Pure Cycle Corporation (PCYO) Earnings Call Transcript & Summary

Yes. I'm Mark Harding, and I'd like to welcome you all. What we try and do each year is give an opportunity for folks to come out and kick the tires and then it's getting harder and harder to get out and sort of visit companies and with technology, what it is today and our ability to kind of show visually it through earnings presentations and investor presentations and whatnot, the actual company visit is sort of waning. But what I always like really is the opportunity to show it because when we describe it, when we report it on the balance sheet, you get a picture of it. But when you actually come out and have an opportunity to see what's going on, on the development side, what's going on, on the water utility side, a perspective of the growth of the Denver area and some of what we still continue to be the value -- our secret value, which is our service area, Lowry and those sorts of things, it does give you a different perspective. And as much as we try and describe that perspective, seeing it, driving it, getting that actual imagery is truly valuable. And I know a lot of you either on the call or who listen us on the replay have had that opportunity to see it. But one of the things that we did this year that we wanted to concentrate a little bit different on just because there's a lot to see is taking a look at our service area, taking a look at where our water originate, what's going on, on the borders of the property, what's going on, on the property. And what we were able to see today is a pretty sizable amount of oil and gas activity. We saw a pad site that had 10 or so wells that had just finished fracking. We see them rigging up on another pad site because they're going to be fracking that probably starting next week. We see a pad site being developed, a pad site being graded out where they're going to bring a rig to. We saw a pad site where the rig was. So they're drilling that, and that one will start to frac probably -- these fracs last around 2 months. And so I think there'll be a little bit of overlap between -- because there are 2 different operators. We got one operator, SM, which is fracking the one starting next week. And then we got GMT, which is drilling and they're doing the other pad site. And so we've got really kind of 2 operators on Lowry. SM has the dominant position out there. So GMT is kind of backfilling in with their position. But it gives you a perspective of kind of the oil and gas industrial side of it, which is fairly robust. And it's been a while since I've talked about it being robust. And I always -- I always temper my remarks because as soon as I say that, then they end up saying, "Oh, yes, we finished that pad site, but we're going to move on to another one before we do this one." And they're not always as predictable as both we would like, and I'm sure you would like to give you guys some certainty as to how the cash flows are going to come in. And then take a look at some of the development that is pressuring this particular area. And you've heard me talk in the past how Denver kind of lives on a notion where we can't grow west and we just can't. And really, the focus of the metropolitan area has been to grow east and even growing east, one of the things that shows as you drive it is boy, there's a lot more barriers to where growth can occur than you might think. When you take a look at the south side of our service area, a lot of land, but it's all chunked up, right? There's 5-acre lots and there's thousands of 5-acre lots that make it absolutely impractical for any real substantive growth to occur on the south side of Lowry. When you take a look at sort of the north side of Lowry and what's going on with some landfills and open space areas, there's a real gap there. And it really shows you kind of positioning of the metropolitan area and how much growth has occurred in the metropolitan area over the last 30 years. And then we're -- take that tour of Sky Ranch, show you the various phases of how they come online, how builders actually stage their production, how they're going to take down lots, how they're going to build their inventory, how they sell their inventory and how we phase that, and giving them various components of that inventory cycle so that they're building what they have for the next year. We're building what they're going to want in the next year. We're planning what they're going to want in the third year. And so a lot of our activities aren't as much about what's going on today. Somebody often wants to know, well, how's business today? And I'm not the right guy to ask that. My filter isn't how business is today. Marc the right guy, our CFO, Marc easily is the right person to ask on how business goes today. But 100% of my focus is how is business going to be in 18 months? How is business going to be in 36 months? And what do I need to be doing such that we are going from what our team is doing today to what our customers are going to want in 18 months to where I need to be preparing for the next phase in sort of that 36-month cycle. And it shows like that, right? I mean when you go out and see it, you sort of say, that makes sense now. I wouldn't have otherwise appreciated that, that is what you're working on, not for today. Those lots are going to be available summer next year. And then you see, oh, I see that. That's what you're going to work to do for 2028 and then some of that other stuff. And then also, what are some of those what are some of those variables that we look to try and either do to develop, to acquire, to partner with on other land opportunities and how do those position themselves in the metropolitan area and where is growth in those areas. So that was what the [indiscernible] was today. And I think we focused probably 60% on non-Sky Ranch stuff and maybe a little bit and whatever that little bit was, was pretty quick on what's actually occurring on Sky Ranch that gives us the world of how cash flows are going to be as we roll into year-end, how cash flows are going to be in fiscal 2027. And so we saw a bunch of that. But we really don't have a strong agenda item here today. I'm going to put our 2 guests here who were -- we had a couple of folks that canceled on us on a last-minute basis. But Dan Aronson out of Minneapolis, he's a long-term holder. He's been on the tour several times. JB, kind of new first-time tour, knows the story pretty well and maybe give them a couple of sentences about what you saw, what you didn't like, what you liked.

