Pure Cycle Corporation (PCYO) Q1 2023 Earnings Call Transcript

Pure Cycle Corporation (NASDAQ:PCYO) Q1 2023 Earnings Call dated Jan. 10, 2023.

 

Corporate Participants:

Mark W. Harding — President, Chief Executive Officer, and Director

Dirk Lashnits — Vice President, Land Development

Kevin B. McNeill — Vice President and Chief Financial Officer

Analysts:

Robert Howard — Boiling Point Resources — Analyst

Bill Cunningham — — Analyst

Bill Miller — — Analyst

Presentation:

 

Operator

Good morning, and welcome to Pure Cycle Corporation’s First Quarter 2023 Earnings Call. [Operator Instructions]

I will now turn the conference over to your host, Mr. Mark Harding, President and CEO of Pure Cycle. You may begin.

Mark W. Harding — President, Chief Executive Officer, and Director

Thank you, Jenny. Good morning, everyone. I’d like to welcome you to our first quarter earnings call for our fiscal year 2023 and Happy New Year to you all. We have a slide deck for this. If you can surf over to our website at purecyclewater.com, on the landing page, you’ll find a button on there where you can click on that and then we will actually forward through the slides, so it’ll give you the ability to see some of the text in the slides within the presentation.

So with that, I’m also joined today this morning by Kevin McNeill, our CFO; and Dirk Lashnits, our Vice President, Director of Land Development, who will also give you updates into some of the business segments and the financial reportings. And then at the end, we’ll have a brief Q&A for those of you who want to drill down on some of the specifics.

So with that, let me first start with our Safe Harbor statement, which I’m sure most of you are familiar with. But statements that are not historical facts contained or incorporated by reference in this presentation are forward-looking statements.

So with that, I’ll get the lawyers out of the room, and we’ll start. I’ll just be very brief on some of the overview of the company. But for those of you that are first timers for the call or new to the company, we really operate on three primary business segments really that are fundamentally interconnected to each other. At the DNA level of the company, we’re a wastewater utility company where we own water in a water-short region here in the state of Colorado in the west. We develop those water rights, and we are a cradle-to-grave on the water rights where we develop the wells, the distribution system with that water to use in both the land segment, which is a parcel of property that we own that we’re doing a land master planned community on, and we’re building lots for our homebuilder customers; and then we are holding back some of those lots and building homes on those for single family rental segment as well. So each of those segments really are interrelated to a vertically integrated platform that we have from the water utility side.

Moving on to just describe a little briefly about the water segment itself. We have just that whole network of utility operations where we have the diversions for the water supply, whether those are taking water sources from our streams and surface water supplies, our groundwater supplies or reuse supplies. We treat that water, we store it, we distribute that out to our customers. We’re also responsible for some of the development of that distribution system pursuant to our design standards for our community, which is some of the lands that we have, but others as well. So we have master planned service areas that are very valuable which we will highlight a little bit later in the presentation. Our customers use that water, they give it back to us, we collect that, we treat it, and then we reuse it. So we have a use and reuse model.

Within that, we get some fee instruments for that. On the water utility side we get connection charges, which are a one-time connection fee which between the water and the sewer tap be around $32,000, $33,000, and those are paid by the homebuilder, our homebuilder customers, and those are typically added into the cost of the home, but that grants the service connection a permanent entitlement to the water supply and then we get usage fees for that. So we get a base fee, which really amortizes some of the cost of operating and maintaining the system, and then we get a consumption charge, which is a tiered consumption charge. And so what this tends to do is it tries to encourage conservation, because the more water you use, the more water — the higher the cost of the water supply.

So as you take a look at our water balance, what we look to do is really keep control over that drop of water where we’re taking that from the supply, we’re treating it, we’re putting it into our system, we’re getting it back from our system, and then we’re reusing that. So we do have a very closed loop system. We do lose a little bit to outdoor irrigation and some evaporation, but those trends are really decreasing and there’s been a lot of press, I’m sure much of you have seen about drought and the vulnerabilities of water supply on the west. So the company’s emphasis on technology and controlling that drop of water through its continuous life cycle is very important to our systems, and we want to make sure that we’re good stewards of this water supply.

Talking a little bit of the infrastructure. We build this infrastructure, long-lived assets. Water supplies certainly are long lives. Those are perpetual, and then you have a lot of the brick-and-mortar that we’re building associated with that. And really this is showing the growth of the company in the last five or six years, really showing about an 86% growth in the capitalized assets class and the various categories of that infrastructure, whether that’s water and wastewater treatment facilities, transmission lines, wells, finished water storage, surface water, groundwater supplies, distribution systems, all the components of a water utility you’ll find in them. So that will continue to grow as we keep seeing that.

