Q4 2022 Pure Cycle Corp Earnings Call
Good morning, ladies and gentlemen, and welcome to the pure cycle Corporation year ended 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, Sir the floor is yours.
Thank you.
Good morning, everyone I'd like to welcome you to our year end earnings call.
Just a few housekeeping items, we do have a deck for this call if you log into our website and pure cycle water Dot com.
A link over to the Investor page and then there'll be a tab on that page that allows you to join so click that join button and then.
I'll be able to advance the slides through the presentation and you'll have the deck on there and then the deck will also be.
A PDF of the presentation will be on the website for.
Reference on.
If you want to get into reading getting a little bit more detail.
With me today is both Kevin Mcneill, we've seen a little under the weather so he's going to take a listen only mode on that as well as Dirk Glassner, who handles all of our land development activities and so other than hearing from me you'll have a chance to hear from Derek on some of the land activities and our successes in that area as well.
So with that I'd like to just start with the presentation and the first thing we need to do is talk about our safe Harbor statement, which.
Is that a historical fact not contained or incorporated by reference in this presentation are forward looking statements. Thank you all are familiar with the forward looking statements and the safe Harbor statements. So we can get the lawyers out of the room.
Oh really.
Breezed through some of the overview question or a overview of the company.
Most of you are going to be familiar with the company and if youre not certainly you can go back and <unk>.
Take a look at this portion of the presentation, a little bit more detail. There is a ton of information about the company on our website. So I encourage you to spend some time there.
Taking a look at the resources that we have on the website give you a little bit more specificity to what it is that we do but really we have.
Three operating segments and Theyre, all very complementary really at the foundational level, we are water and waste water wastewater resource company, we own a large portfolio of water and a valuable part of the country, where you can own water, we develop that water cradle to grave to provide water service to <unk>.
<unk>, we have land that's in the right location in the Denver Metropolitan area, along the I 70 corridor that we're developing a master plan community on.
And then we hold back some of those lots that we developed for our homebuilder customers and we keep them for an opportunity to build homes on them and enter into the single family rental market, where we continue to have ongoing cash flow from an appreciating asset that provides terrific margins for us because we're able to carry.
Forward the equity value that we have both in the land and the water utility segment. So.
I'll, just briefly talk a little bit about.
Each of the segments as I mentioned, the water and wastewater segment, we develop the wells. The versions all the water supply we treat that water supply, we distribute that to our customers.
We get two fee instruments for this we get a connection fee, which is referred to here in Colorado, the tap fee in our water tap fees are right around $28000 or sewer tap fees are right around $5000, we have the capacity.
<unk> to provide water and wastewater service to approximately 60000 connections and then as we have those connections signed up to the company, we get ongoing water and wastewater.
Revenues each month, so we have monthly water and wastewater service bills to that that generates about $500 per connection per year on that side, we collect that wastewater back we processed that wastewater.
Two usable water supply for our outdoor irrigation or our industrial water supply customers.
And really we have a water.
Very tight water balance system, where we're taking our water supplies, whether theyre groundwater supplies surface water supplies, bringing them into a treatment system.
Lending that into the customer we have some of that.
That's going to be outdoor irrigation, which results in a bit of a loss, but we do have mechanisms for recapturing that in terms of the water rate systems.
And then we also take and reuse that system and then are able to reuse that into our industrial customers. So really are investing into a sustainable water balanced system for.
The company and for our customers.
While we continue to grow our infrastructure asset base so over there.
Last five years, we see almost a doubling of our investments in our water investments in water infrastructure.
Really across the board with.
Transmission lines.
Torridge.
Treatment facilities all of the distribution facilities and then the wastewater treatment facilities that we play in that water supply.
Water growth so we have.
Existing areas, where we're growing our customer base one of the doses.
New residential connections, whether that's going to be.
In our master planned community of Sky Ranch, whether thats going to be commercial users both in Sky ranch as well as another.
Surface area that we have a little bit south of the Sky Ranch area called the Wild Pointe service area.
And then existing.
Industrial customers. So we continue to grow our customers year over year were right around 1000 connections to the systems today.
Another important customer that we have is our industrial customers. So we happened to be on a very prolific oil and gas field that sits right on top of where our water supplies are we have multiple operators that are developing that.
Yield in this area.
Multiple formations and so we.
Distribute raw water and reclaimed water sources to our oil and gas customers and generate high volume of water supply as well.
High volume for selling that water to our customers.
And really you had a record year this year in selling water to the oil and gas segment.
Largely a function of the price of oil the regulatory climate in Colorado is kind of settling down operators being more.
More comfortable with how they are operating within the heightened regulatory climate that Colorado offers them.
One of the things I would like to highlight is kind of where we are geographically in the Denver Metropolitan area. As most of you know we are along the foothill areas and that we might as well be along on ocean, because we really can't grow to our west the mountains and we have a geologic barrier there that prohibit really any substantive.
In the Denver area, and so really where we're constrained to really a 180 degree semi circle for growth activity in the Denver Metropolitan area.
If you looked at the map over on the.
The right side of this.
The difference between the Orange and the Green there really green line, there Thats Interstate 70 that east West.
Transportation corridor in the Denver Metropolitan area, and then we have belt loops, you can see the 470 <unk> outlook right.
Right at the top of that is going to be the Denver International Airport. So our Sky Ranch project is four miles directly south of that and then our Lowry range service area, which is that large pink area and this kind of gives you a feel for where development has grown in the Denver metropolitan area not only to the sky.
Ranch property, which is our master planned community, but also opportunities for the Lowry service area and being able to.
Take a look at new development activities in that Lourie service area. So thats kind of give you a perspective on.
Where we are positioned in the residential area.
I'm going to turn the call over to dark he's going to give you a bit of an update on our land development segments and all of the exciting activities that we have in there Derek wanted to.
Gordon.
Alright, Thanks, Mark good morning, everyone.
Land development.
The Sky Ranch project or a master planned community.
This information.
A little of that but.
We will stay the same for the duration of the project so.
Despite this information for.
The next several years to come so sky range is 930 acres.
We can accommodate up to 3200 residential lots about 2 million square feet of commercial development.
But it looks like here.
Alright, so I.
Get a little that our first phase.
The project kicked off in earnest in 2018.
