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Pure Cycle Corp (NASDAQ:PCYO)
Q4 2020 Earnings Call
Nov 10, 2020, 4:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Pure Cycle Corporation Year Ended August 31st, 2020 Conference Call. [Operator Instructions] A question-and-answer session will follow the formal presentation. [Operator Instructions].

It is now my pleasure to introduce your host, Mr. Mark Harding, President and CEO. Thank you, sir. Please go ahead.

Mark Harding -- President, Chief Executive Officer and Director

Thank you, Diana. I'd like to welcome you all to our 2020 fiscal year-end earnings call. Some of the logistics, we do have a new deck for this call, a few slide over to our website at purecyclewater.com, and then either on the front page there is a link to it or in the Investors section there'll be a link to the fiscal year-end 8/31/2020 earnings presentation. And what I'll do you, you can click on that and then walk through this with me. I'll note the transition of the slides as we work through the presentation itself.

So I'm delighted to be with you here today. We've had an extraordinary year. I'm delighted to kind of highlight and give you a little bit of color about what we saw in the year and what we see coming up, and answer any questions as we want to drill down into any of the specifics. So with that, we'll start.

So I'll move to slide two and try and get the lawyers out of the room. This is our safe harbor statement, which all of you are familiar with. This presentation may contain forward-looking statements and forecasts that may differ from actual results.

Move to the next slide, for those of you who are new to Pure Cycle, welcome. Pure Cycle is a diversified land and water resource company. We at our core are water -- wastewater provider. We own water rights in a water-short region. We also have very valuable land holdings in some very good and well-positioned locations here in the Denver metropolitan area that we are developing a master plan community on and create value for our shareholders and homeowners and businesses and customers through our utility segment.

Moving on to slide four. I talk a little bit about the water segment and some of the water infrastructure. This is a partial list of our inventory of water utility assets, most notably, our water rights. We have a very large portfolio of valuable water rights, but also a growing infrastructure of assets that put those water rights into working order, delivering water and wastewater services to our customers. So this kind of illustrates some of the assets that we've developed. We've got groundwater wells, we've got distribution pipeline, collection pipeline, both deep wells, alluvial wells. We now have two well water reclamation facilities that treat wastewater, and then we have additional water storage so that we can meet the raw water demands for some of our industrial customers, kind of a map showing some of those assets and proximity to some of our service area of the Lowry Range. This is about 24,000 acres as well as our Sky Ranch service area.

Let me draw your attention to slide five. This is one of our most recent additions to the capital asset inventory, which is our water reclamation facility. In coordination with developing our Sky Ranch master-planned community, we constructed our newest water reclamation facility, which is a state-of-the-art facility that treats 100% of our wastewater return flows from customers at Sky Ranch back to a high standard irrigation water supply for resale to our irrigation customers.

It's a state-of-the-art facility. 80% of the structure is below ground. It allows us to have a very low profile in a very residential community. This is what we call a zero discharge facility. So all 100% of the water that's treated at this facility will be brought back to one of our reservoirs and will be reused either in our irrigation system or for our industrial customers. It's a magnificent plant, we have all the esthetics to a green roof that covers the main plant and really kind of give you a look and feel of really just a tremendous asset for us.

Construction was completed in about a 16-month period and really it was a phenomenal achievement for us and of our team, because we were constructing this at the same time we were breaking ground on a lot the loss that we have on the Phase I, filing one for Sky Ranch. So it was a tremendous coordination effort for our team and for our contractors' team to not only get it delivered, but on time and in budget. So we're very proud of that facility. If you all have a chance to come visit us, I'd love to give you a tour of it.

Let me move to the next slide, slide six. Really talk a little bit about some of our land assets. We have about 930 acres in one of the most attractive development markets in the Denver metro area, and in fact, probably one of the more attractive markets in the country along the I-70 corridor. We have zoning for somewhere between 3,200 and 3,400 residential units. We have about 2 million square feet of commercial zoning which will accommodate retail and commercial uses right along the interchange. It's an excellent location, just directly South of BIA, right along one of Denver's largest transportation networks along Interstate-70. So it's a very convenient location to get, get from and get around too. So ideally, this has been really part of our great success as that most of the investments in the Denver metropolitan area are coordinated in the I-70 corridor.

Moving to the next slide, slide seven. We've been under construction for our first phase, so you see that in neighborhood B for the past 18 months, and now have complete -- now we have that complete, we're moving on to our second phase, which will look like what you see kind of in that neighborhood A and neighborhood D. So we've got a major thoroughfare Sixth Avenue, which is a section line arterial transportation corridor that will by bisect the next phase of that.

And then in addition to the residential development that we have here, we have sort of an eye out for our retail and commercial opportunities as we continue to grow in our homes. And the density that we have out in this project, we will have an ever-increasing interest in the commercial and retail corridor there. So we've got a significant amount of land set aside for that. That's a high-value development opportunity for us, so we're looking forward to furthering that in with our residential development.

Moving onto the next slide, slide eight. So as I mentioned, we believe we have one of the best locations in all of Denver. Most of the press continues to reinforce not only that the I-70 corridor is a great location, but also Denver is one of the best housing markets in the country. So we see continued headlines about the activity in the Denver market, some of the drivers in the Denver market. The only thing I would like to add to that is that, we can improve our football team and see if we can find a way to get better press on that.

Moving to the next slide, slide nine. This will kind of be a time-lapse view of what's occurred over the last 18 months, really beginning with Q1 where we were just coming out of the ground. We had about 40 residents, maybe 60 homes under construction, and then moving through Q2, you can see a bit more activity, Q3 a bit more activity and then ultimately, kind of where we sat at year-end, which was about 214 residents. This is really a testament to our team's development of the project, but also our home builder partners, and them bringing value, bringing the Sky Ranch into the Denver metropolitan market. And really the success that communities had is in large part due to the successful partnership that we have with our homebuilders.

