Pure Cycle Corporation (PCYO) Q2 2021 Earnings Call Transcript

Pure Cycle Corporation (NASDAQ: PCYO) Q2 2021 earnings call dated Apr. 13, 2021

Corporate Participants:

Mark Harding — President and Director (Principal Executive Officer)

Kevin B. McNeill — Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

Analysts:

Tucker Andersen — Above All Advisors LLC — Analyst

William Miller — Private Investor — Analyst

Justin Xie — Black Diamond Investors — Analyst

Bill Musser — New Frontier Capital — Analyst

Presentation:

Operator

Greetings. Welcome to the Pure Cycle Corporation’s Second Quarter 2021 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, President and CEO, Mark Harding. You may begin.

Mark Harding — President and Director (Principal Executive Officer)

Thanks very much. And I’d like to welcome you all to our second quarter for the period — six-month period ending February 28, 2021 earnings call. Just some housekeeping items. For those of you who are dialed in but want to follow the presentation on our deck, if you jump over to our website at purecyclewater.com, on the front page of that there will be a link where you can click on to the earnings presentation and you can follow it along with us.

So with that, I will start the presentation with the first order of business which is to get the lawyers out of the room or at least satisfy them and note that this is our Safe Harbor statement. And statements that are not historical facts contained or incorporated by reference in this presentation are forward-looking statements. I’m sure you’re all familiar with Safe Harbor statements and forward-looking statements. So to give those of you who are new to the Company, and we’ve got a number of new folks who have either called in to inquire about the Company or had participated in one of the conferences that we’ve done recently, I’ll give you kind of a brief overview of the business enterprise and will drill down on some of the specifics of each of our segments and then I’m going to turn the call over to our CFO, Kevin McNeill, who will give you guys a highlight of our impressive earnings over the quarter. So — or over the six-month period.

So with that, the Company operates in three complementary business segments, water resource segment where we own water rights in a water-short area and then develop those water rights for our own use and as a water provider — wholesale water provider for other customers. Our land development segment where we own property in the right part of the Denver area, in the I-70 corridor, which is one of the fastest-growing corridors in the metropolitan area. And then a new segment that we’ve recently announced is a single-family rental built-to-rent segment. And I’ll drill down a little bit more specifics on that as we go through the presentation. Highlighting our water segment. We are sort of what we define as cradle-to-grave where we have a large water portfolio in the water-short area, in a part of the country where you can actually own water as a property asset. So we own about 29,000 acre feet of water rights and that enables us to provide service to an estimated 60,000 connections. And we define our connections as sort of the equivalent of a residential connection. And then we also develop the wells, the diversion structures off of the surface water streams that treat it, that distribute it out to the customers. We collect that back once the customer has used it. We process that through a water reclamation facility and then we reuse that water supply, either through irrigation customers where we sell that water to irrigation clients or we sell that water to oil and gas customers for industry use. So we use and reuse that water supply. We get paid two fee instruments for that.

We get paid a one-time connection fee, a very substantial fee for our connection charges. We get about $27,700 for the water side and about $4,800 for the sewer side. So rounded numbers around $32,000 for our connection fees. And if you do the math on the capacity of the portfolio, that’s about $2 billion in revenue. And then there is about a 50% margin in that business because we are going to build the brick and mortar, all of the infrastructure that does deliver that to all of our customers. And then we get monthly water and sewer bills. So we collect about $1,500 per connection per year combined water and sewer revenues and doing the math again on our estimated capacity of 60,000 connections that build out, that generates about $90 million year-over-year revenue. And that’s about another 50% margin business when you’re working through operating and maintaining the system.

I do want to highlight this as kind of our keystone asset, our new wastewater reclamation facility. And what this does is, it’s a 100% reuse facility, it takes 100% of the wastewater that comes into that facility, treats it back to a standard that we can reuse that for outdoor irrigation and Colorado has some very specific regulations that govern the reuse of that water supply for parks and open space irrigation. So we do that. We have dual distribution system within the Sky Ranch Community that allows us to deliver that directly to our parks and open space as well as bring that back to our storage facility for use for our industrial oil and gas customers.

