Q2 2022 Pure Cycle Corp Earnings Call
Yeah.
Good day, ladies and gentlemen, and welcome to the pure cycle Corporation second quarter 2022 earnings call.
At this time, all participants have been placed on a listen only mode and the floor will be opened for questions and comments. After the presentation. It is now my pleasure to turn the floor over to your host Mark Harding, President and CEO , Sir the floor is yours.
Thank you good morning, and I'd like to welcome you all to our second quarter of our fiscal year.
2022 earnings call.
We do have a deck for this presentation, which you can find on our website. So if you go to pure cycle water Dot com.
On the Investor page right on the front page, there and they'll tell you icon and they're quick.
Click to join if you can join on that I'll be able to direct the slides.
Walk you through the presentation, but that'll give you kind of.
Little bit more tangible view.
The earnings call as a whole.
With me today are you all hear my voice a lot and so what I'd like to do is actually bring in some other voices to the call today and the folks within the organization that make things happen. We've got a very deep bench with some very talented folks here in the company and so as part of the update.
Due to our land development activities, you'll be hearing from our vice President of land development activities last Nielsen He's got over 25 years of experience on land development activities.
A tremendous amount of experience with some of the major homebuilders some of them are direct partners in Sky Ranch.
Also be hearing from our CFO , Kevin Mcneill and you'll be giving you an update on the financial results of the company.
What I would like to do is give you for those of you who are new to the company just provide a high level overview.
The land development in water and single family rental business aspects of it.
Does that you are more familiar with the company really highlight some of our tremendous accomplishments in really.
To give you some color as to the areas that the company is performing on and really how these legacy assets are starting to generate significant shareholder value.
So with that.
I will start our presentation moved to the first slide hopefully.
I won't get it technical.
Oh, there we go.
Yeah.
Okay. So our first slide always is to get the lawyers out of the room. So this is our safe Harbor statement that statements that are not historical facts contained or incorporated by reference in this presentation are forward looking statements. I think you all are familiar with forward looking statements.
So with that we really operate in kind of three business segments. We're reporting in two business segments, but really have these tremendous assets that are driving value for our stakeholders assets in land and water investments and then also in housing.
Just could not be more true today than it ever has been and when you take a look at this portfolio of assets we have.
About.
780 acres remaining in our land portfolio. We originally started out with about 930 acres of land. We have water assets that include water rights in a water short area. It includes a tremendous amount of assets that we develop to continue to treat transmit.
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Deliver that water to our customers collect that water back from our customers treat that water and reuse that water supply and then more recently, we have entered into the single family home rental market on lots that we are actually developing and delivering two homebuilders, we're keeping some of those blocks for ourselves of being able to deliver.
Rental homes on there so that we can maintain that portfolio continued to grow our asset value and also continued to grow our income on how we get these multiple year revenue streams.
So with that.
Let me talk a little bit about our water segment, we owned water in a water short region much of there's been a lot of attention to the scarcity value of water out west.
We were particularly early on acquiring much of these assets we've held them for more than 30 years. They have continued to appreciate in value.
And as opposed to buying something.
Having that increase in value in selling data real business model here is that we are developing a utility function with that so what we do is we develop on a cradle to grave approach all the wells that treatment that distribution that takes that to the customer we get two different fee instruments for that we get a large upfront.
Capital fee called tap fee or a connection fee those.
Those fees are a combined water and wastewater tap fees, which are about $33000.
Customers are using that water supply they are taking it they.
They use it in the house they use it for irrigation outside the house.
Get that water back through a collection system, we treat that water through a state of the art water reclamation facility and then we reuse that water supply for irrigation demand. So we've got dual distribution systems within our community, where we are distributing that water back out to our irrigation demands and Thats also use that for.
Irrigation or not sorry, industrial water for oil and gas purposes.
Okay.
So our assets continue to grow in value, we're investing into that infrastructure, we are expanding our service capabilities each year to add value to the assets and their ability to generate revenues and thats a whole network of investments, whether that's going to be wells.
Pipeline transmission pipeline.
Storage facilities, where we have both raw water storage in finished water storage.
Water reclamation facilities water treatment facilities, just to make sure that this ongoing service of water and wastewater service to our community and.
And our customers continues to add value to the company.
Customer growth continues to grow so we have customers that are growing both within our service area as well as <unk>.
Outside of our service area. So our connections are.
Getting very close to about 1000 connections about 900.
70, some connections and that continues to grow monthly both through the service areas that we have at Sky Ranch as well as our wildfire service area and then we'll talk a little bit later about the opportunities.
On our large service at the Lowry Ranch.
On.
Really the edge of the Denver Metropolitan area.
Moving on to other customers. So in addition to doing the domestic side of the business, we do provide water for oil and gas concerns, Colorado has a <unk>.
Sale oil deposit play, which is continuing to grow and this year is <unk>.
Being very favorable improvements in our industrial water user sales to our oil and gas interests have hit record water deliveries for us. This year. So we're very excited to continue to meet that demand likely to see a positive continuing trend with <unk>.
Strong oil pricing and as oil remains in the 90 Upper 90 range. That's certainly enhances the opportunity for oil and gas concerns to continue to develop that asset.
Let's talk a little bit about.
The.
Large service area that we have one of the things that's very attractive to the company is that we have a 24000 acre service area, which is.
One of the largest contiguous parcels of property next to an urbanized area in the country and this asset is owned and trust for the.
The state's public education systems, it's owned by the State land Board, which really manages their assets as a fiduciary for public K two K through 12 public education and the state of Colorado. This is kind of an illustration that gives you a shot.
Really where the.
The service that we're our service area positions itself to the Denver Metropolitan area. We've got growth that has really grown out to roughly 353 borders of the property.
Very attractive parcel of property the state land Board is reviewing what they would like to do with the property I think they have.
Very multifaceted multi generational mindset, how they manage their assets and take a look at it not only for how it generates revenue in a consistent income overtime that also how it can have opportunities for open space and recreation and then also taking a look at what that might generate four.
