Pure Cycle (PCYO) Q1 2022 Earnings Call Transcript

Pure Cycle (PCYO -0.10%)
Q1 2022 Earnings Call
Jan 11, 2022, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the Pure Cycle Corporation quarter ended November 30th, 2021 earnings call. At this time all participants have been placed under 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 and Chief Executive Officer

Thank you very much. Good morning and Happy New Year to all. I'd like to welcome you to our first quarter for our fiscal year 2022 earnings call. Just some housekeeping items, we do have a deck for this presentation.

You can find it on our website at purecyclewater.com and you can click on the front line ending page there and it'll direct you to where the presentation is and so with that, I'll get started. Moving to our first slide, which is our Safe Harbor statements. Statements that are not historical facts contained or incorporated by reference in this presentation are forward-looking statements as that meaning from the Securities and Exchange Commission. I think most of you are familiar with Safe Harbor statements, but now that we get the lawyers out of the room, what I'd like to do is really all rough overview kind of the company what business segments and then talk a little bit about the quarter and then a little bit of color about kind of our operations and then open it up to a bit of Q&A at the end here.

So, we -- for those of you that are familiar with the company and those that are just kind of learning the company, we operate in a kind of three complementary business segments in each of these segments actually drive operations for each other segment. So it's an opportunity where we're continuing to leverage the value of our long-standing assets that we've acquired in water and inland development. Our water rate water and wastewater resource development segment is that we own a portfolio of water in an area where you can own water rights. We develop that water on a cradle to a grave model.

Where we own the water, develop all the infrastructure that diverts it, that treat it, that distribute it out to our customers. In the land development segment, we own some highly attractive land in one of the hottest areas in the Denver metropolitan area, the eastern I-70 Corridors. And, we are developing that and we're building horizontal infrastructure for a masterplan community and sell lots to production homebuilders. Mostly national production homebuilders and then also have some commercial real estate that provides some exciting opportunities for us.

And then more recently single-family rentals, where we're taking some of those lots that we're improving. We're holding them back for ourselves and we're contracting to construct homes that we actually list and rent to families and individuals here in the Denver metropolitan area. So I'll talk a little bit about that as well. We got some delivery of that product and some very great successes there as well.

So let me start out with the water utility segment. So we're a wholesale water wastewater provider. As I mentioned, we have wells, we have treatment facilities, we have a distribution network. We process that water, we distribute that water to our customers.

That model generates two fee incomes. One is a large upfront capital fee, which we call tap fees. So these are current tap fees for both water and sewer. So, they're right around 20 -- almost $22,000 or $32,000, $33,000 per connection.

Those are paid by the homebuilder. Typically amortized in the cost of the house and our capacity top-line revenue capacity on that is about 2 -- a little over $2 billion and if you take the number of connections that we can serve, which is about 60,000 connections, multiply that by the tap fee, that's how you get that. That's predominately about a 50% margin business because we'll construct all of the facilities that are necessary to handle the water utility side of that. And then once we've got that customer we generate water and sewer monthly fees and those fees are typically about 120 bucks a month for a typical single-family residential home.

And so that translates into about $1,500 per connection per year. And then, as we get that water back for our sustainability are our most cost-effective new water sources to continue to use and reuse our existing water source. So, we have two wastewater reclamation facilities where we treat that water. We treat that water back to a very high-quality water supply that we can then put through a separate distribution system and be able to redeliver that for outdoor irrigation demand.

So, we've got a used and reused model for our water utility segment. A little bit of color on that, we continue to grow our assets in the water in the wastewater side. So, you've seen tremendous growth over the last four or five years of investment into that system, which continues to develop and serve our customer base. A little bit about our customers.

We're adding about 40 customers a month mostly through two active developments that we are working with the Sky Ranch community for ourselves and then the Elbert, Highway 86, which is another water utility that we acquired a couple of years ago. But this really just shows the projected absorption model for the number of connections. Really, the 5,000 connections would be a build-out of just the Sky Ranch community. It certainly doesn't represent the capacity of our water portfolio, which is about 60,000 connections worth.

And then, we do also serve water for oil and gas operations and that's been something we've talked about steadily over in more recent years. We happened to sit on top of a very, very lucrative oil and gas play in the Niobrara formation and this is typically referred to as the Southern Wattenberg Field. We have a number of operators that have lease interests here. The largest of which is consolidated a number of interests over time and really actively drilling wells in the formation.

There's there are several producing formations here. And so you take a look at kind of what the well capacity is for where we would be servicing the water needs for that. It's about in excess of 10,000 wells incapacity. There's a very large play for us.

We are looking at maybe a footprint of a couple of hundred square miles in this area. And how do we sell that water? We sell water to them at a very high rate. So their demands are very, very large and they need that water in a very compressed period of time. So, they want that over maybe a two or three-week period.

Currently, we're averaging about $250,000 per well for oil and gas operations. And we're seeing a much-renewed strength of activity in the oil and gas space here. So, as oil has firmed up and I think the Colorado politics have settled on in terms of how the state and the operators are going to regulate their operations. There's a lot of renewed sense of certainty as to how the oil and gas operations are going to move forward.

So, we're glad to see a lot of that activity continue to come back for our operations as well. This slide will give you kind of a proximity of where development is to our service area. So, we acquired these legacy water and land assets a number of years ago. And, what's happened is the Denver metropolitan areas have kind of grown out to where we are.

And this kind of gives you a picture of kind of how we're positioned, where the Metropolitan is there in relation to our service area. We have a large service area of 24,000 acres of property that's owned by the state of Colorado. It's owned by the state school board, which has a fiduciary responsibility to generate revenue for the Colorado public education system. One of a number of fiduciaries is that they have and really just kind of gives you the proximity of where our service area.