Thanks, Mark. A couple of comments on -- and for those of you who have taken a tour in the past, I was originally out here when the phase -- the first phase was being developed and you see a water treatment facility in -- there's a lot of open land around. But Sky Ranch over the years, it's really starting to develop and become a substantial community. The opening of the high school, seeing that what was open land a year or 2 ago with a full -- not just the high school, but fields behind it and where you've got Phase 2E and the grading work being done adjacent to that, you can see where the commercial takes place and how it's all filling in. And on the -- just the -- as you mentioned, to be able to go out and see where development stops, where the development is right on the edge of Pure Cycle service territory, it's the natural extension. And I'll just echo you. I mean, I've been out here before and you see, okay, well, there's one rig here. There's some pads that might be drilled. It's pretty extensive, the amount of industrial development in the oil and gas industry, and that's being phased in. So...

Yes. What stood out to me the most was certainly seeing how as Denver expands powered that you are the very next stop for further development over by Lowry. And yes, previously, we had sort of underwritten it as nice to have the upside optionality, and we'll see if it ever happens, but certainly felt like a much more concrete opportunity. So that was most useful. And also the commercial area over at Sky Ranch, the compelling location of that and both for the surrounding areas as well as how it fits so nicely for the broader community there. That was the second thing.

Let me ride on that a little bit because I know there's always -- I've always foreshadowed that commercial and upgrading that interchange is important for a lot of that big users that are going to look like that. And the interesting thing is we kind of have a lock on that for a while. When we build that interchange, there's not a lot of competing land that's going to benefit from that. When you build something at the highway, both north and south components benefit from that. But in our particular case, that's not going to be true because there's the railroad, which in terms of entities that are challenging to deal with, I mean, it starts out as railroads, federal government and then local government. I mean -- and so somebody else has to build that infrastructure over that before those lands come into play. But the commercial off the interstate sort of stuff is going to be ours for a while. And so that does give us a nice value proposition. The people that we get engaged both a commercial and a retail broker, commercial, industrial and retail brokers to really get out there and represent us in that. That's not something that -- that's a different business, right? It's not something that we can do in-house. We -- that's not -- those folks just don't do with the landowner. They deal with the institutional people and they look at it on a national scale. And these guys are competing multistate for particular projects. And we've got a lot of feedback from them in the few months that they've been engaged about the competitiveness of our particular property, the interchange access to it, the interstate frontage of it and where there's just not a lot of competing opportunities for the same types of uses that we would have on our particular site. So just a quick update on some of that interchange type activity. We continue to work on that permitting process. We're the applicant with CDOT, with the county, which is our jurisdiction. And so we should be in a position of getting that CDOT's approval on all of those agreements by the end of the year. That's our pathway on that. We go from a 30% design up to the full design, which will take us maybe 4 or 5 months because it's not anything new other than the hard part is the first 30%. Now that the 80% is the bid docs as to what type of concrete you using and how much rebar you're using, all those sorts of things, important things, but I think that, that's a fairly streamlined process so that we can get to a design