PCYO - NASDAQ

Good morning, everybody, and welcome to the Pure Cycle Corporation's Second 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. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Mr. Mark Harding, CEO and President of Pure Cycle. Mark, over to you.

Thanks very much, and good morning, and welcome to our second quarter 2023 earnings call. A couple of housekeeping logistics, if you haven't already, we do have a deck for this presentation, which you can find on our website. If you go to purecyclewater.com, it will be in the Investor tab. You can click on that, and follow along the presentation with the slide deck. Our first slide is our Safe Harbor statement, which includes fact that historical statements that are not facts contained and incorporated by reference in this are forward-looking statements. I think you're all fairly familiar with the Safe Harbor statement, but with the lawyers out of the room, we can move on to the presentation. What I'll do is give you just a very quick overview of kind of the business enterprise for those of you that are new to the company. We operate in kind of three complementary business segments. Really, the foundational segment of that is the water and wastewater resource development segment. What that is, is we own water supply in the West in an area where water is very limited and a very valuable resource. Here in the Denver Metropolitan Area, we've accumulated a fairly large portfolio, around 30,000-acre feet of water that -- for our purposes and for your-all's purposes, allows us to provide water and wastewater service up to 60,000 single-family equivalents. And so, when we take a look at a customer, whether that customer is a residential customer or a retail customer or commercial customer, we convert that over into what would be the average demand and the average revenue cycle for a single-family equivalent unit. Some of the unique elements of water here in Colorado are -- is its connection with not just the water utility and the fees that that generates, but also what it does for land development interests and how water and land entitlement are tied just because of its limited availability and its difficulties. So, we have a lot of connection between that, not only with what our other business segments are, but what we do here in the West. And then, we provide water to the full spectrum, whether that's going to be a residential user, a commercial user, parks and open space, or industrial users like oil and gas. Our second segment is the land development segment, where we own about -- it started out as about 930-acre parcel, and we've been developing that as a full master plan community. It includes about 3,200 single-family residential units. It is right along the Interstate 70, right in the Denver Metropolitan Area. It is one of the more ideal locations where most of the development activities are occurring in the Denver area, along the I-70 corridor with about 2 million square feet of retail, commercial and light industrial at the site as well. And we develop not only the land, but we develop the utilities there. So, we're vertically integrated in that side of the business. And then, our most recent segment, which I'm going to highlight a little bit more in the presentation are our single-family home rental segments, where we're retaining some of the lots that we're delivering to homebuilders, and then, building homes on those lots for our own portfolio where we're renting them out to residents and folks that are looking for expanded housing for their needs. So, just a little bit more on the water utility segment quickly. We're kind of cradle to grave. You've heard me talk about that before where we own the water resource and we develop the wells, the treatment facilities, the distribution network to deliver that water to our customers. They use that water. We collect that water back once they turn it from water to wastewater. We treat that wastewater. And have really a state-of-the-art treatment facility where we take that water from wastewater and treat all the way back to a reusable quality. And we have a dual distribution system within the community that we're building where we're redistributing that to irrigation customers. We don't do irrigation at the single-family house level, but we do have the parks and open space areas and school areas, that all operate off of that reuse system. So, we get to resell that water back out. How we generate revenues from that? We have two sources of revenue attributable to that. We get a connection charge, which we call a tap charge. So, we get water and tap fees on that. So those combined fees are right around $33,000 per connection. And then, we get usage fees, which are that recurring revenue that is really in perpetuity. We get a base fee whether you use water or not, and that's really to sustain the operating cost for the system. And then, the consumption charge, which is a tiered scale where the more you use the more incremental cost per gallon that you see on that. And those fees generate about $1,500 per unit per connection about $1,000 a month -- I'm sorry, $1,000 a year. There are some customers that get $1,000 a month bills. They're very -- not necessarily in our community, but in the Denver Metropolitan Area. Water does get that high here. But we generate in our community and the size of our lots about $1,000 a year for the water side and about $500 a year on the wastewater side. Taking a look at kind of -- if you look at this kind of on a sustainability basis, it's really a water balance system where we're using the water, we're diverting it, whether we divert that from a well or from our surface water features, we treat that, we deliver that to our system. There is a bit of outdoor irrigation, but we're really, as a water community, continuing to lower that loss parameter, whether that's evaporation loss from our storage of our supply -- on surface water supplies, but whether that's outdoor irrigation. We're seeing our outdoor irrigation continue to decline at the residential level just because of the lot sizes and really living in a semi-arid area. Most consumers are lowering their overall consumption of turf and outdoor irrigation, which is an advantage to us, because we get that water back. We can treat that water. We can reinsert that into our supply and continue to be able to use and reuse that system. So, it kind of gives you a feel of ideology of how we manage our water systems. The next slide, we really continue to invest into our water system and our water infrastructure. So, we continue to grow those assets, so that we can continue to deliver that. This is kind of an inventory of what it is that some of those investments are. Taking a look at the customer base, we continue to grow our customer base. We've kind of got three areas of concentration within either our service area, which is the Lowry Ranch, certainly our largest, it's about 24,000 acres along the Metropolitan area; the Sky Ranch project, which is where we also own the land and then also water utility that we acquired about five years ago that we continue to build out and deliver water to each of those customers. And really whether it's residential, commercial or industrial, we're able to continue to grow that base through both tap fee connections as well as the recurring revenue from the delivered heated water sales. Next slide, one of our industrial segments here where we're delivering water to the oil and gas industry, bit of a seasonality in this. We just came through the winter, and Colorado still has the problem that water tends to get a little stiff in the winter. And so, the deliveries of that are typically a little bit lighter in the second quarter and we saw that continuing this year. Really since the end of the second quarter, deliveries in March and April, really through May, June, July, significant demand in the oil and gas sector, a lot of stability within pricing of oil and gas, continued expansion within the oil shale play. And really, we sit right on top of this oil shale play here at the Southern Wattenberg Field sits right on top of where our water supplies are. So, it's very efficient for us to deliver those water supplies for our oil and gas customers. So, you'll continue to see significant growth in this segment, and we do forecast this year to be one of the -- another continuing year of growth in expansion of record year for water deliveries for oil and gas. Even though this doesn't show that, but really is a little bit of the seasonality into it. This kind of gives you a bit of proximity of to where we are in relationship with the metropolitan area. We're kind of on the east side of the metropolitan area. Substantial amount of growth to this area in recent years. And it gives you the picture of not only how we position ourselves on the water utility side, but also from a land development side. Sky Ranch is up at the top. You can take a look at those kind of the red-shaded areas. The green line will be the Interstate 70, and you see where we're really kind of building out that. We're right along the Interstate. We have quarter-mile frontage along the Interstate. And then, kind of where our service area is positioned, you have a lot of the Denver Metropolitan Area, growing out into the Southeast area, and really positioning our service area, which is owned by the state of Colorado. It's owned by state school trust. And so, they look at what they would like to do with that property to continue to generate revenue for the K-12 education system. So, it gives you a bit of proximity on that. So, I'm going to roll into our land development segment. I'm going to turn it over to Dirk Lashnits, who's the Vice President of our Land Development segment. He's going to give you a bit of an update on our activities on land.