Moving into how the growth of the utility looks like. Our current customer count is up to about 1,250 new connections. We measure that in terms of the number of single-family equivalent connections on net. So we have a combination of residential customers which would be a standard single family equivalent, but then we also have commercial and irrigation connections attributable to those, and so just because you might have one irrigation connection that might represent as many as a 200 as you see down in Lowry because we have large irrigation requirements down there of connections, and we rate [Phonetic] that to the number of how we build those out, so the number of base charges that we get for each of those.

I talked a little bit about our residential connections at Sky Ranch, which is our development. We have our first phase which is completely built out, 500 homes. We are into our second phase. Very robust tap sales in our second phase. Dirk will drill down into that a little bit, but we got 124 taps there, and then a service area that we picked up a couple of years back where we have more than 200 connections between the residential and the commercial connections as well.

Moving on, other one of our big customers on the utility side is the industrial space where we sell a lot of water to the oil and gas industry through a number of different operators, and our water supply, service areas, and really the state of Colorado is located over a fairly prolific oil and gas field that’s gotten a little bit more attention more recently with the shale oil play. But we are seeing operators drill a number of pads in a number of formations here that consume a tremendous amount of water for oil and gas. And so we continue to see those sales. This is the distribution of how those sales go by quarter. And as you can see, it’s kind of all over the map. There’s not a lot of predictability to it. They drill year-round, they frac year-round, and a lot of this is really dependent on a permitting process and how aggressive they are.

The leasehold interest in these — and particularly in our particular field has changed hands a number of times, which is pretty typical in the oil and gas industry, but it started out probably in 2015-’16 timeframe with a lot of the field assessment and field definition and now it’s moved into more of a well development. So they’re developing the field. So they don’t do a lot of exploration. They don’t do a lot of changing to it, so each rig has a much stronger capacity to drill more wells per pad per year. And so what we’re seeing is when you get a dedicated rig out here that can drill as much as 25 to 30 wells a year. And they’re pretty significant wells. They’re two-mile lateral wells on this thing. I think they’re experimenting with some three-mile lateral wells on it, and so they’ll continue to increase the amount of water that they’re using depending on their laterals on.

This is an illustration. If you look at the right-hand side of this, that will be the Denver metropolitan area and the growth of the metropolitan area. The two red areas or pink areas that you see in there, those are our service areas. If you look at the one, transition between the green and the gray there, that’s our Sky Ranch project, which is ideally located. It’s on the I-70 corridor. And it really is in the strongest area of growth in the Denver metropolitan area. And we, as a developer, are really targeting the entry-level housing product, which I think inures very well for us, both in very strong markets as well as in challenging markets. And so, Dirk will talk a little bit more about that.

And then our service area is the very large pink area which continues to be really an untapped asset for us. The land is owned by the state of Colorado in trust for the public education system here, and it’s one of the most unique assemblages of land in the country. And as you can see by the picture on the left there, most of the development has really come up to the border of that property. And so it depends on how the state looks to move forward with that, but that’s certainly an opportunity for us over the next few years that we look forward to doing the utilities for that. We’re the exclusive water wastewater provider for that 24,000 acres of contiguous property. That gives you kind of a sense of the utility side, some of the segments that we have in there.

I’m going to hand this off to Dirk Lashnits who will talk a little bit about our land development activities.

Dirk Lashnits — Vice President, Land Development

Thanks, Mark. Good morning. Land development, so here’s our flagship project called Sky Ranch. Every time I see in its overall view, it always reminds me of the dreaded Tetris piece from that game. This is 930 acres, like Mark said, on the developing edge of development out on the east side of Denver, has 3,200 residential lots capacity and 2 million square feet of commercial capacity, and we’re about 15 miles east of downtown Denver.

Sky Ranch has probably got about a 10 to 15 year build out. That will be heavily dependent on our market conditions. We’re going to build this out in multiple phases. Over the last probably four or five years, you’ve heard us talk a lot about our first phase, the first 500 lots. That’s pretty much in the books, and we’re now moving onto our second phase. The first phase is the block on the left side of the picture. And then our second phase is the middle portion of the parcel and then future phases will grow out to the east and then our commercial piece is the northern block adjacent to I-70.

