Pure Cycle Corporation (PCYO) Q3 2023 Earnings Call Transcript

Pure Cycle Corporation (NASDAQ: PCYO) Q3 2023 earnings call dated Jul. 13, 2023

Corporate Participants:

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

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

Analysts:

Greg Roeder — Adirondack Funds — Analyst

Elliot Knight — Knight Advisors — Analyst

Presentation:

Operator

Greetings. Welcome to the Pure Cycle Corporation Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded.

I will now turn the conference over to your host, Mark Harding. You may begin.

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

Thank you, Holly. I’d like to welcome you all to our third quarter earnings call. We do have a slide deck for this. So for those that want to follow along with the slide deck, you can go to our website at purecyclewater.com. On the landing page there you will find the ability to join the slide deck as well.

So with that, I also have Kevin McNeill, our CFO, joining me today. Dirk Lashnits, who is our Vice President of Land Development is on family vacation. So I will pinch hit into his land development segment.

So with that, let me get started. Our first slide will be our Safe Harbor statement that highlights the fact that statements here are — that are not historical facts contained or incorporated by reference in this presentation are forward-looking statements with the meaning of the Private Securities Litigation Reform Act of 1995. I think you’re all familiar with the Safe Harbor statement.

Let me put a little overview of the Company for those that are new or listening in to the call for the first time. We operate in three multiple complementary business segments. We operate a water and wastewater resource development segment, which is kind of a utility segment. The key investment theme in this segment is we own a large amount of water in a water-short area. We’ve owned those assets for quite some time. So we have a very low-cost basis in that. And those assets continue to rise in value. We develop those assets cradle to grave from developing the water resources all the way through collection and processing the wastewater.

In our land development segment, we own about 900 — well, we’re developing a 930-acre master plan community. The key investment theme here is again owning the land with a very low-cost basis. We acquired this land during the great recession in about 2010. Very favorable basis in the land. Held that for a number of years until it was timely for development. Started developing that in about 2018 and it happens to be in probably one of the hottest submarkets of the Denver Metropolitan Area for development activities. So great investment theme on the land development segment.

And then our third segment, which is still in its infancy, is our single-family home rental business. And we receive rental income from homes that we build on lots that we already own at Sky Ranch and the real key theme here is kind of the vertical construction costs on lands that we already own. It provides accelerated positive cash flows to each unit. It’s a tax- advantage way to develop these significant appreciating assets, because we own and can carry forward the equity of the land in the lot, as well as the water utilities on that. So it provides us some very attractive returns on a cash flow standpoint.

So with that, let me kind of just briefly touch on each of these themes and then we’ll move on to some of the financial metrics and then get into some of the color through some Q&A. The water utility, wholesale water and wastewater segments, again, as I mentioned, we really take it from owning the water rights, the wells, the diversion structures. We treat it, we distribute it to our customers. We collect that back once they use that. We process that wastewater and then we’re able to reuse that water supply. So we have a use and reuse model theme there. Did get some very good press on that recently in the Denver market. So if you can go to our website, we had a feature story from the local news channel here that talked about water scarcity in the West, water scarcity in Denver, and how the Company is really taking a proactive role on reusing its water supply within its development area. And so, moving forward, we really look at a water balance system here. And this kind of shows you an animated version of how we take that water supply from its source. We treat it, we distribute it to our customers. We have a little bit of loss through evaporation, but then we collect that back and we reuse that system. So it really is a use and reuse model. We really want to protect and preserve those assets in a water-short region.

Talking a little bit about the water infrastructure. We continue to grow our utility segment assets. You’ll continue to see more of this as we get into year-end. We’re making more investments into our water supply. Right now, we’re drilling additional wells to help meet the production capacity and the demand that we’re seeing in the industrial segment, in the oil and gas segment. So we continue to add to this in a broad category of all of our assets, whether that’s wells, treatment, transmission, distribution, collection, all those elements, we continue to add to the system.

