Q3 2022 Pure Cycle Corp Earnings Call
Speaker 1: Good morning, Ladies and gentlemen and welcome to the pure cycle Corporation. Third quarter, nine months ending, may 31: 20 20, two earnings call.
Speaker 1: At this time. All participants have been placed on a listen-only mode and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, mr Mark harding, President and CEO of pure cycle. Sir, the floor isyours.
Speaker 2: Thank you very much, Jenny. I'd like to first of all say good morning and welcome to our nine months 2022 earnings call. We do have a deck for this call. If you go to our website, pure cycle water com, and in the Investor section, you'll find the link on that that will allow you to follow along with the slides that we have here.
Speaker 2: With me today. I have our CFO , Kevin mcneil, who will overview some of the financial metrics for the nine months ending. I also have dirk flashnees, who is our Vice President of land development, and I think he'll highlight a little bit of our progress on the Phase two of our skyranange develop.
Speaker 2: After we'll do the deck, and after the deck we'll have a brief qa for some of the color of the quarter and the year and maybe how we're going to close out a fiscal year. So if you have any questions, Please hold those to the end.
Speaker 2: With that, let's get started. I'll talk about our safe harbor statement to say that.
Speaker 2: The statements that are contained are not historical. Facts are corporator. I referenced in this presentation are forward-looking statements. I'm sure most of you are familiar with the forward-looking statements.
Speaker 2: That's in the safe harbor statement. So as we'll get the lawyers out of the room, we can start the presentation I'm going to just give you. Most of you are probably fairly familiar with the company, So I'm going to vide kind of the overview of the company relatively quickly. What we do is we operate in really multiple complementary business segments and really the underpinning of that segment is our water, wastewater resource development segment, where we're providing water utilities.
Speaker 2: In an area where we own a portfolio of water rates, which is accomplishment because it's an area that doesn't have a lot of water and water certainly getting a ton of press these days, particularly out West, with the limited supplies and the ongoing drought that we have. Our portfolio has the capacity to provide about six thousand SPS. weve got a little typo.
Speaker 2: In in the Slide there, So it's: it's actually 60.6 thousand or six thousand with the missing vesimsel, six thousand single family equivalents. Primarily in the Denver metropolitan area. We provide water and wastewater service to land development that we are developing, where we also have a land development segment, and then also provide water to other customers in the regional area.
Speaker 2: Our land development segment is focused on a particular piece of property in the I 70 quarter which is the probably the most attractive and sought after corrid in the Denver metropolitan area. It's directly South of Denver in theinternational Airport. It's about four miles South of Denver. va is right along the interstate where we have an interchange that accesses our property. We have a property interest about half a mile frontage along the interstate So.
Speaker 2: In addition to the residential opportunities, where we have about 32, thirtythousand 400 residential opportunities when you take a look at the multifamily development and a couple million square feet of commercial retail, industrial leases on that and we're developing residential commercial lots for national homebuilders and we provide water and leafwater service to those ones.
Speaker 2: More recently, we're holding back a few of the lots that we're developing within our own community and we're actually moving into building homes on that. we'will contract for someone to build those homes for us and we'll keep those homes in our portfolio and rent those out to the marketplace as single-family rental segment to the.
Speaker 3: And that's a nice growing segment for us and certainly a profitable segment where we can capitalize on the equity value that we have on the waterersside as well as the land development side.
Speaker 3: But with that we'll move to the next slide. Want to talk a little bit- this is new to our presentation- about our ESG efforts: environment.
Speaker 3: Social and governance. We had recently brought in a new ESG initiative specialist and she will be working to bolster the company's.
Speaker 3: Actual written format of ESG. The company is a very environmentally sensitive company and one of the things that we found is that you all don't know about and the rating agencies necessarily don't know how we go about doing that. But as we take water and we process that water, we bring that water back as wastewater and we we process that water, we are taking and using and reusing every drop of that water. What we want to do is really highlight.
Speaker 3: That policy and that investment that we have so that the rating agencies understand how seriously we take the environment and social and governance aspects of that. And so what you'll see growing on our web page is that ESG tab out there. It's new to the web Page but you're going to start to see a significant amount of documentation that follows through on that. On the E will update. Our environmental policies will be begin by assessing, tracking and disclosing.
Speaker 3: Energy management, usage network efficiencies, water use and wastewater management, And so those are going to be the key aspects of the environmental tab. The social update, our human rights policy. We've improved component of that score by six points already. Continue to develop a labor health and safety policy. Tracked our employee satisfaction, water affordability, water conservation.
Speaker 3: And then diversity within the company, and then we continue to update our governance policies. We have a very robust governance policy and really want to kind of show the marketplace and NASDAQ and the rating agencies all of the components that we have as part of our, our policies and our charters.
Speaker 3: So look for more of that as we continue to grow and you'll start to see a bit more of that within ISS and the rating agencies attributable to that.
Speaker 3: So I'll start out by just giving you a quick overview of our water segment. We have as I mentioned the portfolio of water rights. We have about 29 thousand Acre feet of water rights. It's a mix of groundwater and surface water with the capacity to serve about six thousand connections that we rate the connections by an average of single family. How much water single family House uses we have some very valuable surface rights and we develop sort of our system crit grid where we own the.
Speaker 3: The homeowners will use that water supply. That's your metered monthly water veil. That typically generates about a thousand dollars per connection on the waterside and about $500 per connection on the suwerside. So you have water and wastewater, monthly connect or monthly usage fees. We collect that waste water, we bring that through our water reclamation facility and we treat that back to its full reuse capability and then we have a separate distribution system.