where we can send that out to bid. We go to bid with that at the same time, we're going to go look to the bond market and hope to be in a position of issuing those bonds for the construction of that sometime in the fall of next year and then let that construction -- I always think it goes -- should go faster than it does. So I think it should take 6 months. They'll probably tell me it takes a year, but it's in that range. And the nice thing about that is then that really does open up a lot of those commercial users because it's going to take them a little bit. They're going to want to plant the flag. They want to get the land. They want to get -- we have it zoned, but they need specific use, building permits, those sorts of things. And that might take them that 6 months, 6- to 9-month time window. And everything should -- in a perfect world, everything should time itself out correctly by the time it's opened, and you got a bunch of people that are breaking ground on that commercial component. The value for us in that is -- and I've described this as you'll see Sky Ranch continue to build out. And we've got, call it, 1,000 homes occupied. We probably got up to 1,500 homes that are sold or under contract with homebuilders. And so those will continue to build out. And we continue to produce that out somewhere between 250 and 350 units a year. And maybe we dial it down to 200 in a slow year, we dial it up to 350 in a robust year to kind of work on being a just-in-time lot delivery customer for our homebuilders. And that will generate that $20 million to $30 million a year in revenue to the company. And then that will continue to go for the next 7 years. But the stack here is once that commercial comes online, that's going to be a similar absorption where we've got roughly 1,600, 1,800 lot tap equivalencies in the commercial component that will be additive to it. So it's -- I'd love to say that this linearly would grow on that scale, but it likely is a step growth, right? We'll see a function where that commercial will be layering on top of the residential. And it will have its own little bell curve. We'll start out with a few transactions and then it will grow up to a bunch of transactions and then it will tail off at maturity. So you'll see a lot of that type of activity on a stacking basis. And then whether it's that we provide water to another surrounding development, whether we have an acquisition on some of the surrounding vacant land out there, whether some of the stuff starts to break free on the state landlord properties, all that becomes additive to those 2 stacks. And so that's how this scales over time is that you have those step function scales that don't wait it for us to tell everybody, "Oh, you know what, we're going to absorb the next 3,000 units in 3 years, not 6 years or not 9 years." It's going to absorb, and we're going to go as fast as the market will take it. But what we do have is kind of a layering of monetization of the various components of what we have. So that kind of really is some of the interesting things that we would facilitate that. So what we can do is we'll unmute everybody at the same time. If you've got something in background on yours, you can mute your own mics on that, but we'll just open it up and see if anybody -- this is kind of a fireside chat. If you have any questions, just go ahead and hauler out. If you had any follow-up from our earnings call last week, happy to color into some of that stuff as well. So just turn it over to the team here.

We're waiting for somebody. Mark, can you comment on -- for Sky Ranch specifically, on the -- on your customers, our customers, the homebuilders, the competitiveness of the product at Sky Ranch versus other developments that they're working on within the Denver metropolitan area. And I ask that in the sense that my impression is that the consumer, the homebuyer can buy a similar or the same product at Sky Ranch for less than they can at another development. I'm just sort of curious as to if you have a thought as to -- or observation as to how the developers, the builders look at Sky Ranch versus their other developments in the area.

