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Edited Transcript of PCYO earnings conference call or presentation 7-Jan-20 9:00pm GMT

Q1 2020 Pure Cycle Corp Earnings Call

DENVER Jan 13, 2020 (Thomson StreetEvents) -- Edited Transcript of Pure Cycle Corp earnings conference call or presentation Tuesday, January 7, 2020 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mark W. Harding

Pure Cycle Corporation - President, CEO, CFO & Director

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Conference Call Participants

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* Geoffrey Scott

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Pure Cycle Corporation 2020 First Quarter Financial Results Conference call. (Operator Instructions)

At this time, it is my pleasure to turn the floor to your host for today, Mr. Mark Harding. Sir, the floor is yours.

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Mark W. Harding, Pure Cycle Corporation - President, CEO, CFO & Director [2]

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Thanks, Jess, and I'd like to welcome you all to our first quarter earnings call. This is a bit out of cycle for us as we typically usually do 2 calls a year, but because of the results that we have and kind of the uniqueness of some of these results that I thought it might be important to share some of the color of all of these things and kind of give you an update on what we're doing and where we're headed.

So with that, we do have a slide deck for this. If you move over to -- if you can get over to our website, get over to purecyclewater.com and in the Investor tab, you'll find that there is this slide deck for this presentation. And what I'll try to do is I'll try and note the transition of the slides as we work through the presentation.

So our first slide -- second slide, actually, is our safe harbor statement where the statements are not historical facts and -- or incorporated by reference to this presentation are forward-looking statements. And I think you're all familiar with our safe harbor statement.

I'm going to kind of run through the kind of the company story because I'm certain that most of you are fairly familiar with the company and the assets, they're in here. We are a water utility company with the segment that also develops land, and we've been developing our Sky Ranch project. We broke ground on that this year. And I'm going to give you kind of a lot of color on how that's gone this year as well as providing water for industrial sales and some oil and gas royalties.

Slide 4 is just a summary of our water utility assets and kind of a depiction of where we're at in our sandbox here in the Denver metro area. We're in sort of the southeast area. And as you can see, both in terms of where our assets are located in our service area at the Lowry Range, growth in the metropolitan area has kind of grown out to where all of our assets are. So we find ourselves to be located in the right segment of the Metroplex.

Let's drill down specifically to Sky Ranch. So our master-planned community is about 930 acres. It's right on the I-70 corridor. It's about 16 miles east of Downtown and directly south of the Denver International Airport.

We have a mixed-use community. So we have zoning for somewhere around 3,500 homes, and that will be a product mix -- a range of product mix ranging from single-family detached to a single-family attached to multifamily housing.

We have about 0.5 mile of frontage. So about 160 acres, if you include the usability of property right adjacent to the interstate for commercial development. And all total, if you look at all types of uses between residential, commercial, multifamily, we estimate that, that's about 5,000 single-family equivalent connections, which really give us a marker in how we work connections to our water utility.

So let's talk a little bit about what -- what's new and an update to our Q1 results. We've delivered about 372 finished lots. So we are far ahead of our schedule in terms of what our original forecast was. Each of our 3 builders have accelerated their takedown of lots. And so we have capitalized on some good weather towards the back half of the year and continue to complete infrastructure roads, curves and gutters to deliver those finished lots. So we've been paid up through Q1 for 372 of those 506 lots. We're about 90% complete on all wet utilities and dry utilities.

So really, the only thing we have left on the remaining 134 lots are going to be the high ticket items, which are going to be curved gutter and pavements. And so those we will capitalize on, on weather-dependent opportunities as we work through the rest of the winter here, but we have a good inventory for each of our 3 builders to continue to sell lots and to sell homes out there.

We have about 40 residents now in the community. So we're delivering not only finished lots, and the homebuilders are delivering homes, but we've got residents and water and sewer customers and taxpayers in our community today. We've got about 152 building permits issued and sold about 175 water and wastewater taps. So even beyond the number of homes under construction, they keep applying for those building permits, keep processing water and sewer taps based on the volume. So that gives us a leading indicator of their continued success on selling homes in the community.