Speaker 3: That takes that out for reuse, either to outdoor irrigation uses through the parks and open space areas that we have in our master planant community, or we take that two to some of our irrigation or industrial customers. So we're reusing, using and reusing every drop of water that we divert from our system.
Speaker 2: A little bit on the water infrastructure. We continue to invest in our water utility segment So it continues to grow. We're a little over $6 million of assets in that side and a broad portfolio of assets. We have two wastewater reclamation facilities, transmission lines, storage facilities, wells- just the broad portfolio of that. The mapping kind of shows you a relatively large footprint where we're providing water over about.
Speaker 3: fbs and that's how we do that conversion of single family connections. But we continue to add to that, not only from what we serve directly in the service area that we have at skyranash, but also in our ly service area as well as in the wildpoint service areas that we have.
Speaker 2: Talk a little bit about oil and gas, as we've all painfully aware of the price of gas at the pump, oil is much more robust than it has been in recent years and that activity is translating into increased activity in all areas that have oil and gas.
Speaker 3: And in our particular area we get a lot of this activity from shale oil and Colorado has a very active shale oil play in the wattenberg field, in the nibrar formations.
Speaker 3: theres a number of different formations, So theres a potential. As you take a look at 40 -acres spacings, which is the downamhoall spacing that's operators are typically liking for their field development side, there a significant capacity for developing oil and gas in this regionthis particular area has been derisked by a number of operators So that you're fairly comfortable with what the yields of these wells are looking like.
Speaker 3: And we supply a lot of waterthese wells when they could do their well. stimulation and practthese wells use a lot of water and they use it all once. So on average we make about $25 thousand of water deliveries per well. Operators are now really working field development type pads as opposed to hold by production lease drilling, So each of these pads are seeing anywhere between eight and 12 wells per pads.
Speaker 3: Allow us to continue to invest into our water and wastewater assets so that we can continue to expand those systems.
Speaker 3: Just briefly. Next, one of the things that we have highlighted is kind of where the metropolitan area is and where their company's assets are in proximity to growth with the metropolitan area.
Speaker 3: In the big areaerial map you can see kind of the pink areas which will be our ly service area and then also towards thetop of that will be that pink area which will be our Sky Ranch area. So those are the areas thatcertainly Sky Ranch that we have our active master plant community going on but you know you see by the drone shot here. How quickly the metropoitn area is grown out to our service area and so.
Speaker 3: We're very excited about that. That continues to provide a strong pipeline for us for future growth opportunities and as this property continues to urbanize and the land owners in this area continue to look for how they're going to meet the growing demand for development here in the metropolitan area, this ite 70 corridor- the arapable County area, is probably among most attractive in the Denver metropolitan area.
Speaker 3: So with that, what I'm going to do is I'm going to turn the miic over to dirk lastashes, who handles our land development activities, and kind of give you an update of how we're coming along with our land development. So, dirk legyouate.
Speaker 4: Good morning'm stirglash Ts. I oversee our land development and I'll give you a quick overview of our Sky Ranch project.
Speaker 4: Repeat some of what Mark already mentioned. Sky ranches are 930 Acre master plan community on the East side of the Metro area. This project will probably develop in about.
Speaker 4: six phases over the next seven to 10 years were complete with our first phase and underway with our second phase right now, So we'll get into that bigger slides a little bit.
Speaker 4: At buildout. We're looking at somewhere between three point zero zero three million 508 residential lots.
Speaker 4: The we have about 150 acres. Of that, 930 acres is a commercial Parcel that fronts the I 70 corridor Mark mentioned and then, as the rooftops grow out towards this area, that that commercial start coming online. So we hoped to se some activity along those lines in the next.
Speaker 4: The we have about 150 acres of that 930 acres is a commercial Parcel that fronts the I 70 corridor Mark mentioned and then as the rooftops grow out towards this area that that commercial start coming online. So he's hoped to some activity along those lines in the next year to.
Speaker 4: And then our proximity to town. Like we said that I'd 70 corridors, the main East West thoroughfare through the metroarea and we're we have an interchange right off of that and just a few miles from our E four' 70 toll belt.way that kind of connects the whole metroarea and real close to.
Speaker 4: The Airport as business corridornext Slide here. So our first phase: we started this in.
Speaker 4: Well four or five years ago 2018, it's it's wrapping up right now. This is an aerial image and if you look at the top of that image, you can see some Brown lots up there. Those are. Those are those last remaining lots that are getting built out on. So five hundred and nine lots out here about.
Speaker 4: Probably about 475 occupied houses now. So, and all of our of our caps have been paid, So all the houses have been.
Speaker 4: All the lots have been sold and to the builders and they're building the rest of the houseouses out there. Think that will wrap up.
Speaker 4: This year.
Speaker 5: Quick highlights on the financials out there.so we cost us probably about 35 $36 million to build all these. We had that.
Speaker 5: We recognize the revenue from what we sold to our builders- that 36.7 million.
Speaker 5: That we received for our lot payments. We did an initial bond offering out there, that's the $11 million.
Speaker 5: Revenue through our bondds through our district that we've received, and then there's another two million siting out there for future collection on taxes and other future bonds.
Speaker 6: So revenue of.
Speaker 7: We got that.
Speaker 5: Equivalent revenue on our lot sales to our costs. And then we have the reimburseals- are margins there? And then the water side, the $14 million on our tap fees, and that translates into our regular monthly water customers.
Speaker 8: Second phase is Sky edge underway right now. So this is 850 lots, So about one and a half times the size of our first phase. We in the midst of turning over our first lots to our builders right now. So start building houses out there.
Speaker 5: The this ll. This ll roll out in about 4, four intervals, roughly 220 lots.
Speaker 4: Divided into four phases, So our first phase of 220 or so what we're building right now. This phase also includesa.
