Q2 2024 Pure Cycle Corp Earnings Call

Participants

Mark Harding; President, Chief Executive Officer, Director; Pure Cycle Corp

Marc Spezialy; Chief Financial Officer, Vice President; Pure Cycle Corp

Bill Miller

Presentation

Operator

Good morning, everyone, and welcome to the Pure Cycle Corporation Q2 2024 earnings call. (Operator Instructions) Please note this conference is being recorded. I will now turn the conference over to your host, Mr. Mark Harding, President and CEO of cycle.

Mark Harding

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

Marc Spezialy

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

Mark Harding

Thank you, Marc. Let me what I'd like to do is give you an overview of each of the segments and drill down on investments and capacities and really talk a little bit about our utilization because we have a tremendous capacities in each of those. And one of the things we tried to do is stay ahead of the market on that so that we can really react to the market in terms of delivering lots, delivering water service availability and then as we start to continue to build our single-family rental sector.
So with that, as you know, we have these three segments each continue to build and monetize our assets, the review of the size of each of these pies and the segment when you take a look at sort of our water segment.
As I mentioned earlier, we have about 60,000 connections worth of capacity in our water portfolio and currently the developed amount of system that we have conserved 36 hundred taps.
And right now we have about 1,300. So it tells you we've got about 50% excess capacity within that water segment. So what we've done is we continue to build ahead of that. And that's not that that's idle capacity because we are using that capacity to serve oil and gas needs.
In the land development segment, we had a 930 acre master-planned community on what we've got developed on the water and the wastewater side can serve up to about 32 hundred residential lots and that's the full build-out of Sky Ranch as well as 2 million square feet there. The water system is at that 36 under cast of wastewater systems, probably closer to around 2,500 on. So we have those six capacities that we have plenty of opportunity to continue to deliver taps and water usage revenues.
And then in our single-family rental as Marc was highlighting, we very much like this segment very much, and it's an opportunity for us to continue to build asset value as well as recurring revenue value on our income statement and we're looking at somewhere between that 203 hundred units. So that will be probably around 10% to 12% of the total capacity of the residential lots within the Sky Ranch community. And we that seems to be where our balances. So we continue to invest in those segments.
If you drill down on just the water segment, alone. Water is kind of divided into two segments where we get upfront capital fee, which is our tap fees, and then we have usage fees and that usage fees really is divided into our residential customers as well as our commercial industrial customers. And as you saw in our results of operations, we had a pretty close to a record quarter.
And then you're going to see a record year for us in terms of oil and gas deliveries, we delivered a little over 1,000 acre feet. We have the capacity of about 37 hundred acre feet. So that's the gray bar there. And then when you take a look at annualizing that what we think we're going to do, we'll probably be right around that 26 hundred acre foot capacity. So and still a lot of opportunity for us to continue to deliver that and a good partnership relationship with our Oil and Gas Partners.
And continuing to deliver water for that sake.
Taking a look at our tap fees, as we mentioned, you know, our tap fees continue to really Paris the market. And so you see our tap fees closer to 40,000 combined connection capacity. If you take a look and apply that over to our 60,000 connections, that's a little over $2.3 billion worth of value there.
We currently have about 1,200 capacities at our single-family rental site. I'm sorry, not a single primary job, but our residential capacity, which is really just about 2% of our overall capacity.
Taking a look at our land development capacity, Sky Ranch has that capacity of around 5,000 single-family rentals and breaking that out between the residential and the commercial really all our activity has been in the residential side. The commercial activity is becoming a little bit more attractive. There is a certain number of rooftops that the commercial likes to see and this is big commercial, right?
This is not just your local retail commercial. This is going to be regional commercial and so on. Given the fact that our location is right on the interstate that we have an interchange right along the interstate that we are working to improve and upgrade that interchange. So we have been working through that with the county and see data to be able to get that and we should have a permit on that new Enerchange towards the end of the year.
And then the timing of construction of that, we'll see depends on how that how that commercial demand it matures, but we do have some mills that are set aside specifically through our Sky Ranch cap to be able to issue the debt to be able to fund the construction of that interchange. So that gives you a kind of a feel for what we're looking at. And really the metric on the left-hand side of that scale shows that this brings us close to $700 million worth of realizable revenue on Sky Ranch. And if you take a look at our capital account on there where we have $4 million on that. That's really one of the more interesting undervalued aspects of the company.
And that's how these assets continue to generate revenue for the company.
Taking a look at US single-family rentals, again, we're just giving you a little bit of analysis on how many units that are in each case. And one of the things that we've done with our builder partners is increase that portfolio as many of you following the company we had originally when we contracted with our builders on Sky Ranch on the Phase two, we were looking to increase that portfolio to close to 40, and I think we more than doubled that now and really partnering with our builders where we are one of their first customers were coming in and asking them to be building on lots that we own and making sure that they have absorption in the marketplace and opportunities for plus to use their product in that portfolio.
And so that's been a very good partnership with us. Some of the key takeaways before I turn it over to questions and answers are going to be our gross margins. We continue to generate high margins within the business, significant return on assets and significant growth within the overall portfolio, taking a look at each individual business segments and the company as a whole.
And one of the updates I want to do is we continue to be in the market where we do believe that the market has a disconnect between the value of the company and where we're trading. And so we our Board did authorize a share repurchase and we are in the market buying shares each month. And so we'll continue to do that. We'll continue we because of our liquidity and because of our stewardship of the portfolio and our investments.
We continue to be able to fund our operations through our own and through our own liquidity and then can also continue to reduce that denominator to provide returns to our shareholders that way as well.
So with that, a little bit about our Board, but I'll turn it over to Q&A.
So I'm going to kick it back to Jenny and if you've got some questions, certainly chime in and we'll try and drill down and some of the color on that.