I think it gives a pretty good frame of reference for the overall project and just sort of.
<unk>.
This phase encompasses 509 lots.
This is wrapping up as we speak if you look at.
The top right hand corner of the graphic on the page you can see.
The last little bit of homes under construction right now.
So let's work with us in this project.
Basically the project off we've sold all of our tap.
All of the homes have been.
Started last few residents moving in.
We've turned over all the infrastructure to the respective jurisdictions.
We've collected or are a lot revenue, that's the $36 7 million masks for lot sales.
$14 million for caps.
We also did a bond on these.
On this phase in 2019.
Around 11.
About $30 million something like that and then.
We have.
Reimbursable costs accruing out here on these for.
For future.
Alright, so they would move over into our second phase.
The most current phase right across the street to the east.
What youre looking at on the graphic.
<unk> are down to the right hand quarter.
The upper right headquarters our school.
So the biggest thing different times going into this phase that we really took a new look at our land playing out here.
You can kind of see the layout.
The phase one versus the phase two to changes pretty significantly we introduced.
Some some new product lines, our first phase of that.
Basically two product types.
Next phase.
We went up to six.
We really.
Our first phase we inherited with the projected in the second phase, we really deliberate look at how we wanted to plan this out.
R R.
Motivation was largely.
And density.
Our first phase we're looking at about three three houses per acre.
And it can be carried that through our whole project, we really would fall short of what the whole project.
What was the capacity for the whole project would not get us up to that 3500 3200 lots. So so.
Trying to incorporate more density into the private growth going forward.
We got that up to about five or six houses per acre.
That tends to be really helps us from a.
Bonding standpoint and.
It helps us on our water usage standpoint as well.
So we have.
Some new.
New product lines in this neighborhood.
Got it.
Added a fourth builder, so trying to find the right.
Balance of.
Number of builders, who is it going to be three like our first phase are there going to be six there. We ended up with four builders in this phase we felt like that was a pretty good sweet spot.
Our analysis that was.
Where we felt the best.
Yield was so poor builders at this phase.
They've got the peripheral lots.
Challenger homes.
In terms of light green.
<unk> is the blue lots in CEB as Athene Clos.
And each one of those builders has a unique.
At least one unique.
Product segments, and then there is.
A little bit of overlap to get to the fixed so theyre competing on.
One product site.
I think in the in the.
The future will carry this theme.
Concept through at least through the build out of our second phase So what youre seeing here on the first stage is the first quadrant.
This is one of four.
This.
Concept repeats itself three more times in the first.
In the second Phase and then we have our future phases and we will.
We analyze whether it's a good concept and whether we carry this through and then there are some opportunities for some.
Other product segments as we go forward.
In the overall community those would be like a multifamily.
Attached product and then.
Possibly some active adult.
So we got lot revenues in here 70 million I think that.
That's up from our first phase on a per watt basis by about 15%.
Through and Reimbursable is in here and then we did another.
Bond in.
2022 on these on this phase III. This is 850 lots.
And that was it.
$29 million bond on that and that again was was up from our first phase. So we saw some some good appreciation.
Going from phase one to phase II.
So the SEC by just kind of show the breakout of the four different quads that I've mentioned.
So if you look at that center Pie chart. There those are the different colors represent the six different.
Product types that we're building the next pie chart over to the right that's our builders segmentation. So.
I think we've got a good parity across their distribution of prototypes.
Distribution of.
Build a lot.
And you could see the numbers.
Each phase Iia was that on the previous slide.
Represents that first part that we're building there.
These will rollout roughly year over year.
So two ways underway right now and actually that's nearing completion, we have.
Received.
All of our revenue.
Les a few little outstanding items here and there and then we'll move into our next phases as we move through that.
Mentioned the school so this.
This is a view looking towards the west.
No.
More towards the left hand of the screen you see the three.
Stage of completion for the.
For the Phase Iia, one little model house in there Thats a challenger house there.
A few months old we got a significant.
Significantly more amount of vertical construction going on in there but.
On the right hand side of the screen you see the.
Graphic layered in there for the Academy the charter school for Sky Ranch and we are.
Sure.
Center of the screen there is a great shape.
Object, that's going to be the elementary school that is.
That has started construction they've built that foundation and Theyre going to go vertical on that here in just the next couple of weeks ago.
That's pretty exciting.
I will open next fall.
As a K through seven and then they start to add years.
A year later, we go over to the high school phase, which is the E shaped structure.
That will come online.
For years.
Alright.
Just real quick to talk about some market conditions that we're seeing rates pretty.
This right now.
Yes.
So a little funky here.
So we're in a contracting market some experts are calling it a housing recession.
So some quick.
Quick indicators these Tvs all over the Internet.
I pulled out a couple of key metrics here.
Our new home sales across the country are down 17% year over year.
New home.
New whom I'm sorry.
Mortgage applications are down 40% year over year.
And our build our confidence levels are down for 10 months in a row.
<unk> knows.
Sort of sentiment.
Let's talk about interest rates, we had a pretty abrupt uptick.
In 2022.
From basically 3% to 7%.
And looking at those interest rates kind of across historic historically.
We're not they're not.
The out of line if you go back through the decade.
From the 70, we added about an average interest rate of 776.
70 so.
In the eighties.
Remember we.
We hit that 18% market early eighties.
Right around that 7% four.
For the last.
Half century or so.
And then R.
Material and labor costs.
We are seeing so.
So typically we would see probably a couple of percentage point increase year over year.
That's something that we build into our contracts and anticipate.
So thats pretty typical.
But just the last year, our material labor cost have been up.
20%.
Over last year.
40% since the start of the pandemic.
Those are those are affecting.
Our builder partners and how they can sell a house.
The net of that is our.
Our product costs, our product costs are up and our customers buying powers are down.
That's kind of on the bad side.
On the good side.
We still are seeing a.
Strong demand for new home sales just as a comparison.
We peaked in the queue.
2005, 2006 time period, we were.
We are producing about one 4 million units a year new houses per year.
And in 2021.
Lastly, we will run out.
We were only hitting about 600000 so.
There would appear to be still be some pretty good.
Capacity in the market there.
Couple other positive indicators are.
Average days on the market for.
Our home typically we see.
Like a $6 90.
Days on the market so that's seasonal so.
