Good morning, and welcome to Pure Cycle Corporation's first quarter 2023 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during this conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Mr. Mark Harding, President and CEO of Pure Cycle. You may begin.
Thank you, Jenny. Good morning, everyone. I'd like to welcome you to our first quarter earnings call for our fiscal year 2023. Happy New Year to you all. We have a slide deck for this. If you can surf over to our website at purecyclewater.com. On the landing page, you'll find a button on there where you can click on that, we will actually forward through the slides, it'll give you the ability to see some of the text in the slides within the presentation. With that, I'm also joined today this morning by Kevin McNeill, our CFO, and Dirk Lashnits, our Vice President and Director of Land Development, who will also give you updates into some of the business segments and the financial reportings.
At the end, we'll have a brief Q&A for those of you who want to drill down on some of the specifics. With that, let me first start with our safe harbor statement, which I'm sure most of you are familiar with, but, statements that are not historical facts contained or incorporated by reference in this presentation are forward-looking statements. With that, I'll get the lawyers out of the room, and we'll start. I'll just be very brief on some of the overview of the company, but, for those of you that are first timers to the call or new to the company, we really operate on three primary business segments, really that are fundamentally interconnected to each other.
At the DNA level of the company, we're a water, wastewater utility company where we own water in a water-short region here in the state of Colorado in the West. We develop those water rights, and we are cradle to grave on the water rights, where we develop the wells, the distribution system, put that water to use in both the land segment, which is a parcel of property that we own that we're doing a land master plan community on, and we're building lots for our home builder customers. We are holding back some of those lots and building homes on those for a single-family rental segment as well. Each of those segments really are interrelated to a vertically integrated platform that we have from the water utility side.
Moving on to just describe a little bit briefly about the water segment itself. We have just that whole network of utility operations where we have the diversions for the water supply, whether those are taking water sources from our streams and surface water supplies or groundwater supplies or reuse supplies. We treat that water. We store it. We distribute that out to our customers. We're also responsible for some of the development of that distribution system pursuant to our design standards for our community, which is some of the lands that we have, but others as well. We have master planned service areas that are very valuable, which we will highlight a little bit later in the presentation. Our customers use that water. They give it back to us. We collect that, we treat it, and then we reuse it.
We have a use and reuse model. Within that, we get some fee instruments for that. On the water utility side, we get connection charges, which are a one-time connection fee, which between the water and the sewer tap fee are around $32,000-$33,000. Those are paid by the home builder, our home builder customers. Those are typically added into the cost of the home, but that grants the service connection a permanent entitlement to the water supply. Then we get usage fees for that. We get a base fee, which really amortizes some of the cost of operating and maintaining the system, and then a consumption charge, which is a tiered consumption charge.
What this tends to do is it tries to encourage conservation because the more water you use, the more water, the higher the cost of the water supply. As you take a look at our water balance, you know, what we look to do is really keep control over that drop of water, where we're taking that from the supply, we're treating it, we're putting it into our system, we're getting it back from our system, and then we're reusing that. We do have a very closed loop system. We do lose a little bit to outdoor irrigation and some evaporation, but those trends are really decreasing. There's been a lot of press, I'm sure much of you have seen about drought and the vulnerabilities of water supply out the West.
The company's emphasis on technology and controlling that drop of water through its continuous life cycle is very important to our systems, and we wanna make sure that we're good stewards of this water supply. Taking a little bit of the infrastructure. You know, we build this infrastructure, you know, long-lived assets. Water supplies certainly are long lives. Those are perpetual. Then you have a lot of the brick and mortar that we're building associated with that.
Really, this is showing the growth of the company in the last 5 or 6 years, really showing about an 86% growth in the capitalized assets class and the various categories of that infrastructure, whether that's water and wastewater treatment facilities, transmission lines, wells, you know, finished water storage, surface water, groundwater supplies, distribution systems, those, all the, all the components of a water utility you'll find in those. That'll continue to grow as we keep seeing that. Moving into kind of how the growth of the utility looks like, our current customer count is up to about 1,250 new connections. We measure that in terms of the number of single-family equivalent connections on that.