Not only in terms of our exclusive service area, which is the Lowry Range, but also the Sky Ranch. As you can see that also in the pink area a little bit north of our Lowry service area along the I-70 Corridor, which is about four miles south of the airport. And then some surrounding properties that are key opportunities for us to take a look at those land acquisitions, as well as utility operations in that corridor. And so, we really like where we're at.

We like our positioning in the marketplace. We like how this positions itself in terms of investment activity not only for the company but really the region as a whole. So it's a little bit of context about how our assets are positioned together with the Denver metropolitan area. Talk a little bit about our land development operations this has been an exciting development for the company in more recent years.

We acquired about a 930-acre property more than a decade ago at the height of the housing recession. It was an excellent acquisition for us. It not only came with the land but there's some of the water that was what we were under contract to buy when we were looking to just provide utilities to it. The zoning on it allows us to develop that 3,200 residential lots and a couple of million square feet of commercial space because we have an interchange right along the interstate.

So that property is more ideally positioned for retail commercial light industrial uses. And as we look at this property, we look at it as how many connections and how many lots we can monetize and roughly converts over to about 5,000 connections when you take a look at the commercial square footage. So that's about 1,800 square feet as I referenced. So it's ideally located in really the most active development corridor.

We started the development of this property a couple of years ago and really embarked on our first phase of that which was about 509 lots. We have completed all those lots. We have transferred all those lots to our home builder customers. As of the quarter-end, we have a little bit more right now, but there are about 405 residents out there we've sold almost 480 of the 509 taps.

So, we get those tap fee revenues typically at the building permit base, and really we're adding about 40 connections a month in this. So, you'll see this absorb pretty quickly and build-out of that. Two of the three builders that we had in our first portfolio of builders are complete with their model with all of their homes. Or at least the remaining homes are sold and are awaiting delivery.

I think, Richmond has a few lots left they may have maybe a dozen or a little bit more lots left that they're still pricing out and selling to the market there. I think they're building them on spec. So that, they're optimizing their price for that. But, we recognize all our lot revenue and nearly all of our tap fee revenue from Phase 1.

So that's been a very successful launch for us on that. In about spring of last year, we started our second phase and our second phase of this development will be a total of 850 lots. And, we contracted for about 800 of 804 exactly lots with our homebuilder customers and held back a few of those lots for ourselves. So, we held back about 46 lots with the ability to expand for some other areas and really reserve those lots for our single-family rental market.

So, I'll talk a little bit more about that later in the presentation. But what we were very excited about was that this particular phase also included a charter school. So, we were working with the local school district, the Bennett school district here in Colorado to get a charter school. And, we're very pleased that that partnership has really been a very good working relationship both for us and the Bennett school district.

We have a terrific charter operator at the Michigan National Heritage Academy that we're looking to build this charter school on for an opening in August of the school year August 2023. So, that will continue to add to the community itself. It's a local neighborhood school. So, we're very excited about having a local K-12 campus right in our development.

And then just a little bit more about our Phase 2 here. We're looking at the contract revenues that we have from our homebuilder partners will generate about $70 million in total. About another $20 million in tap fees. And then as part of what we're doing, not only do we collect our fees -- lot fees from the homebuilders, but we are also doing the horizontal development of the roads, curbs, and gutters, the parks, the open space.

All of those public improvements and, we do get those -- that investment back in the first phase those public improvements totaled about $33 million. That was a little bit weighed because we had to start some of that with some of those roadways, which were common roadways to the entire project. This second phase estimated about $61 million of public improvement reimbursable. So we have a combination of not only the $70 million in the lot revenues but also the $60 million in the reimbursement revenues.

And then, our costs for developing the second phase are estimated at about $73 million. So gives you a bit of a feel for the high-level economics and delivering the lots in our land development segment extremely attractive opportunity for us. Let me just -- this is a little bit more metrics about parsing out our 850 lots we're doing that in four sub-phases just so that we're able to incrementally deliver these blocks on a real-time basis for our homebuilders. And also kind of how the lot revenues go by the builder.

So it gives you a bit more color about how the distribution of those lot revenues are the total cap fee revenues and the costs and the reimbursable is in that. So it gives you kind of a feel for how those gross proceeds work for us and the cumulative aspect of not only the gross proceeds but plus you'd need to add the reimbursable to that as well. And then, if you take a look at how we're delivering each individual sub-phase, this is kind of the breakdown of each of the sub-base. In our first sub-phase, one of the things that we look to do, three of the four homebuilders here are in a structured, contractual structure, which allows us to be able to deliver lots on an incremental basis and be paid on an incremental basis.

And, so what happens is we call that a lot of development agreement format where each builder is able to pay us when we deliver them a finished lot or not a finished lot, a platted lot. So that the platted lot gives them title to the property. They pay us roughly a third of the finished lot phases price. And then as we deliver the wet utilities we get that second third.

And then finally when we deliver the finished lot, we get that third payment. And then, we have one home builder that's in what we call a finished lot agreement where they'll pay a little bit more for us to carry that cost through to the end of the finish lot and deliver that finish lot. So, we've completed the first two components of the first 229 lots. So, we're working on the roads and curbs right now and I expect that we'll be able to deliver all 229 lots by the end of this fiscal year.

So, we've got a delivery date there. Sort of the October -- no, August timeframe of 2022 and give you kind of a feel for how that's breaking down by each individual builder. So some metrics on that as well. I also want to talk a little bit about our single-family rental business.

And one of the things that we looked at was that, the value of creating an attractive community. The curb appeal, what we're doing for parks and open space? What we're doing for amenities? What we're doing for schools? What we're doing for the commercial value? All increases the value of these lots. Not only for customers and home builders at the time but also increases the value for the homeowners that come out here and they buy things. And so, one of the things that we looked at was being able to continue to participate in that.