We plan to build on average probably about 250 lots per year out here, and we’ll layer in our schools and commercial pieces and rec centers, all those things that go along with a master-planned community. So phasing, as I mentioned, Phase 1 in the books, that was 500 lots. We also had our pilot program for our build-to-rent lots. So we have four occupied units in that phase, 100% complete. Then moving into our second phase, this is 850 lots, we’re subdividing this into four subphases. That’s 2A through 2D. We are well underway in our Phase 2A. That’s about 80% complete and we hope to have that completed later this year, beginning of 2024. We’ve started our infrastructure for Phase 2B. We’re hoping to start that in earnest quarters two through four of this year, and then phases the third and fourth subphase, 2C and 2D, we’ll build out in subsequent years.

Our Phase 2A, we just had our first few residents moving there, so that’s exciting. We have delivered all our lots to the builder customers there. As you saw by our water taps number on the previous slides, those are indicative of the number of homes that the builders have started, so we’re right around that 120, 130 houses started. And I think the builders have sold probably about 20%, 25% of their lots, and they’ll look to have those sold out the remainder of this calendar year, and then we’ll be looking to have that second phase come online for the next batch of lots to not interrupt that sales cycle.

All right. So this is the details on the phasings. These are — this is the Phase 2, 850 lots broken down into four subphases. We got our lot revenues. Those numbers are what we — our income from sales of the lots to the builders, and we have our tap revenues. Those are the water and sewer connection components that Mark mentioned. Then we have our costs to develop the lots and then we have our reimbursable components, and those are the costs attributable to public infrastructure that are eligible for receivable reimbursement through public dollars, whether that’s taxes or bonding.

The graphs on the bottom of the sheet here, the bar graph and then the far right pie chart, those are our builder breakdown, builder distribution. So we have our four builders in this phase, and that’s by builder. And then that center pie chart is our product mix, so those six slices of that pie represent the different product segmentation, which I think is a good balance of product offerings and provide good diversity.

Now to some market conditions here. The news of the day, start with the good, so the positive things. The pent-up demand for new home sales, we think there’s good upside here. Back to the ’05-’06 timeframe, there was about 1.4 million in home sales and even in the latest upswing in ’21-’22 we’re only at 600,000. So I think that represents a good upside for us. In this first quarter, we’ve seen the mortgage rates start to stabilize. Still hovering around 6%, and that’s in historical norms.

Lot deliveries still trailing home starts, so in other words, we are still selling more homes than we are delivering finished lots. So from our standpoint, being in the business of selling lots, that’s good potential there. Like to see that demand. Our homebuilders in Sky Ranch are all ranked nationally — all four in the second phase are in the top 15, I think three of them are in the top 10, two of them in the top five. Yes, top one, top two even. Good for stability and in it for the long haul. They’ve certainly seen some of the market swings and are good partners in helping mitigate that.

Low unemployment, this is obviously a really important one. We hope that stays positive. House prices still appreciating, buying a house is still a good investment. Lower average days on the market, houses are still selling pretty quickly, and those are some typical numbers there. Last year, we were down in Denver at least. We were under 10 days on average in houses we’re selling above that asking price, site unseen, day of asking. So a year ago, we had that peak. And even today with some of the slowdown, we’re still seeing days on market in the 20s. So that’s all still good outlook.

On to the bad or opportunities that we have here. Again, the abrupt uptick in interest rates shocked the system. And I think we’re slowly adjusting to that. Again, we’re still in historical norms. Lot of that important metrics still trending downwards. Builder confidence is down, applications for mortgages are down, buyer traffic in the model homes is down, home sales are all down, and then combine that with higher material and labor costs and then our cancellations on contracts are still up. I think at the end of the day for us, houses are too costly, you need to figure out ways to recalibrate that. The land development side that we do is a link in that chain and how do we adjust for those changing markets.

And the way we do that is mostly on a timing — from a timing standpoint, and that’s really our challenge is trying to time our deliveries. We have a long lead time in development business. We’re probably anywhere from the earliest six months, but more likely a year out from when that demand comes online. So we have that challenge on trying to find the right time to build our lots.

And here’s just a slide of couple of the touches on the job growth chart, interest rates and some sales information. Back to you, Mark.

Mark W. Harding — President, Chief Executive Officer, and Director

We’re going to push this over to Kevin and he’ll give you an update on some of the rental segments and also just brief stats on the quarterly performance.

