Press release·03/03/2025 15:27:04

Recent Developments and Economic Conditions

The housing market stabilized in 2024 as the Federal Reserve shifted from an aggressive monetary policy in 2023 to a balanced policy in 2024 with interest rates remaining relatively consistent throughout 2024. However, with the rising interest rates in 2022 and 2023, the 30-year fixed mortgage rates are still at their highest level in over 15 years. Homebuilders’ strategic use of interest rate buydowns as incentives has played a crucial role in driving sales during higher levels of interest rates.

Several long-term land development and housing market fundamental factors remain positive, including favorable demographics, a lot and housing supply-demand imbalance resulting from a decade-plus of underproduction of new homes in relation to population growth, and low resale home inventory. While the company remains confident in the long-term growth prospects for the industry given these factors, the current demand for new homes is subject to continued uncertainty due to many factors. The combination of higher mortgage interest rates since early 2022, several years of rising housing prices, elevated inflation, and various other macroeconomic and geopolitical concerns, has been moderating housing demand. Although interest and inflation rates have been stabilizing, the company expects this moderate demand to continue into 2025. Given current conditions, the company will continue to monitor market dynamics and surrounding community performance and adjust the timing of additional construction expenditures at Sky Ranch as necessary. The company believes its reasonably priced (entry level) lots and the low inventory of entry level housing in the Denver market will help Sky Ranch navigate the changing market better than other surrounding and significantly higher priced communities.

The company’s future performance and the strategies it implements will depend significantly on prevailing economics, the homebuilding industry, capital, credit and financial market conditions and a fairly stable and constructive political and regulatory environment. The continuing impact of the Federal Reserve’s aggressive raising of the federal funds interest rate and other measures during 2022 and 2023 to moderate persistent U.S. inflation and the uncertainty in future Federal Reserve monetary policy, are expected to be an ongoing headwind for the housing market in 2025 and beyond, as they have elevated mortgage loan interest rates and created macroeconomic uncertainty and volatility across financial markets. Prolonged supply chain disruptions and other production-related challenges could extend or delay the company’s construction cycle times and intensify construction-related cost pressures beyond its experience in 2024. In addition, consumer demand for the company’s homes, and its ability to grow its scale, revenue and returns in fiscal 2025 could be materially and negatively affected by the above-described monetary policy impacts or other factors that curtail mortgage loan availability, employment or income growth or consumer confidence in the U.S. or in the Colorado markets. The potential extent and effect of these factors on the company’s business is highly uncertain, unpredictable and outside its control, and its past performance, including in fiscal 2024, should not be considered indicative of its future results.

Our Business Strategy

For more than 30 years, the company has accumulated and continues to accumulate a portfolio of valuable water rights and land interests along the Front Range of Colorado. It has added an extensive network of wholesale water production, storage, treatment and distribution systems, and wastewater collection and treatment systems that it operates and maintains to serve domestic, commercial, and industrial customers in the eastern Denver metropolitan region. The company’s primary land asset, known as Sky Ranch, is in one of the most active development areas in the Denver metropolitan region along the rapidly developing I-70 corridor, and it is developing lots at Sky Ranch for residential, commercial, retail, and light industrial uses. Sky Ranch is zoned to include up to 3,200 single family and multifamily homes, parks, open spaces, trails, recreational centers, schools, and over two million square feet of retail, commercial and light industrial space, all of which will be serviced by the company’s water and wastewater services segment. Additionally, the company has retained lots in its Sky Ranch development for its single-family rental business where it builds single-family homes for rent, typically under annual lease agreements. With 14 homes currently owned and rented, the company continues to expand this new line of business which may include more than 200 rental homes at Sky Ranch over the next several years.

Water and Wastewater

Water resources throughout the western U.S., and particularly in Colorado, are a scarce and valuable resource. The company’s owned and/or controlled portfolio of more than 30,000 acre-feet of water is comprised of groundwater, designated basin groundwater, and surface water supplies. Its other significant water assets include 26,000 acre-feet of adjudicated reservoir sites, two wastewater reclamation facilities, water treatment facilities, potable and raw water storage facilities, wells and water production facilities, and roughly 50 miles of water distribution and wastewater collection lines. The company’s water supplies and wholesale facilities are primarily located in southeast Denver, an area which is limited in both water availability and infrastructure to produce, treat, store, and distribute water and wastewater. The company believes this provides it with a unique competitive advantage in offering these services.

