Good morning, everyone, and welcome to the Pure Cycle Corporation’s Q2 2024 Earnings Call. At this time, all participants have been placed on a listen-only mode and the floor will be opened for questions after the presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Mr. Mark Harding, President and CEO of Pure Cycle. Here you go.

Thank you, Jenny. Good morning, everyone, and welcome to our six months ended February 29, 2024 earnings call. We do have a deck for this, if you can go to our website at purecyclewater.com and click on the Investor tab. And then, there'll be a link there that will direct you to the deck for this. I can walk through this, and I'll try and note the transition of the slides as we move through the presentation. Let me start out with our first slide, which will be our forward-looking statement, which indicates that I'm sure all of you are familiar with that statements that are not historical facts contained or incorporated by reference in this presentation are forward-looking statements. With that, what I want to do is spend a little bit of time talking a little bit about the various segments of the business, take a look at our performance through our first-six months of this year. Talk a little bit about some of the investments that we've made into our assets and some of their trajectory together with their capacities and the opportunities to continue to monetize those assets and then, give you a little bit on important updates coming up with that. None of this is possible within the organization without having a great team to rely on, not only our management team, but all of our line operators that really, the brick-and-mortar and the block-and-tackle every day to make sure that we're putting up strong performances in each of our individual segments. We've got a tremendous Board of Directors, a very strong Board that continues to keep us accountable and really offer their years of wisdom and advice in that. So we benefit from a very strong team, both at the company level, as well as…

Thank you, Mark, and good morning, everyone. We're excited about the Single Family Rental segment, and we're excited to share the continued success of this safe segmented (ph) it brought. We continue to see high demand in the units. And in the second quarter, we had 100% occupancy. As shown in the charts, we're beginning to see the compounding impact to both revenue and asset valuation as we bring additional units to the market. We'd like to continue to highlight that our Single Family Rental segment complements our other segments by utilizing our portfolio of assets. Each completed unit adds an average of $150,000 in equity by capitalizing on our well price loss and our water availability in this competitive housing market. This table represents our projections for this segment as we continue to build out Phase 2. To date, we've completed the 4 units in Phase 1 and the 10 units in Phase 2a. As you can see from the chart, we are beginning to ramp up the number of units that we will be bringing online. Construction on the 17 units in Phase 2b will begin this summer. And once completed, we will have more than double the units we have available to rent. We are also expanding the variety of types of units we are offering to market in our next build. By being vertically integrated between segments, we can control our building costs because of our equity position in the land and water resources needed to build a home. We are also able to control our operating costs by maintaining and managing these units in-house. This next slide is a visual approach to the projections we just discussed. It showcases the projected growth in our recurring rental revenue as we expand into Phase 2 and reach nearly 100 units. We've also included a separate graph of the estimated increase in asset valuation based on the realizable equity we build with each completed unit. And with that, I'd like to turn the call back over to Mark Harding to discuss our portfolio of assets further.

Thank you, Marc. So what I'd like to do is give you an overview of each of the segments and drill down on investments and capacities and really talk a little bit about our utilization because we have tremendous capacities in each of those and what things we try to do is stay ahead of the market on that so that we can really react to the market in terms of delivering lots, delivering water service availability and then as we start to continue to build our Single Family Rental segment. So with that, as you know, we have these three segments, each continue to build and monetize our assets. The review of the size of each of these pies in the segment, when you take a look at sort of our Water segment, as I mentioned earlier, we have about 60,000 connections worth of capacity in our Water portfolio. And currently, the developed amount of system that we have can serve 3,600 taps. And right now, we have about 1,300. So it tells you we've got about 50% excess capacity within that Water segment. So what we've done is, we continue to build ahead of that. And it's not that, that's idle capacity because we are using that capacity to serve oil and gas needs. In the Land Development segment, we had a 930 acre master planned community. What we've got developed on the Water and the Wastewater side can serve up to about 3,200 residential lots, and that's the full build-out of Sky Ranch as well as 2 million square feet there. The water system is at that 3,600 taps. The wastewater system is probably closer to around 2,500 and so we have those fixed capacities that we have plenty of opportunity to continue to deliver taps and…

Thank you very much, Mark. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Your first question is coming from Bill Miller, who's a Private Investor. Bill, your line is live.