Kevin B. McNeill — Vice President and Chief Financial Officer

Thanks, Mark. Thanks, Dirk. So our single-family rental, our newest division that we launched in 2021, we continue growing it. We’re up to — we got four houses completed now as of December 15. We’ve got 10 more under construction, and those will be delivered throughout the year — throughout our fiscal 2023. The four that are rented are all rented from $2,800 a month to $3,000 a month. Pretty stable renters we think. So still we’re very optimistic about this market or this new segment, especially with interest rates continuing to climb, with home values continuing to stay high, and that’s slowing of that market, the rental rate market in Colorado especially remains very strong.

This is some projections that we put together using our fiscal year from last year, our 2022 results, just because the first quarter is a smaller piece to look at. We projected out with 14 homes and 50 homes. 50 would be the entire Phase 2, 46 homes there and 4 homes in Phase 1. And so what you can see is our current projections, obviously, depending on cost and interest rates and everything else is about $1 million a year, just short of $1 million a year in free cash flows from operations of just the rental units. Doesn’t include, obviously, overhead or anything like that.

So the financial results for the quarter wasn’t the strongest quarter we’ve obviously had. It was from water, wastewater standpoint, as Mark touched on earlier, we continue to invest in the water infrastructure little over $67 million now in water rights between water rights themselves and supply infrastructure to bring the water to our customers. We delivered about 67 million gallons this quarter, which is down a little bit from last year, which is predominantly down because there wasn’t a lot of oil and gas activity during the quarter and also construction activity was down. So with the Phase 2A being done and 2B not really started yet, we didn’t sell as much water to construction activities. Dirk obviously touched on the land development side, which you’ll see when we get to the balance sheet and income statement as well, and then the single-family rentals continue to grow.

From a [Indecipherable] graph standpoint, you can see obviously the revenue and segment revenues were down for this quarter compared to each of the last few quarters. One thing I’ll point out is in our Q1 2020 quarter that was anomaly. We recognized a bunch of revenue in that year to catch up some contingencies that we had. And also, there was a big — there was a lot of lot sales that year. Phase 1 was going very strong. Phase 2A was getting ready to start. So it was just — it was a great year.

This year, you’ll see the revenues are down predominantly, again, because we talked about the housing market slowdown. We delayed a little bit of Phase 2B in order to match our lot deliveries with the homebuilders’ sales. So that was somewhat intentional. But obviously, with the housing market and interest rates, that was hard to control.

From a net income standpoint, it gives you the same thing. Net income dropped during the first quarter compared to the other quarters. Same reason. Revenues were down. We were able to offset some of the revenue declines with a little over $1 million in surface use and other payments from oil and gas companies, which we think is a pretty strong indicator of a good 2023 we hope for fracking and drilling continuing out throughout the rest of the year throughout our service area. And then obviously, there’s our diluted earnings per share. There will be a little more information on this coming out when we actually file the Form 10-Q, which is due in about four or five days, which we anticipate filing here in the next few days.

A few upcoming dates. We have our annual shareholders meeting tomorrow, which is — there won’t be any presentation — any big presentations. It’s more of a formality, so not expecting a big event for that. Our 10-Q, like I said, the filing date is January 17. It’ll be filed before then. And if you haven’t seen it, our ESG report we’ve launched in November, so that’s on our website, gives you a little more detail on what we’re doing from an environmental standpoint, how we’re trying to be good stewards of the environment and shareholder money.

And then real quickly, the balance sheet and income statement, you can see we had a pretty good pickup in cash last year. The Sky Ranch CAB did a bond offering and was able to repay about a little over $24 million in total to us of reimbursables, and so we invested that in some short-term treasuries and capitalizing some of those interest rates, continue to grow the balance sheet in terms of assets, and investing in new water rights and infrastructure. And then you’ll see the income statement. Obviously, I won’t spend a lot of time here. It will come out in the Q and in the press release we issued last night. It has a lot more information on it. But you can see the revenue decline that we discussed predominantly in the land development, lot sale area in that commercial water sale area. Our overheads stayed fairly consistent. We’re keeping our headcount strong, and then you can see in that other net, the $1.2 million of other income that was basically service use payments and future — anticipation of future drilling and oil and gas operations on our land.

With that, we can turn it back over to Mark for closing statements and questions.

Mark W. Harding — President, Chief Executive Officer, and Director

Thank you. Okay. So what are our takeaways here? I guess takeaways for management would be the stewardship of how we handle our business models. We’ve got very valuable, very low-cost basis legacy assets here, both in terms of the water and the land side of the equation. And what we’ve done successfully is really make sure that we carefully position you all with your invested capital to market exposures. So one of the ways that we do that is through how we handle our builder contract. And those of you that are familiar with the company had this appreciation, but we have a lot delivery agreement structure where our builders are working in partnership with us on delivery of this very expensive infrastructure. We are in a high-cost business where we’re delivering horizontal infrastructure for master-planned communities, and then the housing side of it, the vertical side is handled by the homebuilders. But that infrastructure is very expensive, and we want to make sure that neither we nor the builders, our builder partners, have too much exposures in softer markets, and we’re in a softer market right now.