Question and Answer Session

Operator

(Operator Instructions)
Bill Miller, private investor.

Bill Miller

Thank you, Mark.

Mark Harding

Yes, good morning, Bill.

Bill Miller

Wonderful quarter. And you've got a lot on your plate. So my questions are the following one. You've often mentioned acquisition, and I didn't hear it in this call, but maybe I missed it Secondly, what do you think now are the highest return on investment you have that you can control? And thirdly, when do you think you will get into the large-scale commercial development along I-70 triggered question for, I don't know where they're going, but carry interest.

Mark Harding

Well, yes, they are. So thank you for those, and I'll give you a little bit of color on them, highest margin business that we have is really utilizing our portfolio water for oil and gas, right? And so oil and gas, and they don't pay the tap fee on that. And so as a result of that, that's at real capacity and we're one of the few in this area that have excess capacity. And because of that, you know, and the fact that we can price into those rates and charges opportunities for us to fund construction of that infrastructure.
It's really a good relationship. I don't I it's a good margin business for us, but it's also a great business for the oil and gas customers because the limitation that they have is the only entities that have water at this scale are going to be the large water providers that provide water within a city.
And the dilemma for them are that a city doesn't always have excess water supplies right there because they build their systems out so that they can meet the demand needs of their residential customers and they don't have the capacity to give water that would otherwise be available to their residential customers to oil and gas customers.
So that relationship is a great relationship for us. And so we like that business a lot. We continue to invest in that business we continue to make sure that our customers on the oil and gas get what they need when they need it and at a fair price.
And so we like those margins as well. You know, our land development revenues generate higher margins, as you've seen, and that's really because we bought the land correctly. And we continue to work with our homebuilder freight partners. There's very few companies left that will actually do the horizontal development and homebuilders. Our national homebuilder partners are low to have to do the horizontal work themselves, but because it's a it's a very complicated business on how to manage that infrastructure. There's very few companies that are actually doing that horizontal development.
And we like it because we're doing that already we're doing that already with our water and our wastewater systems and adding those components in there allows us to manage and have good decisions on how how much capacity we want to build at what times. And so that's a very synergistic relationship. But I can tell you the number of times our homebuilder partners have gone to us and said,
Hey, can you guys do this in the next jurisdiction because we like that too. And you guys have a terrific model out there and it's not that we wouldn't want to do that. But our portfolio has the thing that makes it so good for us is that we can do water at the same time as that we're doing the land development. The second component of your question was acquisitions. Very good.
You're right. We do have our nets out and we have very targeted acquisitions and our acquisitions are going to be areas where in the land side where we can provide water utility from existing infrastructure that we have on the ability for us to be able to use the Water Transmission Systems, our wells, our surface diversion facilities, our wastewater treatment capacity and there our land portfolio within this area of unincorporated county that meet those requirements and we continue to meet with those landowners on the timing of those.
Unfortunately, it's not something that we can can control. But I will tell you that there is some there is much more activity on that side than there has since our last call, I say that every call and I can honestly say that, you know, each time I meet with these landowners, they do they do have and understanding of our appetite for that. But I also say that there's not any lost opportunities, right? Us not having that right now has not hurt us, and it hasn't provided that.
And that that inventory on our balance sheet.
So there's a little bit of a synergy there. The ideal world would be when they were ready for development, we would be able to buy that I'm okay paying the seller a higher price for that as it gets closer to the time period when that property would be marketable. And so as we know our price is a function of where we think that timing is and their price might be a function of where they would like that timing to be. And so we continue to work with them on that side.
And then the last part of your question was commercial and commercial activity, I would say is probably still a year-plus out and it's really a function of on the rooftops, right?