And so the single-family rental model seemed like a very attractive way for us to do that and that was kind of the fundamental investment theme on that. If you took a look and you really dissect that market, the housing market is an extremely tight market. I think that's true nationwide, but I think it's exaggerated here in the Denver market and what you're seeing is both home prices increased significantly, as well as the rental market for that. And so, these are some statistics about what we see in the rental market over the last three years.

Both in terms of the median lease price. How many listings are available, the price per square foot. And so, that really was our investment theme and we started this process out with three really four lots from our first phase. So, we entered into a contract with a local homebuilder to construct the first three lots of those lots were delivered on budget and in time, and in fact, we rented each of those homes out within 14 days of listing.

So, this is a little bit of pro forma on that but the rental income on that is around $2,800 a month on that. So it gives you kind of an annualized basis. And then, we do have a terrific team of professionals that are helping us construct a portion of our water system as well as our land development activities, which allow us to be able to operate and maintain these homes ourselves. And, this gives you kind of a bit of a pro forma on that where we're going to generate not only sufficient money to be able to cover the vertical cost of that.

And what we look to do was we wanted to roll forward the equity value that we have in the land and the improved lot, as well as the utilities, and then finance the vertical component of that at a very attractive rate. So, we were able to line up some very attractive financing for that. So, we were able to finance our first three homes on that. Be able to not only benefit from carrying forward the vertical cost to our shareholders but also having it be free cash flow for us on each incremental unit.

So, if you take a look at that capitalized cost, we did self perform on some of that activity where we were able to handle the landscaping. We financed roughly the out-of-pocket cost on that to our third-party builder. And so each of those units was about $330,000 and then the appraisal value of those came in significantly higher on that. So really just the delivery of a house on our lot is benefiting us tremendously on that.

So, we've really financed about $1 million worth of these first three homes. Their value, the fair market value, these as estimated to be about $1.6 million. So, we've got some equity built up in each of these single-family units and those units continue to appreciate in value. We've got a kind of us we're seeing a year-over-year increase in excess of 4% on each of these units.

So with that, what I'd like to do is talk a little bit about kind of the quarter-end. The quarter-end was another terrific quarter for us. We continue to monetize our assets both in terms of the land and the water assets about $4.27 million in revenue. Taking a look at our net income about $1.5 million in net income and about $0.6 in earnings per share on a fully diluted basis.

And really this is kind of showing you a little bit of how the contribution is for each of the three segments. And so if you take a look at that revenue the blue portion of that really is representative of the water and wastewater segment the green portion of that is the land of the segment. And while we don't see much because it hasn't contributed materially yet on the single-family rentals, that will continue to grow. So, what we're going to want to do is kind of give you guys a feel for that.

And in this particular quarter because we're finishing out Phase 1 and we're starting Phase 2. It's a little bit more weighted into the land development segment than the water utilities. But, as you saw in Q1 from 2021 that was a bit more evenly distributed. On an operational basis, as we deliver each increment on the land side because the land and the reimbursable for those million development activities are so weighted that those will drive a lot of those revenues and then we get that recurring revenue both from our water utility segment as well as our single-family rental segment.

So the other thing I wanted to do is talk a little bit about kind of how things have gone over the last five years and even more particularly over the last three years, which have been really transformative for the company. We've been monetizing our water and our land assets and driving significant value for our shareholders. And while there's plenty to be optimistic about looking at our trajectory here, what's most encouraging to us is we're still in the early innings of this effort. I mean if you take a look for a second, we've roughly delivered 10% of the lots from our land holdings and really 500 lots of 5,000 lots, and our most valuable commercial properties are yet to come.

So we're extremely excited about that. We've delivered an even smaller percentage of that capacity from our water assets with excess capacities both in our water and our wastewater systems, which will continue to drive cash flow in the coming quarters and in the coming years. And then it's still yet an even smaller asset potential in our single-family rental segment. We've only delivered three units in this past year.

We are focusing on delivering another 11 this year and then continuing to grow that into somewhere between 200 and 300 single-family units. So looking year over year, last year we recognized what I would call significant value in earnings. We were able to record our public improvement reimbursed levels of income. And so really what that showed us was where that land development activity was driving earnings on that.

This year where we now have approximately $30 million in reimbursable. And, we expect to see significant increases in cash flow. So delivering our next 229 lots this year, we'll be able to fully monetize all of those. And then also a portion of our reimbursable from the second bond offering that we're anticipating later this year.

I know many of you have asked appropriately so, what's next. How do we plan to add to our success moving forward? And with that, I would describe how we think about each business segment. And how we prioritize our liquidity both here at the office as well as the board level in kind of three areas here kind of at the bottom of this slide. First and foremost, we look at investing our returns means new opportunities that we control, right.

Our blocking and tackling. Our day-to-day operations. We're optimizing our lot deliveries were investing in the incremental expansion of our water and our water infrastructure to be able to increase capacities for industrial water sales to our oil and gas customers and then continuing to expand in our single-family rental market. And typically, we refinance those costs of the vertical cost of the single-family, but we do have timing issues on that.

And so, what each of these is doing are they're delivering very high margin returns to you. And all of these are within our control and they continue to drive value. Each of these has liquidity demands that really take a portion of our cash position on a quarter-over-quarter basis. But the exciting thing about it is each of them has a very quick return of capital year over year.

And so, what you're going to see is you're going to see continuing growth in the cash position of our balance sheet. And I would classify this as management keeping our eye on the ball. Doing what we do well every day, day-in-day-out, and how we build and maintain a profitable company by optimizing and increasing the returns that we have with that company the assets that the company is acquiring The second category of what we look at is M&A growth. During the past three years, we've become a respected long-term player in the Denver market.

