Pure Cycle Corporation (PCYO) Q4 2021 Earnings Call Transcript

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Pure Cycle Corporation (PCYO 1.15%)
Q4 2021 Earnings Call
Nov 9, 2021, 4:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen. And welcome to the Pure Cycle Corporation Year Ended August 31, 2021 Earnings Call. At this time, all participants have been place on a listen-only mode. And the floor will be open for questions and comments after the presentation.

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

Mark Harding -- President & Chief Executive Officer

Thank you very much. And welcome, good afternoon. I'd like to welcome you all to our 2021 year-end earnings call, a bit of housekeeping upfront. For those of you that are listening in on the call, I have a slide deck for this if you can log into our website at purecyclewater.com. There'll be a banner across the homepage there that will be a click on that I'll direct you to the slide presentation itself. We've got this enabled so that I can actually advance the slides through the website itself. So you'll be able to keep up with us as we go along. If you're logged on to the website alone, without logging into the call, you can hear the audio but you won't be able to press in for questions and answers. So if you do want to log into the audio presentation, you've got to have the dial-in number on that.

So with that, let's get started. First thing, we always want to do is get the lawyers out of the room and note our safe harbor statement which statements that are not historical facts contained or incorporated by reference in this presentation are forward-looking statements. I'm sure all of you are familiar with the safe harbor statement, forward-looking statements.

So with that, I want to kind of highlight the various business aspects of the company. We have three lines of businesses. At a DNA level, the company is a water utility company. So we develop water and wastewater services in the Denver metropolitan area. We own a portfolio of water rights here in Denver in an area of -- the country where you can own water as a real property, right? Taking a look at those, our water portfolio, we measure our level of service in terms of number of connections. We define those as single-family equivalents and we shorten those two SFEs. So our portfolio can serve approximately 60,000 SFEs which will define what that translates to in terms of connections and accounts for us.

In addition to the water portfolio, we provide land development opportunities. So we own about 780 plus or minus acres of land started out at about 930 acres but we have been 2 years into that development and we've been able to sell lots to national homebuilders that have constructed homes. So we have about 150 acres that we've constructed about 500 homes on. So in total, the project has about 3,400 residential units which will be a mix of detached residential units, attached units, the duplexes, multi-family, a whole bunch of different types of products that run the spectrum of price points on that. And then, we also have a commercial area associated with a project where we have a little over 2 million square feet of commercial zone for that which will accommodate retail, commercial, light industrial uses for that.

And then finally, our new segment is to really kind of leverage the land development segment and the successes that we've seen there as we continue to build a great master planned community. We are holding back some lots from our homebuilders and then working and partnering with our homebuilders and other homebuilders to be able -- our homebuilder partners and then independent of our homebuilder partners, people that we contract with directly to construct homes that we will retain and enter into sort of the single-family home rental market. So we've got some exciting details to update you on that as well. I do want to note for those that have not been to our website, we do have a very robust website at purecyclewater.com and it really gives you a lot of information. There's a bunch of presentations on there. There are some videos on there. There's some podcasts on there that really do walk you through a lot of the detail of the company. So outside this call, there'll certainly be a resource for you all to kind of continue to monitor the success of the company.

With that, let me open up and talk a little bit about the wholesale water and wastewater segment, where we construct and we go cradle to grave with this, where we own a portfolio of water together with all of -- the infrastructure that diverts, treats, distributes that water. We get two fee instruments for that. We get a connection fee which is paid by our homebuilders and they pay that connection fee at the time of a building permit. And that really covers the cost of the wholesale system, all of the large infrastructure that goes to a water utility system.

And here in Colorado, that's kind of the pricing mechanism for that as opposed to building that into the property tax area of a lot. We do that a little bit differently here. We have these connection charges. Different providers in that area reference those as either system development fees or tap fees. They're all the same mechanism of that. And we get water tap fees as well as sewer tap fees. So those are those large capital fees. So on a combined basis, there are about $32,000 per connection. And then doing some of the math for you on that. If you take a look at that on the 60,000 connections that we have, that's a little more than $2 billion worth of topline capital attributable to that and we use those dollars to construct that system. And probably, we'll spend about $1 billion of that in building all of the facilities that serve those 60,000 connections.