Thanks, Mark. Good morning, everyone. For our regular listeners, this is going to be a little repeat information and a little redundant to what Mark already talked about. This is our Sky Ranch project located on the east side of the metro area along the I-70 corridor. You can see that running along the north side of the screen there. 900 acres with residential and commercial use, and situated on the frontage of the new development area. Part of town, switch over. So, we started development in 2018. We have our first phase in the books, that's the Western square on this image here, and that was about 509 lots. We've started our second phase, which is roughly 850 lots that we've subdivided into four sub phases. Those are the phases 2A through 2D, roughly 200 lots each. Our first update 2A, all those lots have been delivered. We've been building those out. Our second quarter was pretty uneventful through the winter. We had a pretty brutal winter. And so, we're working on the infrastructure for that 2A phase, and then starting to kick off our Phase 2B. So, we did -- probably our biggest milestone in this period was the award of our utility contract for Phase 2B, that's a $4 million contract for our water and sewer infrastructure that we're going to be kicking off here. We also have been making some progress on our K-8 charter school. That school site is shown on here. That's going to open here in August. K-7, looking at about 300 students starting there in August. That's pretty exciting. We've also expanded our rental portfolio. So, we have some -- adding some lots for that bill to rent segment that Mark mentioned. And then, you can see our builder partners listed here. We got a pretty good group -- good diverse group to help us build our lots. Next slide is kind of the numbers breakdown. You can see the diversity in our product lines. A big change we made from our first phase to our second phase was going from two product types to six product types, really trying to optimize our land and get absorptions out as quickly we can, which we did achieve from our standpoint in terms of delivering our lots. We were able to do takedowns about twice as many lots as our first phase. These have kind of come online from the builder standpoint right in the housing recession. So, we're [indiscernible] to see if the end of that deal with selling to the retail buyer is going to -- how that's going to work out. You can see our numbers for each of the sub phases there. And then, we'll carry over from last quarter as well. We -- the gist of it is we still think that there's lack of supply of homes in this area. So, we're here to supply that. We have to get partners to help us build that out. And then one of the new interesting tidbit that we're watching this existing home inventory with pretty interesting phenomenon with, I don't know, something like 70% or 80% of existing mortgages having current interest rate of less than 4%. So, we're not expecting to see a lot of existing houses turn over and come on to market. So, really the inventory issue is -- for any new homebuyers is going to be new builds. So that's going to be really interesting to watch, and we think we're positioned well to supply that demand. On the bad side, the interest rates, they're still hovering around the high [6%-s] (ph), which is still even below average rate and probably move that into like almost a good category. I think the issue is just the abrupt uptick on those and how everybody's kind of the perception on that and how everybody is recalibrating to the newer higher interest rates. But then, this quarter, we did hit some slow selling season. So, we did have a pretty typical slowdown in traffic and contracts. And hopefully, next quarter, we'll have some new information on how the spring selling season goes. Next slide is just a quick shot of our school that we mentioned. So, this is the charter school. It's under construction opening in four months. You can see it's got a roof on and windows on, all dried in, adjacent there to our first 2A sub phase there. That's about it for land development. I think Mark wanted to -- Mark, if you want to talk about our rental segments, I'll turn it back over.