Not only delivering outstanding financial resources but if you peel back our results what you see are not only outstanding assets but outstanding revenue engines here. In our land development segment, Sky Ranch is only 10% built out and is recognized as one of the leading masterplan communities in the market. So, we continue to look for other opportunities in that area. Our water utilities have sufficient capacities both in the water and wastewater, which will add significant cash flows for us and it will also add an opportunity for us to be able to use that for M&A growth.

So, we can look at additional land acquisitions. Look at additional water acquisitions and what this has led to is it's led to what I would classify as some balance sheet muscle for our M&A discussions. Having liquidity with high margin assets producing revenues is leading not only to just acquisition but what probably is better described as a pipeline of acquisitions and really looking at it in both segments. Both the land and the water.

I would say that we're going to control the single-family rental side in our day-to-day operations where we're doing the blocking and tackling on that side but really focus on continued opportunities in land and development. And I would classify how we think about this as we want to sustainably grow the company through additional acquisitions. We're vertically integrated into very interrelated business segments that would add value to each other and want to continue to drive that value growing each segment sustainably. Water is driving the land.

The land is driving the single-family rental. Each of them is an opportunity for us to create value for our shareholders. And then finally, we acknowledge there are ways we can continue to create value through share repurchases and dividend payments. And these are important drivers for shareholders and important to the company, as well as our board.

But we really are focused on our efforts in the first two components of this. Making sure that we're doing what we're supposed to be doing on a day-to-day basis. Increasing our margins with our existing assets and the opportunities that we have with those. And then the number of opportunities that we're pursuing on the M&A front and really continue to drive value for our shareholders.

So if we have adequate capital to execute on the business activities, which is priority one and we have adequate capital to grow the company, which would be some of those acquisitions that we have in priority number two then return to capital is going to be our next and highest priority where we continue to generate value for our shareholders through that. So really that's kind of a view of how we've grown over the last say more recent three years and really how we look at continuing to leverage that strength in the balance sheet on that. This is our balance sheet and I'll let you guys kind of dissect that. We really do have a long strong balance sheet with very, very low debt to asset potential on that again.

Also, our income statement where our particular revenues are coming from not only from a water segment but from lost sales and the single-family rental, which you'll continue to see grow over time as we continue to add units in that space. A little bit about our board, we have an outstanding board far better than I deserve. A terrific group of men and women that are continuing to provide the advice and the checks and balances that you want to see for a company to be able to continue to invest and grow in this business segment. And with that, I guess I'd like to turn it back over to you all.

See if you guys have any questions that I can drill down on some specific color for you the quarter or what the company is looking to do rolling forward. So with that, I'll turn it back over to Holly and see if there are any questions out there.

Questions & Answers:

Operator

Ladies and gentlemen the floor is now open for questions. [Operator instructions] Your first question for today is coming from Bill Miller. Please announce your affiliation then pose your question.

Unknown speaker

Hi, Mark. 

Mark Harding -- President and Chief Executive Officer

Good morning, Bill. 

Unknown speaker

Good morning to you. Your quite [Inaudible] this morning and congratulations on another great quarter. I'm just working on the opportunities you have and I would think that maybe the rental market is by far the --

Mark Harding -- President and Chief Executive Officer

Bill, are you hearing feedback on your side?

Unknown speaker

Yeah, I am. Sorry.

Mark Harding -- President and Chief Executive Officer

Holly, I'm not sure if there's a mute on your side or if there's a way that we can improve that sound quality if they. Try that Bill.

Unknown speaker

OK. Let's try it. Got it.

Mark Harding -- President and Chief Executive Officer

Yeah. Yeah, that's much better.

Unknown speaker

OK. But just looking at the three elements of your business. Land development, supplying water to various utilities, etc. And then, the rental market.

I'm surprised that is your highest priority because you've had recurring revenue. Is by far the best return. You can get good financing. You get inflation protection with the increase in the price of the homes.

And why isn't it going to be a bigger part of your business? You say 11 this year, which is terrific and you think you'll get the full 200 or 300 eventually. Why are you trying to accelerate that right now?

Mark Harding -- President and Chief Executive Officer

That's a great question. So a lot of what we're doing on the land side, it's a long lead in terms of planning and getting all of the relationships with the builder setup. So when we were first looking at our Phase 2, we -- I went to the market with the 850 lots probably two, two and a half years ago with our builder partners on that. And really, it was in the middle of the pandemic, call it, maybe January -- literally, January or February of 2020.

And so -- we were just starting to roll out the single-family rental market where that was a concept where we thought set. We're seeing a lot of increase in value in terms of these homes, which is a brand-new community. It can go either way, right? It depends on how well the community is delivered and really the positioning that you have in the marketplace. So how does our submarket perform? And we found that it performed terrific.

And so, I would say was more of holding back some of those lots where we were able to hold back. Call it 40-plus of the lots from our builder contract. And it was kind of a late-stage pullback in our discussions with our builders. We had said, OK, we had 850 lots here and they said, OK, we'll buy them all.

And here was the distribution of those lots. And then, as we were getting more and more analytic about the single-family market, we actually went to each of the builders and pulled back some of those lots in each of the blocks that they were working with. Not actually having delivered that single-family market just yet. So, while Phase 2 could have been stronger in that area.

It was still early on for the company. And frankly, we've got another 3,000 lots to be able to deliver in that area. So, I think, we'll see higher weighted portions of that where we'll hold back maybe 100 in the next phase and be able to continue to accelerate that growth. And so the reason why I don't have more than 40 in that is if a couple of years ago when we were contracting for that it was still very early on in that process and so as we're expanding that you're going to see a higher weighted portion of that.

Unknown speaker

OK. So if you're only going to 11 this year, when do we see the acceleration to 30 or 40 rental units.

