WEBVTT - How Empty Land in the Arizona Desert Gets Turned Into Homes 0:00:10.080 --> 0:00:14.160 Hello, and welcome to another episode of the Odd Lots podcast. 0:00:14.280 --> 0:00:17.599 I'm Joe Wisenthal and I'm Tracy Alloway. Tracy, you know, 0:00:17.640 --> 0:00:20.560 we've talked a lot about the home builders, and uh, 0:00:20.680 --> 0:00:23.120 you know, this is the factors that go into building 0:00:23.120 --> 0:00:26.920 at home, the supply chain, prune, the effect of rates. 0:00:27.320 --> 0:00:30.319 We've seen this big collapse in a single family home 0:00:30.360 --> 0:00:33.479 construction over the last year since rate hikes. But there's 0:00:33.520 --> 0:00:37.919 a pretty big component of housing that we that that 0:00:37.960 --> 0:00:39.800 I don't think we really hate yet. Yeah, that's right. 0:00:39.800 --> 0:00:42.559 We talk a lot about building the houses, but we 0:00:42.640 --> 0:00:46.839 don't actually talk about securing the land that those houses 0:00:46.880 --> 0:00:49.120 are going to be built on, right, And so like 0:00:49.200 --> 0:00:51.599 this is also like a pretty big element. And if 0:00:51.640 --> 0:00:54.680 you read the transcripts of some of the big publicly 0:00:55.120 --> 0:00:58.080 traded home builders, a lot of the questions they have 0:00:58.200 --> 0:01:01.480 to ask are like, well, what's your strategy with land 0:01:01.520 --> 0:01:05.039 acquisition right now? Because you can't build if you don't 0:01:05.080 --> 0:01:07.680 have more land. But on the other hand, like that's 0:01:07.680 --> 0:01:10.840 a big capital cost, you're bringing that onto your balance sheet, etc. 0:01:11.400 --> 0:01:13.080 I doubt they want to just have like tons of 0:01:13.160 --> 0:01:16.360 land sitting around. So the question of like thinking about 0:01:16.360 --> 0:01:19.759 acquiring land for housing is like a pretty big dimension 0:01:20.120 --> 0:01:22.720 of like the adequate housing story totally. And it also 0:01:22.760 --> 0:01:26.080 taps into a lot of other big picture questions like 0:01:26.560 --> 0:01:29.560 what are the best markets to actually build in? Do 0:01:29.640 --> 0:01:33.840 people take into account maybe climate change considerations places that 0:01:33.880 --> 0:01:35.679 are popular now, you know, you think of some of 0:01:35.680 --> 0:01:38.720 the Sun Belt states, Artha's going to be viable markets 0:01:38.760 --> 0:01:42.080 in the future. Yeah, all kinds of questions like that. 0:01:42.240 --> 0:01:45.280 So I want to like talk about the land decision 0:01:45.360 --> 0:01:47.480 because you know, again, you know, we talked about the 0:01:47.520 --> 0:01:50.000 rate hikes. So one of the things that we've seen 0:01:50.040 --> 0:01:53.000 with the rate hikes is that actual like physical building 0:01:53.000 --> 0:01:55.040 and supply it seems to be pretty sensitive and we've 0:01:55.040 --> 0:01:59.400 seen this to drop in the amount of new homes built. 0:01:59.520 --> 0:02:02.880 But I don't know anything about like how sensitive land 0:02:02.920 --> 0:02:06.360 decisions are to rate hikes and how fast that they 0:02:06.400 --> 0:02:09.840 can respond and how fast new land could be acquired, 0:02:09.840 --> 0:02:12.080 because that seems like a pretty big process. Well, the 0:02:12.120 --> 0:02:14.040 other thing I would say is this is just an 0:02:14.080 --> 0:02:17.320 interesting business, the business of securing land that you then 0:02:17.400 --> 0:02:20.520 sell on to home builders for development. And I was 0:02:20.680 --> 0:02:23.639 not aware that this was a business model that existed. 