Thanks. Yes, I just want to highlight a little bit of the activity. One of the key takeaways in this quarter is, as Dirk was mentioning, our second phase of this, we divided up that into four sub phases, where we delivered the 229 lots in that phase last summer. And that was very timely for us. We delivered that right before some of the heavy weight started to hit the market on that. And it was a timely thing for both us and our homebuilders. And if I take a look at anything on the delivery of our model here, one of the things that as we look to deliver lots for our homebuilder partners on this, we try to do this on a real-time basis, where neither we nor our homebuilder partner retains a lot of that inventory. So, as we're delivering each sub phase on there, we can accelerate or we can decelerate depending on market conditions. And when we delivered those, we were working towards the next phase of that. Our partners -- our homebuilder partners asked us to kind of give them three months over the winter, which is typically poor seasonal time for us. And then, what we were looking for was because of the success in our single-family rental market, we were looking -- we had reserved 40 lots in our whole second filing, 10 in each sub phase of this thing. And we have 10 units under construction in where we're at now, delivering lots right alongside our homebuilder partners for rent and therefore sale product. And we were interested in increasing that portfolio in the subsequent phases. And it turned out to be a real opportunity for both us and the homebuilder partners, because we would be able to go to them and say, "Hey, you know, here are the lots that we've retained previously. We'd like some additional lots right next to those. And in fact, we could be one of your customers. You can roll into this next phase and start out with instead of maybe 10 homes, we were looking to increase that inventory up to 20 homes in the second phase -- in the second sub phase, and really give our homebuilder partners an advantage where they could pre sell those and fee build for us on that." Now, we're still working on those contracts with fee build and we're still working with our existing partner. Some product lines fit within that portfolio. Some product lines don't. But that's a great opportunity for us. So, one of the takeaways from this quarter is that we did more than -- I think we were more than doubling what we're expecting to deliver on our fee build for all of the second phase. In this particular sub phase, I think we went from 10 units to 17 units, maybe up to as many as 20 units. We're working on a few more of those lots. Our interest in this is really, why we're in this segment, is because it allows us to leverage the things that we're already doing. We're in that the business of delivering a master plan community and we're enhancing the value of the community with everything that we do out there. And each phase of this gets better and better for the community, whether that's parks, open space, a charter school, bringing on commercial, all of that is increasing the value of the community, increasing the value of these homes. And this is really a tax advantage way for us to continue to grow the company, because we're able to cover the cost of the horizontal improvements from the sale of the "for sale" lots, and then be able to go vertical on that with a very advantageous way of having positive cash flow for the renters, not only covering the mortgage on it, but because of the equity value that we're rolling forward into the lot and the water utility connections, it gives us free cash flow on each unit. So, it's very strong for the company, it's strong for the income statement, it's strong for the asset growth, because we continue to see good asset appreciation for every individual loss. So, it's a terrific opportunity and really one of the takeaways are that we were able to successfully almost double the portfolio for that as we roll forward. It gives you a few metrics on where these lots are, how they're contiguous with some of the other areas that we're building. We have debt financing. So, the vertical cost on this, we really have the advantage of being able to finance that with pretty low cost, even still taking a look at the mortgage rates. Our mortgage rates on the lot that we had are at pretty advantageous rates. Those rates have gone up a bit, but there's still mortgage type money. And that's still some of the cheapest money in the market. As we're building these, we have about a $300,000, $325,000 financing component. So, we're at 68%, 70% loan to value on that. So, the bank loves that. And then, we have tremendous equity in it. So, a lot of these that we're delivering are close to $550,000. And you're seeing that $550,000 continue to appreciate at a significant rate, 4% or 5% per year. And then, the price range for our rentals is very competitive with what people are seeing in apartments and multifamily. So, a bit more space, certainly a lot more amenities for lifestyle issues. And so, we are finding continued demand. We have ton of applications for everything that we're bringing online. We get multiple qualified applications for that. So, we're very excited about that. Really, it's kind of a win-win working with both us and our builders on that. This will be some of the metrics on each of the units, and really focusing in on middle column, what are we seeing per unit home. Average rental income per home is about $33,000 per year on that. And we have some operating costs budgeted in there, but these are pretty low maintenance, because they're brand-new homes. We still accrue some of those costs. But when you can take a look at what we're delivering, we get about $20,000, those next two columns between the add back from interest and depreciation expense and the actual net income on that, that are free cash flows to the company. So that's one of the reasons why we like this segment and one of the reasons why we continue to expand that segment. So that's a little bit more about kind of the -- one of the things that we were excited about on the delivery of this next phase. What I'd like to do is turn the call over to Kevin McNeill, our CFO, and he's going to give you a highlight of some of financial results.

