Pure Cycle Corporation (PCYO) Q2 2021 Earnings Report, Transcript and Summary

Greetings. Welcome to the Pure Cycle Corporation’s Second Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-answer-session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, President and CEO, Mark Harding. You may begin.

Thanks very much. And I’d like to welcome you all to our second quarter for the period -- the six months period ending February 28, 2021 earnings call. Just some housekeeping items, for those of you who are dialed in but want to follow the presentation on our deck. If you jump over to our website at purecyclewater.com. On the front page of that, there will be a link where you can click on to the earnings presentation and you can follow it along with us. So, with that, I will start the presentation with the first order of business, which is to get the lawyers out of the room where we satisfy them and note that this is our Safe Harbor statement and statements that are not historical facts contained or incorporated by reference in this presentation are forward-looking statements. I am sure you are all familiar with Safe Harbor statements and forward-looking statements. So to give those of you who are new to the company and we have got a number of new folks who have either called in to inquire about the company or had participated in one of the conferences that we have done recently. I will give you kind of a brief overview of the business enterprise. Then we will drill down on some of the specifics of each of our segments and then I am going to turn the call over to our CFO, Kevin McNeill who will give you guys a highlight of our impressive earnings over the quarter, so -- or over the six-month period. So, with that, the company operates in three complementary business segments, a Water Resource segment, where we own water rights in a water short area and then develop those water rights for our own use and as a water -- wholesale water provider for other customers, a Land Development segment, where we own property in the right part of the Denver area, in the I-70 corridor, which is one of the fastest-growing quarters in the metropolitan area, and then a new segment that we have recently announced as a single-family rental, Build-to-Rent segment and I will drill down a little bit more specifics on that as we go through the presentation. Highlighting our Water segment, we are sort of what we define as cradle to grave, where we have a large water portfolio in the water short area. Part of the country where you can actually own water is a property asset. So we own about 29,000 acre feet of water rights and that enables us to provide service to an estimated 60,000 connections and we define our connections as sort of the equivalent of a residential connection. And then we also develop the wells, the diversion structures off of the surface water streams, the treated that distributed out to the customers. We collect that back once the customers used it. We process that through water reclamation facility and then we reuse that water supply either through irrigation customers, where we sell that water to irrigation clients or we sell that water to oil and gas customers for industries. So we use and reuse that water supply. We get paid two fee instruments for that. We get paid a one-time connection fee, a very substantial fee for our connection charges. We get about $27.7, $27.7 for the water side for the water side and about $4,800 for the sewer side, so rounded numbers around $32,000 for our connection fees and if you do the math on the capacity of the portfolio, that’s about $2 billion in revenue and then there’s about a 50% margin in that business, because we are going to build the brick-and-mortar. All of the infrastructure that does deliver that to all of our customers. And then we get monthly water and sewer bills, so we collect about $1,500 per connection per year combined water and sewer revenues. And doing the math again on our estimated capacity of 60,000 connections at build out, that generates about $90 million year-over-year revenue and that’s about another 50% margin business when you are working through operating and maintaining the system. I do want to highlight this as a kind of our keystone asset, our new wastewater reclamation facility and what this does is its 100% reuse facility. It takes 100% of the wastewater that comes into that facility, treats it back to a standard that we can reuse that for outdoor irrigation and Colorado has some very specific regulations that govern the reuse of that water supply for parks and open space irrigation. So, we do do that. We have dual distribution system within the Sky Ranch community that allows us to deliver that directly to our parks and open space, as well as bring that back to our storage facility for use for industrial, oil and gas customers. This is a little bit about our customer connections and an idea of where they are, where they are coming from and sort of their projected growth rate. And so, we have got a growing customer base. Although, if you look at our capacity at 60,000, we are at a very, very small number, we are just beginning in terms of our customer growth. But we are growing quite rapidly year-over-year on our connections both due to what we are doing at Sky Ranch, as well as our other service areas in Albert County, which is a project that we acquired the service to a couple of years back that we provide both residential and commercial connections down into Albert County on that. So, if you take a look at this, it’s kind of a projection we build out of just the 5,000 connections for Sky Ranch and we are kind of projecting that over the next say, eight years or nine years. Moving on -- kind of a graphic data that illustrates the growth in our investments in our water utility assets. So we continue to add to our portfolio of assets that deliver that service both in terms of the infrastructure, on the diversion and all elements of that storage distribution systems, those sorts of things. So this will continue to grow. This will be that 50% capacity that we use to invest those capacities into the brick-and-mortar of the Utility segment business. So I want to spill over into the second segment, our Land Development segment, which really incorporates us as a master plan developer in the Denver metropolitan area. We acquired about 1,000 acres of property a number of years ago. We