And really the validation of that business model is the fact that we don’t have any exposure in there, right? As you saw in the presentation, and Dirk highlighted, we’ve got about 15% of the Phase 2B, which really would be the grading and the overexcavation components of that that we’ve invested in. And that’s been covered by our homebuilder customers. So that’s not a significant investment in there. And then as their lot deliveries, and this is about pace. This is about how many lots they want to have an inventory because they want to match their sales cycle. And maybe in Phase 1, each builder was doing seven to eight homes a month, so that absorption was pretty high.

In Phase 2B, we’re seeing maybe three, but we are still seeing that. And it’s three homes per builder, so that gives you a cycle for that. We find ourselves in the right market segment, the entry-level product. And so as the homebuilders come out there and look for buying opportunities Dirk really highlighted the continued demand for single-family homes in the marketplace. And that’s still — we’re seeing that in the marketplace. We’re seeing that in terms of the builders and the building permits that they’re pulling and the spec homes that they’re building out at Sky Ranch, and then also that they’re having sales. That we’ve got customers that have moved out there in the last 30 days and continuing to really see that absorption. We continue to invest value into the community. We’re opening up our school, which is going to be a tremendous asset for them because it’s a local school, a charter school that we partnered with a national charter operator out of Michigan, National Heritage Academy, and they have a website, the Sky Ranch Academy has a website. You can take a look at that, but really good delivery device for education for new families out there.

And then taking a look at diversity. One of the things that we like and Kevin mentioned was single-family rental business. There’s still a ton of demand for more space at your home because of the work balance, the work-from-home balance, you’re seeing a lot more dual-income families looking for more space so that they can have offices at home. And our home product, we’ve diversified from either a 45-foot lot or a 45-foot [Phonetic] lot in Phase 1A. And now we’ve got six different product categories, and that’s inuring very well to the market segment. You have six different price points in there as opposed to just a couple of price points depending on finishes. So a lot of those design features that we had in our master planned community really is inuring well, and we’ll stand the test in both good markets as well as headwind markets.

And then ultimately, continued sales of water in industrial operations. And so we’re going to see a little bit of uptick in oil and gas demand, but that’s really a steady-eddy customer for us. And we like making sure that we supply that segment water supply and then can convert that water supply over into the potable supply. So there’s a really good balance in how we’re extending and developing into these assets.

And then continued growth. We continue to grow the company, small tuck-in acquisitions of assets. As you’ve heard me talk about in prior acquisitions, we’re on the hunt for more land and really build our land portfolio. I don’t have anything really substantive to talk, so I’m going to forecheck some of your questions on what’s the update on acquisitions for land development. There are a number of opportunities that we’re pursuing, and we’re very aggressive about doing that. And one of the nice things we have is we can be aggressive about that. We have very liquid balance sheet. We’ve managed this capital well. We’ve been disciplined with our board to be making those investments and then also making investments in ourselves with the stock buyback. So those are the capital allocation structures for us.

So with that, I’m going to turn it over to the lovely Jenny in Scotland who’s waiting for her lunch and see if there’s any questions that you might have on drilling down some of the detail.

Questions and Answers:

 

Operator

[Operator Instructions] Your first question is coming from Robert Howard from Boiling Point Resources. Robert, your line is live.

Robert Howard — Boiling Point Resources — Analyst

Good morning.

Mark W. Harding — President, Chief Executive Officer, and Director

Good morning, Robert.

Robert Howard — Boiling Point Resources — Analyst

Hi. Just had a quick question on the — for the new customers that are getting added on. So you talked about $1,500 of annual revenue from the water customers when they come on. I was just wondering, at least maybe at Sky Ranch, as you’re adding customers, how much additional costs might there be. So are the — is the infrastructure and everything in place so that $1,500 is really almost all incremental, or is there additional cost that gets layered on as you’re still building up stuff? Or have you reached a critical mass where maybe the costs are decreasing a lot slower than they were earlier in the project?