Moving on to slide 10. Where we sit today, we have delivered all our first phase lots. So all 506 lots have been delivered above 18 months ahead of schedule. That was pulled forward by our builders really exceeding their projections for the number of units that they would be able to sell on a monthly basis. And it was delivered on budget. So while typically when you accelerate schedules, you've got premiums for contractors to be able to deliver that. And really I think that we minimized the change orders and really optimized the opportunity to take advantage of either weather or the availability of equipment, while it was on-site so that they didn't have to mob and demob over the various sub-phases that we had when we were delivering all of these lots.

Nearly half the homes are built and sold, so we've got a little over 200 -- probably 220 homes out there that are occupied residence. Our home builders are building an average of about nine homes per month, and they've modeled that out at about half that absorption rate. So I think they're thrilled, we're thrilled. We're seeing a very -- a much faster absorption in that, which benefits us in a number of ways, notwithstanding just more lots out there, but it also increases the assessed value out there, the amount of tax revenues that are available for our reimbursable that we'll talk a little bit later about, and then just moving into the second phase.

So we go to the next slide, talk about that second phase. It's almost twice the size of our first phase with about 50% more land. So we've got a little bit more density coming into this phase. We've got the same type of product out there, where we have our standard detached 40 foot, 50 foot -- 45 foot, 50 foot lots that we have predominantly in the first filing. But we also have a lot of other product offerings. So we're going to have a much more diverse mix of product categories. We'll have some duplex categories. We'll have some attached models. We'll have some townhome models. We'll have some alley load models in addition to all the other offerings that we have.

And what that does is, really it allows a variety of price points for the builders to try and attract a bit more of those customers out and increases again when we have higher density on that and it increases the number of water connections that we have, which is important to our utility segment, increases our assessed value, which is important to our reimbursables. And it provides a greater flexibility in the timing of how we and the municipal authority that we work with, the Sky Ranch Community Authority Board, look at the timing of bond issuances for recovery of those public improvement costs.

Moving on to slide 12, talk about timing for our next phase. We've got all these varying product classes and new builders coming into this. So we have one of our carryover builders will be in the second phase, but three new builders in that. And we hope to break ground yet this year with some grading activity and our erosion control installation sometime later this month or the first part of December.

One of the things we'd like to do here in Colorado is, we like seasonal work, we like the earthwork in the winter because that has the flexibility that we can continue to work regardless of what the weather is outside. Have some model home lots available sometime early fall, in that September timeframe and then continuing to have production lots available by winter, so the builders can come in and they can get their model home lots up and available for what's their heavy sale season, which is right after the Super Bowl. So we'll have a high expectation that while we won't be in this Super Bowl, maybe in next year's Super Bowl.

Let's take a look at our scorecard. So move on to slide 13, Filing 1 costs. If you take a look at our cost, we had about $35.8 million that we had budgeted for that. We came in at that 30 -- we probably came in at right around $34.8 million, $34.9 million, so we still have about $900,000 that we have reserved for warranty items and contingency items and punch out items that we have in the remaining portion of that.

And then if you take a look at what we earn on that, we've earned close to $80 million from that investment, so that came in the form of around $36 million, $37 million in lot sale revenues. We've got a portion of the reimbursables $10.5 million, which is the first phase of those reimbursables together with another $18.5 million that's yet to be reimbursed to us, so that continues to accrue. We've got time value and money component on that, so we do get paid for that time component as the assessed value of the community continues to build up and we have more opportunities to bond more of that public infrastructure. And then the water and wastewater tap fee revenue is going to be coming in right around that $14 million mark. So it's a terrific opportunity for us. We've been very successful on that. We're very proud of it. As you can see from the time-lapse photography and we'll keep uploading some of those images on our website as well to give you guys kind of a bird's eye view of what the community -- how the community continues to grow.

So from that, we're going to carry that one forward into the second filing, so that will be right around 900 lots. We've got a bit of an improvement in our pricing for that. So we did have to kind of attract the builders to the market and define ourselves in the first phase of it. But I think we still have some very good margins in our second phase or even much better margins in our second phase than we had in the first phase. We're projecting costing in about that $65 million range, so lot revenues will be around $72 million, $73 million. And then when you take a look at all the public improvements that we'll be investing into that, that are reimbursable, another $48 million, and then again another $21 million, $22 million in tap fee revenue. So when you take a look at the next 900 lots, while the first phase generated about $80 million for us in revenue, the second phase is going to look to be about $140 million, $145 million in revenue.

Next slide. I want to kind of really give you a little bit of a look see as to what the rest of the story would look like. So Filing 1 showed how profitable the combination of this land and utility model was. We develop these assets and so as we build that infrastructure, we add to the asset base of what the company is doing, as well as the free cash flows for that. So the first 506 lots really generated that $80 million, the next 900 lots is about that $145 million revenue, and then you take a look at the rest of Sky Ranch. And so we've got a pretty conservative view here that would generate about another $360 million.

And what we did there is really kind of project out the commercial on the same equivalency as residential, which I can say is going to be conservative by maybe a couple of orders of magnitude. But it gave us the ability to kind of cast that out in terms of how we look at the water service connections, so we look at it in terms of being able to deliver 5,000 connections, while we sell the commercial lot on a price per square foot as opposed to a standard residential lot. We took a look at kind of projecting out that margin the same way.

So if you look at this cumulatively, Sky Ranch is a tremendous asset for all of us. It generates almost $600 million of revenue for us and just a great opportunity, hundreds of millions of dollars in margin for us and really defines, not only our entrance into the land development segment, but also creates perpetual customers -- recurring customers for us.

So let's move to the next slide, slide 15, really talk a little bit more about our water and wastewater utility segment, and how that combines with the land development segment. Our land assets are a huge revenue driver for shareholder value. But the utility segment creates those recurring utility customers -- perpetual customers. So that's something that we really have kind of the best of both worlds. We get a large asset value from the master planned community and then the customers they move in, they're our customers for life.

