Pure Cycle Corporation (PCYO) Q1 2022 Earnings Call Transcript

Pure Cycle Corporation  (NASDAQ: PCYO) Q1 2022 earnings call dated Jan. 11, 2022

Corporate Participants:

Mark W. Harding — President and Director (Principal Executive Officer)

Analysts:

Bill Miller — — Analyst

Robert Howard — Boiling Point Resources — Analyst

Elliot Knight — Knight Advisors — Analyst

Bill Cunningham — Private Investor — Analyst

Geoff Scott — Scott Asset Management — Analyst

Presentation:

Operator

Good morning, ladies and gentlemen and welcome to the Pure Cycle Corporation Quarter Ended November 30, 2021 Earnings Call. [Operator Instructions]

It is now my pleasure to turn the floor over to your host, Mark Harding. Sir, the floor is yours.

Mark W. Harding — President and Director (Principal Executive Officer)

Thank you very much. Good morning and Happy New Year to all. I’d like to welcome you to our First Quarter for our Fiscal Year 2022 Earnings Call. Just some housekeeping items. We do have a deck for this presentation. You can find it on our website at purecyclewater.com and you can click on the landing page there and it will direct you to where the presentation is.

And so with that, I’ll get started. Moving to our first slide, which is our Safe Harbor statement. Statements that are not historical facts contained or incorporated by reference in this presentation are forward-looking statements as that meaning from the Securities and Exchange Commission. I think most of you are familiar with the Safe Harbor statement. But now that we get the lawyers out of the room, what I’d like to do is really or roughly overview of the Company water business segments, and then talk a little bit about the quarter and then a little bit of color about — kind of our operations and then open it up to a bit of Q&A at the end here.

So we — for those of you that aren’t familiar with the Company and those that are just kind of learning the Company, we operate in kind of three complementary business segments and each of these segments actually drive operations for each other segment. So it’s a opportunity where we’re continuing to leverage the value of our longstanding assets that we’ve acquired in water and land development. Our water — water and waste wastewater resource development segment is that we own a portfolio of water in an area where you can own water rights. We develop that water on a cradle to grave model where we own the water, develop all the infrastructure that diverts it, that treats it, that distributes it out to our customers.

In the land development segment, we own some highly attractive land in one of the hottest areas in the Denver metropolitan area, the Eastern I-70 corridor. And we are developing that and we are building horizontal infrastructure for a master planned community and sell lots to production homebuilders mostly national production homebuilders. And then also have some commercial real estate that provides some exciting opportunities for us. And then more recently single-family rentals, where we’re taking some of those lots that we’re improving, we’re holding them back for ourselves and we’re contracting to construct homes that we actually list and rent to families and individuals here in the Denver metropolitan areas. So I’ll talk a little bit about that as well, because we’ve got some delivery of that product and some great successes there as well.

So let me start out with the water utility segment. So we are a wholesale water, wastewater provider. As I mentioned, we have wells, we have treatment facilities, we have a distribution network, we process that water, we distribute that water to our customers that model generates two fee incomes. One is a large upfront capital fee, which we tall tap fees and so these are current tap fees for both water and sewer. So they’re right around 20 — almost $22,000 or $32,000, $33,000 per connection. Those are paid by the homebuilder, typically amortized in the cost of the house and our capacity — topline revenue capacity on that is about two — a little over $2 billion and if you take the number of connections that we can serve which is about 60,000 connections multiply that by the tap fee, that’s how you get that. That’s predominantly about a 50% margin business, because we’ll construct all of the facilities that are necessary to handle the water utility side of that.

And then once we’ve got that customer, we generate water and sewer monthly fees and those fees are typically about $120 a month for a typical single-family residential home and so that translates into about $1,500 per connection per year. And then as we get that water back for our sustainability, our most cost-effective new water sources to continue to use and reuse our existing water source. So we have two wastewater reclamation facilities where we treat that water. We treat that water back to a very high-quality water supply that we can then put through a separate distribution system and be able to redeliver that for outdoor irrigation demand. So we’ve got to use and reuse model for our water utility segment.

A little bit of color on that. We continue to grow our assets in the water and the wastewater side, so you’ve seen a tremendous growth over the last four or five years of investment into that system, which continues to develop and serve our customer base. A little bit about our customers. We’re adding about 40 customers a month, mostly through two active developments that we are working with, the Sky Ranch community for ourselves and then the Elbert Highway 86, which is another water utility that we acquired a couple of years ago, but this really just shows a projected absorption model for the number of connections.

Really the 5,000 connections would be a build out of just the Sky Ranch community. It certainly doesn’t represent the capacity of our water portfolio, which is about 60,000 connections worth. And then, we do also serve water for oil and gas operations and that’s been something we’ve talked about steadily over the more recent years. We happened to sit on top of a very lucrative oil and gas play in the Niobrara Formation and this is typically referred to as the Southern Wattenberg Field. We have a number of operators that have lease interest here, the largest of which is consolidated, a number of interest over time and really actively drilling wells in the formation, there is several producing formations here.

And so you take a look at what the well capacity is for where we would be servicing the water needs for that. It’s about in excess of 10,000 wells in the capacity. So it’s a very large play for us if we’re looking at maybe a footprint of a couple of hundred square miles in this area. And how we sell that water, we sell water to them at a very high rate. So their demands are very, very large and they need that water in a very compressed period of time. So they want that over maybe a two or three week period. Currently, we’re averaging about $250,000 per well for oil and gas operations. And we are seeing a much renewed strength of activity in the oil and gas space here. So as oil has firmed up and I think the Colorado politics have settled in terms of how the state and the operators are going to regulate their operations. There is a lot of renewed sense of certainty as to how the oil and gas operations are going to move forward. So we’re glad to see a lot of that activity continue to come back for our operations as well.