This is a little bit about our customer connections and an idea of where they are, where they’re coming from and sort of their projected growth rate. And so we’ve got a growing customer base. Although if you look at our capacity at 60,000, we’re at a very, very small number. We’re just beginning in terms of our customer growth. But we are growing quite rapidly year-over-year on our connections, both due to what we’re doing at Sky Ranch as well as our other service areas in Albert County, which is a project that we acquired the service to a couple of years back. We provide both residential and commercial connections down into Albert County on that. So if you take a look at, this is kind of a projection build-out of just the 5,000 connections for Sky Ranch and we’re kind of projecting that over the next, say, eight or nine years.

Moving on, kind of a graphic that illustrates the growth in our investments in our water utility assets. So we continue to add to our portfolio of assets that deliver that service, both in terms of the infrastructure, on diversion and all elements of that storage distribution systems, those sorts of things. So this will continue to grow. This would be that 50% capacity that we use to invest those tap fees into the brick and mortar of the utility segment business.

So I want to spill over into the second segment, our land development segment, which really incorporates us as a master plan developer in the Denver metropolitan area. We acquired about 1,000 acres of property a number of years ago. We acquired that at the right time. You always want to buy right. But acquiring raw land in the middle and the depths of the great recession certainly took a lot of courage and we’re grateful to our shareholders and our Board for the confidence they place in us for making those investments, but it was a good buy. And in total the project can accommodate up to 3,400 residential units in a couple of million square feet of commercial development. And when you equate out that commercial development in terms of SFEs, we’re projecting that to be in that 1,600 single family equivalents on the utility side. And so, that metric will come into play a little bit later as I detail what the build-out capacity of Sky Ranch is. But we believe that that build-out capacity is around 5,000 single family connections and we equate that both not only in terms of the utility segment, but also on the real estate, what we look to realize in terms of the revenue potential on the real estate.

Highlighting a little bit of our successes on this. We started our first phase, which is about 509 single family lots and we did that about 18 months ago, almost two years ago. We’ve got just shy of 300 residents out there now, a little over 100 homes under construction. And so that has exceeded the expectations of both our builders as well as our models and it’s mostly been because of the product. We have an entry-level product out here. It’s one of the — it is, I think, the most affordable master plan community in the Denver metropolitan area and it is not the most affordable, it’s among the most affordable master plan communities in the metropolitan area. We’re projecting that available lots in this first phase will be sold out by the end of this year. We recognized our full revenue on the lot deliveries of about $37 million to date and we’ve recognized about $11.5 million of tap fee revenues to date that total should inch its way up to about $14 million as the balance of taps are applied for by each of our builders. And these are three production builders in our first phase.

Moving on to kind of highlight a little bit of our second phase. We’ve got about 900 lots in our second phase. So about twice the size of our first phase. We broke ground in February of 2021 and our dirt crew is out there grading our first phase of these lots right now. They’re about half through grading the first 230 lots. So we hope them to be done in about end of May time frame and then we’ll mobilize all the utility crews and start to deliver lots later this year. If you take a look at our lot revenue for phase two, we did have a substantial increase from our pricing in the first phase, mostly just because we were looking to break into the market and our first phase and we’re getting into a little bit more price metrics here where we had about a 30% increase in our overall lot costs. And so we’re estimating lot revenues of about $72.6 million. This phase has a number of different product lines. Our first phase was pretty homogeneous. We had single family detached lots which were anywhere from 4,800 square feet to 5,200 square feet, there is 45 or 50-foot lot frontage, pretty standard lot delivery for our production builders. And this one will have a number of different products. We’ll still have those same 45, 50-foot lots. But we’ll have paired products, the town home product, we will have duplex product, we’ll have some alley loads in both the 40-foot sizing and the 35-foot sizing. So it will be much more attractive to a broader range of buyers. So when we look at the absorption on this one, we don’t look at it necessarily by the builder but we look at it by the product class and we have six different product classes in this next phase.

Tap fee revenues again are here illustrated, about $21.5 million and then the reimbursable costs at about $48 million which we get back through reimbursements from the local municipality, the Sky Ranch Metropolitan District or the Sky Ranch Community Authority Board. Doing some math [Indecipherable] here, this is kind of an illustration of both how filing one stacks up, how filing two looks to project itself out and then what the balance of it’s going to look like. And the balance is really taking the remaining 3,600 which we convert that 1,600 commercial lots into residential lots. And so that was — that forecast here is going to have the same revenue projection that we would have at a residential level as well as the same cost projection. We think we’re going to do better than that because the commercial land is more valuable and it has certainly more efficiencies on delivering utilities to it. But for comparison purposes, this kind of gives you a feel for what’s the pedal left in Sky Ranch. And so, if you’re looking at this, we probably got about another $150 million in total revenue over say $65 million. So we got maybe $80 million worth the margin in the phase two that’s available. And then the next phase, that can carry us up to about — a little over $600 million with about, call it $150 million worth of costs in there and some of those efficiencies in there in terms of the tap fees and the lot delivery costs. So very attractive margins and what we’re looking at for the rest of Sky Ranch. And so that comparison each investor can kind of take a look at that from a discount factor, but we are projecting that over, say, the next eight to 10 years that will give you kind of an analysis of how fairly the stock is priced.