Good question. And I would say that, that is true. I mean, homebuilders, they really -- each builder will segment themselves into a particular phase of the market and their product is almost the same across multiple price ranges and the location might vary one way or another. Lot sizes might vary one way or another. And one of the big advantages that I think we have at Sky Ranch in a county that we really haven't talked about that the builders love is setback requirements, right? So in a lot of jurisdictions, the setback requirements are 10 feet. from property such that you get a 20-foot setback between homes, which means you've got to have a bigger lot. In Arapahoe County, we have a 5-foot setback requirement. So we have the ability to be closer to lot line to lot line development in Arapahoe County. What that means is it's a smaller lot, which means it's a smaller cost for the real estate for the homebuilder on that basis. And so it was -- it used to be an impediment to be closer to your neighbors. And I think that's kind of blurred away through the marketplace because what they're looking for is to max out the square feet. And what they want is, can I hit that same house on a smaller lot at a lower price, because if there are 4 walls, if they get 2,800 square feet and they have 10 feet of yard versus 5 feet of yard, they don't really look at the yard. They're looking at the 2,800 square feet. And that's what their buying mentality looks for. And so that's one of the big advantages that we have being in the jurisdiction that we have. So setback requirements are shorter and smaller. And then even then, we can get even variances beyond the 5-foot setback as long as we get fire-rated walls, it would be like you'd be a paired product that has a fire rated, whatever the hour rated of the fire the building material is between that. And so there's ways for us to be even closer on that where some of the homebuilders are looking and saying, geez, I'd really like to try this product, and it's very innovative because what they're doing is they're getting an active side, which is going to be the open part. They might have a patio front door and a passive side, which would be nothing but wall. And the 2 passive sides are going to be closer together, but the 2 active sides, so you can imagine almost like a duplex that's got just a small area in between it, but they're detached houses. And again, it's a price point stuff. It's affordability stuff. And it's our ability to work with them on that product innovation, and we can deliver much more flexibility than any of the other jurisdictions. Our other jurisdictions is primarily City of Aurora, and they just don't allow that. And so it gives us a bit of perspective on bigger house, same size house, smaller lot, much, much cheaper, and that's a big deal for them. A good question. I mean we never really get to talk about the innovation of the actual home product that we are able to do and the homebuilders -- and this is a double-edged sword because when they start to hear it, they're like, "Oh my God, we want to do this, and we want to do that." And I'm like, "Oh my gosh, I can give you some of that." But if you want all of that, then it becomes your product specific. And now I'm like, okay, I need you before I go out there and get all that. I need you to be there, making sure that they're there if we're getting that type of product. Yes, it can be crossing over to other builders if we got that setback variance, and we know we can do that. But when we start to go at the design stage, they get very interested and just like every pretty bureau to tell you they're going to be there. I want to go after dinner. Anybody on the call, we've got a good attendance here. So...

Mark, this is -- I don't know if you can hear me.

Yes, we can.

Okay. Great. This is Vishal from Bard Associates. If you look back like last 10 years, I'm sure a few things did not go per your expectations and a few things sort of went ahead. But if you can talk about that, the highlights and the low lights and do you -- and also like do you think where the development and everything is where you thought you would be here? Or is it a bit slower because of the setbacks or it's faster because of the things which happened?