Moving on to slide 16, kind of the growth in our water utility assets. We've seen 64% growth in our investment in water utilities over the past four years. And these are long-lived assets. These assets will deliver water and wastewater services to our customer at high margin opportunities for us. I mean, they are fairly priced and really these customers last for hundreds of years, as long as the houses are going to be out there. And so, we're delighted to continue to grow our water assets and we get the water and wastewater tap fees in addition to the monthly water and wastewater revenues.

Moving on to kind of the next slide, slide 17. As we continue to grow the recurring revenue, customers from what was -- maybe a couple of hundred customers three years ago, we're over at about 650 and be moving up to 5,000 customers or slightly more than 5,000, probably close to 5,500, 5,700 just from the Sky Ranch alone. And so it's creating tremendous value for us on that recurring revenue. Our water portfolio is -- as those of you have been following us through the years is very large. This is only a fraction of what we can serve, we can serve up to about 60,000 connections. So we continue to look to expand through both land acquisitions and water utility acquisitions that both can leverage ourselves and the successes that we have on master planned communities as well as continue to grow the success of our utilities.

Moving on to slide 18. 2020 has been a year from Pure Cycle's perspective, if you just look at the analytics, it's another record year revenue growth, asset growth and cash liquidity growth. 2020 will be a memorable year in many ways, and many of them are not so good memories, but for our company I can't emphasize enough how great our team has executed on expanding all metrics to our business, maintaining a pristine debt-free balance sheet in one of the most challenging economic environment has really -- has been a testament to kind of how our team views working for us and the work that we do and the customers that we serve. So terrific kudos to them for their continued focus on maintaining their professionalism in a very difficult and challenging year.

Moving onto the balance sheet. This is a view of our clean liquid debt-free balance sheet. And I'll let you guys study that at your leisure. Income statement, another marvelous high margin income statement with continued growth in earnings per share. Those of you who have followed us through the years, probably appreciate how hawkish our position is on our share count. Our last equity raise was more than 10 years ago. So both management, as well as our Board are very hawkish on maintaining shareholder value and being able to grow organically as well as through acquisitions.

Moving onto the next slide, talk a little bit about -- it is noteworthy to talk about our continued succession planning and adding additional C-suite talent. We have a new CFO, who is on the call with me, Kevin McNeill. Not that the other guy that was doing that for the past 20 years was all that bad, but Kevin is bringing in tremendous value to us. And so, I really do appreciate all of the advanced support that he is bringing in the C-suite level and then our extremely talented Board. And we continue to bring on new Board members with highly valuable experience, and it really does gives a company of our size tremendous horsepower. And I can't say enough about those folks and the stewardship and the guidance that they give, both Kevin and I, and our senior management team here to be able to make the achievements that we've made through the years.

Moving on to the next slide, take a look at some more specific financial metrics. There is really growth in all key areas, growth in revenues, growth in our margins, growth in our net income, our EBITDA, cash, assets, shareholder equity, all metrics up just year-over-year. We continue to grow those -- we continue to grow those margins. We continue to be efficient about it. We continue to keep our eye on execution and creating shareholder value. So those are the key takeaways from this year is really just demonstration of execution, demonstration of really what has been a long accumulation of these very valuable assets.

Move onto the next slide. If I were to say one of the frustrating things is our share price. While I'm sure you've never listened to a CEO didn't note that their share price was lower than what the value of the firm should be represented. And there is probably a lot of things out there that would comment on that. I'll just leave that. It's a great opportunity for those of you listening and those of you are new to take advantage of sort of a company that's probably under-recognized and certainly under-appreciated.

So with that, I'm going to turn it back over to the moderator, and kind of open it up to some questions, and see if I can drill down on some of the specifics that you guys might have on how we've done this year. Diana, I'll send it over to you.

Questions and Answers:

Operator

Ladies and gentlemen, the floor is now open for questions. [Operator Instructions] Our first question is coming from Geoffrey Scott of Scott Asset Management. Please go ahead.

Geoffrey Scott -- Scott Asset Management -- Analyst

Good afternoon, Mark, how are you?

Mark Harding -- President, Chief Executive Officer and Director

I'm great, Geoff. How are you?

Geoffrey Scott -- Scott Asset Management -- Analyst

Good. You continue to exceed our expectations. Timing on the commercial, the last time I drove by, there was a lot of activity. How close are we to getting really a commercial push on this?

Mark Harding -- President, Chief Executive Officer and Director

What we're trying to do -- I have a lot of people that are sending us offers. And we're being very selective about it because a lot of this is people that want to buy it and then they want to hold it for a period of time and then they want to develop it for another user. And I'd like to eliminate the middleman in that, quite frankly. I'd like to go directly to those users.

So we're -- we've got a new Board member, Jeff Sheets, who brings a tremendous amount of commercial experience. He has been doing it in the Denver market in very valuable spots. And he understands the model about what the Grocer needs to see, what Kroger needs to see what Home Depot needs to see, what Walmart needs to see, what the fast casuals and all of those. And really taking a look at -- we have a very strong balance sheet, we want to really optimize some of that structure going directly to them.

And while that traffic is getting there, it's not quite there, I'd say, as we start breaking ground on the second phase and we've got, not just the three builders who are punching out their remaining lots on the first phase, and then four builders on the second phase is going to be a tremendous amount of traffic out there that's going to answer some of those questions. So I would put that not in a '21 timeframe, but probably a '22 timeframe, so we can really optimize some of the value of it.

Geoffrey Scott -- Scott Asset Management -- Analyst

Okay. Can you kind of take us through the discussions with the builders? Only one of the three renewed and you have some new ones. What were the dynamics of those discussions? Did it have to do with price or customer acceptance? Or just take me through the discussions.