Public education systems. So it is a it is a very highly attractive piece of property and as you can see.
Well positioned for the future economic growth.
Okay.
So with that I think I'd like to turn the floor over to Dr. Glassman I'll go ahead and advance the slide so that we don't have today, alright give you an update on land.
Everyone monitor classing, if I'm, the vice president of land development.
Pure cycle here for about five years.
Since the onset of Sky Ranch and as Mark mentioned.
I've been doing development in the front range of Colorado for last couple of decades.
Worked out a lot of.
Big projects around town that you may have.
Heard of Highlands, right answer Stapleton and.
The 930 acre site here at Sky Ranch.
<unk> considered a pretty large development in the overall.
Market area. So.
On the slide here.
Developing 930 acres of Sky Ranch.
3200 residential lots.
Tying back to.
Land development kind of our vertical integration of our water assets.
We are developing our new water customers.
So on the previous slides we saw.
Some some assets 60000 ffbe.
Water available and whether it would be about.
Equate to about 3200 of those fees.
Basically.
One one lakh equals one F N b.
Roughly so in average house.
And you also saw the 29500 acre feet of water that how that translates to our our use of jamba out at Sky Ranch.
Sky Ranch also has.
Large commercial parcel that has great frontage on.
The I 70 corridor, the major east West thoroughfare through.
Through the Metro area.
And then our project is located on the east side of Denver.
About 20 minutes driving into town.
Alright.
Alright so.
The picture on the screen as of our first phase.
509 lots.
<unk>.
<unk> sold off transfer to all 509 of them.
We have.
505 of those were sold to.
Our builder partners that are shown on the screen there Thats Keith Taylor Morrison enrichment and then.
Retained.
For lots and are doing that for our build to rent segment.
Three of those have been completed and are.
Have tenants in a rented out and then we're in the process of completing the fourth slot.
So 405 occupied houses those of our current water customers they've bought taps, they're using our water.
And we sold.
500 of our 505 caps.
And we should be.
Built out of this phase.
Here in the next couple of months.
Some of these numbers.
Received 10 5 million of Reimbursable as that was.
<unk> operating down a year or two ago.
Pretty favorable terms on that deal.
That $22 7 million in receivables those are on the books for us.
As to recoup recoup those costs.
Future revenues from from taxes come in.
And that also includes our project management fees so as the.
So your cycle also functions as the project manager for our Metro District.
Which ties back to the.
The reimbursable money that are used to build public infrastructure that is that is reimbursable.
The $36 $7 million in lost revenue to date.
Sale of our lots to our builders.
In the $15 1 million in tap fees to do the range of the water district.
Okay. This is a little.
Drone footage of our project.
Working from West to East here kind of flipped from the screen previous but.
At the bottom of the screen the video Thats the rest of the state to build out you'd see some foundation there.
Along that street.
After the houses to be built at the Richmond area.
It.
Move to the end of the street there right on that corner is our last BTR lot.
For for this phase so that would be the four.
For rentals in this in this neighborhood.
And well go onto our.
Second phase so first phase 500 lots with phases, roughly 850 lots out of the 3200, we mentioned previously.
So this year.
Taxi at all the different colors on this map each of those colors represents a different build their partner.
For builders, we have one carryover from phase one that's Kb home and then we are introducing new product lines and segments from the other three builders D. R Horton Lennar and challenger.
The.
Second phase.
Subdivided into four different quadrants. The first one of those sub base as highlighted in yellow there. So that's the area that is currently under construction 229 lots in there.
Okay.
We're expecting to deliver those.
This spring, we've actually turned over a few of those lots to start the construction of model homes. If you were to.
Drive out on site today.
You can see model home vertical from Kb homes.
And then the other three builders have started some foundations and we're starting to.
Install the streets.
This sub phase.
So click and go into some drone footage on this.
Thanks here again kind of working from the bottom of it is going to switch from last screen.
Theirs are.
New streets that have been installed.
On the bottom of the screen napkins or school site, we have a <unk>.
Charter school coming into the community.
And then turning in.
This quarter here, it's going to be a future Recreation Center, an amenity center for the neighborhood.
So construction underway in there.
<unk>.
Let's see.
The top of the map there is.
The school site has shown and then if you were to continue up the page is north that would be where our commercial.
Properties.
<unk> and <unk>.
The 2 million square feet of commercial metals start to come online as more rooftops.
Develop out there.
And then just a couple of numbers on the.
Yes.
This space $70 million and lot sales.
GAAP EPS was $20 9 million.
$61 million in Reimbursable costs for that public infrastructure through the district.
And then the $73 million in total development cost to bring to bring the second phase online.
So I think I'm going to turn it over to Kevin now there is to get into the numbers.
Thanks Dirk.
Kevin Mcneill CFO been back for a couple of years now.
So the slide that's up right here shows how this.
Phases of Sky Ranch developed three of the contracts that we have with the builders are under milestone payments, which means we get paid along the way as we complete certain things like utilities streets and roads and all of that so so this really summarizes what we're doing in the four phases.
As Dirk noted the second phase was broken into four distinct phases that we are developing one at a time when they overlap them here.
Is it coming up within the market.
But this really shows a breakdown of the revenue <unk> revenue tap revenue and reversals by those four separate phases and how they roll through.
Sure.
The second phase is progressing nicely, we are about 57% done.
First subsea is another.
Now the next slide will show, where we're at in this current sub phase, which as Stuart noted was about to 219 lots sold to homebuilders 229 in total 10 of those were keeping for our single family rental Division.
And what they do is they take these down in pieces as we complete stuff like I said on the last slide. So the first two takedowns are complete which has plateaued lots and lots of what utilities and then the third one is coming up which will be finished lots, which will be the three builders that are under milestone payments and then the fourth builder.
Which takes which is D R Horton builder.
Take finished slots so they'll buy all their lots at one time, they don't make milestone payments, we did pay a premium for it.
To have that because we obviously take a little more risk during the development stage.
And so you can see the slides.
Scrap at the bottom really summarize.