Taking [Phonetic] a little bit about our customer growth. We continue to have organic growth within our service areas. We have three principal service areas. The Wild Pointe service area, which is a service area we acquired a number of years ago, relatively small. We have about 180, I think, residential connections, about 71, close to 100 commercial connections. We have a little bit more capacity in that system. And that system is probably around 85%, 90% built out. Sky Ranch, which we’ll highlight in our land development segment as well. But we’ve got about 700 now connections on the residential side and about 135 commercial irrigation connections. Our capacity there is about 5,000. So we’re right around that 20% built out Sky Ranch and then the Lowry Ranch, which is our service area. It’s a 24,000-acre service area that’s really right at the edge of the metropolitan area and that’s really still undeveloped. Excellent organic growth both at Sky Ranch and Wild Pointe with tremendous demand potential out of the Lowry Ranch.

Talk a little bit about our oil and gas. Had a kind of a record quarter for oil and gas deliveries. We happen to sit right on top of a very prolific oil and gas play, heavy oil play, not a lot of gas. We have — [Technical Issues] 80% of the resource there is going to be oil. We have multiple operators in the segment. The largest operator is Civitas, but they’re very active in that. And they’re really kind of getting to the unincorporated areas. They’ve been focusing in on developing the areas which were closest to development that are going to be within the city of Aurora, where they’re required to get their water from the city of Aurora. As they get outside the city of Aurora on Lowry, which is our service area, and the surrounding properties around Lowry, then we — Aurora does not like to provide service to extraterritorial areas. And those are areas that are either within our service area or areas that we can assist them in providing water. And so, you’ll continue to see growth in this segment. We continue to expand our supply side to make sure that we can continue to meet that demand. But there’s tremendous amount of growth potential yet in this segment as well. And it’s likely to continue to be a large customer for us for decade into the future — or decades into the future.

Next slide. Slide 10 really has a depiction of kind of where our service areas are, kind of the sandbox that we operate in in the metropolitan area. The pink areas are going to be Sky Ranch and the Lowry Ranch, which development has significantly encroached into both of those areas as we’ll define in our land development segment. Sky Ranch is really seeing tremendous demand for housing, mostly to our price point area. But this kind of illustrates the growth of the metropolitan area and the key positioning that the Lowry Ranch has as potential within the Denver market. It is the right place to be in the Denver market. Both of these assets and both of these development opportunities are excellently positioned within the metropolitan area.

So with that, let me highlight a little bit about the land development segment. As I highlighted, [Technical Issues] developing a 930-acre property. It’s called Sky Ranch. It’s a master plan community and it’s a well-balanced master plan community. We have multiple single-family lot size products and price points. We have great trails, open space, recreational opportunities that are on site. We have great transportation access. We’re right adjacent. We have about 160 acres, which is frontage along I-70 with outstanding proximity to DIA and other employment centers in the area. Great schools. We have a charter school that we partnered with an operator — charter operator out of Michigan, National Heritage Academy. And we are opening the first phase of that school, a K8 facility, we will be offering grades through seven, this August. We’re excited that the school is opening and it’s a great regional asset that’s really going to be a center pivot point for us in the community. And then we have great commercial opportunity, given the proximity that we have to the interchange and to an interchange on the interstate. It’ll give us a terrific opportunity to continue to build out that in a multiple field master planning community.

Taking a look at some of the residential products that we’ve been working on. We have our first phase, which was about 509 lots. It’s fully complete. If you take a look at our single-family rental segment, we had really our introduction into that kind of proof of concept on building these units taking a look at the rental side and the demand for rental side. So, tremendous success on that rolling into the second phase. The second phase was a total of about 850 lots. We have nothing but great portfolio of national publicly traded homebuilders.

You can see these. These are all top 10 homebuilders in the Denver market as well as nationally. Great partners to work with. They’re very consistent, they’re able to get their product up. Great sales force, really pulling in a tremendous amount of demand to the community. Right now we are working on Phase 2A and Phase 2B. So we’ve got two overlapping projects going on at the same time. 2A is about 90% complete from our perspective, where we’ve delivered the lots, all of the infrastructure, the horizontal infrastructure that go into those lots. We’re punching out some of the landscaping and irrigation and the park and the play structures on the park right now.

