Pure Cycle Corporation

Greetings. Welcome to the PureCycle Corporation's second quarter 2021 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If any of you require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, President and CEO, Mark Harding. You may begin.

Thanks very much and I'd like to welcome you all to our second quarter. For the period of six months period ending February 28 2021 earnings call just some housekeeping items for those of you who are dialed in but want to follow the presentation on our deck. If you jump over to our website at pure cycle water.com on the front page of that there will be a link where you can click on to the earnings presentation and you can follow it along with us. So with that, I will start the presentation with the first order of business which is to get the lawyers out of the room or at least satisfy them and note that this is our safe harbor statement and statements that are not historical facts contained or incorporated by reference in this presentation are forward looking statements. I'm sure you're all familiar with safe harbor statements and forward looking statements. So to give those of you who are new to the company, and we've got a number of new folks who have either called in to inquire about the company or had participated in one of the conferences that we've done recently, I'll give you kind of a brief overview of the business enterprise. Then we'll drill down on some of the specifics of each of our segments, and then I'm going to turn the call over to our CFO, Kevin McNeil, who will give you guys a highlight of our impressive earnings over the quarter, or over the six-month period. With that, the company operates in three complementary business segments, a water resource segment where we own water rights in a water short area, and then develop those water rights for our own use and as a also a water provider for other customers. A land development segment where we own property in the right part of the Denver area in the I-70 corridor, which is one of the fastest growing corridors in the metropolitan area. And then a new segment that we've recently announced is a single family rental built to rent segment. And I'll drill down a little bit more specifics on that as we go through the presentation. Highlighting our water segment, We are sort of what we define as cradle to grave, where we have a large water portfolio and the water short area in a part of the country where you can actually own water as a property asset. So we own about 29,000 acre feet of water rights, and that enables us to provide service to an estimated 60,000 connections. And we define our connections as sort of the equivalent of a residential connection. And then we also develop the wells, the diversion structures off of the surface water streams that treat it, that distribute it out to the customers. We collect that back once the customer has used it. We process that through a water reclamation facility and then we reuse that water supply either through irrigation customers where we sell that water to irrigation clients or we sell that water to oil and gas customers for industrial use. So we use and reuse that water supply. We get paid two fee instruments for that. We get paid a one-time connection fee, a very substantial fee for our connection charges. We get about $27.7 for the water side and about $4,800 for the sewer side. So rounded numbers around $32,000 for our connection fees. And if you do the math on the capacity of the portfolio, that's about $2 billion in revenue. And then there's about a 50% margin in that business because we are going to build the brick and mortar, all of the infrastructure that does deliver that to all of our customers. And then we get monthly water and sewer bills. So we collect about $1,500 per connection per year combined water and sewer revenues. And doing the math again on our estimated capacity of 60,000 connections that build up, that generates about $90 million year-over-year revenue. And that's about another 50% margin business. when you're working through operating and maintaining the system. I do want to highlight this is kind of our keystone asset, our new wastewater reclamation facility. And what this does is it's 100% reuse facility. It takes 100% of the wastewater that comes into that facility, treats it back to a standard that we can reuse that for outdoor irrigation. And Colorado has some very specific regulations that govern the reuse of that water supply for parks and open space irrigation. So we do do that. We have dual distribution system within the Sky Ranch community that allows us to deliver that directly to our parks and open space, as well as bring that back to our storage facility for use for our industrial oil and gas customers. This is a little bit about our customer connections and an idea of where they are, where they're coming from, and sort of their projected growth rate. And so we've got a growing customer base, although if you look at our capacity at 60,000, we're at a very, very small number. We're just beginning in terms of our customer growth, but we are growing quite rapidly year over year on our connections, both due to what we're doing at Sky Ranch as well as our other service areas. In Albert county, which is a project that we acquired the service to a couple of years back that we provide both residential and commercial connections down into Albert county on that. So if you take a look at this as kind of a projection build out of just the 