60 days and the high selling season, which is summer than 90 days to go longer in the winter.
And just to know we are at.
On the downward trend on that right now going into the winter. So our current sales cycle.
On the way down and then it starts picking back up.
Late winter early spring.
So that's difficult, but we're currently seeing like a 30 to 60 days on the market. So that's that go into the positive direction and we are still seeing.
Positive home appreciation.
It's less than what it was but.
I think a lot of us were seeing.
Inclined to think that that.
Appreciation was probably pretty unsustainable, so that coming down a little bit.
Okay.
It could be seen as a pretty positive thing.
Short term mortgage options, we're starting to see some some creativity on the lending side to help.
Compensate for the.
For the other increased costs.
So do these two one by down now figured out.
Other creative ways to help.
Our.
Our buying customer.
And then.
So you'll see the low unemployment is especially here in Colorado So.
Our.
Takeaways that we're.
Correction.
Yes.
Is.
Necessary and hope it is not going to be a collapse. So.
It's kind of Recalibrating on all fronts.
For that correction out at Sky Ranch.
What we're looking to do it as is.
Reevaluating the timing on the next set of lots that we deliver to our builders so as those builders.
A slowdown in their sales.
When they will need to take the locks on from a throw that next phase that would be our base to be.
Next slide just a little bit more graphic.
Graphic representations of some of the market.
That's fair.
First ones are housing supply.
Lending standards.
Hopefully.
Significantly different from the 2008 recession.
These lending standards, there and then.
<unk> seen many foreclosures really at this point, so that's a good sign and that unemployment.
FX exposure to that.
I think thats just related on that I'll turn it back over to Mark Great I appreciate that thanks.
So I want to talk.
About our last business segment single family rentals more recently, we've added this new business really through retaining lots in our master planned community and so we want to develop these slots into single family rentals, mostly for the appreciation that we're getting and seeing in the.
Masterplan community, we're actually causing that appreciation as we do.
What we do well on the on the development side, creating a nice place of home on that we see a significant increase in value for those and then its a great opportunity for us to continue to invest in the company and provides ongoing cash flow. So we really liked that complement to our water and land development activities and so we're going to continue to see.
Some more activity there.
Some of the specifics on this are the trends in the consumer preferences home versus apartments.
We have.
<unk>.
Recalibration.
<unk>.
Consumers seeking more space rather than location.
Affordability is a key driver in this area and as Derrek mentioned, we've really we've really concentrated on.
A broader product class, we've got more we've got paired homes. We've got town homes. Those are all going to be delivering at an entry level price point, that's going to be more flexible for the consumer as well as for the renter and so we have a number of different product offerings. So that when somebody comes to us with an interest to rent on a single family home level.
We have everything from a large four bedroom home with the den.
Maybe a two bedroom home that would be.
Townhome type products, so those price points will be flexible for all sorts of customers in there and really a continuing strengthening of the market for home rentals. So we like that on both local and national trends for the single family rental market.
This is just some of the statistics.
On our single family rentals, and how those cash flows come to us.
So if you take a look at it on an average we're generating about.
$33000 in annual revenue income this is a little bit of our operating costs, which are going to be our taxes and our dues and then.
I appreciate the interest cost depreciation expense.
And then when you are adding back those cash flows we ended up getting very high margins in this thing so we're able to carryforward the.
Equity value of the land and water.
The rental segment to provide those free cash flows to us. So we really like this segment, we're going to continue to invest in that.
We have currently four rentals up and available we had three last year, we just added one.
This week actually and we have another 10 under construction so to give you a bit of metrics on what we're looking for on carrying forward into this next phase.
Again, the diversity of the product mix. It. This is phase Iia. So if you look at what we're getting in terms of our products on the what we've sold to our builder customers. We're also retaining some of those for our own purposes. So we have duplex homes, we have small 35 foot alley load product and then.
We also have more of that.
The same.
Product that we had in the first phase and that rents are going to range anywhere from <unk>.
Slightly less than.
$2400 a month.
<unk> $3000 a month, so great opportunities for us on the single family rental market.
I wanted to drill down on some of the specific financial highlights we had a fantastic year as you saw from some of our press releases.
<unk> execution continued growth in the water and the wastewater segment, we continue to invest in that so we have around $67 million in water asset capitalized cost.
Again if.
We continue to grow that segment, we have had a little opportunistic acquisitions in that area. So we purchased a little more water that was regionally in an area that was located for some other water rights that we had water has never been more relevant I know that many of you I'm sure have seen all.
All of the press about western water in.
The supplies on the Colorado River most of our supplies are not on the Colorado River, they're more on the Platte River, we've had a relatively normal water year, but water continues to be one of those high value investments in those highly sought after opportunity. So we continue to look at that.
And then water deliveries, we had a record year in water deliveries over 400 million gallons of water deliveries.
Generating record revenue for us in that segment.
Excuse me I got a frog in my throat.
Sure.
Okay.
Thank you.
So continuing with our land development activities.
As Jeff was highlighting.
We've delivered 100% of the phase one both in terms of the water and oil and the land development revenues.
Phase Iia, where about 76% complete on that maybe a bit more than that and really have delivered all of those lots to our homebuilder customers.
As we also highlighted we had another bond reimbursable.
Recover some of those public improvements that we continue and invest in not only carrying forward some of those from phase one but also some of those in phase II.
And then we continue to generate.
Very nice gross margins on our lot sales when you take a look at both the lot sales as well as the reimbursable to come back to us on that so very high opportunity on the land development side that has generated record liquidity for us we've had some outstanding execution and really very low exposure.
<unk> model here is allowing us to be able to develop this infrastructure and deliver that in real time. So neither we nor our homebuilder customers are exposed to anything other than what we've delivered and the opportunity for us is really to continue to partner with them on market demand for.
<unk> on that.
And then the single family rentals.
Again continued growth in the home rental market. So we like very much delivering more homes in that area.
Take some some highlighting some financial metrics again.
Revenue, we have about $23 million in revenue eight of that came from water and wastewater and then 15 of that came from primarily our land development segment.
Great growth in our net income as you can see.
From very modest means as we started that started this.
Endeavour in 2018.
The big highlight in 2021 was kind of an accounting recognition issue.
Being able to be comfortable with recurring or recapturing those public improvement investments. So that's.