We expect to deliver the remaining portion of that by, say, September of 2020, which will, in some cases, accelerate our lot deliveries by as much as 2 years. So we're pulling forward lots that we're expected to deliver in maybe late '20, '21 -- early 2022 time frame. So that gives us an idea of the success of our first phase.

Some of our key infrastructure components are complete. We've completed -- we wouldn't really have been able to get going without the off-site road infrastructure, but also have completed the water and the water treatment facility. So those are all complete and in service.

Moving to the next slide. What I really want to highlight here is kind of the average. We're getting about 6 to 8 homes per builder per month. So that gives you quite an absorption for the community as a whole.

I did some lot metrics here for updating our analysis on this, and we did have some inflators from our original takedown schedules from our homebuilder purchases. So our average home price is up a bit just because of those inflators. So we're seeing about a little favorable margin on the price of the lots that we're delivering.

And then I also wanted to highlight kind of how the first quarter went down with some of the reimbursables. As some of you who follow the company closely, will have noted our press releases back in November before the holidays. We were able to close on financing a portion of the public improvements that we have installed for this community. And if you take a look at just the amount of money that we were repaid, the $10.5 million, that averages about another $20,000 -- almost $21,000 per lot in reimbursable costs, and then we still have other reimbursables that are yet to be paid, that will be paid from future bond offerings and that probably is a wee bit better than the $20,000 that we're projecting, but I do -- wanted to note how that ultimately -- how we're going to end up on some of the lot sales on this first day. So that gives you kind of a picture of how the first phase has kind of worked its way through.

Moving on to the second phase, while I'll highlight some of the financial results that will go back to the Sky Ranch development, I do want to talk a little bit about some oil and gas activity because there's been a tremendous amount of activity in oil and gas. A couple of the big announcements have been that ConocoPhillips has entered into an agreement with a company called Crestone Peak Resources to sell their position in this field. Crestone, I think that acquisition is expected to close sometime end of February, first part of March time frame. And I think most of you know that Occidental Petroleum entered into agreement to acquire Anadarko Petroleum, who also has significant ownership interest of minerals in this area as well. And this kind of gives you a framework.

And what I've tried to do is highlight the different operators that we have in this area. So this slide really does emphasize sort of each of the individual operators and their kind of positioning here. I think we have 3 significant operators with substantial positions in this area and then maybe 3 more smaller operators that have other positions in there. So where the field was, at one point, almost exclusively dominated by 1 operator, I think we have as many as 6 operators in this field now.

As you'll note in the financial sections, our industrial, oil and gas, water sales have been very, very light. And I think that's probably indicative of a couple of things. One, that the transaction had been in the works. And so I think Conoco had some expectation that they were going to hand off the torch to another operator in this area. And at the end of sort of the summer, they had left -- they have drilled 13 wells, but had not fracked those yet. So we still have an inventory of wells that have been drilled, but not yet fracked, and whether that was going to be Conoco that was going to frac those or Crestone that's going to frac those, I think that was dependent on whether or not they were able to strike that deal and whether that deal closes.

As you know, we average about a little over $200,000 -- about $210,000, $220,000 per well as we sell water to each of these wells, and it's about a $2.7 million, $2.8 million number, and that's really going to be the variance that we saw from our year-end and first quarter -- first and second quarter this year numbers in terms of why those are a little bit weaker than what we anticipate.

So what we'll see is how Crestone attacks this field, how they position their assets and they'll have probably a little bit different program than Conoco in terms of how they operate. But I think it's still a very attractive field. One of the things that has been interesting, is sort of really the analytics on oil and gas deliveries and how well these wells are producing and the amount of oil that's in this part of the basin. So we're still very bullish on industrial water segments for oil and gas.

Let's see -- and we move on to kind of the next phase. So Slide 9 really starts to introduce Phase 2 of Sky Ranch. And while we're still finishing the balance of the Phase 1 lots, which will take us through delivery of those lots through our fiscal year-end, homebuilders will still be building homes on those through the next 2 years. So I think they're going to be inventorying some of those. They'll probably be out of lots to deliver sometime in 2021, and they're going to want kind of us to continue to work towards delivering additional lots.