This slide will give you kind of a proximity of where development is to our service areas. So we acquired these legacy water and land assets a number of years ago. And what’s happened is the Denver metropolitan areas kind of grown out to where we are. And this gives you a picture of, kind of how we are positioned, where the metropolitan is there in relationship to our service area. We have a large service area. We have 24,000 acres of property that’s owned by the State of Colorado. It’s owned by the state school board, which has a fiduciary responsibility to generate revenue for the Colorado public education system, one of a number of fiduciaries that they have and really just gives you a proximity of where our service area, not only in terms of the — our exclusive service area, which is the Lowry Range, but also Sky Ranch.

As you can see that also in the pink area, a little bit north of our serve — our Lowry service area along the I-70 Corridor which is about 4 miles south of the airport. And then some surrounding properties that are key opportunities for us to take a look at both land acquisitions as well as utility operations in that corridor. And so we really like where we’re at. We like our positioning in the marketplace. We like how this positions itself in terms of investment activity, not only for the Company, but really the region as a whole. So it gives a little bit of context about how our assets are positioned together with the Denver metropolitan area.

Talk a little bit about our land development operations. This has been an exciting development for the Company in more recent years. We acquired about a 930 acre of property more than a decade ago at the height of the housing recession. It was an excellent acquisition for us. It not only came with the land but some of the lot that — we were under contract to buy when we were looking to just provide utilities to it. The zoning on it allows us to develop up to 3,200 residential lots in a couple of million square feet of commercial space, because we have an interchange right along the Interstate. So that property is more ideally positioned for retail, commercial light industrial uses.

And as we look at this property, we look at it as how many connections and how many lots we can monetize and just roughly converts over to about 5,000 connections, when you take a look at the commercial square footage. So that’s about 1,800 square feet. As I referenced, it’s ideally located and really the most active development corridor. We started development of this property a couple of years ago and really embarked on our first phase of that which was about 509 lots. We have completed all those lots. We have transferred all those lots to our homebuilder customers. Excuse me, as of the quarter end, we have a little bit more right now, but there is about 405 residents out there.

We’ve sold almost 480 of the 509 taps. So we get those tap fee revenues typically at the building permit phase and really we’re adding about 40 connections a month in this. So you’ll see this absorbed pretty quickly on build-out of that — two of the three builders that we had in our first portfolio of builders are complete with their model with all of their homes or at least the remaining homes are sold and are awaiting delivery. I think Richmond has a few lots left. They may have or maybe a dozen or a little bit more lots left that they’re still pricing out and selling through the market there. I think they’re building them on specs, so that they’re optimizing their price for that. But we’ve recognized all our lot revenue and nearly all of our tap fee revenue from the Phase 1. So that’s been a very successful launch for us on that.

In about spring of last year, we started our second phase and our second phase of this development will be a total of 850 lots and we contracted for about 800 of — 804 exactly, lots with our homebuilder customers and held back a few of those lots for ourselves. So we held back about 46 lots with the ability to expand for some other areas and really reserve those lots for our single-family rental markets. So I’ll talk a little bit more about that later in the presentation. But what we’re very excited about was that this particular phase also included a charter school, so we were working with the local school district, the Bennett School District here in Colorado to get a charter school and we’re very pleased that partnership has really been a very good working relationship both for us and the Bennett School District.

We have a terrific charter operator, the Michigan National Heritage Academy that we’re looking to build this charter school on for an opening in August of the school year August of 2023. So that will continue to add to the community in itself. It’s a local neighborhood school. So we’re very excited about having a local K-12 campus right in our development. And then just a little bit more about our Phase 2 here. We’re looking at the contract revenues that we have from our homebuilder partners will generate about $70 million in total, about another $20 million in tap fees. And then as part of what we’re doing, not only do we collect our fees — lot fees from our homebuilders, but we are also doing a horizontal development of the roads, curbs and gutters, the parks, the open space, all of those public improvements and we do get those — that investment back. In the first phase, those public improvements totaled about $33 million. That was a little bit weighted, because we had to start some of that with some of those roadways which were common roadways to the entire project. This second phase estimates about $61 million of public improvement reimbursables. So we have a combination of not only the $70 million in the lot revenues, but also the $60 million in the reimbursement revenues and then our costs for developing the second phase are estimated about at $73 million. So, gives you a bit of a feel for the high-level economics on delivering the lots in our land development segment, extremely attractive opportunity for us.

Let me just — this is a little bit more metrics about parsing out our 850 lots. We’re doing that in four sub phases just so that we are able to incrementally deliver these lots on a real-time basis for our homebuilders and also kind of how the lot revenues go by builder. So it gives you a bit more color about how the distribution to those lot revenues are, the total tap fee revenues and the costs and the reimbursables in that. So it gives you a feel for how those gross proceeds work for us and the cumulative aspect of not only the gross proceeds, but you need to add the reimbursables to that as well.

And then if you take a look at how we’re delivering each individual sub-phase. This is kind of the breakdown of each of the sub-phase. Our first sub-phase, one of the things that we look to do three of the four homebuilders here are in a structure, the contractual structure which allows us to be able to deliver lots on an incremental basis and be paid on that incremental basis. And so what happens is, we call that a Lot Development Agreement format where each builder is able to pay us when we deliver them a finished lot or not a finished lot, a platted lot. So that the platted lot gives them title to the property, they pay us roughly a third of the finished lot phases price and then as we deliver the wet utilities, we get that second, third, and then finally, when we deliver the finished lot, we get that third payment. And then we have one homebuilder that’s in what we call a finished lot agreement where they’ll pay a little bit more for us to carry that cost through to the end of the finished lot and deliver that finished lot. So we’ve completed the first two components of the first 229 lots. So we’re working on the roads and curbs right now and expect that we’ll be able to deliver all 229 lots by the end of this fiscal year. So we’ve got delivery dates there sort of the October — no, August timeframe of 2022 and give you kind of a feel for how that’s breaking down by each individual builder. So some metrics on that as well.

Also want to talk a little bit about our single-family rental business and one of the things that we looked at was that the value of us creating an attractive community, the curb appeal. What we’re doing for parks and open space, what we’re doing for amenities, what we’re doing for schools, what we’re doing for the commercial value, all increases the value of these lots. Not only for customers and homebuilders at the time, but it also increases the value for the homeowners that come out here and they buy these. And so one of the things that we looked at was being able to continue to participate on that. So the single-family rental model seemed like a very attractive way for us to do that and that was kind of the fundamental investment theme on that. If you took a look and really dissecting that market, the housing market is an extremely tight market. I think that’s true nationwide. But I think it’s exaggerated here in the Denver market and what you’re seeing is both home prices increase significantly as well as the rental market for that.