acquired that at the right time. You always want to buy right, but acquiring raw land in the middle in the depths of the Great Recession certainly took a lot of courage and we are grateful to our shareholders and our Board for the confidence they placed in us for making those investments, but it was a good buy. And in total, the project can accommodate up to 3,400 residential units and a couple million square feet of commercial development and when you equate out that commercial development in terms of SFEs we are projecting that to be in that 1,600 single-family equivalents on the utility side. And so that metric will come into play a little bit later as I detail what the build-out capacity of Sky Ranch is. But we believe that that build-out capacity is around 5,000 single-family connections and we equate that both not only in terms of the Utility segment but also on the real estate, what we look to realize in terms of the revenue potential in the real estate. Highlighting a little bit of our successes on this, we started our first phase, which is about 509 single-family lots and we did that about 18 months ago, almost two years ago. We have got to just shy of 300 residents out there now, a little over 100 homes under construction and so that has exceeded the expectations of both our builders as well as our models. And it’s mostly been because of the product. We have an entry level product out here. It’s one of the -- it is I think the most affordable master plan community in the Denver metropolitan area and if it’s not the most affordable, among the most affordable master plan communities in the metropolitan area. We are projecting that the available lots in this first phase will be sold out by the end of this year. We have recognized our full revenue on the lot deliveries of about $37 million to-date and we have recognized about $11.5 million of tap fee revenues to-date. The total should inch its way up to about $14 million, as the balance of tap’s are applied for by each of our builders and these are three production builders in our first phase. Moving on to kind of highlight a little bit of our second phase, we have got about 900 lofts in our second phase. So about twice the size of our first phase, we broke ground in February of 2021 and our dirt crew is out there grading our first phase of these lots right now. They are about half through grading the first 230 lots. So we hope they -- them to be done in about the end of May time frame and then we will mobilize all the Utility crews and start to deliver lots later this year. If you take a look at our lot revenue for Phase 2, we did have a substantial increase from our pricing in the first phase mostly just because we were looking to break into the market in our first phase and we are getting into a little bit more price metrics here where we had about a 30% increase in our overall lot costs and so we are estimating lot revenues about $72.6 million. This phase has a number of different product lines. Our first phase was pretty homogeneous. We had single-family detached lots, which were anywhere from 4,800 square feet to 5,200 square feet. They are either 45-foot or 50-foot lot frontage, pretty standard lot delivery for our production builders. And this one will have a number of different products. We will still have those same 45-foot, 50-foot lots. But we will have paired products, a townhome product. We will have a duplex product. We will have some alley loads in both the 40-foot sizing and the 35-foot sizing. So it will be much more attractive to a broader range of buyers. So when we look at the absorption on this one, we don’t look at it necessarily by the builder, but we look at it by the product class and we have six different product classes in this next phase. Tap fee revenues again here illustrated about $21.5 million and then the reimbursable cost at about $48 million, which we get back through reimbursements from the local municipality, the Sky Ranch Metropolitan districts of the Sky Ranch Community Authority Board. Doing some math work all here, this is kind of an illustration of both how filing one stacks up, how filing two looks to project itself out and then what the balance of it is going to look like. And the balance is really taking the remaining 3,600, which we convert that 1,600 commercial lots into residential lots and so those -- that forecast here is going to have the same revenue projection that we would have at a residential level, as well as the same cost projection. We think we are going to do better than that because the commercial land is more valuable and it has certainly more efficiencies on delivering utilities to it. But for comparison purposes, this kind of gives you a feel for what’s the pedal left in Sky Ranch. And so if you are looking at this we probably got about another $150 million in total revenue over, say, $65 million. So we have got maybe $80 million worth of margin in the Phase 2 that’s available and then the next phase that can carry us up to about 6 -- little over $600 million with about, you can call it $150 million worth of costs in there and some of those efficiencies in there in terms of the tap fees and the lot delivery cost. So very attractive margins and what we are looking at for the rest of Sky Ranch. And so that comparison each investor can kind of take a look at that from a discount factor, but we are projecting that over this say the next eight years to 10 years that will give you a kind of an analysis of how fairly the stock is priced. Moving on into our new discussion topic and I do want to spend a little bit of time on this because this is exciting for us. It’s a Build-to-Rent. We are actually going to contract with our portfolio homebuilders to be able to build these homes for us, so that we can continue to have them be our builder and just we are not competing with them. We really are just saying we are going to hold back on this lot and then we are going to be your first customer on those lots. So as they are building on the blocks that we reserve these lots for, they have the opportunity to be able to come in and build for us on that. And really it’s a nice model for us, because it allows us to capitalize on the highly appreciated land cost, as well as the long-standing investment that we have in the utilities. And if I look to try and highlight why we think this is important and why this is a good segment for us. This is kind of