Our existing portfolio builders are very excited for Phase 2 as are a number of other builders. So it's been exciting to see the level of interest that this project has garnered in the metro area. We've got as many as 10 different builders who are extremely interested to come into the community. They have seen the success that we've had in the first phase. They're anxious for more of the same and continued delivery of those lots.

If you take a look at what we're doing in the second phase, we've got a bit more acreage there, which will include some of the commercial acreage and then a lot more of the residential. We'll have some school sites in there and some mix of products being detached, attached and multifamily in the second phase.

We're working some of the land plans and construction drawings through the process. We hope to have a grading permit for sometime this summer. And so beyond the site, doing some grading sometime late summer, early fall and then take an opportunity to really complete those. It takes about 9, 10 months to do all of the excavation and dirt work on that and so deliver lots about that same time frame when we're going to want to see some of those new lots opening up from sort of the sale out of Phase 1 and then them opening up in Phase 2, so that they can continue to deliver those. And then also adding additional builders to the portfolio. So where we think we have 3 builders was a good mix in the first phase, we may have 6, 7 different builders just because of the product mix and the number of units we're offering in the second phase, and then we'll see how the commercial takes off. We've got a number of inquiries about commercial opportunities. Those are going to be slightly different opportunities for us in terms of how the developers look at those.

If we take a look at sort of the -- we've done some early costing of that. And so we think our costs for Phase 2 are going to be sort of inflation adjusted in line with what we have on our Phase 1 cost. We'll have the percentage of reimbursables, so that much of the investment that we make in public improvements in Phase 2 are going to be slightly less than they were in Phase 1 because we had some off sites in Phase 1 that applied both to Phase 1 as well as Phase 2. So some of the drainage won't be as heavy in the second phase as we saw in Phase 1. So when you take a look at kind of the high percentage of the reimbursables that we had in Phase 1, some of those will cross over into Phase 2.

And then the nice part about it is, we do have continued capacity in our water utilities out there. Both our sewer system and our water system are very -- they have capacity in each of those. We might -- we won't have much investment into the sewer system, and we might have a small incremental investment into the water system to kind of continue to expand that on an annual basis so that we keep up with the capacity and the demand on that.

So that will give you a little bit more color on Phase 2 and kind of some timing and some costing estimates. I know everybody is going to want the key question, which is going to be, well, how much are you going to sell your lots for? And I think we'll probably have some price adjustments from our first phase. I don't want to provide too much color on that because we're still working with a number of players on that yet. And so as we get those commitments finalized, then I'll have a little bit more color and a little bit more detail for you, as it relates to where those revenue side of the opportunities are.

If you move on to Page 10, I'm going to highlight some of our financial metrics because it gives you kind of a year-over-year growth, and we've had very good growth rates for the company over the last few years. So investments into sort of the water assets, you can see kind of that continued growth from '16. We've almost doubled the size of our water utility investments over that period of time.

Taking a look at our liquidity. We continue to really be good stewards of your invested capital here. So what you see is investment over those years of investing into the Sky Ranch project, and now we're rebuilding that up. So that last column in each of these investments -- each of these charts, are going to really be indicative of the quarter end results compared to all the other columns, which are going to be the year-end results.

Moving on to Slide 11. That gives you kind of an idea of our operating revenues. So last year, we had a terrific year. We had $20 million in operating revenue. In Q1, we've got half of that already in Q1. So we got $10 million in operating revenue and then just kind of a continued growth in earnings per share and then sort of net income after tax. So very good financial metrics for us and for our shareholders.

Page 12, we'll drill down on some of the specifics of each of the individual segments, our land and development segments. We had Q1 '20 over Q2 -- or Q1 '20 over Q1 '19. So we have a significant increase, almost a sevenfold increase in revenues for Q1 '20, our municipal revenues, and those are both usage revenues as well as tap fees. So now with delivery of lots, we're getting significant monetization of our tap fees in that area. So you see the high growth in the tap fees. You'll see the softening of the frac revenue and sort of that explanation of the transactional nature of that sales of the assets here in this part of the basin. And then some improvement in our royalties. The improvement in our royalties, where we had 4 new wells that came online that pooled 1/8th of the pooling. So we had 1 quarter section of the 8 quarter sections in that well interest. So continued opportunities and growth in oil and gas royalties from the 640 acres that we had with Sky Ranch. So total EBITA $7.6 million in Q1 '20 as opposed to just $600,000 in Q1 '19.