Thank you. Good morning.

Good morning, Bill.

Good morning. Wonderful quarter and you got lot on your plate. So my questions are the following: One, you've often mentioned acquisitions. I didn't hear it in this call, but maybe I missed it. Secondly, what do you think now are the highest return on investment that you have that you can control? And thirdly, when do you think you will get into the large scale commercial development long I-70?

Three good questions.

Well, I don't know what they're good, but they're interesting.

Well, yeah. They are. And so thank you for those. And I'll give you a little bit of color on the, the highest margin business that we have is really utilizing our portfolio of water for oil and gas, right? And so oil and gas, they don't pay the tap fee on that. And so as a result of that, that's at well capacity. And we're one of the few in this area that have excess capacity. And because of that, and the fact that we can price into those rates and charges, opportunities for us to fund construction of that infrastructure. It's really a good relationship. I don't -- it's a good margin business for us, but it's also a great business for the oil and gas customers because the limitation that they have is the only entities that have water at the scale are going to be the large water providers that provide water within a city. And the dilemma for them are that a city doesn't always have excess water supplies, right? They build their systems out so that they can meet the demand needs of their residential customers, and they don't have the capacity to give water that would otherwise be available to their residential customers to oil and gas customers, so that relationship is a great relationship for us. And so we like that business a lot. We continue to invest in that business. We continue to make sure that our customers on the oil and gas get what they need when they need it and at a fair price and so we like those margins as well. Our land development revenues generate high margins, as you've seen, and that's really because we bought the land correctly. And we continue to work with our homebuilder…

Okay. Mark, you left out the rental area.

Single Family Rentals, tremendous -- boy, this is an interesting one because as interest rates, we were thinking that most of the renters in there were just in there because interest rates were a timing element there and that's not really what we're seeing. What we're seeing is people choosing to rent, and it's stunning because we get applicants for the Single Family Rentals that would easily qualify to buy these houses. And just on -- just maintaining relationships, we try to get in and find some of their motivations. And it's, frankly, they're just saying, look, we don't want to buy. We don't want the maintenance costs, although, they're brand new homes. And so the maintenance costs are pretty low or they just -- they're not sure if this is where the Denver -- they may be new to the Denver market or they may be considering their careers, and so they're not sure if they're going to stay in this particular market or stay in even this particular submarket, but tremendous demand. We've got a great renewal rate on that. I think we've had almost 90 -- we haven't been absolutely perfect, but it's pretty close. I think we're 90%-plus occupancy while we've been in this segment for the last two years. So we continue to grow that segment. And really focus in on delivering those homes at a cost-effective basis, right? Having a partnership with our national homebuilders, being able to have them continue to line build and build very efficiently deliver what is a seasoned product for us as well as the for sale product that they have, so we'll continue to grow that segment.

Okay. Finally, since we're all pretty sensitive to inflation. What kind of price increases are you able to put in place and have you been consistently doing it or withholding that knife for a while?

I think we're -- I would say on the rental rates, we're at the 90 percentile, but we're not at the 100 percentile. And our philosophy is, I'd rather retain a tenant. And so when we get renewals, those price increases are very modest. They might be 1% or 2%. When we get into a turnover, then we mark those up a little bit closer to where those gaps are in the marketplace. So I would say, we're super competitive because we want to maintain that high 90%, 95% occupancy rate.

Okay. What about in the oil business?