Mark W. Harding — President, Chief Executive Officer, and Director

That’s a good question. And really, we segment some of that brick-and-mortar costs for adding those connections into the tap fee charges. So typically, the way we see it is that connection charges, that $33,000 for a tap fee charge, we build the wells, the treatment facilities, all of the brick-and-mortar stuff to deliver that water to the customer through that capital allocation base. And a lot of that is early on investment that we’ve had and then also what we see is the oil and gas revenues tend to allow us to expand that system apart from the tap.

So the way we usually look at it is that’s the 50% margin business, but it becomes a little bit better margins because some of the oil and gas revenue we can allocate to expanding that supply side in advance of those tap connections. When we get the actual connections, the $1,500 connection per year, which is really your point, there are additional costs on that because we have an operating entity where we’ve got chemical costs to make sure that we disinfect the water, we have lab costs because we have to continuously sample our water and make sure that our water meets all of the primary and secondary clean water standards.

So that business, we typically also look at as a 50% margin business, and it’s not so much on the capital side as it is on the operating side. We have operators that are making sure that they’re going out, making sure the system is operating correctly, taking a look at whatever is occurring daily, nightly, weekly on those sorts of things in addition to really the lab costs. But that’s how that divides out. There’s not a significant uptick in that. As a matter of fact, it’s usually a little bit better on the front end because everything is brand new, and it operates the way it’s supposed to. But we really — we look at those margins as about those 50% in each segment of that, if that answers your question.

Robert Howard — Boiling Point Resources — Analyst

Yeah, sure. And then just that $1,500 number, I think you guys have been talking about that for a number of years. Is there pressure on that? Or I don’t know is the market rate elsewhere for — in Denver, are other people charging that amount, or is there possible pressure for that going up, just inflation in general. How are you able to keep the customer rates flat?

Mark W. Harding — President, Chief Executive Officer, and Director

Yes. And I would say there’s two rates there. So there’ll be the tap fee rate and then the usage rate. The tap fee rate probably has a little bit more upward mobility just because of the scarcity value. And as you continue to hear about the competitiveness of water rights and the incremental costs because we have to go farther and farther out to reach for those water supplies, I’d say our tap fees have a little higher upside than, say, necessarily the usage rates. The usage rates will continue to grow. We continue to grow those for making sure that we keep up with our inflation costs as well as anticipatory costs for whatever the evolving regulatory climate is going to look like. But that’s a little bit more inflation oriented as opposed to the value of water in water-short areas and the cost of water, acquiring those water rights from farther and farther areas.

So when you take a look at those two revenue streams, there’s probably a little more strength in the tap fee side, which is going to be our big number. You apply that to our portfolio. We have 60,000 connections worth of that, so that’s over $2 billion worth of revenue potential over time as opposed to that $1,500. That’s been a stagnant number. We’re probably a little bit above that. That’s just been a metric number that we continue to look at. I would say that that continues to go at about 3%, 3.5% per year.

Robert Howard — Boiling Point Resources — Analyst

Okay, great. That’s all I got. Thanks a lot.

Mark W. Harding — President, Chief Executive Officer, and Director

Thanks.

Operator

Thank you very much. Your next question is coming from Bill Cunningham who is a private investor. Bill, your line is live.

Bill Cunningham — — Analyst

Hi, Mark. How are you doing?

Mark W. Harding — President, Chief Executive Officer, and Director

Just living the dream, Bill.

Bill Cunningham — — Analyst

Good. On the last conference call, I had made the comment about the unusually good results, which were a result of lot sales and tap fees, and we talked about how earnings are lumpy and so we might not see the same results quarter-to-quarter and this quarter proved exactly what you were talking about. I did some penciling out of things ahead of time to figure out what your numbers might be and thought it was 50-50 as to whether you’d be reporting a loss or a profit this quarter. So it was a pleasant surprise that you actually squeaked through with a bit of a profit. And hopefully, nobody else was surprised with the results being not as good as the prior quarter.

Mark W. Harding — President, Chief Executive Officer, and Director

Yeah. No, that’s true, Bill. And it’s cyclical in a couple of ways. One, because of the way our year-end reports puts us into — and where we report, right? Denver, as most of you all found out, Denver is a great place to live, except maybe December, January, February. And so cyclically, we have — and we’re in the outdoor business, right? So a lot of our water supplies, outdoor irrigation, and outdoor land development activity, outdoor sales for single-family homes are all cyclical in the winter months. So it is pretty predictable. We are grateful that we were still able to be profitable, and we will continue to strive to do that quarter-over-quarter.