Mark Harding -- President, Chief Executive Officer and Director

Sure. So with one particular builder, they had acquired another builder. And so just as we were starting to solicit interest and specific contract for them, they were on a freeze just because they had to choke down an elephant of an acquisition and they couldn't get to the timing of it. Wasn't that they were dissatisfied. It was just that they said, listen, I definitely want to be in but I can not do anything for another four months. And I said, listen, I can't hold your slot for that period of time. And they understood it, and they were my first bridesmaid. They said, OK, we're back. If anybody fall off and certainly if they did, let me know.

The other player, it was a price deal. They got such a good deal in the first filing. And when I increased it 40% of them, they were sort of choking on and going, oh my God, you got to be kidding me. And I said, the real response should be you're welcome for having such a great opportunity in the first phase, and the second phase is a bit more average price. And they sort of said, yeah, you know. And so I'm not waiting to have that train catch-up. I said listen, this is the day you're either in or out. And I had -- even getting the next four in, I still had to tell another four, and they're all national builders that couldn't make room for them in this space.

So -- I mean it was not just this four or even the three new ones. They were four or five national builders who I still said, I can't get you into this phase, but I will show you lots in the next phase. So it's been that kind of thing.

Geoffrey Scott -- Scott Asset Management -- Analyst

Yeah. Okay. All right. As I said the last time I drove through, it looked great. So congratulations. I'll let somebody else in.

Mark Harding -- President, Chief Executive Officer and Director

Thanks.

Operator

Thank you. Our next question is coming from Andrew Luster of Harvard Capital [Phonetic]. Please go ahead.

Andrew Luster -- Harvard Capital -- Analyst

Hi. Thanks for taking the call. Congratulations on a really good quarter.

Mark Harding -- President, Chief Executive Officer and Director

Thank you.

Andrew Luster -- Harvard Capital -- Analyst

A couple of questions. If I read one of the charts correctly, if I understood it needed water usage seems to be down 77%, which seems odd. Could you sort of help me understand that with something sort of interrupted, and is that something that snaps back? And secondly, sticking with your sort of analogy, with the Denver Broncos sort of the ultimate tally is whether winning or losing is the score. So it is disappointing that the share price is down. But in light of all your sort of excellent execution and significant cash balance, I wanted to -- management given any thought to a buyback, or any sort of type of activity to enhance shareholder value?

Mark Harding -- President, Chief Executive Officer and Director

Let me -- a good question, so let me I mean give you the first one, which is pretty straightforward. The reason that the water deliveries are down, is really 100% attributable to oil and gas, and the fact that the COVID issue is really just crippled oil and gas -- domestic oil and gas development. So we had one frac come in after year-end. So we do have one frac come in the first quarter, but for the most part that's what that's attributable to. Does it snapback? Yes, I think it does snapback. It's a function of the feast or famine industry itself. But we do know that this is a very oil-rich area. What makes it work is fracking, and what makes fracking work is a whole bunch of water. So that's how that goes.

On your point of points matter, and so at the end of the day, we put up some good points here. The game is not over and the share price doesn't necessarily reflects the points that are on the board. And at what time does the company management look to allocate resources that wouldn't otherwise be available to the company for investing into its overall operations, into changing the denominator and the share count? That's certainly something we talk about often. We're moving into our second phase, so we want to keep a little bit of powder in there for opportunities on our second phase, whether that's going to be delivering those lots to our builders, taking advantage of some of the commercial opportunities, or even some acquisition opportunities.

So we do have our nets out for how we can continue to deploy that capital. We think we have some pretty good talent here. We have the combination of using water and land development where I think two and two equal more than four. And so we want to try and save some powder for that. And then to the extent that we continue to build that asset base, Andrew, that's certainly part of the equation and part of that lexus that we'll consider

Andrew Luster -- Harvard Capital -- Analyst

Thank you. If I can just ask one follow-up in light of your comments. When it comes to potentially considering sort of acquisition of land or other assets, which I assume is what you're alluding to in terms of deployment of available capital. Could you just share for a moment, how you think about that, sort of what the cost of raw land or something would have to be to you relative to your expectations for the future? Thank you.

Mark Harding -- President, Chief Executive Officer and Director

Yes. So it is either raw land or continuing to grow the utility segment and diversify where we're providing water and wastewater. And sometimes we pick up customers as a part of that, so we did do that already through our [Indecipherable] acquisition. We like land that does not have zoning, that does not have water. So what we're doing is bringing our water portfolio to the equation, getting zoning on it. And if we do nothing more than that, we add value to it.

So there's plenty of land that is in our sandbox that have those opportunities. We recognize we did very well on the acquisition of Sky Ranch. We bought it when the world was on fire in 2010, and banks couldn't get rid of their positions fast enough. It doesn't have to be that. While we do have a mindful eye and ROI for land acquisitions, we have the ability to generate some pretty good returns here. And so they don't have to be 80%, 90% ROI, they can be in the high teens and we can be a little more risk on, on getting some of those types of acquisitions that still are good appropriate value.

The market is probably on the high side of it right now, but there is still opportunities. There is opportunity -- even if I pick up a high value -- not high value, but I'd say, a piece of property at sort of the high-end of the market that doesn't have water, it's still when I add my water to it, adding value to it. So there is a good transaction for both the seller of land and a good transaction for the company in being able to take a look at those types of acquisitions.

Andrew Luster -- Harvard Capital -- Analyst

Thank you.

Mark Harding -- President, Chief Executive Officer and Director

Yeah.

Operator

Thank you. Our next question is coming from Bill Miller,a private investor. Please go ahead, sir.

Bill Miller -- Private Investor -- Analyst

Hi, Mark. Congratulations on a great quarter, a great year.