0:02:23.720 --> 0:02:26.880 I kind of assumed that the developers themselves would go 0:02:26.919 --> 0:02:28.680 out and buy the land and then just build it 0:02:28.720 --> 0:02:31.200 and do everything themselves. But that is not the case. 0:02:32.040 --> 0:02:34.760 That is apparently not the case. I didn't even think 0:02:34.760 --> 0:02:36.400 about it that way. I just, oh, there's plenty of 0:02:36.480 --> 0:02:38.880 land out there, you just put up a home. I 0:02:38.919 --> 0:02:41.160 didn't quite figure out. No, there's all these permits and 0:02:41.480 --> 0:02:43.720 regulatory red tape that you have to change to the 0:02:43.800 --> 0:02:46.560 land itself. Okay, Well, we are going to be speaking 0:02:46.560 --> 0:02:50.799 to someone on the land specific side of the question 0:02:51.320 --> 0:02:53.400 in studio with us. We're going to be speaking with 0:02:53.520 --> 0:02:57.320 Chase Emerson. He is the co CEO of Emerson Holdings, 0:02:57.320 --> 0:03:01.720 a boutique land investment group and broke based in Arizona, which, 0:03:01.760 --> 0:03:04.040 as we know, is one of the hottest I guess 0:03:04.480 --> 0:03:08.120 in many ways multiple one of the hottest real estate 0:03:08.200 --> 0:03:11.880 markets in the country about the business of land. So, Chase, 0:03:11.960 --> 0:03:13.920 thank you so much for coming on. Odd lots great 0:03:13.919 --> 0:03:16.160 to be here. Thank you so much. So why don't 0:03:16.160 --> 0:03:19.400 you just a big picture what does Emerson Holdings? Why 0:03:19.440 --> 0:03:20.960 don't you just sort of give us the top line 0:03:21.040 --> 0:03:24.480 view of like where you sit within the housing industry 0:03:24.880 --> 0:03:29.000 big picture with our funds and with investor funds, we 0:03:29.120 --> 0:03:32.760 buy land right on the edge of existing development. We 0:03:32.880 --> 0:03:37.320 then master plan and design a community, obtain all of 0:03:37.360 --> 0:03:41.240 the engineering approvals and permits, and then sell to top 0:03:41.240 --> 0:03:45.600 twenty five national home builders. So my big question, and 0:03:45.680 --> 0:03:47.960 I alluded to it in the intro, but why does 0:03:48.000 --> 0:03:52.120 this business model exist? Like why doesn't a big institutional 0:03:52.440 --> 0:03:55.240 housing developer just buy the land themselves and then build 0:03:55.280 --> 0:03:58.760 on it. It's a really difficult industry for institutional investors. 0:03:58.800 --> 0:04:02.200 So much of it depends on local knowledge and relationships. 0:04:02.560 --> 0:04:06.320 And so while many many institutions have tried buying land 0:04:06.360 --> 0:04:10.080 and having land funds, for example, few have had success 0:04:10.120 --> 0:04:13.600 at that. Looking at the home builders also, home builders 0:04:13.840 --> 0:04:17.320 have typically started to just buy land that has all 0:04:17.360 --> 0:04:21.200 of the final approvals in place, so randomly. This is 0:04:21.240 --> 0:04:25.040 something I was talking about with farmers in rural Connecticut 0:04:25.080 --> 0:04:27.040 about a week ago, which is how do you go 0:04:27.080 --> 0:04:29.840 about identifying land that's for sale? And there are all 0:04:29.839 --> 0:04:32.360 these secret ways that they were telling me about, like 0:04:32.440 --> 0:04:35.799 looking up on local hunting registries to see who owns 0:04:35.839 --> 0:04:38.640 the land, because you can contact people and say can 0:04:38.680 --> 0:04:40.880 I hunt on your land? And so that's a way 0:04:40.880 --> 0:04:43.159 of getting in touch with people. So when you say 0:04:43.279 --> 0:04:46.159 you need local knowledge for the market. Is that the 0:04:46.240 --> 0:04:49.120 kind of thing that you're thinking of. Yeah, exactly, when 0:04:49.120 --> 0:04:52.320 someone goes to sell, oftentimes they'll look at who a 0:04:52.400 --> 0:04:56.640 large landowner is in the area, or a broker will 0:04:56.680 --> 0:04:59.200 have a lead on who may be interested in selling, 0:04:59.640 --> 0:05:01.640 and want to be the first person that they call 0:05:01.720 --> 0:05:05.000 with that opportunity. Talk to us a little bit more 0:05:05.160 --> 0:05:08.960 about the perspective of the home builders themselves, and like, 0:05:09.320 --> 0:05:11.880 I guess my question is, like what business you know? 0:05:11.920 --> 0:05:14.719 I guess modern capitalism is all about finding like the 0:05:14.800 --> 0:05:18.200 specific business that you're in and then outsourcing as many 0:05:18.240 --> 0:05:20.960 sort of like peripheral businesses to third parties. And so 0:05:21.040 --> 0:05:25.200 in their view, land acquisition land development is not the 0:05:25.200 --> 0:05:27.919 business that they're in. Obtaining permits from the local authorities 0:05:28.080 --> 0:05:30.839 is not the business that they're