Homebuilders themselves, we’ve got about 200 starts in that 200 and, say, 30 lots there. So a lot of demand in that in what was otherwise a soft or a slowing housing market. We’re certainly not seeing that. And then we are also seeing tremendous opportunity rolling into the second phase, to the next 211 lots. We’re right now currently developing the utility package on that, which is the water, the sewer, the storm drain systems on that. Those should be complete towards the November time frame. And in Colorado, we sort of chased that weather issues to make sure that we can get some pavement down to start making some of those lots available in that same time frame towards the end of our first quarter next year, our fiscal year end being 8/31.

And then because of the demand that we’re seeing, we’re also moving forward with our Phase 2C. So we’ve got the recordation of those plats coming up in August and then we’ll be taking a look at the earthwork on that one. So what you’re going to see is we’re really going to have three overlapping projects going on at the same time as we’re punching out Phase 2A, getting into the meat of Phase 2B, we’re really going to start Phase 2C. So it kind of gives you an indication of the level of interest that we have from our homebuilders as well as the sale and velocity of sales from single-family units.

This is kind of a mix of the builders, a little bit of detail on the lot sizes, the different product levels that we have, and kind of the gross numbers on each of the phases per lot. And so we have attractive margins with the well-balanced land plan between the residential and commercial. As you’ve heard us talk in the past, we collect not only the revenue from the sale of the lot, but then also reimbursables from the public improvements that we put on this. So when we’re building the water, the sewer, the storm drains, the roads, curbs and gutters, all of that stuff accrues under the governmental structure that we operate under here in Colorado. And then we get repaid that through — typically through bond offerings. We did a bond offering last summer, so you did see a recollection of about $23 million there. We continue to accrue those fees. We have an interest component associated with that. So we have a time value money component with that as well.

Let me move to the next slide and talk a little bit about some of the market conditions. I know there’s a lot of talk about what the market is and the subsets of the market. And really what we’re seeing, the biggest key driver here is that demand continues to exceed supply and particularly for entry level housing. And so that’s continuing to put wind in our sale and in our project because we’re offering very affordable houses in that entry level housing here in Denver. And it’s hard to — hard to have that pass by your lips, but to say an entry level house in Denver is $400,000, but that is it and very small segment of the supply. There’s less than 4% of the housing product in Denver metropolitan area that can meet that price target. And it’s not that we’re not operating profitably at that level, we just have a better structure to that. I will say we do do a better job, but at the end of the day, we do deliver a very good product to our homebuilders, and our homebuilders carry forward our price advantage into their finished products. So we have a great relationship on meeting that market conditions in our market segment.

The other key driver in the market conditions are probably the declining sale of some of the existing homes and those will be mortgage locked product where you’ve got a lot of mortgages that are at that very low mortgage rate. The move-up buyer is probably a little bit more cautious on the decision making just because they have a very low basis in their interest rate.

Some of the headwinds in the market, things have started to normalize. You have that uptick in interest rates. But I think folks are recalibrating to the interest rate markets and understanding that the current interest rates are not the anomaly. It was maybe a 3% interest rate. That’s more than anomaly. They’re still in the historical averages for the last 30 years as we all know. We’re seeing — traffic site wide at Sky Ranch is pretty consistent. But if you look at the national statistics, you have kind of weakening traffic mostly because of those interest rate and the mortgage locked buyers out there. So we’re delighted for our price segmentation in that entry level.

Let me talk — while I do want to highlight, don’t want to — not highlight our opportunity for opening our school. That was one of the key things that when we started this project, we were very cognizant about how we can provide that educational alternative here at Sky Ranch. And so we are happy and delighted to partner with National Heritage on the Sky Ranch Academy. We’ve got about more than 400 students that will be opening up this August. The school is really finished. They’re putting in furniture and making sure the final touches. Staffing has gone very well for building that into the community and we’re looking forward to that grand opening.