And so these are some statistics about what we see in the rental market over the last three years, both in terms of the median lease price, how many listings are available, the price per square foot. And so that really was our investment theme and we started this process out with three — really four lots from our first phase. So we entered into a contract with the local homebuilder to construct the first three lots. Those lots were delivered on budget and in time, and in fact, we rented each of those homes out within 14 days of listing. So this is a little bit of pro forma on that, but the rental income on that is around $2,800 a month on that. So it gives you kind of an annualized basis and then we do have a terrific team of professionals that are helping us construct a portion of our water system as well as our land development activities, which allow us to be able to operate and maintain these homes ourselves and this give you a bit of a pro forma on that where we’re going to generate not only sufficient money to be able to cover the vertical cost of that and what we look to do was, we wanted to roll forward the equity value that we have in the land and the improved lot as well as the utilities and then finance the vertical component of that at a very attractive rate, so we were able to line up some very attractive financing for that.

So we were able to finance our first three homes on that, be able to not only benefit from carrying forward, the vertical cost to our shareholders, but also having it be free cash flow for us on each incremental units. So if you take a look at that, capitalized costs, we did self-perform on some of that activity where we were able to handle the most of the landscaping. We financed roughly the out-of-pocket cost on that to our third-party builder. And so each of those units were about $330,000 and then the appraisal value of those came in significantly higher on that. So really just the delivery of house on our lot is benefiting us tremendously on that.

So we’ve really financed about $1 million worth of these first three homes, their value — the fair market value of these is estimated to be about $1.6 million. So we’ve got some equity built up in each of these single-family units and those units continue to appreciate in value. We’ve got a — we’re seeing a year-over-year increase in excess of 4% on each of these units. So with that, what I’d like to do is talk a little bit about kind of the quarter end. The quarter-end was another terrific quarter for us. We continue to monetize our assets, both in terms of the land and the water assets, so about $4.27 million in revenue. Taking a look at our net income, about a $1.5 million in net income and about $0.06 earnings per share on a fully diluted basis. And really this is kind of showing you a little bit of how the contribution is for each of the three segments.

And so if you take a look at that revenue, the blue portion of that really is representative of the water and the wastewater segment. The green portion of that is the land development segment and while we don’t see much, because it hasn’t contributed materially yet on the single-family rentals that will continue to grow. And so what we’re going to want to do is give you guys a feel for that, in this particular quarter, because we’re finishing out Phase 1 and we’re starting Phase 2. It’s a little bit more weighted into the land development segment than the water utilities. But if you saw in Q1 from 2021, that was a bit more evenly distributed. On an operational basis as we deliver each increment on the land side because the land and the reimbursables for those land development activities are so weighted that those will drive a lot of those revenues and then we get that recurring revenue, both from our water utility segment as well as our single-family rental segment.

So the other thing, I wanted to do is talk a little bit about kind of how things have gone over the last five years and even more particularly over the last three years, which have been really transformative for the Company. We’ve been monetizing our water and our land assets and driving significant value for our shareholders. And while there’s plenty to be optimistic about looking at our trajectory here, what’s most encouraging to us is we’re still in the early innings of this effort. I mean if you take a look for a second, we’ve roughly delivered 10% of the lots from our land holdings and really 500 lots of the 5,000 lots, and our most valuable commercial properties are yet to come. So we’re extremely excited about that. We’ve delivered at even smaller percentage of that capacity from our water assets with excess capacities both in our water and our wastewater systems, which will continue to drive cash flow in the coming quarters and in the coming years, and then still yet, an even smaller asset potential in our single-family rental segment.

We’ve only delivered three units in this past year. We’re focusing on delivering another 11 this year and then continuing to grow that into somewhere between 200 and 300 single-family units. So looking year-over-year, last year, we recognized what I would call a significant value in earnings. We were able to record our public improvement reimbursables of income and so really what that showed us was where that land development activity was driving earnings on that. This year, we now have approximately $30 million in reimbursables and we expect to see significant increases in cash flow. So, delivering our next 229 lots this year, we’ll be able to fully monetize all of those and then also a portion of our reimbursables from our second bond offering that we’re anticipating later this year.

I know many of you have asked appropriately so, what’s next? How do we plan to add to our success moving forward? And with that, I would describe how we think about each business segment and how we prioritize our liquidity, both here at the office as well as the Board level and kind of three areas here, kind of at the bottom of this slide. First and foremost, we look at investing our returns into opportunities that we control, right? Our blocking and tackling, our day-to-day operations, we’re optimizing our lot deliveries, we’re investing in the incremental expansion of our water and our water infrastructure to be able to increase capacities for industrial water sales to our oil and gas customers and then continuing to expand in our single-family rental market. And typically, we refinance those costs — of the vertical cost of the single-family, but we do have timing issues on that. And so what each of these are doing are they’re delivering very high margin returns to you and all of these are within our control and they continue to drive value.

Each of these have liquidity demands that really take a portion of our cash position on a quarter-over-quarter basis, but the exciting thing about it is each of them have a very quick return of capital year-over-year. And so what you’re going to see is you’re going to see a continuing growth in the cash position of our balance sheet and I would classify this as management keeping our eye on the ball, doing what we do well every day, day-in day-out and how we build and maintain a profitable company by optimizing and increasing the returns that we have with the assets that the companies require [Phonetic].

Second category of what we look at is M&A growth. During the past three years, we become a respected long-term player in the Denver market, not only delivering outstanding financial results, but if you peel back our results, what you see are it’s not only outstanding assets, but outstanding revenue engines here.