You know, we have a combination of residential customers, which would be a standard single-family equivalent. We also have commercial and irrigation connections attributable to those. Just because you might have one irrigation connection, that might represent as many as a couple of hundred, as you see down in Lowry, because we have large irrigation requirements down there of connections. We rate that to the number of how we build those out, so the number of base charges that we get for each of those. Talked a little bit about our residential connections at Sky Ranch, which is our development. We have our first phase, which is completely built out, 500 homes. We are into our second phase. Very robust tap sales in our second phase.
Dirk will drill down into that a little bit. We got 124 taps there. A service area that we picked up a couple of years back, where we have more than 200 connections between the residential and the commercial connections as well. Moving on. Another one of our big customers on the utility side is the industrial space, where we sell a lot of water to the oil and gas industry through a number of different operators. Our water supply or service areas and really, you know, the state of Colorado is located over a fairly prolific oil and gas field that's gotten a little bit more attention more recently with the shale oil play.
We are seeing operators drill a number of, number of pads in a number of formations here, that consume a tremendous amount of water for oil and gas. We continue to see those sales. This is a distribution of how those sales go by quarter. As you can see, it's kind of all over the map. There's not a lot of predictability to it. They drill year-round, they frack year-round, and a lot of this is really dependent on a permitting process and, how aggressive they are. The leasehold interest in these, particularly in our particular field has changed hands a number of times, which is pretty typical in the oil and gas industry.
It started out, probably in 2015, 2016 timeframe with a lot of the field assessment and field definition, and now it's kind of moved into more of a well development. They're developing the field so that they don't do a lot of exploration, they don't do a lot of changing to it. Each rig has a much stronger capacity to drill more wells per pad per year. What we're seeing is, you know, when you get a dedicated rig out here, that can drill as much as 25 to 30 wells a year. They're pretty significant wells. They're 2-mile, lateral wells on this thing. I think they're experimenting with some 3-mile lateral wells on it.
They'll continue to increase the amount of water that they're using depending on their laterals on it. This is kind of an illustration. If you look at the right-hand side of this, that'll be kind of the Denver metropolitan area and kind of the growth of the metropolitan area. The two red areas or pink areas that you see in there, those are our service areas. If you look at the one, kind of transition between the green and the gray there, that's our Sky Ranch project, which is ideally located. It's on the I-70 corridor, and it really is in the strongest area of growth in the Denver metropolitan area.
We, as a developer, are really targeting the entry-level housing product, which I think mirrors very well for us, both in very strong markets as well as in challenging markets. Dirk will talk a little bit more about that. Our service area at Lowry. This is the very large pink area, which continues to be really an untapped asset for us. The land is owned by the state of Colorado in trust for the public education system here and is one of the most unique assemblages of land in the country. As you can see by the picture on the left there, most of the development has really come up to the border of that property.
It depends on, you know, how the state looks to move forward with that, but that's certainly an opportunity for us over the next few years that we look forward to doing the utilities for that. We're the exclusive water, wastewater provider for that, 24,000 acres of contiguous property. That gives you kind of a sense of the utility side and some of the segments that we have in there. I'm gonna hand this off to Dirk Lashnits, who will talk a little bit about our land development activities.
Thanks, Mark. Good morning. Land development. Here's our flagship project called Sky Ranch. Every time I see it, in its overall view, it always reminds me of the dreaded Tetris piece from that game. This is 930 acres, like Mark said, on the developing edge of development out on the east side of Denver, has 3,200 residential lots capacity and 2 million sq ft of commercial capacity, and we're about 15 mi east of downtown Denver. Sky Ranch has probably got about a 10-15-year build-out that'll be heavily dependent on our market conditions. We're gonna build this out in multiple phases. Over the last probably 4 or 5 years, you've heard us talk a lot about our first phase.
That's the first 500 lots. That's pretty much in the books. We're now moving on to our second phase. That first phase is the block on the left side of the picture. Then our second phase is kind of the middle portion of the parcel. Then future phases will grow out to the east. Then our commercial piece is the northern block adjacent to I-70. We plan to build about average probably about 250 lots per year out here. We'll layer in our schools and commercial pieces and rec centers, all those things that go along with a master planned community.