in. Talk to us 0:05:30.839 --> 0:05:33.560 a little bit more about like that relationship and what 0:05:34.839 --> 0:05:37.599 service you provide. Yeah, there's been an evolution in the 0:05:37.600 --> 0:05:41.600 way that homebuilders buy land. Before the Great Financial Crisis, 0:05:42.000 --> 0:05:45.760 builders would go on the periphery and purchase large tracts 0:05:45.800 --> 0:05:49.960 of land, often without the approvals in place, and many 0:05:49.960 --> 0:05:53.360 of them got burned. For example, we just purchased a 0:05:53.440 --> 0:05:56.240 property that a home builder paid one hundred million dollars 0:05:56.279 --> 0:06:00.479 for sent tax homes before the downturn. We purchased it 0:06:00.520 --> 0:06:02.640 for just over ten million, just to give you a 0:06:02.720 --> 0:06:05.680 fi for some of the mistakes that the builders had made. 0:06:06.000 --> 0:06:09.920 But today builders are just trying to buy land that 0:06:10.000 --> 0:06:12.960 has all Just to be clear, this was one hundred 0:06:12.960 --> 0:06:15.320 million dollar land track purchase that was made in what 0:06:15.400 --> 0:06:17.839 two thousand and seven, two thousand and six, two thousand 0:06:17.839 --> 0:06:19.919 and six, and today, after all of this and the 0:06:19.960 --> 0:06:22.200 housing recovery and anything, you were able to get it 0:06:22.240 --> 0:06:25.640 for ten millions. Yes, exactly, So that really Man two 0:06:25.880 --> 0:06:30.159 six was crazy. So you know you mentioned the permits 0:06:30.200 --> 0:06:33.760 and regulation. Walk us through what does the process actually 0:06:33.839 --> 0:06:38.120 look like. Say you identify you know it's currently farmland, 0:06:38.480 --> 0:06:41.480 it's being used to grow alfalfa, and you buy it. 0:06:41.720 --> 0:06:43.520 How do you go through the next steps and what 0:06:43.560 --> 0:06:45.960 do those steps look like? How long does it take? Yeah? 0:06:46.040 --> 0:06:49.080 So the first step is rezoning. So oftentimes there'll be 0:06:49.120 --> 0:06:51.720 a holding category for the land. It may have one 0:06:51.760 --> 0:06:55.000 acre zoning and so typically it's up zoning it for 0:06:55.120 --> 0:06:58.440 more density. So the first step is rezoning. The next 0:06:58.480 --> 0:07:01.479 step is what's called preliminary plat and that is the 0:07:01.560 --> 0:07:06.679 early engineering rough engineering for roads, for infrastructure, A PLAT 0:07:06.800 --> 0:07:09.440 is a document that gets recorded on the land showing 0:07:09.520 --> 0:07:13.120 lots and infrastructure, and then the final step is the 0:07:13.160 --> 0:07:18.120 final engineering, which is called final plat. And how long 0:07:18.200 --> 0:07:20.800 is this whole process? So the reasoning process can take 0:07:21.000 --> 0:07:24.120 twelve to eighteen months. If it's political, it can take longer. 0:07:25.400 --> 0:07:28.680 The prelimary platting and final plotting process can also take 0:07:29.080 --> 0:07:31.680 eighteen to twenty four months, So there's a long lead 0:07:31.720 --> 0:07:35.320 time before land can be converted from agricultural land to 0:07:36.120 --> 0:07:39.120 land that has final approvals. So it sounds like you 0:07:39.200 --> 0:07:42.040 do some of the urban planning almost for a lot 0:07:42.120 --> 0:07:44.840 of these developments, like you decide where the roads are 0:07:44.880 --> 0:07:48.800 going to be and the basic look of the development. Correct. Yeah, 0:07:48.840 --> 0:07:54.920 depending upon the municipality. Sometimes you're even setting exact park details, amenities. 0:07:55.920 --> 0:08:00.200 You're definitely saying lot sizes, community design, and that it's 0:08:00.280 --> 0:08:02.920 very early in the process. Why don't the homebuilders want 0:08:02.920 --> 0:08:05.080 to be in that because you'd think that's something like, well, 0:08:05.080 --> 0:08:08.000 what is the design of our community that we're building, 0:08:08.240 --> 0:08:11.680 what's it going to look like, what kind of amenities, parks, etc. Intuitively, 0:08:11.720 --> 0:08:13.080 I would think that would be the kind of thing 0:08:13.280 --> 0:08:16.000 homebuilders would want. Like you work closely with them, do 0:08:16.080 --> 0:08:18.640 they tell you generally the sort of trends that are 0:08:18.720 --> 0:08:20.920 like going on in that direction. Yeah, we have close 0:08:20.960 --> 0:08:23.400 relationships with the homebuilders and get their feedback early in 0:08:23.440 --> 0:08:27.720 the process with preferred builder buyers, but we maintained control 0:08:27.720 --> 0:08:31.160 of that process. Typically, sometimes the homebuilder will enter into 0:08:31.240 --> 0:08:33.560 escrow with the land seller and then they will control 0:08:33.640 --> 0:08:36.000 that process. So I want to go back, you know, 0:08:36.360 --> 0:08:39.000 I'm still like blown away that there is a piece 0:08:39.000 --> 0:08:41.120 of land that sold for one hundred million in two 0:08:41.120 --> 0:08:44.000 thousand and six that's still just worth still sold for 0:08:44.080 --> 0:08:47.080 ten millions. Talk to you know. Obviously, one of the 0:08:47.120 --> 0:08:52.240 biggest themes of this podcast is scars from downturns and 0:08:52.280 --> 0:08:55.079 how they affect behavior for years and years and years. 0:08:55.400 --> 0:08:57.560 So if you have these homebuilders that in two thousand 0:08:57.559 --> 0:09:00.800 and six spent egregious amounts of land that they were 0:09:00.880 --> 0:09:04.520 underwater on for fifteen years maybe forever, talk to us 0:09:04.559 --> 0:09:07.840 a little bit more about like how that informs still 0:09:08.000 --> 0:09:13.120 today or up until recently, home builder decisions about land purchases. Yeah, 0:09:13.160 --> 0:09:15.679 it really has impacted the home builder's outlook on how 0:09:15.760 --> 0:09:18.920 much supply they should keep at any given time, and 0:09:19.080 --> 0:09:21.959 I think that we're setting up for a shortage of 0:09:22.000 --> 0:09:28.880 developable lots given their narrower outlook. For example, Meritage Homes 0:09:28.920 --> 0:09:31.400 said that they have four and a half years of supply, 0:09:31.920 --> 0:09:35.160 but that's based on current levels of demand, and so 0:09:35.360 --> 0:09:39.480 if home sales increase, that supply drops from four and 0:09:39.480 --> 0:09:59.600 a half years to perhaps three years. You know, you 0:09:59.640 --> 0:10:03.840 mentioned in political tension, and I have to ask nimbiism 0:10:04.080 --> 0:10:07.360 must be a big part of your business, I would expect, 0:10:07.640 --> 0:10:10.400 like dealing with people who don't necessarily want to see 0:10:10.480 --> 0:10:15.440 large scale residential developments next door. Absolutely. Yeah. Cities and 0:10:15.480 --> 0:10:19.280 towns go through evolutions of being pro growth, and then 0:10:19.440 --> 0:10:23.359 once a certain amount of residents live there, the mentality 0:10:23.400 --> 0:10:26.880 can shift, and so sometimes you get city leadership that 0:10:26.920 --> 0:10:30.959 will push for what's called executive housing or larger lots, 0:10:31.400 --> 0:10:34.880 and that can really hurt housing affordability. Has there been 0:10:34.920 --> 0:10:38.160 a change over time, as you mentioned Meritage, right now 0:10:38.240 --> 0:10:40.599 they say, Okay, we have four and a half years 0:10:40.640 --> 0:10:43.960 of spare capacity to build more homes at current demand 0:10:43.960 --> 0:10:46.120 loals we don't know. Demand might go up, demand might 0:10:46.160 --> 0:10:51.440 go down, etc. Do those trends change over time? And 0:10:51.880 --> 0:10:54.960 do homebuilders generally have like targets? Do they try to 0:10:55.040 --> 0:10:57.120 match each other? Do they all want to be within 0:10:57.280 --> 0:11:00.240 some range? Is there a number that investors like to 0:11:00.360 --> 0:11:03.400 hear that's optimal these days? Yeah, the home builders are 0:11:03.400 --> 0:11:07.240 typically very conservative in their underwriting. They plan for two 0:11:07.280 --> 0:11:11.680 to three homes per subdivision per month, and so if 0:11:11.760 --> 0:11:19.960 you consider that builders need to plan for just two 0:11:19.960 --> 0:11:22.400 to three months of housing, sometimes they can get be 0:11:22.400 --> 0:11:25.320 caught flat footed. Sorry, could you explain that I didn't 0:11:25.400 --> 0:11:27.160 quit get when you say they planning for two or 0:11:27.200 --> 0:11:30.160 three months per subdivision? Can you? Sorry? I didn't quite 0:11:30.200 --> 0:11:32.679 understand why that. Yeah, So two to three homes per 0:11:32.720 --> 0:11:36.000 subdivision per month is typically what a builder will underwrite 0:11:36.240 --> 0:11:39.439 a new land acquisition at, so they assume a certain 0:11:39.480 --> 0:11:43.559 sales level. Okay, but if they only have a few 0:11:43.600 --> 0:11:47.120 years of supply, they can often be caught without existing supply. 