We've got about 700 rooftops open. We've got 500. As we've talked about. We've got two overlapping phases. So I've got 500 lots under production right now. And I think a lot of those commercial and this was large scale, right, large-scale grocery, large-scale box vendors, they really look to have high volume stores and that's an opportunity for us, not only because the value of the commercial land, but then also the Yum.
The sales tax revenue that that generates to accelerate the repayment of our reimbursables So those two go hand-in-hand. And we really do want to make sure that we're targeting those those larger those larger commercial opportunities for the high dollar value. So I would say that it's not for lack of trying. It's mostly for a bit more of the patients on absorption on single-family homes.
Okay.
Mark, you left out the rental area, single-family rentals. You know, tremendous operators, boy, this is an interesting one because as interest rates, we were thinking that most of the renters in there were just being there because interest rates were a timing element there. And that's not really what we're seeing.
What we're seeing is people choosing to rent and it's stunning because we get applicants for these single-family rentals that would easily qualify to buy these houses and just on just maintaining relationships, you know, we've tried to get in and find some of their motivations and it's frankly, they're just saying, look, we don't want to buy.
You know, we don't want the maintenance cost and although they're brand-new homes and so the maintenance costs are pretty low. Are they just they're not sure if this is where they're there, the Denver, they may be new to the Denver market or they may be considering their careers.
And so they're not sure if they're going to stay in this particular market or stay in even this particular submarket, but tremendous demand on. We've got a great renewal rate on that. I think we've had almost 90. We haven't been absolutely perfect. But it's pretty close. I think we're 90 plus percent occupancy while we've been in this segment for the last two years.
So we continue to grow that segment and really focus in on delivering those homes at a cost effective basis, right, having partnership with our national homebuilders, being able to have them continue to line, build and build very efficiently deliver what is a seasoned product for us as well as the for-sale product that they have. So we'll continue to grow that.

Bill Miller

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

Mark Harding

I think we're more I would say on the rental rates, we're at the 90 percentile, but we're not at the 100 percentile. And our philosophy is I'd rather I'd rather retain a tenant. And so when we get renewals, those price increases are very modest. They might be one or 2% when we get into a turnover, then we'll mark those up a little bit closer to where those gaps are in the marketplace.
So I would say we're super competitive because we want to maintain that stuff high 90, 95% occupancy rate. Okay. What about in the oil business. And you are right. I mean, we have we have kind of a multiyear contract with our oil and gas operators that are fixed pricing on those. So I think we're very we're balanced there. We look at a good partnership role with them.
And I think they look at us as a great partner with them because they're not competing with residential customers. And so we have multi-year obligations where that's increased every year. The pricing of those does do inflate every year. And let me let me kind of address some questions that you would ask me next, which are going to be how do we see our price increases in the utility segment then on tap fees as well as water usage fees those are increasing.
As you can see when when you take a look at when the companies first started Sky Ranch, our tap fees were closer to $28,000 combined now they're closer to $40,000 combined.
And so that's a function of the fact that it's costing more for water providers to reach farther and farther out. And so when you see a comparable rates on there that's accelerating significantly. Again, the water usage rates at the monthly rates, those are those are more inflationary, right? They don't they don't inflate as much. And what we do is we've got a tiered pricing mechanism in there, which is a function of the more you use, the more you pay for that increment of water and that's kind of a forced conservation measure.
And we're seeing that our portfolio is actually going we'll be serving more connections than we thought, whereas we thought that might be at 60,000 connections and we continue to report that 60,000 connections. There's probably some paddle in there. I think there are some some conservatism and what that portfolio can serve and then our lot BC. and OR., we are we how are we pricing our lobbies as compared to the market.
And we continue to be it's a entry-level product, but we also continue to price those lots to maintain our margins together with the increased cost of delivering those horizontal infrastructure components. So and we do take a look at each of those and I think we're very competitive on all.