Real time recognize revenues as opposed to a crude dose.
And then recognize some of those.
In previous years into that 2021 area and then our margins continue to improve so we're very proud of our team and the ability to continue to execute on both the water utility.
The land development segment, and we look forward to continuing to highlight as it becomes more material the single family rental segment.
Again more asset growth, we continue to invest in our assets water wastewater.
Water rights and then ultimately selling you record liquidity right around that $35 million of cash and cash equivalents for yearend, so an outstanding year for us.
And we're really proud of.
This is timed out for us so we're in a very good position as we are taking a look at being opportunistic on some of.
The investment side.
Do you want to talk a little bit about our ESG initiatives. So we've hired a new ESG initiatives specialist who continues to really develop our documentation for ESG activities, we want to be.
We want you to be on the lookout for that so we will have our first annual ESG report coming up later this month, we'll post that to our website. So be on the look for that we want to be on the forefront on some of this disclosure and as documentation both from an SEC guidance standpoint, as well as what the NASDAQ exchange theyre going to be looking for so.
You will see significant documentation and really how the company foresees that.
Hi initiative for us things to look forward, specifically are assessing tracking and disclosing energy management uses.
Network efficiency water usage water recycling wastewater collection data those sorts of things.
We can track, we are going to track and assess employee satisfaction water affordability and access.
Staff diversity all of those sorts of.
Highlighting issues continue.
Continue the board diversity matrix as required by NASDAQ.
We continue to see more on that.
A little bit on some of the highlights theres a balance sheet.
Terrific balance sheet $35 million in cash very low debt position low debt position at some favorable interest rates. So we locked in a lot of that financing at those four <unk>.
Four 5%.
Interest rates, so those have worked well for us.
Total revenues if you take a look at the income statement again $23 million.
2022.
And then you know.
<unk> almost $10 million and net income of <unk> 40 per share on a diluted basis.
I also want to talk a little bit about some other tools. So we are adding a new tool to our box through a board authorization.
For a share repurchase program and really looking at this as being kind of the anti dilutive nature of it we are very as many of you know we're very hawkish on our denominator.
And our capital currency, we have not raised capital through the sale of stock since well.
Since we acquired Sky Ranch back in 2010 and were very modest on our stock option plans, we do want to incentivize our employees to be owners of the company and so this is an important component of that but we're also being opportunistic to invest in ourselves and so this is.
An authorization that the board took as an opportunity for us to take a look at some of our liquidity and take a look at some of the market valuations and the disconnect that may be we believe that the market may perceive to be compared to what our intrinsic value itself.
You'll see a little bit of that and you'll see that disclosure as we.
Take advantage of that through.
Through to the next.
Several quarters, a couple of upcoming important dates the proxy statement and.
Proxy cards will be mailed out on December 2nd we will have an annual shareholder meeting in January . So this year's meeting it will be January 11th and then again the ESG report initiatives will be later this month.
Take a look at kind of our leadership, we continue to have very solid leadership, both at the staff level as well as the board level.
We're highly complemented by just an outstanding intellectual capital within our board of directors.
And so they provide great governance and great.
Direction for us on an ongoing basis, so I couldnt be more.
We're thrilled to have their continued leadership in scope.
Okay before I.
Finished with my closing remarks, let me just give you a bit of a recap here, we had a terrific year delivering lots that really we are on schedule and budget.
We were able to generate significant liquidity through the sale of the cat bonds and really that that was a direct result of our excellent credit quality, how we develop how we do land development.
The opportunity for us to invest and then be reimbursed those that that business model really paid dividends for us not only delivering these next set a lot.
And a real time fashion, but also being able to recapture some of that liquidity through a bond offering.
And really how do we know our business model is working because when you see market shifts like this neither we nor our builders are overly exposed our builders have tightened their budgets for 2023, but we're one of the few developers that actually are providing finished lots in this market and providing them at the end.
<unk> level, where everybody wants to be.
Prior to give you a kind of a dynamic here prior to 2007 prior to the recession of 2007, the Denver market here home starts.
And entry level home starts represented about 50% of the overall market. So you've really had a concentration of builders and developers really pursuing that first time buyer market and that number has fallen to closer to 5%. So we have an affordability problem in comm.
<unk> and that's primarily because of.
A number of reasons.
And really Sky Ranch is one of the few.
Projects out there that's delivering lots for homebuilders in that starter home market.
The demand for housing in Denver remains strong so we're well positioned at that entry level market, we are selling.
Holmes, our homebuilders are selling homes to new buyers versus a trade up buyer.
New buyers that we will have to get comfortable with what is going to be just recalibrated mortgage the anomaly isn't 7% the anomaly was.
Four 4%, 3% mortgage I think that that 7% number as Dirk highlighted is really more of a traditional average on that and then we're not really selling to buyers with an existing rig right theyre not a trade up buyers. These are new buyers in the market. We have a lot of optionality in this company.
Terrific balance sheet, great liquidity to make disciplined acquisitions, both in land and water and now with our new tool in the box.
You can invest in ourselves. So we're very we're very delighted to have the liquidity that we have right now.
And.
We will continue to look at opportunities to continue to grow the company.
So with that I think I'll turn it back over to Ali and see if you'll have some questions that we can drill down to an answer some specifics.
Thank you ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on your phone at this time.
We asked them while posing your question. Please pickup your handset lifting on speaker phone to provide optimum sound promising.
Please hold while we poll for questions.
Thank you.
First question is coming from Bill Miller.
As an investor Sir Please go ahead.
Hi, Mark good.
Bill.
I congratulate you on a great quarter.
I'm just curious about a couple of things.
One is your acquisitions.
David alluded to.
And where are you on any big.
Further land acquisitions.
Long I 70 or anywhere else.
Secondly.
The home rental market is obviously a home run for you are you going to expand beyond the 10, a year or whatever.
You have because that certainly your highest return.
Investment opportunity you have.
So when you reallocate resources, there and finally.
Are you going to stop at 200000 or are you going to go beyond that and how aggressively do you plan to pursue that at.
This price.
Yep.
So let me take them in the order presented if I can remember them. So on the land acquisition.
We certainly do have a high degree of interest for that and as we've talked in the past.
We're very I think we're very well known in the market segment, we have water.