Move on to the single-family rental segment. If you take a look at this segment, really the key investment theme here is that we’re retaining lots within the community that we fully recovered the lot cost, the horizontal cost, as well as tap fee cost from that, from the sale of the lots in the land development segment. And then we go vertical with that. We’re able to finance that vertical, the additional investment in that vertical cost, with mortgage type money. It’s not as cheap as it was when it was at 3%, but still it’s going to be the cheapest money that we can use some very attractive leverage on that. Our loan to values are typically about 70%, loan to asset value there. So our banks, they love that product because they know what our equity value is in that. Almost every single home that we’re putting up, we’ve got about $200,000 in equity value in that and then the whole house value. If we’re looking at this entry level market, something in the high $400,000, low $500,000 range, continues to appreciate at that 4% per year. We have very attractive margins. We have asset growth and we have free cash flows on each of these units. So we have kind of a triple threat in each of the single-family units that we’re building.

This — Slide 19 will be kind of a distribution of where our single-family units are. You see the four units that are in our first phase and then we went a little bit more aggressive in the second phase with 10. And then we got even more aggressive. We almost doubled the portfolio or 50% increase in the portfolio from where we were in Phase 2A into the rest of the project. So our next phase is going to have, I think, around 18, then 20, then 23. So we continue to increase our appetite for this product just because of the value proposition that it provides for our shareholders.

All right. This will be kind of the metrics on the single family. You’ve seen this before, but the key highlights here are each unit provides approximately $20,000 in free cash flow, as well as having our renters continue to — continue to provide the principal and interest payments to the leverage that we have in the vertical construction side. So it’s a very attractive segment for us. And we’re pricing these — we — we’re pricing these at an attractive level. It’s interesting when we get these applications for everyone, we get — we get just a ton of applications coming in on that. They are all very financially healthy applicants and they’re typically people that don’t have to rent, they just choose to rent. And so we were delighted to provide this opportunity to them. We have multiple product segments here where they range from a townhome product in some of these to a duplex product to the larger four bedroom, two and a half, three bathroom, single family detached product. So we kind of price each of those accordingly. But we’re seeing very strong demand in here and we like this segment a lot.

Okay, let me turn the presentation over to Kevin, who can give you some highlights on the financial results for Q3. Take it away, Kevin.

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

Thank you, Mark. Yes, the first slide we’re on here really reiterates what Mark said, highlights our three segments and just shows the growth in each one. Obviously, we’re starting with the water and wastewater. Continue to add customers through Sky Ranch, had a great year, especially the last quarter for water sales to oil and gas operators, almost 263 million gallons of water.

Land development, as Mark noted, we have two of our development — two of our sub phases in Phase 2 going at the same time. It was a pretty tough winter. A lot of snow stayed on the ground, a lot of rain. So hopefully we’ll get Phase 2 going — Phase 2B going even faster in the summer months. That’s — obviously in Colorado typical development time is out in the summer when it’s sunny and not raining. And then the single-family rental market, as Mark pointed out, continued growth in that. We’ve got another 19 units in the next phase that we’re going to start, which will — once Phase 2 is all done, between the two phases, we’ll have 69 rental homes in total.

The next one from a standpoint of the financial results, which we’ll — we sent out a press release last night with financial results, and then we’ll be issuing our Form 10-Q tomorrow. You can see the three — the nine months ended revenue on the left pretty consistent the last three years. So we’re pretty happy with — 2021 through 2023 are showing pretty consistent results, which is really indicative of the Sky Ranch community continuing to grow at a typical standard pace, what we feel pretty sustainable pace. It hasn’t taken off, it hasn’t dropped despite the market challenges through the year.

2020 revenue was a little bit higher because we had the completion of Phase 1, which by itself was larger than any of the individual sub phases of Phase 2. And that’s how we recognize revenues under this percentage of completion method, where the more we construct and the more we develop lots in the infrastructure, the more revenue we recognize. And then looking off to the right, you can see the segment revenue has continued to expand into that rental market, the rental houses of the yellow. And the other two segments, the water and wastewater and land development, have remained fairly consistent now the last few years, which we like.