Mark Harding -- President, Chief Executive Officer and Director

[Indecipherable]

Bill Miller -- Private Investor -- Analyst

My question is really three to five years from now, what do you think the profile of the company is going to be? And particularly, what kind of recurring revenue as a percentage of your overall revenue what you have? Is that your goal to increase that as time goes on? Or what -- are you going to be more of a cyclical company where you make some deals and create a hell of a lot of value and lot of cash?

Mark Harding -- President, Chief Executive Officer and Director

Yeah. I like the latter part of that, a company that creates a hell of a lot of value and cash, those are good things. And those are kind of my Northstar on that, so I do want to do that. But in doing that the nice thing about it is, we do create those recurring customers. And so three to five years, we have Phase 2 built. I have Phase 3 coming online. I have commercial coming online. I likely have other surrounding properties coming online. And while we might be adding 20 -- 27, 30 homes a month, it would not be inconceivable for us adding 40, 50 homes a month in that timeframe.

So -- and adding those provides asset value, which is great returns. It allows us to have that powder to be able to reinvest into other asset acquisitions, other utilities, dividend, share buyback, all of the above. And then it continues to grow our recurring customer count so that you guys get the chance to see an increasing dividend yield from that recurring revenue stream. So you touched on kind of -- you must have a microphone into our Board because we talk about those things every Board meeting.

Bill Miller -- Private Investor -- Analyst

Well, would you aspire to have 50/50? Or are you thinking more 80/20 with anything land and development of the land?

Mark Harding -- President, Chief Executive Officer and Director

I do like the development of the land and I do like those opportunities where our water adds value to the land. And I like being disciplined about that and staying within a reasonable reach of our infrastructure, which -- there is a lot of land in that area. And so then it becomes the determination of the proper pricing between the seller and the buyer.

And we can risk-on and risk-off depending on the view of the market. And a lot of those acquisitions are made in times when they are more challenging for the sellers than they're for the buyer. And having liquidity in that gives us an opportunity to take advantage of that. But we also don't want to just have a big balance sheet for balance sheet purposes.

Bill Miller -- Private Investor -- Analyst

Great. And when do you think you get involved in the development -- commercial development along I-70?

Mark Harding -- President, Chief Executive Officer and Director

I think that's going to start in late '21, '22 timeframe. We're going to have opportunities that we can feed into that. We can maybe do a finished lot on that and bring a tenant in there as opposed to just selling raw ground. And that would be a high value per square foot lease which would be a recurring customer. I don't know that I want to go vertical, but I can give them ground leases

And things like that, that are very attractive.

Bill Miller -- Private Investor -- Analyst

Great. Well, it sounds very, very good. Thank you.

Mark Harding -- President, Chief Executive Officer and Director

Thanks, Bill.

Operator

Thank you. Our next question is coming from Justin Shea, a private investor. Please go ahead.

Justin Shea -- Private Investor -- Analyst

Hi, Mark. Congrats on the great quarter. I just had two quick questions. The first one is like, as we think about this company becoming more recurring revenue-based in the long run, I was wondering how you think about your pricing power going forward, maybe like five, 10 years out?

Mark Harding -- President, Chief Executive Officer and Director

Pricing power of the water utility, or pricing power of the land?

Justin Shea -- Private Investor -- Analyst

For water utility.

Mark Harding -- President, Chief Executive Officer and Director

So there is two types of pricing power there, one in the connection charges, the tap fees, which are kind of a capital component that really monetizes the scarcity value of water. And there is pricing power there. We're a bit more disciplined about pricing power once we have a customer that has no option. So there is some constraints to that, that while we don't have a direct regulatory climate for adjusting our rates and charges, that's something that's significantly more scrutinized.

So, I would say we have strong pricing power on connection charges because at the end of the day, we're preferential on where we want to supply water, where we commit to supply water, and those tap fees, a developer, a landowner have a choice. They can either choose to go with us at those tap rates, or they can choose to get their water from another source. So there is pricing power both on our strength, our positioning, but then also as the scarcity value water continues to grow.

I mean, the thing that brought me into this business, Justin, was just a simplistic macroeconomic argument where if you look at water and particularly, water here in Colorado, we do not have any other options. I mean, if you live on a coast, at some price, you can make more water, right? You can desalinate and you can make more water. We do not have that option here. There is a fixed supply of water and a growing demand. And drawing from my macroeconomic twice, if you have a fixed supply and a growing demand, there's only one thing that happens to change that and that's price. So we think that, that price will continue to grow just because of scarcity value alone.

Justin Shea -- Private Investor -- Analyst

Got it. That makes a lot of sense. Thank you. And then the second question I had was sort of going into the winter months, do you see absorption in the first phase of Sky Ranch declining? Or do you think it will remain strong through those months?

Mark Harding -- President, Chief Executive Officer and Director

Now as you think it will remain strong. We build 12 months of the year. It's a lot easier to build in the summer months, but they do a lot of foundations in prepping for the winter month. So what they likely do is, they just bulk up on pouring a lot of foundations in that October-November timeframe, and then they build vertical and the rest of it. So they got to catch up to the foundations that they pour in the early part of the -- or the late part of the fall, and then they can go vertical and there's really no weather constraints to being able to put up the sticks on the houses. And they sell 12 months of the year.

So, I mean, while there is seasonality to the industry and it really doesn't matter where you're at, there is seasonality to housing across the country, which oddly starts after the Super Bowl. All of the homebuilders sort of say that's the starting done and it doesn't matter whether you're in Southern California, or whether you're in Northern Massachusetts, it's the end of the Super Bowl. And that's a mystery to me, but that's what they want. They want to have all those lots ready for that March-April timeframe and capitalize on the marketing that they're going to do in February.

Justin Shea -- Private Investor -- Analyst

Got it. And then the last question is, do you guys take on any leverage when you guys perform the [Indecipherable] development? Or is it just straight from your cash balance?