What the different builders are building and what the lot type Saar because in this phase we have a lot more different products than just frontloaded standard detached homes, we've got Townhomes and we got paired homes an outflow at home. So this.
Hopefully gives you a good summary.
Lots of different builders are building out there.
I might take.
Take it back and talk a little bit about some of the single family rental market and one of the things that we took a look at was how we can continue to add value to the assets that we have and to cover this a little bit one of the options for us.
We as the developer are creating value in the community by what we're doing on the horizontal land work, we're doing a lot of the street's curbs gutters, but then also there's a lot of.
Amenities to the parks landscaping that trails, and really are monetizing the overall product and that's adding value to what it is that we're looking at out there and so one of the things that we thought.
Was that as we continue to build that value is there an opportunity for us to continue to grow the asset value as well as the income potential.
So we took a look at that single family rental market and really the dynamics of it are very compelling for US. There is a lot of big players that have entered this market theyre entering the market by just buying homes out there, they're starting to get into the back where theyre looking to buy lots and then build on those as well so that they can vertically integrate that as well.
But we like it because we are carrying forward a lot of the equity value that we have in the land itself as well as the water utilities and sell when we're bringing.
Our new home on the market, we're building that on a lot that has tremendous value in it and how.
How we parcel this out I know a lot of you that are familiar with the company have asked.
How we can accelerate the single family market business, we're trying to pace that out so that.
Each each phase of what we're looking at pace for 100% of the cost.
The verdict horizontal development that we have for what we're delivering to our homebuilder customers, but also what we're retaining for the company itself. So that we're really.
Fully we'd gotten full returns on all of that investment into the roads curbs and gutters and then we go vertical with that and.
Are using very very.
Very attractive financing rates to be able to do that were out in the market using mortgage money to be able to.
Leverage ourselves on the incremental costs going vertical.
And oftentimes, we already see that we're seeing about a 70% loan to value and not just because of the tremendous equity value that we have.
We put the first three homes up rented them within two weeks at the top end of the market. So we have tremendous demand for that and we don't have the only rental homes in the community. There is a lot of private folks that have bought homes out there that are also.
Privately renting markets. We think we have certainly an advantage there just because we have a team of.
Capable construction folks that are able to.
Help with some of that development activity, whether that's on the outside landscaping areas and they are also helpful. In maintaining the properties because they are onsite very efficient for us to be able to maintain that so we like that segment. We like how we are growing that segments and making sure that we're keeping up and not overextending ourselves while at the same.
Capitalizing on the opportunity that that presents for us.
Taking a look at some of the math on this it really generates about.
30.
First three homes that we have are right about the rental pro forma we're getting on average about 2850 for each of the three hubs, so thats generating almost $34000 in annual revenue.
<unk> to US and then when you take a look at.
The operations and some of the taxes and interest expense on the debt service on that that gives us about a 15000 $16000 margin on that so not only is this asset appreciating and we are seeing.
Not a 4% 5% appreciation of the overall home value in the market, but we're also generating free cash flow to that so it's a great opportunity for us very excited about how this is.
Rolling out and monetizing to us.
Illustration of dispersed three pages they were all right together.
Efficient floor building dose, we're not actually contracting to global contracting, but we're not actually building dose, though we have a homebuilder partner.
<unk> did a tremendous job for US a group called Valeant.
<unk> really.
We're able to get these up on time and in budget on the first three we have them under contract for our fourth and are working with them on our next 10. So that we can be efficient about how we are delivering those and this gives you a kind of a view.
We had our financing cost of about 300 in call. It $330000, we get a little bit of capitalized costs in there for our team to go ahead and do some of the landscaping.
The exterior side, but just gives you kind of.
View of how that appraisal and what the market value of these homes are so we see them out in the mid five hundreds and Thats really a testament to kind of the appreciation of the value of the community as a whole so we.
<unk> two.
Be very excited about this segment.
I'm going to turn it back over to Kevin who will talk a little bit about the details on the.
The financial performance for the six months ended so.
Alright, well, thanks, Mark now for the fun stuff the numbers.
So the top three graph shows three of the obviously the operating metrics everybody looks at revenue operating income and net income and what we're looking at is for the six months ended February 28, 2022 compared to the prior four years of the same periods just to give you an idea of where we're trending if you look at the revenue obviously the.
The 2020, the second quarter of 2020, that's really where we started selling homes in most of the loss in taps in the first phase. So that's why the big jump in there.
Look at this year over last year of the same quarter over quarter. It looks like there was a slight decline, but last year had about 1 million and a half in project management revenues that we recognize from prior years that at the time until last year. We didn't think they were collectable based on Sky Ranch, just getting started in the Metro district growing.
Last year, we determined they were collectable, we recognized some some project management fees that were recorded before so that was it.
One 1 million and $5. So if you factor that out of last year's numbers this year actually increased a bit.
But just over a $1 million, which is really because phase two has come on board, we had a tremendous quarter in terms of water revenue, which we'll talk about women a little further down the slide operating income remained consistent.
At around that $3 million Mark again last year was slightly impacted by the project management fees. So it has an increase and then net income is the next big one.
Looks like we did amazing job last year, and some things going on this year, but really what it was the same thing as that project management fee last year, we recognized about $19 million in public Reimbursable for public improvements that again, we didn't think they were collectable or we couldnt prove their applicable until last year. When we had the tax basis in the house as well.
Growing assess.
So thats values were way up.
And so we were able to recognize about $19 million last year of public improvements. So again factor that out of last year and this year is pretty consistent.
It shows a slight growth as a matter of fact.
Looking at the bottom a little more detailed with three segments that we thought were reporting on water and wastewater continues to grow in terms of assets. We have grown one of the slides earlier showed about 65% increase in our investment in water rights and water systems.
Continues to go obviously summit Sky Ranch and some just in our general service area.
One thing I will point out this year and this is not a typo, we did deliver 137 million gallons during the second quarter Big.
Big chunk of that 125, plus plus for oil and gas operators with their drilling process, which is obviously, a testament to the oil and gas prices and demand and continuing to go which is great from that for that water business.
