PCYO - NASDAQ

Good morning, everyone, and welcome to the Pure Cycle Corporation’s Q2 2024 Earnings Call. At this time, all participants have been placed on a listen-only mode and the floor will be opened for questions after the presentation. [Operator Instructions] 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. Here you go.

Thank you, Jenny. Good morning, everyone, and welcome to our six months ended February 29, 2024 earnings call. We do have a deck for this, if you can go to our website at purecyclewater.com and click on the Investor tab. And then, there'll be a link there that will direct you to the deck for this. I can walk through this, and I'll try and note the transition of the slides as we move through the presentation. Let me start out with our first slide, which will be our forward-looking statement, which indicates that I'm sure all of you are familiar with that statements that are not historical facts contained or incorporated by reference in this presentation are forward-looking statements. With that, what I want to do is spend a little bit of time talking a little bit about the various segments of the business, take a look at our performance through our first-six months of this year. Talk a little bit about some of the investments that we've made into our assets and some of their trajectory together with their capacities and the opportunities to continue to monetize those assets and then, give you a little bit on important updates coming up with that. None of this is possible within the organization without having a great team to rely on, not only our management team, but all of our line operators that really, the brick-and-mortar and the block-and-tackle every day to make sure that we're putting up strong performances in each of our individual segments. We've got a tremendous Board of Directors, a very strong Board that continues to keep us accountable and really offer their years of wisdom and advice in that. So we benefit from a very strong team, both at the company level, as well as at the Board level. And so we want to continue to recognize and acknowledge all those folks that make -- what we do happen. So, a little bit of information backgrounds on some of our leadership team, both in terms of the presentation as well as on the line. So you can get a lot of information about who it is that's shepherding these assets and steering the direction of the company. So the company operates in three different business segments, and these segments are vertically integrated with each business segment informing and really improving the value of each other segments. If you take a look at the fundamental premise of the company, we're a Water/Wastewater provider and we have a significant portfolio of very valuable assets in an area where water is a hard to come by commodity. And so, we have been developing those assets over a very extended period of time. We've got more than 30 years of investments in these water assets. And they have had significant appreciation over that period of time. The portfolio logistics on it allow us to provide water and wastewater service to approximately 60,000 single family connections, and we're really just getting started with that. We have a little over 1,300 connections to date, and we'll talk a little bit more about that. But that Water segment helps us create value in the next business segment, which is our Land Development segment, where we develop land as a master planned community. And so we take a look at it as a large-scale development. And as we make these large investments in water and wastewater, we also make those investments in land development, providing single-family lots and multifamily, as well as commercial lots to national homebuilders and area land and businesses. And then that third segment is, as we're developing lots, we retain some of those lots for ourselves. We keep the equity value of the lot together with the water service connections and really work with our homebuilder partners to build single-family homes on those lots that we keep in our own portfolio, and we rent those out to families and individuals for a single-family rental market business. So, each of those segments, as you can see, really complement each other segment and really provide value in the asset chain. Talk a little bit about the company's assets. We have about 120 million in assets. And one of the things that I think is most unique about this company is really the extremely low basis that we have in these assets. When you take a look at the fair market value compared to what the cost basis is, and it's because a lot of these are assets that the company has been very disciplined about acquiring. Taking a look at our water and wastewater assets, our capital accounts in just the water rights portfolio is slightly less than $15 million. And when you take a look at the connection fees that can generate over $2.5 billion worth of revenue on that and then annual year-over-year revenues greater than $100 million. It really does give you an indication of the opportunity that the company has in just that one asset, taking a look at the land assets we were very fortuitous in acquiring our Sky Ranch property. We acquired it when not a lot of people wanted land assets back in the Great Recession in 2010, got a very low basis in that. We got less than a $5 million basis in the Land Development side and about $10 million in assets there. And as I'll highlight a little bit later in the presentation that asset can generate significant opportunities for the company in excess of $600 million as we continue to build that out. And then our newest segment being Single Family Rentals, the opportunity there is, it's a very tax advantaged way of us adding recurring cash flows to the company and being able to retain some of that equity value in both the land and the water. And so, what we have is an opportunity where we can have homebuilders build on those properties, carry forward some of that equity. And then each home that we bring online carries with it as much as 30% equity value in the marketplace, and we're able to rent those out at fair market value. So, there's a great opportunity for us to monetize some of that vertical integration of each of those assets into the Single Family Rental. One of the other things we'd like to highlight is, kind of the company's stewardship of its capital resources. We've got a very strong balance sheet, a high degree of liquidity in there. If you take a look at our cash position, together with our receivables from our governmental entity partner, where we're constructing that infrastructure. We've got over $50 million worth of liquidity between cash and cash and notes receivable and very modest debt. We use our debt to really take a look at the vertical cost of the single-family rentals, and that's very attractive because we can get mortgage-type financing on that -- company can't get a mortgage, but it's a product that we work very closely with our banking partners to be able to get that type of credit facility in there and be able to leverage some of that opportunities within the company. So that's one of the key things we like to highlight just because of the uniqueness of what it is that those assets bring to the company. What I'd like to do is talk a little bit about our financial performance. So, we'll advance to Slide 9 and jump right into the Q2 results, a great quarter for us, about $8.5 million in revenue. As you can see quarter-over-quarter in the past three years, we're more in line with what we thought we were looking at in ramping up these operations in '21, '22. '23 had a little bit of a pause because of the interest rate increases that were so aggressive towards the end of 2022. And our homebuilder partners were looking at how they wanted to inventory and the velocity of the homes that they were looking for. And so we had