Speaker 4: A new charter school that will serve the community and.
Speaker 4: Has some land asside for a new REC centerwe should start seeing the first residents out here, first customers on our water system towards the end of this year. So okay, our first.
Speaker 4: Maybe first quarter early or second quarter of our fiscal year.
Speaker 4: We got a handful of blockts set aside in this phase for our single-family rental lots.
Speaker 9: That we'll be developing.
Speaker 4: So the estimated lot of revenues out here of seven million compared to our first phase that was around 35 million. So we've it's about twice as much revenue for this phase and not quite the same amount of lot. So there's a little bit of the appreciation there.
Speaker 4: umso the estimated lot revenues out here are seven million, you know, compared to our first phase that was around 35 million. So we've, you know, it's about twice as much revenue for this phase and not quite the same amount of lot. So this a little bit of a appreciation there.
Speaker 4: The new tap fee number there, the two million. This, this next number, the 61 million of reimburseful is, is an aggregate that includes the first phase one and that 11 million was our first bond.
Speaker 4: And we'll be looking to do another bond on this phase here in the near future to help recover some of those reimburbles.
Speaker 4: And then our development costs. On this pace our costs are up a little bit from our first phase and just tracking.
Speaker 4: Through the different phases of the projectthat's sit for construction and I'm going to hand it over to gyou. The back marker: the finance.
Speaker 3: Yes So let me just detail out a little bit of the financial metrics on these two phases. So, as were talking about from the first phase, Phase one had about 509 lots. This one has a broad mix of product classifications So we've got four different, yet three new buildilers, one returning builder, really building a very strong variety we had.
Speaker 3: A couple of different product mixes in the first phase. I think we have six different product mixes in the second phase and we're delivering this in increments as was mentioning almost four equal increment not exactly qu but that allows both up and the homebuilers that manageed how we're doing the horizontal coks and that's an important component you know each builder under our lot development agreement format is really our partner with us on developing these lots and so.
Speaker 10: We get paid three equal installments on our lot delivery agreements where we deliver a plat lot will get that first third payment. Then we use those funds to be able to invest into delivering the water sewer systems here and then we get the second payment. We use that second payment that really finish out a lot of developed in the roads, curds and gutters And so that really does partner us with our home builder partners to make sure that that heavy lift of the horizontal infrastructure.
Speaker 3: Is done concurrently with their purchase of the lots and these kind of detail. That out is to how we're going to expect to see that over that second phase, what the gross proceeds are and then also how that reimbursesibles accruited that. And you know, as you build a community those investments tend you always have a bit more out of those infrastructure costs as you continue to build that. So we probably see a bit more infrastructure in these first two phases.
Speaker 3: thingsthen are needed necessarily just for those phases, just because you have that expanding network of infrastructure, the drain infrastructure, the road frtructure, those sorts of things.
Speaker 3: Moving to the next slide, kind of going to show us how we're going to complete out this first ST phase, the 229 monthts. So we've had the first two deliveries where we've delivered the planated loss, the wet utility loss, and then the big takedown will be this third takedown. We do have some finish lo delivery agreements with one of our builders And so that's why that third segment is going to be so much larger than the other and we do expect that we'will deliver all two hundred and twenty-nine lots this.
Speaker 2: Fiscal year. So you see that bigate in there which we'll see a fairly robust fourth quarter cash flow on this thing and really bring that. We showed you a metric in there: 67% complete on our first phase. We'll be able to get that to pretty close. We won't be 100% but we will be substantially complete on the lot deliveries for that. For the third pain.
Speaker 2: Want to talk a little bit about the charter school, that's. one of the things that we saw early on is the importance of having a neighborhood school, and we went to the local school district, which we happened to be on their far Western border and, as this shot shows you, our first dayshas actually fell into a different school district. Our school district boundaries are really agnostic to the city municipal boundaries, So they have their own separate boundaries.
Speaker 3: And so our first phase was actually in the aurora public school district are. The rest of the property fell into the Bennett school district, which is a big farther East of where we are, and what we went to them with is to say: listen, we appreciate that we're under your far Western boundary year and that it's a bit challenging for us to serve this. We'd like to talk about how we are able to have a local school here where the students at skyrch can walk school then.
Speaker 3: They were very supportive of that. We work very directly with superintendent the CFO in the Board of the Bennett school district and we're able to get an authorized charter. And then we ended up interviewing a lot of different charter operators in partment with a group called national heritage Academy and National heritage famies, one of the larger priv charter school operators in the country. They have over one hundred schools in nine different states serving about six thousand students.
Speaker 3: And we were excited that we had our original groundbreaking for that. We actually probably program on a little bit earlier with some of the gradating work out there. But we actually were able to get some elected officials out for groundbreaking ceremony our.
Speaker 10: K 8'll open up in August of next year, and then we'll actually probably serve grades K through seven and then incrementally add grades each year and then open up a high school in 2025. So we think this is a tremendous amenity for the region, for our project, for the Bennett school district, for national heritage Academy, And so it's a true success for all of us and we're very proud to bring this to conclusion.
Speaker 10: im going to turn the Mike over to Kevin and he's going to detail out some of the financial results of the quarter.
Speaker 4: All right, Thank you, Mark. Yes, So the Slide row now obviously summarizes our single family rentals that Mark talked about earlier, which is new to us: from November we've got three built rented. That have you ve been occupied since November . We've got a fourth, one under construction right now.
Speaker 11: fll back up littlebits. Are this just some metrics on the market? You'll see that the rental market is still continuue to be strong. We expect it to stay that way for a number of years.