Sure.
Most of these surrounding land interests do not have water said, the intrinsic value of us being able to acquire a piece of land at our water two it does add value in the equation.
And.
While we have not broken any of those three yet we are seeing a lot of movement. In this area. So we're very we're very interested to continue to pursue that we're very active in pursuing that and we have a high degree of liquidity to pursue that yet. So we very much like that optionality and being able to do that as you see we can.
We continue to try and do some tuck in acquisitions on the water side.
I would say our preference would be more land and water, but when water is available that we have that's going to be located near where existing supplies are that makes sense for us to add we will continue to do that.
And taking a look at the single family rental market. That's also a great opportunity for us and what we're looking at with our builder partners, they've all done very well.
Were concentrated in the right.
Market segment of that at the entry level home each of the builders did very well in phase one we're continuing to roll that forward.
And really what we wanted to try to do is if somebody if somebody finds themselves to be overweighted in that segment that may be an opportunity for us to take some of those lots back and continue to invest in that single family market. So yes. We are interested in doing that currently all of our lots are under contract, but this is one of those opportunities. So.
You may see us.
Continuing to invest a little bit more in that area in phases to B C and D. So those are opportunities for us.
As it relates to share buyback one of the things that the board is very cautious of is we.
Want to make sure that we have that optionality in investing in all elements of the company.
Water land and our own currency to the extent that the market continues to have a disconnect. There can I can I.
Tests to you know 200000 shares 200000 shares was picked because it was an anti dilutive number but.
You can see as you as you've seen and bill you've been with US a try.
This amount of time.
The stewardship and the governance that we have are very disciplined we take a look at these things incrementally we see if they're working and then where they are working we continue to reinvest in those areas. So.
This share buyback was very very well thought through through a number of quarters and it's an opportunity for us to continue to invest in our own currency. So I can't give you any more specifics other than that other than you kind of see our past performance and our history of how we do things thoughtfully care.
Fully and then we continue where we see successes so that those who is going to be our metrics that we continue to roll forward.
Mark how a bigger portion of your company do you want the rental business.
It's a good question if you take a look at the 3200 single family lots out there.
A good growth target would be somewhere around that 12% to 15% of that market can be in our portfolio.
Okay.
That's going to be a big business for you.
That is going to be a good business for us and much to your point you know I mean, it is one of those things where that asset continues to appreciate.
Customers paying down the vertical cost of that through the mortgage rentals on that and then it also provides cash flow to us so it's going to be one of those.
It is a win win segment and it's one that we actually have a reason to be in.
If you take a look at us being in the business just to be in the business.
I would say, it's a good business to be in and a lot of money is going towards that segment, but given the fact that we are able to carry forward the equity value that we have in the land and the equity value that we have in the water. It's a highly tax efficient mechanism for us to invest in so we're carrying that forward and it's appreciating and so if it <unk>.
Turns out that we find a great acquisition and we've got a few hundred.
Homes that are out there that can be an opportunity for us to spin that off and use that as monetizing for another.
Land acquisition that might be a bit above our.
Our punching way get the time and then continue to grow that back so there's a real flex there for us on that.
On that business segment.
Terrific.
Thank you.
Thank you.
Thank you. Our next question is coming from Jeffrey Scott with Scott Asset management. Please go ahead.
Hi, Mark how are you.
I'm, Greg Jeff good to hear from you.
Two questions you Didnt mention much about the commercial side can you talk about the development and potential timing of that.
Great question.
We have.
We're continuing to build up on that residential side.
Commercial segment I'd say.
Will a bit out.
I think theyre looking for about most of what we would be putting up there would be looking for.
<unk> thousand rooftops in and around the area. We do have neighboring developments that do provide a lot of density to the to the equation on this thing and really we're looking for the higher value commercials. There. We're looking for the big boxes, we're looking for the big.
Not just a <unk>.
Small grocery store, we want a big grocery store, we want big retail centers out there that are really high volume stuff and we also want to be opportunistic to be able to maybe partner on some of that where we're able to bring the utilities and bring the land to the venture much like we're doing in the single family rental segment.
Carrying forward some of that equity value, we're not going to go vertical on the commercial is like we are in the residential but we do have opportunities to take a look at that and high value margins for us being able to do that so.
Still a bit off and I think that our patients here is going to be well rewarded.
By bringing in some of that big Big commercial not just.
Some small retail commercial that usually does like to lead that and then they end up getting in some preferred positions because people really pulled that trigger a little too early and then a lot of times those sites get redeveloped, we want to really kind of be patient in <unk>.
Develop that out as a big commercial opportunity and mostly because of our location right where we're located we're located.
Right off the Interstate we're located right next to the belt loop on that were just south of the Interstate so or sorry, just out of the.
Airports and so that does pretend it's high high value use for large commercial so.
I know I've said.
We're being patient on that and we continue to be patient on that.
Don't have a start date on that but we continue to be very active on pursuing.
Market opportunities for that.
If I understood correctly.
Yes.
The big box people want a lot more houses built alright, so they wouldn't be in a community of multiple thousands so we're talking about.
Development kind of four and five years away from now.
Yeah.
As a hard.
Hard one for me to say, it's that far out you know I'd say, it's it might be couple of years out, but not four or five years out.
Okay.
Next question.
On page whatever it is 26, you said yet.
$404 9 million gallons delivered if my math is correct.
That's kind of a 1200 acre feet 3500 acre feet.
And you have 30000.
So.
Youre selling what.
3% to 4% of the acre feet that you currently have.
Why additional water acquisitions.
It's really just where we can.
Once the water is purchased by city municipality.
It's gone forever and so what we're looking at is not necessarily expanding the portfolio just anywhere we're expanding our acquisitions, where it's next to areas that we're already vested with and so.
We.
It's an opportunity for us to continue to build that portfolio. We do know we're long on water, we don't want to be overly invested in that area, but.
There, where it's a strategic acquisition, we'd look to consider those and.
It's a function of price as it is at a good price. So how are we able to bring value with our infrastructure and our other water rights to that particular asset that really builds value beyond the acquisition cost of it.
If I hear you correctly, it's really a defensive move to keep it out of a governmental.
Control.
Not necessarily out of governmental control I mean.
Once.