Bill Cunningham — — Analyst

I do have a couple of particular questions for you. One is I was looking at the tap fees sold in the totals. Your 10-K, at August 31, said that 618 taps had been sold in Sky Ranch. Your press release said four more were sold this quarter. But then you reported a total of 766 taps that have been sold so far in Sky Ranch. So I’m confused on the difference between the 766 and the 622.

Mark W. Harding — President, Chief Executive Officer, and Director

Yeah. And really, what we — and this was a real strong push to normalize the number of tap connections. There’s a difference between the residential connections and then we have the CAB, the governmental entity that’s responsible for the parks and the open space and the outdoor irrigation, and they pay a tap fee, but they are only one connection, and so that’s the difference.

Bill Cunningham — — Analyst

Okay.

Mark W. Harding — President, Chief Executive Officer, and Director

So what you see is when we report the number of irrigation connections, that’s a higher number. And we’ve been really trying to normalize that for everybody so that people like you who really drill down into numbers can get a feel for that $1,500 per connection per year amount, what is that applying to. And that’s now — we’re really trying to give you all a little more clarity. as it’s applying to that 1,246 number of connections. When we sell — when we send out a bill, that’s not 1,246 bills because there may be one customer that might have 50 of those connections, but that equates out to the same number of connections. So that’s what we’ve tried to — I was figuring when I went through that statistic this quarter, I’m like Cunningham is going to call me out on this thing. I’m glad you did. I appreciate that. But we did that with you in mind specifically for the detailed orientation as well as Robert, who came back and said, okay, I’m really tracking this $1,500 per connection, and we really want to give the market a better, clearer understanding of how to compute that number.

Bill Cunningham — — Analyst

Okay. Great. Thank you. And then I also have some questions on the different builders in Phase 2A, and there seems to be a big difference from builder to builder as to what they’re doing there. KB looks like they’re going gangbusters where they’ve sold 27 homes already, which I think is about two-thirds of their total. And Challenger with their homes seems to be doing okay also. Lennar has just started selling their single-family homes, but their townhomes are still listed as coming soon. And then D.R. Horton, we had talked about last quarter where I guess they were having to do some revisions to their building plans with the county and hadn’t started yet. So I’m just wondering what might be going on with a couple of the laggards here with Lennar townhomes and the D.R. Horton homes?

Mark W. Harding — President, Chief Executive Officer, and Director

Those are the two largest builders that Dirk was referring to. And I’d say they all look at their own scheduling, and this is new for both of those builders. This is a new project that they’re in. And I think Lennar has got — they’ve probably got — of their townhomes, they probably got 18 spec townhomes under construction. So what they’re really both of them — more Lennar than D.R. Horton, are really pushing for this seasonal downtime where they can build and then hit the market in March cycle with a ton of product, and they like the product that they have because it’s very price-sensitive product. Those townhome products are going to do extremely well.

And I think what Lennar is forecasting is we want to have a good inventory of those. I think we showed some aerials of that, and if we didn’t do it in the earnings presentation, jump on the website because we throw up a lot of our drone shots on that. You can see the bulk of the starts and the numbers out there. And I think we’ve got more than maybe 60, close to 70 vertical construction out there of homes out there, And you’re right, KB has done very well out there because they’ve got a paired product.

Again, that’s higher density, better price points out there. Challenger is very competitive on their price. And then Horton, and they’re pulling lots of taps, so we know that they’ve got lots of building permits that they’ve got teed up, and then they’re just going to line build. They’re just going to throw everything they got at it, do it all at once. And that’s pretty stylistic for the builders.

Bill Cunningham — — Analyst

Okay. Yeah, that’s great to know that Lennar is actually building the townhouses right now because just looking at…

Mark W. Harding — President, Chief Executive Officer, and Director

Yeah. They’re very aggressively building them.

Bill Cunningham — — Analyst

Wow. Okay, that’s great. Because when you look at the website and see coming soon, you just figure that nothing has happened yet, so…

Mark W. Harding — President, Chief Executive Officer, and Director

No, I think they’ve got four or six taps under news.

Bill Cunningham — — Analyst

Under news.

Mark W. Harding — President, Chief Executive Officer, and Director

Yeah.

Bill Cunningham — — Analyst

Okay, great. Thank you very much, Mark.

Mark W. Harding — President, Chief Executive Officer, and Director

You bet.

Operator

Thank you. Your next question is coming from Bill Miller, who is a private investor. Bill, your line is live.

Bill Miller — — Analyst

Good morning, Mark.

Mark W. Harding — President, Chief Executive Officer, and Director

Morning, Bill.

