Pure Cycle Corporation [PCYO] Conference call transcript for 2022 q4
2023-01-10 19:16:04
Fiscal: 2023 q1
Operator: Good morning and welcome to Pure Cycle Corporationâs first quarter 2023 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require Operator assistance during this conference, please press star, zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Mr. Mark Harding, President and CEO of Pure Cycle. You may begin.
Mark Harding: Thank you Jenny. Good morning everyone. Iâd like to welcome you to our first quarter earnings call for our fiscal year 2023, and happy new year to you all. We have a slide deck for this. If you can surf over to our website at purecyclewater.com on the landing page, youâll find a button on there where you can click on that and then we will actually forward through the slides, but it will give you the ability to see some of the text in the slides within the presentation. With that, Iâm also joined today this morning by Kevin McNeill, our CFO, and Dirk Lashnits, our Vice President and Director of Land Development, who will also give you updates into some of the business segments and the financial reportings, and then at the end weâll have a brief Q&A for those of you who want to drill down on some of the specifics. With that, let me first start with our Safe Harbor statement, which Iâm sure most of you are familiar with. Statements that are not historical facts that are contained or incorporated by reference in this presentation are forward-looking statements. With that, weâll get the lawyers out of the room and weâll start. Iâll just be very brief on some of the overview of the company, but for those of you that are first-timers to the call or new to the company, we really operate on three primary business segments, really that are fundamentally interconnected to each other at the DNA level of the company. Weâre a water-wastewater utility company, where we own water in a water-short region here in the State of Colorado and the west. We develop those water rights and we are cradle-to-grave on the water rights, where we develop the wells, the distribution system, put that water to use in both the land segment, which is a parcel of property that we own that weâre doing a master planned community on and weâre building lots for our homebuilder customers, and then we are holding back some of those lots and building homes on those for the single-family rental segment as well, so each of those segments really are interrelated to a vertically integrated platform that we have from the water utility side. Moving on to just describe a little bit briefly about the water segment itself, we have just that whole network of utility operations, where we have the diversions for the water supply, whether those are taking water sources from our streams and surface water supplies, our groundwater supplies or our reuse supplies. We treat that water, we store it, we distribute that out to our customers. Weâre also responsible for some of the development of that distribution system pursuant to our design standards for our community, which is some of the lands that we have but others as well, so we have master planned service areas that are very valuable, which we will highlight a little bit later in the presentation. Our customers use that water, they give it back to us, we collect that, we treat it and then we reuse it, so we have a use and reuse model. Within that, we get some fee instruments for that on the water utility side. We get connection charges, which are a one-time connection fee which, between the water and the sewer tap fee, are around $32,000, $33,000, and those are paid by the homebuilder, our homebuilder customers, and those are typically added into the cost of the home, but that grants the service connection a permanent entitlement to the water supply and then we get usage fees for that, so we get a base fee which really amortizes some of the cost of operating and maintaining a system, and then a consumption charge which is a tiered consumption charge, and so what this tends to do is it tries to encourage conservation, because the more water you use, the more water--the higher the cost of the water supply. As you take a look at our water balance, what we look to do is really keep control over that drop of water, where weâre taking that from the supply, weâre treating it, weâre putting it into our system, weâre getting it back from our system, and then weâre reusing that, and so we do have a very closed loop system. We do lose a little bit to outdoor irrigation and some evaporation, but those trends are really decreasing and thereâs been a lot of press, Iâm sure much of you have seen, about drought and the vulnerabilities of water supply on the left, so the companyâs emphasis on technology and controlling that drop of water through its continuous life cycle is very important to our systems, and we want to make sure that weâre good stewards of this water supply. Taking a little bit of the infrastructure, you know, we build this infrastructure. Itâs long-lived assets. The water supplies certainly are long-lived - those are perpetual, and