If you move to Slide 13. What I did want to do is kind of spend a little bit of time walking you through the bonding transaction and sort of the accounting thereof because it's a -- that's a little unique and both in terms of how the bond pricing gets set and how the net proceeds are and then how we recognize that on our balance sheet.

So all 3 of those things are very detailed, very complicated, but I'll give you an overview of each of those. So we did engage Citicorp, who did a terrific job for us. Our underwriters took a look at evaluating the bonding capacity. And when they evaluate the bonding capacity, they took a late -- they take a look at the entire capacity of what we're building in this phase. So all 506 homes and what they do is they estimate the home value. So we sort of have a feel for that based on the number of transactions that we had up to that point in time to give them what will be the total assessed value. The total combined value of all 506 homes. And then they take that number and apply that to the total number of mills that are set by the municipality and the projected interest rate to come up with a determined capacity for the bonds. And so that was where that $13.5 million number comes from. It comes from the total assessed value of all 506 homes, and that would be the sale price of each of the individual homes, multiplied by the mills, multiplied by an interest rate.

And then they take a look at tax receipts are 1 year in arrears. So what we'll do is, have to capitalize interest for a period of time on that. And so they take a look at what that capacity is going to be, the absorption capacity of all of those 506 homes so that they accrue amount of interest so that they can pay those bonds currently every quarter when they become due up until the tax receipts start to flow in, in that year lag. And then you net that out against their fees and get us the $10.5 million. So that's kind of how you take a look at how that bonding goes for the first 506 homes.

And then how we account for that is, again, another unique area. So what we do is the GAAP guidance allows us to take the total cost that we've incurred as of that date. So as of the date that we issued those bonds, as a percentage of the total cost of the project. So this is the total cost, not the total revenue, the total cost of the project as opposed to what our forecasted total cost is. And that percentage we book as the amount that we've held to income because the total cost is what we've spent into the project. So we received that cost number in there. And then the difference of that rolls into income. So the remaining amount is deferred, held into inventory and then will be released as we sell the remaining lots.

So our inventory number was 60% of that cost had been occurred. So we rolled -- we had already rolled that out of the inventory number. So the 60% of the bond proceeds rolled into the income category. 40% of those costs were yet to be incurred. So that was held in deferred until we recognize that revenue. And so what that will do in the subsequent quarters is it will increase our profit margins for the remaining 150-odd lots, 154, 158 lots. And so our margins, because we take a look at what those margins were assuming that we get none of the reimbursables, and that was going to be about a 6% margin and now on the remaining portion of that, we're going to have -- see those margins increase significantly up to about 27%.

So it's a bit complicated as to how we apply those proceeds, but what you'll end up seeing is that the timing difference between Q1 and the balance of the delivery of the lots, which if we see the continued absorption that we have in the market, we should sell all the lots by our end of fiscal year-end.

Then we have the balance sheet and the statement of operations. And a couple of things to note in the statement of operations are sort of the tax expense. So we are now in a tax liability position. We use the remaining NOLs that we carried over from our fiscal year-end. In 2019, we had about $2.5 million of remaining NOLs. And so now we have tax accruals hereon after. So you'll see a bit of that, where we can send some of that money over to Uncle Sam.

And then the key indicators on our earnings per share. So you'll see the remaining bond proceeds come out of that. That other $4.2 million, which is going to be deferred revenue held in inventory will roll out into earnings per shares on subsequent quarters. So those are going to be some of the highlights of the balance sheet and the income statement.

So those are going to be kind of the highlights of the quarter. It was a terrific quarter from our perspective. We were able to really execute on a number of fronts, not only on the delivery of lots in a particularly opportunistic area where we had a mild fall. We got slammed with a bit of weather over the Thanksgiving holiday and then had a little bit more temporal weather in December. So we continue to take advantage of delivering infrastructure for finished lots and then kind of how we handled the reimbursables in the bond transaction from our first phase.

