flexibility in doing that?
We do.
Is there any cap on how much you can do that per period or?
No, we really don't. The reason we like it so much is that, you know, we have an advantage to roll forward some of that cost. You know, as Greg was mentioning, when we're carrying forward the equity value of the land and the water on that, really that's a tax-efficient strategy to be able to do that.
He's right, we're delivering a home that might be a $550,000 home if you take a look at the standard detached product base, we've got a number of different categories. The reason we like really concentrating a bit more into the rental market here in the second phase is we've got six different product classes. We're not constrained to just the same type of rental customer, right? It can be just.
It can be an individual that come out and is taking a look at a townhome or a duplex. You know, it can be we've got duplexes together, and it could be, you know, a family with, say, renting both sides of it, where the parents may be on one side and the new family would be in the other side.
You have great opportunities for their shared spaces and things like that. You know, that's why we like it. Not only is it a great opportunity for us, but the diversity of the product mix in our second phase of this thing gives us a ton of optionality in what we're offering to the marketplace. It's not a homogeneous customer for us.
No, that's great. I do appreciate that. I think, yeah, that was a very thoughtful move in terms of expanding your product range in phase two A. Additionally, just kind of a little bit of housekeeping. Your receivables from the CAB, I presume that's gonna be very lumpy over time as needed.
It is. It is. You know-
Okay.
It's every couple of 3-year cycles between the two as you start and you build up AV. You know, each of these bonds have kind of 5-year call restrictions on that. They're really 3-year plus premium calls in years 4 and 5. As you do them, you know, what happens is the AV, so the value of each of these homes continue to grow, and you have the same number of mills, so you increase your bonding capacity.
They are lumpy. You know, I will say that our underwriters could not have been more complimentary about our business model. They, you know, they took a look at it, and we were in a tough market where, not so much in terms of the interest rate market, but a lot of outflows from invested capital for municipal bonds.
when you have all that money coming out and you have, you know, deals trying to hit the market, you know, we were oversold 400% on our bond offering. It really is a validation of how we do it, you know, the care with which we do, you know, how we're investing in this infrastructure. We're maturing that. We're not over our skis on any component of the infrastructure or the delivery of lots, and we have great partners in our home builders.
No, that's great. Lastly, again, a bit more of housekeeping, but I seem to recall from a prior conversation that when you do ultimately go to large commercial, and perhaps I'm wrong, you'll be eligible for other types of infrastructure reimbursements, perhaps from the state, or am I incorrect in that?
No, you are correct. The interesting thing about that is Colorado is what we call a sales tax incentive state. What we do is we weight the burden, the tax burden to the commercial base. By a lot, I mean by 4x.
The same AV at the residential and commercial. If I take $1 million of AV at residential versus $1 million AV at commercial at the same mill rate, I get 4 times the tax revenue on that. Yes, it supercharges your ability to get back your reimbursables, even to the point where we would no longer have reimbursables. We would have more bond capacity that would be able to forward fund some of those public improvements.
Mm-hmm. I take it then, if I'm hearing you correctly, that also means that would also imply to me that the cadence of reimbursement would be somewhat accelerated from where it is now once you do start actual commercial development.
Yes.
Great. Okay. Well, thanks again. Congratulations, and keep at it.
Thanks.
Thank you. Our next question is coming from Greg Sennett , who is a shareholder. Please go ahead.
Yes, I have one quick question about the rental. Is the product when you're building a home, let's say a single family home that in an area that's $400,000-$500,000, is the product identical to the other homes that are, you know, does it look the same? Does it have the same amenities inside the home?
Yeah, typically, we do wanna have it be consistent with what the other products are. They're not exactly the same, because, you know, every home builder will own their particular home plan, but it will be the same composition.
You're not gonna see. You know, if we're in an area where we've got two-story walkout basements, you're gonna find a two-story walkout basement. If we're in an area of slab on grade crawl space, you're gonna find the same home on that same block. It won't be out of character to the blocks and to the overall community.