Moving on into our new discussion topic. And I do want to spend a little bit of time on this because this is exciting for us. It’s a built-to-rent. We’re actually going to contract with our portfolio homebuilders to be able to build these homes for us so that we can continue to have them be our builder and this we’re not competing with them. We really are just saying we’re going to hold back on this lot and we’re going to be your first customer on those lots. So as they’re building on the blocks that we reserve these lots for, they have the opportunity to be able to come in and build for us on that.

And really it’s a nice model for us because it allows us to capitalize on the highly-appreciated land cost as well as the longstanding investment that we have in the utilities. And if I look to try and highlight why we think this is important and why this is a good segment for us, this is kind of an illustration of some of the demand statistics about how home values continue to go and then the constrained inventory that we see in terms of home prices. And then we also see a significantly constrained inventory of entry-level home prices here in Colorado. If you took a look at these statistics before the recession, roughly 50% of all homes that were started in the Denver area were in that entry-level product category. And today that number has fallen to less than 4%. So tremendous demand for what it is that we’re doing out there. And then just some statistics about the price appreciation of the home values, the competitive listings. I think you’ve all seen the headlines about every time you list a property you’re getting above — you’re getting multiple offers above your asking price. And so what that tells us is there is significant appreciation for these lots and how we translate that. We’re looking at why Sky Ranch. The Denver population continues to be among the top in the country in terms of urbanized areas for residential growth. We think the Sky Ranch, our entry price product, is the right location. We’ve got a tremendous land plan that incorporates parks and open space and a new charter school that we’ve approved or that our local school district has approved and we’ve been working with them for a number of years to really bring that investment into the community and then the commutes to employment centers. So Sky Ranch is the perfect location for something like this particular model.

And how we look to capitalize on that is to take a look at where we’re able to deliver the vertical side of this for about $300,000, a little bit more than $300,000 on a $450,000 home. So that’s the incremental cost of the investment into the build-to-rent as compared to just selling the lot and the tap. And what we were able to do is line up interest rates — attractive interest rates for that additional cost. So when we went to this — we took this opportunity to our Board, it said that we might consider it, but you can’t use any of our cash and you’ve got to find a way to be able to fund the incremental component of the vertical cost, which we were able to do with that mortgage type money. And so we’ve lined up some financing for about 3.75 [Phonetic] for this built-to-rent. And then if you look at the metrics on it, if we’re renting that out as a $450,000 home, we’ve got a rental income there at about $2,800 a month. And so that generates about $33,000 over the year and then we’ve got our costs in here. But what this ultimately does is it has positive cash flow to us of another $15,000 per single family connection. And when you add that to the $1,500 single-family connection on our utility model this becomes very accretive to the income statement. So the advantage on this build to rent, if you take a look at the next slide, it allows us to be able to grow both the balance sheet and the income statement. So the positive accretive cash flows that are going to be recurring cash flows to the income statement of $15,000 per connection and then also taking a $450,000 market value and seeing that continue to appreciate.

And so if you show just some modest depreciations on those home values, you’ve got a great asset appreciation. So we’re going to — we’re going to kind of add this to the portfolio with our second filing here and we’ve got about 100 lots reserve for that. It will be incremental. So we’ll have start out with a dozen that will be in our first phase. We will kind of roll that forward at each incremental phase and we were also able to add three new lots to our first filing. So we are actually under construction for our first three units of that. And so as we continue to update you on that, one of the things that we’d like to do is also try and have an Investor Day here this summer where we — as we can now open up and travel for those of you that are out of town, have an opportunity to come out and see not only the successes of our first phase, see the construction of our second phase, see what we’re looking at in terms of our built-to-rent units as well and then more on kind of water utility segment and some industrial oil and gas activity as that kind of inched its way back. So there’ll be a bit more information about that as we come a little bit closer to the summer and get some dates that we’ll circulate out to everybody.