0:11:47.240 --> 0:11:49.880 And then you have a land grab where builders try 0:11:49.920 --> 0:11:54.960 to acquire new property and start competing again for land parcels, 0:11:54.960 --> 0:11:57.760 and we're seeing that now in today's market. So, just 0:11:57.880 --> 0:12:02.680 on that note, how do you yourself identify potential purchases? Like, 0:12:02.880 --> 0:12:05.880 what are all the different factors that go into it? 0:12:05.880 --> 0:12:09.280 I assume you're looking at the market overall, the exact 0:12:09.280 --> 0:12:12.800 location of the plot, who you're able to sell it to, 0:12:13.240 --> 0:12:18.040 and maybe the amount of liquidity or financing available for 0:12:18.080 --> 0:12:21.719 those purchases. Yeah, first, all of our acquisitions are cash 0:12:21.760 --> 0:12:25.680 and so, but the main thing we look for is water. 0:12:25.880 --> 0:12:28.760 In Arizona, it's critical to have in a shured water supply. 0:12:29.360 --> 0:12:33.040 And while eighteen percent of the land in Arizona is private, 0:12:33.440 --> 0:12:36.640 only a small fraction of that actually has one hundred 0:12:36.679 --> 0:12:39.800 year water supply. Talk to us more about that. So 0:12:40.960 --> 0:12:43.440 if you want to get to go through all of 0:12:43.480 --> 0:12:47.040 the permitting process, what do you have to demonstrate two 0:12:47.120 --> 0:12:53.199 local authorities about water? So there's two different jurisdictions in Arizona. 0:12:53.240 --> 0:12:56.400 There are areas that are known as certificate of as 0:12:56.400 --> 0:13:00.000 shured water supply areas, and in these areas, each individual 0:13:00.040 --> 0:13:03.320 usual developer has to demonstrate that they have one hundred 0:13:03.400 --> 0:13:07.360 year or short water supply for their community. Other areas 0:13:07.400 --> 0:13:10.280 have what's called a designated provider, and that might be 0:13:10.360 --> 0:13:13.280 a city, it might be a private water company, and 0:13:13.480 --> 0:13:18.400 that entity basically gives the landowner there one hundred year designation. 0:13:19.640 --> 0:13:24.840 It's very interesting because it creates different incentives within those areas. So, 0:13:24.920 --> 0:13:30.640 for example, a designated provider area, all demand counts towards 0:13:30.679 --> 0:13:35.520 that allocation. So if it's industrial, if it's multifamily, there's 0:13:35.520 --> 0:13:38.360 a fixed amount of water and everything counts towards that 0:13:38.760 --> 0:13:43.600 total capacity. Within a certificate of a short water supply area, 0:13:43.960 --> 0:13:48.240 only single family residential is counted. So it's a loophole 0:13:48.400 --> 0:13:54.040 essentially where multifamily and industrial can take capacity without any 0:13:54.080 --> 0:13:59.240 allocation for that. That's really interesting. So you mentioned how 0:13:59.280 --> 0:14:02.480 that create sort of different incentives. Just give us a 0:14:02.520 --> 0:14:05.960 little bit more color on what you mean. So, for example, 0:14:06.000 --> 0:14:10.000 there's a city called Castagrande, which is just outside of Phoenix. 0:14:10.840 --> 0:14:13.280 You might be familiar with Lucid Motors, one of the 0:14:13.360 --> 0:14:18.080 large EV manufacturing companies. Casa grand is a certificate of 0:14:18.080 --> 0:14:23.080 a short water supply area, and so it's very difficult. 