Do you have any concern about the stigma of, I don't know, let's say it's five years from now, I live in an area where developers were supposed to put in affordable housing in a neighborhood, and there was a stigma in the resale market that when something came up that, you know, well, this wasn't built by the builder, this was built by and therefore, the valuation's not gonna be the resale?
Well.
is not gonna be the same.
Yeah. I think that's the reason we're careful with what the product class is. Then we also you know, I would probably tend to argue that, you know, in large measure, you know, we have some control over maintaining these properties.
So even after we're out of the master plan community, we're still in a position to maintain this number of homes. If we execute the way, you know, William Miller took a look and called me out on, you know, getting a foreshadow of what we think the community might pose for us. If we've got 12, 15% of 3,000 homes, you know, that's gonna be 300, 400, 500 homes in that area. So we'll have the ability to have enough staff to kinda maintain those properties.
We will do that. We'll keep that for that very purpose. You know, we wanna have preferred rental pricing. We wanna have good resale should we choose to monetize that particular asset. We're conscious of that. No, you know, we don't wanna be, you know, a slumlord in this area. We really very much like this community.
You know, we're vested in the community. We wanna continue to, you know, invest and continue to generate the returns on that asset. You know, good stewardship of an asset is the DNA of this company. You see it year over year in what we're doing and how we're investing. You know, I can't speak to, you know, what's gonna happen in 20 years, when I may not be at the helm. Certainly, the footprint of what it is that we're doing is to continue to invest in our assets.
Are the laws in Colorado tenant-friendly or are they landlord-friendly?
Good question. You know, I think they're pretty consistent. You know, the eviction process is pretty consistent. We haven't seen that. We haven't had that experience. You know, I would say it's neutral. It's not one or the other. It tends to be fair in the composition.
In the single family.
I'm thinking back to that Michael Keaton movie about that San Francisco project. I can't. I'm blanking on what the movie was, but The Nightmare Tenant. So far I don't think we have that here.
Yeah, well, it's early.
Sure.
In the single-family area, do people maintain their yards themselves, or is there an HOA that takes care of the landscaping?
No. Everybody maintains their own property. Now, some of the higher density, like the townhomes and the duplexes, do have a separate fee structure that does allow them to be maintained on a common maintenance basis. The single-family detached are maintained by the homeowners.
Okay. All right. Thank you very much. Appreciate it.
You bet.
Thank you. Our next question is coming from Elliot Knight with Knight Advisors. Please go ahead.
Good morning, Mark.
Good morning, Elliot.
I don't have a question, but I, as you know, have followed this company closely for 30 years. I have to say, this has been the most productive Q&A session and presentation that I've heard, and I'd just like to thank everyone.
Well, thank you. You know, the nice thing about it is we don't really take bow laps here. At the end of the day, I think what you've seen, and I think what everybody's really catching up on is kind of the discipline that the board and management have on kinda continuing to do the right things, test the market, reinvest in those things that are working, modify those things that need some modification.
We're very thrilled to have this kind of liquidity moving into, you know, what will be an interesting market. I don't think that this overall interest rate market is a recalibration more than it is anything else. We've got macroeconomic indicators that are much different than maybe what we saw in 2007, you know? More than anything, we have strength going into it, and so we're thrilled. If this presents an opportunity for us, you're gonna see us take advantage of it.
I have seen you take advantage of things in the past. I have every confidence, Mark, that you're going to do it, and just keep up the good work. Thank you.
Pats on the back like that keep me going.
There we go.
Thanks, Elliot. Good to hear from you.
Thank you. Sirs, at this time, there appear to be no further questions in queue, so I will hand it back to Mr. Harding for any closing comments he may have.
Terrific. Well, I'd like to again thank you all for your continued support. To the extent that you didn't get an opportunity to ring in on a technical challenge, please don't hesitate to give me a call. I'd be happy to drill down on any of the specifics and continue to stay tuned. We have some exciting things that we're working on, and we'll look forward to executing and bringing those to increasing the value for all of our shareholders. With that, I'll sign off, and thank you all.
Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation.
Thanks, Elliot. There were some laws that just passed. I don't know if they're just Denver.