Mark Harding -- President and Chief Executive Officer

So, each of the core. Each of the sub-phases. We've got four sub-phases where I've pulled back 10 lots in each of the sub-phases. So, you're going to see that consistently.

But the overlap between filing two and filing three and filing three and filing four will have a weighted percentage of more of those lots. So while they are filing two in this 850 is 40. Filing three might be another hundred of those lots and then you're gonna see us being building out the first 40 at the same time as we're building out a portion of the next hundred. So they're going to be cumulatively in terms of how we roll out each subsequent phase.

Unknown speaker

So, Mark in three years now and counting acquisitions what percentage of your revenue and particularly free cash flow is the rental market going to be?

Mark Harding -- President and Chief Executive Officer

A great question. If in three years, we're executing. We'd like to be in a position of having maybe 50, 60 units occupied and another 60 units under construction. So if you take a look at that in a short timeframe that would be going from three units to maybe 100 units in a three-year period.

And that's going to be a function of kind of how each of these individual phases rolls out as well as overlapping the next phase, Phase 3.

Unknown speaker

OK. And --

Mark Harding -- President and Chief Executive Officer

So the recurring revenue, good point on that is in each of these are generating about $15,000 per unit per year in free cash flow. So that be $1.5 million in free cash flow is my decimal right there, a 100 to 15,000. I think that's right and then typically if they're about $0.5 million each. That's $50 million worth of asset value that we add to the balance sheet.

Unknown speaker

All right. Now Mark, just a second question. You've talked consistently about having a pipeline of acquisitions. But I've been hearing that for several years and the versus the immediacy of being able to buy back shares and what I hope is the bargain price.

Why can't you do both? Why can't you have your cake and eat it too?

Mark Harding -- President and Chief Executive Officer

Yes. I mean you are very diligent about that. And we -- as you see, our cash position fluctuates from quarter-over-quarter when we're dealing with executing our existing business day-to-day. So, we have a $20 million balance at year-end, maybe a $12 million balance at quarter-end.

And so a lot of that quarter-over-quarter activity gets invested into our operations. And so there is some of that fluctuation. Once we get the next round of bonds reimbursable out of that, that will help us monetize and keep a stronger liquidity position to be able to consider them, things like that. But really, for the time being, where we're positioned with the balance sheet and the opportunities that we're pursuing on the acquisition front, I think we -- we're using our liquidity to its best purpose.

So that's why we're not quite in a position where we can do both. I can't have my cake and eat it too just yet.

Unknown speaker

Well, when do you get the reimbursable back?

Mark Harding -- President and Chief Executive Officer

That's a good question. We're forecasting that sometime this year. I think within the next fiscal year. We take a look at kind of what we think is the current portion of that which is about $16 million of the $30 million.

So, we believe at least we'll get that much back and we'll see how the next bond positions itself out.

Unknown speaker

So, there's no appetite for anticipating $16 million or whatever coming back and starting now when the stock is seemingly getting no attention from the investing world.

Mark Harding -- President and Chief Executive Officer

Yeah. No, I get it and it's frustrating for us as well. And I think what we're really looking for is to make sure that we're keeping some of that muscle for sitting down at the kitchen table with some of these acquisitions Bill.

Unknown speaker

On the other hand, they're looking at the same dynamic as you are. So why are they going to sell out cheaper to sell out now?

Mark Harding -- President and Chief Executive Officer

That is the discussion. They're looking at, well is it going to be worth more tomorrow than it is today and how much more and if -- it's a very private decision for landholders in the area. And many of these are long legacy generational landowners. And so typically if they don't have it they don't want it.

And the opportunities for them are mostly estate planning and intergenerational planning activities. So this does give them away to do some planning, some tax planning, some estate planning activities and so we're working with that together with each dynamic that each individual landowner or farm owner in the case of water supply, water rights have. So, they're a little bit unique and everybody's got their own circumstance. But I would say that that certainly the last three years and our visibility in the Denver market has increased significantly.

Unknown speaker

OK. Well, thanks for the great quarter.

Mark Harding -- President and Chief Executive Officer

Yeah. Thank you as always.

Operator

Your next question is coming from Robert Howard. Please announce your affiliation, then pose your question.

Robert Howard -- Boiling Point Resources -- Analyst

Hi. It's Rob Howard from Boiling Point Resources. Just when you want to check-in. 

Mark Harding -- President and Chief Executive Officer

Good morning, Rob.

Robert Howard -- Boiling Point Resources -- Analyst

Hi, Mark. I just want to check in on what the wholesale water rights market is looking like right now in the Denver area? There have been prices being kind of creeping up or what's that look like?

Mark Harding -- President and Chief Executive Officer

It is. It's increasingly competitive. It's more costly, more difficult each year that goes by and I'll give you just one anecdotal reference point. We bought a small farm that had about 300 acre-feet of water in a little bit about 30 miles north of where we're at strategically positioned for us on one of the tributaries that we have existing water rights at Lowry.

We bought that for about call it $9,000 an acre, which translates into about an acre-foot of that. So, I got about 300 or so 320-acre feet that we bought for about $10 million. And really looking at some of the transactions and really talking with some of our neighbors right around that particular farm, that's trending at about $15,000. So, we've seen about a 50% increase in three years on that.

So the wholesale market for water continues to just skyrocket on that on a per acre-foot basis. And also the cost of developing and delivering it because you have to reach farther and farther out. And one of the advantages that the company has is that our point of use for our water rights is right where our water is originate. So, we don't have a lot of that costly infrastructure.