Land development spoke a lot about that so I'll just point out that the gross margins remain consistent we're continuing the progress on our second development phase and hope to move into the next quarter fairly soon.
Family rentals as Mark talked about we've got the three theyre all rented all three are under noncancelable for one year terms and they pay monthly all.
All seem very happy we got the fourth one constructed now being constructed the foundation is done we expect that one to come on line probably at the same time next year.
October November of 2022.
So, let's let the top three show just sort of our last completed fiscal year. So I won't spend much time on them. Just shows you where we're at and from year over year again last year had a tremendous impact to the P&L with that public improvements in.
Project management fees being recognized.
Looking at the bottom this is really where we spend a lot of our time and focus as this capital allocation and where we're looking at our priorities for the next years or five years. So if you look at our business segments, obviously, the land water and wastewater and single family rentals continue executing on all three of those continue to focus on them operating those in it.
Police have manner, we don't try to operate them standalone to land development adds to the water.
<unk> family adds to land development water as well so we see all of those growing fairly consistently with each other.
The next one over to emanate growth, which there's always questions about this.
Constantly seeking new land deals water deals or land and water deals. We can do any of the three we don't it doesn't have to be one or the other we can add to any of our segments or all three.
It's a high priority this year.
Future as it has been for the last couple of years.
And obviously you remain focused on shareholder return one of the big things with the single family rentals.
That recurring revenue, which we think helps with our.
With shareholder return and then this year, we obviously.
Going to focus on some of our ESG reporting we've hired an ESC specialist who is going to help us really focus in on how do we identify and report on what we're doing from an environmental and social standpoint, and how we can get better at what we're doing.
If you do a tremendous job obviously of the water company, but.
We could use some help reporting on it so.
So that'll be a focus this year.
At the consolidated balance sheets. So this obviously, we filed our Form 10-Q last night. It went out after market close so you'll be able to access it on our website as well as the SEC.
Spend a lot of time there was a press release that went last night with some more details you can see cash obviously.
<unk> from $20 5 million, which.
Majority of that is land development, obviously as we as we build infrastructure, we pay for the cab the Sky Ranch Metro District will pay us back. So we do have the two receivables of $16 million and in long term and current we are expecting to do some get some funding in the next few months.
That will help take some of that back.
Continuing down you can see our current our current liabilities dropped from $12 5 million to $4 3 million big chunk of that was the tax payments, we need some income tax payments last year.
One negative I guess of the public improvement recognition was we had a nice tax bill from that.
But that will be recovered will obviously, when we get some bonding and some tax revenues paid in equity.
Equity continues to grow obviously through net income we do have we did have some exit options exercised and did our normal stock grants to our board of directors in January at the annual shareholders meeting.
The next one is the income statement, which I think I pointed out some of the bigger items you can see the <unk>.
Last year in that three months ended column for 2021, you can see the 1 billion and a half.
Management fee about three quarters of way down in the revenue section along with the $19 million down in the reimbursement, but beyond that if you look at the current year you can see our commercial customer metered water usage is up about $1 million.
That tremendous amount of.
Frac water that we sold.
That runs through and so that was pretty productive and then you can see the lot sales have increased which a lot of that is that what we call percentage of completion method.
We recognize revenue as we as we complete the project not necessarily based on when we get cash.
So there is there is that and we can obviously answer questions about that later.
You can see the earnings per share at the bottom really.
It looks somewhat wonky, but again, it's because of that $20 million from last year.
Pretty big impact on earnings per share obviously in this year.
We're trending trending.
Trending well for all three months of two quarters that we've completed are fairly consistent around 67 per share.
Next slide so this is our leadership and board of directors, obviously for those were long term shareholders Youll notice one thing that's been replaced Bard after resigned from the board and retired entirely ease off doing other things travelling.
And the way they want to be involved in water business, a few more years, but.
He was with us for <unk>.
17 years I think so.
Tremendous assets, obviously, we added Wanda able this year in January she was elected by the shareholders.
She has been a long term legal counsel to us for a number of years and graciously agreed to join our board. So we.
Welcome Wanda and look forward to her long tenure with us as well.
Stock chart, obviously, showing some of the how the stock has performed and the volume throughout the last few months or last year or so and.
So I think that wraps up our presentation and we will turn it back over to Kate to open it up for questions and answers.
Before I do that let me let me let me, let me close and really kind of Exane a couple of things one of the things, we're really seeing continued execution and performance here and oftentimes.
To somebody new to the stock you would look at this thing and say how are they doing this how is it that we can generate this kind of income off the asset base and its really because these are legacy assets that we've accumulated a number of years ago and they are.
Very good assets I mean, when you take a look at inflationary times one of the things that you want to see is hard assets. In this company is probably going to be well positioned in a hard asset players you can get with land water, which is one of the most sticky assets sticky customers that you get because.
You have to have that water you are going to make sure that you continue to pay your water bills and then also single family rental and so we like each of those segments. We've got tremendous growth in each of those segments and so we're pleased to be able to really start to deliver shareholder performance and as you saw the continuing results one.
The things that we're pleased about is that we've got kind of just.
Pattern of revenue recognition together with our development activities, Kevin was talking a little bit about how some of that started last year with the recognition.
Our reimbursable and what we see with the Reimbursable as our as we continue to add assessed values. So the homes that get built there we have the recoverability of that through property taxes and fees that homeowners are paying so that's a tremendous.
Opportunity for us to not only capitalize on how we deliver these lots to our homebuilders. The key thing is not only as a company doing well on each of these lots, but so are our homebuilder customers doing well theyre getting a tremendous value and the appreciation of the lots when they are delivering their home value.
And we're very pleased that theyre doing well, we're doing well the community is doing well and so this partnership.
US together with a national Homebuilders is really executing very well, we have a great team behind us with Derek and Kevin and the rest of the folks within the organization that keep us going day to day, and making sure that the company executes and stayed focused on what it's doing so with that we will.
Turn it back over to Kate and if you've got some questions. We can try and drill down on some of the.
Specifics of what we're doing.
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.