Net income wise, so the nine months into this year and last year are pretty consistent, $4.1 million to $3.6 million. You can see in 2021 we had a very large net income year, and that was because of these public improvements that we get that are reimbursed. We used to run those through the P&L until we were sure we were getting paid in 2021 based on the growth of Sky Ranch and the amount of tax revenue that was coming into the Community Authority Board out there. We recognized all of that past due stuff through revenue, and now we take that through the balance sheet. So it won’t be as lumpy through our P&L as long as we can continue to collect on that.

You see diluted earnings per share, same thing that 2021 was impacted by that pretty heavily, but 2022, 2023 are remaining pretty consistent and showing a nice trend there. Balance sheet and income statement are the next two pages, next two slides, that you’ll see, obviously when we get to — when the 10-Q gets issued and through our press release yesterday. Won’t go through this in a lot of detail. Just point out a few items. You can see cash. We’ve maintained a pretty good cash run rate. We’re at $26 million at the end of the quarter and that’s not all in one bank. Obviously with the bank problems the last few months, we’ve diversified that out pretty well. We use two separate banks. We also invest in what’s called an ICS product that separates all of it up into multiple banks and gets us the FDIC insurance at literally hundreds of banks, and it does it automatically every night. So that’s a product that pays a very good interest rate.

Continuing down through the balance sheet, you’ll see in the notes receivable section that reimbursable public improvements at $23 million. That really is the development of public improvements that are donated to other government [Phonetic] bodies that we get paid back for over time, whether it’s through bonding or fees or property taxes through the Community Authority Board. So that will continue to go up as we continue to develop that property and until we get payments. We did get about — a little over $400,000 in payments from the Community Authority Board so far this year. That was on top of the $23 million-ish that we got last year. So that continues going. And then we do have the revenue that will — from builders paying us in advance, and then we’ll recognize that revenue as we continue developing the property.

Looking at the income statement, which again I won’t spend a lot of time on, but you can see lot sales have, for the most part, remained fairly consistent. When you look at the period over period, last year was a little bit slow, the May 31, 2022, the three months ended there. Really it’s a timing thing. It all depends on how many phases we have going, like I said, this year we have two phases going. Phase 2A and 2B are both going at the same time, and the way we recognize revenue. As we construct, we get to recognize the revenue from the homebuilders as we sell those lots. Again, the public improvements don’t run through there, it just runs through the margin.

Continuing down our G&A expenses. If you look at those, you can see a pretty sharp decline this year for the three months ended May 31. Not because we had any tremendous layoffs or anything like that. It was actually the opposite. We’re still hiring people. We had some employment retention credits that we received from not laying off people and continuing to do what was right through COVID. So that was — that we got a bunch of money this quarter. We also continue to operate as streamlined as we can. We try — we’re very efficient about the employees we hire. We do as much work in house as we can and don’t try to outsource a lot of work.

Interest income, like we were talking about, you can see obviously with the interest rates up quite a bit this year and we were very cognizant about getting with our bank and making sure we had FDIC insurance at good rates. Our interest income was pretty good. The stock at the bottom, the weighted average common shares, I’ll point out we haven’t had much change. There is not — hasn’t been much dilution. We do some stock offerings to employees and Board members and options and stuff like that, but nothing tremendous. We fund all of our operations with our earnings.

A few dates coming up. We obviously talked about the stock repurchase program before, but then the 10-Q will get filed tomorrow. We’re holding an Investor Day next week, next Wednesday, so I think we have a number of people signed up for that already. We’ll also host — so it’s in person. So if you want to join on our website, there’s a place to sign up or you can email us at info@purecyclewater.com. We will also have a Q&A session over the lunch hour. So we’ll broadcast that through Teams and that’ll be available on our website next week or through email. We can also email you the link. And then Mark is presenting at the IDEAS conference in Chicago in August. And so we’ll get more information on that as it’s available.

Now I’ll turn it back to Mark for some questions and answers.