Great. So I'm going to -- good question. What's the last -- since we started, say, we've been in Sky Ranch for 6 years. And you say, okay, what went well? What were the tailwinds? What were the headwinds? The tailwinds were we were a breakout, right? We were the next part of the Denver Metro area. And you don't know. You don't know how that's going to go, right? And so when we first broke ground on this thing, we had 3 national homebuilders. We had Richmond, we had KB and we had Taylor Morrison. And we were starting out with 500 lots, and they all said, okay, I just want -- I want 30 lots. And you sort of say, okay, I'm breaking ground here, and I've got a lot of off-site infrastructure and you all want to commit to 100 lots, and I've got 500 lots here, and I got to build the infrastructure for 500 lots. And so that took a little bit of -- that took -- you're pulling your pants on something like that, getting started on that. We do it, we get it going. And they open up and they said, okay, not 100 lots. I want all 500 lots, and I want it tomorrow. And so that was a big surprise for us, right? And that was entirely driven by the price segmentation, right? They drop in, they were able -- they knew what the footprints were. They didn't know -- they knew what they could price their models out, but they didn't know if people were going to come to the next level of development, right? It was the next step out in the metropolitan area. And what they found was holy crap, everybody wants [ Bronx ]. And so that's how it started. And then all of a sudden, COVID, right? And nobody knew what to do for COVID. So we fortunately had their full commitments on that. And there was this giant hush that went through the marketplace on the sales side because nobody could get out of the house to buy a house. And then it sort of settled down after about 3, 4 months, and it was just another gold rush. Everybody is like, okay, not only am I looking for price, but I'm now getting out of challenge. I don't want to be in an urbanized area. And everybody that might have been in a higher density development now wanted, I can't get on the elevator. I'm never going to get on another elevator again. And so they were actually -- you had this flight to the suburban model. And because technology started to really ratchet into it, people didn't need to live downtown. They didn't need to live where they were going to commute every day to an office. And so that then you had an unusual cycle and then a little bit of an acceleration, right? There was a bunch of stuff that people were wanting to do. And I would say that took us from, say, 2022 to 2024 as fast as you can build more, more, more. And I was just like, well, I know I can hear you. But I'm willing to do that, but here's the dollars. And here's the -- and they're like, well, no, just more, we'll get there. And I'm like, no, we're going to get there before we do that. And so you try and take it on a disciplined approach. I could have delivered more if I speculated more in '23. right? And then '24 still looked great. So we dialed it up a little bit in '24. Everybody was there. They said, yes, yes, yes. We want more. We want more lots. And then '25 started to come in and then the new administration came in and things got a little wonky and they're like, well, about that next phase. I'm not so sure. And I'm like, well, we're already under contract. Well, yes, but my inventory is not rolling as fast. And what we were able to do on that side of it that, again, taking lemons and making lemonade out of it is when some people started to slow down, we had some bridesmaids sitting on the sidelines saying, "Hey, if anybody isn't interested in moving forward, your price point works." That's what we want. And so instead of having 4 builders, now we have 7 builders. And we're still not trying to deliver more than what they want in their annual inventories, right? Everybody would prefer to say, I'm going to buy the lot when I sell the house. And they say, well, I'll let you do that if you can make me younger, right? That's just a real hard timing. But what we're doing for our customers is as close to that as anyone can do, right? We don't chunk off more than they want to take down, and we're creating this rolling inventory on a master plan. And so what's happened over the last, say, 5 or 6 years are a few headwinds, a few unpredictables, but what we've really done is established the mark in it. And growth in the Denver area has gone to us. In some areas, it's gone past us. And so we're not what I would still call infill, but we're also not the breakout community. And so we went by a couple of breakout communities on the 2. And you sort of look at it and say, okay, they're grading a lot of lots, hoping that the market is going to be there. And I think -- personally, I think they're over their skis on what they've got, but that's okay. They'll have a little bit of inventory. Some builders will come in there and do that. But what we try to do is not be over our skis, and we try and not trying to have to catch up on that demand. And so there's a delicate balance there. What's it going to look like on the next 3, 4 years? It's going to be -- we're going to be disciplined enough to do it on the same scale as our builders. And now with all the infrastructure in, we got all the backbone roads in and a major off-site infrastructure in such that if somebody comes in and says, okay, for those 2028 deliveries, I don't want 30 lots, I want 90 lots. That's something we can dial up and dial down into now having the backbone infrastructure. It was a little chunky on the front end when we wanted to do -- we had the backbone that would have supported it at 500 units, and they only wanted 100 units, and it worked out well for us. I'd say that's luck rather than skill. But now it's going to be just be -- just be in that just-in-time basis. And if the demand picks up, maybe our pricing picks up in a way that helps support that, I think they'd be comfortable paying that price. The homebuilders themselves have tried to get as close as they can to not close on those lots. And to the extent that they are, they're closing with land banking it, which it's not -- that's the creation of the affordability challenge because then you've got double-digit interest costs on a land bank and they've got $2 billion on the balance sheet that they're earning 3.5% on it. And so that's just a weird dynamic on the homebuilding company, but that's kind of the preference on their IRR versus gross margin. But I don't know if that -- if that gave you enough color on that.