Wish to lead the queue you May press Star Q, we do ask that if you are listening by speakerphone. Please pick up your handset for optimum sound quality. Once again, if you have any questions or comments. Please press star one on your phone now please hold a moment, while we poll for questions.
Our first question today is coming from Elliot Knight at Knight Advisors. Your line is live you may begin.
Good morning, Mark.
Good morning Elliot.
In placing us much in the news.
Would you talk a little bit about.
Wow.
Rates are being set.
For tap fees.
Monthly rates.
What's the process what do you think the outlook is.
For increases.
From here on to protect against inflation. That's question one and question.
Question. Two is would you give us an update of the status of the two reservoir sites the pure cycle controls. Thanks.
Okay sure.
So rates and charges for water and we have kind of two sets of charges. There we have a capital fee, which our tap fees, which are connection charges. Those are paid by the homebuilders. They are paid at the time of building permit and Theyre very large sheets, you take a look at $32000.
A big chunk of capital and that really pays for us to developing our system and the nice part about these assets are that we've been able to stay ahead of the infrastructure on this so a lot of investment has been made into that system to be able to keep us delivering that water and without any debt.
And if you look at why we do what we do and how we do it so well is because we do not have that and we're able to invest in those systems incrementally we've been very disciplined about that tap fees are set.
Really we have we have two mechanisms for setting those therapies in our service area. Those are governed by our agreement with the state of Colorado and those have to be at average surrounding water providers. So we take a look at where those water providers, who are developing their tap fees and the cost of fill up.
Developing and delivering and bringing that water to their customer base and as you might imagine all of the close in water here in the state of Colorado has been developed it's been developed years ago and each incremental development has to reach farther and farther out for water supplies and that's typically going to be reflected in the tap fees and so.
When we set our rates and charges comparable to those entities that really does translate into the incremental cost of developing those water supplies.
When we take a look at that at Sky Ranch.
We really look to be competitive in the market as well. So we look at our nearest competitor.
With the city of Aurora, we want to make sure that were in line slightly less.
And the city of Aurora to continue to provide a competitive advantage for our homebuilder customers.
Much of our homebuilders that are building at Sky Ranch are also building in the city of Aurora and Theyre seeing significant value building in Sky ranch as compared to city of Aurora, because the cost differential the rates the monthly rates for our.
Our customers those are really.
Governed as well by typical water providers that are doing the same thing so we keep track of that.
What youll see is youll see much more pressure in the tap fees than youll see in the rate per K Gal the rates the monthly rates and and that's really going to be ascribed to the scarcity value the incremental cost of developing those water supplies. So while you might see more inflationary increases in the rates as you look at the.
Right the monthly rates Youll.
Youll see probably a bit more.
Pricing leverage or pricing advantages and the tap fee, just because of the incremental and the higher cost of doing that.
Your second question was.
How do we look at home.
Home values.
No it wasn't.
The reservoirs out of the reservoir and Thats right and an update on the reservoirs.
We have.
Two.
Very significant assets in these reservoirs and really.
Embedded value within the water utility itself and Colorado is unique because not only do we not get very much precipitation on an annual basis. When we do get it we get it very quickly right mother nature does a great job of storing that water for us all winter long, but we get it.
Over a six week period in the spring.
Spring melt and the challenge for US here in managing the supply versus the demand is that supply is available to us far ahead of when our demand comes in and so being able to store that has a very unique opportunity and these are two reservoirs that are what we call non jurisdictional reservoirs.
That's a bit of an inside baseball talk about how you look at.
<unk>.
Timeline and the permitting needs for getting those reservoirs bill.
Interest from neighboring water providers.
And regional water providers to be able to participate in those developments and we continue to explore those I would say theres not theres nothing that I can point to tangibly on the scale other than we continue to work with our partners at the South Metro with the wise system, which is what we have a portion of our water supply and does.
Eloping those assets at the conjunction with all of the other elements that.
The partners are working on other water supplies and treatment systems and water quality systems as well as our neighboring providers.
In the Denver area. So.
It continues to be a significant asset for us we continue to explore not only how we're going to use that for our own purposes, but for regional purposes.
Okay going back to the tap fee, though do you see tap fees going up this year.
They will go up.
We do notice our customers they'll probably be.
I think we're looking at.
We've built in a tap fee increase of around two 5%.
I think a year ago. So we had that incremental in there I think we've seen of a higher appreciation in our surrounding water providers growth to that.
What we look to do as we continue to increase those so that we don't have this very.
Very large increases followed by flat level of increase we wanted to keep that kind of increasing year over year.
Okay.
You bet.
Thank you once again, ladies and gentlemen, if you have any questions or comments. Please press star one on your phone now. Our next question today is coming from Bill Cunningham with seeking Alpha. Your line is live you may begin.
Hi, Mark how are you.
Great. Thanks, Perry Alright, yes, so, yes, I am a private investor, but I do right occasionally for seeking alpha so that description might have not been 100% perfect.
In any case.
Earnings this quarter were okay, but there if somebody is looking at the number they are not going to be blown away by it.
But I think.
It.
It might not be recognized and correct me if I'm wrong is that you.
We're kind of in a trough now where phase one has basically been almost done and phase two is just about to ramp up.
So the GAAP numbers don't.
Really fully reflect where you are right now.
That's a fair statement and one of the things that I think is important to highlight is that we have a number of options and generating revenue to the company and and we do have some seasonality in delivering lots in the land development business.
We do have kind of weather in Colorado that prohibit a lot of the outdoor activity. We do develop we do construct year round.
But it's very difficult for us to get some of that pain medicine and concrete down.
The winter months, and so we were very fortuitous and getting all of the.
Sort of the utilities and all the dirt work done in the winter timeframe both.
Coming right up to the spring deliveries and as you saw in that.
Drone footage of kind of the area of the phase II, we've got a number of roads and alleyways done now so youre going to see tremendous activity, we still feel that we're on pace to deliver all 229 lots. So when you take a look at how those numbers are going to roll in they do roll in.
More towards that finished lots phase with that.
<unk> deliveries, we have two types of contracts we have the.