an illustration of some of the demand statistics about how home values continue to go and then that constrained inventory that we see in terms of home prices. And then we also see a significantly constrained inventory of entry level home prices here in Colorado. If you took a look at these statistics before the recession, roughly 50% of all homes that were started in the Denver area were in that entry level product category and today that number has fallen to less than 4%, so tremendous demand for what it is that we are doing out there. And then just some statistics about the price appreciation of the home values, this -- the competitive listings, I think you have all seen the headlines about every time you list a property, you are getting above -- you are getting multiple offers above your asking price and so what that tells us is there’s significant appreciation for these lots and how we translate that. We are looking at why Sky Ranch. The Denver population continues to be among the top in the country in terms of urbanized areas for residential growth. We think the Sky Ranch, our entry price product is the right location. We have got a tremendous land plan that incorporates parks and open space and a new charter school that we have approved or that our local school district has approved and we have been working with them for a number of years to really bring that investment into the community. And then the commutes to employment centers. So Sky Ranch is the perfect location for something like this particular model. And how we look to capitalize on that is take a look at we are able to deliver the vertical side of this for about $300,000, a little bit more than $300,000 on a $450,000 home. So that’s the incremental cost of the investment into the Build-to-Rent as compared to just selling the lot and the tap. And what we were able to do is line up interest rates -- attractive interest rates for that additional cost. So when we went to this -- when we took this opportunity to our Board. It said that we might consider it but you can’t use any of our cash and you have got to find a way to be able to fund the incremental component of the vertical costs, which we were able to do with that mortgage type money and so we have lined up some financing for about 3.75% for this Build-to-Rent. And then if you look at the metrics on it, if we are renting that out as a $450,000 home, we have got a rental income there at about $2,800 a month and so that generates about $33,000 over the year. And then we have got our costs in here, but what this ultimately does is it has positive cash flow to us of another $15,000 per single-family connection and when you add that to the $1,500 single-family connection on a Utility model, this becomes very accretive to the income statement. So the advantage on this Build-to-Rent, if you take a look at the next slide, it allows us to be able to grow both the balance sheet and the income statement. So the positive accretive cash flows that are going to be recurring cash flows to the income statement of $15,000 per connection and then also taking a $450,000 market value and seeing that continue to appreciate. So if you show just some modest depreciation on those home values you have got a great asset appreciation. And so we are going to kind of add this to the portfolio with our second filing here and we have got about 100 lot reserve for that. It will be incremental. So we will have start out with a dozen that will be in our first phase. We will kind of roll that forward as each incremental phase and we were also able to add three new lots to our first filing. So we are actually under construction for our first three units of that. And so as we continue to update you on that and one of the things that we would like to do is also try and have an Investor Day here this summer where we -- as we can all open up and travel for those of you that are out of town, have an opportunity to come out and see not only the successes of our first phase, see the construction of our second phase, see what we are looking at in terms of our build-the-rent units as well and then, more on kind of a water Utility segments and some industrial and gas activity and that’s kind of inched its way back. So there will be a bit more information about that as we come a little bit closer to the summer and get some dates that we will circulate out to everybody. So with that as a lead in, I do want to highlight the fact that there still is an attractive oil and gas opportunity for us to sell water to oil and gas operators. There’s been a significant investment into this field that’s been derisked. So they do have a very strong understanding of the production efficiencies of this field and there’s thousands of wells that are looked to be drilled in here. And we continue to see an increase in the amount of water usage per wells. So our current operator is using about 250,000 worth of water for each well that they have in this capacity. And really, what they look to do is try and stay ahead of the growth of the metropolitan area. So they are going to be working their way from sort of the west side of this map over to the east so that they can maintain the spacing that the new -- the setback requirements the state of Colorado has and Colorado has had a fairly dysfunctional relationship with oil and gas. But I think they have come into a fairly workable framework for operators to be able to get what they need to get done and be at safe distance and setback requirements for residential communities that where they are encroaching into the residential community, there’s an expectation that they will be in a safe operating distance. And so we find ourselves in that part of the formation that’s attractive but also where development hasn’t quite come out of that yet. So I think there’s a good relationship and we find ourselves kind of in a better part of that field for operators. So we do have a rig that was relocated here this spring and is drilling additional wells, and so we will continue to deliver water for them and you will start to see that on our income statement as we go forward. Okay. So what I am going to do is move over to the financial results here and I am going to turn the call over to Kevin McNeill, he is our CFO and he’s been kind of really working this side of the company and optimizing what we are doing on that and I will let him highlight what we have done.