Once we get a connection, we have an annual usage rate and that's what you're accustomed to paying. You get your monthly water and sewer bills. And so here in Colorado -- and really in our particular service areas, we get about $1,000 per connection on the water side and we get about $500 per connection on the sewer side. So every SFE generates about $1,500 per year per customer on that. We collect that water back from them and then we retreat that and then we actually reuse that water supply. So we have a zero discharge system where we're bringing all that water back and reusing that through outdoor irrigation in some of our industrial customers. So a very substantial SGE component to our business through water conservation and water reuse.

Talk a little bit, this will show you -- I won't detail this too much but you can study this at your leisure and it's kind of a definition of where we're at in the metropolitan area and some of our service areas where we provide service to Sky Ranch to the Lowry Ranch and then also service area that we picked up through an acquisition a couple of years ago called Wild Pointe. So those are kind of some of those things, some of the metrics on the wholesale facilities that we have in our system. And then we're -- we have licensed operators that operate and manage both our water and our wastewater systems for our customers. Kind of a chart of some of the growth potential that we have. If we have 60,000 connections, where are we today, we're just getting started. We have about 650 water connections so we have a long, long runway in this opportunity for us. And those customers come from residential customers. They come through commercial customers, both either at Sky Ranch or at the Albert Highway 86, Albert County connections. And then just through other opportunities as the Lowry Ranch, our service area continues to build out, those will be where those customer connections will be coming from.

This is kind of a projection of just the 5,000 connections that relate to Sky Ranch alone. So we've got a projected build out of all of those 5,000 connections within a 9 year time horizon, 8 more years left on that. So we'll talk a little bit about that in our land development update but very successful master plan project with Sky Ranch.

One of the often questions I get and certainly, something that impresses folks when they come and kick the tires on the company is kind of the proximity of where our service area the Lowry Ranch is in comparison to the metropolitan area. And this is kind of a good shot for you on that. This is really at the southwest corner of our service area and it kind of gives you a feel for development which has encroached on that. So, the left side of that roadway is in the city of Aurora and then the right side of that is predominantly everything relating to our service area, so certainly, a very attractive piece of land. It's in the right location of the metropolitan area.

The Lowry Ranch itself is owned by the state of Colorado. That asset is held in trust with the Colorado State Land Board and they operate and develop their assets as fiduciary for the public education system here in Colorado. They have a number of trust beneficiaries, the largest of which is K-12 public education. So they are responsible for the land development side and we're responsible for all of the utilities attributable to that. So, that kind of gives you a feel for it as if you're able to come or as you come out and take a look at this thing, really where our service area is in comparison to the Metropolitan area. This will just highlight some of the investments that we continue to make in our water utility, our water and our wastewater utilities. So we've had tremendous growth over the most recent years, mostly attributable to adding capacity for Sky Ranch and adding capacity for our industrial water customers through oil and gas.

A little bit of tracking on our tap fee revenue year-over-year over the most three recent years and these are going to be taps that are going to be sold both in Sky Ranch as well as Wild Pointe, our service areas there.

Drilled down a little bit in our land development. As I mentioned, we had originally 930 acres. We're down to about 780 because of continuing development of single-family lots. It can accommodate about 3,200 -- I think, 3,200, if you look at some multifamily, that might bump up to about 3,400 on that as well but a couple of million square feet of commercial development opportunities and that can translate. We're estimating about 1,800 SFEs. It could be significantly more than that depending on what type of commercial users we get in there. I think we're ideally located. We're in an area of the Denver metropolitan area where all of the activity is occurring. We're along the I-70 corridor. We have about 0.5 mile of frontage along I-70 with an interchange right at our development. So we're in the sweet spot of all of the growth activity in the Denver area.

Drilling down on our first day. This will give you kind of an aerial view of that. We had an original 509 lots. We have approximately 375 occupied houses out there. And then the number of caps sold will give you kind of those -- the difference between those two is about 90 plus or minus units that are under construction. So we have 100 homes currently under construction of the 509 total lots that were available in Phase 1. We're estimating that we have two of the three homebuilders that are completely sold out of their lots or the other home. The final homebuilder has a few remaining lots that we're estimating. Those are going to be pretty much sold out by the end of Q2 '22. So those are going fast. Any available lots that are out there are going fast.