Incremental payment contract with three of our builders and then the finished lot delivery with one of our builders and it really optimizing how we're able to cash flow some of that stuff.
Quarter over quarter, you might see us.
That's a bit more in our construction and process.
But year over year Youre going to see that continued growth. So yes, we had great revenue from oil and gas opportunities, while we were working through the winter months.
Positioning ourselves for a lot of the finished lot deliveries in the spring and summer. So you will see that acceleration in Q3 and Q4.
Well I, even know with your projections even from last quarter, you were showing that kind of the revenue from lot sales.
As you were finishing lots, we're going to be relatively low now and you've got kind of a bigger number for a couple of quarters away, which is even in your current slide show that so this is.
This shouldn't be a surprise to anyone but no very predictable youre right and really the important part is to.
One of the things that give us the flexibility of doing this is the liquidity of the company that we have a great cash position that we have the ability to invest in those.
Execution of the launch the business lines, and making sure that we can capitalize on efficiencies in delivering that and so that's why you see a little bit more investment in the winter months, and then a little bit more returns as we roll into the spring and summer deliveries.
And then also I guess anybody who has been a long term investor in pure cycle noticed you have a lot of assets that have not yet been monetize I know some of your short term investors would like you to monetize them immediately even some of your longer term investors would like you to.
Monetize them sooner rather than later, but.
They also to the extent theyre not being monetized or sold there. We're also increasing in value I believe.
And as we were listening to the conference call I think the last year CPI number was eight <unk>.
Percent.
You've got land assets that you Havent monetize get you've got the water rights you Havent monetized.
And even though you havent monetize the map there basically.
Increasing great inflation hedge I think.
Yes.
Uh huh.
The challenge when you take a look at this is that we do have these.
Tremendous value assets that are recorded at the book value and so a lot of times when you see us posting up these great returns when we sell an asset.
It's hard to see the predictability of that on a quarter over quarter or year over year basis, because until you actually do that in print that sale you can't recognize that revenue, but then right.
Beg the question for folks when they say well how is it that the company is going to generate that kind of returns off of that what we show on the balance sheet is a relatively modest asset was just because the cost basis that we have and the time that we've accumulated those and continue to develop those assets.
And finally can you go through what the status is with the models being built in phase two.
And what what's happening there you haven't really mentioned much about that.
So we've got four builders each of the builders have.
Three model home permits where they can do field construction.
<unk> was the most aggressive getting out there prior to some of the roads being finished.
And so they were out there that we do have a model home offer kv, we've got foundations being started for the other three builders.
<unk> model homes.
Yeah.
For most of the builders Theyre looking at it saying look we just want to get into production. We want as many building permits as we can get as fast as we can get them and really that's a testament to the.
The strength of the housing market here in Denver, we have while you can see in the.
The press really continues to report the price appreciation.
Average home values here in Denver continue to grow and it's expensive and the thing that we like is that we're kind of an entry level product basis, and and it's hard for me to say that a $400000 home as an entry level home, but when you compare that to the average home value.
Getting close to 700000.
We are ideally positioned for continuing to develop these because theres not a lot of that product in the market. So each of our homebuilders really are looking to pull the stops out and get as many permits as they can as fast as they can and really now that we're we've got all of our roads up and access.
And fire access and everything completed to that it's really just processing. So I know each of them have got not only their model permit then but also starting to get their production home permits and so youre going to see a tremendous amount of activity, which brings me to another thing that I want a dimension is to let you all know that we will.
Have an investor day. This July it will probably be.
Just just after the fourth of July so.
Look for an opportunity for us to send that out into the market here in the next month or so and then if you can join us youre going to see a tremendous amount of activity on the site and it gives you really a tangible view of not only how we're executing but also how each of the components of this pit to get out of water fits together with the land development fits.
Together with the single family rental.
Great. Thank you Marc and I have attended most of your Investor days. There are always extremely informative. So anybody who has any inclination to go should so yes, I appreciate that they arent they argue.
Very helpful to kick the tires.
Thank you. Our next question today is coming from Geoffrey Scott at Scott Asset Management. Your line is live you may begin.
Mark how are you great Jeff how are you.
Very well thank you.
Two questions one.
You haven't talked at all about the commercial activity in the commercial possibilities going forward what is the timing for it and how has your outlook changed over the last three months and then the second question has to do with it.
The rise in interest rates in the future rise in interest rates and are you expecting any slowdown at all in.
Our builder activity or.
To builder by potential.
Purchasers and.
How increased in <unk>.
Interest rates may.
Impact future bond sales, okay. Thanks, great.
Great question. So let me take the second one first interest rates, who do see rising interest rate market and.
It's sensitive to housing that mortgage rate is a very sensitive component of it.
Think that our positioning at the starter home market gives us the most flexibility.
Not only is that.
A great asset in terms of what entry level buyer is but it also because of our positioning and our cost basis in this.
We are substantially less than our competitors in the city of Aurora. So that's our next closest Masterplan community and many of our homebuilders are building in that community, which is less than a quarter.
A mile away from us and they are building the same model homes that they are building at Sky Ranch, our same home product that they are building at <unk> ranch for $50 $60000 cheaper than and so when you have that dynamic where we're so competitively advantaged in there.
What we're likely to see is a lot of those buyers really are going to gravitate to our product our development as opposed to other developments because.
It's more affordable for them. If you are in the middle market, where those homes are $600000 that interest rate sensitivity is super super sensitive and so.
As opposed to an entry level buyer or a move up buyer theyre going to find that same buyer capacity, even in a slightly higher interest rate environment interest rates do increase the overall comps and so are we seeing.
Increased costs in developing our horizontal work, we are but the advantage for us and how we are delivering this is a large portion of us delivering this infrastructure really is through reimbursable and our actual cost in doing that get reimbursed by the bonding capacity.
Recoverability of that now we do see higher interest rates and the bond market, but that's going to be offset by what we're seeing as higher assessed values into homes and so I think what we've seen we may have.