And as we continue to reach farther and farther out for water, we defer that capital costs for a number of years because we can continue to use water that's close in. And so we're really looking at a balance of making sure that we keep growing that portfolio. We keep partnering with regional entities such as the WISE project that you see in our financial statements from the disclosure in our MD&A sections and really working with other providers to be able to bear the cost of some of that infrastructure on a regional project basis

Robert Howard -- Boiling Point Resources -- Analyst

OK. That sounds great. And are there opportunities for -- I don't know if some other entity is short of water this year, in the near term before you're using up all of your water rights for your own internal uses? Do you -- are you able to sell stuff for a year? And is that somewhat profitable? Or what is the margin is going to be for something like that?

Mark Harding -- President and Chief Executive Officer

So we do that on to our industrial customers. So, I would say when you're selling water on a one-time one-off basis, that's going to be somebody that uses water and then doesn't have a continuing need for that, one-time use of that, and that's really our oil and gas customers. And they have tremendous water demands. And so we continue to grow our water system, the plumbing of our water system, the wells, the pipelines, the storage reservoirs, the pumping capacity, all of that, we continue to grow and use the oil and gas revenues to be able to finance that.

And then what that does for us is it leverages the margins and the opportunities that we have when we get our permanent connections. When I get our residential or commercial, our retail customer connections that are permanent connections, and they generate that tailing $1,500 per connection per year revenue. Those tap fee margins are much higher because we continue to incrementally expand our system for our one-time-use customers, oil, and gas. And so those are great opportunities, and we are capitalizing on those.

Robert Howard -- Boiling Point Resources -- Analyst

OK. Great. Thanks for your time. Keep up the good work.

Mark Harding -- President and Chief Executive Officer

Thanks.

Operator

Your next question is coming from Elliot Knight. Please announce your affiliation then pose your question.

Unknown speaker

Elliot Knight, Knight Advisors. 

Mark Harding -- President and Chief Executive Officer

Elliot, nice to hear you.

Unknown speaker

Mark. Hi, there. Speaking of hearing me, on a personal note, Mark, it was 29 years ago next month that I flew out to Denver and we met for the first time. And I just want to say, listening to you today and listening to this presentation, it is really extraordinary what Pure Cycle has become.

Now that's the end of my speech. My question is having to do with the oil and gas business. When well started to be drilled out there, we were told by the industry that these wells would be refracked after about five years. So question number one is, what's going on? Have they begun refracking? Question number two is, can you tell us what you know about the operator's drilling plans, the number of wells that are planned for the next 12 months, what their overall thinking is? And number three is the availability of labor and frac crews, which are said to be in short supply.

What do you know about that? Thank you.

Mark Harding -- President and Chief Executive Officer

You bet. Thanks. And again time flies and I do remember that that that faded day though those 30 years ago and I think you and many others on this call and that are shareholders of this company for their continued support through the years here. In the oil and gas space.

And your first question was, you're right. A lot of these wells where we're in a shale deposit and so what makes this whole thing work are our fracking and well stimulation. And when they go in and they do that it creates an opportunity for the oil to flow to the wellhead much, much quicker and they do typically or that shale deposit lends itself very well for restimulation and Colorado as a whole has seen that in probably the northern market in the northern Weld County Niobrara area. We have not seen that yet in the southern Niobrara field.

And really that particular area -- I think is, as attractive if not more attractive than what you've seen in sort of the core Weld County area and really we've suffered from operator issues. And so, we had a very -- we had a major in this field who came in spending a ton of money defining the field. Putting infrastructure in and really putting it all together. But it just never was something that became big enough for them and so they -- while they did a great job on defining it and really starting the process and proving out and derisking it, they didn't they did a terrible job on developing it because it just didn't meet their threshold and it didn't seem like it could compete because it was too big.

The operator was too big. Not the field the operator was too big. And so, they ultimately ended up selling to what was a private enterprise. So that went from Conoco to a company called Crestone, which was predominantly a Canadian pension fund creation where they were going to monetize that.

And then Crestone did a much better job about coming in and starting that production, but oil was still pretty weak during that period of time. So they weren't all that aggressive about it because the economics at $40 a barrel is much different than it is at $70 a barrel. And then more recently, Crestone, again, transferred that interest. And now what we have is a combination of a company called Extraction, Bison and Crestone.

So it was a consolidation in the group called Civitas. So this is kind of a brand-new entity. They're a publicly traded company. You can look them up and take a look at what they're doing.

They predominantly have Crestone and Extraction land positions, and then I think Bison management and some of their development expertise and that portfolio as well. So you've got a kind of a combination of those 3 entities. I know we have one rig that's dedicated to this field. They've been drilling wells they're prioritizing drilling wells has, as close as they can with the revised Colorado setback.

So they have a 2,000-foot setback and so they're prioritizing drilling wells as far on the west side of the play as they can. So that they can get those laterals in place and then start to move east with that. And so a lot of those wells are concentrated as close to the development urban areas. A lot of them are in the city of Aurora.

And Aurora depending on the water year may or may not provide water to those wells. And so I think that we supplied some water to some of those wells and Aurora supplied some water to some of those wells. The labor shortage. I don't see it as being a limitation on it.

I think it's mostly been just the repositioning of the interest over the last three or four years with various operators and I think with this recent consolidation and a new entity really having a core position and this being one of their primary drivers to the company rather than an also-ran as then maybe Crestone -- I mean not the Crestone but Conoco or strengthen in oil price that Crestone never really had that you're going to see a much more continued activity on that. If we've got one rig drilling wells continuously they can drill about 30 wells per year. And what's happening is a lot of what Conoco did was going to be HBP, hold by production. So, they were more interested in defining maybe 100 square miles, 130,000-acre lease interests that they wanted to make sure that they locked that in and drilled each of those wells in a way that they didn't have that potential of losing each of those lease interests on that.

That's all done. And what they're really doing is drilling 8, 10, 12 well pad, 12 well per pad drilling program and that's much more efficient for them. It also is much more efficient in delivering water whereas opposed to us doing $250,000 a well and then moving to another well, we're seeing $1.5 million, $2 million of water deliveries per pad. And so that's a significant increase in terms of how much water they're wanting over what period of time, which is why we continue to incrementally expand our water delivery operations both in terms of storage and then transfer capacity.