about a 90 day gap in starting our Q -- second -- or the second sub phase of our second phase, hard to get that one fast my lips, but our Phase 2b had that 90-day pause and really what we've seen is a stabilization of that interest rate market. Interest rates are kind of settling in. They're still high above where they were maybe two, three years ago, but on a normalized basis, they're really in-line with what normal expectations are for mortgage rates. So, I think the market is coming around to that and what we see in the single-family home business, not just here in Colorado and the Denver market, but all across the country is really a lack of inventory for sale. And a lot of that is attributable to mortgage locks on a lot of those folks that have a 3% mortgage that it really isn't all that attractive for them to switch that out for a higher mortgage rate. Our margins are continued to be terrific margins where we're exceeding 50% in all three of our business segments. We'll highlight that a little bit, but you can see our gross profit from that on Q2 is also continuing the results of the company. Net income, a little over $2 million of net income and an earnings per share of about $0.09 a share. And so, what this does is it carries us through our typically slow period of time. We do have a little bit of seasonality within the company just because of the climate here in Denver and a lot of the activity that we're doing on the construction side with delivering lots, you'll see a significant amount of acceleration of that in Q3 and Q4. And that really times out just because of the timing of our year-end. We have an 8/31 year end. And so that puts our Q1/2 in our winter months as opposed to Q2/3 or our Q2 is the first Q of the calendar year. So it always trips up a bit on how we look at that. But really rolling into Q3, Q4. Those are going to be the summer months. Those are going to be summer irrigation seasons, those are going to be the high productivity for our construction activities on delivering lots. Take a look that each of the individual business segments, as I mentioned, when you take a look at our revenue and our gross margins by each of those segments, again, very impressive results. 55% gross margins in our water utilities, very high margins in our land development. And then, we are starting to get some traction and some materiality into our single-family rentals. We've got 14 units that are fully leased and a lot of those are coming through on some of their first-time renewal, some of the units are second year renewals and our renters continue to be very enthusiastic about the product that we have and the service that we're giving them. So we've got a high renewal rate on a lot of the turnover on those units. Let me drill down a little bit about where Water and Wastewater segment revenues come from. As those of you that are following the company, we also provide water -- commercial industrial water to the oil and gas industry. And that's a real high component of what it is that we're doing. And that's very advantageous for us because it allows us to be able to develop our water system with a current user in demand for that. And so they're able to provide the company additional capital to expand our system in advance of some of our residential demand. And I think the Q2, if you look at just that three months ending, that was pretty close to a record quarter delivery for oil and gas waters. What we see is that trend continuing. The field that we have is the Southern Niobrara field here in Colorado. And it's about a 200 square mile area where we're delivering water to our operators that are in this field. We've got a couple of operators, one large operator Civitas, and then some other smaller operators that are drilling wells. And this is at the stage of field development. So they've derisked the field. It's a very oil-rich field. It's a very, very heavy oil, a lot of production that comes in out of these fields. So I think it's well liked amongst the operators. One of the segments on this that was a little bit light in Q2 is going to be the tap fees and that's a seasonality issue, as you can kind of see that as we trend through the years, we usually pick up a lot more of those tap fees in Q3, Q4, which is where our builders are pulling building permits and that's where they pay their tap fees, they pay their tap fees at the time of a building permit. So you're going to see that increase in velocity as the rest of the year rolls through. And so a little bit of projection on our number of customers, and we continue to grow on our customer base, and those are our recurring customers. There's a little bit of statistics on the oil and gas side. They're becoming very efficient. And so each rig can drill a well in about five days. And so they're drilling as many as 12 to 16 wells per pad site. And so I think we've got 1.5 rigs that are dedicated to this field and so you're going to see continuing performance in this segment where we're delivering water to the commercial oil and gas operators. Our Land Development, one of the things that we want to highlight really is kind of the settling out of interest rates and the activity that's going on within the Land Development. We have three phases currently under construction. Phase 2a, which is our first 219 lots, that's approximately 96% and I think we've got a couple of homes that are still under construction in there from some of our builders. But for the most part, most of those lots are finished and then our activity in there is about 96% finished. We've got some landscaping needs that are very seasonal in their orientation. So as you take a look at the accounting of that, that's about 96% complete, and we do that on a percent complete basis. So you see how that hits the income statement by virtue of our percent complete accounting methodology. Phase 2b, we're looking at about 52% complete, and we're really in the process now of grading out and prepping for that asphalt and curb and gutter on that so that those lots will be delivered. We have finished lots that are available for our homebuilders on some of the infrastructure that overlaps with 2a and so our builders are out within the county looking for building department approval for their master plans and then we'll be under construction probably in later this month or into May, and then continuing through the rest of the year. And then overlapping those is our third phase, which is another 220 lots from Phase 2c and that's where we've released the contract for our grading contractors. They've been on site since February. They'll be finished with their work, then we'll get the utilities in there and look to be delivering some of those finished lots towards the end of the calendar year. And so what you've got is really three phases. I'd say two phases concurrently with about 500 lots under production for delivery to our builder partners where they can obtain their building permits and really go vertical. And then on top of that, we really do have our fourth subphase that Phase 2b, which will be another 215 lots. And those lots really, we'll look to plat those by the end of the year and get those under production by the spring of 2025. So really accelerating the development of our Land Development, mostly because of the demand and the fact that Sky Ranch is one of the very few master planned communities in the Denver market that still can deliver entry-level product. I dare say, affordable because when you say an entry-level product is anything less than $500,000, it's hard. But affordability is one of those strong issues in our market as well as many other markets in the country and it's really a function of just the cost of delivering lots. Let me move to Single Family Rentals, and I'm going to pass the baton over to Mark Spezialy and have him give you an update on our Single Family Rentals.