A little bit of highlight about what we've received to date. So we have $36 million in lot fee revenue to date. We've recognized almost $14 million in tap fees revenues attributable to that. And then, we also have some reimbursables. So as we build the public improvements on it, the roads, curves and gutters, the drainage that will be owned by other governmental entities, we get reimbursed for that. So in the first phase, we have about $20 million worth of reimbursables, of which we've received about $10.5 million of those to date. We'll receive the balance of those as the project continues to build out. These are our portfolio of homebuilders that are on that KB, Taylor Morrison and Richmond in our first phase.

Taking a look at our second phase, we opened up our second phase which is a total of about 850 lots. 804 of those lots are lots that are going to be contracted for by our homebuilder partners and we have a portfolio here. KB is returning. We have D.R. Horton Challenger and Lennar, all building in our second phase. And then we've retained about 46 lots in there with an additional 100 lots that can be added to that as we continue to expand into that. So those 46 lots are going to be those lots that we're going to hold for our single-family rental market segment of this thing. We expect to deliver our first lots later this year. We'll probably have some model home lots available for our homebuilders so they can start constructing those model homes and start to hit the season full speed around February, March timeframe.

The lot revenue pursuant to our contracts on the 804 lots will generate about $70 million to the company, about $21 million in tap fees. We have about $61 million worth of reimbursable costs that will get back attributable to the roads and curbs and all those improvements that we'll construct. So we have an estimated $73.4 million in total development costs attributable to our second phase. This is kind of sub-phase it a little bit. So what we're looking for is to deliver lots as our builder wants -- our builder partners want them. And so they like to take them down in a certain pace attributable to those. So it carved up the project very nicely for us, almost in four equal installments.

We're under construction on Phase 1 and Phase 2. So we're almost complete with our utilities and the grading work in Phase 1. We're still doing the grading work of Phase 2 and then we'll roll over our utilities into Phase 2 and have these each incremental phase sequentially develop their lots. In these kind of micro phases, the P&L for you, if you take a look at the lot revenue attributable to each phase, the number of tap fee connections attributable to those, the total cost attributable to infrastructure in each of those phases. And some of that's not quite so linear. So a lot of times, you end up having some more upfront costs in Phase 1 than you do in Phase 4 but that could be an idea of kind of the sequencing of grading out and providing all that public improvements and then also the reimbursables for each of those phase.

So, when you look at that total Phase 2 lots of 850, that will give you kind of the full color about how that whole thing works and the gross margin potential of being close to $80 million for this particular phase. And then, some other statistics about the total number of lots by our builders, the types of lots that they are and how they distribute those out in terms of the percentage as a whole. So this is kind of very helpful information to kind of give you an understanding of how we run and manage this business segment.

If you want to go down into really what we're working on in phase -- the first sub-phase of this second phase, they're very terribly named and we probably should do a better job of that. But as many of you who follow the company, we have an agreement structure where we have either a lot development agreement where our homebuilder partners will pay us in three installments or a finished lot delivery. And so depending on what your preference is and what your tolerance is per lot, if we are carrying that cost until a finished lot delivery, where the homebuilder is paying that all at the one price then we do include some of our capital cost attributable to that, so that lot price is significantly more than the lot development agreement lot prices we have. So some of that is going to be distributed here. We have closed on the platted lots for the three builders that we have in our LDA structure. So that's been the first takedown. The second takedown we're projecting to close that one out at the end of this first quarter '22.

So it's our second payment when we deliver the wet utilities and then the final payment will be for the three builders that are under the LDA structure and then the one builder that is under the finished lot delivery structure. So that will be the big payment. So we'll see that. And it doesn't always come in all at once. Those will be coming in at a block at a time. So we really do deliver those on a real time basis but you'll see some of that revenue trickle in. We expect all of that to be completed next summer. So $18.4 million will be the sort of the lot delivery pricing mechanism for this first sub phase. Give you a little bit more color by builder of this first sub phase and their product type as well.