Our land development segment, Sky Ranch is only 10% built out and is recognized as one of the leading master-planned communities in the market. And so we continue to look for other opportunities in that area. Our water utilities have sufficient capacities, both in the water and wastewater which will add significant cash flows for us and it will also add an opportunity for us to be able to use that for M&A growth. So we can look at additional land acquisitions, look at additional water acquisitions. And what this has led to is it’s led to, what I would classify as, some balance sheet muscle for our M&A discussions. Having liquidity with high margin asset producing revenues is leading not only to just acquisition but what probably is better described as a pipeline of acquisitions and really looking at it in both segments, both the land and the water. I would say that we’re going to control the single-family rental side in our day-to-day operations where we’re doing the blocking and tackling on that side.

But really focus on continued opportunities in land and development and I would classify how we think about this as we want to sustainably grow the company through additional acquisitions. We’re vertically integrated in very interrelated business segments would add value to each other and want to continue to drive that value growing each segment sustainably. Water is driving the land. The land is driving the single-family rental. Each of them are opportunities for us to create value for our shareholders. And then finally, we acknowledge there are ways we can continue to create value through share repurchases and dividend payments. And these are important drivers for shareholders and important to the Company as well as our Board. But we really are focused on our efforts in the first two components of this, making sure that we’re doing what we’re supposed to be doing on a day-to-day basis, increasing our margins with our existing assets and the opportunities that we have with those and then the number of opportunities that we’re pursuing on the M&A front and really continue to drive value for our shareholders.

So if we have adequate capital to execute on the business activities, which is priority 1, and we have adequate capital to grow the Company, which would be some of those acquisitions that we have in priority number 2, then return of capital is going to be our next and highest priority where we continue to generate value for shareholders through that. So really that’s kind of a view of how we’ve grown over the last, say, more recent three years and really how we look at continuing to leverage that strength in the balance sheet on that. This is our balance sheet and I’ll let you guys dissect that. We really do have a long, strong balance sheet, very, very low debt-to-asset potential on that. Again, also our income statement where our particular revenues are coming from, not only from a water segment, but from lot sales and the single-family rental, which you’ll continue to see grow over time as we continue to add units in that space.

A little bit about our Board. We have an outstanding Board far better than I deserve. A terrific group of men and women that are continuing to provide the advice and the checks and balances that you want to see for a company to be able to continue to invest in growing this business segment. And with that, I guess, I’d like to turn it back over to you all to see if you got any questions that I can drill down on some specific color for either the quarter or what the Company is looking to do rolling forward.

So with that, I’ll turn it back over to Hollie and see if there’s any questions out there.

Questions and Answers:

Operator

Ladies and gentlemen, the floor is now open for question. [Operator Instructions] Your first question for today is coming from Bill Miller [Phonetic]. Please announce your affiliation, then pose your question.

Bill Miller — — Analyst

Hi, Mark.

Mark W. Harding — President and Director (Principal Executive Officer)

Good morning, Bill.

Bill Miller — — Analyst

Good morning to you. You’re quite early this morning and congratulations on another great quarter. I’m just looking at the opportunities you have, and I would think that maybe the rental market is by far the…

Mark W. Harding — President and Director (Principal Executive Officer)

Bill, are you hearing feedback on your side?

Bill Miller — — Analyst

Yeah, I am. Sorry.

Mark W. Harding — President and Director (Principal Executive Officer)

Yeah. Hollie, I am not sure if there’s a mute on your side or if there’s a way that we can improve that sound quality. Okay, try that, Bill.

Bill Miller — — Analyst

Okay, let’s try it. Got it?

Mark W. Harding — President and Director (Principal Executive Officer)

Yeah, that’s much better.

Bill Miller — — Analyst

Okay. But just looking at the three elements of your business, land development, supplying water to various utilities, etc., and then the rental market, I am surprised that is in your highest priority, because you have recurring revenue, it’s by far the best returns. You can get good financing, you get inflation protection with the increase in the price of the homes. And why isn’t it going to be a bigger part of your business? You say 11 this year, which is terrific and maybe you think you’ll get there, what 200 or 300 eventually? Why aren’t you trying to accelerate that right now?

Mark W. Harding — President and Director (Principal Executive Officer)

That’s a great question. So a lot of what we’re doing on the land side, it’s a long lead in terms of planning and getting all of the relationships with the builder setup. So when we were first looking at our Phase 2, we — I went to the market with 850 lots, probably two, two and half years ago with our builder partners on that and really, it was at the in the middle of the pandemic, call it maybe January, February — literally January or February of 2020. And so we were just starting to roll out the single-family rental market where that was a concept where we thought — we’re seeing a lot of increase in value in terms of these homes, which a brand new community, it can go either way, right?

It depends on how well the community has delivered and really the positioning that you have in the marketplace. So how does our submarket perform and we found that it performed terrific. And so I would say, it was more us holding back some of those lots where we were able to hold back, call it 40 plus of the lots on our builder contract, and it was kind of a late-stage pullback in our discussions with our builders. We had said, okay, just we had 850 lots here and they said, okay, we’ll buy them all and it was the distribution of those lots. And then as we were getting more and more analytic about the single-family market, we actually went to each of the builders and pulled back some of those lots in each of the blocks that they were working with, not actually having delivered that single-family market just yet.

So while Phase 2 could have been stronger in that area, it was still early on for the Company and frankly we’ve got another 3,000 lots to be able to deliver in that area. So I think, we will see higher weighted portions of that where we’ll hold back maybe 100 in the next phase and be able to continue to accelerate that growth. And so, the reason why I don’t have more than 40 in that is a couple of years ago when we were contracting for that, it was still very early on in that process. And so, as we’re expanding that, you’re going to see a higher weighted portion of that.

Bill Miller — — Analyst

Okay. So if you’re only going to do 11 this year, when do we see the acceleration to 30 or 40 rental units?

Mark W. Harding — President and Director (Principal Executive Officer)

So, each of the core — each of the sub phases, we’ve got four sub phases where I pulled back 10 lots in each of those sub phases. So you’re going to see that consistently. But the overlap between filing two and filing three and filing three and filing four, we’ll have a weighted percentage of more of those lots. So while phase filing two in this 850 is 40, filing three might be another 100 of those lots. And then you’re going to see us being building out the first 40 at the same time as we’re building out a portion of the next 100. So they’re going to be cumulatively in terms of how we rolled out each subsequent phase.