then you have a lot of the brick and mortar that weâre building associated with that, and really this is showing the growth of the company in the last five or six years, really showing about an 86% growth in the capitalized asset class and the various categories of that infrastructure, whether thatâs water and wastewater treatment facilities, transmission lines, wells, finished water storage, surface water, groundwater supplies, distribution systems, all the components of a water utility youâll find in there, so that will continue to grow as we keep seeing that. Moving into how the growth of the utility looks like, our current customer count is up to about 1,250 new connections. We measure that in terms of the number of single family equivalent connections on it, and so we have a combination of residential customers which would be a standard single family equivalent, but then we also have commercial and irrigation connections attributable to those, and so just because you might have one irrigation connection, that might represent as many as a couple hundred as you see down in Lowry, because we have large irrigation requirements down there of connections. We rate that to the number of how we build those out, so the number of base charges that we get for each of those. I talked a little bit about our residential connections at Sky Ranch, which is our development. We have our first phase, which is completely built out, 500 homes. We are into our second phase, very robust tap sales in our second phase - Dirk will drill down into that a little bit, but weâve got 124 taps there, and then a service area that we picked up a couple of years back, where we have more than 200 connections between the residential and the commercial connections as well. Moving on, another one of our big customers on the utility side is the industrial space, where we sell a lot of water to the oil and gas industry through a number of different operators. Our water supply, our service areas, and really--you know, the City of Colorado is located over a fairly prolific oil and gas field thatâs gotten a little bit more attention more recently with the shale oil play, but we are seeing operators drill a number of pads in a number of formations here that consume a tremendous amount of water for oil and gas, and so we continue to see those sales. This is the distribution of how those sales go by quarter, and as you can see, itâs kind of all over the map. Thereâs not a lot of predictability to it. They drill year round, they frac year round, and a lot of this is really dependent on a permitting process and how aggressive they are. The leasehold interest particularly in our particular field has changed hands a number of times, which is pretty typical in the oil and gas industry, but it started out probably in 2015, â16 time frame with a lot of the field assessment and field definition, and now itâs kind of moved into more of a well development, so theyâre developing the field, so they donât do a lot of exploration, they donât do a lot of changing to it. Each rig has a much stronger capacity to drill more wells per pad per year, and so what weâre seeing is when you get a dedicated rig out here, that can drill as much as 25 to 30 wells a year. Theyâre pretty significant wells. Theyâre two mile lateral wells on this thing. I think theyâre experimenting with some three-mile lateral wells on it, and so theyâll continue to increase the amount of water that theyâre using, depending on their laterals on it. This is kind of an illustration, if you look at the right-hand side of this, that will be kind of the Denver metropolitan area and kind of the growth of the metropolitan area. The two red areas or pink areas that you see in there, those are service areas. If you look at the one, kind of transition between the green and the grey there, thatâs our Sky Ranch project, which is ideally located - itâs on the I-70 corridor, and it really is in the strongest area of growth in the Denver metropolitan area, and we as a developer are really targeting the entry level housing product, which I think inures very well for us both in very strong markets as well as in challenging markets, and so Dirk will talk a little bit more about that. Then our service area at Lowry, itâs the very large pink area which continues to be really an untapped asset for us. The land is owned by the State of Colorado in trust for the public education system here, and itâs one of the most unique assemblages of land in the country. As you can see by the picture on the left there, most of the development has really come up to the border of that property, and so it depends on how the state looks to move forward with that, but thatâs certainly an opportunity for us over the next few years that we look forward to doing the utilities for that. Weâre the exclusive water-wastewater provider for that 24,000 acres of continuous property. That gives you kind of a sense of the utility side and some of the segments that we have in there. Iâm going to hand this off to Dirk Lashnits, who will talk a little bit about our land development activities.