So with that as a lead-in, I do want to highlight the fact that there still is an attractive oil and gas opportunity for us to sell water to oil and gas operators. There has been a significant investment into this field that’s been derisked. So they do have a very strong understanding of the production efficiencies of this field and there’s thousands of wells that are looked to be drilled in here. And we continue to see an increase in the amount of water usage per well. So our current operator is using about $250,000 worth of water for each well that they have in this capacity. And really what they look to do is try and stay ahead of the growth of the metropolitan area. So they’re going to be working their way from sort of the west side of this map over to the east so that they can maintain the spacing that the new — the setback requirement the State of Colorado has. Colorado has had a fairly dysfunctional relationship with oil and gas. But I think they’ve come into a fairly workable framework for operators to be able to get what they need to get done and be at safe distance in setback requirements for residential communities that were there encroaching into the residential community. There is an expectation that they will be in a safe operating distance. And so we find ourselves in a part of the formation that’s attractive, but also where development hasn’t quite come out of that yet. So I think there is a good relationship and we find ourselves kind of in the better part of that field for operator.

So we do have a rig that was relocated here this spring and is drilling additional wells. And so we will continue to deliver water for them and you start to see that on our income statement, as we go forward.

Okay. So what I’m going to do is move over to the financial results here. I’m going to turn the call over to Kevin McNeill, who is our CFO, and he’s been kind of really working this side of the Company and optimizing what we’re doing on that. And I’ll let him highlight what we’ve got.

Kevin B. McNeill — Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

Great. Thanks, Mark, and welcome everybody for — thanks for joining us this afternoon. I’m going to highlight a few items, won’t go line by line, obviously on the balance sheet or P&L. On the slide, we’re on the — current slide around 23. The top three graphs really show you the three — those three major items, revenue, gross margin, net income and where we’re at in the six months ended February 28 compared to the last couple of years really to give you a gauge of how we’re doing compared to where we were over the last few years.

The bigger item, I want to highlight is the bottom section and this is related to the reimbursables. As we noted in prior calls, up until now we’ve felt those reimbursables were contingents the payment of them and so they were recorded on our books anywhere. We are waiving and deferring some of the recognition of interest income and project management fee revenue.

But this quarter going into the current year with the development — second development filing progressing the mill levy changes growing and sustained tax from the first filing, we did analysis and determine that that was actually collectable. And so now we believe under US GAAP guidance it’s considered probable that we’ll collect this. Based on that we are able to recognize, about $19 million of of other income related to the reimbursables along with $1.5 million of project management fees and $1.4 million of interest income, which really lines this up with what’s really occurring and get us back in track and get our gross margins more in line with what was expected and what is truly going on in the first phase.

Progressing to the next slide, I’ll just highlight a couple of items on the balance sheet with cash. We’re maintaining a pretty good cash balance whilst you start see that part coming down in the next quarter as we continue with development of the second filing. But they will start getting some milestone payments.

The next slide is the income statement, which [Indecipherable] show up in our 10-Q which will be filed tomorrow morning, highlights just a couple of items. You can see for the six months ended 06/30 this year versus last — our February 28 this year versus last year, our metered water usage up about $100,000, which is really predominantly due to the Sky Ranch growth. There is about 300 homes built out there, as Mark pointed out earlier. There is some additional fracking revenue from oil and gas operations. And then the one that’s — the big decline is obviously the land — the lot fee revenue which does come down because filing one is substantially complete, all those lots are sold, [Indecipherable] going, we expect those revenues to start being recognized later during this year as permits or its plants and utilities and everything get sold. So that was really it. Obviously as we get to the end of the few questions and answers then obviously if you have other questions, you can feel free to reach out to Mark or myself.

And with that, I’ll turn it back over to Mark.

Mark Harding — President and Director (Principal Executive Officer)

Great. So a couple of highlights there. One of the things about — you can’t be on an earnings call where somebody doesn’t talk about what impacts that COVID has on your enterprise. And I would say the one impact that it did have was kind of a delay in processing our approvals for our second phase. And it was just — it was unavoidable sending in these very detailed complex designs and engineering documents over to the county when they were trying first to figure out how they can get their people to work remotely and then secondly how to have the timelines for processing these applications work with public hearings and things like that. And that really we would like to have these overlap a little bit better than it did. We were set up to do that. But how we started all these and just didn’t work out to time that way, but we do feel optimistic that that will be better managed going forward. So if I were to say what the COVID impact to the Company have been, that would be the one that I would highlight. Staffing wise, we’ve been able to maintain our staffing here in the office through rotating occupancy levels and we’re building that back up. So most of our team does come into the office and most of our team in the field has been consistently working in the field, delivering water, wastewater services.