Bill Miller — — Analyst

So, Mark, in three years, about counting acquisitions, what percentage of your revenue and particularly free cash flow are — is the rental market going to be?

Mark W. Harding — President and Director (Principal Executive Officer)

Great question. If in three years we’re executing, we’d like to be in a position of having maybe 50 units, 60 units occupied and another 60 units under construction. So if you take a look at that in a short timeframe, that would be going from three units to maybe 100 units in a three-year period. And that’s going to be a function of kind of how each of these individual phases roll out as well as overlapping the next phase, Phase 3.

Bill Miller — — Analyst

Okay. [Speech Overlap] recurring revenue?

Mark W. Harding — President and Director (Principal Executive Officer)

So the recurring revenue, good point on that, is each of these are generating about $15,000 per unit per year in free cash flow. So that’d be a $1.5 million in free cash flow is my decimal right there, $100 [Phonetic] to $15,000. I think that’s right. And then typically if there are about $0.5 million each, that’s $50 million worth of asset value that we would add to the balance sheet.

Bill Miller — — Analyst

All right. Now, Mark, just second question. You’ve talked consistently about having a pipeline of acquisitions. Well, I’ve been hearing for several years and versus the immediacy of being able to buy back shares, what I’d hope is a bargain price. Why can’t you do both, why can’t you have your cake and eat it too?

Mark W. Harding — President and Director (Principal Executive Officer)

Yeah, you are very diligent about that. And we — as you see our cash position fluctuates from quarter-over-quarter when we’re dealing with executing our existing business day-to-day. So we had a $20 million balance at year end, maybe a $12 million balance at quarter end. And so a lot of that quarter-over-quarter activity gets invested into our operations. And so there is some of that fluctuation. Once we get the next round of bond reimbursables out of that, that will help us monetize and keep a stronger liquidity position to be able to consider some things like that, but really for the time being, where we’re positioned with the balance sheet and the opportunities that we’re pursuing on the acquisition front, I think we’re using our liquidity to its best purpose. So that’s why we’re not quite in a position where we can do both. I can’t have my cake and eat it too just yet.

Bill Miller — — Analyst

Well, when do you get the reimbursables back?

Mark W. Harding — President and Director (Principal Executive Officer)

That’s a good question. We’re forecasting that sometime this year. I think within the next fiscal year, we’re taking a look at what we think is the current portion of that which is about $16 million of the $30 million. So we believe at least we’ll get that much back and we’ll see how the next bond positions itself out.

Bill Miller — — Analyst

So there’s no appetite for anticipating in the $16 million or whatever coming back and starting now when the stock is seemingly getting no attention from the investing world?

Mark W. Harding — President and Director (Principal Executive Officer)

Yeah. No, I get it and it’s frustrating for us as well. And I think what we’re really looking for is to make sure that we’re keeping some of that muscle for sitting down at the kitchen table with some of these acquisitions, Bill.

Bill Miller — — Analyst

On the other hand, they are looking at the same dynamics you are, so why are they going to sell out cheaper, sell out now?

Mark W. Harding — President and Director (Principal Executive Officer)

That is the discussion. They are looking at, well, is it going to be worth more tomorrow than it is today. And how much more and if — it’s a very private decision for land holders in the area and many of these are long legacy generational landowners. And so typically if they don’t have it, they don’t want it, and the opportunities for them are mostly estate planning and intergenerational planning activity. So this does give them a way to do some planning, some tax planning, some estate planning activities.

And so we’re working with that together with each dynamic that each individual landowner or farm owner in the case of water, water supply, water rights have. So they’re a little bit unique and everybody has got their own circumstance. But I would say that certainly the last three years and our visibility in the Denver market has increased significantly.

Bill Miller — — Analyst

Okay. Well, thanks for the great quarter.

Mark W. Harding — President and Director (Principal Executive Officer)

Yeah. Thank you, as always.

Operator

Your next question is coming from Robert Howard. Please announce your affiliation, then pose your question.

Robert Howard — Boiling Point Resources — Analyst

Hi, it’s Rob Howard from Boiling Point Resources. Just wanted to check in…

Mark W. Harding — President and Director (Principal Executive Officer)

Good morning, Rob.

Robert Howard — Boiling Point Resources — Analyst

Hi, Mark. I just wanted to check in on what the wholesale water rights market is looking like right now in the Denver areas. There have been — price has been creeping up or what’s that look like?

Mark W. Harding — President and Director (Principal Executive Officer)

It is. It’s increasingly competitive. It’s more costly, more difficult each year that goes by and I’ll give you just one anecdotal reference point. We bought a small farm, had about 300 acre feet of water in a little — it’s about 30 miles north of where we’re at strategically positioned for us on one of the tributaries that we have existing water rights at Lowry. We bought that for about, call it, $9,000 an acre, which translates into about 1 acre foot. Of that, so I got about 300 or so, 320 acre feet that we bought for about $10 million and really looking at some of the transactions and really talking with some of our neighbors right around that particular farm, that’s trending at about $15,000. So we’ve seen about a 50% increase in three years on that. So the wholesale market for water continues to just skyrocket on that, on a per acre foot basis.

And also the cost of developing and delivering it because we have to reach farther and farther out and one of the advantages that the Company has is that our point-of-use for our water rights is right where our waters originated. So we don’t have a lot of that costly infrastructure. And as we continue to reach farther and farther out for water, we defer that capital costs for a number of years, because we can continue to use — of water that’s close in and so we’re really looking at a balance of making sure that we keep growing that portfolio, we keep partnering with regional entities such as the WISE Project that you see in our financial statements from the disclosure in our MD&A sections and really working with other providers to be able to bear the cost of some of that infrastructure on a regional project basis.

Robert Howard — Boiling Point Resources — Analyst

Okay. That sounds great. And are there opportunities for, I don’t know if some other entity is short water this year and in the near term before you’re using up all of your water rights for your own internal uses. Do you — are you able to sell stuff for a year and is that somewhat profitable or how many — what the margin is going to be for something like that?