The other water providers. So it's very competitive so we have 70 different water providers, who were all out scouring opportunities for water supplies and so you have diminishing.
Acquisition opportunities and an increasing number of folks that are looking for those acquisition opportunities and so we're looking at making sure that we can continue to grow that side of the business through.
No logical acquisitions.
Okay.
Anything happening on the reservoir.
No you know, we still look to partner with other regional interest on the reservoir assets that we have and whether that's with our neighbors are with.
Our partners that we have and wise with the South Metro group all of those all of those.
Studies evaluations and smart consultants continue to take a look at that but nothing really exciting to update you on.
Okay, I'll, let somebody else jump in thanks.
Thanks, Jeff.
Our next question is coming from Greg Melick Cholmski with benchmark. Please go ahead.
Hey, Mark how are you.
Good.
Good good good just a couple mainly.
Mainly one general question in.
And that kind of involves the single family rental business.
Has your approach to financing that changed at all with the I know the mortgage rates you mentioned were in the high threes or low fours.
Has there been any change in approach through how the company is anticipating plumbing future ones with.
With the rise in mortgage rates or how are you guys evaluating that.
That's a good question.
That's the opportunity for us.
We did lock in maybe that $4 million at some very attractive rates.
And so we like that and we will we will continue to keep those out there.
As mortgage rates have gone up to 7% because of we have such strong equity value in that we may look at instead of financing 80% of that we may we may drop that down a bit in finance, maybe 50% of that so we will still use that financing mechanism.
And I'd say, we're we're gonna be indicative to everybody else. It was better for it to be at three 4%. It is not awful for it to be at 7% and its not always going to stay at 7% right. This is the type of financing activity and I think that that's where the millennials that are going to really be looking at buying a house.
And then maybe making the decision to buy a house.
For other reasons other than its an investment or its that.
There's a significant utility value in owning a house and so.
Taking a 7% mortgage on our house.
More traditional and more and more in line with the long term projection of that and so I'd say, yes, we do have.
And appetite for continuing to finance those out to the extent that we're getting for four 5% on that.
We may be able to get a better return by financing some of those ourselves because that's going to provide more cash flow to the bottom line and when we have those opportunities to do that but we're not going to be overweighted in it we like to continue to grow that segment you know our board has said that.
This is a great segment for us, but we want to be able to leverage the vertical cost up that we're going to carry forward the equity value, but we want to leverage some of that vertical costs.
<unk> still a very good rate for us to do that as some of the cheaper money because of the mortgage type lending activities. There. So youre going to still see us pursue 50, 60% of that into the mortgage side.
Okay, and how do you see the overall rental market right now and so maybe maybe projecting going forward what is the strength or weakness.
Associated with that versus kind of what you guys. Some loosely would underwrite when you're looking at picking up.
Hum.
Okay.
It's a great question and it is strengthening so what youre seeing is.
To the extent that those.
<unk>.
Former buyers that would be out there and maybe they lose the ability to qualify for the same house that they would've wanted at 4% to compared to 7%.
We're really getting a lot of referrals from our homebuilders to say well if you like the community.
Why don't you go talk to the developer Who's got some units that are coming online for rental because it puts them in lots of them into the market right.
There is that as a component of it and then the second component of it that I think we're really excited about is really bringing online our school right. That's a sense of community. That's a sense of place Thats a sense off.
Education being the initiative of every new subdivision, new community and so that that's a strong driver for new families, particularly because we are opening up this K K seven day, it'll be a full K eight facility.
We may not we may not open all of those grades all at once but that's what the capacity of that is and so we find that to be some some good traffic flow on the single family rental business, which is kind of putting a little bit of wind in our sail on why we may partner with some of our builders to claw back a few of those lots themselves.
Okay, Yeah, that's what I would still use so youre, saying the financing is still favorable rental market is robust. So I guess, if I can float something that maybe I'm sure I'm sure you guys have thought of it as something that looks really attractive.
You look at capital allocation and you've talked about the land.
I'm with land as one land still is by no means cheap at all and two as you guys are obviously aware.
You buy the land and want it costs a lot of it requires a lot of capital to develop and two it takes a lot of time.
So with what kind of is already on our plate I'm not really sure land is the best use of capital at this point you look at the water rights.
And similar to the previous.
Color.
It's nice, but when you're a public company in the market just gives you know credit score.
The water, but water assets you have.
That might not be the best use of capital either we've been over the buybacks and you know one thing I think just in terms of looking at how you guys are approaching this.
You know you mentioned investing in your own currency, but really I think the correct way to view that as if you put for sale sign up in the company's worth say $25 a share if you're capitalizing on an $8 print.
You're creating immense value for the shareholders that continue to stay along for the ride so you're doing that now, which I commend and I think that's great and then I think you guys should be.
At these prices, but then you get into the single family rental business and.
Yeah again, it's like buying back stock where you are.
Basically able to create.
Four of 500000 dollar asset at a fraction of that cost you own the land to keep the developer margin and then on top of that you have tremendous optionality with the financing so let's call. It. If you can put one of these things up for let's say 250000 300000.
And most of that you can finance with bank money.
You're able to not only create value, but you're also keeping the momentum at Sky Ranch movie I think one of the biggest and most important things in the environment like right now is keeping things moving in an efficient manner.
And even bleeding into the commercial keep keep the rooftops comment.
So if there is a slowdown like you've mentioned that maybe some of the builders.
They're not selling as many homes or whatever.
Guys could realistically take down you know 100 homes and if you break out what that would actually cost you guys and then you back out the financing.
Even something like that wouldnt be that expensive wouldn't cost that much money you build the water business.
Keep keep the roofs coming and you'd also be making money doing that so I think that this is really an opportunity where you guys should heavily evaluate.
You know stepping up the rental business because as you said, it's a win win and I was just curious if kind of.
With what I said you had thoughts on that are followed a long or where maybe you would disagree with any of that.
I'm, just curious because I'm thinking about that and it just looks like a no brainer type of opportunity for you guys right now yeah.
Yeah, No I agree with everything you said.
What I would do and what we are looking at is working with each of our builders to say, okay. Let's take a look at this next take down.
We're ready to move forward in this next take down and you guys find yourselves to be a little bit long on your lot inventory longer than you think you'd want to be then we can pull back.