Great. Thanks, Mark. Yes. So, the slide we're looking at now shows the three segments, just highlight of them, the three segments Mark talked about earlier, the water and wastewater, land development and single-family rentals. Mark went over that each three. All three are continuing to grow. This -- for the year-to-date, we've provided about 79 -- sold about 79 million gallons of water this year, which is lower than the last couple of years, but as Mark talked about, oil and gas was a big part of that. Dirk went over the land development, where we're at on that, we're about 87% complete on Phase 2A. Phase 2B, which is the next one in there, will start sometime in the next few weeks. And so, during our third quarter, we'll see a pretty good pickup in the revenue from that. And then, the rental homes continued -- we have four rented right now in that $2,400 to $3,000 a month under one-year non-cancelable leases. And the next 10 should start coming on here in the next few weeks with two or three each week for a month. And then, by the end of the year, we should have all 10 of those rented out as well. The next slide shows our revenue by core by -- for the six-month period for the last few years just as a comparison. And you'll see, obviously, 2023 is lower than the last few years. 2020 was an anomaly year. That was when Phase 1, which was 509 homes was really going. And what we do is we recognize revenue as a percentage of completion. So, as we complete a section of ground and then we sell off the lots, we get to recognize it as construction proceeds. So, as Dirk talked about, it was very tough winter this year, very hard to do a whole lot of construction outside. So -- and then, the oil and gas revenue was down for the first six months, which we expect to pick up pretty substantially in the second half of the year. We've already seen a very large increase just in March and April alone. So that should come back up. Net income and diluted earnings per share here, and you'll see these in our 10-Q, which we plan on filing tomorrow. I will point out one thing. For 2021, that was a year where we determined based on the way the reimbursements work is as we complete certain infrastructure that will be turned over to various municipalities, we get reimbursed for that. And in 2021, we determined that Sky Ranch was doing so well. We will get reimbursed and so we are able to recognize about $20 million of other income as a one-time effect, which is now running through our balance sheet because we -- now we can prove that we're going to get it. And so, we don't have to take big swings in our P&L. And so that helps the P&L look a lot better and keep it more normalized. The balance sheet and income statement, you'll see, again, we'll file our 10-Q tomorrow, so this will all be in there. A couple of highlights I'll point out is the cash. We invested a fair amount of $15 million in treasury bills, and so those matured in March. We'll -- we're holding them in a fully insured -- a fully FDIC insured packages; it's called ICS program. So, with all the banking stuff that went on this last month, few months, we feel pretty confident because we have everything fully insured. We've been using most of that cash for some land development. You'll see if you go down a few lines and look at the reimbursable public improvements, it's up about $3 million, because we did spend $2 million to $3 million in the last few months on land development, it's not -- that hasn't stopped, it's just slowed. We're also investing -- continuing to invest in water as Mark pointed out in few slides ago. We've been buying and making sure we have enough water for the future. P&L wise, you'll see again, the revenue and net income are down this quarter and year-to-date. A lot of it you can see right in the middle from the water sales, you'll see last year's six months, we had about $2 million in commercial sales. This year, we're about $500,000. So, they'll pick up pretty substantially in the second half of the year. Otherwise, our operating costs, our G&A costs are staying fairly consistent. We're keeping running with the same amount of staff we had before. We've talked about the stock repurchase program. We haven't bought -- it's been approved. We haven't bought anything yet. Luckily, the stock has stayed above our limit. So, as long as that keeps going, we'll keep it in place, but [don't need] (ph) anything. And then, couple of important upcoming dates. We'll announce -- we'll get started on e-mailing everybody of the July 19th Investor Day, we'll get that set up and start -- get everybody notification of how to sign up for it. If you want to come, we'll let you -- give you more information. And then, our 10-Q should be filed by tomorrow. There's our leadership and Board of Directors, and I'll turn it back over to Mark for questions.