Bill Miller

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

Mark Harding

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

Bill Miller

Makes great sense. Thank you very much.

Mark Harding

Thanks for your continued support.

Operator

(Operator Instructions)
Greg [Monastery], private investor.

Hey, Mark, how are you how do you get your arms? I guess two questions. The first one relates to I guess you have what you described as the receivables and I was just wondering you could give any color on the time line for the next bond issuance. I know historically I think that every like two or three years is where you guys are kind of there start to be noise about another one happening. And if I remember maybe 2021 when we got the last one. So I was just wondering if you had any visibility into the timing of that?

Marc Spezialy

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

Okay. Thanks, Tom. And then just my second question, and I know it's always kind of, I guess the elephant in the room but I know it, I guess is there a point where we look at our market valuation and there's been enough time that's gone by way we can confidently say this is a perpetual issue that whatever it is you guys are doing isn't translating to value for your stockholders. Really the main mechanism for that, which is the public markets. And with that in mind may be look at seeing what we're missing here, what we can do differently to go about fixing that because I look at this and it's funny,
I was going through your investor relations section a couple of weeks ago and stumbled upon the interview with Mark Harding from I think it was 2018 with the $10 --$10.50 $11 stock price and much of all the great things we've accomplished not even accomplished yet, and it just allows me almost to fast-forward now six years, and we're at $9 and you guys on a net basis have issued more stock than you bought back in. And it's just puzzling to me because there are great assets here.
There's great people here and just something isn't catching. And I'm just curious if you guys have a point where you say okay, maybe let's see and out of let's tried to do something different let's change things up. Let's evaluate this from a different angle than we have before.

Marc Spezialy

Well, Greg, you've put your finger on the pulse and your frustration is echoed by management and the Board and I'm at a loss at the end of the day, one of the one of the Sage pieces of advice that we continue to get at. We'll do what you do and you know, continue to produce those results continue to grow. And I really execute on your business model and the market will take care of itself.
And in fact, it has not right. I mean, when you correctly highlighted the the only the only stock that we issue or incentive stocks on. And so our buyback program is intended to be anti-dilutive on that basis and could we be a bit more aggressive on that?
We probably could and continue to look at that metric. And really we set our price points on the repurchase as such, that we're being opportunistic, but we could be buying a bit more to become anti-dilutive, but the dilutive portion of this is insignificant. And so that's not a problem if the margins are not the problem within the company, the story is not the problem within the Company and doesn't the team is not the problem within the company because they continue to execute result.

So is it messaging now? Is it is it performance now? Yes.