Great. Thanks, Mark. And welcome everybody for -- thanks for joining us this afternoon. I am going to highlight a few items. I won’t go line by line obviously on the down through the P&L. On the slide, we are on the -- concurrent slide, we are on 23. The top three graph really show you the three -- those three major items, revenue, gross margin, net income. And where we are at in the six months ended February 28th compared to last couple of years really to give you a gauge of how we are doing compared to where we were the last few years. The bigger item I want to highlight is the bottom section and this is related to the reimbursable. As we have noted in prior calls, up until now, we have felt those reimbursables were contingent to payment of them and so they weren’t recorded in our books anywhere. We were waiving and deferring some of the recognition of interest income and project management fee revenue. But this quarter going into the current year with the development -- second development filing progressing, some mill levy changes, growing and sustained tax base from the first filing, we did an analysis and determined that that was actually collectable and so now we believe under U.S. GAAP guidelines, it’s considered probable that we will collect this. Based on that, we are able to recognize about $19 million of project -- other income related to the reimbursables along with $1.5 million of project management fees and $1.4 million of interest income, which really lines this up with what’s really occurring and they will get us back in track and gets our gross margins more in line with what was expected, what is truly going on in the first phase. Progressing to the next slide, I will just highlight a couple of items in the balance sheet. Cash, we are maintaining a pretty good cash balance. We will obviously start use -- you will see that start coming down in the next quarter as we continue with development of the second filing, but then we will start getting some milestone payments. The next slide is the income statement which obvious -- will obviously show up in our 10-Q which we will file tomorrow morning. Highlight just a couple of items. You can see for the six-month ended 6/30 this year versus last -- February 28 this year versus last year, our metered water usage up about $100,000, which is really predominantly due to the Sky Ranch growth. There’s about 300 homes built out there, as Mark pointed out earlier. There’s some additional fracking revenue from oil and gas operations. And then the one that’s -- the big decline is obviously the land of -- the lot fee revenue, which that’s come down because filing one is substantially complete, all those lots are sold. Filling two is getting build and we expect those revenues to start being recognized later during this year as permit -- or as flat and that utilities and everything gets installed. So that was really it. Obviously as we get to the end there’s some questions-and-answers, and if you have any questions you can feel free to reach out to Mark or myself. And with that, I will turn it back over to Mark.