Moving on, many of you have heard us talk about our single-family rental segment. And really, what we are looking for here, we would not be in this segment if we weren't the land developer. And what we're looking for is really to continue to roll through the equity value that we're building in the lots themselves and being able to take some of that appreciation of the community in the lots and in the homes in there. So we're seeing tremendous price appreciation here at the Sky Ranch and from home buyers who bought 18 months ago, they're seeing as much as 30% of appreciation in their home value in 18 months. And that really is attributable to the community growth naturally in the metropolitan area and growth in this particular market segment. So really, that's our strategy on that. We want to kind of build shareholder value by that and also build recurring revenue attributable to a really highly appreciated asset value.

Some of the things that we like about that are steady increases in lease prices that while other rental types continue to kind of either maintain or see a little bit of weakness, we have a variety of product offerings in there where we have detached homes, town homes, duplexes, number of square foot and bedroom configurations. And ultimately, what we're seeing is tremendous demand for this. We started with three homes that are in our first phase, we constructed those in a competitive process and now have delivered those three homes on budget and in time and all three homes were rented with listing within 14 days.

So we're seeing tremendous demand for that within the market segment. And here's just some general statistics about the Denver market which continued to show you strength in the price appreciation of these single-family homes and then just a constrained availability in the marketplace. So we very much do like this market segment and we like the fact that it's an opportunity for us to leverage our balance sheet where we can finance the vertical cost of that with some very inexpensive money, where we have lines of credit that are available to us through our lender, where we can borrow money at 375 pg and these houses are appreciating at 5%, 6% per year. So you've got even just all by itself a natural arbitrage there but then the monthly income on this thing, when you take a look at it, we've got a positive cash flow for every unit that we have. And so, when we get $1,500 per connection of recurring revenue on our utility customers, the single-family rental market gives us about 10 times that $15,000, almost $15,000 per single-family house on recurring revenue. So those are very nice adds for the company and shareholder value in this.

A little bit more statistics about it. We delivered those three homes and just the difference between the cost of the house. So the capital cost of the house for us was about $320,000 and the market value of those homes appraised at almost $350,000. So tremendous opportunity for us and we're able to use 70% loan to value for financing, though. So our bank likes it so far. It's worked very well for us on all aspects of it. We're estimating constructing somewhere between 12 and 20 homes per year as we get into our second phase. This would kind of give you a progression of each of the three homes that we've got. So if you take a look at it, start date in March to delivery of those homes in November, it was terrific opportunity for us to kind of execute on the concept of this and see if we can not only get these things built but get these things leased out. And it's -- they look great. So you can visit our website. We'll have some more detailed photos of kind of the floor plans and how they position themselves but very nice product on that.

A little bit about oil and gas; so we do provide water to oil and gas operators in this area. We've got a number of operators in this field, the largest of which is a brand-new company which was a combination of three previous companies. It's a company called Civitas. It's a public company. And they've got a very large leasehold position in here. It's attractive because it's got a number of formations and the ability to drill horizontally with spacings at 40-acre spacing and they drill 10,000 foot, maybe sometimes as much as 15,000-foot laterals on this. We have a tremendous amount of capacity in this field that we have over 10,000 well capacity, if they drill at a full build-out spread of 40-acre spacing on that. And then we're averaging about $250,000 worth of water sales for each well that gets fracked. And so there's been about 120 wells fracked to date.

Oil prices are much more attractive at $80 a barrel than they were at $45 a barrel. So we see a lot more activity in the field right now. This is kind of just an illustration of our wholesale system where we have a very large footprint of water that we can distribute across the full width of the county and all the way from County Road -- County Line Road on the bottom side of the scale all the way up to I-70 which is the northern side. And we have the ability to get water on the other side of the highway as well. So that's been a very nice segment for us and we continue to work with our oil and gas partners in that as well.