Thank you, Mark, and good morning, everyone. We're excited about the Single Family Rental segment, and we're excited to share the continued success of this safe segmented (ph) it brought. We continue to see high demand in the units. And in the second quarter, we had 100% occupancy. As shown in the charts, we're beginning to see the compounding impact to both revenue and asset valuation as we bring additional units to the market. We'd like to continue to highlight that our Single Family Rental segment complements our other segments by utilizing our portfolio of assets. Each completed unit adds an average of $150,000 in equity by capitalizing on our well price loss and our water availability in this competitive housing market. This table represents our projections for this segment as we continue to build out Phase 2. To date, we've completed the 4 units in Phase 1 and the 10 units in Phase 2a. As you can see from the chart, we are beginning to ramp up the number of units that we will be bringing online. Construction on the 17 units in Phase 2b will begin this summer. And once completed, we will have more than double the units we have available to rent. We are also expanding the variety of types of units we are offering to market in our next build. By being vertically integrated between segments, we can control our building costs because of our equity position in the land and water resources needed to build a home. We are also able to control our operating costs by maintaining and managing these units in-house. This next slide is a visual approach to the projections we just discussed. It showcases the projected growth in our recurring rental revenue as we expand into Phase 2 and reach nearly 100 units. We've also included a separate graph of the estimated increase in asset valuation based on the realizable equity we build with each completed unit. And with that, I'd like to turn the call back over to Mark Harding to discuss our portfolio of assets further.