Great. So a couple of highlights there, one of the things about -- you can’t be on an earnings call where somebody doesn’t talk about what impacts that COVID has on your enterprise. And I would say the, one impact that it did have was kind of a delay in processing our approvals for our second phase. And it was just -- it was unavoidable, sending in these very detailed complex designs and engineering documents over to the county when they were trying first to figure out how they could get their people to work remotely. And then secondly, how to have the timelines for processing these applications work with public hearings and things like that. That really what -- we would like to have these overlap a little bit better than it did. We were set up to do that by how we started all these and just didn’t work out to time that way, but we do feel optimistic that that will be better managed going forward. So if I were to say what the COVID impact to the company have been, that would be the one that I would highlight. Staffing-wise we have been able to maintain our staffing here in the office through rotating occupancy levels and we are building that back up. So most of our team does come into the office and most of our team in the field has been consistently working in the field, delivering water, wastewater services. So, with that, let me go ahead and turn it back over to the moderator and see if we can add a little color to some questions you all might have.

Thank you. [Operator Instructions] Our first question is from Tucker Andersen with Above All Advisors. Please proceed with your question.

Hi, Mark.

Tucker, good to hear from you.

Very informative presentation. You guys are getting really professional. I don’t recognize you anymore. A few questions, could you talk about any color on when and how you may proceed with the commercial development?

Yeah. So what we -- we have added some Board strength here and probably have one of the best guys who handles commercial opportunities for one of the local private developers here in town, who really would not be competing on anything that we are doing. And so, his name is Jeff Sheets, and both he as well as Patrick Beirne who was really spent most of his career at Pulte have both come into our questions on this is to say. They have never regret. They have never had a situation where they didn’t regret selling their commercial. They always wanted and could never convince their management teams to hold that commercial until the full value got there. Now, there’s a delicate balance between how do you hold for value and how you present value that value that you are holding for. And so right now we have been in touch with a lot of the commercial users whether that’s going to be grocery anchors or your big box stores to get them on -- to get on their map such that on their map such that we know that what their requirements are. But they are sort of saying, listen, we see you. This is a perfect place. We really like the interchange off the interstate. So all of those things are great and they are just really wanting a little bit more density on the rooftops out there. So I would probably put this at later stage of this second phase and by later stage, maybe that’s when we are -- that -- we have got 500 units plus the 900. Maybe when we get more like 1,000 units up, which probably isn’t that long, Tucker, given the absorption that we have seen. And if we take a look at that same absorption in the second phase that we saw in the first phase, we are looking at it at maybe five units per product type per month. So that might be 30 per month. That could be sometime next summer, summer of 2022 that we would start looking at that and start really getting into those lease opportunities. We want to be sort of delivering the full pad site. We don’t want to have somebody take us out of the property and then do a pad site and then sell it to somebody. We want to get to the pad site for the actual end user. And so if I give you that analysis, that’s how we think we can optimize both that value chain, as well as the present value of the sale of those commercial properties.

That’s great color. The follow-up I would have to that is, as you develop more of the residential, does it make the remaining residential lots more attractive and perhaps your pricing better. If you have like, let’s say, an operating grocery store and some basic amenities for the people who are residing at Sky Ranch and is that also an additional consideration?

It is. It is very much additional consideration. And actually you are touching on one of the key points why we went to this Build-to-Rent, because everything that we are doing that we are otherwise going to do is going to continue to increase the value of those homes. And so, for example, getting a charter school operator on there, getting commercial out there, getting roadway improvements, getting a rec center, getting all of the parks and amenities up, every time we do that, that increases not only the value of the lot, but the value of the home, if it increases the value of a $100,000 lot by 5%, that’s great for us. But if it increases the value of a $450,000 home by 5%, that’s almost 4.5 times greater for us. So that’s why we like that.