Fiscal 2021, I'd say, it was a terrific year for us almost by every metric that we can measure. Taking a look at completing of the first filing of what we were doing at Sky Ranch. It was a challenging year for all companies in terms of employee retention, employee growth. And so, I would say, our team has continued to deliver throughout the challenge. We're in the office because we're critical and a type of company that you're turning valves and you're building things. So we've got a full portfolio of folks that do a terrific job for us. And then also just the launch of a brand-new business line and full execution from start to finish on that. So great year, not only in terms of the operating side but also on the financial side. So I always like to highlight our good years when we're talking about the financing of this.

Revenues of $17 million. If you take a look at those revenues, the difference between $17 million -- and so this is a difficult one to explain but I do want to spend some time on it. That $17 million in revenues but we have $20 million in net income. And for those of us who are not CPA, you sort of say, well, how does that happen? Really, that's because we recognize the -- we were able to book the receivable from the reimbursables that we had on our balance sheet and so that does fall into the net income line on that. And then we have kind of the rest of the gross margins on both the revenue attributable to our operations as well as the receivables attributable to those. So that Sky Ranch receivables currently sit on our balance sheet at about $25 million. Total number of utility customers are about 650. So a very good year financially for us as well.

We have both the balance sheet and the income statement attributable to this. I won't spend any time really detailing that but what does come out on this is very strong liquidity position, high degree asset potential with almost no liabilities. The one liability we have in here was that income tax payable. So that always hurts that you get to contribute to the federal coffers on this thing but happy to be in a position of a tax paying entity as opposed to accruing losses on a year-over-year basis.

So with that, what I'd like to do is turn it back over to the operator. And if you've got some questions, if I can drill down on color for any of you that want a little bit more detail on any of the things that our year-end has concluded for us.

Questions and Answers:

Operator

[Operator Instructions] Your first question for today is coming from Bill Miller [Phonetic]. Bill, your line is live.

Unidentified Participant

Mark, terrific quarter. Great year. Congratulations on all fronts.

Mark Harding -- President & Chief Executive Officer

Thank you, Bill.

Unidentified Participant

The -- in days of your work, you said, well, we have a lot of opportunities to acquire more land and acquire more metro districts or take over some of the utilities of the prime water but don't have the water. And I wonder where that stands? Whether you're still very active in those endeavors. You've got a lot going on already. I don't know whether you want to be or it should be or anything else? But second and perhaps, more importantly, you've got all these cash receivables. You've got extraordinary liquidity. And yes, I don't understand why you're not buying back more stock. If you have acquisitions, a, you could always borrow to make the acquisition, if you wanted to do it for cash which I assume you would. And secondly, you're always able to get financing because of the strength of your balance sheet. So you ought to be able to buyback a bunch of stock and have a fire powder to do any kind of acquisition activity that you want. So could you please respond?

Mark Harding -- President & Chief Executive Officer

I will -- I'm going to break that apart into three segments there. And so in talking about what's on our wish list, certainly, channeling the Board and sort of saying, OK, now you've got Sky Ranch and you've got a great opportunity on building out Sky Ranch, let's continue to follow up on that. And that's true. I think our team is great and the combination of water and land development have really proven dividends for us on that. And so we do have an appetite to continue to do that and we are in the market for additional acquisitions on that. I would say that there's a number of potential acquisitions. And while the market is certainly strong because housing is strong, it doesn't frighten us at all because I think we know we can bring value to a particular acquisition by virtue of the fact that we have water that will combine with it. So our particular taste in that side of the equation would be to find land opportunities that don't have water, bring our water to them and be in a position to zone, entitle them and then build them out. And so we are aggressive about that. It does take a willing seller on that side and sometimes, it takes a little bit of handholding to get the sellers who are really long standing. In some cases, Centennial families that have held these land holdings for a very long time. So those -- that's a key part of the equation. So Bill, we are very aggressive about that and hope to be able to talk a little bit more detail about that as we announce that to the market. We are out in evaluating other utility operations where we can combine and take over their utilities and help bolster their utilities and their growth potentials in other markets, kind of like what we did with Wild Pointe. So those two are out there. I do say that every call but they really are out there and we really are active in that market segment. Strength of the balance sheet, yes, we do have a strong balance sheet and we are able to develop this without any borrow cost but that borrower cost is available to us. And one of the things I didn't highlight in our presentation was this graph which shows our stock performance year-over-year. And if you look at it from this time last year, we've had a significant increase in our stock price which we're delighted about. I mean the market is -- I wouldn't say, the market is fairly valuing us but they're better valuing us. And so if it were trading at the $7, $8 a share as opposed to $15 a share, that buyback potential might be a significant different discussion. But it is something that we talk about at every Board meeting and talk about whether or not it's appropriate for us to be in the market and competing with people that want to buy stock. So there's that balance and we try to strike that balance to say, we're really trying to build a broader and diversified shareholder base. And for the time being, our conclusion has been not to compete with them and let them have an opportunity to be out there. But there's still ways to deliver significant shareholder value by a repurchase program. So it's not lost on us if that's a potential but it's just -- it hasn't risen to a point of action item yet.