Thank you, Marc. So what I'd like to do is give you an overview of each of the segments and drill down on investments and capacities and really talk a little bit about our utilization because we have tremendous capacities in each of those and what things we try to do is stay ahead of the market on that so that we can really react to the market in terms of delivering lots, delivering water service availability and then as we start to continue to build our Single Family Rental segment. So with that, as you know, we have these three segments, each continue to build and monetize our assets. The review of the size of each of these pies in the segment, when you take a look at sort of our Water segment, as I mentioned earlier, we have about 60,000 connections worth of capacity in our Water portfolio. And currently, the developed amount of system that we have can serve 3,600 taps. And right now, we have about 1,300. So it tells you we've got about 50% excess capacity within that Water segment. So what we've done is, we continue to build ahead of that. And it's not that, that's idle capacity because we are using that capacity to serve oil and gas needs. In the Land Development segment, we had a 930 acre master planned community. What we've got developed on the Water and the Wastewater side can serve up to about 3,200 residential lots, and that's the full build-out of Sky Ranch as well as 2 million square feet there. The water system is at that 3,600 taps. The wastewater system is probably closer to around 2,500 and so we have those fixed capacities that we have plenty of opportunity to continue to deliver taps and water usage revenues. And then on a Single Family Rental, as Marc was highlighting, we like this segment very much, and it's an opportunity for us to continue to build asset value as well as recurring revenue value on our income statement. And we're looking at somewhere between that 200 and 300 units. So that will be probably around 10% to 12% of the total capacity of the residential lots within the Sky Ranch community. And we -- that seems to be where our balance is, so we continue to invest in those segments. If you drill down on just the Water segment alone, Water is kind of divided into two segments where we get upfront capital fee, which is our tap fees, and then we have usage fees. And that usage fees really is divided into our residential customers as well as our commercial industrial customers. And as you saw in our results of operations, we had a pretty close to a record quarter, and then you're going to see a record year for us in terms of oil and gas deliveries. We delivered a little over 1,000 acre feet. We have the capacity of about 3,700 acre feet, so that's the gray bar there. And then when you take a look at annualizing that, what we think we're going to do will probably be right around that 2,600 acre foot capacity. So still a lot of opportunity for us to continue to deliver that and good partnership relationship with our oil and gas partners and continuing to deliver water for that segment. Taking a look at our tap fees. As we mentioned, our tap fees continue to really pair at the market. And so you see our tap fees closer to $40,000 combined connection capacity. If you take a look and apply that over to our 60,000 connections, that's a little over $2.3 billion worth of value there. We currently have about 1,200 capacities at our Single Family Rental side, I'm sorry, not a Single Family Rental, but our residential capacity, which is really just about 2% of our overall capacity. Taking a look at our Land Development capacities. Sky Ranch has that capacity of around 5,000 single family rentals and breaking that out between the residential and the commercial really all our activity has been in the residential side. The commercial activity is becoming a little bit more attractive. There's a certain number of rooftops that the commercial likes to see and this is big commercial, right? This is not just your local retail commercial. This is going to be regional commercial. And so, given the fact that our location is right on the interstate, that we have an interchange right along the interstate that we are working to improve and upgrade that interchange. So we've been working through that with the county and CDOT to be able to get that, and we should have a permit on that new interchange towards the end of the year, and then the timing of construction of that will see depends on how that commercial demand matures, but we do have some mills that are set aside specifically through our Sky Ranch cap to be able to issue the debt to be able to fund the construction of that interchange. So that gives you kind of a feel for what we're looking at and really the metric on the left-hand side of that scale shows that this brings us close to $700 million worth of realizable revenue on Sky Ranch. And if you take a look at our capital account on there where we have $4 million on that, that's really one of the more interesting undervalued aspects of the company and how these assets continue to generate revenue for the company. Taking a look at our single-family rentals. Again, we're just giving you a little bit of analysis on how many units that are in each phase. And one of the things that we've done with our builder partners is increase that portfolio. As many of you following the company, we had originally, when we contracted with our builders on Sky Ranch on the Phase 2, we were looking to increase that portfolio to close to 40, and I think we've more than doubled that now. And really partnering with our builders where we are one of their first customers. We're coming in and asking them to be building on lots that we own and making sure that they have absorption in the marketplace and opportunities for us to use their product in that portfolio. And so that's been a very good partnership with us. Some of the key takeaways before I turn it over to questions and answers are going to be our gross margins. We continue to generate high margins within the business. Significant return on assets and significant growth within the overall portfolio, taking a look at each individual business segment and the company as a whole. One of the updates I want to do is, we continue to be in the market. We do believe that the market has a disconnect between the value of the company and where we're trading. And so we -- our Board did authorize a share repurchase, and we are in the market buying shares each month. And so we'll continue to do that. We'll continue -- because of our liquidity and because of our stewardship of the portfolio and our investments, we continue to be able to fund our operations through our own -- through our own liquidity and then can also continue to reduce that denominator to provide returns to our shareholders that way as well. So with that, a little bit about our Board, but I'll turn it over to Q&A. So I'm going to kick it back to Jenny. And if you've got some questions, certainly chime in, and we'll try and drill down on some of the color on that.

Thank you very much, Mark. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Your first question is coming from Bill Miller, who's a Private Investor. Bill, your line is live.

Thank you. Good morning.

Good morning, Bill.

Good morning. Wonderful quarter and you got lot on your plate. So my questions are the following: One, you've often mentioned acquisitions. I didn't hear it in this call, but maybe I missed it. Secondly, what do you think now are the highest return on investment that you have that you can control? And thirdly, when do you think you will get into the large scale commercial development long I-70?