Speaker 4: This shows us some pro forma information on what an individual rental House looks like. This is based really, on the first three that we have running right now and this is what we're experiencing, and we expect this to continue for the next, the fourth one and the next 10 into the next 46 that we have planned for the whole second phase of the developments. Like said, right now, the first three are fully rented.
Speaker 4: Going pretty well, I think, as well as we expected them to go. This is a little timeline that shows you how they progress. Of the, the first four pictures on the left show you how that the first three houses were built that forth. The fifth picture over there on the far right is the fourth out that's under destruction. Windows just got put in yesterday, which is pretty exciting to watch. And then the next 10 and in those four all in our first phase, the next tenor in our second phase, in phase twoa.
Speaker 11: Have we've signed a contract with the builder. We have them. They're going to get staking them and start construction on them, probably this month. We've been expected delivery of those 10 phased in over the next, over the six months after that. So they'll phase about a delivery of about two rental homes every two or three weeks for So we don't take 10 on at one time. We'll be able to load that into our portfolio in, hopefully in a progressive manner and not overwhelm our staff with everything.
Speaker 12: Looking at then. So the nineers. So for the nine months ended may thirty-first which we filed our Form 10 -q and had to earn up but earnings release last night, So hope they have be a chance to look at that. You can see our revenue is pretty in line, So the top left.
Speaker 4: Chart is our nine month ended revenue for this quarter for this year, compared to the last 5- four years, and see we're in line with the last few years. 2020 was a little bit higher, which was mainly because Phase one was in full swing and we are selling a lot more taps. We had a lot more for progression going on that on the construction there. Phase two then has started taking over. We started selling taps this quarter. We've sold about 40 of them so far this year, which is predominantly modeled home.
Speaker 4: recognizede for retaining employees throughout COVID-19. Now's about $2 thousand which is.
Speaker 4: Obviously positive for us. Net income looks a little bit screwing. It looks like a drop. But in last year-' not sure if every members, but we had a onetime pickup where we were allowed to recognize the public improvements, the amount that we were going to get reimbursed. Up until that time we weren't sure the cab would be able to reimburse us. So there was enough property tax revenue driven to do that, And so last year we were able to prove that it was because Sky ans are doing so well, And so we were able to recognize about 16 and half million last year.
Speaker 11: In other income and so that skews the results a little bit. But you can see the four million is pretty closeed on track with a few years ago and we expect that to close a little bit higher during the last quarter of the year due all the lot sales we expect to have for the closeouts.
Speaker 11: You can see the information across the bottom in our three segments that we report.
Speaker 11: So obvious. We had 61 million of water assets has marked, but talk about earlier.
Speaker 11: We did deliver fifty-nine point million gallons of water during the quarter, which was a lot, you obviously for the skyran residents. W residents and then hydraulic are to that oil and gas operators.
Speaker 4: Before this is our five year. This is looking back at how we did for fiscal year ends for the last five years. So this obviously doesn't have this year fiscal year out there, but we did we go of a projection and there for our revenue based on our nine month and it made 30 first revenue and where we're expecting the builders to come in in the last quarter. So we're looking at, we're hoping to post revenue right now we're projecting pretty much in line with the last few years, obviously a little bit higher last year. Some of that is tap revenue. Some of that, a big chunk of that, is.
Speaker 11: The finished law deliveries, especially the rhortden coming in hopefully during the year. As you can see them, the net income what we're projecting is about a a million, which again is lower than last year, but that two million last year, as you can see in that note, was very much impacted by the sixteen point: a, five million of net.
Speaker 11: Public improvements that we recognize. So if you factor that out we're obviously going to exceed that this year gross margin. We didn't put in a projection disco. That's a little more difficult to put in projections.
Speaker 4: This is our our balance sheet, So this was this what you'll see in our Form. 10-Q that got filed last night. You can see it's pretty consistent for, compared to year-end, the public improvements doing.
Speaker 4: Increase as you can see, the' 16 million is still current. The cab is working on some financing right now, So hopefully that will change. The public improvements do continue to increase. There up you can see the long term up from body Y, seven thousand to 19.3, which is a good thing because that means the development is moving along.
Speaker 4: And dirtk and his team have done a great job on phase, on the second phase, and moving the long, despite obvious slowdowns with continued COVID-19 and supply chain issues and everything else, but it's progressing nicely. The rest of the balance sheet is pretty consistent year-over with the year-end andi think that's, from our standpoint, is exactcly. We want to see the statement of income of operations. Obviously we have the three months ended on the left, two left columns this year compared to last year- and then the nine -month ended.
Speaker 4: Between the two and, as you can see, the. I draw your attention to the lot sales. If you look at the nine months ended.
Speaker 11: 2020 twocompared to 2020. One 2020 one and three point three million this year were five point six which is really is all that Phase two way as it progresses with the three of the builders three of the four builders. We recognize revenue as a percentage of completion. So as construction occurs. And as we finish what utilities in all the public infrastructure we recognize revenue on those contracts not necessarily in line with the cash. So that we expect to have a fairly significant increase during the fourth quarter as we.
Speaker 4: Finished those lots for our finished lot deliveries, and that will have a big impact on the revenue as we continue forward, And so we're expecting that in the fourth quarter.
Speaker 4: Not to putting in pressure on dirt butand then you'll see if you continue down obviously that general mixadministrative expenses remain inconsistent. There RE in line that which really represents the operating costs of the company in the overhead and everything else and as you you can see like we've been talking about that recognition of public improvements down at 17.2 million which is a little different than the ever. We talked on the previous Slide because the tax effect of everything.
Speaker 4: Not the putting pressure on under, butand then you'll see if, if you continue down obviously, that general mix, administrative expenses remain inconsistent there, there in line that which really represents the operating costs of the company in the overhead and everything else. And as you, as you can see, like we've been talking about that recognition of public improvements down at 17.2 million, which is a little different than the ever we talked on the previous Slide because of the tax effect of everything. That's really that number, that.