The company provides wholesale water and wastewater service to local governments for both residential and commercial customers. The local governments it serves include the Rangeview Metropolitan District, Arapahoe County, the Sky Ranch Community Authority Board and related metropolitan districts, and the Elbert and Highway 86 Commercial Metropolitan District. The company’s mission is to provide sustainable, reliable, high-quality water to its customers and collect, treat, and reuse wastewater using advance water treatment systems, which produce high quality reclaimed water it can reuse for outdoor irrigation and industrial demands. By using and reusing its water supplies, the company proactively manages its valuable water rights in the water-scarce Denver, Colorado region which dramatically reduces the environmental impact of its water resource operations. The company designs, permits, constructs, operates and maintains wholesale water and wastewater systems that it owns or operates on behalf of governmental entities. It also designs, permits, constructs, operates, and maintains retail distribution and collection systems that it owns or exclusively operates on behalf of its governmental customers. Additionally, the company handles administrative functions, including meter reading, billing and collection of monthly water and wastewater revenues, regulatory water quality monitoring, sampling, testing, and reporting requirements to the Colorado Department of Public Health and Environment.

Revenues for the company’s water operations are dependent on it growing the number of customers it serves. If it is unable to add customers to its systems and sell taps to builders, its revenues could be negatively impacted. The company currently is the developer of the Sky Ranch Master Planned Community, which is the main driver of its tap sales. Prolonged periods of hot and dry weather generally cause increased water usage for watering lawns, washing cars, and keeping parks irrigated. Additionally, prolonged periods of dry weather could lead to drought restrictions and limited water availability. Despite the company’s substantial water supply, customers may be required to conserve water usage under such drought restrictions which would negatively impact metered usage revenues. The company has addressed some of this vulnerability by instituting minimum customer charges which are intended to cover fixed costs of operations under all likely weather conditions.

Land Development

The company’s Land Development segment is primarily focused on developing the Sky Ranch Master Planned Community located along the booming I-70 corridor. It develops and sells residential, commercial, retail, and light industrial lots. Sky Ranch is zoned to include up to 3,200 single-family and multifamily homes, parks, open spaces, trails, recreational centers, and schools. Additionally, Sky Ranch is zoned to include over two million square feet of retail, commercial, and light industrial space, which is the equivalent of approximately 1,800 residential units, meaning the Sky Ranch community at build-out will include a total of roughly 5,000 residential and equivalent units. The company’s land development activities include the design, permitting, and construction of all the horizontal infrastructure, including, storm water, drainage, roads, curbs, sidewalks, parks, open space, trails, and other infrastructure to deliver “ready to build” finished lots to home builders and commercial customers. The company’s land development activities generate revenue from the sale of finished lots as well as construction revenues from activities where it constructs infrastructure on behalf of others.

The company’s land development activities provide a strategic complement to its water and wastewater activities because a significant component of any master planned community is providing high quality domestic water, irrigation water, and wastewater to the community. Having control over land and the water and wastewater services enables the company to build infrastructure for potable water and irrigation distribution, wastewater and storm water collection, roads, parks, open spaces, and other investments efficiently and to manage delivery of these investments to match take-down commitments from its home builder customers without significant excess capacity in any of these investments.

The company has been developing the Sky Ranch community since 2017, which it is developing in phases. It believes it will take approximately eight to ten more years to fully develop Sky Ranch. In 2017, the company began the initial development phase of Sky Ranch when it entered separate contracts with several national homebuilders, pursuant to which it sold a total of 505 single-family, detached residential lots at Sky Ranch. Phase 1 of the Sky Ranch development is complete, and all revenue and costs have been recognized.

During the company’s fiscal 2021, it began construction on the second development phase at Sky Ranch. For this phase, the company entered separate contracts with KB Home, Lennar Colorado, Melody (a DR Horton Company), and Challenger Homes to sell 781 single-family attached and detached residential lots at Sky Ranch, and it retained approximately 93 lots (through such contracts and subsequent amendments) for use in its single-family home rental business. The second development phase is approximately 250 acres and is being completed in four sub-phases (referred to as Phase 2A, 2B, 2C and 2D). Due to the company’s strong performance in the first phase of the Sky Ranch project, it was able to realize an approximate 38% increase in its average lot prices in Phase 2.