Dirk Lashnits: Thanks Mark, good morning. Land development - so hereâs our flagship project, called the Sky Ranch. Every time I see it, itâs overall view, it always reminds me of the dreaded Tetris piece from that game. This is 930 acres, like Mark said, on the developing edge of development out on the east side of Denver. It has 3,200 residential lot capacity and 2 million square feet of commercial capacity, and weâre about 15 miles east of downtown Denver. Sky Ranch has probably got about a 10 to 15-year build-out that will be heavily dependent on our market conditions. Weâre going to build this out in multiple phases. Over the last probably four or five years, youâve heard us talk a lot about our first phase - thatâs the first 500 lots, thatâs pretty much in the books, and weâre now moving onto our second phase. That first phase is the block on the left side of the picture, and then our second phase is kind of the middle portion of the parcel, and then future phases will grow out to the east, and our commercial piece is the northern block adjacent to I-70. We plan to build about on average, probably about 250 lots per year out here, and weâll layer in our schools and commercial pieces and rec centers, all those things that go along with a master planned community. Phasing--as I mentioned, Phase 1 in the books, that was 500 lots. We also had our pilot program for our build-to-rent lots, so we had four occupied units in that phase, 100% complete. Then moving into our second phase, this is 850 lots. Weâre sub-dividing this into four sub-phases - thatâs 2A through 2D. We are well underway in our Phase 2A - thatâs about 80% complete, and weâll have that completed later this year, beginning of 2024. Weâve started our infrastructure for Phase 2B. Weâre hoping to start that in earnest quarters two through four of this year, and then the third and fourth sub-phases, 2C to 2D, weâll build out in subsequent years. Our Phase 2A, we just had our first few residents move in there, so thatâs exciting. We have delivered all our lots to the builder customers there. As you saw by our water taps number on the previous slides, those are indicative of the number of homes that the builders have started, so weâre right about that 120, 130 houses started. I think the builders have sold probably about 20, 25% of their lots, and theyâll look to have those sold out the remainder of this calendar year, and then weâll be looking to have that second phase come online for the next batch of lots to not interrupt that sales cycle. All right, so this is the details on the phasing. These are--this is the Phase 2, 850 lots broken down into the four sub-phases. Weâve got our lot revenues - those numbers are what we--our income from sales of the lots to the builders, and we have our tap revenues, those are the water and sewer connection components that Mark mentioned. Then we have our costs to develop the lots and then we have our reimbursable component, and those are the costs attributable to public infrastructure that are eligible for receivable reimbursement through public dollars, whether thatâs taxes or bonding. The graphs on the bottom of the sheet here, the bar graph and then the far right pie chart those are our builder breakdown, builder distribution. We have our four builders in this phase, and thatâs by builder, and then our--that center pie chart is our product mix, so those six slices of that pie represent our--the different product market, product segmentation which we think is a good balance of product offerings and good diversity. Moving onto some market conditions here, sort of the news of the day, start with our--the good, so the positive things. The pent-up demand for new home sales, we think thereâs good upside here. Back in the â05 - â06 time frame, there was about 1.4 million in home sales, and even in this latest upswing in â01 - â02--or â21, â22, weâre only at 600,000, so I think that represents good upside for us. In that first quarter, weâve seen the mortgage rates start to stabilize. Theyâre kind of hovering around 6%, and thatâs in historical norms. Lot delivery is still trailing home starts, so in other words, we are still selling more homes than we are delivering finished lots, so from our standpoint, being in the business of selling lots, thatâs good potential there, like to see that, that demand. Weâve got--our homebuilders in Sky Ranch are all ranked nationally. All four in the second phase are in the top 15, I think three of them are in the top 10, two of them are in the top five, so thatâs--
Mark Harding: Weâve got the top one.
Dirk Lashnits: Yes, the top one, top two even. Good for stability and in it for the long haul. Theyâve certainly seen some of the market swings and are good partners in helping mitigate that. Low unemployment, this is obviously a really important one, we hope that stays positive. House prices still appreciating by now, still a good investment. Lower average days on the market - houses are still selling pretty quickly and those are some typical numbers there. Last year, we were down--in Denver at least, we were under 10 days on average, and houses were selling above asking price sight unseen, day of asking. A year ago, we had that peak and even today with some of the slowdown, weâre still seeing, based on market, in the 20s, so thatâs all still good outlook. Onto the bad, or opportunities that we have here, again the abrupt uptick in interest rates kind of shocked the system, and I think weâre slowly adjusting to that. Again, weâre still in kind of historical norms. A lot of the important metrics still trending downward - builder confidence is down, applications for mortgages are down, buyer traffic in the model homes is down, home sales are all down, and then combine that with higher material and labor costs and then our cancellations on contracts are still up. You know, I do think at the end of the day for us, houses are too costly. We need to figure out ways to recalibrate that. The land development side that we do is a link in that chain and how do we adjust for those changing markets, and the way we do that is mostly on a timing--from a timing standpoint, and thatâs really our challenge, is trying to time our deliveries. We have a long lead time in the development business. Weâre probably anywhere from at the earliest six months, but more likely a year out from when that demand comes online, so we have that challenge on trying to find the right time to build our lots. Here is just a slide, itâs a couple of the--it touches on the job growth chart, interest rates and some sales information. Back to Mark.
Mark Harding: Iâm going to push this over to Kevin and heâll give you an update on some of the rental segment, and also just some brief stats on the quarterly performance.