So with that, let me go ahead and turn it back over to the moderator and see if we can add a little color to some questions that you all might have.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question is from Tucker Andersen with Above All Advisors. Please proceed with your question.

Tucker Andersen — Above All Advisors LLC — Analyst

Hi, Mark.

Mark Harding — President and Director (Principal Executive Officer)

Tucker, good to hear from you.

Tucker Andersen — Above All Advisors LLC — Analyst

Very informative presentation. You guys are getting really professional. I don’t recognize anymore. A few questions. Could you talk about any color on when and how you may proceed with the commercial development?

Mark Harding — President and Director (Principal Executive Officer)

Yeah. So what we — we have added some Board strength here and probably have one of the best guys who handles commercial opportunities for one of the local private developers here in town who really would not be competing on anything that we’re doing. And so, his name is Jeff Sheets. And both he as well as Patrick Beirne, who has really spent most of his career at Pulte have both come into our questions on this is to say they never regret, they never had a situation where they didn’t regret selling their commercial. They always wanted and could never convince their management teams to hold that commercial until the full value got there.

Now there is a delicate balance between how do you hold for value and how you present value that value that you’re holding four. And so right now, we’ve been in touch with a lot of the commercial users, whether that’s going to be grocery anchors or big box stores to get them on — to get on their map such that we know that what their requirements are. But they are sort of saying, listen, we see you. This is a perfect place. We really like the interchange off the interstate. So all those things are great. And they’re just really wanting a little bit more density on the rooftops out there. So I would probably put this at later stage of the second phase. And by later stage, maybe that’s when we’re — we’ve got 500 units, plus the 900, maybe when we get more like 1,000 units up, which probably isn’t that long, Tucker, given the absorption that we’ve seen. And if we take a look at that same absorption in the second phase that we saw in the first phase, we’re looking at it maybe five units per product type per month. So that might be 30 per month. That could be sometime next summer, summer of 2022 that we would start looking at that and start really getting into those lease opportunities.

We want to be sort of delivering the full pad site. We don’t want to have somebody take us out of the property and then do a pad site and then sell it to somebody. We want to get to the pad site for the actual end user. And so, if I give you that analysis that’s how we think we can optimize both that value chain, as well as the present value of the sale of those commercial properties.

Tucker Andersen — Above All Advisors LLC — Analyst

That’s great color. The follow-up, I would have to that is, as you develop more of the residential does it make the remaining residential lots more attractive and perhaps your pricing better if you have like, so, I’d say an operating grocery store and some basic amenities for the people who are residing at Sky Ranch? And is that also an additional consideration?

Mark Harding — President and Director (Principal Executive Officer)

It is, it is very much additional consideration. And actually you’re touching on one of the key points why we went to this built-to-rent, because everything that we’re doing that we are otherwise going to do is going to continue to increase the value of those homes. And so for example, getting a charter school operator on there, getting commercial out there, getting roadway improvements, getting a rec center, getting all of the parks and amenities up, every time we do that that increases not only the value of the lot but the value the home. If it increases the value of $100,000 lot by 5% that’s great for us. But if it increases the value of a $450,000 home by 5% that’s almost 4.5 times greater for us. So that’s why we like that.

Tucker Andersen — Above All Advisors LLC — Analyst

Yeah, yeah. The build-to-rent is very interesting and if I could ask just a couple of more questions. I don’t want to take up all of your time. Is your build-to-rent financing, specific mortgage financing for that project? Or is it — is it financing that has recoursed general balance sheet?

Mark Harding — President and Director (Principal Executive Officer)

It is directly related to the residential units, not against the balance sheet.

Tucker Andersen — Above All Advisors LLC — Analyst

Okay. And the only other question I had is what’s happening to affordability, both in your Sky Ranch development in general and then in the Denver area in particular with the other pressure on builders with regard to cost and things like that? And I know for now it looks like mortgage rates are [Indecipherable]. So I’m not including mortgage rates, but just in terms of the general delivered product cost, and how that’s affecting affordability there?