Bill Miller — — Analyst

Happy New Year.

Mark W. Harding — President, Chief Executive Officer, and Director

Happy New Year.

Bill Miller — — Analyst

And I wonder where we are with two things: one, you at one time indicated you might buy back some of the lots for the build-to-rent part of your business; and secondly, where do we think we are with the I-70 development which to me it’ll sometime near term and I wondered whether you could give us any indication of how soon that might take place.

Mark W. Harding — President, Chief Executive Officer, and Director

In terms of the buyback and some of the other phases of the lots, we’re moving forward with Phase 2B. We’re recording our plat this month, and then we’ll get a sense from the builders. I think the builders were really hoping to wait to see how their traffic activity was going to look for the first part of the year. And so we’ve reached out to each of them and let them know as you look to your close, if you have — if your absorptions extend yourselves out a little bit farther than you would otherwise want to inventory, we will pull whatever number of lots back from that.

So all four of our builders have that offer. We’ve made that offer to them. They’re all under contract, so I’ve got to work with them on their cooperation. But I’m pretty confident we’re going to claw back — not claw back, we’re going to be invited back in a couple of those from some of the builders because it’s a win-win for them. They cannot close on that lot and then we’re talking with them specifically to say, but you can still build the house on that.

And so that’s an opportunity for them not to have — it really is a win-win, right? They can manage their cash flows so that they actually can still show positive sales on Sky Ranch to a customer that they know and they understand, which would be us as opposed to waiting for traffic and contracts and cancellations. This is a great opportunity for both us and them to really continue to build the portfolio. And we’re seeing extremely strong demand. Every time we finish one of these houses and we put it up, it is gobbled up. We put it out on Zillow and it’s just — we get competitive people looking for rental on this stuff.

So we still are very aggressive. We still like that segment. We’re moving forward into that segment. The question would be, well, can we do more in another phase. Get out of the 850 and start another phase. We can, but that puts us in a bit more exposure where we’re actually inventorying all those land development opportunities. And we do have a balance sheet they can do that. But at the end of the day, we’re also balancing that against opportunities for acquiring other land and making sure that we continue to build and grow the company, so there is a balance there.

Second question, in terms of the land development side on the I-70 corridor. I think you’re probably referring to the Lowry project. And we continue to see a lot of pressure for entitlements. Everybody wanted more and more finished lots in the marketplace up through what was this interest rate environment and us being able to time the market where we’re delivering lots, not throwing 850 lots to builders for them to inventory, but doing this on a cyclical basis where they’re helping us pay for that hold [Phonetic] cost as well, certainly is a proven delivery model for land development.

We’ll see with the weakening of housing, how that cycle comes into impact Lowry’s timing and other land developments in and around Sky Ranch that we’re also looking at acquiring. So we’re cognizant of all those elements. Our crystal ball isn’t any clearer than the market, probably even cloudier than some of the experts in the market. But what we try to do is make sure that we’re making informed decisions with our capital allocation plan.

Bill Miller — — Analyst

Well, what about buying back stock until [Phonetic] those informed decisions?

Mark W. Harding — President, Chief Executive Officer, and Director

That’s a great opportunity for us. And if the market continues to frustrate that stock price, we’re there now. We’re ready to do that. Do I have an answer for you at what price do we buy stock? I don’t.

Bill Miller — — Analyst

Okay. Sounds good. Keep going.

Mark W. Harding — President, Chief Executive Officer, and Director

Thank you.

Operator

Okay. We have now reached the end of the question-and-answer session. I will now hand it back over to Mark for any closing comments.

Mark W. Harding — President, Chief Executive Officer, and Director

So in closing, I guess I want to continue to thank you all for your continued support and confidence in our business model and our team here. I want to recognize and give a shout out to our board of directors. They’re an outstanding group of folks that continue to give our management team very sound and reasoned and expert advice into all business segments that we have. We’ve built a great board that has disciplines in each of these to help us continue to evaluate those decisions and make good decisions for our investors and our invested capital.

As Kevin mentioned, we have our annual shareholder meeting. There’s not anything exciting on the shareholder plans. But if you haven’t voted your shares, please vote them. And we look forward to an update in sometime in April timeframe to give you a little bit more detail on the market. If you weren’t able to ask a question or if you’re listening to this on a replay, don’t hesitate to give me a holler, and I’d be happy to give you any color or any information that would help you guide the decisions in ownership of the stock.

So with that, I will close and thank you all and look forward to speaking to you again soon.

Operator

[Operator Closing Remarks]