Three good questions.

Well, I don't know what they're good, but they're interesting.

Well, yeah. They are. And so thank you for those. And I'll give you a little bit of color on the, the highest margin business that we have is really utilizing our portfolio of water for oil and gas, right? And so oil and gas, they don't pay the tap fee on that. And so as a result of that, that's at well capacity. And we're one of the few in this area that have excess capacity. And because of that, and the fact that we can price into those rates and charges, opportunities for us to fund construction of that infrastructure. It's really a good relationship. I don't -- it's a good margin business for us, but it's also a great business for the oil and gas customers because the limitation that they have is the only entities that have water at the scale are going to be the large water providers that provide water within a city. And the dilemma for them are that a city doesn't always have excess water supplies, right? They build their systems out so that they can meet the demand needs of their residential customers, and they don't have the capacity to give water that would otherwise be available to their residential customers to oil and gas customers, so that relationship is a great relationship for us. And so we like that business a lot. We continue to invest in that business. We continue to make sure that our customers on the oil and gas get what they need when they need it and at a fair price and so we like those margins as well. Our land development revenues generate high margins, as you've seen, and that's really because we bought the land correctly. And we continue to work with our homebuilder partners. There's very few companies left that will actually do the horizontal development. And homebuilders, our national homebuilder partners are loathe to have to do the horizontal work themselves. But because it's a very complicated business on how to manage that infrastructure, there's very few companies that are actually doing that horizontal development. And we like it because we're doing that already. We're doing that already with our water and our wastewater systems and adding those components in there allows us to manage and have good decisions on how much capacity we want to build at what time. And so that's a very synergistic relationship. I can't tell you the number of times our homebuilder partners have gone to us and said, hey, can you guys do this in the next jurisdiction because we like that too, and you guys have a terrific model out there. And it's not that we wouldn't want to do that, but our portfolio has -- the thing that makes it so good for us is that we can do water at the same time as that we're doing the land development. The second component of your question was acquisitions, very good. You're right. We do have our nets out. We have very targeted acquisitions and our acquisitions are going to be areas where in the land side, where we can provide water utility from existing infrastructure that we have. The ability for us to be able to use the water transmission systems, our wells, our surface diversion facilities, our wastewater treatment capacity. And there are land within this area of unincorporated Arapahoe County that meet those requirements. And we continue to meet with those landowners. The timing of those, unfortunately, is not something that we can control. But I will tell you that there is much more activity on that side than there has since our last call. I say that every call, and I can honestly say that each time I meet with these landowners. They do have an understanding of our appetite for that. But I also say that there's not any lost opportunities, right, us not having that right now has not hurt us and it hasn't provided that inventory on our balance sheet. So there's a little bit of a synergy there. The ideal world would be when they were ready for development, we would be able to buy that. I'm okay paying the seller a higher price for that as it gets closer to the time period when that property would be marketable. And so as we -- our price is a function of where we think that timing is and their price might be a function of where they would like that timing to be. And so we continue to work with them on that side. And then the last part of your question was commercial. Commercial activity, I would say, is probably still a year plus out, and it's really a function of the rooftops, right? We've got about 700 rooftops open. We've got 500 as we've talked about, we've got two overlapping phases. So I've got 500 lots under production right now. And I think a lot of those commercial, and this is large scale, right, large scale grocery, large scale box vendors. They really look to have high volume stores and that's an opportunity for us, not only because of the value of the commercial land, but then also the sales tax revenue that, that generates to accelerate the repayment of our reimbursable. So those two go hand-in-hand, and we really do want to make sure that we're targeting those larger commercial opportunities for the high dollar value. So I would say that it's not for lack of our trying, it's mostly for a bit more of the patients on absorption on single-family homes.

Okay. Mark, you left out the rental area.

Single Family Rentals, tremendous -- boy, this is an interesting one because as interest rates, we were thinking that most of the renters in there were just in there because interest rates were a timing element there and that's not really what we're seeing. What we're seeing is people choosing to rent, and it's stunning because we get applicants for the Single Family Rentals that would easily qualify to buy these houses. And just on -- just maintaining relationships, we try to get in and find some of their motivations. And it's, frankly, they're just saying, look, we don't want to buy. We don't want the maintenance costs, although, they're brand new homes. And so the maintenance costs are pretty low or they just -- they're not sure if this is where the Denver -- they may be new to the Denver market or they may be considering their careers, and so they're not sure if they're going to stay in this particular market or stay in even this particular submarket, but tremendous demand. We've got a great renewal rate on that. I think we've had almost 90 -- we haven't been absolutely perfect, but it's pretty close. I think we're 90%-plus occupancy while we've been in this segment for the last two years. So we continue to grow that segment. And really focus in on delivering those homes at a cost-effective basis, right? Having a partnership with our national homebuilders, being able to have them continue to line build and build very efficiently deliver what is a seasoned product for us as well as the for sale product that they have, so we'll continue to grow that segment.