Unidentified Participant

Mark, now...

Mark Harding -- President & Chief Executive Officer

There was a third one you had that I meant...

Unidentified Participant

Well, as you know, the -- probably between last year and this year, the progress you've made is not reflected in your stock price. I mean you're undervalued before. You're still undervalued. If you look at the cash generation, if you look at the new endeavors you have, the recurring revenue from your rental sales, I mean, you're a much stronger company in every way than you were a year ago.

Mark Harding -- President & Chief Executive Officer

Okay, Bill [Phonetic].

Unidentified Participant

Okay. But if that's the case and you know given your projections for next year that, in fact, are going to be even more undervalued in relation to next year right now. So I mean the authorization and the actual of your buying back stock seems to me to be a validation of everything you're saying.

Mark Harding -- President & Chief Executive Officer

Yes. Well -- and so the one thing I would layer on to that is that it is helpful for us to have some powder to pursue these acquisitions with. And so depends on the size of the acquisition, some sizes are bigger than others. And we want to continue to maintain some liquidity, so demonstrating some strength in how we're making these proposals for acquisitions. So, I'll leave it there because I can't give you too much more color beyond that but that certainly is something that continues to be on our agenda.

Operator

Your next question is coming from Elliot Knight [Phonetic]. Elliot, your line is live.

Unidentified Participant

Thank you. Hi, Mark.

Mark Harding -- President & Chief Executive Officer

Elliot, nice to talk to you.

Unidentified Participant

Thank you. Could we talk a little bit about the oil and gas and the -- what the fracking is going on? Because logically, given what's going on in the oil industry worldwide and in the US, this should be an ideal time for companies to be fracking, getting the flush production, getting their money back and moving on. What's going on in Pure Cycle's water -- frac water supply? What's going on particularly in permitting? My understanding is that there was a hiatus in permitting but they're preceding that in anticipation of a hiatus. The industry that sought extra were very aggressive in seeking permits. What's going on in that?

Mark Harding -- President & Chief Executive Officer

So that's a good question and one that I can give you kind of a bit of an update on. And certainly, you as a recovering oil and gas analyst will appreciate. Colorado had kind of a bit of a, I'll call it, an environmentally sensitive way of approaching oil and gas. And so, we have experimented and taken a look at changing and updating our regulations at a state wide level over the last, say, 3 or 4 years. And I think most of that has settled down and the industry has a fairly stronger appreciation of how they can move forward. So that had constrained a lot of activity together with a $45 oil price. And so a lot of that activity occurred when oil was low. Now that oil is not low, you're right, companies are much more aggressive about developing the supplies. And while it is an opportunity to develop supplies while oil is at $80 a barrel, I think this slide probably tells you a better story of what it is that we're doing. What the industry has to do is stay ahead of growth, right? And so what we're seeing is, this whole metropolitan area is growing from the west to the east, right? We only have -- we do live on a notion here in Denver, right? We have the Rocky Mountains which prevent us from growing West. So all that growth has to go East. And as it grows East, it competes with oil and gas. And so all of the regulations, the setbacks, the controls that these oil and gas companies have had to work through while we updated those regulations really concentrate on being ahead of urban development. And so, while oil price is important to them, now that they've got all that stuff settled out, they're aggressively developing so that they stay ahead of a lot of that development. So the permitting of this is much more robust than it has in any other year. So, you're seeing thousands of well permits come in so that they're getting their pad sites set and certainly, from this particular area in the Denver. This is kind of we're probably the most central player in an urbanized area in the state of Colorado, right? You can take a look at this -- Arapahoe [Phonetic] County is one but then as you extend to the north around the airport and upper in some of the northern communities, all of that growth is moving toward the east. And so all these oil and gas companies really are looking about being very aggressive about getting their pads in, getting their wells drilled and then kind of continuing to walk their way east. So you will see a significant increase in our oil and gas revenues in 2022, the guidance that I'd give you on that. I think our high year for that was right around $3.5 million. I think we'll exceed that this year in terms of oil and gas sales. And then I think 2023, '24 look very, very good for us because they're bringing those rigs in. They're drilling all those wells. They've got the permits. They're doing the everything that they need to be doing. So while this is the starting of what is to be much more robust activity than maybe the past 3 or 4 years, I see that trend continuing even at the risk of a lower oil price because of this urbanization and the fact that the Denver area continues to encroach in these areas. So they want to stay ahead of that. So that's how I would describe the oil and gas and really the robust nature of it as compared to what we've seen previously.