Kevin B. McNeill — Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

It is the concern in any market and a key concern in our market as well. And lumber prices and labor availability all are contributing to that and that was one of the other key considerations when we were looking at the BTR model is we really wanted to partner with the national builders because they have the best cost per square foot.

If we had to come in and custom build these, it’s very challenging to do that just because of that cost increase. And we do want to stay competitive. That’s why we took a look at this second phase with a lot more density than our first phase. And that’s where you see some of the townhome product because that density then adds to the assessed value, which then adds to the recoverability of our reimbursables. So all those factors give us the ability to keep that — keep us in the forefront as Denver’s most affordable Master Plan Community.

Tucker Andersen — Above All Advisors LLC — Analyst

Thanks. Keep up the value creation for us, long-term shareholders. That’s all I have to say.

Mark Harding — President and Director (Principal Executive Officer)

You have been one of those and thank you for your confidence through the years.

Tucker Andersen — Above All Advisors LLC — Analyst

Yeah. Good, good, good work.

Operator

Thank you. Our next question is from William Miller, a Private Investor. Please proceed with your question.

William Miller — Private Investor — Analyst

Okay, Mark. I loved everything you said but you haven’t told me about what I think is a critical component of your future. Why I should be going out and buying more land for your rental endeavors? I mean, that’s so much — so much the best opportunity you have and it’s got the best cash flow, it’s recurring revenue, which is what people will ultimately pay for in your stock, and you’ve got to get more of my land and own it now?

Mark Harding — President and Director (Principal Executive Officer)

I am locked stock and barrel with you, Bill. We got our nets out, we’ve got — we’ve made pitches on a number of fronts for a number of properties and we will keep you updated. That is an active part of what we’re doing is growing the business and we’re growing the business in every conceivable way, that which we can control as well as that which we can buy as well as that we can partner with. So whether I buy the land, whether I partner with somebody who already has zoning for land s that I get the utilities, all of the above, are part of our growth strategy. And so we are — we are active in that front. And I know you as well as my Board and then others want to see tangible success, but we’re also disciplined about doing it. We want to be smart. We’re never going to find as good a buy as Sky Ranch. We know that. That’s not our metric. But by the same token, we do have the ability to pay a little bit more than maybe somebody else would for that land because we have water that we can combine with it. So we are aggressive out in that marketplace and stay tuned.

William Miller — Private Investor — Analyst

Well, is it a very competitive marketplace at this time?

Mark Harding — President and Director (Principal Executive Officer)

As you might imagine, it is. There are a lot of housing being what it is, people are out there making pitches, but it’s a little bit different for a lot of the properties that we’re in and around our — in and around Sky Ranch because there’s not a lot of water that would go with it. So a lot of folks who might be looking at that might be looking to say well it might be worth this, but you don’t have any water and so I would say we probably have a competitive advantage.

William Miller — Private Investor — Analyst

And what is going to act as a catalyst for you’re actually getting something done?

Mark Harding — President and Director (Principal Executive Officer)

Well, that’s a good question and I don’t have a good answer for that. I mean, it’s ultimately — it’s a function of having — it has to be right for the seller. So sometimes the sellers out there, there is no price, they just don’t want to sell. Sometimes it’s a price that may be unreasonable and sometimes it’s a matter of, we’re working through some logistics with some specific buyers or some specific sellers.

So I’d say all of those metrics come into play. We’ve talked with folks who said, yeah, I know, but, no, I’m not interested in selling right now because of where they’re at in their life and they may be doing some estate planning. There are folks that you know are interested in selling but the price may be too high because they know we have water and they want to price it with our water as opposed to pricing it the way they are selling it and then there are some that are reasonably priced and we’re trying to effectuate a transaction.

William Miller — Private Investor — Analyst

Mark, what took you so long to get to the idea of rental property?

Mark Harding — President and Director (Principal Executive Officer)

This is what my wife says, I’m a slow learner. It’s the gender problem. I have a gender problem of that.

William Miller — Private Investor — Analyst

Okay. Well, now that you’ve overcome your gender problem, I hope you will be able to [Phonetic] go to the next phase of your issues and get some more land so that we can start factoring in what this is going to look like in three to five years.

Mark Harding — President and Director (Principal Executive Officer)

Yeah. Excited to do that too.

William Miller — Private Investor — Analyst

Okay, great. Well done.

Mark Harding — President and Director (Principal Executive Officer)

Thanks.