Mark W. Harding — President and Director (Principal Executive Officer)

So we do do that on a — to our industrial customers. So I would say when you’re selling water on a one-time one-off basis, that’s going to be somebody that uses water and then doesn’t have a continuing need for that one-time use of that. And that’s really our oil and gas customers and they have tremendous water demands. And so we continue to grow our water system. The plumbing of our water system, the wells, the pipelines to storage reservoirs, the pumping capacity, all of that, we continue to grow and use the oil and gas revenues to be able to finance that.

And then what that does for us is it leverages the margins and the opportunities that we have when we get our permanent connections. When I get our residential or commercial, our retail customer connections that are permanent connections and they generate that tailing $1,500 per connection per year revenue, those tap fee margins are much higher because we continue to incrementally expand our system for our one-time use customers oil and gas. And so, those are great opportunities and we are capitalizing on those.

Robert Howard — Boiling Point Resources — Analyst

Okay, great. Thanks for your time. Keep up the work.

Mark W. Harding — President and Director (Principal Executive Officer)

Thanks.

Operator

Your next question is coming from Elliot Knight. Please announce your affiliation, then pose your question.

Elliot Knight — Knight Advisors — Analyst

Elliot Knight, Knight Advisors.

Mark W. Harding — President and Director (Principal Executive Officer)

Elliot, nice to hear you.

Elliot Knight — Knight Advisors — Analyst

Hi, there. Speaking of hearing me on a personal note, Mark, it was 29 years ago next month that I flew out to Denver and we met for the first time and I just want to say listening to you today and listening to this presentation, it is really extraordinary what Pure Cycle has become. Now that’s the end of my speech.

My question is — my question is having to do with the oil and gas business. When well started to be drilled out there, we were told by the industry that these wells would be refracked after about five years. So question number 1 is what’s going on? Have they begun re-fracking? Question number 2 is can you tell us what you know about the operators’ drilling plans, number of wells that are planned for the next 12 months, what their overall thinking is? And number 3 is availability of labor and frac crews, which are said to be in short supply. What do you know about that? Thank you.

Mark W. Harding — President and Director (Principal Executive Officer)

You bet. Thanks. And again, time flies and I do remember that that fated day though those 30 years ago and I think you and many others on this call and that our shareholders of this Company for their continued support through the years here. In the oil and gas space and your first question was, you’re right. A lot of these wells where we are in shale deposit and so what makes this the whole thing work are fracking and well stimulation and when they go in and they do that, it creates an opportunity for the well to flow to the wellhead much, much quicker and they do typically or that shale deposit lend itself very well for re-stimulation. And Colorado as a whole has seen that in probably the northern market in the Northern Weld County Niobrara area. We have not seen that yet in the Southern Niobrara field. And really that our particular area, I think is as attractive, if not more attractive than what you’ve seen in sort of the core Weld County area and really we suffered from operator issues.

And so we had a very — we had a major in this field who came in, spent a ton of money defining the field, putting infrastructure in and really putting it all together, but it just never was something that became big enough for them. And so they — while they did a great job on defining it and really starting the process and proving out and derisking it, they didn’t — they did a terrible job on developing it. Because it just didn’t meet their threshold, it just didn’t seem like you could compete, because it was too big, the operator was too big, not the field, but the operator was too big. And so they ultimately ended up selling to what was a private enterprise. So that went from Conoco to a company called Crestone which was predominantly a Canadian pension fund creation where they were going to monetize that.

And then Crestone did a much better job about coming in and starting that production, but oil is still pretty weak during that period of time. So they weren’t all that aggressive about it, because the economics at $40 a barrel is much different than it is at $70 a barrel. And then more recently, Crestone again transfer that interest and now what we have is a combination of a company called Extraction, Bison and Crestone. So it was a consolidation in a group called Civitas. And so this is a brand new entity. They are a publicly-traded company. You can look them up and take a look at what they’re doing. They predominantly have Crestone and Extraction land positions and then I think Bison management and some of their development expertise and that portfolio as well. So you’ve got kind of a combination of those three entities.

I know we have one rig that’s dedicated to this field. They’ve been drilling wells. They’re prioritizing drilling wells as close as they can with the revised Colorado setback. So they have a 2,000-foot setback. And so they’re prioritizing drilling wells as far on the west side of the play as they can so that they can get those laterals in place and then start to move east with that. And so a lot of those wells are concentrated. It’s close to the development urban areas. A lot of them are in the city of Aurora and Aurora depending on the water year may or may not provide water to those wells. And so I think that we’ve supplied some water to some of those wells and Aurora supplied some water to some of those wells.

The labor shortage, I don’t see as being the limitation on it. I think it’s mostly been just the repositioning of the interest over the last three or four years with various operators. And I think with this recent consolidation and a new entity really having a core position and this being one of their primary drivers to the Company rather than an also-ran as then maybe Crestone — I mean not Crestone but Conoco or a strengthened oil price that Crestone never really had that you’re going to see a much more continued activity on that. If we’ve got one rig drilling wells continuously, they can drill about 30 wells per year. And what’s happening are a lot of what Conoco did was going to be HBP, hold by production. So they were more interested in defining maybe 100 square mile, 130,000 acre lease interest that they wanted to make sure that they lock that in and drill each of those wells in a way that they didn’t have that potential of losing each of those lease interest on that. That’s all done and what they’re really doing is drilling 8-10 [Phonetic] 12 well pad, 12 well per pad drilling program and that’s much more efficient for them.

It also is much more efficient on delivering water where as opposed to us doing $250,000 a well and then moving to another well, we’re seeing $1.5 million, $2 million water deliveries per pad. And so that’s a significant increase in terms of how much water they’re wanting over what period of time, which is why we continue to incrementally expand our water delivery operations, both in terms of storage and then transfer capacity. So each of those could — what I would characterize the oil and gas play to an oil analyst such as yourself from recovered oil analyst, you had some repositioning of the play. The play was derisked. You’ve had pricing of the asset and some patients by operators to make sure that that price per barrel was at a sufficient level for them to increase their investment activity on that and then consolidation of the play so that it’s really centrally focused. So I think all of those things are now giving us some good forward-looking view of how long a gas would play over the next five years.