Speaker 11: Looks great last year but exkewuse the numbers this year and makes this year look not quite as attractive. But it really is that was a one time catch up just an accounting thing and doesn't really have much to do with the the performance of the company. So hopefully that will normalize itself out in the next year because we'll the continue book way. We're booking and now which is running at through receiable think. That's it and we'we'll turn it back to marketif. You have any final comments and yeah. I just want to highlight just a couple of things on the financial metrics and and as we've talked about this and it.
Speaker 10: And the local rate payers and the local residents of that pay those taxes and so the reason it was a little wonkkey for us. On the front. End of this thing is that we were deferring the potential for those revenues rather than recognize them on a periodic basis and.
Speaker 10: And so once we were able to demonstrate to our auditors, we had full confidence. But our auditors may have wanted a little bit more definition on how we were going to get these reimburs out and it's really standard industry practices to how this does occur, not only in Colorado but across the country. But once the local municipal jurisdiction we able to get some assess value from the homes that were there, from the residents that they were there, from the tax collections.
Speaker 3: We were able to bond that and so the reason that we recognized all that revenue very little lump be last year was due to that now. What we're doing is we're recognizing those revenues incrementally. And so those are growing and you to see that much more stabilized revenue stream on our financial reporting. So that was that's why some of those year-over-year metrics.
Speaker 3: It is that you know previous years, So that we accruved that and then we recognizizede it all at once once's that at that first bond issue.
Speaker 10: This time we're accruing that in the income statement, incrementally showing it as a receivable on our balance sheet. So that's the real differentiator in how that reporting looks. pret you all.
Speaker 10: I want to open it up, those kind of our prepared remarks, want to open it up to some qa and just so that I'll preempt you all I'm going to. I'm going to ask the first question, which is kind of obviously the you know, what impacts do a rising interest rate have on your development?
Speaker 3: And so you know, as we're developing our second phase, you know we've got all 85.804 thousand of the 850 lots contracted for with all national homemillers and what we're seeing is in the in this Denver market. You know, one of the advantages that skyranch has and us in this marketplace is we are probably one of the most affordable nationalter planant communities in the Denver marketplace and our home.
Speaker 3: Number all our homebuilders and a number of other home builders, and some of the things that they're seeing are weakening in traffic for homes priced about that 606- 50. that's where you know. They're seeing a little bit longer time on the market for those songs and that's obviously a function of the traffic, the number of buyers and the interest rate.
Speaker 3: Those and some of that traffic is flow into prices homes that are priced below 600. So all of our homes are going to be in that below the 600 market. You know we do have. That's one of the reasons why we have this lot delivery agreement structure with our homebuildilers: So that we're working together with them, So that we're not taking on this large inventory of lotts. They're not taking on that large in victory a lot. So we're delivering these clolots on a real sundays.
Speaker 3: So I would say so far our, our traffic flow seems to be fairly consistent with our first phas. We'll see how, as they start putting up these homes, a lot of the builders are going to build the homes on SPEC and they'll build, you know, say maybe six to 6, 10 homes on SPEC, have those as inventory and then continue to build them incrementally each month So that they can kind of maintain that that move in opportunity for their home, build their customers. So with that, if you be, a little bit more color on that I'll certainly try to give you.
Speaker 1: You your first question is coming from mr bill Miller, who is a private Investor. Bill, ask your question, Please. All right, good morning your, good morning ear you. I'm wondering how you're going to benefit from or get fer by the inflation. Obviously have your energy area which is producing inflation and how many wells do you have on your CAD and what is the production of reues?
Speaker 3: So let me kind of parse that into 2, two segments. The inflation question 1: of the things that we see, we are seeing a bit increasing cost of deliveries in kind of rose terms together. There's anything that's energy-related, concrete asphalt, those sorts of things. We do see a bit of that cost increase.
Speaker 3: We have some inflators in our lot delivery contracts with our homebuilders that naturally anticipate inflationary measures in there. So each of our lot contracts that we have we did put in a 4% insulator. In each of those inflation is rising at at a higher rate than 4% And so bid on the the low side up that. But we are keeping keeping up with our builders on.
Speaker 3: The inflationary side of the cost that we're going to see, in that our homebuilders are seeing a mix of inflation lumber and those have prices have stabilized or come down a lot of supply chain issues and they're spot. Some of the supply chain issues. garage doors, for example, seem to be one of the more challenging metrics in there, but they've managed that fairly well and we see that necessarily through our individual homebuilding efforts with our homebubuildilder where.
Speaker 3: We were taking a look and managing that with our builder to say hey, I can take inventory of windows, I can take inventory of garage doors here and so they go out, they get those ordered for those long lead time issue. So it's A. it's a management issue in terms of each of the homebuilders. I think the labor shortage issue has kind of worked its way out for most of our home buildthers. They while I think they would love to have a stronger, robust.
Speaker 3: More robust labor chain on there. It does not seem to be prohibiting their production on any side of this thing. The other question: in terms of the energy side, we do anticipate we have another pad that our operator is looking to start construction on later this year and drill out the remaining balance of wells on Sky Ranch. I think they're forecasting something like twelve.
Speaker 3: To 14 wells. They might have say eight wells that'll be on drilling our mineral interests going through you know one direction and that maybe another six that drill wells into the neighboring property owners, and and so what we tried to do is work with the neighboring property owners to limit the number of pad sites So that sometimes they're going to be drilling wells on their pad sites that pool our mineral interest, sometimes will be drilling well on our pad site that pools their mineral interest.