So with that, I'm going to turn the call back over to Jess and see if you guys have any questions and would like me to drill down on any of the specifics.

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Questions and Answers

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Operator [1]

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(Operator Instructions) So far, I don't have any questions signaled. (Operator Instructions) We have a question from Geoffrey Scott at Scott Asset Management.

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Geoffrey Scott, [2]

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A couple of questions. Can you size the infrastructure expenditures for Phase 2 for us?

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Mark W. Harding, Pure Cycle Corporation - President, CEO, CFO & Director [3]

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Can I size the infrastructure? So...

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Geoffrey Scott, [4]

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In dollar terms?

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Mark W. Harding, Pure Cycle Corporation - President, CEO, CFO & Director [5]

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Not just yet. If you take a look at -- let me set aside that I'll bifurcate that out between what the commercial delivery is going to look like versus the rest of the residential delivery. And so what I would see in the -- the rest of the residential delivery, we're probably a little more than 2x the size of the first phase. So if you take a look at the lot delivery, and so if we took out some of the heavy public improvements like the drainage channel and things like that, it would probably -- delivery of the 506 lots would be around, call it, $30 million. And so maybe we're looking at a little bit of economies of scale and maybe twice that investment for the delivery of the next increment of that. And what we would try to do is, is really similar to Phase 1, phase that. So there's going to be opportunities where we can grade out, say, the whole area for residential to capitalize on economies of scale and then incrementally deliver subphases within that phase. So we did that even in Phase 1. We delivered Phase 1 506 lots, while we were technically set up to deliver it in 3 phases, but we, ultimately, because of the success, ended up delivering it in 2 phases, just because of the acceleration.

But we'll similarly bifurcate that out where we have commitments from builders. We're going to try and look at the same contractual format, where we're going to have a lot development agreement where we'll get paid 1/3, 1/3, 1/3 type transaction so that we can continue to have the builders, optimize their cash flow, so that they're not paying for all of that infrastructure upfront, neither am I. So we're partnering and delivering that on a real-time basis. And I think we have adequate capital. If I ultimately run through the analysis, I think we believe we have adequate capital to run all of Phase 2 on the same platform that we did with Phase 1.

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Geoffrey Scott, [6]

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Okay. Sounds good. You talked about 40 residents. Is that 40 human beings? Or is that 40 houses?

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Mark W. Harding, Pure Cycle Corporation - President, CEO, CFO & Director [7]

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40 houses. So 40 families out there. I don't have a census count out there. It's predominantly family. So we're seeing in lots the young kids that are loving the updated play structures that we've got at our parks.

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Geoffrey Scott, [8]

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Yes. But it's 40 houses that are inhabited now.

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Mark W. Harding, Pure Cycle Corporation - President, CEO, CFO & Director [9]

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Correct.

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Geoffrey Scott, [10]

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Yes, because I've driven through it. And I'm -- I've been surprised at the amount of activity, it's really going very well from an outsider's perspective.

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Mark W. Harding, Pure Cycle Corporation - President, CEO, CFO & Director [11]

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Yes, coming out of the ground, it's exciting to see. And it's not -- whereas -- I'm sure you saw at one of the Investor Days we had maybe a couple of years ago, you're like, wow, this is the middle of nowhere. And all of a sudden, now you've got 150 homes in the middle -- and it doesn't feel like that at all.

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Geoffrey Scott, [12]

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No. I mean I drove through it kind of 10 days ago. And I was surprised at just the change from when I drove through it in August.

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Mark W. Harding, Pure Cycle Corporation - President, CEO, CFO & Director [13]

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Yes, yes, yes.

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Geoffrey Scott, [14]

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The next question is really kind of chicken and egg, that the first houses go in there, the lots are a little bit less valuable because there's no commercial. And then once commercial is -- once residents get in there, there's more interest on the commercial side because you have this market that's grown up. And then once the commercial was in, the next set of residential is even more valuable because there's commercial there. Where do you kind of stand on that spectrum? What you -- how are you thinking about the comparative values going forward, does that question make sense?