5000 connections for sky ranch and we're kind of projecting that over the next eight or nine years. Moving on, kind of a graphic that illustrates the growth in our investments in our water utility assets. So we continue to add to our portfolio of assets that deliver that service, both in terms of the infrastructure on the diversion and all elements of that storage, distribution systems, those sorts of things. So this will continue to grow. This will be that 50% capacity that we use to invest those TAPIs into the brick and mortar of the utility segment business. I want to spill over into the second segment, our land development segment, which really incorporates us as a master plan developer in the Denver metropolitan area. We acquired about 1,000 acres of property a number of years ago. We acquired that at the right time. You always want to buy right, but acquiring raw land in the middle and the depths of the The Great Recession certainly took a lot of courage, and we're grateful to our shareholders and our board for the confidence they place in us for making those investments, but it was a good buy. In total, the project can accommodate up to 3,400 residential units and a couple million square feet of commercial development. And when you equate out that commercial development in terms of SFEs, we're projecting that to be in that 1,600 single-family equivalents on the utility side. And so that metric will come into play a little bit later as I detail what the build-out capacity of Sky Ranch is. But we believe that that build-out capacity is around 5,000 single-family connections. And we equate that both not only in terms of the utility segment, but also on the real estate, what we look to realize in terms of the revenue potential on the real estate. Highlighting a little bit of our successes on this, we started our first phase, which is about 509 single-family lots, and we did that about 18 months ago, almost two years ago. We've got just shy of 300 residents out there now, a little over 100 homes under construction, and so that has exceeded the expectations of both our builders as well as our models, and it's mostly been because of the product. We have an entry-level product out here. It's one of the It is, I think, the most affordable master plan community in the Denver metropolitan area. If it's not the most affordable, it's among the most affordable master plan communities in the metropolitan area. We're projecting that the available lots in this first phase will be sold out by the end of this year. our full revenue on the lot deliveries of about $37 million to date. And we've recognized about 11 and a half million of tap fee revenues to date. That total should inch its way up to about 14 million as the balance of taps are applied for by each of our builders. And these are three production builders in our first phase. Moving on to kind of highlight a little bit of our second phase, we've got about 900 lots in our second phase. So about twice the size of our first, phase. We broke ground in February of 2021, and our dirt crew is out there grading our first phase of these lots right now. They're about half through grading the first 230 lots, so we hope them to be done in about the end of May timeframe, and then we'll mobilize all the utility crews and start to deliver lots later this year. If you take a look at our lot revenue for phase two, we did have a a substantial increase from our pricing in the first phase, mostly just because we were looking to break into the market in our first phase, and we're getting into a little bit more price metrics here where we had about a 30% increase in our overall lot costs, and so we're estimating lot revenues about $72.6 million. This phase has a number of different product lines. Our first phase was pretty homogeneous. We had single-family detached lots, which were anywhere from 4,800 square feet to 5,200 square feet. They're either 45 or 50-foot lot frontage. Pretty standard lot delivery for our production builders. And this one will have a number of different products. We'll still have those same 45, 50-foot lots, but we'll have paired products, a townhome product. We'll have a duplex product. We'll have some alley loads in both the 40-foot sizing and the 35-foot sizing. So it'll be much more attractive to a broader range of buyers. So when we look at the absorption on this one, we don't look at it necessarily by the builder, but we look at it by the product class. And we have six different product classes in this next phase. Cap fee revenues, again, are here, illustrated about $21.5 million, and then the reimbursable costs at about $48 million, which we get back through reimbursements from the local municipality, the Sky Ranch metropolitan districts of the Sky Ranch Community Authority Board. Doing some math for us all here. This is kind of an illustration of both how filing one stacks up, how filing two looks to project itself out, and then what the balance of it's going to look like. And the balance is really taking the remaining $3,600, which we convert that $1,600 commercial lots into residential lots. And so those That forecast here is going to have the same revenue projection that we would have at a residential level as well as the same cost projection. We think we're going to do better than that because I think commercial land is more valuable and it has certainly more efficiencies on delivering utilities to it. But for comparison purposes, this kind of gives you a feel for what's the pedal