Elliot Knight — Knight Advisors — Analyst

Thank you very much. That’s great answer. I have no further questions.

Mark W. Harding — President and Director (Principal Executive Officer)

Thanks, Elliot. See you [Phonetic].

Operator

Your next question is coming from Bill Cunningham [Phonetic]. Please announce your affiliations, then pose your question.

Bill Cunningham — Private Investor — Analyst

Bill Cunningham, I’m a private investor and occasional Seeking Alpha author. Hi, Mark.

Mark W. Harding — President and Director (Principal Executive Officer)

Bill, nice to hear from my favorite Seeking Alpha writer.

Bill Cunningham — Private Investor — Analyst

And your least favorite all at the same time. I’m the only one of it [Phonetic]. So in any case, I have a couple of questions on the water. One is I believe to the extent you get water from the Lowry Range, you have to pay your royalty of 10% to 12%. Is that correct?

Mark W. Harding — President and Director (Principal Executive Officer)

That is correct. So 10% if it’s delivered to a public entity, 12% if it’s delivered to a private entity.

Bill Cunningham — Private Investor — Analyst

Okay. And to the extent you’re getting — you’re taking it from Sky Ranch property, obviously, there is no royalty to pay. I’ve been looking at your financials and I don’t see the royalties broken out separately. Is — are they so small that they are insignificant or am I missing it?

Mark W. Harding — President and Director (Principal Executive Officer)

No. Yeah, so typically, we record that net of revenue.

Bill Cunningham — Private Investor — Analyst

Okay.

Mark W. Harding — President and Director (Principal Executive Officer)

Pardon [Phonetic] me. You don’t see a separate category for that. So our revenue number is net of that royalty and it is pretty small right now. Not only do we not pay royalty on Sky Ranch water, we don’t pay royalty on our Lost Creek Water. We don’t pay royalty on our WISE water and those are the lion’s share of what we’re using. A lot of, a lot of it, we’re delivering to oil and gas will come from Lowry and so that has a higher rate. We get about three times the price that we deliver water to our residential customer delivering it to our oil and gas customers. So it almost washes out in terms of the revenue.

Bill Cunningham — Private Investor — Analyst

Okay. Okay, good. The second question has to do with the tap fees and I’m looking at the numbers for Phase 2. You’re showing over $33,000 in tap fees per home, but when I do the math, I come up with less than $25,000 per home. Now, I think the answer is that these are less than single-family equivalents, but just wanted to check on that with you.

Mark W. Harding — President and Director (Principal Executive Officer)

That is correct. And so when we look at a measured — a metric here, we look at that at a 0.4 acre foot equivalency and that would be, what is — what was historically the average for a single-family lot. At Sky Ranch, our lots are a little bit smaller. And so we’re averaging about 0.3 as opposed to 0.4. And so what that does is it means we can serve more connections with the same water supply and when you look at that maybe that we still get the same dollar per acre foot, but when you have more connections in our recurring revenue model, what happens is we have a fixed fee portion of that. So a customer might pay $45 per month if they use no water and then a consumption charge based on how much water they use. And so what that — what the smaller lot size and more customer connections do for us is it has more revenue potential for us on a continuing basis for that standby fee for reservation of that connection.

Bill Cunningham — Private Investor — Analyst

Okay. So then do the builders pay different amounts for a tap fee depending upon the size of the unit they’re building?

Mark W. Harding — President and Director (Principal Executive Officer)

They do. So we have five metrics that go into calculating, each individual tap, each individual lot and it’s based on size of the lot, size of the house, the number of car garage it has because then there is going to be concrete portion of that which takes out irrigated portions of that, how much zero escaping they have and how many square foot of the house it is. So all of those metrics go into our tap calculator and then they — it actually comes out and splits out. Okay, this house on this lot we know we know, we calculate, estimate the average annual demand to be this much and that — then is factored to 0.4 acre foot. So some of them are higher, if you have a large lot. I remember when we rolled this model out, we had one homebuilder and the very first house they came out with ended up being on a corner lot and they ended up having like a $45,000 tap as opposed to $25,000 tap and they said, we don’t like it. And I said, well, if you want me to fix it at $32,000 for every one of your lots, we will, but it’s not going to be in your interest to do that.

Bill Cunningham — Private Investor — Analyst

Interesting. Great, thanks. And then I finally have a question on the commercial development, particularly on supermarket. I know at one point you were mentioning that you needed 2,000 rooftops for a supermarket chain to be interested in going in there. You’ve got 500 in Sky Ranch now and adding there is that trailer park that’s near you, that’s another couple of hundred. There is Harmony almost adjacent to you. There is the whole area where that Vista PEAK Prep school is, where there’s thousands of homes in there. And looking at Google Maps, it appears that the closest supermarket to Sky Ranch right now is over 10 miles away and a couple of stops from the interstate away. So I’m wondering what the thought process might be now for at least a supermarket going in on some of the commercial property.

Mark W. Harding — President and Director (Principal Executive Officer)

We have engaged with a number of grocery retailers on that platform. They are very interested in what it is that we’re doing. And while I would like to say I could give you a timeline on that, the model would be one of them used to put their flag pole in early because they wanted to be kind of the first one there and establish their position and the bigger operators now are a little bit lagged on that. They want to be — instead of six months early, they want to be six months late, but they want to reserve the site. And they say, okay, yes, we’re going to be there. And I want to be right here. They know exactly where they want their lot and I think we’ve got some land plans around that lot and then it’s just going to be a timing of when that works for them and how that pricing works. So…

Bill Cunningham — Private Investor — Analyst

Okay, great.

Mark W. Harding — President and Director (Principal Executive Officer)

What I’m not interested in doing, I’m not interested in selling them the land at a lower price and then having them wait two, three years to build on it. I’d rather wait until they’re ready to build on it and optimize the land value on it.