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Mark W. Harding, Pure Cycle Corporation - President, CEO, CFO & Director [15]

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It does. It's sort of the cyclical value that you create with the master-planned community. And you're right, when you're leading with that, you've got a residential opportunity, and it may have a value that would be discounted compared to when you're in an urbanized area, and you've got all the convenience of commercial facilities. And so 2 things happen. One, the assessed value of your existing customer base goes up. So resale of homes are certainly -- have a significant price appreciation that has 2 -- that has -- it has 2 effects. One, it certainly has the advantage to the original homebuyer. But from our perspective, it also adds more tax revenue to help pay more of the reimbursables than we already financed in the first phase.

And then on the other side, what you're alluding to is your lots become more valuable because your homebuilders have the ability to build the same house and sell it at a higher price. And so we want to participate in that. And so how we look to do that one, Geoff, is we want to try and have a base price for our house and then also have a participation with the builders on sort of any price appreciation over a certain number. And then that way, I'm not forecasting it at their expense, and they're not benefiting the price appreciation at my expense. So we'll partner with them on that to be able to incentivize us to provide a great curb-appeal community and a community that continues to have price appreciation for even the same product that they're going to be building.

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Geoffrey Scott, [16]

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And you'll get that agreement for Phase 2?

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Mark W. Harding, Pure Cycle Corporation - President, CEO, CFO & Director [17]

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That's what we're looking at, yes. That's how we're trying to structure this as the same lot delivery agreement, get a bump in the price and then also have a back-end true-up on home value sales.

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Geoffrey Scott, [18]

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Is the residential developments to date sufficient that commercial people have been coming to you? Or have you still been having to go out to them?

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Mark W. Harding, Pure Cycle Corporation - President, CEO, CFO & Director [19]

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Kind of 50-50, I'd say. There's some tire kickers that are just sort of looking to lock up on long options, which are really not of interest to us. We're really looking at users, builders on the things rather than kind of sell it to somebody who's going to sell it to somebody. So we want to be a little bit more patient with that because we've got -- we really are monetizing the project very nicely, and I don't want to miss out on sort of undervaluing the commercial, which then continues to grow in value because of what we're doing on the residential.

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Geoffrey Scott, [20]

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Yes. I mean that was my impression from my little drive through that once Phase 2 starts to be very visible, commercial becomes extremely valuable.

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Mark W. Harding, Pure Cycle Corporation - President, CEO, CFO & Director [21]

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Yes. Yes.

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Geoffrey Scott, [22]

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Of that 2.3 million square foot commercial, how much is it going to be in Phase 2? And then how much is going to remain?

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Mark W. Harding, Pure Cycle Corporation - President, CEO, CFO & Director [23]

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So I would sort of segment that as to say, that's commercial and that'll be through the -- throughout the rest of the project. While we're -- while, because we're planning that upfront, that's going to be that 480 acres occurs, but I will say that a portion of that commercial will develop in Phase 2 and a portion of that commercial will develop in Phase 3.

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Operator [24]

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(Operator Instructions) And Mr. Harding, I have no other questions holding. I'll turn the conference back to you for any additional or closing comments.

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Mark W. Harding, Pure Cycle Corporation - President, CEO, CFO & Director [25]

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Okay. Did we get one that wanted to jump in there at the end, Jess?

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Operator [26]

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We just did. Absolutely. [Robert Cross].

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Unidentified Analyst, [27]

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Mark, fine job. I'm inquiring about subsequent quarters this year that possibly, you won't have a CAB reimbursement. So the earnings might be less than this quarter. Could you comment on that?

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Mark W. Harding, Pure Cycle Corporation - President, CEO, CFO & Director [28]

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So a good question. That's what we've tried to smooth out. So what you saw was we recognized 60% of those revenues on Q1, and then we'll have that 40% -- the remaining 40% of those bond proceeds, which will go over the rest of the year. So it will be less, but it still will have some of those bond proceeds to even out some of those EPS on subsequent quarters.