Speaker 3: And really that's the combined interests of both of us you know I would say that the energy side's going to be it's going to be a consistent increase in wells but not off the charts you know. We don't we don't see it exploding in terms of the number of wells that get drilled. I think it's going to be a consistent increase in the number of wells that get drilled and the number of well that we're going to be fracking and.
Speaker 3: andit's really a function of the fact that everybody'is competing for rig. everybody'is competing for frac creuise, And so, you know, our operators are competing with everybody else and I think that they're looking at it as to go as fast as they can because the prices are good, but the whole capacity within the system is going to be a bit constrained by the number of rigs that are.
Speaker 3: So I hope that answers your question. Bill great, tell me little about the ability to raise your rental income. I mean, you've got a.
Speaker 13: Refresh coming in November . Can you raise the rents, or is that not possible? Or how do you ohwe your that's done? That's kind of why we look at having annual leases.
Speaker 3: You know we, we want to make sure 1, that the tenants like us secondly, that we like the tenants and that we're fairly frreshed. And so you know, the advantage I think that we have in the, the single family rental market, is that we're carrying forward tremendous equity in both the lot itself as well as the water utilities, and the first three were classic example of that. You know, we held the look, the lot value for ourselves.
Speaker 3: We went and contracted to build these homes for $33 thousand. They appraised at around $55 thousand and then we were able to rent that out as if it were a $55 thousand House, which gave us significant margin in the making sure that we're using a little bit of leverage within the company. So we financed the vertical component of that at that 330 and not only does our rent cover that but it gives us incremental Mar.
Speaker 3: And we do want to keep conscious of that rental market. You know, if homebuyers are are looking at, the demand for a single family homes is as high as it's ever been. You know the demand for buying single family homes is as high as it's ever been. If one of those weekendens it's going to be an interest rate sensitive market where the demand for renting those single family own are buying those single family people may wait, you know, a few months to see what interest rates.
Speaker 3: Do or how the change in interest rates are when you look at historical trends. Interest rates that 5% to 6% are historically low and they're not low comparison to a 3% interest rate. But they're certainly not what interest rates have been in the past being eight perpoint a 10% on those things. So I think it it's going to it's going to equalize in the marketplace for buyers. They're going to they're going to continue to aggressively pursue that I think this.
Speaker 3: Single family market segment is going to continue to grow, whether that's going be for rens or whether that's going to be for purchase. If we continue to see growth in the rental sideze competition in the rental side, you're going to see rental rates continue to appreciate. We we will continue to monitor that. We will continue to maintain a market segment in that area where we're competitive. But you know we also want to have a good long term tenet in there so that we can continue to maintain.
Speaker 14: That was what my question about and you've largely answered it but.
Speaker 13: In a rising rate, environment will pure cycles.
Speaker 13: Great environment will pure cycles profit.
Speaker 13: Be impacted because you began this program at a period of when interest rates were very low of. Will your margin be squeezed by the rising rentp, the rising interest rates, or do you think rising rents are going to more than offset that?
Speaker 14: Anything you could say on that would be helpful. Yes So I would say that the rising interest rates don't.
Speaker 3: Directly impact our lotck prices although if.
Speaker 3: If it takes more income to qualify for the same value of home, it does impact the buildder's ability to buy.
Speaker 3: Home or lots at a certain price and so that's where I think you're going to see a lot of.
Speaker 3: The weakening softening in the marketplace for a lot that are going to be $13.15 million a lot that delivers a $65 thousand home seven $1 thousand kind of that median home value. So the interest rate sensitivity does have an impact in home prices and by virtue of home prices that can correlate down to the price of a lot but.
Speaker 3: That's kind of where I think we have our competitive advantage that we're delivering lots entry-level marketplace. Our lots in our average lo is around $1 thousand, So we're substantially- not just a little bit- cheaper, we're substantially cheaper than our next ne ST comcreditor for that. When you take a look at rising interest rate environment into the rental market, that does impact that and the cost of money continues to impact.
Speaker 3: Players that are buying homes and renting hom set fair market value and so again, we're going to be positively positioned in that because we're carrying forward equity value that we have in the lo and the water utilities to the tune of 40% of the lot or 40% of the home value. So that gives us a competitive advantage. Yes, we want to be competitive, we want to make sure that that asset is producing.
Speaker 3: The right revenue for our shareholders on that, but we also want to maintain consistency with income on that, And so there's a balance there where we want to continue to be competitive will continue to be market based on our rental rates and that continuing to be market based on that will continue to improve our margins, And so, when we already start with good margins, rising interest rate environment will help us in that area.
Speaker 3: For our shareholders on that, but we also want to maintain consistency with income on that, And so there's a balance there where we want to continue to be competitive will continue to be market based on our rental rates and that continuing to be market based on that will continue to improve our margins, And so when we already start with good margins, you know rising interest rate environment will help us in that area. Okay, Thank you.
Speaker 8: As a reminder. ladayies and gentlemen, if you do have any questions or comments, Please press Star one on your key padder. At this timeokay there appeared to be no further questions in the key, while now hand it by over to Mark for any closing remarks.
Speaker 3: Okay you, you are very kind to me today. I'm I'm very appreciative about that. I'm going to, I'm going to throw the question everybody.
Speaker 1: Hello, we do have another. We have another question. If you want to take it as sure, you gu, it's from Greg Ana chawsky of benchmark Greg over tiy.
Speaker 15: amarco area. Great thanks, everythinggood. Good, I'd say I jumped in there at the last minute. I just kind had a quick question, maybe to the first. one is on the economics of the single family rentals and obviously looks good and kind of branching off of that. I'm sure you're aware multifamily is a rather attractive assent class. i'was just wondering if you guys have given any thought to potentially.