Great. So, really, a couple of the significant key takeaways here are, even though we've got a rising interest rate market and kind of a bit of headwinds in the housing industry, one of the things that we saw was just an enthusiastic response from our homebuilder partners to continue to build out at Sky Ranch. And we see that not only in terms of the existing development that's underway, we've got even the loss that we delivered going through the difficult construction season through the winter, we've got more than hundred starts out there. We've got residents who have already moved into that filing. And each of our homebuilder partners were really supportive on continuing to build out at Sky Ranch. And I think Dirk highlighted this a little bit is it really is an issue of segmentation for us. We're an entry level product. You can buy homes out there in the $400,000. There's townhome products that actually even start with a $300,000 out of Sky Ranch, and that's really unheard of in the Denver market. That's probably one of the most affordable master plan communities in the Denver metro area. And because of our structure and how we're delivering these lots, the homebuilders really like partnering with us because we do manage the deliveries very well. We manage them on a real-time basis so that they can keep track of their absorptions on not only what they have, but then how they build on those. And really the continued development with delivery of the charter school continued enhancements into the community really emphasize the differentiation that we have in the marketplace. So, we're thrilled that all of our homebuilder partners are continuing to move forward. We've started the second delivery and we sequenced those. Pretty much every year, we're delivering those. And we'll still deliver. We'll probably have two of the three deliveries where we're taking a look at the [plot] (ph) deliveries, which we closed subsequent to our quarter-end, and that generates all the revenue that we need for the investment into the water utilities that Dirk was doing. So, we continue to be able to leverage the revenue that we're generating from how we have our delivery of lots for our homebuilder customers so that we match that investment with what we're putting into the ground so that we've got that covered. And then, also the claw back on some of the lots for the BTR segment, those are great. And then, I think what you're going see is significant improvements and opportunities in the oil and gas space. So, with that, I'm going to turn it back over to Jenny [indiscernible] take a look at any questions you might have, where we might be able to add a little bit of color.

Thank you very much. We will now open the floor for questions. [Operator Instructions] And we have a question coming from Elliot Knight of Knight Advisors. Elliot, your line is live.

Thank you. Good morning, Mark.

Good morning, Elliot.

Somewhere in this press release, and I can't find it right now, I think I saw something about you bought some water in the quarter. Is that right?

Yes, it was a very small acquisition. It was just a well that was right next to one of our other wells. It was like $300,000 or something like that.

Okay. Does it make any sense to think about how much you paid per acre foot or -- to sort of estimate the value embedded in the company given the vast water reserve that Pure Cycle has?

Yes, it's a good question. One that we get a lot is to say, how do you take a look at your inventory, and what are the comparable sales for those types of water rights? This particular well was a one-off type opportunity. It had been idle for a number of years. So, this will be a little bit of inside baseball for water utility, but it didn't have a lot of consumptive use on it and it has a very good appropriation, which means there's a high level of water you can take from it, but it hadn't had a lot of water taken from it. So, it allowed us to be able to optimize the acquisition price on that. The water that we have been buying in this particular area has gone up significantly. It's nearly doubled in the sort of the five years that we've started acquiring water in this particular reach of Colorado. We bought some wells maybe five years ago that we paid, say, $8,000 an acre foot for. And those wells are now trading for $14,000, $15,000 an acre foot. And so that's why we like that particular area on that. When you take a look at trying to transpose that over to the full portfolio that we have at 30,000-acre feet gives you kind of a sense of scale on that. Water is a lot like real estate. When you take a look at valuation, it kind of depends on where and what you're doing with it and when. But certainly, the value of the portfolio continues to grow year in and year out. And even more so, more recently, right? You see a lot of press and a lot of people are focusing in on the value of water in the West and trying to figure out how do you participate in the scarcity value of water. And as we've talked, and really highlighted, we're not in the business of buying low and selling high. We're in the business of buying right and developing forever, so that we have a customer and a revenue source that continues to generate revenue for our shareholders.

All right, Mark. If you tried to come up with some range of what the average current market value of that 30,000-acre feet is, what would you say that range might be?

I'd like to think of it in the high end of that range, that $15,000 an acre foot range. Certainly, when we're selling that water to our industrial segment, we're generating something close to $5,000 an acre foot per year on it. And so, when you take a look at, is it fairly valued or undervalued at $15,000? I certainly could make a case that it's undervalued. One of the challenges that the optics of the company has is that we have had these assets for 30 years, and they're recorded at cost. And you look at our cost basis on it, and it might be $20 million where you have $1 billion worth of potential on that balance sheet and the cost because we were so early in getting it. And so, the market has appreciated so much over time on that. That is a fairly low value recorded on the balance sheet. So that's kind of how I -- we look at that question.

So, it's really a matter of time. The value is there. I mean, you and I have been talking for all of those 30 years.

That's true.

And it's almost inevitable that at some point that value is going to be realized.

Well, that's true and we are seeing that. We're seeing that as the metropolitan area has grown out to where our service area is, as we vertically integrated some of the development activities and continue to leverage what the value of that water does for land. We're seeing that in our connection charges. That's the real tangible way to value this thing is to see when we were looking at some of these acquisitions, tap fees were $6,000 a tap. And now most of the market is -- our taps are around $35,000. Most of the market is north of $40,000. And we'll continue to pace our connection charges with the market. So, we do that every couple of years and this is one of those years that we're going to take a look at benchmarking our tap fees compared to our neighbors. On that, you're going to see some strength growing in that. And so, those are ways that not only you can track the value, but also ways that we can extract the value of that water.

Okay. Thanks very much as always.

You bet.

Thank you, Elliott. [Operator Instructions] Okay. We have another question coming from [Greg Sterling] (ph), a private investor. Greg, your line is live.