Kevin McNeill: Thanks Mark, thanks Dirk. Yes, so our single family rental, our newest division that we launched in 2021, we continued growing it. Weâre up to--weâve got four houses completed now as of December 15. Weâve got 10 more under construction, and those will be delivered throughout the year, throughout our fiscal 2023. The four that are rented are all rented from $2,800 a month to $3,000 a month, pretty stable renters, we think, so still very optimistic about this market. With this new segment, especially with interest rates continuing to climb, with home values continuing to stay high and the slowing of that market, the rental rate market in Colorado especially is going to be very strong. This is some projections that we put together using our fiscal year from last year, our 2022 results, just because the first quarter is a smaller piece to look at. Weâve projected out with 14 home and 50 homes. Fifty would be the entire Phase 2, 46 homes there and four homes in Phase 1. What you see is our current projections, obviously depending on cost and interest rates and everything else, is about a million dollars a year, just short of a million dollars a year in free cash flows from operations of just the rental units. It doesnât include obviously overhead or anything like that, but--. The financial results for the quarter, it wasnât the strongest quarter weâve obviously had. There was, from a water-wastewater standpoint, as Mark touched on earlier, we continue to invest in the water infrastructure, a little over $67 million now in water rights, which we can pass that water rights themselves and supply infrastructure to bring the water to our customers. We delivered about 67 million gallons this quarter, which is down a little bit from last year, which is predominantly down because there wasnât a lot of oil and gas activity during the quarter, and also construction activity was down, so the Phase 2A being done and 2B not really started yet, we didnât sell as much water to construction activities. Dirk obviously touched on the land development side, which youâll see when we get to the balance sheet and income statement as well, and then single family rentals continued to grow. From a graph standpoint, you can see obviously the revenue and segment revenues were down for this quarter compared to each of the last few quarters. One thing Iâll point out is in that Q1 2020 quarter, that was kind of an anomaly. We recognized a bunch of revenue in that year to catch up some contingencies that we had, and also there was a big--there was a lot of lot sales that year. Phase 1 was going very strong, Phase 2A was getting ready to start, and so it was just a--it was a great year. This year, youâll see the revenues are down, predominantly again because we talked about the housing market slowdown. We delayed a little bit of Phase 2B in order to match our lot availabilities with their--with the homebuildersâ sales, so that was somewhat intentional, but obviously with the housing market and interest rates, that was hard to control. From a net income standpoint, youâre going to see the same thing, that income dropped during the first quarter compared to the other quarters - same reason, revenues were down. We were able to offset some of the revenue declines with a little over a million dollars in surface use and other payments from oil and gas companies, which we think is a pretty strong indicator of a good 2023, we hope, for fracking and drilling, and continuing out throughout the rest of the year throughout our service area, and then obviously thereâs our diluted earnings per share. There will be a little more information on this coming out when we actually file the Form 10-Q, which weâll do in about four or five years, which we anticipate filing here in the next few days. A few upcoming dates - we have our annual shareholders meeting tomorrow, which is--you know, there wonât be any big presentations, itâs more a formality, so not expecting a big event for that. Our 10-Q, like I said, the filing date is January 17, but we file before then, and then if you havenât seen it, our ESG report, we launched in November so thatâs on our website, gives you a little more detail into our--what weâre doing from an environmental standpoint, how weâre trying to be good stewards of the environment and our money and the shareholder money. Real quickly, the balance sheet and income statement, you can see we had a pretty good pick-up in cash last year. The Sky Ranch cap did a bond offering and was able to repay a little over $24 million in total to us of reimbursables, and so we invested that in some short term treasuries and capitalized on some of those interest rates, continued to grow the balance sheet in terms of assets, and investing in new water rights and infrastructure. Youâll see the income statement, obviously I wonât spend a lot of time here, but it will come out in the Q, and then the press release we issued last night has a lot more information on it, but you can see the revenue decline that we discussed predominantly in the land development, lot sale area in that commercial water sale area. Our overhead stayed fairly consistent - you know, weâre keeping our headcount strong, and then you can see in that other net, the $1.2 million of other income, that was basically surface use payments and future--in anticipation of future drilling and oil and gas operations on our land. With that, Iâll turn it back over to Mark for closing statements and questions.