A few basis points increase in the interest rate, but I think we're seeing six 7%, 8% increases in the home values and so that capacity more than offsets. What we're seeing is a bit of an increase in the interest rates for the for the debt market on municipal bonds.
On the commercial opportunities, we continue to reach out to a number of commercial operators I think the most attractive opportunities youre going to be in the light industrial side, where we can put up some sort of distribution centers and we've got a portion of the property that is kind of set aside for that there might be as you get.
Those users really like the interchange issues.
They like our proximity.
To the airport area and they bring a tremendous assess value and we've talked about that in the past where our commercial really Colorado is the sales tax incentive state. So the commercial properties pay nearly four times the tax assessment that residential property does.
So that continues to enhance our our bonding capacity on the commercial side.
A lot of the retail and kind of the box store stuff is still a bit early but we continue to work on the master plan and the transportation network for that to make sure that that's going to be consistent.
Got work with C dot on the interchange to make sure that that aligns with how our commercial opportunities are and so there is three elements really four elements of the commercial you have retail commercial and light industrial and then that fourth being.
Multifamily and we use that multifamily to be a transition between the commercial.
And residential and so all four of those continue to inch forward I would say multifamily and light industrial probably will occur before retail and commercial.
Okay. Thanks, very much Mark seemed July look.
Look forward to it.
Thank you. Our next question is coming from Greg Sterling, a private investor your.
Your line is live you may begin.
Yes, hi, good morning, guys. Most of my calls I've been asked questions have been answered, but I was just wondering about your outlook for.
Fracking water sales for the balance of us here and going into next.
Good question, certainly had a robust demand.
The first half of the year as we take a look at the second half of the year oil being 90 plus.
Certainly its an advantage in that.
I know operators and we've got probably three or four operators in this field are really working on permits and kind of rig availability and so.
It's going to be a function of how quickly they can get all of those elements together, we've got more fracs coming up this.
And the next 60 days I think we've got another four well pad frac and the Fracs are actually interesting because they are increasing in their designs as well so as they continue to.
Develop this shale oil play that continue to fine tune, how the Frac design works and Theyre using more water per frac on each iteration of that and so we see that kind of ticking up.
It's hard to say.
I hesitate to give a lot of guidance and that youre going to see fiscal year record revenue in Frac revenue and then how we roll into next year is going to be a function of the permits and the continued strength in the market and both of those look very good we see not only permits and all of the areas around Sky ranch, but to give you a.
Heads up we do have I think around 10 wells that are being permitted on sky ranch itself. So.
We will likely see those get drilled and probably not in late 'twenty two but early 'twenty three I think is when they are scheduled.
Not only will that generate frac revenue for us, but that will generate oil royalty revenue for us and that's a nice opportunity. We don't highlight that often enough that we do have mineral estate on this we have minerals the states at Sky Ranch and then we have other minerals.
The southeast part of the state so we continue to monetize that asset as well.
We look for.
That's a correlate with the price of oil. So you can as we get a little bit more.
Guidance in terms of rig counts and things like that we will certainly pass that along deal.
Great. Thank you.
Thank you once again, ladies and gentlemen, if you have any questions or comments. Please press star one on your phone now.
Our next question is coming from Tucker Andersen with above all advisors. Your line is live you may begin.
Good morning, Mark.
Great to hear from you good to hear from you and if I could take a moment of personal peripheral H quick to hear for my friend Al at night too.
Sure She does not work with friends forever.
Workers.
I apologize I missed a few minutes of the call. So if you if you covered what I am going to ask just tell me and I'll go back and listen to the replay, but my question involves both inflation and labor shortages and are any of them affecting either your subs.
You know the work they're doing for you in terms of development or more likely your builders because I know there are a lot of builders, who have really had to delay deliveries because of the labor shortages or or supply chain issues and stuff like that.
I can't get refrigerators, one week, if I can get something else next week. So I'm just sort of curious about what youre seeing in the Denver area.
Great question and.
It is it is an issue that I think it's been managed fairly well amongst our not only the major national homebuilders, but also our local builder that's delivering the BTR.
I think the national folks have the ability to flex their labor pool or their contractors from one project to another and they're doing that based on efficiencies and where they get the most permit then they can line build so we have not seen that really impact the delivery of homes out here.
And in our BTR segment, one of the things that we were doing is working with our builder on that and saying listen we've got these that are coming down the pike and we do want to manage the supply chain issues.
We have some flexibility to inventory some of that stuff at our office and so we've got some warehouse space here and we've given them. The green light to go ahead and preorder some of that stuff and if that stuff comes in early great weekend warehouse it and if it doesn't that we have the ability to kind of manage inventory to deliver those to make sure that we are.
Where we.
We're really not constrained by either the supply chain issues or labor shortage issues that we want to make sure that you know.
There is some for planning in that on the inflationary side, taking a little bit about that we do think that.
That we will see some cost increases on delivering some of our horizontal infrastructure.
But because that the reimbursable, we talked about this a little bit earlier, but we do get a.
A real direct recovery on that so that's not going to impact our margins and that's pretty unique where we're in a position that we do know that inflation will impact some of that costing but because we have that relationship to be able to.
To deliver that and we get our actual cost back on that that's a recoverable increased to us that that really doesn't impact our builders either and so that's an important component to them is that they're protecting their margins too and we're not having to pass that along we see it but we're not having to pass that along that gets pass along more.
Through a longer term recovery mechanism, which are going to be property taxes over a 30 year basis.
Thanks, that's very helpful.
Keep up the good work and I look forward to seeing you can make it out in July it's certainly I want to do my best.
My daughter at the same time, if I comps.
Thank you.
Our next question today is coming from Greg Bennett, a private Investor. Your line is live you may begin.
Good morning.
Two questions one.
Oil the oil and gas business that you mentioned on Sky Ranch.
Are you in the oil and gas business, how do you structure those deals.
Those wells are you doing it through a partnership with somebody who know something about oil and gas or are you doing this on your own.
Neither we really leave that out so we've got a a.
We own the minerals Binney 640 acres.
930 acres that we originally acquired with Sky Ranch, and then we lease that out too.