Speaker 16: Either converting or adding additional capacity in future phases to potentially build thousand, thousand hundred 200 unit multifamily complex that the company could retain for their rental program as well.
Speaker 3: Good question and I will let me answer the two phases. 1: we do have a multifamily component to the overall master plan development and I think it it really positions itself between our commercial and our residential. So it'll be in that area, on kind of the lower half of that one hundred and fifty acres- it's our commercial side- and transition between where we go to the detached residential stuff.
Speaker 3: It may be as many as 450 units, and would we carve off one of those buildings for the company? It's about one or more of the buildings for the company. It's up entirely within the scope of opportunity with what we're looking at here.
Speaker 3: You know, I think the multiffamily is a little bit different property management than the tax single family And so we have to look at that fairly carefully as to how we would manage that, whether we would manage that in House or contract or something like that, but it is within the range of possibility. Right now we're going to focus in on a very diverse and whyide product mix for single family and you know we'll have very big homes where for bedroom, for bathroom detax, single family rentals and we.
Speaker 3: Understand that market. There's a strong, strong market for that right now, just because of the work from remote, where we can have, you know, one or maybe even two office environments for people that want to work from home, or even you know kids, kids and office from home. And then you know other product classes where we'll have some paired product'll have some town home product,'ll have some smaller lot product, threety five foot lot product in there.
Speaker 3: And so when you start to see a very broad range of product classes and you'll have a broad range of renting entry points on that you really do have kind of a robust rental current income driver for the company. So we do like that segment. I would say the real advantage for this segment- and this is something that we highlight a lot- is we may not be diving into the single family rental market if we were going out buying the score at fair market value.
Speaker 3: It's probably not the highest value thing that we think we're good at doing this to define where these market, where the homes would be in the highest market potential for that, but because we're adding value to the community, because we're adding value to each of our individual lots. That's where we think that this is so compelling for our shareholders. Is that it it not only increases the value of the asset class these homes are appreciating at know five 6, 7%.
Speaker 3: And in Sky Ranch' example because you know we started the community you've seen as much as a 40% increase in value of the homes from our Phase one and so we're adding that value to the community through our parks through our trails through our open space through our commercial development through our charter homes are our charter school. All those things are are increasing the value for our homebuilder partners which we think is terrific. It's increasing the value for our lot. It's increasing the value for our residents out there and so all.
Speaker 16: And I guess I's woning if you could expand on that in terms of one kind of what the strategic benefit of that is into if in any way you can extrapolate from.
Speaker 16: That valuation paid in relation of the remaining or the rest of the company's existing water assets, because I guess one of the biggest problems people wanted into is somebody coming across this company. You look at the portfolio of 21 thousand Acre feet and a lot of people have difficulty putting putting a real value on that. So I'm just wondering if you could maybe, if there's any read through in terms of the valuation or just in general, how you would tell somebody to look at that.
Speaker 3: Great question. Yes, and I' I'm glad you brought that up. There was going to be a component of the question I was going to ask or a rhetorical statement that I was going to answer for that. You're right, where one of the underpinnings of the company continued to be a water resource company.
Speaker 3: And the value of water as it relates into water short region and we did buy small addition. It was three additional wells that we have there were in proximity to the two two wells that we bought three years ago and so we like that particular area. It consolidates a bit more water in that area. For us we found a good value proposition. In there was a seller that we have been talking to for a number of years on that and.
Speaker 3: In acquisitions, whether that's going to be land or water acquisitions. A lot of its relationship orient. A lot of these are legacy owned by families through generations, And so sometimes it isn't how much or what's going on in values or the market segments. It really does fall into the timing of the individuals, And so that was an opportunity for us.
Speaker 3: The value in that acquisition. I think I I never like to say Oh, while we did great on that acquisition as compared to the South, we try and be fair and byithink that fair market value hold those things and we try to be fair market value and timing of our acquisitions more than we try to be.
Speaker 3: Really a heart driver, heart bargain driver on the purchase price of any one asset. And so as the market continues to.
Speaker 3: See these inflationary pressures. We're seeing a lot of loosening of that conversation and that's a classic example of that.
Speaker 3: We were able to pick up some wells that we had had our eye on for a while. The seller did come through and really was able to sell it to us on a quick clothes and we were able to get that one put together. You know, I think we bought those assets for around $1 thousand an Acre foot and you know we probably paid about $1 thousand an Acre foot for that water three years ago. So I think that that was a good acquisition for us on that particular side.
Speaker 3: I think that water in general has has increased in value. So we want to be conscious that we do have a large portfolio, but we also want to be conscious that once it's gone, it's gone and there's not a lot of opportunities to continue to grow that, And so our tuck-in acquisitions are going to be areas that are strategic for us and those were certainly one that.
Speaker 3: Strategic for us, which then leads into- and I'll just ponificate a little bit about: you know how do we look at capital allocation and you know, when we look at acquisitions like that water acquisition, when we look at acquisitions like additional land acquisitions, when we look at opportunities to deploy capital for shareholders through a share buyback program for or through a dividend program, you know, all of those are good option.
Speaker 3: And things that we evaluate in relation to our liquidity, and one of the key drivers to management, as well as our Board, is as to invest in the business lineines that provide us that ongoing revenue. And you see that right, you see that through our financial statements quarter over quarter, where that liquidity gi got a frroging dr here.
Speaker 3: Where you see that liquidity will adjust depending on the timing of delivery of a plat ay, on the timing of delivery of what utilities or the timing of delivery of those finished lots, And while our cash position starts to weaken through the interperiods of those contracts, and these particular contracts really flighted out fairly well for our year-end. So you're going to see those cash balances.