We have kind of multiyear contracts with our oil and gas operators that are fixed pricing on those. So I think we're very -- we're balanced there. We look at a good partnership role with them, and I think they look at us as a great partner with them because they're not competing with residential customers. And so we have multiyear obligations for this -- increase every year, the pricing of those do inflate every year. And let me kind of address some questions that you would ask me next, which are going to be -- how do we see our price increases in the utility segment on tap fees as, well as water usage fees. Those are increasing, as you can see, when you take a look at when the company first started Sky Ranch, our tap fees were closer to $28,000 combined. Now they're closer to $40,000 combined. And so that's a function of the fact that it's costing more for water providers to reach farther and farther out. And so when you see a comparable rates on there, that's accelerating significantly. The water usage rates at the monthly rates, those are more inflationary, right? They don't inflate as much and what we do is, we've got a tiered pricing mechanism in there, which is a function of the more you use, the more you pay for that increment of water, and that's a kind of a forced conservation measure. We're seeing that our portfolio is actually going -- will be serving more connections than we thought, whereas we thought that might be at 60,000 connections, and we continue to report that 60,000 connections. There's probably some pedal in there. I think there's some conservatism in what that portfolio can serve. And then our lot fees, are we -- how are we pricing our lot fees as compared to the market. And we continue to be an entry-level product, but we also continue to price those lots to maintain our margins, together with the increased cost of delivering those horizontal infrastructure component. So we do take a look at each of those, and I think we're very competitive on all of them.

Well, finally, where are you seeing the most inflationary impact on your business?

I would say, we have not seen strong inflationary pressures here. I would even say, we've seen some cost improvement on building materials have come down. Certainly, the trades have been relieving, the supply chains are relieving. So, I'd say, we're counter on that, Bill. We've really seen a little bit of relief from that high inflationary side. And whether that was because of any number of factors rolling out of the last three years on supply chain and COVID shutdowns and distribution channels and having labor force, workforce be very constrained and competitive. If it's any one of those, it would probably labor for getting competitive bids for landscaping, getting competitive bids for the utility packages, those sorts of things would be the one where I'd say. If we’ve seen any cost rising, it would be on the labor side.

Makes great sense. Well, thank you very much.

Thanks for your continued support.

Thank you. [Operator Instructions] Your next question is coming from Greg Malachowski who's a Private Investor. Greg, your line is live.

Hey, Mark. How are you?

Good. How are you?

Good. So I got two questions. The first one relates to, I guess, what you described as the receivables. And I was just wondering if you could give any color on the time line for the next bond issuance? I know historically, it's I think, been every like two or three years is where you guys are kind of the start to dig noise about another one happening. And if I remember, maybe 2021 when we got the last one. So, I was just wondering, if you had any visibility into the timing of that?

Yeah. So yeah, the last one was probably '22, and it was -- as we started that Phase 2. So, there's -- we tend to bond those out in relationship at the start of each of the phases. And so as we're accelerating the completion of Phase 2, we'll be moving into Phase 3 and Phase 3 is likely to be, we keep increasing the sizes of those. Our first phase was 500 units. Our second phase was a little over 800 and say, 70 units. Our third phase is likely to be over 1,000 units. And so that continue -- and really, when you take a look at the absorption of any master planned community, they typically go on a bell curve where you start out with a few number of units, and as those units grow and then you have overlapping phases, we look to deliver closer to 300, 400 lots a year as we continue to build this out. And so that next filing, that next Phase 3 will probably start in earnest beginning of next year. What we are likely to see is towards the end of this year, we'll have a refinancing opportunity of our first phase of bonds. And so just to talk with you a little bit about the life cycle of these bondings. You go out and you bond these things out. We like to bond them a little bit more mature than maybe some of the other developers where we have already started some of the homes. We'll have contracts with homebuilders. Some developers go out very early. They pay a lot more money in terms of their interest costs and they constrain their overall receivables, right? So when you take a look at a residential mill, it has a fixed…