Mark Harding: Thank you. Okay, so what are our takeaways here? I guess takeaways for management would be the stewardship of how we handle our business model. Weâve got very valuable, very low cost basis legacy assets here, both in terms of the water and the land side of the equation, and what weâve done successfully is really make sure that we carefully position you all with your invested capital to market exposures, and so one of the ways that we do that is through how we handle our builder contracts, and those of you that are familiar with the company kind of had this appreciation, but we have a lot delivery agreement structure where our builders are working in partnership with us on delivery of this very expensive infrastructure, when youâre in a high cost business where weâre delivering horizontal infrastructure for master planned communities and then the housing side of it, the vertical side is handled by the homebuilders. But that infrastructure is very expensive, and we want to make sure that neither we nor the builders, our builder partners have too much exposures in softer markets, and weâre in a softer market right now. Really, the validation of that business model is the fact that we donât have any exposure in there, right? As you saw in the presentation and Dirk highlighted, weâve got about 15% of the Phase 2B, which really would be the grading and the over-excavation components of that, that weâve invested in, and thatâs been covered by our homebuilder customers, so thatâs not a significant investment in there. Then as their lot deliveries, and this is about pace, right - this is about how many lots they want to have in inventory because they want to match their sales cycle, and maybe in Phase 1, each builder was doing seven to eight homes a month, so that absorption was pretty high. In Phase 2B, weâre seeing maybe three, but we are still seeing that and itâs three homes per builder, so that gives you a cycle for that. We find ourselves in the right market segment, that entry level product, and so as the homebuilders come out there and look for buying opportunities, Dirk really highlighted the continued demand for single family homes in the marketplace, and thatâs still--weâre seeing that in the marketplace, weâre seeing that in terms of the builders and the building permits that theyâre pulling and the spec homes that theyâre building out of Sky Ranch, and then also that theyâve having sales, you know, that weâve got customers that have moved out there in the last 30 days and continuing to really see that absorption. We continue to inject value into the community. Weâre opening up our school, which is going to be a tremendous asset for them because itâs a local school, a charter school that weâve partnered with a national charter operator out of Michigan - National Heritage Academy, and they have a website, the Sky Ranch Academy has a website. You can take a look at that, but really good delivery device for education for new families out there. Then taking a look at kind of diversity, one of the things that we like and Kevin mentioned was single family rental business. Thereâs still a ton of demand for more space at your home because of the work balance, the work-from-home balance. Youâre seeing a lot more dual income families looking for more space so that they can have offices at home, and our home product--you know, weâve diversified from either a 45-foot lot or a 45-foot lot in Phase 1A, and now weâve got six different product categories, and thatâs inuring very well to the market segment. You have six different price points in there as opposed to just a couple of price points, depending on finishes, so a lot of those design features that we had in our master planned community really is inuring well and will stand the test in both good markets as well as headwind markets. Then ultimately continued sales of water in industrial operations, so weâre going to see a little bit of uptick in oil and gas demand, but thatâs really a steady-eddy customer for us. We like making sure that we supply that segment water supply and then can convert that water supply over into the potable supply, so thereâs a really good balance in how weâre extending and developing into these assets. Then continued growth - you know, we continue to grow the company, small tuck-in acquisitions of assets. As youâve heard me talk about in prior acquisitions, weâre on the hunt for more land and to really kind of build our land portfolio. Donât have anything really substantive to talk, so Iâm going to forecheck some of your questions on whatâs the update on acquisitions for land development. There are a number of opportunities that weâre pursuing and weâre very aggressive about doing that. One of the nice things we have is we can be aggressive about that - you know, we have a very liquid balance sheet. Weâve managed this capital well, weâve been disciplined with our board to be making those investments and then also making investments in ourselves with the stock buyback, so those are kind of the capital allocation structures for us. So with that, Iâm going to turn it over to the lovely Jenny in Scotland, who is waiting for her lunch, and see if thereâs any questions that you might have on drilling down some of the detail.
Operator: Thank you very much - I am indeed waiting for my lunch as itâs five past two. Your first question is coming from Robert Howard from Boiling Point Resources. Robert, your line is live.
Robert Howard: Good morning.
Mark Harding: Good morning Robert.
Robert Howard: I just had a--hi, I just had a quick question on the--for the new customers that are getting added on. You talked about $1,500 of annual revenue from the water customers when they come on. I was just wondering, at least maybe at Sky Ranch, as youâre adding customers, how much additional costs might there be? Are the--you know, is the infrastructure and kind of everything in place so that $1,500 is really kind of almost all incremental, or is there additional costs that kind of get layered on as youâre still kind of building up stuff, or have you kind of reached a critical mass when maybe the costs are decreasing a lot slower than they were earlier in the project?