Yeah. Hi, Mark. Thanks for taking my call. I'm just curious on the lot pricing adjustments with the two homebuilders. Was that purely a function of the taking back those homes for rental, or was there an actual price adjustment in the lot -- per lot pricing itself?

Both. When we did do these contracts originally, we incorporated some time, value of money component in that, understanding that inflation would be there. And I think our inflator is 4% in most of these contracts. So, you do see that gross number continue to roll up. And so, even though we had a three-month sort of deferral of starting our wet utility package, that continued to grow. We continue to grow that price in there, because we wanted to make sure that as a multiyear contract, we weren't stagnant in our price on that. And then, the clawback of some of those lots, we wanted to make sure that we could continue to grow that segment given the success that we've already seen in the first 14 units. So, as we get into this a little bit more, we're looking at getting up to 80, maybe 90 units from this first and second phase, and then growing this up to maybe 200 units plus in our single-family rental segment.

Okay. Thanks for that clarity. And then, another question. I think I noticed that it doesn't look like D.R. Horton has started selling their homes yet? Is there any update on that?

They were -- so, they had new product lines that they were bringing out here, and it just was a -- they were, I think, a little bit late getting those home plan sets over to the county and getting approved. So, the other two builders -- or the other three builders, I think we're first in on some of that. Certainly, KB, because they were continuing out here. And then, I think Lennar and Challenger were both very aggressive on getting model homes up before the winter. It was just a timing inference on that. Horton, one of the largest in the country. They typically are probably the most aggressive on the spec bill. So, you're going to see -- and they've kind of -- we see that by virtue of the taps that they're buying and the building permits that they're doing is they're going to get it all done all at once, and then they're going to just line build in there. They're also one of the most excited about moving forward with additional lots. They're beyond all of the 850 lots of Phase 2, and really excited to partner with us on our next phase, Phase 3 of this thing. And so, good builder. All our portfolio of builders are being good. I mean, they're all solid top 10, top 15 national homebuilders that are terrific to work with. And so, we like continuing those relationships. And I think we really are good partner with them, because they make money in this transaction without having a huge burden of inventorying 800 lots that they have to then take a look at how they're going to deliver some of that infrastructure. Many of the markets, even in Denver, in the recent years, most of the homebuilders themselves have had to do a lot of horizontals, and that's something they're loathed to doing. They're good at building homes. They're not -- when they have to, they'll work on delivering the roads, curbs and gutters. But our particular project, we're being paid to give them that product and that's one of the products that they really want to add more to their portfolio line. So, it's been a good partnership for them. But no, there's no particular reason why Horton other than just a logistical issue of them getting their plans through the county in terms of the building permits.

Okay. That sounds great. That's actually very helpful. And has there been any speculation around the demand? The school is going to be fully open starting the school year, and whether they've actually started recruiting students, or if there's been any increase in demand for homes in the area because of that?

There is. I mean, one of the -- that slide that we had up there, it was really referencing not only the status of the build on it, it had a little graph there that showed the admissions on it. So, I think they've gotten -- this is just opening the K-8 school, and they're anticipating starting with grades K-7. They really were hoping to have around an opening of around 500 students. They've got about 400 applications. They're exceeding their benchmarks of where they thought they would be. That little scatter diagram shows you kind of where those applications are coming from. And so, the concentration of them are really coming from our development, right? They're coming right with -- which is what you would expect. They're coming right within the -- call it, the 600 homes that we've got up. But they're also pulling and drawing from other areas. You can see there's some coming from the town of Bennett, which were a Bennett charter. So, it is a Bennett charter school system. So, some of those kids are coming in and moving toward the metropolitan area, and then all around the surrounding area. So, the penetration of school and the marketing of that has been fairly wide distribution. And any new community -- you're looking at an entry level buyer here at Sky Ranch. So, it's going to be new home, first home buyers, starter families, most important thing for them is going to be access to school. And very early on, we recognize that, that was going to be the center piece of this community. We located the school in the center of the community, so it would be walkable for each of these students. We've got trails and underpasses that deliver anybody that wants to walk to school, parents that want to be able to just drop off their kids, any number of things. So, we've been very thoughtful about that and high kind of absorption rate for all of our families that are at Sky Ranch. And our homebuilder partners are the first ones to be the highest marketer of the charter school, because they know how quickly that conversation gravitates to what is the school system and what are the opportunities for education here. So, yes, it's going to continue to accelerate the demand and the attractiveness of the overall project.

Okay. Yes, that sounds great. And then, if I could just ask you one more question, which is I know you've been kind of hesitant to use the share repurchase program, but what would be the impetus to actually make you do that or give you some incentive to actually do that especially with the stock pricing where it is currently?