So each of those could be --  what I would characterize the oil gas play to oil analysts such as yourself or recovered oil analyst is you had some repositioning of the play. The play was derisked. You've had pricing of the asset and some patience by operators to make sure that, that price per barrel was at a sufficient level for them to increase their investment activity on that. And then consolidation of the play so that it's really centrally focused.

So I think all of those things are now giving us some good forward-looking view of how oil and gas will play over the next five years.

Operator

Thank you very much. That's a great answer. I have no further questions.

Mark Harding -- President and Chief Executive Officer

Thanks, Elliot. Best to you.

Operator

Your next question is coming from Bill Cunningham. Please announce your affiliations, then pose your question.

Unknown speaker

Bill Cunningham, I'm a private investor and occasional Seeking Alpha author. Hi, Mark.

Mark Harding -- President and Chief Executive Officer

Bill, nice to hear from my favorite Seeking Alpha writer.

Unknown speaker

And your least favorite all at the same time, I'm the only one [Inaudible] so -- In any case, I have a couple of questions on the water. One is, I believe, to the extent you get water from the Lowry range, you have to pay a royalty of 10% to 12%. Is that correct?

Mark Harding -- President and Chief Executive Officer

That is correct 10% if it is delivered to a public entity. 12% of it is delivered to a private entity.

Unknown speaker

And to the extent you get you're taking it from Sky Ranch property obviously there's there is no royalty to pay. I've been looking at your financials and I don't see the royalties broken out separately. Are they so small that they're insignificant? Or am I missing it?

Mark Harding -- President and Chief Executive Officer

No. Yeah. So typically we record that net of revenue.

Unknown speaker

OK.

Mark Harding -- President and Chief Executive Officer

I mean, you don't see a separate category for that so our revenue number is net of that royalty and it is pretty small right now. Not only do we not pay royalty on Sky Ranch water. We don't pay royalty on our Lost Creek water. We don't pay royalty on our WISE water.

And those are the lion's share of what we're using. A lot of it we're delivering to oil and gas will come from Lowry. And so that has a higher rate. We get about three times the price that we deliver water to our residential customers delivering it to our oil and gas customers so it almost washes out in terms of the revenue.

Unknown speaker

OK. OK. Good. The second question has to do with the tap fees and I'm looking at the numbers for Phase 2.

You're showing over 33,000 in tap fees per home. But when I do the math I come up with less than 25,000 for home. Now I think the answer is these are less than single-family equivalents but just wanted to check on that with you.

Mark Harding -- President and Chief Executive Officer

That is correct. And so when we look at measure divide, a measure -- a metric here and we look at that at 0.4 acre-foot equivalency. And that would be is what was historically the average for a single-family lot. At Sky Ranch, our lots are a little bit smaller.

And so we're averaging about 0.3 as opposed to pointing four. And so what that does is it means we can serve more connections with the same water supply. And when you look at that maybe that's we still get the same dollar per acre-foot. But when you have more connections in our recurring revenue model what happens is we have a fixed fee portion of that.

So a customer might pay $45 per month if they use no water. And then a consumption charge based on how much water they use. And so what that what the smaller lot size and more customer connections do for us is it has more revenue potential for us on a continuing basis for that standby fee for reservation of that connection.

Unknown speaker

OK. So then do the builders pay different amounts for a tap fee depending upon the size of the unit they're building?

Mark Harding -- President and Chief Executive Officer

They do. So we have five metrics that go into calculating each individual tap, each individual lot. And it's based on the size of the lot, size of the house, the number of car garages it has. Because then there's going to be a concrete portion of that which takes out irrigated portions of that.

How much zero escaping they have. And how many square feet of the house it is. So all of those metrics go into our tap calculator and then they -- it actually comes out and spits out, OK, this house on this lot, we now we know. We calculate, estimate the average annual demand to be this much and that then is factored to 0.4 acre-feet.

So some of them are higher. If you have a large lot -- I remember when we rolled this model out, we had one homebuilder, and the very first house they came out with ended up being on a corner lot and they ended up having like a $45,000 tap as opposed to $25,000 tap. And they said, "Well, we don't like this." And I said, "Well, if you want me to fix it at $32,000 for every one of your lots, we will, but it's not going to be in your interest to do that."

Unknown speaker

Interesting. Great. Thanks. And then, I finally have a question on the commercial development, particularly on supermarkets.

I know at one point you were mentioning that you needed 2,000 rooftops for a supermarket chain to be interested in going in there. You've got 500 and Sky Ranch now and adding there's that trailer park that's near you. That's another couple hundred. There's Harmony almost adjacent to you.

There is the whole area where that Vista peak prep school is where there are thousands of homes in there. And looking at Google maps it appears that the closest supermarket to Sky Ranch right now is over 10 miles away in a couple of stops on the interstate away. So I'm wondering what the thought process might be now for at least a supermarket going in on some of the commercial property.

Mark Harding -- President and Chief Executive Officer

We have engaged with a number of grocery retailers on that platform. They are very interested in what it is that we're doing and while I would like to say I could give you a timeline on that. The model would be one of them used to put their flag pole in early because they wanted to be kind of the first one air and establish their position and the bigger operators now are a little bit lagged on that. They want to be -- instead of six months early they want to be six months late, but they want to reserve that site they say, OK, yes we're going to be there and I want to be right here.

They know exactly where they want their lot. And I think we've got some land plans around that lot. And then, it's just going to be the timing of when that works for them and how that pricing works. So --

Unknown speaker

OK [Inaudible]

Mark Harding -- President and Chief Executive Officer

What I'm not interested in doing, I'm not interested in selling them the land at a lower price and then having them wait two-three years to build on it. I'd rather wait until they're ready to build on it and optimize the land value on it.