Yes. No, that's great.

I'll jump in. This is Darren with [indiscernible]. You mentioned volume output you expect to remain around 200 to 250 lots per year, but also the number of builders have grown from 3 at the start to 7 now. And so that implies less lots per builder. If you could kind of provide some color on that, is that macro related, Denver specific, Sky Ranch specific? Why do you expect less lots per builder moving forward?

So builders will be very predictable. They're going to want less lots when the market is slow and more lots when the market is hot. And they just only want to pay for the lots that are when the market is slow, but they want us to build lots for when the market picks up. And so that's where we kind of temper that out is to say, okay, fine. We'll have -- we'll inventory, maybe some of the grading costs on that and then before we move because we like to flow fund our land development deals where we really get them 1/3, 1/3, 1/3, where the first 1/3, they get the plat, they get the physical title to the land, and they think 1/3 of the total lot cost in that payment. And then I take that 1/3 and I use that to do off-sites, grading and wet utilities. And then they pay me the next 1/3 so that I can use that money to do the paving roads and gutters and then I eat last. And so when things are good, they're happy to pay that second 1/3 in the first 1/3 just to make sure that that's there. When things are bad, they're like, okay, can you take that first 1/3 and then I'll pay you that second 1/3 after you got the lots graded. And we don't want to get overextended on that. So I can dial that up from when we started this, they were at 30 lots per builder per year. In 2023, 2024, they were moving up to 60, 70 lots per builder per year. And then they dial back down in 2025 to say I'd rather be at 30. And then I'm still -- I still have that 250 lots. And if they all want 30, then that's 7 as opposed to 4. And so that's that flex in and out. But what happens is if I'm only developing 250 lots at a time and they move back up from 30, 40 to 70, 80, then those that come in first, get that the lots that are going to be finished. And so it may be that you see it dial back down to 4 builders if the market gets hot and then we'll dial back up and for the 4 builders and then the 7 builders that come in and then the market will swing back down. And so it's in that -- if you see a cycle there, we want to draw that linear line right through the middle of that cycle and have us have a little bit of inventory, have them have a little bit of inventory. So it's that right balance.

Awesome. Can I ask a follow-up question on the actual composition of those because you guys got critical mass now in Sky Ranch. You've got a number of SFRs. You're going to build up in the next few months will be upwards to close to about 70. And I know you've commented on the previous calls, change regulations, be a little bit of a pause here and cut back from the initial about 100 that you were looking at doing. Aside from Sky Ranch, do we know those who are buying what is the owner-occupied percentage within Sky Ranch versus those who rent out units. Obviously, the company rents, but are there private owners that are renting out units as well?

Yes, that's a great question. I'm going to punch that over to Deb. Deb Saya, she runs the SFR segment for us.

So the last time we looked at that, about 4 weeks old, the data I'm spinning out at you. There were 62 rentals in Sky Ranch that was as ours were being built. So there were 30 above our numbers, which went down. There were 50 when we looked about a year ago, was it a year ago, the last Board meeting -- Annual Board meeting, yes.

Right. And so I mean -- and those are going to be mom-and-pop dentists buying a rental unit, and it's sort of 1s and 2s or somebody that got relocated and they wanted to -- or they had a family change and needed a bigger house, smaller house either way to keep the house, those types of...

But it's a minor -- almost everything that's being sold is owner...

Yes, predominantly.

It helps with the understanding a little bit of the characteristics, not being part of the community, understanding part of the characteristics of the community.