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

Great. So again a great quarter. We’re thrilled that all these — each segment is continuing to grow, continuing to demonstrate terrific margins, capitalizing on the legacy value of the assets and we look forward to continuing to deliver results. So with that, I’ll turn it back to Holly and she can open it up for Q&A.

Questions and Answers:

Operator

Certainly. [Operator Instructions] Your first question for today is coming from Greg Roeder at Adirondack Funds.

Greg Roeder — Adirondack Funds — Analyst

Hey, Mark. Can you hear me?

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

I can. Morning Greg.

Greg Roeder — Adirondack Funds — Analyst

Hey. Good morning. How are you?

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

[Indecipherable]

Greg Roeder — Adirondack Funds — Analyst

I got a question for you on once you complete Sky Ranch and fully complete it, how much book value of your water rights will you have parted with as a result of that project?

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

So we really wouldn’t have parted with any of them. What I would say is that we put about 12% into service. So when you take a look at it, we’ll have about 5,000 of 60,000 connections in service. We’ll have collected the tap fee.

And the interesting thing about that segment is the recurring revenues relating to it, right. We’re going to continue to get water and sewer revenue. It’s hard to say perpetual, but it is one of those asset classes that in 100 years they’re going to be doing the exact same thing with it, right.

Greg Roeder — Adirondack Funds — Analyst

Right.

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

I mean, we still will have that revenue stream and our systems are built and maintained for those very, very multigenerational aspects of delivery. So we’re not in the business of buying and selling water rights. We want to provide that as a perpetual service. And what I can tell you is we’ll have customers for 12% of the total portfolio, that’s the way to think about it.

Greg Roeder — Adirondack Funds — Analyst

Right. So technically you will own the rights subject to a service agreement. Is that kind of how it works?

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

Yes, that’s right.

Greg Roeder — Adirondack Funds — Analyst

Okay, so if you’re ever to want to sell that to a utility you could, those type of transactions are common?

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

Yeah, they are. I mean, private water utilities, if it would be a peer of ours, publicly traded private water utility would come in and they’d say, I want to buy the customer base and the portfolio that goes with it. Whether they buy the existing customers that water would stay with the account or they buy the whole portfolio where they want the unallocated together with the allocated. I mean there’s any number of combinations but typically if you are — once we sell a tap, there is infrastructure that goes with it, there’s customers that go with it, there is operation and maintenance responsibilities that go with it.

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

Got you. And one last question on the 69 rentals that you plan to own, how should we look at that by product type?

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

Really it’s all single family. And so the various categories of the single family are going to range from probably a higher concentration of detached single family, but they’ll be detached and attached. They’ll be duplex attached paired product, as they call it. There’ll be townhome product where we may own a few of the units or we may own the entire. These get developed in maybe five or six-pack building segments of that. We’ll take a look as to — we do have multifamily as part of this development as well that will be a transition between the commercial area and the residential area, and we’ll take a look at what opportunities exist for us to play in that field as well. There’s very good players in that area where we may partner with some of those folks on how we develop some of that.

But right now I think our concentration is going to be on the single family right now and not the multifamily. We’ll see the multifamily together with the commercial over the next, say, two or three years.

Greg Roeder — Adirondack Funds — Analyst

And is there a big spread in rents between a detached and a townhome?

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

Not so much. I mean, we do have — we do have price segmentation on it, but our spreads right now are somewhere between 2,810 and 3,100. So a big four bedroom, three bedroom or three bath house might be at the high end of that where you might have, say, a two bedroom, two bath, duplex town home that might be on the low end of that.

Greg Roeder — Adirondack Funds — Analyst

Okay, that’s all, thanks.

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

You bet.

Operator

[Operator Instructions] Your next question for tonight is coming from Elliot Knight at Knight Advisors.

Elliot Knight — Knight Advisors — Analyst

Good morning, Mark.

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

Good morning, Elliot.