Okay. Finally, since we're all pretty sensitive to inflation. What kind of price increases are you able to put in place and have you been consistently doing it or withholding that knife for a while?

I think we're -- I would say on the rental rates, we're at the 90 percentile, but we're not at the 100 percentile. And our philosophy is, I'd rather retain a tenant. And so when we get renewals, those price increases are very modest. They might be 1% or 2%. When we get into a turnover, then we mark those up a little bit closer to where those gaps are in the marketplace. So I would say, we're super competitive because we want to maintain that high 90%, 95% occupancy rate.

Okay. What about in the oil business?

We have kind of multiyear contracts with our oil and gas operators that are fixed pricing on those. So I think we're very -- we're balanced there. We look at a good partnership role with them, and I think they look at us as a great partner with them because they're not competing with residential customers. And so we have multiyear obligations for this -- increase every year, the pricing of those do inflate every year. And let me kind of address some questions that you would ask me next, which are going to be -- how do we see our price increases in the utility segment on tap fees as, well as water usage fees. Those are increasing, as you can see, when you take a look at when the company first started Sky Ranch, our tap fees were closer to $28,000 combined. Now they're closer to $40,000 combined. And so that's a function of the fact that it's costing more for water providers to reach farther and farther out. And so when you see a comparable rates on there, that's accelerating significantly. The water usage rates at the monthly rates, those are more inflationary, right? They don't inflate as much and what we do is, we've got a tiered pricing mechanism in there, which is a function of the more you use, the more you pay for that increment of water, and that's a kind of a forced conservation measure. We're seeing that our portfolio is actually going -- will be serving more connections than we thought, whereas we thought that might be at 60,000 connections, and we continue to report that 60,000 connections. There's probably some pedal in there. I think there's some conservatism in what that portfolio can serve. And then our lot fees, are we -- how are we pricing our lot fees as compared to the market. And we continue to be an entry-level product, but we also continue to price those lots to maintain our margins, together with the increased cost of delivering those horizontal infrastructure component. So we do take a look at each of those, and I think we're very competitive on all of them.

Well, finally, where are you seeing the most inflationary impact on your business?

I would say, we have not seen strong inflationary pressures here. I would even say, we've seen some cost improvement on building materials have come down. Certainly, the trades have been relieving, the supply chains are relieving. So, I'd say, we're counter on that, Bill. We've really seen a little bit of relief from that high inflationary side. And whether that was because of any number of factors rolling out of the last three years on supply chain and COVID shutdowns and distribution channels and having labor force, workforce be very constrained and competitive. If it's any one of those, it would probably labor for getting competitive bids for landscaping, getting competitive bids for the utility packages, those sorts of things would be the one where I'd say. If we’ve seen any cost rising, it would be on the labor side.

Makes great sense. Well, thank you very much.

Thanks for your continued support.

Thank you. [Operator Instructions] Your next question is coming from Greg Malachowski who's a Private Investor. Greg, your line is live.

Hey, Mark. How are you?

Good. How are you?

Good. So I got two questions. The first one relates to, I guess, what you described as the receivables. And I was just wondering if you could give any color on the time line for the next bond issuance? I know historically, it's I think, been every like two or three years is where you guys are kind of the start to dig noise about another one happening. And if I remember, maybe 2021 when we got the last one. So, I was just wondering, if you had any visibility into the timing of that?