Not pulled back on the start but we'll pull back some of those lots instead of having 10 in that next sub second section of that maybe we have 50, maybe we pulled back some of those and we can develop those or we can have them build on them. The same the same way they would be building right next door and then just deliver that house to us.
And it's never been more relevant for them to having a guaranteed buyer. So that conversation is there Greg and we will take a look at something like that.
Alright, yes, that's good that's it for me I, just I think it's awesome I think right.
Right now right now is we're having been a conservative company being responsible with capital.
Youre going to wind down the line by playing offense and being in a position to really capitalize on these things. So it's good to see you guys start looking that way and you know.
The previous 12 months was excellent so.
I'm excited about the new developments and I think again, you can look at the overall macro situation, but you know I think given what you guys control.
I think it matters a whole lot less than people might think so.
We're happy to see you guys kind of looking at things through that lens as well so take it easy and I look forward to the next call.
Great. Thanks.
Thank you ladies and gentlemen, if there are any remaining questions or comments. Please press star one on your phone at this time.
Our next question is coming from Bill Cunningham, who is an investor Sir. Please go ahead.
Mark.
Hi, Bill how are you good I actually have for starters, just a very basic financial presentation question for you.
<unk> earned 40 cents a share in the most recent fiscal year. The first three quarters were 17 cents a share which I think means you had an absolutely fantastic final quarter of <unk> 23 per share, but it doesn't appear that you actually lay out anywhere the actual numbers specifically for the fourth quarter.
Yes, I'm missing something.
You are right, we don't and I apologize for that because it's always helpful for us to take a look at quarter over quarter in this particular case and.
One of the things that the fourth quarter did for us that really boosted that up was.
The ability to well liquidity wise it was the ability to get that next.
<unk> offering from the cab the delivery of all of those finished lots and so it was weighted into.
The finished lot category. So when we take a look at our builder agreements three of the four builder agreements are lot delivery agreements, where they pay us on that third a third a third principle.
And the reason that that fourth quarter and it will always looked like that on a quarterly presentation that won't always be the fourth quarter, but it will always looked like we'd get this huge weight because one of our builders as a finished lot delivery they pay a premium.
For that but that's why we will always wait in one of the delivery quarters mhm.
Right.
I'm also looking at your Sky Ranch co website, which it shows that two of the four builders and phase two are simply coming soon D. R. Horton and lennar. So I'm wondering is is that actually updated that theyre not selling homes, there yet or what you know what's the situation.
And with those two.
So <unk> probably got.
I would say they've got eight.
Eight.
<unk>.
Four to five times.
Okay, So they've got to put.
Ill it turn town homes under construction and I would say six or eight.
Detached single family homes under construction. So there they just havent opened yet.
For sale they have them.
They're not doing sales trailers theyre going to be selling out of a model home I think their model home will be open.
Before say the holidays.
D. R. Horton D. R. Horton is really they have yet to start out there.
We're a little bit slow on getting there.
<unk> for their home products through the county, So I think that they are set to get out there within the next two or three weeks to start their start their product Horton typically has a more aggressive build cycle on that they build more spec homes than most but we'll see what they do in this market.
Okay. So with Lenoir are actually building homes, obviously, they've purchased tap fees from you, but they haven't sold the homes yet and Dr.
How many tap fees have you sold in phase II I'm wondering about.
Of the two.
Of the 230 lots I think we've sold about 110 taps.
So thats kind of giving you that that'll give you an idea that the building permits that are in that.
Is there likely to be a lull than with it sounds like you've kind of got you know you are ahead of the you're ahead of the ball there with a lot of tap fee was already being sold and I you know for homes that have not yet been sold so I assume there might be a bit of a lull on tap case in the next couple of quarters is that yes. If you are.
Looking at a quarter over quarter, I, probably wouldn't disagree with that I try and I try and caution you as well as the rest of the market that.
Orderly management of <unk>.
Company like ours is a little bit harder, but we.
We still we still look at a great year year over year yeah. Okay.
Okay very good thank you.
Great. Thanks Bill.
Thank you.
Our next question is coming from John Rosenberg, who is with lots of them water. Please go ahead.
Yes, good morning, Hi, Mark Good morning, John .
Most of my questions have been covered.
Also congratulations on your year end.
And your results and your strategy.
One of your last callers.
Talked about.
Question for you and talked about your flexibility in moving more towards the rental segment as market conditions demand.
And I just wanted to.
Well first I wanted to congratulate you on that segment and also ask you so drilling a little bit more so you have absolute flexibility in doing that.
Is there any cap on how much you can do that per period or.
No, we really don't and the reason we like it so much is that we.
We have an advantage to roll forward some of that cost and so.
As Greg was mentioning when we're carrying forward the equity value of the land and the water on that and really that's a tax efficient strategy to be able to do that and he's right. We're delivering a home that might might be a buyer.
$550000 home if you take a look at the standard detached product base and we've got a number of different categories. The reason we like.
Really concentrating a bit more into the rental market here in the second phase is we've got six different product classes and so we're not constrained to just the same type of rental customer right. It can be just it can be.
An individual that come out and is taking a look at a town hall or a duplex.
It can be we got duplexes together and it could be.
Family with bringing.
Se renting both sides of it where the parents maybe on one side and the new family would be in the other side and you have great opportunities for them shared spaces and things like that so that's why we like.
Not only is it is it that it's a great opportunity for us, but the diversity of the product mix in our second phase of this thing gives us a ton of Optionality and what we're offering to the marketplace. So it's not a homogeneous customer for us.
No that's great I do appreciate that and I think yeah that was a very.
Thoughtful move in terms of expanding your product range in phase Iia.
Additionally, just kind of a little bit of housekeeping.
Your receivables from the CIB I presume, that's going to be very lumpy over time as needed.
It is.
It's every couple a couple of three years cycles between the two as you start and you build up a b.
Each of these bonds have kind of a five year call restrictions on that there are really three year plus premium calls in years four and five.
And as you do them what happens is the so the value of each of these homes continue to grow and you have the same number of mills. So you increase your bonding capacity. So they are lumpy.
I will say that our.
Our underwriters could not have been more complimentary.
Our business model and they.
Took a look at it and we were in a tough tough market. We're not so much in terms of the interest rate market, but a lot of outflows from invested capital for our municipal bonds and so when you have all that money coming out and you add deals trying to hit the market.