Yeah. Yeah. The Build-to-Rent is very interesting and if I could ask just a couple more questions, I don’t want to take up all your time. Is your Build-to-Rent financing specific mortgage financing for that project or is it financing that has recourse to your general balance sheet?

It is directly related to the residential units, not against the balance sheet.

Okay. And the only other question I had is, what’s happening to affordability both in your Sky Ranch development in general and then the Denver area in particular with the other pressure on builders with regard to costs for things like that? And I know for now it looks like mortgage rates are clear, so I am not including mortgage rates, but just in terms of the general delivered product cost and how that’s affecting affordability there?

It is the concern in any market and a key concern in our market as well. And lumber prices and labor availability all are contributing to that. And that was one of the other key considerations when we were looking at the BTR model is we really wanted to partner with the national builders, because they had the best cost per square foot. If we had to come in and custom build these, it’s very challenging to do that just because of that cost increase. And we do want to stay competitive. That’s why we took a look at the second phase with a lot more density than our first phase and that’s where you see some of the townhome product, because that density then adds to the assessed value, which then adds to the recoverability of our reimbursable. So, all those factors give us the ability to keep that -- keep us in the forefront as Denver’s most affordable master planned community.

Thanks. Keep up the value creation for us long-term shareholders. That’s all I have to say.

You have been one of those and thank you for your confidence through the years.

Yeah. Good work.

Thank you. Our next question is from William Miller [ph], a Private Investor. Please proceed with your question.

Okay, Mark. I loved everything you said, but you haven’t told me about what I think is a critical component of your future. Why aren’t you going out and buying more land for your rental endeavors? I mean that’s so much…

What…

… that’s so much best…

You…

… opportunity you have and you have got the best cash flow, it’s recurring revenue, which is what people will ultimately pay for in your stock?

Yeah.

And you have got to get more land and own it now.

I am lock stock and bare with you, Bill. We are -- we have got our nets out. We have got -- we have made pitches on a number of fronts for a number of properties and we will keep you updated. That is an active part of what we are doing is growing the business. And we are growing the business in every conceivable way, that which we can control, as well as that which we can buy, as well as that which we can partner with. So whether I buy the land, whether I partner with somebody, who already has zoning for land, so that I get the utilities, all of the above are part of our growth strategy. And so, we are active in that front and I know you as well my Board and then others want to see tangible success. But we are also disciplined about doing it. We want to be smart. We are never going to find as good a buy as Sky Ranch. We know that. That’s not our metric. But by the same token, we do have the ability to pay a little bit more than maybe somebody else would for that land because we have water that we can combine with it. So we are aggressive out in that marketplace and stay tuned.

Well, is it a very competitive marketplace at this time?

As you might imagine, it is. There are a lot of housing being what it is. People are out there making pitches. But it’s a little bit different for a lot of the properties that we are in and around our -- in and around Sky Ranch, because there’s not a lot of water that would go with it. So, a lot of folks who might be looking at that might be looking to, say, well, it might be worth this but you don’t have any water, and so I would say, we probably have a competitive advantage.

And what is going to act as a catalyst for you are actually getting something done?

Well, that’s a good question and I don’t have a good answer for that. I mean it’s ultimately -- it’s a function of having -- it has to be right for the seller. So sometimes the sellers out there, there’s no price. They just don’t want to sell. Sometimes, it’s a price that may be unreasonable and sometimes, it’s a matter of we are working through some logistics with some specific buyers or some specific sellers. So I’d say all of those metrics come into play. We have talked with folks who said, yeah, I know. But no, I am not interested in selling right now, because of where they are at in their life and they may be doing some estate planning. There are folks that are interested in selling, but the price may be too high, because they know we have water and they want to price it with our water as opposed to pricing it the way they are selling it and then there’s some that are reasonably priced, then we are trying to effectuate a transaction.

Mark, what took you so long to get to the idea of a rental property?

Just like my wife says, I am a slow learner. It’s the gender problem. I have a gender problem with that.