Unknown speaker

Yeah. Well, it also adds to the value I would think of the homes being sold and Sky Ranch if there's an active supermarket there.

Mark Harding -- President and Chief Executive Officer

I -- yes, intuitively that's true. But honestly, that's not what we suffer from. We don't suffer from the enthusiasm in our market. I think, the price point that we're in the entry-level what where I would say when we started this product there was the Taylor Morrison and KB.

Some of their first homes, they were selling at $360,000. You can't buy a home out on our site for less than 500 now. I mean, it is that attractive in terms of the building costs, the delivery costs, all those costs aren't materially higher. It's the community that we're creating out there, the attractiveness of it, its location, its access to transportation.

All those things are increasing the value of those lots.

Unknown speaker

Great. Thank you very much, Mark.

Mark Harding -- President and Chief Executive Officer

Thank you.

Operator

Your next question is coming from Geoffrey Scott. Please announce your affiliation then pose your question.

Unknown speaker

Mark, it's Geoff Scott, Scott Asset Management. How are you?

Mark Harding -- President and Chief Executive Officer

Great. Nice to hear from you, Geoff.

Unknown speaker

Yes, it's been a while. I haven't been around for 29 years, but I was sub-$3. So, I've been around for some time anyway. Follow-up on the commercial side, have you actually identified some -- a specific land area where that commercial development is going to happen?

Mark Harding -- President and Chief Executive Officer

We have. What we really do is leverage the interstate and the interchange on that. And so, we're looking at about 140 acres right up that's got that I-70 frontage for our commercial opportunities. What I didn't show in the deck, and I will next call.

And I think we might have it posted on our website, but you can see, we spend a lot of time on the design work for that commercial parcel, how the pad sites are going to layout, how the transportation network is going to layout, what we think about in terms of square footage for building spaces given our conversations with the various users. We were talking with a nice supercenter for grocery and fuel and then -- and coupling onto that, you're going to see a little -- some pad sites available for that, that are going to be local pizza, dry cleaning, liquor retail, things like that. So we've got good designs for that. So, we have spent the time to land plan that to optimize what parking is going to need pursuant to our zoning requirements and all of that.

So while it hasn't quite monetized in terms of having the connections there, the company is planning for that, and the development of that parcel has -- we spent a lot of time working on that and have had some great guidance from our board. We've got some of the best commercial developers in town on our board that really was instrumental in helping us lay that out, make sure that we're optimizing not only the acreage there but how that acreage gets used on parking that can be co-parking oriented. This parking can benefit multiple retailers, that type of stuff.

Unknown speaker

OK. In terms of timing. What fiscal year would be kind of targeted for actual commercial building and leasing?

Mark Harding -- President and Chief Executive Officer

I'd love to say it can be in '22. I doubt that that's the case. I think it's probably a '23 type opportunity. We might have something to talk about this year, but I think, it's come to fruition.

I think it's probably still 18 months out.

Unknown speaker

OK. Then a very kind of a high-level question. The fires up toward boulder it's not going to affect the population of Sky Ranch, but you have to believe that with all the rebuilding activity that there is going to be extensive pressure on labor and materials is -- are you starting to see that already?

Mark Harding -- President and Chief Executive Officer

I have not seen that yet? Our production builders typically have better access to that and manage that much better. What we would look at as a pressure point for the company would be could we deliver our BT hours in that segment and really we've got a great homebuilder that delivered our first three. He's very, very aggressive and wants to grow his business and really we're a key component of growing that business together with the fact that he competes against the production builders and the production builders in the next phase are much more positioned to be able to expand on that. They're building their homes next to us.

They may be able to expand that if they're not able to price that out competitively to our existing builder then I think we're positioned well for that. Not to say that won't still constrain the market because you have other trades. You have electricians you have plumbers all of those trades need to come out and be able to be committed to a particular area. And there are another thousand homes that that will need to be rebuilt.

When you look at it in the aggregate we're building about 15,000 homes a year in the Denver market. So on a percentage basis, it's tragic and it's a lot of homes, but it's probably not that weighted.

Unknown speaker

Yeah. I was going to say labor was tight before the fires and after the fires, it has to be even tighter.

Mark Harding -- President and Chief Executive Officer

Yeah. Yeah. Well, I wouldn't disagree.

Unknown speaker

OK. Congratulations, I appreciate the time.

Mark Harding -- President and Chief Executive Officer

Thank you for your support.

Operator

There are no further questions in queue.

Mark Harding -- President and Chief Executive Officer

Great. Well, so for those that are listening to the replay or [Inaudible] on this, if something pops up that you'd want some additional information on, please don't hesitate to give us a call. We do have a terrific website. It's now an award-winning website.

And so there's a -- we will continue to update that. We will continue to provide color content, photos, video footage, podcast, a whole range of opportunities for us to continue outreach to the public and to the investment community. On an active basis, we're much -- we're very active at the conferences. So I know a number of you have been to some of those conferences, and we've spoken one-on-one on that.

We'll continue to do that to continue to reach out to the market and make sure that they understand what it is that we're doing and certainly the enthusiasm and excitement that we have for the company. And we also look forward to delivering you some performance on the M&A front and activities on that. I know we've been working on that for a while. And not all of those are within our control, but we're very excited about some opportunities that we're pursuing.

And hopefully, we can satisfy Bill Miller that we're putting that capital to good use. So with that, again, thank you all for your continued support, and please keep in touch.

Operator

[Operator signoff]

Duration: 72 minutes

Call participants:

Mark Harding -- President and Chief Executive Officer

Unknown speaker

Robert Howard -- Boiling Point Resources -- Analyst

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