We were oversold, 400% on our bond offering so it really is a validation of how we do it.
The care with which we do you know how we're investing in this infrastructure, we're maturing that we're not over our skis on any any component of the infrastructure or the delivery of lots and we have great partners in our homebuilders.
Oh, that's great.
Lastly, again, a bit more of housekeeping, but I seem to recall from our prior conversation that when you do ultimately go to large commercial and perhaps I'm wrong.
You'll be eligible for other types of infrastructure reimbursement, perhaps from the state or am I incorrect in that.
You are correct and the interesting thing about that is Colorado is what we call a sales tax incentive state and so what we do is we wait.
The burden the tax burden to the commercial base.
So via what I mean by four acts so the same AAV.
The residential and commercial so if I take up a million dollars of AAV at residential versus $1 million 80 at commercial at the same mill rate I get four times the tax revenue on that.
And so yes, it's super charges your ability to get back Youre reimbursable, even to the point, where we would no longer have reimbursable. So we would be we would have more bond capacity that would be able to fund forward fund some of those public improvements.
Okay.
And I take it then if I'm hearing you correctly that also means that would also imply to me that.
The cadence of reimbursement would be somewhat accelerated from where it is now.
Once you do start actual commercial development.
Yes.
Great Okay, well, thanks again congratulations.
Keep at it.
Thanks.
Thank you.
Our next question is coming from Greg Senate, who is a shareholder. Please go ahead.
Yes, I just have one quick question about the rental.
It's the product when you're.
Uh huh.
Building a home so.
Let's say a single family home.
And in area 400 or 500000.
Is the product of identical to the other homes that or does it look the same does it have the same amenities inside the home.
Yes, typically we do want to have it would be.
System with what the other products are they're not exactly the same.
You know every homebuilder, we're own their particular home.
Plan, but it will be the same composition, so youre not going to you're not going to see if we're in an area, where we've got two story.
The walkout basement.
Going to find a two storey walkout basement, if we're in an area of slab on grade crawl space Youre going to find the same home on that same block so won't be out of character to the blocks and to the overall community.
Do you have any concern about the stigma I don't know, let's say, it's five years from now I live in an area where.
Hello per square.
Posed to put in affordable housing in the neighborhood and.
There wasn't a stigma.
In the retail market that when something came up.
Well this wasn't built by the builder. This was built by and therefore, the valuation is not going to be that.
Our retail business.
I think that's the reason we're careful with what the product class is and then.
We also.
I would probably tend to argue that in large measure we have some control over maintaining these properties and so even after were out of the out of the Master plan community. We're still in a position to maintain this number of homes and if we if we execute the way.
<unk>.
<unk> Bill Miller took a look and called me out on.
Getting a foreshadow a what we think.
The community might pose for us if we've got 12, 15% of 3000 homes, that's going to be 345 hundred homes in that area and so we will have.
The ability to have enough staff to kind of maintain those properties and so we will do that will keep that for that very purpose. We want to have preferred rental pricing we want to have good resale should we choose.
To monetize that particular asset so we're conscious of that and now we don't want to be.
Slumlord in this area, we really very much like this community.
<unk> in the community we want to continue to.
Invest and continue to generate the returns on that asset. So good stewardship of an asset is the DNA of this company and you see it year over year, and what we're doing and how we're investing and so I would.
Can't.
Can't speak to what's going to happen in 20 years, when I may not be at the helm, but certainly the footprint of what it is that we're doing is to continue to invest in our assets.
Are the laws in Colorado.
Friendly or are they landlord friendly.
Good question, you know I think they are pretty consistent.
Yes.
The the eviction process is pretty consistent we haven't seen that we haven't had that experience.
But I would say it is probably landlord.
It's neutral it's not one or the other is it tends to be fair in the in the composition.
Single family I'm thinking back to that that Michael Keaton movie about that San Francisco product yet.
Blanking on what the movie was the nightmare tenant so far we are.
I don't think we have that view.
Yeah, well it's early.
And in the single family or do people maintain there.
<unk> themselves or is there an HOA that takes care of the.
Landscaping.
No.
Everybody maintains their own property.
Now some of the some of the some of the higher density like the Townhomes and the duplex is do have.
A separate.
Fee structure that does allow them to be maintained on a common maintenance basis.
But the single family detached are maintained by the homeowners.
Okay, Alright, thank you very much I appreciate it you bet.
Thank you our next pardon.
Pardon me. Our next question is coming from Elliott Nice Nice advisors. Please go ahead.
Good morning, Mark good.
Good morning Elliot.
I don't have a question.
But as you know who have followed the company closely for 30 years.
I have to say this has been the most productive Q&A session on accretion from what I've heard.
I'd just like to thank everyone.
Well thank you.
The nice thing about it is.
You don't we don't.
As you know our personality, we don't really take that lapse here at the end of the day I think what you've seen and I think what everybody is really catching up on is kind of the discipline that the.
Board and management have on kind of continuing to.
Do the right things test the market reinvest in those things that are working modify those things that are that.
That need some modification and so we're very thrilled to have this kind of liquidity moving into.
What will be an interesting market I don't think that there.
Overall interest rate market is recalibration more than it is anything else we've got.
Macro economic indicators that are much different than maybe what we saw in 2007, but more than anything we have the ability that we have strength going into it and so we're thrilled.
If this presents an opportunity for us youre going to see us take advantage of them.
I have seen you.
Take advantage things in the past I have every confidence mark with your.
Going to do it just keep up the good work that's on the back like that keeps me going.
So here we go.
Thanks, Alex good to hear from you.
Thank you.
At this time there appear to be no further questions in queue. So I'll hand, it back to Mr. Hurting for any closing comments you may have.
Terrific well I'd like to again, thank you all for your continued support.
To the extent that you didn't get an opportunity to bring in on a on a technical challenge.
Don't hesitate to give me a call I'd be happy to drill down on any of the specifics and.
We continue to stay tuned we have some exciting things that we're working on and we'll look forward to executing and bringing those two.
Increasing the value for all of our shareholders, so with that I'll sign off and thank you all.
Thank you ladies and gentlemen, this does conclude todays conference call. You may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation.
Thanks, Alex.
There were some laws that just path or Denver.