Unidentified Participant

So Civitas is on board with this, obviously. You must be reflecting what their plans are. Is that fair?

Mark Harding -- President & Chief Executive Officer

Yes, that's fair. I mean they are really concentrating on drilling to stay ahead of that encroachment. And so if you look at where their well pads are going to be located, they're going to be located where they're drilling. Actually, their horizontal legs are going to be going under communities. They're going to be offset from their pad site but their laterals are going to be under those areas that they already have homes on and then they'll continue to march their way east.

Unidentified Participant

Okay, thank you.

Mark Harding -- President & Chief Executive Officer

Yes.

Operator

[Operator Instructions] We do have a follow-up question coming from Elliot Knight [Phonetic]. Elliot, your line is live.

Unidentified Participant

Thank you. Well, if nobody else is going to ask the question, Mark, would you talk and update us on the timetable for commercial -- development of your commercial properties?

Mark Harding -- President & Chief Executive Officer

Yes, great question. So the commercial, we've got a very, very nice detailed master plan of our commercial site and kind of laying it out as to all the mix of uses in there. Where the logical retail uses are, retail use is going to be grocery, maybe big box store availability for like a Home Depot or Walmart, Sam's Club, that type of stuff, as well as some of the lower commercial like fast casual dining and things like that. And then, still leaving aside some of that for a mixed type development where one of the high demand areas in this economy now is starting to be distribution centers. And I think that's being borne out of the supply chain crisis and the fact that we migrated to a just in time model and then the world did, frankly, is where you ordered something and then we started to make it and we were able to get it to you in a relatively quick order. And people are a little punchy about that because that thing is broken.

And so there's a stronger need and we're seeing a very high demand for distribution centers where they can stack to inventory things whether that's going to be the actual distributor like an Amazon or a Walmart or somebody like that or some in between entities. So we've got a little bit of stay set aside for that. We probably -- we'll be starting to look at some of those transactions next year and then following into '23, I would say, some of that retail is probably '23, '24 timeframe just because they need a certain number of rooftops. If you look at a large grocery store, their metrics are they need $1 million a day volume in that and then they translate that into the number of rooftops. And so we've been very good about reaching out to all these folks and getting on their map, making sure that they put pins in our project. And so they -- whether it's grocery, whether it's the big box, whether it's the distribution centers, we have been very active on marketing those out to all of those. And so a lot of those folks are going to be in our queue and as we continue to build that out, get more rooftops and the surrounding properties getting more rooftops. We're the logical. We're really the only site because of the interchange in that area that they'll be able to do that type of development activity. So, while it -- we've had a ton of marketing on it, we've had a ton of planning on it, we've had a ton of conversations with the right folks on it. It's still a little bit off but we wanted to make sure that we didn't wait for them to call us that we were in front of them and making sure that we set those plans so that they make their plans accordingly.

Unidentified Participant

Okay. And last but not least, I'd be remiss if I didn't mention you've talked about stock buybacks. There are such things as cash dividends and even a modest dividend and annual dividend would make Pure Cycle a dividend paying stock. And I truly continue to believe that would really be a help. So I hope you'll consider cash dividends.