0:14:23.120 --> 0:14:25.960 Now castagrand is essentially out of water, so it's very 0:14:26.000 --> 0:14:28.840 difficult to start a new subdivision in a place like 0:14:28.920 --> 0:14:33.760 castagrand But you can start a multi family development and 0:14:33.880 --> 0:14:39.880 oftentimes it will look just like a single family subdivision. Oh, 0:14:39.920 --> 0:14:43.400 so you can have something called a multifamily that looks 0:14:43.480 --> 0:14:45.880 like But if you say, but Here's what I don't get. Like, 0:14:45.920 --> 0:14:48.280 if you say they're running out of water, are they 0:14:48.320 --> 0:14:50.080 going to run out of water? Yeah, where's the water 0:14:50.200 --> 0:14:51.680 coming from? It's like I get that, it's like a 0:14:51.720 --> 0:14:55.280 regulatory loophole, but people still need to drink or more importantly, 0:14:55.720 --> 0:14:57.680 and you know, I know there's a lot of semiconductor 0:14:58.000 --> 0:15:01.600 factories being opened up, like Denis mc stronly water intensive 0:15:02.000 --> 0:15:05.080 process to like wash the wafers in the cilicle. Yeah, 0:15:05.120 --> 0:15:08.440 for the semiconductor industry, it is a it is a 0:15:08.480 --> 0:15:12.720 ton of water. For example, Taiwan Semiconductors uses twenty thousand 0:15:12.760 --> 0:15:15.760 acre feet of water per year and just to put 0:15:15.800 --> 0:15:22.120 that into context, that is roughly eighty thousand new homes. Wow. 0:15:22.320 --> 0:15:25.240 But it's a lot of water. But at the same time, 0:15:25.480 --> 0:15:28.320 it's it's not a lot of water if you consider agriculture. 0:15:29.000 --> 0:15:33.040 So agriculture is in Arizona, there's a lot of cotton production, 0:15:33.120 --> 0:15:37.640 for example, and five thousand acres of cotton production is 0:15:37.680 --> 0:15:44.080 equivalent to all of Taiwan semiconductors water capacity. So from 0:15:44.080 --> 0:15:48.320 a sort of like GDP value add my guess is 0:15:49.320 --> 0:15:52.440 maybe let's have less cotton productions right in Arizona and 0:15:52.560 --> 0:15:57.760 more chips exactly. You know, you mentioned that water rights 0:15:57.760 --> 0:16:01.560 are top of mind for you and selecting real estate 0:16:02.040 --> 0:16:06.160 and locations. Has that changed over the years. Has it 0:16:06.200 --> 0:16:09.280 become more difficult to source water to the extent that 0:16:09.400 --> 0:16:12.120 you know, maybe ten or twenty years ago, this wasn't 0:16:12.840 --> 0:16:16.680 as pressing an issue. It's become very difficult to secure water. 0:16:16.840 --> 0:16:19.800 You have to really look at who stands in line 0:16:19.840 --> 0:16:22.240 to get the water and what your legal rights are. 0:16:22.480 --> 0:16:24.120 And that's the very first thing that we look at 0:16:24.160 --> 0:16:26.600 when buying land. And this has been going on in 0:16:26.680 --> 0:16:30.240 Arizona since the very beginning, right, I mean, like, I mean, 0:16:30.240 --> 0:16:32.240 it's the desert. The entire West is like there's no 0:16:32.320 --> 0:16:35.920 water there. So talk to us just like generally about 0:16:35.920 --> 0:16:38.560 like where's that water coming from? Is it piped in 0:16:38.640 --> 0:16:42.760 from elsewhere? Is underground aquifers that are depleting, etc. And 0:16:42.960 --> 0:16:44.920 I mean this is like the history of the American 0:16:45.000 --> 0:16:47.640 West is like fights over this. Yeah. So Arizona has 0:16:47.680 --> 0:16:50.760 two main sources of water. The first is the Central 0:16:50.800 --> 0:16:54.320 Arizona Project, which takes water from the Colorado River. The 0:16:54.400 --> 0:16:58.160 second is we have abundant groundwater. Depending upon which part 0:16:58.160 --> 0:17:02.120 of the Phoenix area you're in, there's more abundant water 0:17:02.200 --> 0:17:06.920 than others, and so that with the Colorado River, we're 0:17:07.000 --> 0:17:11.960 dependent upon allocation from the Colorado River basin states and 0:17:12.119 --> 0:17:15.919 that is more at risk of being cut back, whereas 0:17:15.960 --> 0:17:21.480 with groundwater, it's very abundant and their ancient deposits of groundwater. 