Phasing, as I mentioned, phase I in the books, that was 500 lots. We have also had our pilot program for our build-to-rent lots. We have four occupied units in that phase, 100% complete. Moving into our second phase, this is 850 lots. We're subdividing this into four sub-phases. That's IIA through IID. We are well underway in our phase IIA. That's about 80% complete, and hope to have that completed later this year, beginning of 2024. We've started our infrastructure for phase IIB. We're hoping to start that in earnest, quarters two through four of this year.
Phases, the third and fourth sub-phase, phase IIC and phase IID, we'll build out in subsequent years. Our phase IIA, we just had our first few residents move in there, that's exciting. We have delivered all our lots to the builder customers there. As you saw by our water taps number on previous slides, those are indicative of the number of homes the builders have started. We're right around that 120, 130 houses started. I think the builders have sold probably about 20%-25% of their lots. They'll look to have those sold out the remainder of this calendar year.
We'll be looking to have that second phase come online for the next batch of lots to not interrupt that sales cycle. All right. Next phase. This is the details on the phasing. This is the phase II, 850 lots broken down into the four sub-phases. We got our lot revenues. Those numbers are what our income from sales of the lots to the builders. We have our tap revenues. Those are the water and sewer connection components that Mark mentioned. We have our costs to develop the lots.
We have our reimbursable component, and those are the costs attributable to public infrastructure that are eligible for receivable reimbursement through public dollars, whether that's taxes or or bonding. The graphs on the bottom of the sheet here, the bar graph and then the far right pie chart, those are our builder breakdown, builder distribution. We have our four builders in this phase, and that's by builder. Our that center pie chart is our product mix. Those six slices of that pie represent our the different product market, product segmentation, which we think is a good balance of product offerings and provides good diversity. All right. Onto some market conditions here, sort of the news of the day.
Start with our the good, the positive things. The pent-up demand for new home sales, we think there's good upside here. Back in the 2005, 2006 timeframe, there was about 1.4 million in home sales. Even in this latest upswing in 2001, 2002, or 2021, 2022, we were only at 600,000. I think that represents good upside for us. In this, that first quarter, we've seen the mortgage rates start to stabilize, still kind of hovering around 6%, and that's in historical norms. Lot delivery is still trailing home starts. In other words, we are still selling more homes than we are delivering finished lots.
From our standpoint, being in the business of selling lots, that's good potential there. Like to see that demand. We got our home builders in Sky Ranch are all ranked nationally. All four in the second phase are in the top 15. I think three of them are in the top 10, two of them are in the top five.
Yeah. Top one. Top two even good for stability and in it for the long haul. They've certainly seen some of the market swings and are good partners in helping mitigate that low unemployment. This is.
Obviously, a really important one. We hope that stays positive. House prices still appreciating. Buying a house, still a good investment. Lower average days on the market. Houses are still selling pretty quickly and those are some typical numbers there that. Just last year we were down, in Denver at least, we were under 10 days on average, and houses were selling above asking price, sight unseen, day of asking. You know, a year ago we had that peak and even today with some of the slowdown, we're still seeing days on market in the 20s. That's all still good outlook. Onto the bad or opportunities that we have here. You know, the.
Again, the abrupt uptick in interest rates kind of shocked the system, and I think we're slowly adjusting to that. Again, we're still in kind of historical norms. A lot of the important metrics still trending downward. Builder confidence is down. Applications for mortgages are down. Builder or buyer traffic in the model homes is down. Home sales are all down. Combine that with higher material and labor costs, and then our cancellations on contracts are still up. You know, I think at the end of the day for us is that houses are too costly. We need to figure out ways to kind of recalibrate that.
The land development side that we do is a link in that chain and, how do we adjust and, for those changing markets. The way we do that is mostly on a timing, from a timing standpoint. That's really our challenge is trying to time our deliveries. We have a long lead time in development business. We're probably anywhere from at the earliest 6 months to, but most more likely 1 year out from when that demand comes online. We have that challenge on trying to find the right time to build our lots.
Here's just a slide with a couple of the touches on the job growth chart, interest rates and some sales information. Back to Mark.
We're gonna push this over to Kevin. He'll give you an update on some of the rental segments and also just a brief stats on the quarterly performance.