Mark Harding -- President & Chief Executive Officer

I do appreciate that and you are right. And it opens up a whole new segment of funds and buyers and holders and that sort of stuff. And really, we took a look at that strategically and dividends, you like to do through your annual revenues, right? You don't want to necessarily do your land sales or your tap sales through a dividend model. But that was one of the driving factors -- not driving but that's certainly one of the factors on the BTR segment. And that supercharges our recurring revenue to allow us to take a look at those dividends ahead of where the dividends would have otherwise justified themselves from our utility segment. So foremost on our minds, you're right. It is also one of those conversations that come up at each Board meeting.

Unidentified Participant

That is music to my ears. Thank you, Mark.

Mark Harding -- President & Chief Executive Officer

And I'm sure others listening, yes.

Unidentified Participant

Indeed.

Operator

You do have another follow-up question coming from Bill Miller. Bill, your line is live.

Unidentified Participant

Mark, the idea of recurring revenues is so attractive to investors because then you can model into the future. And given the limited recurring revenues from the water sales to our single family houses, why not just expand dramatically or significantly whatever you want to use your own rental business without being able to study the financial for very long before the call, it seems to me you're getting $15,000 a year in cash flow and under the best of circumstances, you're getting like $1,500 a year per house which...

Mark Harding -- President & Chief Executive Officer

Utility segment, sure. Sure. Good question, Bill. You walk that fine line from competing with your customers and actually being a customer, developing your whole product for us. And we are looking at accelerating that. So given how we performed on the first three, while it's only three, at the end of the day, that was significant demand at the high end of our rental range, right? We were forecasting this out to be $2,400 a month and I think those rented out at $2,800 a month. And we probably could have had a little bit of strength there as well. But we were more interested in making sure that we got occupants there so that we are understanding how that whole process works. Moving into the second phase, while we reserve 46 of those, there's a portion of that second phase that we're looking at that can be between 100 and 160 units. So you could see as much as 200 units coming to market on that second phase. And that is all in, right? If you're looking at $500,000 and 200 units on that, it's a big number. And so we're going to pursue that. We're going to do it smart. We're going to do it incrementally. We're going to do it while we don't get too far over our skis but still being aggressive to deliver that and bolster that recurring revenue and then start to talk a little bit about that B word on the previous call.

Unidentified Participant

Well, cash dividends interest me but anyway...

Mark Harding -- President & Chief Executive Officer

I can't -- I'm paddling.

Unidentified Participant

Okay. Well, the point basically is, I would really emphasize the rental units and maybe you are competing to some degree but that should be second to the fact that you're returns for your rental units are so dramatically better than your house...

Mark Harding -- President & Chief Executive Officer

And just the depreciation of the asset, too.

Unidentified Participant

Well, that's not an important because that's going to give you more leverage for higher end.

Mark Harding -- President & Chief Executive Officer

Good word.

Operator

There are no more questions in queue.

Mark Harding -- President & Chief Executive Officer

Great. Well, so wrapping this up, certainly if you listen to this on a replay and something came up that piqued your interest, don't hesitate or if you have any technology challenges to call in for a question, don't hesitate to give me a call and happy to drill down on any of the specifics of what it is that we're doing. We're very excited. I think it's been a terrific year. It's been a better year in terms of performance of the stock. Certainly, the volume is up. So we're trading on average about $1 million worth of equity a day. So the liquidity is certainly enhanced on all that. And so, I think we'll continue to do more outreach on investor relations, conferences. I'm looking at an opportunity to get to New York, maybe even yet this year. Maybe get to New York sometime in December and if we do that, we'll certainly send out a note and see if we can huddle up for a lunch or something like that and get to be face-to-face again for a change. So again, we want to thank you all for your continued support and your continued interest in the company. And with that, I would say stay tuned for some more great results in 2022. So, thank you all.

Operator

[Operator Closing Remarks]

Duration: 52 minutes

Call participants:

Mark Harding -- President & Chief Executive Officer

Unidentified Participant

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