William Miller — Private Investor — Analyst

Congratulations on all your endeavors.

Operator

Thank you. Our next question is from Justin Xie with Black Diamond Investors. Please proceed with your question.

Justin Xie — Black Diamond Investors — Analyst

Hey, Mark. Great to hear from you. Wanted to ask a couple of questions on the rental segment. First is like, could you walk me through sort of the financing process for the built-to-rent construction? And it seems to me like your capitalized costs are less than sort of the leverage you’re getting. Is that right? And are you like able to recycle out all of your capital?

Mark Harding — President and Director (Principal Executive Officer)

Yes. So typically — so let me — that’s a great question, Justin. So while they said — my Board said I can’t use any of our balance sheet to be able to do this, bridging a bit of our balance sheet to do this. So what we will end up doing is we’ll build the unit itself. And so we use our money to do that. And I view this in terms of sort of the three units we’ve got under construction. So those three units. I’ll round up and say, in round numbers it’s going to cost us $1 million to build all three units. We will build — we will pay for the $1 million. And once we get COs from the county, which means that the house is complete then we collateralize each one of those for the $1 million. So I’ll break that up into three and the bank will take give me $1 million back and take the deed of trust on each of those three units to be able to do that. And so if it costs me $320,000 or $330,000 to build the unit and there are $450,000 in terms of what the sale price is and we’ll have an appraisal on that. We don’t have to pay PMI insurance on that. So it’s directly related because we’ve got a good margin on that and then we can cash flow that by getting somebody in there that would pay not only our debt service on that but the accretive margin to have that positive cash flow to the bottom line.

Justin Xie — Black Diamond Investors — Analyst

Yeah. That sounds wonderful. Great to hear that. And then secondly, I guess how are you thinking about the percentage of properties that end up being built-to-rent versus for sale because, at least in my impression built-to-rent seems to be like the most value accretive thing. So how are you thinking about the proportion of properties in those categories?

Mark Harding — President and Director (Principal Executive Officer)

Great question. And so that’s another one that the Board sort of has a strong show-me mentality on it, is to say, okay, I’m going to give you 100 units and see how you do with 100 units. Can you get them built? Can you get them built with what you say you can get them built? Can you manage the rental and get the income attributable to what the way the thing is forecast out? And if you take a look at 100 out of 1,400 homes, that’s less than 10%. You’re looking at about 7% of the overall units. If we look at the rest of the 30 — the rest of the 2,000 residential units out there, if I take 10% to 15% in there, I think that’s probably a balanced number where it leverages the community correctly. We may have — we may take a look at blocks of it. In this next one we’re looking at 100 dispersed in ones and twos around the community, but maybe we take 60 or so configure it and we want to vary the product so that we can have a common and maintenance through there and take a look at some efficiencies on that side as well. So we’ll vary it up and kind of continue to build on that. But if I were to say our tolerance level may be somewhere around — say maybe 300 to 400 units in this — in Sky Ranch and then as Mr. Miller was highlighting go get some more land and do it. You seem to be generating some value here. So we will continue to look at other properties and continue sort of that 10% to maybe 15% of that to be in a built-to-rent capacity for us to keep.

Justin Xie — Black Diamond Investors — Analyst

Got it. Sounds great. And in terms of property management, is that being done in-house or are you finding some third-property property manager or third-party property manager?

Mark Harding — President and Director (Principal Executive Officer)

So for the time being, we think we’re going to keep that in-house. And one of the reasons we’re doing that is — one of the reasons I would attribute a lot of our success on the development side is we’ve got a combination of doing utilities together with land development. And really where the efficiency is come on this thing, when you go out, you bid you’re land development, right. We’re not going to — we’re not going to grade the ground or do a lot of the wet utility, the retail distribution system or the dry utilities or any of that work. We bid that out of the market and the market comes back very competitive when they first bid these things out. And you never can know everything when you’re bidding in the land development. There’s always surprises. So you always get these change orders and the thing that we’ve done successfully is we have guys that are capable of doing this work. Right.