Good -- great question. We did want to continue to make sure that we understand and appreciate that the market may have a disconnect in terms of what the value of equity is. And so, we did initiate that. We put our acquisition benchmark in place. And what we try to do is be patient about that and see where the market is. The market -- it wasn't overly conservative on that. I mean, it wasn't at our historic low, but where we thought and in consultation with us and the Board where we thought would be a good level of acquisition, and it just -- the strength of the stock, while I would say it's not trading in a range -- and I'm sure you've not heard at conference call on any CEO that says the trading of the stock is where it should be. But it didn't -- the strength of that both the volume and the share price did not drop to that level. We'll likely bump that up, so that we can get that -- we do want to invest in ourselves, and we want to lower that denominator. We have allocated a program to do that. We have some liquidity. We have a very good balance sheet. We're very protective of that balance sheet, but we also have some ability not only to invest into land, to invest into water, to invest into single family rentals, but also invest in ourselves. So, you'll probably see a little bit more aggression in that in Q3, Q4.

Okay. That sounds good. Thanks for taking my questions. Good luck the rest of the year.

Thanks. Appreciate your support.

Thank you very much. And the next question is coming in from [Greg Fernett] (ph), who is a private investor. Greg, your line is live.

Good morning. When I've been out in Denver, driving to the airport, I noticed towards the West, I think it's 56th Avenue, a huge amount of development going on there, and it looks like it's commercial and multifamily. Where are those people getting their water from? And at some point, do you have water in that area that if that development continues, that you would be a provider of water?

Great question. Denver is -- when you fly into Denver, you see a population that is 4.5 million people, and you say, "Okay, that's Denver." And Denver is actually made up of 70 different jurisdictions. The city and county in Denver is only like 650,000 people. And so that particular development that you're referring to is in the city of Aurora. And much like us, every jurisdiction has to have exclusive franchise service areas. So, when you're developing on our service area, the big contiguous 24,000 acres of property that we show on that graphic, you have to get your utilities from us. That's a requirement. And similarly, when you're developing in the city of Denver, you have to get your utilities from Denver. When you're developing in the city of Aurora, you have to get your utilities from the city of Aurora. That particular project is in the city of Aurora. And does every city have a high degree of confidence that they have enough water to meet their needs? I would say no. Denver might, just because they're less aggressive at expanding their boundaries, but every other provider always is looking to expand their portfolio. When I'm out looking for water, I'm competing with 70 other municipalities that are doing the exact same thing because they've got growing service areas. And what you're seeing is everybody, us included, are concentrating on lowering the overall amount of water that every single-family house is using primarily in outdoor irrigation. And so, some of the things that have happened this year, and particularly in the city of Aurora, but other municipalities are they're significantly limiting outdoor turf, cool weather turf, the Kentucky Bluegrass type stuff. And so, they're limiting it to as little as 500 square feet, which is a postage stamp typically for a single-family home. And one of the things that we're experimenting with on all of our single-family rentals are, our turf is actually -- we're installing artificial turf on that. The quality of the artificial turf, the cost of the artificial turf compared to the overall cost of maintaining an actual cool weather grass is very cost competitive. And so, what that allows us to do is it allows us to serve more than 60,000 connections, which is good for us. We get more connection fees. We get more base rental fees, or base monthly fees on that. And so, each of those water jurisdictions, each of those water providers have -- there's not an opportunity for us necessarily to provide service to that particular development because they are annexed into another jurisdiction as much as it's also an opportunity for us to have an exclusive franchise on both Sky Ranch and our Lowry areas and expanding, right? We're looking at expanding that area beyond Sky Ranch to territory around us so that we can continue to grow that business segment.

Okay. On the rental homes, are these financed -- and you may have mentioned this, are these homes financed with a fixed rate long-term mortgage? Or are you still...

Yeah, they are.

Okay. So, there's no variable rates?

Corporations -- no, they're not variable rates. Corporations technically can't have a mortgage, but our bank -- and most banks offer products similar to this, create something that's comparable to a 30-year mortgage-type product on it, and it kind of has -- we have a fixed rate, which is why we're having a very advantageous rate for the first 14. And then, we get mortgage-type rate. I think, we've got expansion into the 6%, 6.5% for the next 20 that we're looking at for filing 2B.

If you own account for appreciation, what is the return on capital for the amount that you're putting in to these rental homes based on the rent and paying the debt service?

So, when we take a look at -- because that's a good question. Our Board asked me that same question. When we're taking a look at how these perform for us on IRR standpoint, these are over 20% IRR for us. They're significant opportunities. It's really because we have the retained equity value of the land and the tap fee on it. So, we're renting these out as $550,000 house that would cover that mortgage, and we really only have a $330,000 mortgage on it. So, not only does it cover the debt service on it, but it gives us maybe a 30% free cash flow in that. So, the IRR maybe -- I guess, Kevin's kind of given me some more realistic numbers, but they may be as high as 40%, 45% IRR on these.

Without any assumed appreciation?

Correct.

In the year.

Yeah. When we just look at the cash flow, because you can't -- I'd love to -- boy, I'd love to be able to hire all the appreciation. Our water assets would look phenomenal. But yes, no, we just do it based on the free cash flow.

Are there any rules in your area about having affordable housing and that a certain number of units have to be for lower income renters or lower income buyers in your community?