All right. Well, thanks, Mark. Thanks, Dirk. Yeah. Our single-family rental, our newest division that we launched in 2021, we continue growing it. We got four houses completed now as of December 15th. We got 10 more under construction, and those will be delivered throughout the year, throughout our fiscal 2023. Right, the four that are rented are all rented from $2,800- $3,000 a month. Pretty stable renters, we think. Still, we're very optimistic about this market or this new segment, especially with interest rates continuing to climb, you know, with home values continuing to stay high and that slowing of that market. The rental rate market in Colorado especially remains very strong.
This is some projections that we put together using our fiscal year from last year, our 2022 results. Just 'cause the first quarter is, you know, the smaller piece to look at. We projected out with with 14 homes and 50 homes. 50 would be the entire phase II, 46 homes there and four homes in phase I. What you can see is our current projections, obviously depending on costs and interest rates and everything else, it's about $1 million a year, just short of $1 million a year in free cash flows from operations of just the rental units. Doesn't include obviously overhead or anything like that, but. The financial results for the quarter wasn't the strongest quarter we've obviously had.
It was from water, wastewater standpoint, as Mark touched on earlier, we continue to invest in the water infrastructure. A little over $67 million now in water rights between asset water rights themselves and supply infrastructure to bring the water to our customers. We delivered about 67 million gallons this quarter, which is down a little bit from last year, which is predominantly down because there wasn't a lot of oil and gas activity during the quarter, and also construction activity was down. With the phase IIa being done and IIB not really started yet, we didn't sell as much water to construction activities. Mark or Dirk obviously touched on the land development side, which you'll see when we get to the balance sheet and income statement as well. Then the single-family rentals continue to grow.
From a true. From a graph standpoint, you can see obviously the revenue and segment revenues were down for this quarter compared to each of the last few quarters. One thing I'll point out is in that Q1 2020 quarter, that was kind of anomaly. We recognized a bunch of revenue in that year to catch up some contingencies that we had, and also there was a lot of lot sales that year. phase I was going very strong. phase IIA was getting ready to start. It was a great year. This year you'll see the revenues are down predominantly again, 'cause we talked about the housing market slowdown. We delayed a little bit of phase IIB in order to match our lot deliveries with the home builders' sales.
That was somewhat intentional, but obviously with the housing market interest rates, that was, you know, hard to control. From a net income standpoint, it gives you the same thing, that income dropped during the first quarter compared to the other quarters. Same reason revenues are down. We were able to offset some of the revenue declines with about a little over $1 million in surface use and other payments from oil and gas companies, which we think is a pretty strong indicator of a good 2023, we hope, for fracking and drilling continuing out throughout the rest of the year and throughout our service area. Obviously, there's our diluted earnings per share.
There'll be a little more information on this coming out when we actually file the Form 10-Q, which is due in about 4 or 5 days, which we anticipate filing here in the next few days. A few upcoming dates. We have our annual shareholders meeting tomorrow, which is, you know, there won't be any big presentations. It's more of a formality. Not expecting a big event for that. Our 10-Q, like I said, the filing date is January 17th, it'll be filed before then. If you haven't seen it, our ESG report we've launched in November. That's on our website. Gives you a little more detail into our what we're doing from an environmental standpoint, how we're trying to be good stewards of the environment and our money and shareholder money.
Real quickly, the balance sheet, income statement. You can see we had a pretty good pickup in cash last year. The Sky Ranch CAB did a bond offering and was able to repay about a little over $24 million in total to us of reimbursables, and so we invested that in some short-term Treasuries and kept letting some of those interest rates continue to grow. The balance sheet in terms of assets and investing in new water rights and infrastructure, and that. You'll see the income statement. Obviously, I won't spend a lot of time here, but it'll come out in the Q. The press release we issued last night has a lot more information on it.
You can see the revenue decline that we discussed predominantly in the land development, lot sale area and that commercial water sale area. Our overhead stayed fairly consistent. you know, we're keeping our head count strong. Then you can see in that other net, the $1.2 million of other income that was basically surface use payments and future in anticipation of future drilling and oil and gas operations on our land. We will turn it back over to Mark for closing statements and questions.