Yeah. So yeah, the last one was probably '22, and it was -- as we started that Phase 2. So, there's -- we tend to bond those out in relationship at the start of each of the phases. And so as we're accelerating the completion of Phase 2, we'll be moving into Phase 3 and Phase 3 is likely to be, we keep increasing the sizes of those. Our first phase was 500 units. Our second phase was a little over 800 and say, 70 units. Our third phase is likely to be over 1,000 units. And so that continue -- and really, when you take a look at the absorption of any master planned community, they typically go on a bell curve where you start out with a few number of units, and as those units grow and then you have overlapping phases, we look to deliver closer to 300, 400 lots a year as we continue to build this out. And so that next filing, that next Phase 3 will probably start in earnest beginning of next year. What we are likely to see is towards the end of this year, we'll have a refinancing opportunity of our first phase of bonds. And so just to talk with you a little bit about the life cycle of these bondings. You go out and you bond these things out. We like to bond them a little bit more mature than maybe some of the other developers where we have already started some of the homes. We'll have contracts with homebuilders. Some developers go out very early. They pay a lot more money in terms of their interest costs and they constrain their overall receivables, right? So when you take a look at a residential mill, it has a fixed capacity and you know what that capacity is. Colorado is really what we consider to be a sales tax incentive state. So, as long as you have some commercial there, you really have the ability to get all of your public improvements back. And so we were very confident about our receivables on that side. And so, as these typically go out on early stage, once that five-year window goes – expires, you really have a very mature tax base, right? So, we know all our 510 lots in our Phase 1, those are all completed, they've all seen increases in the assessed value of their homes as compared to when we originally bonded that, which means you have excess bonding capacity in there. And so, when you refinance those bonds, you're able to refinance it and actually increase the capacity of that. So, you'll likely see that late this year, first part of next year for our next bond issue and then rolling into late '25, '26 for Phase 3 bond issue and then likely another bond issue for the interchange improvements that we're doing. And we may or may not have some capacity within that to pay some of those reimbursables as well. In addition to the bonding of that and one of the nice things that we have with Sky Ranch is the amount of revenue that come in from other sources other than our mill levies, and a lot of that is from some severance tax from oil and gas activity. And so that provides excess revenue to the government entity to our Sky Ranch Community Authority Board that then they use those funds to pay down that. So, you'll see interim payments even between our bond offering to that receivables in there. And that gives our auditors a lot of confidence. It gives the market a lot of confidence of the liquidity of that receivable.

Okay. Thanks. And then just my second question, and I know it's always kind of, I guess, the elephant in the room, but it's -- I guess, is there a point where we look at our market valuation and there's been enough time that's gone by where we can confidently say this is a perpetual issue that whatever it is you guys are doing isn't translating to value for our stockholders through the main mechanism for that, which is the public markets. And with that in mind, maybe look at seeing what we're missing here or what we can do differently to go about fixing that because I look at this and it's funny, I was going through your Investor Relations section a couple of weeks ago and stumbled upon the interview with Mark Harding from I think it was 2018 with $10, $10.5, $11 stock price and much of all the great things we've accomplished, not even accomplished yet. And it's just wows me almost, to fast forward now six years and we're at $9. And you guys, on a net basis have issued more stock than you bought back. And it's just puzzling to me because there are great assets here. There's great people here and just something isn't catching. And I'm just curious, if you guys have a point where you say, okay, maybe let, let's try to do something different, let's change things up, lets evaluate this from a different angle than we have before?

Boy, Greg, you've put your finger on the pulse. And your frustration has echoed by management and the Board and I'm at a loss at the end of the day. One of the sage pieces of advice that we continue to get is, look, do what you do and continue to produce those results, continue to really execute on your business model and the market will take care of itself. And in fact, it has not, right? I mean when you correctly highlighted, the only stock that we issue are incentive stocks. And so our buyback program is intended to be antidilutive on that basis. And could we be a bit more aggressive on that? We probably could and continue to look at that metric. And really, we set our price points on the repurchase such that we're being opportunistic, but we could be buying a bit more to become anti-dilutive. But the dilutive portion of this is insignificant. And so that's not the problem. The margins are not the problem within the company. The story is not the problem within the company. And the team is not the problem within the company because they continue to execute results. So is it messaging? No? Is it performance? No. How do companies like our size company reach those ears? And how many analysts are out there looking for these opportunities and is it liquidity? Is it the volume of the stock? Is it the capacity? I continue you are, you'd be no. I mean when you look at it, our average trading shares are anemic. And then when all of a sudden, somebody comes in and said, I want to take a position, we'll get 0.5 million shares trade on a day. And so it seems like there's the ability to buy into it. And so those folks that -- when I'm out on the road, when I'm at a conference or when I'm doing a non-deal roadshow, folks are saying, hey, I think this is a great opportunity, but your average day volume doesn't allow me to do it. Is that the mechanism? When somebody comes in and analyze it from a portfolio standpoint and then they go, okay, what's the 100-day average trading of the stock, and they say, I can't buy a position. And my answer to that is, I bet you can without working against yourself. And so all of those things are things that we try to address. We try to address how do we reach more ears, more eyes, more opportunities, and it's not just the management level, it's at the Board level, it's at the investor level. And we're attenuated to it, while at the same time, we're keeping a steadfast hand on the wheel and making sure that we continue to put those results up. And so the bots that are out there, the programs that are scanning your gross margin scanning, your returns scanning your earnings per share also are able to kick this out and have somebody take another look at it and understand what it is that we're doing. And it's one of those things that's a mystery for us and we are looking to try other things. We are looking to expand that approach. We are looking to have sponsorship and we're just not an issuer where we're going to get any love from an investment bank where relatively small in comparison to each of the industry segments that we're operating in, but we're punching above our weight class. And I think it gets some notice and eventually, a lot of these market analysts will pick up some coverage. We continue to try and introduce it to them and incentivize the opportunity that we have, so that they look really smart and being able to find one of those hidden gems. But I'd love to take it off-line if you've got some ideas that we haven't pursued or for -- to broadcast out to all of our investors. If there's something out there that you think we could be doing better, different or highlighting the opportunities that the company holds because you guys have done the work and you know what that model looks like. I know what that model looks like. And we've got our own modeling in there, and I'd love to be able to share that. But the rules that allow companies to do some of that type of activity are just a little bit restrictive. So I share your pain.