Okay. Well, now that you are overcoming your gender problem, I hope you will speedily go to the next phase of your issues and get some more land, so that we can start factoring in what this is going to look like in three years to five years.

Yes. Excited to do that too.

Okay. Great. Well done.

Thanks.

Congratulations on all your endeavors.

Thank you. Our next question is from Justin Xie with Black Diamond Investors. Please proceed with your question.

Hey, Mark. Great to hear from you. I wanted to ask a couple questions on the Rental segment. First is like, could you walk me through sort of the financing process for the Build-to-Rent construction? And it seems to me like your capitalized costs are less than sort of the leverage you are getting, is that right and are you able to recycle all of your capital?

Yes. So typically -- so let me -- that’s a good -- a great question, Justin. So while I -- while they said and my Board said I can’t use any of our balance sheet to be able to do this. I am bridging a bit of our balance sheet to do this. So what we will end up doing is we will build those units itself and say, we use our money to do that and I will view this in terms of sort of the three units we have got under construction. So those three units, I will round up and say in round numbers is going to cost us $1 million to build all three units. We will build -- we will pay for the $1 million. And once we get CEOs [ph] from the county, which means that the house is complete, then we collateralize each one of those for the $1 million. So, I will break that up into three and the bank will take give me the $1 million back and take the deed of trust on each of those three units to be able to do that. And so, if it costs me $320,000 or $330,000 to build the unit and there $450,000 in terms of what the sale price is and we will have an appraisal on that, we don’t have to pay PMI insurance on that. So it’s directly related because we have got a good margin on that and then we can cash flow that by getting somebody in there that would pay not only our debt service on that but the accretive margins to have that positive cash flow to the bottomline.

Yeah. That sounds wonderful. Great to hear that. And then, secondly, I guess, how are you thinking about the percentage of properties that end up being Build-to-Rent versus for sale because at least in my impression, Build-to-Rent seems to be like the most value accretive thing? So, how are you thinking about the proportion of properties in those categories?

Great question. And so that’s another one that the Board sort of has a strong show-me mentality on it, is to say, okay, I am going to give you 100 units and see how you do with 100 units. Can you get them built? Can you get them built with what you say you are going to build? Can you manage the rental and get the income attributable to way this thing is forecast out. And if you take a look at 100 out of 1,400 homes, that’s less than 10%. You are looking about 7% of the overall units.

Yes. Right.

If we look at the rest of the 30 -- rest of the 2,000 residential units out there, if I take 10% to 15% in there, I think, that’s probably a balanced number where it is leverages the community correctly. We may have -- we may take a look at blocks of it. In this next one, we are looking at 100 dispersed in ones and twos around the community. But maybe we take 60 or so contiguous and we want to vary the product, so that we can have a common maintenance scheme through there and take a look at some efficiencies on that side as well. So we will vary it up and kind of continue to build on that. But if I were to say our tolerance level maybe somewhere around three, say, maybe 300 to 400 units in this -- in Sky Ranch and then as Mr. Miller was highlighting, go get some more land and do it. You seem to be generating some value here. So we will continue to look at other properties and continue sort of that 10% to maybe 15% of that to be in a Build-to-Rent capacity for us to keep.

Got it. Sounds great. And in terms of property management, is that being done in-house or are you finding some third property manager or third-party property manager?