Mark Harding

How do companies like our size company reach those years? And how many analysts are out there looking for these opportunities? And is it liquidity is that the volume of the stock is at the capacity?
I continue you rub not. I mean, when you look at it, your average trading shares are anemic. And then when all of a sudden somebody comes in and says, oh, I want to take a position, it will get 0.5 million shares trade on a day.
And so it seems like there's there's the ability to buy into it. And so those folks at when I'm out on the road when I'm at a conference or when I'm doing a non-deal roadshow, folks are saying, hey, I think this is a great opportunity, but your average day volume doesn't allow me to do it is that the mechanism when somebody comes in and analyze this from a portfolio standpoint and then they go, okay, what's the 100 day average trading of the stock and they say, oh, I can't buy a position. And my answer to that is of B2K without working against yourself.
And so all of those things are things that we tried to address. We tried to address how do we reach more years, more eyes, more opportunities. And it's not just the management level. It's at the Board level. It's at the industrial level and we're attenuated to it while at the same time, we're keeping a steadfast hand on the wheel and making sure that we continue to put those results up.
And so the bots that are out there, the programs that are scanning, your gross margin, scanning, your returns, scanning your earnings per share also are able to kick this out and have somebody take another look at it and understand what it is that we're doing. And it's one of those things that's a mystery for us. And we are if we are looking to drive other things. We are looking to expand that approach. We are looking to have sponsorship, and we're just not an issue where where we're going to get any low from an investment bank or relative was relatively small in comparison to each of the second industry segments that we're weak operating in. But we're punching above our weight class.
And I think it gets some notice and eventually a lot of these as some market analysts will pick up some coverage. We continue to dry and introduce it to them and incentivize, you know, the the opportunity that we have so that they look really smart and being able to find one of those hidden gems. But I'd love to take it offline. If you've got some ideas that we haven't pursued or for unit of broadcast out to all of our investors, you know, if there's something out there that you think we could be doing better different or highlighting the opportunities that the company holds because you guys have done the work and you know what that model looks like.
I know what that model looks like, and we've got our own modeling in there, and I'd love to be able to share that, but that the rules that allow companies to do some of that type of activity are just a little bit restrictive. So I share your being on the call, if I could.
There's two things that I just think perhaps we'll almost certainly would help. It just comes down to weather. And I mean, you guys and the Board kind of feel the same way in the first one is I think that the Company could absolutely benefit and shareholders could benefit and even the people internally working would benefit from hiring an adviser and conducting a strategic review because if nothing else, I it's just this is a collection of assets that are unique, but also somewhat hard to value.
And when I look at a nine or $10 stock price and what that implies in terms of the valuations of your business segments. It's just it's not it doesn't make sense to me. And there's very clear benefits on the capital allocation front from buying back significant amounts of stock. And that doesn't have to be, you know, $50 million of stock in one shot, but there's really no reason you guys can't have a 10 million share repurchase program. Are you buying half-a-million with a month or at least in the market trying to and you guys ran a process and one who knows D.R. Horton's bought Vidler Water, they've got Forestar, you know, if you guys get a $25 offer on the table.
I think a lot of your, hey, jeez, that Sinopec announcement something to consider, but even just internally fully seeing this is what somebody would pay for our company. If they had the opportunity to do acquire parts or all of it, it would be useful in terms of then looking at capital allocation decisions and seeing and that's that's the first one, and that's the easy suggest.
And the other one would just kind of be clarifying. Some of the you guys are ambitious right and you haven't made too many acquisitions to date, but there's a lot of this. We're in the market to buy more water. We're in the market to buy more licenses and when you look at it again, kind of the issue is these are assets that take a while to develop that. You've had the water portfolio in some cases, four, I think that is right.

And then I'm looking at the numbers and your annual letter and the utilization is 2% or 2% of capacity. Why not just come out and say we want to get that number up to 20% capacity or 30% before we're going to entertain the idea of buying more of something.

Marc Spezialy

We already have plenty of even the Sky Ranch, this scariest you guys bought, I think, like 13 years ago and we've developed 15%, 20% of it tops. Why not demonstrates we are monetizing the assets. We have we have enough for the next 10 years, our focus is accelerating that returning capital to shareholders. And once we've got pointing to 30% of the water portfolio utilized once we've monetized half of the Sky Ranch and then we'll pursue acquisitions.

But I think it gives people a little bit of pause when we're not buying back stock where we should you know, I'm not in favor of a dividend, but last call somebody mentioned that and you run the math, it costs less than million bucks a year to pay a penny a quarter.

Marc Spezialy

We're not doing that. I just think you guys you can find the parameters of your capital allocation. And just clearly stated, our focus is solely on maximizing what we have and returning capital to shareholders and demonstrating our competency there. I think that will do wonders for us. So it's something to think about.
And I know some of this you can't really answer in too much detail or just stuff you guys are not to speak about, but I just wanted to put it out there because I think it's something that doesn't really have any downside is something that maybe people can get behind or just see that if the market's not going to look at things where we want them to at some point, it's kind of on us to be proactive about that.

So with that, I'll sign off as always, I thank you guys for the work is taking my call and I look forward to the next couple of quarters at X-Rite.

Mark Harding

Thank you very much.

Operator

When we appear to have no further questions in the queue, I will now hand back over to Mark for any closing.

Mark Harding

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

Operator

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

Mark Harding

Thank you, Janie.

Operator

Thank you, Mark.