0:17:22.080 --> 0:17:24.919 I read an article recently that and I know, like 0:17:24.960 --> 0:17:28.040 all of these states that sort of depend on Colorado 0:17:28.240 --> 0:17:34.520 water or Colorado Colorado River water always like these like negotiations, 0:17:34.520 --> 0:17:37.440 and I have to imagine that like developers in Arizona 0:17:37.480 --> 0:17:39.800 want to see more allocated to Arizona, and developers in 0:17:39.880 --> 0:17:42.760 Nevada wantest be more developed, you know, New Mexico, etc. 0:17:43.240 --> 0:17:45.200 Can you talk a little bit like is there tension 0:17:45.400 --> 0:17:47.400 between the states and how it affects you and how 0:17:47.400 --> 0:17:50.520 it affects your thinking in terms of like who is 0:17:50.560 --> 0:17:53.080 going to get these allocations? And more importantly, you know, 0:17:53.080 --> 0:17:55.040 if I know that the Southwest is like in a 0:17:55.080 --> 0:17:58.720 two decade drought, and this is like what if there 0:17:58.760 --> 0:18:00.840 are cutbacks or if there are say, look, look we 0:18:00.920 --> 0:18:03.080 really need to conserve what is that going to do 0:18:03.400 --> 0:18:07.240 to the ability for these like rapidly growing population states 0:18:07.440 --> 0:18:09.560 to keep growing at the pace that they are. Yeah, 0:18:09.600 --> 0:18:13.000 we still have plenty of water for growth, but much 0:18:13.000 --> 0:18:15.760 of the land in Arizona is not going to be 0:18:15.760 --> 0:18:18.119 developable with water. So that's the first thing that we 0:18:18.160 --> 0:18:22.879 look at. We think that areas that have groundwater versus 0:18:22.920 --> 0:18:25.720 called river water are going to become more and more valuable. 0:18:26.240 --> 0:18:29.480 For example, the city of Maricopa is the eighth fastest 0:18:29.520 --> 0:18:32.399 growing city in the US right now, and that water 0:18:32.600 --> 0:18:39.360 is entirely from groundwater, and not only it's also replenished, 0:18:39.440 --> 0:18:41.480 which is a key thing. So that oh I thought 0:18:41.480 --> 0:18:43.480 it was just going to empty one day. Yeah. So 0:18:43.880 --> 0:18:49.400 basically there's affluent produced by subdivisions, by employment, and this 0:18:49.440 --> 0:18:53.520 affluent is often recharged back into the aquifer or used 0:18:53.560 --> 0:18:58.160 for irrigation. Maricopas where they have that big Rio Verde 0:18:58.280 --> 0:19:01.720 controversy at the moment, right, Yes, rio Verde Foothills is 0:19:01.800 --> 0:19:04.280 just outside of the city of Scottsdale. What is that 0:19:04.320 --> 0:19:06.120 I don't know about this country. This is where it's 0:19:06.160 --> 0:19:09.880 two communities basically fighting over water rights. So rio Verde 0:19:09.880 --> 0:19:12.360 Foothills is an area just outside of the city of Scottsdale, 0:19:12.480 --> 0:19:17.200 and residents have drilled wells, built homes and others who 0:19:17.200 --> 0:19:20.119 were unable to hit groundwater by drilling a well, have 0:19:20.280 --> 0:19:23.760 relied on hauled water, and so basically a truck will 0:19:23.840 --> 0:19:27.639 fill up water from the City of Scottsdale, drive it 0:19:27.680 --> 0:19:30.440 out to these homes and fill up their tank, whether 0:19:30.440 --> 0:19:32.480 it's once every couple weeks or once a moe. It 0:19:32.520 --> 0:19:35.919 sounds insanely costly, but the City of Scottsdale is now 0:19:36.320 --> 0:19:39.600 turning off the tap for those residents. Yeah, so everyone 0:19:39.680 --> 0:19:41.640 is either going to have to drill a private well 0:19:41.800 --> 0:19:44.960 or find water from elsewhere. I mean, people are talking 0:19:45.000 --> 0:19:47.879 about this as the start of the water wars or 0:19:47.960 --> 0:19:51.720 a sort of instance of a preview of the water 0:19:51.840 --> 0:19:56.240 wars to come. I guess a big picture existential question. 0:19:56.400 --> 0:20:01.760 But you develop land exclusively in Arizona, is that business 0:20:01.760 --> 0:20:05.400 model going to be viable, you know, forty years from now? Yeah, 0:20:05.400 --> 0:20:07.439 I think it will be. If you look at the 0:20:07.560 --> 0:20:10.960 water use in Arizona today, seventy two percent is used 0:20:10.960 --> 0:20:14.240 by agriculture, and so when you convert agricultural use to 0:20:14.280 --> 0:20:17.679 residential use, you actually create a lot of savings in 0:20:17.760 --> 0:20:21.280 terms of net water use. So basically like and there 0:20:21.480 --> 0:20:23.720 was I think there's like, isn't one of like the 0:20:23.880 --> 0:20:27.040 huge ELFLFA farms, like it's owned by Saudi Arabia, which 0:20:27.080 --> 0:20:30.800 is their prerogative to like by land, etc. But there 0:20:30.840 --> 0:20:33.879 are like it does seem like building more home Like 0:20:34.000 --> 0:20:36.480 you could probably grow a felfa somewhere else, right, Yeah, 0:20:36.560 --> 0:20:40.639 we're we're leasing roughly ten thousand acres to the Saudi government. 