Kevin McNeill: Thatâs a good question, and really we segment some of that brick and mortar cost for adding those connections into the tap fee charges. Typically, the way we see it is that the connection charges, that $33,000 for a tap fee charge, we build the wells, the treatment facilities, all of the brick and mortar stuff that delivers that water to the customer through that capital allocation base, and a lot of that is sub--is early on investment that weâve had, and then also what we see is the oil and gas revenues tend to allow us to expand that system apart from the tap. The way we usually look at is thatâs a 50% margin business, but it becomes a little bit better margins because some of the oil and gas revenue, we can allocate to expanding that supply side in advance of those tap connections. When we get the actual connections, the $1,500 connection per year which is really your point, there are additional costs in that because we have an operating entity where weâve got chemical costs to make sure that we disinfect the water, we have lab costs because we have to continuously sample our water and make sure that our water meets all of the primary and secondary clean water standards, so that business we typically also look at as a 50% business, 50% margin business, and itâs not so much on the capital side as it is on the operating side. We have operators that are making sure that theyâre going out, making sure the system is operating correctly, taking a look at whateverâs occurring daily, nightly, weekly on those sorts of things, in addition to really the lab costs. Thatâs how that divides out. Thereâs not a significant uptick in that - as a matter of fact, itâs usually a little bit better on the front end because everything is brand new and it operates the way itâs supposed to. But we really--we look at those margins as about those 50% in each segment of that, if that answers your question.
Robert Howard: Yes, sure. Then just that $1,500 number, I think you guys have kind of been talking about that for a number of years. Is there pressure on that, or I donât know, is the market rate elsewhere in Denver, are other people charging that amount, or is there possible pressure for that going up, just inflation in general? How are you able to kind of keep the customer rates flat?
Mark Harding: Yes, and I would say thereâs two rates there. Thereâd be the tap fee rate and then the usage rate. The tap fee rate probably has a little bit more upward mobility just because of the scarcity value, and as you continue to hear about the competitiveness of water rights and the incremental costs, because we have to go farther and farther out to reach for those water supplies, Iâd say our tap fees have a little higher upside than, say, necessarily usage rates. The usage rates will continue to grow. We continue to grow those for making sure that we keep up with our inflation costs as well as anticipatory costs for whatever the evolving regulatory climate is going to look like, but thatâs a little bit more inflation-oriented as opposed to the value of water in water short areas and the cost of water, acquiring those water rights from farther and farther areas. When you take a look at those two revenue streams, thereâs probably a little more strength in the tap fee side, which is going to be our big number. You apply that to our portfolio - we have 60,000 connection worth of that, so thatâs over $2 billion worth of revenue potential over time as opposed to that $1,500. Thatâs been a stagnant number. Weâre probably a little bit above that - thatâs just been a metric number that we continue to look at. I would say that that continues to go at 3%, 3.5% per year.
Robert Howard: Okay, great. Thatâs all Iâve got. Thanks a lot.
Mark Harding: Thanks.
Operator: Thank you very much. Your next question is coming from Bill Cunningham, who is a private investor. Bill, your line is live.
Bill Cunningham: Hi Mark, how are you doing?
Mark Harding: Just living the dream, Bill!
Bill Cunningham: Good. You know, on the last conference call, I had made the comment about the unusually good results, which were a result of lot sales and tap fees, and we talked about how earnings are lumpy so we might not see the same results quarter to quarter, and this quarter proved exactly what you were talking about. I kind of did some penciling out of things ahead of time to kind of figure out what your numbers might be and thought it was 50/50 as to whether youâd be reporting a loss or a profit this quarter, so it was kind of a pleasant surprise that you actually squeaked through with a bit of a profit. Hopefully nobody else was surprised with the results being not as good as the prior quarter.
Mark Harding: No, thatâs true, Bill. You know, itâs cyclical in a couple of ways. One, because of the way our year-end reports, that puts us into--and where we report, right? I mean, Denver, as most of you all found out, Denverâs a great place to live except maybe December-January-February, so cyclically we have--and weâre in the outdoor business, right, so a lot of our water supplies, outdoor irrigation, outdoor land development activities, outdoor sales for single family homes are all cyclical in the winter months. It is pretty predictable. We are grateful that we were still able to be profitable, and we will continue to strive to do that quarter over quarter.