Speaker 3: Refresh at our fiscal. You're in with that final lot payment and the finish life delivery device of our one of our finish lot contracts. On that you sort of look at and say, as investors, how do we evaluate those opportunities from a high-margin business? wateratersis clearly that we continue to evaluate opportunities there. It's a high barrier entry business. You got to know what what it is that you're doing complicated.
Speaker 3: Local issues. You have managed local management, district issues, So things like that. We could make an argument. There are a few businesses that provide better opportunity for sustainable revenue than the water business in general, because that's a perpetual customer. They're always going to pay their water bill, So we like that opportunity segment out there. Our second appetite in this metrics is land appetite, to be sure.
Speaker 3: We've been in and an expansionary housing market. denendver'has been among the top metropolitan areas for housing starts and home appreciation, And while those metrics alone, or note where the what we have is an advantage over the run of the mill developers is, we have that portfolio of water where we can bring that water to a particular piece of property and by doing that itself it increases the value of that land. So we do have our nets out for land acquisitions and and there are opportunities and those conversations are.
Speaker 3: Slightly different now than they were maybe six months ago, And so, you know, we'll see how that. How that creates those opportunities for continuing to grow the company on the land segment side, and these opportunities don't just lead to good returns but they lead to, you know, generating ongoing recurring revenues and terrific margin margins for us, and that so that's that's really why those are the two top priorities.
Speaker 3: When you look to share repurchases to be sure that that increases the enterprise value of the company. The problem with share repurchases is they're more near term and it's hard to be.
Speaker 3: Exactly efficient on when you do those share repurpurchases, both from the company's standpoint. To correctly identify what the company's value is, you need to understand both the numerator, which is the challenge for us, because we have a number of different segments that really contribute to that numerator value through legacy assets that we purchased right, these assets that we purchas.
Speaker 3: yeah you know our some in our water case more than 30 years ago and so when we're seeing posting these stamp fees and the high margins that we get on that you know it's hard to project that out. The denominator clearly easy to understand and that's clearly one where you know share repurchase has a direct, tangible value on how that impacts the value of the shareholders.
Speaker 3: So we continue to look at both of those consistently and we continue to evaluate those opportunities. All things being equalbolstering understanding of the numerator value of the company continuue to be our current focus to the extent that our cash position continues to grow and exceed the need for what we have on a period of over-period basis. Then the market sal doesn't appreciate the share value then that's something that we can take a strong look at and see if we can increase the value of the.
Speaker 3: Company through share repurchase or as our continuing recurring revenue growth through a dividend, opportunities. So with those- no that's, I think you made a lot of good points there on just the back and forth in terms of what you ll call that, and overall you guys have done a very good job of kind of seeing this through and really nurturing. In the infancy of these things. They're very obviously risky and I mean that's the reason you got the.
Speaker 16: Sky Ranch in the first place because they're not managed properly in the beginning phases, a lot of bad things can happen. But I also think, as we've progressed, if you look at the valuation in the marketts asssigning, we're trading like a 20 per or 30% discount where we were barely getting into Phase one and, as you've touched on, there's been significant value created and I think it's just something to look at because obviously you CAn't stop.
Speaker 16: Developing lots because hey, we're just going to buy that stock. That's obviously counter, product.ive, But at the same time, the same way, you guys just picked up a small cuck-in acquisition of a couple million dollars. Having an open authorization there which doesn't even cost the company anything, I think is something worth consider and get free, and it's really just an option to say hey, we reserve the right if the market gets stupid enough to go in there. And a couple million dollars, a quarter even.
Speaker 16: I think is not something that's going to jeopardize the operation. So I think again I would just stress that something for I think the Board should considerit costs nothing to have an authorization and it just gives the company another option at its disposable. But overall I think everybody should be very pleased with where this is headed what you guys have done and just all the thought that goes into this stuff. It's certainly not simple So.
Speaker 15: I'm hoping to get out there for the Investor Day, they not. But you know I wish you guys the best and I, and just you know, keep up the good work and the you know we're, we're looking forward to this obviously, Thank you. Well, Thank you, and you bring up some bitidpoints there. So you know it is, it is I, you know. I feel fortunate that we've got a great management team, gvin and dirk in our engineers and serena as our controller. I mean we just have terrific leadership here.
Speaker 3: But we also have outstanding count far better than I deserve what we all deserve at the Board level. And so these are. These are weighty subjects that we do take seriously and we do debate, and you would be impressed with the dialogue at the Board level. So to, while it doesn't seem like you see that tangible results of the debates and the thoughtfulness to go into those, I assure you that our Board is just.
Speaker 3: Terrific and deliberative about each and every one of those and the capital allocation strategies that we we approach. So continue to monitor that we have continue to evaluate some of those opportunities and continue to add to the tool bockx and what I'll do is. I'll go ahead and start to close this and for those that either at a technology issue that didn't get to ring in or if something comes up that you didn't think of on. The call don't give us a call and for those of you that'll be out here tomorrow for our Investor Day or those of you that will ring in.
Speaker 3: Through the Q we'll have a bit of a, a and that, So there's an opportunity for us to send out of teams invy for folks. So if you do have an interest in that, just send us an rvp and then we'll send you a team's length for the qa on the Investor Investor Day as well. So with that I'll ring off and I hope you all have a continued relaxing and productive summer.
Speaker 1: Thank you, Ladies and gent.lemen, this does conclude today's conferencecall. You may disconnect your prophone lline at this time and have a wonderful day. Thank you for your participation.
Speaker 1: You Ladies and gentlemen, this does conclude today's conference call. You may disconnect your phone lines that this time and have a wonderful day. Thank you for your participationthank you, Jenny.
Speaker 8: ok.
Speaker 8: Okay thanks, guys.