Yes. And Deb, you might comment. I know a lot of the folks that are -- so we have a couple of value propositions on it. When we were first getting going on it, you had somebody coming in that got relocated over to Buckley, Air Force Base, right? And Deb comes in and say, "Hey, I got this guy, and he's asking about a military discount." And I'm like, okay, sure. We'll give them a military discount. The guy wants to put up a card and said, "Hey, anybody that wants to Sky Ranch is your place." And so unbelievable amount of military relocates come and live in Sky Ranch. I doubt it because we gave them a military discount, maybe. And it was just thank you for your service discount. But oh my gosh, we're 5 minutes away -- 10 minutes away from Buckley. So we got a lot of folks, and that's a transient high-caliber renter and they're always probably going to rent as opposed to buy just because they're mobile and we get a lot of people that come here that are coming here for the school, specifically, either they were out of district commuting into it and renting out of district and then parents are like, oh my god, why am I renting this house 30 minutes from the school when I could rent a house and be 2 minutes from the school. So we get a lot of that action as people are really the value of the school, the value. I can't tell you the opportunity of having a K-12 campus right on walkable distance for all your kidos is super valuable in the community.

The school brings in grandparents as well, large number on the for sale side as well as just from being at the school. And the other big draw is DIA. So we have a lot of DIA staff members. Same thing kind of happened with an airline pilot, posted it on their like company chat and we get calls. Mark is right, the first military guy actually stuck our information on the bulletin board. And then as it progressed, the wides got us on the Facebook page and all of that. So we do have -- that's probably the largest population of tenants that we have.

And the SFR segment as a whole, we've had a lot of discussion at the Board level and really looking to make sure that we understand that segment. We get good -- we need to know what the rate of return is on that particular segment. We stood it up. I think we did a good job standing it up. We operate it in-house. Deb does a fabulous job of making sure they're leased. They are -- we're delivering units months ahead, and she's got them rented before -- I mean, this is a weird dynamic and good -- great for people to look ahead of that. But when I was renting a house, it was, okay, we need to move on the weekend, go find a place to live. And that's what it was just-in-time sort of deal, and that doesn't seem to be the case. We get these things leased far ahead of them being completed and have just a solid occupancy record here. And the basis of it really is tax advantage because we're holding a lot of that equity between the lot, the tap and what's going on in that, which doesn't show on the balance sheet. So when you start to look at the optics of it, is that a great segment or not? We think it is. But we also need to make sure it is. We need to report back to the shareholders to say, here's what we now know this segment to return. And if it's not, then we'll take a look at, okay, maybe that's not the right segment. So before we -- there was a good reason to pause it certainly because of the administration said we were the problem on housing affordability, which we're not. But at the end of the day, we also want to be fiduciary with shareholder capital here and make sure that this works.

What is the hurdle rate, Mark, with that rate of return discussion you said with the Board? Is there like a cap rate hurdle or an IRR hurdle for single-family rental?

I think we got into it on a forecast basis to say we think it's going to be in that 10% return on investment, and we want to see if that's the case. I think when you take a look at our return on equity, we're making much, much higher margins on sort of the land assets and the water assets. If I take a look at what we're doing, we might make 70% margin on the land assets. We might make 60% margin on the water assets, but we're only using 2% of that asset. So when you take a look at that on return on equity, the overall return on equity is around 9%. And so what we want to -- our minimum would be we've got to do better than that return on equity. We'd like our return on investment to be in the mid- to high teens if we're in the low teens, but we have a great tax advantage way of keeping that asset that might juice that up a little bit, that would be worth considering. So those are going to be -- I don't know that we've got a hard fast threshold other than it's got to do better than our return on equity.

There's nothing else in the SFR. I was going to kick it back over to Lowry real quick, if that's all right. So we spoke a moment ago about going out there and you see how the residential development has now directly abut that property. And so at least for layman's eye, it looks like the next logical step or progression is for development there. And yet the regulatory approval processes, the red tape that needs to be broken through in order to enable that to happen is different than the processes that enabled the residential development that goes all the way up to the border of that. Could you speak a bit about maybe even if in cliff notes bullet point format, what is the process step-by-step that needs to occur for that to materialize. How does that differ from the process that enabled all the adjacent development? And accordingly, where do you maybe see some risks or some key uncertainties?