Bill Cunningham: I do have a couple of particular questions for you. One is I was looking at the top fees sold in the totals - your 10-K at August 31 said that 618 taps had been sold in Sky Ranch. Your press release said four more were sold this quarter, but then you reported a total of 766 taps that have been sold so far in Sky Ranch, so Iâm confused on the difference between the 766 and the 622.
Mark Harding: Yes, and really what we--and this was a real strong push to normalize the number of tap connections. Thereâs a difference between the residential connections, and then we have the CAB, the governmental entity thatâs responsible for the parks and the open space and the outdoor irrigation, and they pay a tap fee but theyâre only connection, and so thatâs the difference. What youâll see is when we report the number of irrigation connections, thatâs a higher number, and so--and weâve been really trying to normalize that for everybody so that people like you, who really drill down into the numbers, can get a feel for that $1,500 per connection per year amount, what is that applying to. Thatâs--now weâre really trying to give you all a little more clarity, is this applying that to 1,246 number of connections. When we send out a bill, thatâs not 1,246 bills because there may be one customer that might have 50 of those connections, but that equates out to the same number of connections, so thatâs what weâve tried to--I was figuring, would I do that statistic this quarter? Iâm like, Cunningham is going to call me out on this thing! So Iâm glad you did, I appreciate that, but we did that with you in mind specifically, for the detail orientation as well as Robert, who came back and said, okay, Iâm really tracking this $1,500 per connection. We really want to give the market a better, clearer understanding of how to compute that number.
Bill Cunningham: Okay, great. Thank you. Then also, I have some questions on the different builders in Phase 2A. There seems to be a big difference from builder to builder as to what theyâre doing there. I mean, KB looks like theyâre going gangbusters, where theyâve sold 27 homes already, which I think is about two-thirds of their total, and Challenger with their homes seems to be doing okay also. Lennar has just started selling their single family homes, but their townhomes are still listed as coming soon--
Mark Harding: Pending - right, right.
Bill Cunningham: --and then D.R. Horton, we had talked about last quarter, where I guess they were having to do some revisions to their building plans with the County and hadnât started yet, so Iâm just wondering what might be going on with a couple of the laggards here with Lennar townhomes and the D.R. Horton homes.
Mark Harding: You know, those are the two largest builders that Dirk was referring to, and Iâd say they all kind of look at their own scheduling and this is new for both of those builders. This is kind of a new project that theyâre in, and I think Lennar has got--theyâve probably got--of their townhomes, theyâve probably got 18 spec townhomes under construction, so what theyâre really--more Lennar than D.R. Horton, are really pushing for the seasonal downtime where they can build and then hit the market in kind of the March cycle with a ton of product. They like the product that they have because itâs very price-sensitive product. Those townhome products are going to do extremely well, and I think what Lennarâs forecasting is we want to have a good inventory of those. I think we showed some aerials of that, and if we didnât do it in the earnings presentation, jump on the website because we throw up a lot of our drone shots on that. You can see the bulk of the starts and the numbers out there, and I think weâve got more than maybe 60, close to 70 vertical construction out there, of homes out there, and youâre right - KBâs done very well out there because theyâve got a paired product. Again, thatâs higher density, better price points out there. Challenger is very competitive on the price, and then Horton--you know, theyâre pulling lots of taps, so we know that theyâve got lots of building permits that theyâve got teed up, and then theyâre just going to line build. Theyâre just going to throw everything theyâve got at it, do it all at once, and theyâre pretty stylistic for the builders, each of .
Bill Cunningham: Well, itâs great to know that Lennar is actually building the townhouses right now, because just looking at the website--
Mark Harding: Yes, theyâre very aggressively building.
Bill Cunningham: Wow, okay. Thatâs great, because when you look at the website and see Coming Soon, you just figure that nothing has happened yet, so--
Mark Harding: No, I think theyâve got four six-packs under--
Bill Cunningham: --thatâs very positive news.
Mark Harding: Yes, yes.
Bill Cunningham: Okay, great. Thank you very much, Mark.
Mark Harding: You bet.
Operator: Thank you. Your next question is coming from Bill Miller, who is a private investor. Bill, your line is live.