0:20:40.720 --> 0:20:42.600 Even we should have done it. We should have had 0:20:42.600 --> 0:20:46.199 an ELFFLFA farmer in Arizona as the other get We 0:20:46.200 --> 0:20:48.679 should have had two parts and it's like no a 0:20:48.800 --> 0:20:52.240 debate what should Arizona's water be used for? Like housing 0:20:52.280 --> 0:20:56.080 development or elf cell phone? I would have liked that. Well, 0:20:56.080 --> 0:20:57.960 why don't we talk a little bit about what you're 0:20:58.080 --> 0:21:00.560 seeing now? And Joe kind of alluded to it in 0:21:00.600 --> 0:21:03.119 the intro, But we have seen a lot of the 0:21:03.119 --> 0:21:07.080 home builders affected by higher interest rates. Is that something 0:21:07.119 --> 0:21:09.760 that you are feeling on your own business model or 0:21:09.840 --> 0:21:12.240 does it not matter so much because people are still 0:21:12.240 --> 0:21:15.119 buying up land for future development. So stepping back to 0:21:15.200 --> 0:21:17.639 when interest rates went up back in June and July, 0:21:18.440 --> 0:21:21.600 pretty much all of the home builders either extended escrows 0:21:21.680 --> 0:21:25.760 on land transactions or canceled escrows, and so they stopped 0:21:25.800 --> 0:21:29.600 their land buying entirely. They also often stopped their land 0:21:29.640 --> 0:21:34.400 development spending, so parcels they had purchased, they stopped finishing 0:21:34.440 --> 0:21:37.399 some of those lots. We are just starting to see 0:21:37.680 --> 0:21:43.240 builders approved feasibility on deals and move to closing. So 0:21:44.160 --> 0:21:48.679 this is based on strong sales in January. Right, so 0:21:48.800 --> 0:21:52.280 housing is picking up. Did you yourself lose? Did you 0:21:52.280 --> 0:21:55.000 yourself have buyers walk away? At some point in twenty 0:21:55.080 --> 0:21:58.840 twenty two, we had several buyers walk away. Most of 0:21:58.880 --> 0:22:02.600 them asked for extension and we said no, because we 0:22:02.640 --> 0:22:06.520 know that land is in tight supply. Is that just 0:22:06.560 --> 0:22:09.040 a function? I mean, how are they making the decision 0:22:09.160 --> 0:22:13.440 to walk away from these properties? Do you notice any patterns? Yeah? 0:22:13.640 --> 0:22:17.320 I think it's a knee jerk reaction, and there's a 0:22:17.359 --> 0:22:22.240 difference of opinion between the local land acquisition teams and 0:22:22.560 --> 0:22:26.800 their corporate view of the market. The local teams recognize 0:22:26.880 --> 0:22:29.040 the land is in short supply and that they're going 0:22:29.119 --> 0:22:32.159 to have to start buying land again, whereas corporate is 0:22:32.200 --> 0:22:37.440 often issuing decisions to shut down land spend altogether. Right. Yeah, 0:22:37.000 --> 0:22:39.439 I was in a little bit of a prep. I 0:22:39.560 --> 0:22:43.160 was reading the recent earnings call from Poulty Homes Group 0:22:43.440 --> 0:22:45.560 as one does, as one does, And they said in 0:22:45.600 --> 0:22:47.800 the fourth quarter, we walked away from twenty one thousand 0:22:47.880 --> 0:22:51.880 auction plots and associated nine hundred million in future land 0:22:51.960 --> 0:22:54.840 acquisition spend. And as a result of these actions, will 0:22:54.880 --> 0:22:57.320 occurred a pretext charge of thirty one million for the 0:22:57.400 --> 0:22:59.840 right off. So they post when they make entering these 0:23:00.000 --> 0:23:01.480 deals with you, they post some sort of escrow. If 0:23:01.520 --> 0:23:04.359 they walk away, they lose it, correct, correct, is part 0:23:04.400 --> 0:23:08.960 of your business? I mean, like that's obviously not great 0:23:09.119 --> 0:23:11.400 for you, but is like part of like why there's 0:23:11.440 --> 0:23:17.120 a business margin opportunities essentially like warehousing this risk, so 0:23:17.160 --> 0:23:19.920