left in Sky Ranch. And so if you're looking at this, we've probably got about another $150 million in total revenue over, say, $65 million. So we've got maybe $80 million worth of margin in the phase two that's available. And then the next phase, that can carry us up to a little over $600 million with about, call it $150 million worth of costs in there and some of those efficiencies in there in terms of the tap fees, and the lot delivery costs. So very attractive margins in what we're looking at for the rest of Sky Ranch. And so, you know, that comparison, each investor can kind of take a look at that from a discount factor. But, you know, if we're projecting that over, say, the next 8 to 10 years, that will give you kind of an analysis of how fairly the stock is priced. Moving on into our new discussion topic. And I do want to spend a little bit of time on this because this is exciting for us. It's a build to rent. We're actually going to contract with our portfolio home builders to be able to build these homes for us so that we can continue to have them be our builder. And if we're not competing with them, we really are just saying we're going to hold back on this lot and then we're going to be your first customer on those lots. So as they're building on the blocks that we reserve these lots for, They have the opportunity to be able to come in and build for us on that. And really, it's a nice model for us because it allows us to capitalize on the highly appreciated land cost as well as the longstanding investment that we have in the utilities. And if I look to try and highlight why we think this is important and why this is a good segment for us, this is kind of an illustration of some of the demand statistics about how home values continue to go and then the constrained inventory that we see in terms of home prices. And then we also see a significantly constrained inventory of entry-level home prices here in Colorado. If you took a look at these statistics before the recession, roughly 50% of all homes that were started in the Denver area were in that entry-level product category. And today that number has fallen to less than 4%. So tremendous demand for what it is that we're doing out there. And then just some statistics about, you know, the price appreciation of the home values, you know, the competitive listings. I think you've all seen the headlines about, you know, every time you list a property, you're getting above, you're getting multiple offers above your asking price. And so what that tells us is, their significant appreciation for these lots and how we translate that. We're looking at why Sky Ranch, the Denver population continues to be among the top in the country in terms of urbanized areas for residential growth. We think the Sky Ranch, our entry price product is the right location. We've got a tremendous land plan that that incorporates parks and open space and a new charter school that we've approved or that our local school district has approved and we've been working with them for a number of years to really bring that investment into the community. And then the commutes to employment centers. So Sky Ranch is the perfect location for something like this particular model. And how we look to capitalize on that is to take a look at you know, we're able to deliver the vertical side of this for about $300,000, a little bit more than $300,000 on a $450,000 home. So that's the incremental cost of the investment into the build to rent as compared to just selling the lot and the tap. And what we were able to do is line up attractive interest rates for that additional cost. So when we took this opportunity to our board, they said that we might consider it, but you can't use any of our cash, and you've got to find a way to be able to fund the incremental component of the vertical cost, which we were able to do with that mortgage-type money. And so we've lined up some financing for about 3.75 for this bill to rent, And then if you look at the metrics on it, if we're renting that out as a $450,000 home, we've got a rental income there at about $2,800 a month. And so that generates about $33,000 over the year. And then we've got our costs in here. But what this ultimately does is it has positive cash flow to us of another $15,000 per single family connection. And when you add that to the $1,500 single family connection on a utility model, this becomes very accretive to the income statement. So the advantage on this bill to rent, if you take a look at the next slide, it allows us to be able to grow both the balance sheet and the income statement. So the positive accretive cash flows that are going to be recurring cash flows to the income statement of $15,000 per connection and then also taking a $450,000 market value and seeing that continue to appreciate. And so if you show just some modest depreciations on those home values, you've got a great asset appreciation. So we're gonna kind of add this to the portfolio with our second filing here, and we've got about 100 lots reserved for that. It'll be incremental, so we'll have, you know, start out with a dozen that'll be in our first phase. We'll kind of roll that forward as each incremental phase. And we were also able to add three new lots to our first filing. So we are actually under construction for our first three units of that. And so as we continue to update you on that, and one of the things that we'd like to do is also try and have an investor day here this summer where we, as we