And you're right, these bond events happen periodically. There's kind of an optimization of when these are -- the right time to do. And some of that has to do with the fact that you want to be kind of right mid-stage where you've had some construction that's got started. You know what those homes are selling for, so that they have a good forward indicator to bond buyers to give them guidance as to say, here's the AV, here's the sales, here's the mill levy and here's the bonding capacity. So you get all that right, and then there's a window where you're not going to improve on that because you've got a year lag. So even though you might have a few more homes, it's still not going to give you more bonding capacity because they already priced that into it.

And so we'll see that same cycle in Phase 2. It might be a little bit bigger because we might wait and see that we have instead of 500 homes, maybe we're looking at projecting out 900, 1,000 homes, something like that, and then see how that will look for the next phase of the bond reimbursable.

So those are going to be lumpy, but then when they occur, you'll see how we record that in revenue for those percent -- in the same percentage, based on the percentage of the cost of the public improvements to date compared to the percentage of the total public improvements that we're going to make in the project.

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Unidentified Analyst, [29]

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Okay. It's a hard thing to get my hands around, but I -- yes, I'm sure you're right.

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Mark W. Harding, Pure Cycle Corporation - President, CEO, CFO & Director [30]

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I wish I could have an easier way to explain the GAAP process on that, and it's something that -- that's about as simplistic -- that's just how I understand it. I think there's probably -- if I had our CPA explain it to you, we'd all be lost.

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Operator [31]

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And we'll return to Geoffrey Scott at Scott Asset Management.

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Geoffrey Scott, [32]

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Mark, just one quick follow-up. What are the real estate taxes on your -- kind of your average house that they are $325,000?

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Mark W. Harding, Pure Cycle Corporation - President, CEO, CFO & Director [33]

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Very -- well, I'd say, very modest. For those that are in New Jersey, it's a downright steal. But I would say, based on the mill levies, and this will be kind of total mill levies, not just our mill levies, but we have overlapping districts and jurisdictions in here. It will be around, say, $3,800, $4,000 a year.

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Geoffrey Scott, [34]

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$4,000 on a $325,000 house.

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Mark W. Harding, Pure Cycle Corporation - President, CEO, CFO & Director [35]

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Yes, I'd call it, say, maybe a $350,000 house.

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Geoffrey Scott, [36]

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Okay.

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Mark W. Harding, Pure Cycle Corporation - President, CEO, CFO & Director [37]

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Well, so we've got another [Pat O'Donnell], okay. I was going to be disappointed if Pat didn't make -- have a question.

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Unidentified Analyst, [38]

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Just -- I think it's a kind of a follow-up on the previous one. But if you look at that -- the number you have on the inventory at $4 million, that isn't on the balance sheet, though, right? So where -- I'm still kind of confused on, so where is it?

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Mark W. Harding, Pure Cycle Corporation - President, CEO, CFO & Director [39]

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I think it is in the inventory number.

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Unidentified Analyst, [40]

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No, it's not in the inventory...

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Mark W. Harding, Pure Cycle Corporation - President, CEO, CFO & Director [41]

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Oh, that's right, that's right.

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Unidentified Analyst, [42]

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If you look at Slide...

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Mark W. Harding, Pure Cycle Corporation - President, CEO, CFO & Director [43]

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So what happened is that $4 million will be recognized with inventory. So as we roll, it's a deferred revenue component. And what happens is as we sell additional lots, we're going to pull that $20,000 per lot into the rev rec for each lot we sell from here forward. That's how our margins go from 6% to 27%.

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Unidentified Analyst, [44]

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I'm sorry, I just don't -- I don't -- so you get this $4 million asset, if you're going to move it from sort of -- I just think of it, it should be moving from the balance sheet to the income statement, but it's not on the balance sheet here? Or is it on the balance sheet and it's incorporated in the -- in one of these other numbers? It's not in the investment in water systems. It's not in land and middle interest. It's not in other long-term assets. Or is it maybe -- it's on the other long-term assets? Where is that inventory number?

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Mark W. Harding, Pure Cycle Corporation - President, CEO, CFO & Director [45]

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So what we had to do was reduce the cost of that infrastructure. So you lower that cost out of there. And then that money, it's receded into the assets, so we have the cash for it but then as we recognize it from the balance sheet, so where it's at on the balance sheet, is in cash. And then where it rolls into the income statement, is going to be a higher margin in how we're delivering the lots.