Bill Miller: Hi there, Mark.
Mark Harding: Morning Bill.
Bill Miller: Happy new year. I wonder where we are with two things: one, you at one time indicated you might buy back some of the lots for the build-to-rent part of your business; and secondly, where do we think we are with the I-70 development, which can either be sometime near term, and I wondered whether you could give us any indication of how soon that might take place.
Mark Harding: In terms of the buyback and some of the other phases of the lots, weâre moving forward with Phase 2B, weâre recording our plat this month, and then weâll get a sense from the builders. I think the builders were really hoping to wait to see how their traffic activity was going to look for the first part of the year, and so weâve reached out to each of them and let them know, you know, as you look to your close, if you have--if your absorptions extend yourselves out a little bit farther than you would otherwise want to inventory, we will pull whatever number of lots back from that. All four of our builders have that offer, weâve made that offer to them. Theyâre all under contract, so Iâve got to work with them on their cooperation, but Iâm pretty confident weâre going to claw back--not claw back, weâre going to be invited back in a couple of those from some of the builders, because itâs a win-win for them. They can not close on that lot and then weâre talking with them specifically to say, but you can still build the house on that. Thatâs an opportunity for them not to have to--it really is a win-win, right? They can manage their cash flows so that they actually can still show positive sales on Sky Ranch to a customer that they know and they understand, which would be us, as opposed to waiting for traffic and contracts and cancellations. This is a great opportunity for both us and them to really continue to build the portfolio, and weâre seeing extremely strong demand. Every time we finish one of these houses and we put it up, it is gobbled up. We put it out on Zillo and itâs just--you know, we get competitive people looking for rental on this stuff, so we still are very aggressive. We still like that segment, weâre moving forward into that segment. The question would be, well, can we do more in another phase, get out of the 850 and start another phase? We can, but that puts us in a bit more exposure, where weâre actually inventorying all those land development opportunities, and we do have a balance sheet that can do that but at the end of the day, weâre also balancing that against opportunities for acquiring other land and making sure that we continue to build and grow the company, so there is balance there. Second question in terms of the land development side on the I-70 corridor, I think youâre probably referring to the Lowry project, and we continue to see a lot of pressure for entitlements. Everybody wanted more and more finished lots in the marketplace up through what was this interest rate environment, and us being able to time the market, where weâre delivering lots, not throwing 850 lots to builders for them to inventory but doing this on a cyclical basis, where theyâre helping us pay for that hold cost as well, certainly is a proven delivery model for land development. Weâll see with the weakening of housing how that cycle comes into impact Lowryâs timing and other land development in and around Sky Ranch that weâre also looking at acquiring, so weâre cognizant of all those elements. Our crystal ball isnât any clearer than the market, probably even cloudier than some of the experts in the market, but what we try to do is make sure that weâre making informed decisions with our capital allocation plan.
Bill Miller: Well, what about buying back stock under various informed decisions?
Mark Harding: Thatâs a great opportunity for us, and if the market continues to frustrate that stock price, weâre there now. Weâre ready to do that. Do I have an answer for you at what price do we buy stock? I donât.
Bill Miller: Okay, well sounds good. Keep going.
Mark Harding: Thank you.
Operator: Okay, we have now reached the end of the question and answer session. I will now hand back over to Mark for any closing comments.
Mark Harding: So in closing, I guess I want to continue to thank you all for your continued support and confidence in our business, our business model and our team here. I want to recognize and give a shout-out to our board of directors - theyâre an outstanding group of folks that continue to give our management team very sound and reasoned and expert advice into all business segments that we have. Weâve built a great board that has disciplines in each of these to help us continue to evaluate those decisions and make good decisions for our investors and our invested capital. As Kevin mentioned, we have our annual shareholder meeting. Thereâs not anything exciting on the shareholder plans, but if you havenât voted your shares, please vote them. We look forward to an update sometime in the April timeframe to give you a little bit more detail on the markets. If you werenât able to ask a question or if youâre listening to this on a replay, donât hesitate to give me a holler and weâd be happy to give you any color or any information that would help you guide decisions in ownership of the stock. With that, I will close, and thank you all. Look forward to speaking to you again soon.
Operator: Thank you Mark. This concludes todayâs conference. You may now disconnect your lines at this time. Thank you for your participation.
Mark Harding: Thank you Jenny.