If I could, there's two things that I just think perhaps almost certainly would help, it just comes down to whether or not, I mean, you guys and the Board kind of feel the same way. And the first one is, I think that the company could absolutely benefit and shareholders could benefit. And even the people internally working would benefit from hiring an adviser and conducting a strategic review because if nothing else, it's just -- this is a collection of assets that are unique, but also somewhat hard to value. And when I look at a $9 or $10 stock price, and what that implies in terms of the valuations of your business segments, it's just -- it's not -- it doesn't make sense to me, and there's very clear benefits on the capital allocation front from buying back significant amounts of stock, and that doesn't have to be $50 million worth of stocking one shot. But there's really no reason you guys can't have a $10 million share repurchase program where you're buying $0.5 million worth a month or at least in the market trying to. And if you guys ran a process and one who knows D.R. Horton bought Vidler Water, they bought Forestar. If you guys get a $25 offer on the table, I think a lot of, well, hey, Jesus, that's something to consider. But even just internally, fully seeing this is what somebody would pay for our company if they had the opportunity to acquire parts or all of it. It would be useful in terms of then looking at capital allocation decisions and seeing, and that's the first one, and that's the easy suggestion. The other one would just kind of be clarifying some of the -- you guys are ambitious, right? And you haven't made too many acquisitions to date. But there's a lot of this were in the market to buy more water. We're in the market to buy more land. And when you look at it, again, kind of the issue is these are assets that take a while to develop. You've had the water portfolio in some cases for, I think, debt is right? And then I'm looking at the numbers and your annual letter and the utilization is 2% or 2% of capacity. Why not just come out and say, we want to get that number up to 20% capacity or 30% before we're going to entertain the idea of buying more of something we already have plenty of. And even the Sky Ranch, the Sky Ranch you guys bought. I think, like 13 years ago, and we've developed 15%, 20% of it taps. Why not demonstrate we are monetizing the assets we have. We have enough for the next, call it, 10 years. Our focus is accelerating that and returning capital to shareholders. And once we've got 20% to 30% of the water portfolio utilized, once we've monetized half of the Sky Ranch, then we'll pursue acquisitions, but I think it gives people a little bit of pause when -- we're not buying back stock the way we should. I'm not in favor of a dividend, but last call, somebody mentioned it and you run the math, it costs less than $1 million a year to pay $0.01 a quarter. We're not doing that. I just think if you guys confines the parameters of your capital allocation and just clearly stated, our focus is solely on maximizing what we have and returning capital to shareholders and demonstrating our competency there. I think that would be wonders for. So it's something to think about, and I know some of this you can't really answer in too much detail or it's just stuff you guys aren't allowed to speak about, but I just wanted to put it out there because I think it's something that doesn't really have any downside. It's something that maybe people can get behind or just see that if the market is not going to look at things the way we want them to, at some point, it's kind of on us to be proactive about that. So with that, I’ll sign off. As always, I thank you guys for the work if you’re taking my call. And I look forward to the next couple of quarters. Thanks.

Thanks, Greg.

Thank you very much. Well, we appear to have no further questions in the queue. I will now hand back over to Mark for any closing comments.

Thank you. And again, I want to thank all of you for your continued support and we are valued investment dollars here. For those of you that are listening on a replay, if something came up that you didn't quite get your color on. Certainly, feel free to open up and give me a call and talk about it directly. We will be having an Investor Day this summer. So as that gets a little closer, we'll start to give you a heads up on all the day, allow those of you who have been out here or have been out here a few years ago, the opportunity to see the progress that the company has made and really get a feel for what it is that we're doing and the opportunities that the company has before them. So with that, thank you all, and I will sign off and look forward to talking to you in the future.

Thank you very much. That does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.

Thank you, Jenny.