Bill Cunningham — Private Investor — Analyst

Yeah. Well, it also adds to the value I would think of the homes being sold in Sky Ranch if there is an active supermarket there.

Mark W. Harding — President and Director (Principal Executive Officer)

I — yes, intuitively, that’s true. But honestly, that’s not what we suffer from. We don’t suffer from enthusiasm in our market. I think the price point that we’re in, the entry level where I would say when we started this product. There were Taylor Morrison and KB, some of their first home. They were selling at $360,000. You can’t buy a home out on our site for less than $500 now. I mean it’s — it is that attractive in terms of the building cost, the delivery cost, all those costs aren’t materially higher. It’s the community that we’re creating out there, the attractiveness of it, its location, its access to transportation, all those things are increasing the value of those lots.

Bill Cunningham — Private Investor — Analyst

Okay, great. Thank you very much, Mark.

Mark W. Harding — President and Director (Principal Executive Officer)

Thank you.

Operator

Your next question is coming from Geoffrey Scott. Please announce your affiliation, then pose your question.

Geoff Scott — Scott Asset Management — Analyst

Mark, it’s Geoff Scott, Scott Asset Management. How are you?

Mark W. Harding — President and Director (Principal Executive Officer)

Great. Nice to hear from you, Geoff.

Geoff Scott — Scott Asset Management — Analyst

Yeah, it’s been a while. I haven’t been around for 29 years, but I was stubbed [Phonetic] $3. So I’ve been around for some time anyway. Follow-up on the commercial side, have you actually identified some — a specific land area where that commercial development is going to happen?

Mark W. Harding — President and Director (Principal Executive Officer)

We have. What we really do is leverage the interstate and the interchange on that. And so we’re looking at about 140 acres right up that’s got that I-70 frontage for our commercial opportunities. What I didn’t show in the deck and I will next call and I think we might have it posted on our website. But you can see we spend a lot of time on the design work for that commercial parcel, how the pad sites are going to lay out, how the transportation network is going to lay out, what we think about in terms of square footage for building spaces given our conversations with the various users. We were talking with a nice supercenter for grocery and fuel and then — and coupling onto that, you’re going to see a little — some pad sites available for that, that are going to be local pizza, dry cleaning, liquor retail, things like that. So we’ve got good designs for that.

So we have spent the time to land plan that, to optimize what parkings going to need pursuant to our zoning requirements and all of that. So while it hasn’t quite monetized in terms of having the connections there, the Company is planning for that and development of that parcel has — we spent a lot of time working on that and have had some great guidance from our Board. We’ve got some of the best commercial developer in town on our Board that really was instrumental in helping us lay that out, make sure that we’re optimizing, not only the acreage there but how that acreage gets used on parking that can be co-parking oriented. This parking can benefit multiple retailers that type of stuff.

Geoff Scott — Scott Asset Management — Analyst

Okay. In terms of timing, what fiscal year would be kind of targeted for actual commercial building and leasing?

Mark W. Harding — President and Director (Principal Executive Officer)

I’d love to say it can be in ’22. I doubt that’s the case. I think it’s probably a ’23 type opportunity. We might have something to talk about this year, but I think to come to fruition, I think it’s probably still 18 months out.

Geoff Scott — Scott Asset Management — Analyst

Okay. Then a very high-level question. The fires up toward Boulder, it’s not going to affect the population of Sky Ranch. But you have to believe that with all the rebuilding activity that there is going to be an extensive pressure on labor and materials. Is that — are you starting to see that already?

Mark W. Harding — President and Director (Principal Executive Officer)

I have not seen that yet. You know our production builders typically have better access to that and manage that much better. What we would look at as a pressure point for the Company would be, could we deliver our BTRs in that segment and really we’ve got a great homebuilder that delivered our first three. He is very, very aggressive and wants to grow his business and really we’re a key component of growing that business. Together with the fact that he competes against the production builders and the production builders in the next phase are much more positioned to be able to expand on that.

They’re building their homes next to us, they may be able to expand that if they’re not able to price that out competitively to our existing builder, then I think we’re positioned well for that, not to say that that won’t still constrain the market because you have other trades, you have electricians, you have plumbers, all of those trades need to come out and be able to be committed to a particular area. There is another 1,000 homes that will need to be rebuilt. When you look at it in the aggregate, we’re building about 15,000 homes a year in the Denver market. So on a percentage basis, it’s tragic and it’s a lot of homes, but it’s probably not that weighted.

Geoff Scott — Scott Asset Management — Analyst

Yeah. I was going to say labor was tight before the fires and after the fires, it has to be even tighter.

Mark W. Harding — President and Director (Principal Executive Officer)

Yeah. I wouldn’t disagree.

Geoff Scott — Scott Asset Management — Analyst

Okay. Congratulations. I appreciate the time.

Mark W. Harding — President and Director (Principal Executive Officer)

Thank you for your support.

Operator

There are no further questions in queue.

Mark W. Harding — President and Director (Principal Executive Officer)

Great. Well, so for those that are listening to the replay, our guests [Phonetic] on this, if something pops up that you’d want some additional information on, please don’t hesitate to give us a call. We do have a terrific website. It’s now an award-winning website and so there is a — we will continue to update that. We will continue to provide color content photos, video footage, live podcast, a whole range of opportunities for us to continue outreach to the public and to the investment community. I mean, on an active basis. We’re much — we’re very active on the conferences. So I know a number of you have been to some of those conferences and we’ve spoke one-on-one on that. We’ll continue to do that, continue to reach out to the markets and make sure that they understand what it is that we’re doing and certainly the enthusiasm and excitement that we have for the Company.

And we also look forward to delivering you some performance on the M&A front and activities on that. I know we’ve been working on that for a while, and not all of those are within our control. But we’re very excited about some opportunities that we’re pursuing and hopefully we can satisfy, Bill Miller that we’re putting debt capital to good use. So with that, again thank you all for your continued support. And please keep in touch.

Operator

[Operator Closing Remarks]

Mark W. Harding — President and Director (Principal Executive Officer)

Thank you, Hollie.