Elliot Knight — Knight Advisors — Analyst

Two pleasant surprises that I’ve heard this morning. One is, I noticed cap fees are now up to $38,000. It wasn’t that long ago that they were much closer to $30,000. That’s just an observation. Second surprise is that apparently the Denver market is a lot stronger, particularly for first-time owners, than I had thought.

In an earlier call, you speculated that Pure Cycle might take back some lots from builders. Has the market been strong enough so that the builders don’t want to sell lots back to you?

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

Good question. It’s not so much that they don’t want to sell the lot back to us because they haven’t actually paid for it at that time. What became an opportunity for both them and us was particularly when interest rates were rising fast and we moved into the winter months and everybody got all dark and cold and concerned about what the market was or wasn’t going to do, it was — I made a little hay out of that. And I said, instead of you worrying about it on the start time, our next phase, why don’t we do this? Why don’t I take back a few of these lots that you’re yet to have paid for and I’ll enter into an agreement with you so that you’ve actually got a customer for a percentage of the next phase. You presold these. And it was an interesting exercise for both them and their management team on, okay, we do — we don’t have to buy the lot, we can still do what we’re going to do on the building side. And it gives us confidence that if they had picked the number, they had 50 lots in there that they had — maybe one of the builders would have had five or six lots that we would have taken and entered into a contract for them to build on those lots. And so it was a great opportunity for both of us. So that’s kind of how it worked in terms of it wasn’t that they were being iced out of the opportunity, it was actually that they were getting pre sales in the opportunity. So very good relationship for both them and us.

Very astute on your observations on the tap fees. One of the advantages, and I think we highlight that in our investment theme, but we’ve had these water rights for a very long time and they’ve appreciated significantly in value. And where we see that value is in tap fees. And our tap fees really are competitive to the local markets, right. Customers can either choose to develop in our area or not. And so that tap fee — excuse me, that tap fees have a market-based reaction of the availability of water resources and we’ve seen a big pressure on those tap fees.

You’ve been with the Company and tracking the Company not to see tap fees go from $30,000 to $38,000, but you’ve seen them go from $15,000 to $38,000. So it has had tremendous growth and there will be continued growth in that area as resources become more constrained.

Elliot Knight — Knight Advisors — Analyst

Actually I don’t know where tap fees were in 1993, but that’s when I started with the Company.

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

They were slightly less.

Elliot Knight — Knight Advisors — Analyst

But it’s so interesting. The first questioner made the very salient observation that 88% of the Company’s water reserves are still going to be available. It’s the largest undedicated water supply in the Denver area. Multiply that by $38,000 and you get a big number. But what you’re doing is you’re taking that water and making it far more valuable through bill to rent and that sort of thing. It’s a fascinating exercise that you’re going through and you’re doing it well. Thanks, Mark.

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

Thank you. Pats on the back like that keep me going.

Operator

We have reached the end of the question-and-answer session and I will now turn the call over to Mark for closing remarks.

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

For those of you that either had a technology issue on getting in for a question or that you’re listening in on the replay of this and if a question pops up, don’t hesitate to give me a call. We look forward to seeing those of you who are going to come out and kick the tires next week. It shows much better than — in person than it does on the slide deck. It’s very — the tremendous velocity that we’ve got on the land side, the development side, and what we continue to do to enhance the community through assets such as the investment that we make in trails and open space and parks, and then ultimately charter schools, rec centers, commercial development, everything we’re doing, continues to add value to the community, to each individual homeowner. And we’re looking — as Elliot highlighted, we’re looking to participate on vertically integrating all sides of that. So that we’re doing what we’re doing, we’re also doing it for our own account. And so that helps motivate all these investment decisions. And we continue to expand the water utility segment, the land development segment.

As I’ve said before, we like that land development and pairing land development with water utilities. So our nets are out for additional opportunities on land development and bringing our water and increasing the value of the opportunity by adding water resources or horizontal expertise and then maybe even some of our vertical expertise.

So, again, I want to thank you all for your continued support and confidence in the Company and look forward to seeing those of you that can make it next week.

With that I’ll sign off.

Operator

[Operator Closing Remarks]