Mark Harding -- President, Chief Executive Officer and Director

So we have had the luxury of being able to use our own capital, that together with how we structure our transactions with our builders. So what we do is, we let our equity ride in the land and then we use kind of this model of a third, third, third pricing model on delivery of our lots, and so our homebuilders will pay us as we progress on finishing their lots. So they will give us a third of that cost when we get the plot. They will give us another third of the lot costs when we finish the wet utilities, and then they give us the last payment when we finish the finished lot. And so what I'm able to do is really use their money to make all the improvements and then I get paid on the equity value of the lot in that last payment.

Justin Shea -- Private Investor -- Analyst

Great. Got it. Thank you. That's it from me. I appreciate it.

Mark Harding -- President, Chief Executive Officer and Director

You bet.

Operator

Thank you. Our next question is coming from Bill Cunningham [Phonetic], a private investor. Please go ahead.

Bill Cunningham -- Private Investor -- Analyst

Hi, Mark.

Mark Harding -- President, Chief Executive Officer and Director

Hi, Bill.

Bill Cunningham -- Private Investor -- Analyst

Mark, we have questions on how many acres are involved in the 895 lots that you're talking about? Each of your blocks are I believe 160 acres, and it appears that [Multiple Speech]

Mark Harding -- President, Chief Executive Officer and Director

Yeah. Technically not, because we got to exclude those land areas that I've got to dedicate for school sites and things like that. So if you look at it [Multiple Speech]

Bill Miller -- Private Investor -- Analyst

Well -- yeah, I understand. Yeah. That's what I was going to say with -- yeah, it looks like neighborhood A is totally allocated either for the homes, for the school or for the parks. But it's neighborhood D that I'm not clear on, because there is kind of a blank area in the bottom half of that, and I'm wondering whether that's part of the 895 for future use, or whether that would be in addition to 895?

Mark Harding -- President, Chief Executive Officer and Director

That'd be in addition to the 895. So there is a bunch of space that goes below where we're at. That will be one of the subsequent phases of this that would be hundreds of homes still left in that quarter section. So if you look at it, our first filing was about 151 acres. This is about 247 acres -- 250 acres total, so about 50% increase in the actual acreage and about doubling the number of density that we have.

Bill Cunningham -- Private Investor -- Analyst

Great. Good. So there's a lot of extra land there.

Mark Harding -- President, Chief Executive Officer and Director

Yeah. We fill a bunch [Indecipherable]

Bill Cunningham -- Private Investor -- Analyst

Also on the timing of revenue on this section, it appears that you're going to be delivering some lots potentially late winter, which I assume would be revenue and income-producing activity from a financial statement point of view. I remember with Phase I that you were receiving a lot of deposits that you couldn't record as income, so I'm wondering if that might be an issue with this next phase.

Mark Harding -- President, Chief Executive Officer and Director

So it look a lot like that. We will be getting a bunch of builder money and that a third, a third, a third model. We recognize revenue on that percent complete basis. So as we are constructing, you'll see that revenue fall through the P&L as we complete the various components of that on a quarterly basis. So we try and time those things out not to be so lumpy, but there'll be a little bit lumpy. But you're going to see the cash position roughly stay the same, because us spending a ton of money but the cash position staying roughly the same because we're going to get money from other builders on that, and then recognize the revenue as we complete the lots on a percentage basis.

Bill Cunningham -- Private Investor -- Analyst

Very good. Thank you, Mark.

Mark Harding -- President, Chief Executive Officer and Director

You bet. And I think I've got your email thing fixed. Although, I did not email -- and for everybody, I apologize I didn't get a chance to send out the investor list email for those of you that are on our investor list. And for those of you who are not on our investor list, please email me and I'll put you on our investor list.

Operator

Thank you. Our next question is coming from Tucker Andersen of Above All Advisors. Please go ahead.

Tucker Andersen -- Above All Advisors -- Analyst

Hi, Mark, how are you?

Mark Harding -- President, Chief Executive Officer and Director

Tucker, great to hear from you.

Tucker Andersen -- Above All Advisors -- Analyst

Yeah. I have several questions. Let's just take them one at a time if you don't mind. Do you have any visibility on the oil and gas, both in terms of the fracking water and in terms of the royalties? Are we at a price where the wells that have been drilled are still producing? And could you talk a little bit about what you think oil might have to get to for more drilling?

Mark Harding -- President, Chief Executive Officer and Director

So the wells that we have drilled at our HBP, we still get royalty revenue from that. So that's still 100% margin for us. It's still -- it's in the other income section, so it's below the line on that.

Visibility, our new operator in the field is really owned by the Canadian and public employee pension fund. So they operate a lot different than, say, maybe one of the publicly traded companies. They look at this thing for the long haul. And the thing that their eye is on is the encroachment of development, right? So the position that they have is, development is coming from the West to the East. And Sky Ranch is kind of the first on the front of that train, and they want to be in, drilled and out before houses encroach on that.

So I would say they're probably inclined to be a little bit more aggressive than maybe a public person would be, just because while price is important to them, they also want to make sure that they get those assets drilled and producing because that could last decades. And so, if they're a little early on that because price would necessarily be drilling at $40 a barrel and they like it to be $50 a barrel, they could probably live with something like that.

I'll leave it to them and have them give us that guidance. We're very reactive to that rather than proactive to that. But it's a very good field. I'd say the demand for oil is down because of COVID. And next year we're all knocking on our -- are knocking here to make sure that we all get those vaccines and can move forward with our lives, and get back to what would be normal operations. So that's closer than -- closer to us, ahead of us than it has been behind us. So those are all good metrics for us. I can't dial it in any more than that. But I do see that being a significant opportunity for the company, that's a high margin opportunity for the company, and we will continue to take advantage of.

Tucker Andersen -- Above All Advisors -- Analyst

Yeah. The market shares your optimism, given what happened to oil prices yesterday that if the vaccine is reopened, the prices will drop. But I guess in terms of visibility, the answer is we'll know when you know.