They’re very talented with the big iron, the loaders, the excavators, the equipment that needs to be able to install the facilities for our utility segment and they can do the same thing on the other side. So when change orders come up rather than being that high-priced dollar on the change order, we take care of that. And so having that team on site also gives us the ability that these guys can do everything. And so we can — if we’ve got a plumbing issue over so and so’s house, they can be dispatched over there and it really won’t be a significant intrusion into our overall business model, because we have them doing productive work all the time. As opposed to if you’ve got a management agency and you’ve got to get a guide dispatched to go out and commute an hour each way, 30 minutes each way, you got 15-minute on site fix and another 30 minutes back that kills you in terms of the management of that. So we like that because we’re already on site. We already have the talent and the resources to do that. And so that’s why we like maintaining it ourselves. We’ll see maybe I’m wrong, and maybe it becomes too concerning and then we sort of, say, either we step into that when you get 100 units, when you get 300 units and you certainly can easily staff in and have those dispatched directly on site. Between 0 and 300, I think we can manage that with the talent that we have.

Justin Xie — Black Diamond Investors — Analyst

Got it. Sounds good. And just to be sure, the financing on the built-to-rent, are these fixed rate or are these variable-rate loans?

Mark Harding — President and Director (Principal Executive Officer)

They are fixed rate.

Justin Xie — Black Diamond Investors — Analyst

Okay. Fantastic. And then one last question from me. I guess, like when you think about the acquisitions in the pipeline and the deals you’re looking at, is there any thought to put on leverage when you make these acquisitions and lower your cost of capital or are you thinking to just pull straight from the cash balance?

Mark Harding — President and Director (Principal Executive Officer)

We’ll see. It depends on the size.

Justin Xie — Black Diamond Investors — Analyst

Got it. Okay. Perfect. That’s all the questions for me. I love the work you’re doing. Thanks for talking with me.

Mark Harding — President and Director (Principal Executive Officer)

Thanks for your support.

Operator

Thank you. Our final question is from Bill Musser with New Frontier Capital. Please proceed with your question.

Bill Musser — New Frontier Capital — Analyst

Hey Mark. How you doing?

Mark Harding — President and Director (Principal Executive Officer)

Bill Musser, good to hear from you.

Bill Musser — New Frontier Capital — Analyst

Quick question on the Lowry Range. Where is the land boards head at with respect to the development of a portion of that property now that there is so much development in the area? And secondarily, is there any role for you guys in helping them move forward on something?

Mark Harding — President and Director (Principal Executive Officer)

So land board is actively looking at working with the county on two fronts. How much of that property should be conserved. You have 27,000 acres out there and not all of it is going to be developed. And so they’ve recently take some Mac and to work with the County on, you know what’s the proper percentage of what gets conserved and then from that percentage, the difference between that and the total portfolio they want some certainty on entitlements and zoning. And so that can take a bit of time. So I think they’re going to — they just recently authorized that. I think they’re going to take couple or three years to take a look at entitlements and conservation opportunities up there to get a good land, land development, land conservation and continuing revenue stream from the whole portfolio, but they’ve been more I guess proactive on taking a look at that property than they have in the last say 10 years of that. So we’re excited to see that. We will continue to help and participate with them on that process. If there is an opportunity for us to bid on land development opportunity, we may consider that. Certainly already have the utilities there but it depends on what we have going on at the time and other acquisitions when they’re looking for development of the property itself.

Bill Musser — New Frontier Capital — Analyst

Great. Thanks.

Operator

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. I will now turn the call over to management for closing remarks.

Mark Harding — President and Director (Principal Executive Officer)

So let me close with this. One of the things that has been helpful and for those of you who haven’t had an opportunity to travel out here and kick the tires, there’s nothing quite like seeing it. And so we will set something up probably in the mid-July time frame to be able to have everybody have the opportunity to travel out here, take a look at it, also be on the lookout for our new website. We were hoping to have that up and live for this call, but that got just didn’t align for us on that. But you’ll see a new improved website, which will have a webcam on there so you’ll be able to click on that and be able to see the dirt movers, the graders moving around the site and some of — all of the activity that we’ve got going on there and continue to have sort of that virtual presence in the marketplace as well. If anybody didn’t get their question queued up from a technology standpoint, don’t hesitate to give me a call. We’ll probably be a bit more active in the investor side of doing a little bit more conferences and getting either in person or virtual conferences.

So if you see us in the conference stop by, say hello or give us a shout out. And if you all have other folks that we should add to our investor mailing list, don’t hesitate to send those over as we’re getting a bit more active on both sending out notices and Twitter and social media. So there’ll be a bunch more opportunities to see the Company’s uptake through that venue as well.

So with that I’ll bring it to a close and again thank you all for your continued confidence in your invested capital.

Operator

[Operator Closing Remarks]