There are no mandate on that. Although affordability continues to be topic for everybody, right, and we're not -- Denver has had some affordability issues. It used to be a very affordable marketplace 30 years ago. And that's caught up. You look at the average home value and to say that home starting in the $400,000 is affordable. It's the entry level home market is pretty -- those are hard words, but that is where we're at in the metro area. And the average -- the median home value is closer to $650,000. And so, when you look at that, and our ability to deliver these homes in that entry level market is why our homebuilder partners are so aggressive about maintaining their positions.

Final question. Once -- do you anticipate that the growth of Sky Ranch is where you see the future in the next three years or five years? Or do you see a separate area that would be developed either by you would buy the land and develop it like Sky Ranch or another developer would come in there and do that and sell lots to the builders, but you would be the water utility? And when do you think that would happen?

Yeah. All of the above. We are very aggressive and trying to acquire more land, more land that we can develop, working with neighboring landowners that may want to keep their position and develop it themselves and then we can be the utility on those, as well as acquiring existing utilities with the customer base. So, when you look at all of the things that we've done in the past, all of those are still on the table for us and very much an active part of how we look to continue to grow the company. So, yes, Sky Ranch will -- in specific, Sky Ranch will continue to grow over the next three to five years. We'll continue to build that out. And that will provide opportunities for us not only in monetizing the land interest -- the interesting side when you look at that and that's why we like this kind of vertical integration is that not only will that grow the land development segment and monetize that, but it also grows the utility segment and monetizes that, and it also grows the single-family rental segment. So, each of those grow as we continue to build those out, and we have a higher degree of control over that continued growth. And so that's why we like more land acquisitions. We are thoughtful about making sure that we're not too far over our skis in extending ourselves out to an area that we don't know what the market is like or that we can't efficiently provide water and wastewater services. So, we're concentrating our capital even if we have spend a little bit more for it to be in the Sky Ranch vicinity right in that I-70 corridor, because our utilities can be easily extended to serve those areas. So that's kind of our philosophy and how we want to try and continue to grow.

You currently don't have anything in your inventory for that. Is that correct as far as for...

Not another land interest that we would develop. We do have an inventory of 24,000 acres, which is our service area, which is ideally positioned that we will be the utility provider. And if you look at just does the company have within its existing portfolio, the ability to use all of its water, my answer to that would be yes, we do. And then, that's a growth of the metropolitan area. And so, you've seen that kind of that encroachment of the metropolitan area to our service area. That amount of land all by itself will use every -- that's a 30-year portfolio of land inventory where we know we are the exclusive water provider and then it's just a determination on the land owner as to how and when they'd like to continue to monetize that asset.

Okay. If Aurora running out of water that they would need to come to you for maybe just buying water and you're piping it into them, or do they have a lot of water? So...

They're a big utility. They don't have enough water to serve what they've already annexed and zoned. They don't have it by maybe an order of magnitude. They need to maybe double or even triple their portfolio to be able to provide service to what they've already annexed into the city. And they like us and every other water provider, they like to own the water themselves. They do the same thing, right? They go cradle to grave where they own the water, they develop all of the infrastructure to divert and treat and deliver and reuse as well. So, us providing water to City of Aurora, probably not. The dynamics may change over time, but that's historically not been something that any of the water providers do. They're really concentrating on their own service areas and their own annexations to make sure that they can grow that portfolio. As water becomes more and more competitive because every year, it gets more expensive and it gets harder to do, that dynamic may change and there may be regional cooperations. And we're part of one of those, right? We do partner with Aurora and Denver and 10 other water providers on a project known as WISE. You hear -- you read a lot about that in our disclosures where that's a regional project where everybody got together and said, okay, we're going to all concentrate our capital on this particular project. And there may be more opportunities for that. Everybody will have their own piece of that pie, but it's a regional participation rather than have everybody do their own separate project and run pipes that parallel each other and cross each other and those sorts of things.

So, when do you expect to generate revenue from that, or already...

Yeah, we already are. Oh, yes. We're selling that water every day.

Okay. All right. Thank you very much.

You bet.

Thank you. That appears to be the end of our question-and-answer session. I will now hand back over to Mark for any closing remarks.

Again, I want to thank you all for your continued support and want to just continue to highlight the achievements that we have and really the optimism that we have within what we're doing. This pairing of land development and water utilities is working out very well not only for helping us continue to monetize these historic investments, but also within the marketplace, within our customers, within our homebuilder partners, terrific opportunities there. We continue to leverage them in the single-family rental segments as well. As Kevin noted, we'll have an Investor Day this summer. We'll post that to the website. And for those of you that are interested, if you've not been out to take a look at what we're doing out here, the pictures don't do a justice, it's a terrific opportunity. You can see where our assets are positioned relative to the overall metropolitan area and really how these historic investments really will continue to pay dividends for us. If you didn't get a chance to ask a question, don't hesitate to give me a holler. Happy to drill down on any of the specifics. But again, thank you all, and we look forward to seeing you over at summer.