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Unidentified Analyst, [46]

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Okay. Then okay, okay. This was the case. Okay.

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Mark W. Harding, Pure Cycle Corporation - President, CEO, CFO & Director [47]

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Trust me, we struggled as there's not a lot of precedent for how this stuff happens. And so if I give you kind of the 3 different scenarios for this, and maybe this will help too for all of you to understand. If we issued the bonds upfront before we incurred any of that cost, then that money would be in inventory all through the process, and so you take it ratably down. If we issued the bonds after we sold all of the lots, then all of that would go to cash and then run down into the balance sheet. When we issue it in the middle of it, some of it goes to cash, some of it goes to the income statement. And so it's that timing of, if it was all upfront, it'd be running through inventory on every lot. If it was all after, it'd be in cash and it would roll through the income statement in its entirety. And then in between, we do it on a percentage basis.

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Unidentified Analyst, [48]

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Yes. I'm just having trouble trying to figure out what -- I'm kind of trying to figure out a holistic view of what the business is worth. And so much of these tap fees are onetime -- obviously, onetime revenue and income statement -- income numbers. And I guess, if I kind of looked at -- back at your other slide that you had on Slide 11. Was that Slide 11? I'm sorry, Slide 10, where you had water investments in cash. You say, if you kind of go back to '16, and I think about this right, if you go back to '16, it's sort of -- if you had the cash plus water investments, you're at, what is that $56 million-ish, and if you kind of fast forward to today, your water investments plus cash is sort of $73 million. So over the sort of 4 years, we've kind of gone up about $17 million. Is that -- plus maybe -- yes, yes -- no, because that's a $4 million...

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Mark W. Harding, Pure Cycle Corporation - President, CEO, CFO & Director [49]

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Yes.

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Unidentified Analyst, [50]

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Yes. So is that sort of what we -- because we really haven't spent too much, I mean, I know there are some things in terms of the big water channel and stuff like that, that we'll get some benefit in the second phase. And obviously, we'll get some income going forward, but that $4 million that we're going to be -- show up as income is already in the cash statement. So if we kind of like -- I guess, I'm thinking out loud here, sorry. But -- so if we're at $0.09 a share-ish before the sort of this event, we'll probably be -- you could add that into it in the next 3 quarters, so it's like $0.36 on top of that. So it's $17 million plus a little bit. Is where we're at after Phase 1? Does that sound about right?

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Mark W. Harding, Pure Cycle Corporation - President, CEO, CFO & Director [51]

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I'm tracking your numbers. But yes, I think that's right.

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Unidentified Analyst, [52]

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Okay. Okay. That's cool. Sounds good.

I got one more for you. It's just, I was thinking about flying out for your -- you got the year-end meeting next week, is that right?

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Mark W. Harding, Pure Cycle Corporation - President, CEO, CFO & Director [53]

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Yes. You preempted my close. Yes. We have our shareholder -- we do have our shareholder meeting coming up next week. So if you're all passing through town or are interested to come out and take a look, it's on the 15th. It will be at 2:00 at Downtown at our Attorney's office at Davis Graham & Stubbs. So there'll be the address for that on our proxy materials. But I certainly invite you all to have an opportunity to come out, meet the Board, ask any other detailed questions to the extent that we can give you some more color of kind of how the first half of this has gone and what we expect to see kind of on Phase 2 and the build-out and sort of what may be some of these implications of the repositioning of some of these oil and gas assets would be.

Okay. So with that, I think I will, again, thank you all for your continued support. We wouldn't be here without all of your support, and I know we have a lot of long-term shareholders. So I do want to thank you for your trust and your commitment over the years, and we hope to continue to deliver positive results through the rest of this year and moving forward.

So if any of the -- if any of you have a question that you didn't quite be able to get on through the technology of the call, certainly don't hesitate to give me a call or if you are listening to this on a rebroadcast, don't hesitate to just give me a call directly.

So with that, I thank you, and I will close the call.

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Operator [54]

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Ladies and gentlemen, we thank you for your participation. You may disconnect at this time, and have a great day.