Mark Harding -- President, Chief Executive Officer and Director

Yeah, that's right.

Tucker Andersen -- Above All Advisors -- Analyst

Yeah. Could you help me understand a little more the reimbursement for the public amenities, and how that works should refer to as assessments go up more can be bonded? And then are those bonds, the obligation of public authorities, or how does that work?

Mark Harding -- President, Chief Executive Officer and Director

So yes, they are the obligation of a public authority. And so, they're based on tax revenues and so the tax revenues are a function of a percentage of the value of the homes and the businesses that are built in that subdivision. Colorado is what we call a growth pays its own way state. So every new development has its own unique set of municipalities that fund its own infrastructure, from its own houses. And so we have that -- you circle that up for your own development. One of the thing, typically when you take a look at Colorado development, you don't get all your reimbursables back if you have just residential development.

And the reason being is, we wait our taxes to commercial properties. So we cut our -- the commercial properties subsidize our residential properties. That's a better way to say it. So whereas I might get a 7% of the assessed value of a residential property, I get 4 times that for a commercial property. So I get 28% of the assessed value of a commercial property. And now that we have any project that has even a little bit of commercial, really does improve their opportunities to get back their reimbursables. And the bulk of our 160 acres, gives us really [Indecipherable] on tax revenue for our reimbursable.

So we find ourselves in one of those very unique positions where those will -- we expect to fully recover all of our reimbursables in this particular project. And the reimbursables really are just those public improvements, right? So roads, curbs, gutters, drainage channels, all of that added infrastructure that's ultimately turned over to another municipality, who said, I'll operate and maintain this. But because you're the new growth and you're responsible for it, you have to cover that cost. And so that cost really gets in that property taxes, both the business property taxes, as well as the residential property taxes.

Adding more units creates more assessed value. So instead of me having 600 single-family detached homes that, call it, $400,000 each, I'll have 900 at an average value of maybe $375,000. So some of them are going to be smaller, but they're going to have more accumulatively, the higher the density, the more assessed value and the more recoverability you have out of those reimbursables.

They're a little bit lumpy and there is a little bit of art to the timing of those. In the first phase, what we did was, we issued those after we had about that 45, 50 units under construction wasn't -- you can issue them with zero homes up or you can issue them after all your homes are built. And somewhere in there is that optimization and we work with our financial advisors to really take a look at the market conditions and whatever is occurring at that time, to sometimes there is a chase for yield and muni bonds are a good way that they can get that yield. And so the timing of that may not be as important, so we'll continue to keep an eye on that for the timing of those bonding and those sorts of things. But they accrue -- until we get those bondings, I think we have a 6% interest rate on that. So it's still accruing that time value and money component.

Tucker Andersen -- Above All Advisors -- Analyst

But because of the ratio of the commercial to the residential, will it be somewhat back end loaded because your commercial development is back end loaded?

Mark Harding -- President, Chief Executive Officer and Director

Well, it's probably midstream loaded, let me put it that way. I would say the commercial isn't going to be the first thing that gets developed and it's not going to be the last thing that gets developed.

Tucker Andersen -- Above All Advisors -- Analyst

Second, could you give us a little color on where you see the Denver market in general? You're right, it has been one of the best markets in the country. Do you see any danger of overheating and overbuilding at this point?

Mark Harding -- President, Chief Executive Officer and Director

The only danger is we're going to put up a sign that says no Californians. No offense, all you are from California. We've turned out -- we turned California blue state, it used to be a Texas red state. So when you take a look at the drivers license conversions, they're almost three to one from California now. And...

Tucker Andersen -- Above All Advisors -- Analyst

That's why [Indecipherable] lost.

Mark Harding -- President, Chief Executive Officer and Director

Yeah, that is exactly. At the end of the day, we are seeing an in-migration from everywhere, frankly. Our greatest secret was always our weather. Somehow we ended up making sure that it's nod on the Monday night football game. And I think everybody's figured out that's not what it happens the other six days of the week. So great weather, great climate, a great diversity, probably the most highest education per capita of a major metropolitan area, tremendous workforce potential. So you're seeing a lot of Silicon Valley get out of Dodge and open up shop here and other places that have the high intellectual capital, together with a reasonable standard of living. And I see that continuing, Tucker. I mean, to those of us who are natives we lament on the fact that it was great when nobody else knew it. But certainly, the economy is helping out, bringing new opportunities for the city and new investment and new growth.

Tucker Andersen -- Above All Advisors -- Analyst

Yeah. My daughter just traded up from her condo, so it's a single-family home, so she is committed. One comment and one final question. In terms of the previous question about stock buyback and the stock being undervalued, my comment would be, I'm glad you're holding lots of dry powder for whatever happens. But in the long run, the way I hope your Board looks at it is just the stock buyback as another alternative investment, what the long-term returns are possible on that which is a question of how much undervalued it is and what your other opportunities are? So I would just hope that's one of the consideration of the Board and they do measure acquisitions against what they're doing by buying some of your own company when they buy your stock back.

Mark Harding -- President, Chief Executive Officer and Director

Sure.

Tucker Andersen -- Above All Advisors -- Analyst

My final question is, now that you have the expertise as a land developer and you have done this incredible job with what might have been what's the corporate lifetime opportunity with Sky Ranch. Given how busy you are and given how many balls you're juggling, do you have the bandwidth right now to really expand into another land development opportunity? And how do you think about that just about distress on your organization?

Mark Harding -- President, Chief Executive Officer and Director

I think we do. We've ramped up. We're very careful about how we right-size the organization. And so, we still have -- we still send out to the market through competitive bid process a lot of the big heavy lifting out there. And so, whether we can get multiple groups doing that at the same time without diluting ourselves, bringing on senior manager, bringing Kevin on. We've got very strong talent in controller -- assistant controller range that we've built upon to allow us to make sure that we're administering multiple projects at the same time without losing control of our cost containment and those sorts of things. And then, you can rightsize into some of those field guys up and down. They're readily available in the market.