Thank you. Okay, so what are our takeaways here? I guess takeaways for management would be kind of the stewardship of how we handle our business models. You know, we've got very valuable, very low cost basis legacy assets here, both in terms of the water and the land side of the equation. What we've done successfully is really make sure that we carefully position you all with your invested capital to market exposures. So one of the ways that we do that is through how we handle our builder contracts. Those of you that are familiar with the company kind of had this appreciation. You know, we have a lot delivery agreement structure where our builders are working in partnership with us on delivery of this very expensive infrastructure.
You know, we're in a high cost business where we're delivering horizontal infrastructure for master planned communities, and then the housing side of it, the vertical side is handled by the home builders. That infrastructure is very expensive, and we want to make sure that neither we nor the builders, our builder partners, have too much exposures in softer markets. And we're in a softer market right now. And really the validation of that business model is the fact that, you know, we don't have any exposure in there, right? We as you saw in the presentation and Dirk highlighted, we've got about 15% of the phase IIB, which really would be the grading and the over-excavation components of that we've invested in. That's been covered by our home builder, customers.
You know, that's not a significant investment in there. As their lot deliveries, this is about pace, right? This is about how many lots they want to have in inventory because they want to match their sales cycle. Maybe in phase I, each builder was doing 7-8 homes a month, so that absorption was pretty high. In phase IIB we're seeing, you know, maybe three. We are still seeing that. It's three homes per builder, you know, that gives you a cycle for that. We find ourselves in the right market segment, the entry level product. As the home builders come out there and look for buying opportunities, Dirk really highlighted the continued demand for single-family homes in the marketplace. We're seeing that in the marketplace.
We're seeing that in terms of the builders and the building permits that they're pulling and the spec homes that they're building out at Sky Ranch, and then also that they're having sales. You know, that we've got customers that have moved out there in the last 30 days and continuing to really see that absorption. We continue to invest value into the community. We're opening up our school, which is gonna be a tremendous asset for them because it's a local school, a charter school that we've partnered with a national charter operator out of Michigan, National Heritage Academies. And they have a website, the Sky Ranch Academy has a website. You can take a look at that, but really good delivery device for education for new families out there.
Taking a look at kind of diversity. One of the things that we like, and Kevin mentioned, was single-family rental business. There's still a ton of demand for more space at your home because of the work balance, the work from home balance. You're seeing a lot more, dual income families looking for more space so that they can have offices at home. Our home product, you know, we've diversified from, either a 45-ft lot or a 45-ft lot in phase IA, and now we've got six different product categories, and that's enduring very well to the market segment. You have six different price points in there as opposed to just a couple of price points depending on finishes.
A lot of those design features that we had in our master plan community really is enduring well and will stand the test in both good markets as well as headwind markets. Ultimately, you know, continued sales of water in industrial operations. You know, we're gonna see a little bit of uptick in oil and gas demand, but that's really a steady Eddie customer for us, and we like making sure that we supply that segment water supply and then can convert that water supply over into the potable supply. There's a really good balance in how we're extending and developing into these assets. You know, continued growth. You know, we continue to grow the company, small tuck-in acquisitions of assets.
As you've heard me talk about in prior acquisitions, we're on the hunt for more land and really kind of build our land portfolio. Don't have anything really substantive to talk, I'm gonna forecheck some of your questions on, you know, what's the update on acquisitions for land development. There are a number of opportunities that we're pursuing, and, you know, we're very aggressive about doing that. One of the nice things we have is we can be aggressive about that. You know, we have very liquid balance sheet. We've managed this capital well. We've been disciplined with our board to be making those investments also making investments in ourselves with the stock buyback. Those are kind of the capital allocation structures for us.
With that, I'm gonna turn it over to the lovely Jenny, in Scotland, who's waiting for her lunch, and see if there's any questions that you might have on drilling down some of the detail.
Thank you very much. I am indeed waiting for my lunch as it's 2:05 P.M. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it might be necessary just to pick up your handset before pressing the star keys. One moment while we poll for questions. Thank you very much. Your first question is coming from Robert Howard from Boiling Point Resources. Robert, your line is live.
Good morning.
Good morning, Robert.