The oil and gas interests in our original lease was.
It goes back but it was originally leased out to Anadarko, which got assigned to Konica, which got assigned which got assigned which got assigned and so it's now owned by a public.
A new public company called <unk>, which is a combination of a number of companies more recently, but.
We just we're just a mineral estate owner and they go in and they develop.
The resource and we just get a 20% gross royalty interest and while I'm on that one of the things that we were very careful about when we get those leases is knowing that we have a master plan community. We were very specific about where those those.
Oil and gas sites, we're going to be so we have them located in an area that had some some strong buffers against where that would be compared to residential areas to make sure that theres not a conflict between the residential development in the oil and gas development.
And I take it that the homeowners the new homeowners disclose that that can happen.
So that Theres no pushback on that one homeowners. It is it is in the setbacks are substantial because we've incorporated a lot of kind of open space areas that buffer the oil and gas interests.
The water that you are selling for oil and gas is that on federally leased property or is that on private property since by the administration seems to be pushing back on federal leases.
Yes. This is all private.
There is some state interest on our service area in the 24000 acres that we have is our service area is owned by the state of Colorado. They have leased those oil rights as well, but for the most part it's all private interest private property.
Okay.
I think this is my final question.
10 31 exchanges.
For property.
Our tax paying company now is that correct, yeah, our axes.
Is there a way that you could structure, maybe the commercial property development.
It can be done through a 10 31 exchange that you maintain those properties.
Then creates evergreen income on the rental from those properties.
We are looking at that we have some very significant talent on our board that can help us with some of the commercial opportunities.
Gentleman by the name of Jeff sheets, who really spent 30 years of his career.
Managing commercial properties for one of the largest commercial developers here in Denver area and looking at some of those very transactions, where we can stay in.
The prevailing thinking on our commercial and I'll give you both management as well as our Board's directive is just because of the liquidity that the company as it affords us an opportunity that we don't have to chase.
Land sales.
Land sales on the residential side are appropriate because you've got residential units, but when we're looking at commercial were looking at staying in the deal a little bit longer we may not be choosing to do the vertical side of it of the management side of it but there are opportunities for us to stay in that.
Land deal on a number of <unk>.
Transaction structures that allow us not only to optimize the land value and the increase in value from developing that commercial opportunity as well as bringing that commercial online sooner. If we can bring that online sooner for an operator, they can invest more in the vertical.
<unk> side of it and then we can form some tax advantaged strategies associated with that.
So our our commercial ground leases.
That is something that happens in Colorado, where.
Somebody would do that vertical and you would do a ground lease for the for the property and then there would be no no tax gain to the company just evergreen income.
Yes, that's right.
Exactly what we're looking at.
At what point do you think the commercial you need a certain population I guess out there when might the commercial for grocery store 10, either.
Whatever when mitek, what year might that come about do you think.
Good question, we have had a number of conversations with the local well, it's a national national grocer here the dominant market player here at Kroger, they operate through Kings King Soopers brand.
I've had a number of conversations with them about what footprint, they're looking for or what size store they would be looking for or what size structure they'd be looking for as well as sort of the demographics on that and they all it used to be where they like to pull and so they'd be early and then pull some of that they'd like to be just a little bit later.
And that so that they can capitalize on our larger store in this area. So I think the grocery is probably still a couple years out but.
But we still have opportunities on the light industrial and then we're trying to balance out what type of retail component. We have a lot of a lot of pad sites that we can create for fast casual and.
The services, maybe some medical services, where we get dental and urgent care facilities, we want to make sure that all of that kind of blends itself together, we've got the space for it.
Certainly got the access with the.
Interstate there and so we want to make sure that all of that is really a continuing play and we really do have kind of a good market share. There. If you look at the site the south side of the Interstate really has the best potential on their typically when you see it there is both sides of the Interstate.
Those commercial opportunities in the north side is a bit more challenged just specialty right. They have.
The Union Pacific's got the mainline system that rolls through there, which kind of bifurcate that which create a little bit more challenge of developing that on the north side. So we very much like our competitive advantage at the Interstate there and the commercial play that we see on that.
Is the exchange completely done.
On to the property or does the state have to change.
Change the Interstate at the exchange.
To get on and off to your property.
There will need to be improvements to the interchange.
And so we've been working with <unk> and the county about the timing of does the capacity. It does and then how we've got some impact fees that will lay over for both the residential building permits as well as the commercial building permits that help fund all of that stuff.
Okay. Thank you.
You bet. Thanks for the question.
Thank you we have no further questions in the queue at this time.
Terrific well, let me, let me just close by thanking Kevin and Derek for kind of weighing in on this thing and really give you all the opportunity to kind of hear from some of the talent within the organization that are really executing the results on this so.
And as some of the call information was you know the results of the quarter were very impressive, but we're looking to have an even better close out on finishing up the balance of the year. So continue to look for that and I really do encourage you. If you have the chance to come out and visit.
Summer, Colorado in the summer isn't isn't a horrible place.
Our best.
Our best season, even though I know a lot of you folks like to win.
Winter here in Colorado.
For a recreational opportunities this summer really is.
Beautiful out here and you'll be able to see kind of the progress that we're making on all fronts of the business on the water side really get a chance to tour our state of the art water reclamation facility.
We're managing our oil and gas systems and delivery of raw water and reuse water to oil and gas operations the delivery of.
Our second phase.
We will have broken ground on the charter school aspect and then continuing development of our single family rental. So all of these really do continue to add tremendous value to our shareholders. We continue to be mindful of how to communicate that to the public. So that also has a direct correlation to the share price.
I think.
We all would agree that it could be significantly better and we're going to continue to post results quarter over quarter year over year. So that that continues to translate into the market as well so with that if we all didn't get a chance to answer your question certainly give me a call I'd be happy to.
Drill down on any of the specifics and we will.
Hopefully see you all in the summer thank you very much.
Thank you ladies and gentlemen. This does concludes today's event you may disconnect at this time and have a wonderful day, we thank you for your participation.
Yeah.