can all open up and travel, for those of you that are out of town, have an opportunity to come out and see not only the successes of our first phase, see the construction of our second phase, see what we're looking at in terms of our build-to-rent units as well, and then more on kind of the water utility segments and some industrial and gas activity as that's kind of inched its way back. So there'll be a bit more information about that as we come a little bit closer to the summer and get some dates that will circulate out to everybody. So with that as a lead-in, I do want to highlight the fact that there still is an attractive oil and gas opportunity for us to sell water to oil and gas operators. You know, there's been a significant investment into this field that's been de-risked, so they do have a very strong understanding of the production efficiencies of this field. And there's thousands of wells that are looked to be drilled in here. And we continue to see an increase in the amount of water usage per well, so our current operator is using about $250,000 worth of water for each well that they have in this capacity. And really what they look to do is try and stay ahead of the growth of the metropolitan area. So they're going to be working their way from sort of the west side of this map over to the east so that they can maintain the spacing, the setback requirements the state of Colorado has. And Colorado has had fairly dysfunctional relationship with oil and gas, but I think they've come into a fairly workable framework for operators to be able to get what they need to get done and be at safe distance and set back requirements for residential communities that where they're encroaching into the residential community, there's an expectation that they'll be in a safe operating distance. And so we find ourselves in a part of the formation that's attractive but also where development hasn't quite come out to that yet. So I think there's a good relationship and we find ourselves kind of in a better part of that field for operators. So we do have a rig that was relocated here this spring and is drilling additional wells. And so we will continue to deliver water for them and you'll start to see that on our income statement as we go forward. Okay, so what I'm going to do is move over to the financial results here, and I'm going to turn the call over to Kevin McNeil. He's our CFO, and he's been kind of really working this side of the company and optimizing what we're doing on that, and I'll let him highlight what we've done.

Great. Thanks, Mark, and welcome, everybody. Thanks for joining us this afternoon. I'm going to highlight a few items. We won't go line by line, obviously, on the balance sheet or P&L. On the slide we're on, the current slide we're on, 23, the top three graphs really show you those three major items, revenue, gross margin, net income, and where we're at in the six months ended February 28th compared to the last couple of years, really to give you a gauge of how we're doing compared to where we were the last few years. The bigger item I want to highlight is the bottom section, and this is related to the reimbursables. As we've noted in prior calls, Up until now, we've felt those reimbursables were contingent, the payment of them, and so they weren't recorded on our books anywhere. We were waiving and deferring some of the recognition of interest income and project management fee revenue. But this quarter going into the current year with the development, second development filing progressing, the mill levy changes, growing and sustained tax base from the first filing, we did analysis and determined that that was actually collectible. And so now we believe under U.S. GAAP guidance, it's considered probable that we'll collect this. Based on that, we were able to recognize about 19 million of other income related to the reimbursables, along with 1.5 million of project management fees and 1.4 million of interest income, which really lines this up with what's really occurring and gets us back in track and gets our gross margins more in line with what was expected and what is truly going on in the first phase. Progressing to the next slide, I'll just highlight a couple of items in the balance sheet. With cash, we're maintaining a pretty good cash balance. You'll see that start coming down the next quarter as we continue with development of the second filing, but then we'll start getting some milestone payments. The next slide is the income statement, which obviously will show up in our 10-Q, which will be filed tomorrow morning. I'll highlight just a couple of items. You can see for the six-month ended, February 20th this year versus last year, our metered water usage is up about 100,000, which is really predominantly due to the Sky Ranch growth. There's about 300 homes built out there, as Mark pointed out earlier. There's some additional fracking revenue from oil and gas operations. And then the one that's the big decline is obviously the lot fee revenue, which that's come down because filing one is substantially complete. All those lots are sold. bonds getting going, we expect those revenues to start being recognized later during this year as permits or as PLATs and light utilities and everything getting sold. So that was really it. Obviously, as we get to the end, there's some questions and answers. And if you have any other questions, you can feel free to reach out to Mark or myself. And with that, I'll turn it back over to Mark.