Hi, I just had a quick question on the for the new customers that are getting added on. You talked about $1,500 of annual revenue from the water customers when they come on. I was just wondering, at least maybe in Sky Ranch, as you're adding customers, how much additional costs might there be? Are the, you know, is the infrastructure and kinda everything in place so that $1,500 is really kind of, you know, almost all incremental, or is there, you know, additional costs that kinda get layered on as you're still kind of building up stuff?
Have you kind of reached a critical mass where maybe the costs are decreasing a lot slower than, you know, they were earlier in the project?
That's a good question, really we segment some of that, brick and mortar costs, for adding those connections into the tap fee charges. Typically, the way we see it is that the connection charges, that $33,000 for a tap fee charge, you know, we build the wells, the treatment facilities, all of the brick and mortar stuff that deliver that water to the customer through that capital allocation base. A lot of that is early on investment that we've had. Then also what we see is the oil and gas revenues tend to allow us to expand that system apart from the tap.
The way we usually look at it is that's a 50% margin business, but it becomes a little bit better margins because some of the oil and gas revenue we can allocate to expanding that supply side in advance of those tap connections. When we get the actual connections, the $1,500 connection per year, which is really your point, there are additional costs in that 'cause we have, you know, an operating entity where we've got chemical costs to make sure that we disinfect the water. We have lab costs 'cause we have to continuously sample our water and make sure that our water meets all of the primary and secondary clean water standards.
That business, we typically also look at as a 50% business, 50% margin business, and it's not so much on the capital side as it is on the operating side, right? We have operators that are making sure that they're going out, making sure the system's operating correctly, taking a look at, you know, whatever's occurring, daily, nightly, weekly on those sorts of things in addition to really the lab cost. That's how that divides out. There's not a significant uptick in that. As a matter of fact, it's usually a little bit better on the front end, because everything's brand new, and it operates the way it's supposed to. You know, we really, we look at those margins as about those 50% in each segment of that, if that answers your question.
Yeah. Yeah, sure. Just that $1,500 number, I think you guys have kind of been talking about that for, you know, a number of years. Is there, you know, pressure on that? Or I don't know, is the market rate, elsewhere for, you know, in Denver, are other people charging that amount? Or is there, you know, possible, you know, pressure for that going up just, you know, inflation in general? How are you able to kind of keep the customer rates flat?
Yeah. I would say that there's two rates there. There'll be the tap fee rate and then the usage rate. The tap fee rate probably has a little bit more upward mobility just because of the scarcity value. As you continue to hear about the competitiveness of water rights and the incremental costs, because we have to go farther and farther out to reach for those water supplies, I'd say our tap fees have a little higher upside than, say, necessarily the usage rates. The usage rates will continue to grow. We continue to grow those for making sure that we keep up with our inflation costs as well as, you know, anticipatory costs for whatever the evolving regulatory climate's gonna look like.
That's a little bit more inflation oriented as opposed to the value of water in water-short areas and the cost of water acquiring those water rights from farther and farther areas. When you take a look at those two revenue streams, there's probably a little more strength in the tap fee side, which is gonna be our big number. You know, you apply that to our portfolio, we have 60,000 connections worth of that. That's over $2 billion worth of revenue potential over time, as opposed to that $1,500. You know, that's been a stagnant number. We're probably a little bit above that. That's just been a metric number that we continue to look at. You know, I would say that that continues to go at about 3.5% per year.
Okay, great. That's all I got. Thanks a lot.
Thanks.
Thank you very much. Your next question is coming from Bill Cunningham, who is a private investor. Bill, your line is live.
Hi, Mark. How are you doing?
Just living the dream, Bill.
Good. You know, on the last conference call, I had made the comment about the unusually good results, which, you know, were a result of lot sales, and tap fees, and we talked about how earnings are lumpy and that so we might not see the same, you know, results in, you know, quarter to quarter. This quarter proved exactly, you know, what you were talking about. I kind of did some penciling out of things ahead of time to kind of figure out what your numbers might be and thought it was 50/50 as to whether you'd be reporting a loss or a profit this quarter. It was kind of a pleasant surprise that you actually squeaked through with a bit of a profit. Hopefully nobody else was surprised with, the results being not as good as the prior quarter.