Okay. Thanks. And then just my second question, and I know it's always kind of, I guess, the elephant in the room, but it's -- I guess, is there a point where we look at our market valuation and there's been enough time that's gone by where we can confidently say this is a perpetual issue that whatever it is you guys are doing isn't translating to value for our stockholders through the main mechanism for that, which is the public markets. And with that in mind, maybe look at seeing what we're missing here or what we can do differently to go about fixing that because I look at this and it's funny, I was going through your Investor Relations section a couple of weeks ago and stumbled upon the interview with Mark Harding from I think it was 2018 with $10, $10.5, $11 stock price and much of all the great things we've accomplished, not even accomplished yet. And it's just wows me almost, to fast forward now six years and we're at $9. And you guys, on a net basis have issued more stock than you bought back. And it's just puzzling to me because there are great assets here. There's great people here and just something isn't catching. And I'm just curious, if you guys have a point where you say, okay, maybe let, let's try to do something different, let's change things up, lets evaluate this from a different angle than we have before?

Boy, Greg, you've put your finger on the pulse. And your frustration has echoed by management and the Board and I'm at a loss at the end of the day. One of the sage pieces of advice that we continue to get is, look, do what you do and continue to produce those results, continue to really execute on your business model and the market will take care of itself. And in fact, it has not, right? I mean when you correctly highlighted, the only stock that we issue are incentive stocks. And so our buyback program is intended to be antidilutive on that basis. And could we be a bit more aggressive on that? We probably could and continue to look at that metric. And really, we set our price points on the repurchase such that we're being opportunistic, but we could be buying a bit more to become anti-dilutive. But the dilutive portion of this is insignificant. And so that's not the problem. The margins are not the problem within the company. The story is not the problem within the company. And the team is not the problem within the company because they continue to execute results. So is it messaging? No? Is it performance? No. How do companies like our size company reach those ears? And how many analysts are out there looking for these opportunities and is it liquidity? Is it the volume of the stock? Is it the capacity? I continue you are, you'd be no. I mean when you look at it, our average trading shares are anemic. And then when all of a sudden, somebody comes in and said, I want to take a position, we'll get 0.5 million shares trade on a day. And so it seems like there's the ability to…

If I could, there's two things that I just think perhaps almost certainly would help, it just comes down to whether or not, I mean, you guys and the Board kind of feel the same way. And the first one is, I think that the company could absolutely benefit and shareholders could benefit. And even the people internally working would benefit from hiring an adviser and conducting a strategic review because if nothing else, it's just -- this is a collection of assets that are unique, but also somewhat hard to value. And when I look at a $9 or $10 stock price, and what that implies in terms of the valuations of your business segments, it's just -- it's not -- it doesn't make sense to me, and there's very clear benefits on the capital allocation front from buying back significant amounts of stock, and that doesn't have to be $50 million worth of stocking one shot. But there's really no reason you guys can't have a $10 million share repurchase program where you're buying $0.5 million worth a month or at least in the market trying to. And if you guys ran a process and one who knows D.R. Horton bought Vidler Water, they bought Forestar. If you guys get a $25 offer on the table, I think a lot of, well, hey, Jesus, that's something to consider. But even just internally, fully seeing this is what somebody would pay for our company if they had the opportunity to acquire parts or all of it. It would be useful in terms of then looking at capital allocation decisions and seeing, and that's the first one, and that's the easy suggestion. The other one would just kind of be clarifying some of the -- you guys are ambitious, right?…

Thanks, Greg.

Thank you very much. Well, we appear to have no further questions in the queue. I will now hand back over to Mark for any closing comments.

Thank you. And again, I want to thank all of you for your continued support and we are valued investment dollars here. For those of you that are listening on a replay, if something came up that you didn't quite get your color on. Certainly, feel free to open up and give me a call and talk about it directly. We will be having an Investor Day this summer. So as that gets a little closer, we'll start to give you a heads up on all the day, allow those of you who have been out here or have been out here a few years ago, the opportunity to see the progress that the company has made and really get a feel for what it is that we're doing and the opportunities that the company has before them. So with that, thank you all, and I will sign off and look forward to talking to you in the future.

Thank you very much. That does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.

Thank you, Jenny.

Thank you, Mark.