So, for the time being, we think we are going to keep that in-house and one of the reasons for doing that is, one of the reasons I would attribute a lot of our success on the development side is, we have got a combination of doing utilities together with Land Development. And really where the efficiencies come in on this thing, when you go out and you bid your Land Development, right? We are not going to grade the ground or do a lot of the wet utility, the retail distribution system or the dry utilities or any of that work. We bid that out to the market. And the market comes back very competitive when they first bid these things out. And you never can know everything when you are getting in the Land Development. There is always surprises. So you always get this change orders and the things that we have done successfully is, we have guys that are capable of doing this work, right? They are very talented with the big iron, the loaders, the excavators, the equipment that needs to be able to install the facilities for our Utility segment and they can do the same thing on the other side. So when these change orders come up rather than being that high priced dollar on the change order, we take care of that. So having that team on-site also gives us the ability that these guys can do everything. And so we can -- if we have got a plumbing issue over it so and so’s house they can be dispatched over there and it really won’t be a significant intrusion into our overall business model, because we have them doing productive work all the time. As opposed as if you have got a management agency and you have got to get a guy dispatched to go out and commute an hour each way, 30 minutes each way. You got a 15-minute on-site fix and another 30 minutes back, that kills you in terms of the management of that. So we like that because we are already on-site. We already have the talent and the resources to do that. And so that’s why we like maintaining it ourselves, we will see. Maybe I am wrong. Maybe it becomes too consuming and then we sort of say either we stuff into that when you get 100 units, when you get 300 units, you certainly can easily stuff in and have those dispatched directly on-site between zero and 300. I think we can manage that with the talent that we have.

Got it. Sounds good. And just to be sure the financing on the Build-to-Rent is are these fixed rate or these variable rate loans.

They are fixed rate.

Okay. Fantastic. And then one last question for me, I guess, like, what -- when you think about the acquisitions in the pipeline and the deals you are looking at. Is there any thought to put on leverage when you make these acquisitions and lower your cost of capital or are you thinking to just pull straight from your cash balance?

We will see. It depends on the size.

Got it. Okay. Perfect. That’s all the question for me. Love the work you are doing. Thanks for talking with me.

Thanks for your support.

Thank you. Our final question is from Bill Musser with New Frontier Capital. Please proceed with your question.

Hey, Mark. How are you doing?

Bill Musser, good to hear from you.

Quick question on the Lowry Range, where is the landlords head at with respect to the development of a portion of that property now that there is so much development in the area? And secondarily, is there any role for you guys in helping them move forward on something?

So, the landlord is actively looking at working with the county on two fronts. How much of that property should be conserved? You have 27,000 acres out there and not all of it is going to be developed. And so, they have recently take some action to work with the county on what’s the proper percentage of what gets conserved and then from that percentage, the difference between that and the total portfolio, they want some certainty on entitlements and zoning. And so, that can take a bit of time. So I think they are going to -- they have just recently authorized that, I think they are going to take a couple of three years to take a look at entitlements and conservation opportunities up there to get a good land, land development, land conservation and continuing revenue stream from the whole portfolio. But they have been more I guess proactive on taking a look at that property than they have in the last, say, 10 years of that. So we are excited to see that. We will continue to help and participate with them on that process. If there’s an opportunity for us to bid on Land Development opportunity, we may consider that. Certainly already have the utilities there. But it depends on what we have going on at the time and other acquisitions when they are looking for development of the property itself.

Great. Thanks.

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. I will now turn the call over to management for closing remarks.

So let me close with this. One of the things that has been helpful and for those of you who haven’t had an opportunity to travel out here and kick the tires, there’s nothing quite like seeing it. And so we will set something up probably in the mid-July timeframe to be able to have everybody have the opportunity to travel out here, take a look at it. Also be on the lookout for a new website. We were hoping to have that up and live for this call but the gods just didn’t align for us on that. But you will see a new improved website, which will have a webcam on there. So you will be able to click on that and be able to see the dirt movers, the graders moving around the site and some of all of the activities that we have got going on there and continue to have sort of that virtual presence in the marketplace as well. If anybody didn’t get their question queued from a technology standpoint, don’t hesitate to give me a call. We will probably be a bit more active in the investor side of doing a little bit more conferences and getting either in-person or virtual conferences. So if you see us in a conference, stop by, say hello or give us a shout-out. And then if you all have other folks that we should add to our investor mailing list, don’t hesitate to send those over as we are getting a bit more active on both sending out notices in Twitter and social media, so there will be a bunch more opportunities to see the company’s updates through that venue as well. So, with that, I will bring it to a close and again thank you all for your continued confidence in your invested capital.

Thank you. This concludes today’s conference and you may disconnect your lines at this time. Thank you for your participation and have a great day.