Yep. No, that's true, Bill. You know, it's cyclical in a couple of ways. I mean, one, because of the way our year-end reports, you know puts us into. You know, where we report, right? I mean, you know, Denver, as most of you all found out, Denver is a great place to live, except maybe January, December, January, February, you know? cyclically, we're in the outdoor business, right? A lot of our water supplies, outdoor irrigation, outdoor land development activity, outdoor sales for single-family homes are all cyclical in the winter months. You know, it is pretty predictable. We are grateful that we were still able to be profitable, we will continue to strive to do that quarter-over-quarter.
I do have a couple of particular questions for you. One is, I was looking at the tap fees sold and the totals. Your Form 10-K at August 31st said that 618 taps had been sold in Sky Ranch. Your press release said four more were sold this quarter, you reported a total of 766 taps that have been sold so far in Sky Ranch. I'm confused on the difference between the 766 and the 622.
Yeah. Really what we. This was a real strong push to normalize the number of tap connections. You know, there's a difference between the residential connections, and then we have the CAB, the governmental entity that's responsible for the parks and the open space and the outdoor irrigation. They pay a tap fee, but they're only one connection, and so that's the difference. What you'll see is when we report the number of irrigation connections, that's a higher number.
We've been really trying to normalize that for everybody so that people like you who really drill down in the numbers can get a feel for that $1,500 per connection per year amount. What is that applying to? That's now we're really trying to give you all a little more clarity. Is this applying to that 1,246 number of connections? When we send out a bill, that's not 1,246 bills because there may be one customer that might have 50 of those connections. That equates out to the same number of connections. That's what we've tried to stick.
I was figuring. When I went through that statistic this quarter, I'm like, "Cunningham is gonna call me out on this thing." I'm glad you did. I appreciate that. We did that with you in mind, specifically for the detail orientation, as well as, you know, Robert, who came back and said, "Okay, I'm really tracking this." $1,500 per connection. We really wanna give the market a better, clearer understanding of how to compute that number.
Okay, great. Thank you. Then I also have some questions on the different builders in phase IIA. There seems to be a big difference from builder to builder as to what they're doing there. I mean, KB looks like they're going gangbusters, where they've sold, you know, 27 homes already, which I think is about two-thirds of their total. Challenger with their homes seems to be doing okay also. Lennar has just started selling their single-family homes, but their townhomes are still listed as coming soon.
D.R. Horton, we had talked about last quarter, or I guess they were having to do some revisions to their building plans with the county and hadn't started yet. I'm just wondering, you know, what might be going on with a couple of the laggards here with the, with Lennar Townhomes and the D.R. Horton homes.
You know, those are the two largest builders, that Dirk was referring to. You know, I'd say they all kinda look at their own scheduling, and this is new for both of those builders. This is kind of a new project that they're in.
Mm-hmm.
I think Lennar has got. They've probably got, of their townhomes, they've probably got 18 spec townhomes under construction. What they're really, both of them, more Lennar than D.R. Horton, are really pushing for this seasonal downtime where they can build and then hit the market in kind of a March cycle with a ton of product.
Okay.
They like the product that they have because it's very price-sensitive product. Those townhome products are gonna do extremely well. I think what Lennar's forecasting is we wanna have a good inventory of those. If we didn't do it in the earnings presentation, jump on the website 'cause we throw up a lot of our drone shots on that. You can see the bulk of the starts and the numbers out there. I think we've got more than maybe 60, close to 70 vertical construction out there, of homes out there. You know, you're right, KB's done very well out there because they've got a paired product. Again, that's higher density, better price points out there. Challenger is very competitive on their price. Then Horton, you know, when t hey're pulling lots of taps, so we know that they've got lots of building permits that they've got teed up.
Okay.
They're just gonna line build. They're just gonna throw everything they got at it, do it all at once. That's pretty stylistic for the builders.
Okay.
Each of these.
Well, that's great to know that Lennar is actually building the townhouses right now, because just looking at the website.
Yeah. They're very aggressively building them.
Wow. Okay, that's great because when you look at the website and see coming soon, you just figure that nothing has happened yet.
No, I think they've got four six-packs under.
That's very, very positive news. So.
Yep. Yep.
Okay, great. Thank you very much, Mark.
You bet.