Okay. So the regulatory process, that property is in unincorporated Arapahoe County. And so the neighboring jurisdiction is City of Aurora. So City of Aurora controls everything that comes up to the property. Once you get on to that property, it's Arapahoe County. And I would say we know that process very well. That's exactly the same process we deal with at Sky Ranch. And so that's our entitlement jurisdiction. We know what those zoning. And in fact, when I was talking about some of the setbacks and things like that, we think that Arapahoe County is actually more advantageous than the City of Aurora. Is Arapahoe County easier or harder to work with than the City of Aurora? Well. Yes. Arapahoe County was by far considered the best jurisdiction to work with, say, 5, 7 years ago. And then everybody Arapahoe County retired. I mean every department had retired at Arapahoe County. And so they're actually backfilling into that staffing issue. And what does that translate into? It's a little bumpier than it was a few years ago. But our relationship with them and their experience with us doing exactly what we say we're going to do, exceeding expectations, solving problems. We didn't -- we solved the problem of schools. We brought our own schools. We solved the problem of the interchange. We didn't wait for somebody else -- the county or anybody else to say, somebody else will build that. Well, growth has to pay its own way. So we do that, they do that. So when you take a look at the actual zoning and entitlements is through Arapahoe County. The biggest complication or the big thing that's different on Lowry than it is in any other property is the owner. It's owned by the State of Colorado. It's owned by the State Land Board. It's a trust for K-12 education beneficiaries. And so they have different metrics than anybody else, right? They're fiduciary for school funding in perpetuity. And this is -- and they say this, but this is what -- this is their single most valuable asset in their portfolio of 3.5 million acres of land all over the state. And it's a very diverse piece of property, right? It has any number of opportunities for use and revenue. And so when the landlord looks at that, they're looking at all uses. What education uses do we have there? What mineral uses do we have there? You saw that they were very active about monetizing their minerals out there. So they've got the oil and gas leased out there and it's being drilling. They're looking at it, okay, what are the setback requirements for oil and gas development and urban development. And there's a setback where oil and gas encroaches to residential, which is very big. That might be a 3,000-foot setback. But on a reverse setback, if the oil and gas facilities are there and residential encroaches to that, that might be 300 feet. So there's an entirely different filter for them to analyze on which lands they want to look at for multi-uses and how they want to do those and the timing of those that all layer into that. And so sometimes when you have an infinite number of possibilities, it's hard to take that first step. If you only have 2 possibilities, it's binary. If you have 100 different opportunities, it's problematic. And so they've been looking at it pretty hard for a few years now. Do I know what they're looking at? No. That's pretty close to the vest on their side. We're their partner on the water. They generate a lot of money. We're likely to become their largest revenue lessee in the next 5 years. On what they make from water utility alone because they -- a lot of our water -- not all, a lot of our water originates on that property. They get a big royalty on that. And so we continue to be that steward of those systems and continue to invest on that. So I'd say we know the process a lot. Process can be political, right? We have change -- we're going to have change of leadership in the State of Colorado this year. So we got a new governor coming, new sheriff coming into town. It will be a Democrat, I assure you. But those are some of the interesting dynamics. The jurisdictional issues are in our favor, the ownership complicated. But having a single for 40 square miles is a lot different than having multiple landowners. So as that ball gets rolling, you're likely to see it roll for a long time. If anything would impress you about the tour, that's a 50-year inventory of land. When you look at 40 square miles, boy, that's a lot. They're not going to develop every square inch of it. They're not going to conserve every square inch of it. And so somewhere between those 2 poles is unanswered. And I think the next -- last 5 years, growth was continuing to get out there, but there was an inventory of land. And I think that's whittled itself away. I don't think that changes their time line because they're not -- that doesn't -- their motives are different than a private ownership. Good question. Back to the callers. Anybody else? Any color that they'd like an observation on.