And so, I'm pretty confident that we've got the institutional structure there and we can capitalize on pursuing those opportunities. And as we get those opportunities, adding value through sort of the high-level stuff by zoning and water availability and design which are all outsourced. We don't have those skillsets in our bailiwick and really would never just because you want to go to the people in the market that are doing that for the land planning and the civil work and those sorts of things.

So, all those things are really dialed up and dialed down depending on the workload from consultants and the teams that support us in those avenues.

Tucker Andersen -- Above All Advisors -- Analyst

That's very helpful. And thanks for rewarding your patient investors.

Mark Harding -- President, Chief Executive Officer and Director

Well, thanks for being one of those

Operator

Thank you. Our next question is coming from Greg Bennett of Morgan Stanley. Please go ahead.

Greg Bennett -- Morgan Stanley -- Analyst

Hi. Thanks for taking the question. And did you -- I didn't hear the beginning of the call. But have you gotten all the permits for your Phase 2? I think in the last call you said you were -- because of COVID, you're waiting on things to be signed off on.

Mark Harding -- President, Chief Executive Officer and Director

Yeah. The permit wise, all that stuff is -- has been done for some time. The challenge is, when you go through all of the CDs, all the civil work, all the drainage work, the phase -- we did a Phase 1 drainage study, a Phase 2 drainage study, and then that goes over to the regulatory agencies and they've got to review it through their models. And so, it's the detailed engineering that has been taking longer than it should have. And I'd say we're within maybe two, three weeks of having most of that stuff buttoned up to be getting a grading permit and start breaking ground.

Greg Bennett -- Morgan Stanley -- Analyst

Okay. And the first homes from Phase 2 will not be delivered, it will be a year from now. Is that correct?

Mark Harding -- President, Chief Executive Officer and Director

Yeah. We'll squeeze it, we did more out of it than that, but the bulk of them will start to be coming in about a year from now.

Greg Bennett -- Morgan Stanley -- Analyst

Okay. When would you apply for Phase 3 then? How long is the process for setting up for grade or we wait too early for that?

Mark Harding -- President, Chief Executive Officer and Director

No. We would likely probably start that kind of end of next year, starting to get some of the engineering going on that and then overlapping that as we're building out maybe the second or third sub-phase of this second phase to start to bring on that online. I think you're going to see some one's and two's in the commercial layered into that as well, so those all will be going concurrently.

Greg Bennett -- Morgan Stanley -- Analyst

And then as far as from a growth perspective, if we were to look at your water assets, how far North do you go and how far South? Are there markets that you can -- if somebody has land and they don't want to sell it to you, but they want your water and they want to give you the utility business? Do you go 50 miles North, or what's the -- I guess, what's the universe for the use of your water asset?

Mark Harding -- President, Chief Executive Officer and Director

I probably classify that as a 20-mile radius around where we're at. So you kind of look at the I-70 corridor, Sky Ranch is about 5 miles North. We've got Wild Pointe, which is about 10 mile South. We can go farther East. We can go a little bit farther North. West would be difficult because then you start getting into the urbanized areas that already have a water system. So when we look at those growths of the utility customers, we look at North, South and East, but not West

Greg Bennett -- Morgan Stanley -- Analyst

Okay. So I don't want to work -- how worse out there? You've got 10 years' worth of production probably, am I correct, for selling of lots and development? But if you go 10 miles away, is that potentially a competition for your builders?

Mark Harding -- President, Chief Executive Officer and Director

I would not say so. The market that segregates itself out in a number of different ways. So there is a cliff for us on the Westside, so we can't grow West. And everything coming out to Sky Ranch and the I-70 corridor is developed, so we are in the sweet spot. I mean, whether it's our land, the neighboring land -- neighboring land North of us, neighboring land South of us, or land leading through our Sky Ranch project continuing East, that's the only way growth will occur in Denver. And so, the mountains give us that geologic barrier to the West that doesn't -- miles what beyond a coast. You just can't grow West. But you can, but if the beautiful people grow West.

Greg Bennett -- Morgan Stanley -- Analyst

Okay. And a final question for that target area, universe. Are you the only source for water for undeveloped land now? Or are there other sources for water?

Mark Harding -- President, Chief Executive Officer and Director

I would say we're not the only source, but I like our position. We're the cheapest source. We can give them one tap at a time. They can buy $30,000 tap rather than spending hundreds of millions of dollars to develop the position that we've developed over the last 30 years.

Greg Bennett -- Morgan Stanley -- Analyst

Okay. Thank you very much. Great job.

Mark Harding -- President, Chief Executive Officer and Director

Thanks.

Operator

Thank you. [Operator Instructions] Mr. Harding, I'm showing no additional questions in the queue. Do you have any additional or closing comments?

Mark Harding -- President, Chief Executive Officer and Director

So I'd just like to thank you all for your continued support. We'll post this on our website and you can continue to listen to it or refer back to it. And for those of you weren't able to make it on the call, if you have a question after listening to it, don't hesitate to give me a call. And I'd like to wish you all well, stay healthy and keep an eye out. We've got plenty of pedal left in this for the next few years. So we're excited to continue to deliver results. So thank you all.

Operator

[Operator Closing Remarks]

Duration: 64 minutes

Call participants:

Mark Harding -- President, Chief Executive Officer and Director

Geoffrey Scott -- Scott Asset Management -- Analyst

Andrew Luster -- Harvard Capital -- Analyst

Bill Miller -- Private Investor -- Analyst

Justin Shea -- Private Investor -- Analyst

Bill Cunningham -- Private Investor -- Analyst

Tucker Andersen -- Above All Advisors -- Analyst

Greg Bennett -- Morgan Stanley -- Analyst

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