Thank you. Your next question is coming from Bill Miller, who's a private investor. Bill, your line is live.
Hi there, Mark.
Morning, Bill.
Happy New Year.
Happy New Year.
I wonder where we are with two things. One, you at one time indicated you might buy back some of the lots for the build-to-rent part of your business. Secondly, where do we think we are with the I-70 development, which looks to me to be sometime near term. I wondered whether you could give us any indication of how soon that might take place.
In terms of the buyback and some of the other phases of the lots, you know, we're moving forward with phase IIB. We're recording our plat this month, then we'll get a sense from the builders. I think the builders were really hoping to wait to see how their traffic activity was gonna look for the first part of the year. We've reached out to each of them and let them know, you know, as you look to your close, if your absorptions extend yourselves out a little bit farther than you would otherwise want to inventory, we will pull whatever number of lots back from that. All four of our builders have that offer. We've made that offer to them.
They're all under contract, so I've gotta work with them on their cooperation. I'm pretty confident we're gonna claw back. Not claw back. We're gonna be invited back in a couple of those from some of the builders because, you know, it's a win-win for them. They can not close on that lot, and then we're talking with them specifically to say, "But you can still build a house on that." That's an opportunity for them not to have to. It really is a win-win, right? They can manage their cash flows so that they actually can still show positive sales on Sky Ranch to a customer that, you know, they know and they understand, which would be us, as opposed to waiting for traffic and contracts and cancellations.
You know, this is, this is a great opportunity for both us and them to really continue to build the portfolio. You know, we're seeing extremely strong demand. Every time we finish one of these houses and we put it up, it is gobbled up. I mean, we put it out on Zillow. You know, we get competitive people looking for rental on this stuff. We still are very aggressive. We still like that segment. We're moving forward into that segment. You know, the question would be, well, you know, can we do more in another phase? You know, get out of the 850 and start another phase. We can, but that puts us in a bit more exposure, where we're actually inventorying all those land development opportunities.
We do have a balance sheet that can do that. At the end of the day, we're also balancing that against opportunities for acquiring other land and making sure that we continue to build and grow the company. There is a balance there. Second question, in terms of the land development side on the I-70 corridor, I think you're probably referring to the Lowry project. You know, we continue to see a lot of pressure for entitlements. You know, everybody wanted more and more finished lots in the marketplace up through what was this interest rate environment.
You know, us being able to time the market where we're delivering lots, not throwing 850 lots to builders for them to inventory, but doing this on a cyclical basis where they're helping us pay for that hold cost as well, certainly is a proven delivery model for land development. We'll see, you know, with the weakening of housing, how that cycle comes into impact Lowry's timing and other land developments in and around Sky Ranch that we're also looking at acquiring. We're cognizant of all those elements. You know, our crystal ball isn't any clearer than the market, probably even cloudier than some of the experts in the market. You know, what we try to do is make sure that we're making informed decisions with our capital allocation plan.
Well, what about buying back stock under those informed decisions?
That's a great opportunity for us. If the market continues to frustrate that stock price, we're there now. We're ready to do that. You know, do I have an answer for you at what price do we buy stock? I don't.
Okay, sounds good. Keep going.
Thank you.
Okay. We have now reached the end of the question and answer session. I will now hand back over to Mark for any closing comments.
In closing, I guess I wanna continue to thank you all for your continued support and confidence in our business, our business model, and our team here. I wanna recognize and give a shout-out to our board of directors. They're an outstanding group of folks that continue to give our management team very sound and reasoned and expert advice into all business segments that we have. We've built a great board that has disciplines in each of these to help us continue to evaluate those decisions and make good decisions for our investors and our invested capital. As Kevin mentioned, we have our annual shareholder meeting. There's not anything exciting on the shareholder plans, but if you haven't voted your shares, please vote them.
We look forward to an update in sometime in April timeframe to give you a little bit more detail on the market. If you weren't able to ask a question or if you're listening to this on the replay, don't hesitate to give me a holler, and, I could be happy to give you any color or any information that would help you guide the decisions in ownership of the stock. With that, I will close and thank you all and look forward to speaking to you again soon.
Thank you, Mark. This concludes today's conference. You may now disconnect your line at this time. Thank you for your participation.