In February 2021, the company began construction activities in Phase 2A at Sky Ranch, which has 229 residential lots, 10 of which it has retained for use in its single-family rental business. As of November 30, 2024, Phase 2A of the Sky Ranch development is nearly 100% complete, and the company has received all $18.4 million of payments related to the sale of the 219 lots in Phase 2A.

In March 2023, the company began construction activities in Phase 2B at Sky Ranch, which is platted for 211 residential lots, 17 of which it has retained for use in its single-family rental business. As of November 30, 2024, Phase 2B of the Sky Ranch development is approximately 97% complete, and the company has received all $17.3 million of payments related to the sale of the 211 lots in Phase 2B.

In February 2024, the company began construction activities in Phase 2C at Sky Ranch, which is platted for 228 residential lots, 40 of which it has retained for use in its single-family rental business. As of November 30, 2024, Phase 2C of the Sky Ranch development is approximately 41% complete. As of November 30, 2024, the company received $3.4 million, which consists of the first milestone payments from the three builders with milestone payment contracts. The company expects the second milestone and finished lot payment for Phase 2C, which totals $14.4 million, to be received over the next 9 months.

The company recognizes revenue earned under contracts with milestone payments over time using the percentage of completion method which aligns the recognition of revenue with the requisite progress made on construction activities. During the three months ended November 30, 2024 and 2023, due to the construction progress in Phase 2A, 2B and 2C, the company recognized $2.3 million and $1.9 million of lot sales revenue related to construction at Sky Ranch. The company expects to recognize the majority of the remaining revenue from all four homebuilders for Phase 2C before the end of its fiscal 2025.

Remaining payments for lot sales and the related revenue for Phase 2D will occur as construction of that phase occurs. The company believes it will take approximately two more years to complete construction and sell the finished lots in all four subphases depending on market conditions and the permitting process.

In addition to the lot sales described above, from the start of development at Sky Ranch through November 30, 2024, the company has received $25.0 million of water and wastewater tap fees from the homebuilders. The company estimates water and wastewater tap fees will exceed $20.0 million for Phase 2 in total.

Single-Family Rentals

During the company’s fiscal 2021, it launched a new line of business it is referring to as its single-family rental business. As of November 30, 2024, the company has completed 14 single-family homes on these lots which it owns, maintains, and has leased to qualified renters under one-year lease terms. The company has expanded its single-family rentals in its second development phase of Sky Ranch by building homes on lots it did not sell to its home builder partners, which it will rent out once completed. As of November 30, 2024, the company reserved approximately 94 lots in Phase 2, 10 of which are in Phase 2A and are completed and rented as of November 30, 2024. Additionally, the company has reserved 17 lots in Phase 2B, which it anticipates completing in fiscal 2025.

Results of Operations

For the three months ended November 30, 2024, the company generated net income of $3.9 million, an increase from $2.1 million in the prior year period. The increase was primarily due to an increase in oil and gas royalty income. Total revenue was consistent during the two periods. Lot sales revenue is recognized using the percentage of completion method, which is based on progress of construction. Despite increased challenges on the housing market, the company’s land development activities continue to perform well and increased compared to the prior year period, as it continues construction on Phase 2B and 2C at Sky Ranch. The company believes the increase in lot sales revenue is due to its entry level pricing and affordable lot costs. The increase in lot sale revenue was offset by a decrease in water revenue due to decreased water sales to oil and gas operators.

For the three months ended November 30, 2024, water deliveries decreased compared to 2023 primarily due to a decrease of water sales to oil and gas operators. Lot sales revenue increased as compared to 2023 due to timing of development activities and the inclusion of field construction on Phase 2C. Land development construction costs decreased compared to 2023 due to fluctuations in construction activity and the percentage of public improvement activity that occurred during the quarter.

As of November 30, 2024, the company had working capital of $20.3 million, including $19.0 million in cash and cash equivalents. The company believes it has sufficient working capital to fund its operations for the next 12 months, including its obligations for the Sky Ranch development and its single-family rental construction. The company expects to fund these obligations through milestone payments from homebuilders, water and wastewater tap fees, and its existing cash balances.

Critical Accounting Policies and Use of Estimates

The company’s critical accounting policies and estimates remain consistent with those described in its 2024 Annual Report. There have been no changes to its critical accounting policies during the three months ended November 30, 2024.