Pure Cycle Corporation

Good morning, ladies and gentlemen, and welcome to the Pure Cycle Corporation year-ended 2022 earnings call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Mark Harding. Sir, the floor is yours.

Thank you. Good morning, everyone. I'd like to welcome you to our year-end earnings call. Just a few housekeeping items. We do have a deck for this call. If you log into our website at purecyclewater.com, there'll be a link over to the investor page, and then there'll be a tab on that page that allows you to join. So click that join button, and then I'll be able to advance the slides through the presentation and you'll have the deck on there and then the deck will also be a PDF of the presentation will be on the website for reference on You want to get into reading it in a little bit more detail? With me today is both Kevin McNeil who's feeling a little under the weather So he's going to take a listen only mode on that as well as Dirk Lashnitz who handles all of our land development activities and so Other than hearing from me, you'll have a chance to hear from Dirk on some of the land activities and our successes in that area as well. So with that, I'd like to just start with the presentation. And the first thing we need to do is talk about our safe harbor statement, which is that historical facts not contained or incorporated by reference in this presentation are forward-looking statements. I think you all are familiar with the forward-looking statements in the safe harbor statement, so we can get the lawyers out of the room. I'm going to really kind of breeze through some of the overview of the company. Most of you are going to be familiar with the company, and if you're not, certainly you can go back and take a look at this portion of the presentation in a little bit more detail. There's a ton of information about the company on our website, so I encourage you to spend some time there and take a look at the resources that we have on the website to give you a little bit more insight specificity to what it is that we do, but really we have three operating segments and they're all very complimentary really at the foundational level. We are water and wastewater resource company. We own a large portfolio of water in a valuable part of the country where you can own water. We develop that water cradle to grave to provide water service to customers. We have land that's in the right location in the Denver metropolitan area along the I-70 corridor that we're developing a master plan community on. And then we hold back some of those lots that we develop for our home builder customers and we keep them for an opportunity to build homes on them and enter into the single family rental market where we continue to have an ongoing cash flow from an appreciating asset that provides terrific margins for us because we're able to carry forward the equity value that we have both in the land and the water utility segment. So I'll just briefly talk a little bit about each of the segments. As I mentioned, the water, the wastewater segment, we develop the wells, diversions, all the water supply. We treat that water supply. We distribute that to our customers. We get two fee instruments for this. We get a connection fee, which is referred to here in Colorado as a tap fee. And our water tap fees are right around $28,000. Our sewer tap fees are right around $5,000. We have the capacity to provide water and wastewater service to approximately 60,000 connections. And then as we have those connections signed up to the company, we get ongoing water and wastewater revenues each month. So we have monthly water, wastewater service bills to that. That generates about $1,500 per connection per year on that side. We collect that wastewater back. We process that wastewater onto usable water supply for our outdoor irrigation or our industrial water supply customers. And really, we have a water, you know, a very tight water balance system where we're taking our water supplies, whether they're groundwater supplies, surface water supplies, bringing them into a treatment system. sending that into the customer. We have some of that use that's going to be outdoor irrigation, which results in a bit of a loss, but we do have mechanisms for recapturing that in terms of the water rights systems. And then we also take and reuse that system and then are able to reuse that into our industrial customers. So really are investing into a sustainable water balance system for the company and for our customers. We continue to grow our infrastructure asset base. So, over the last 5 years, you see almost a doubling of our investments in our water investments and water infrastructure. Really cross the board with wells, transmission lines, storage, treatment facilities, all of the distribution facilities, and then the wastewater treatment facilities that reclaim that water supply. Water growth, so we have existing areas where we're growing our customer base. One of those is new residential connections, whether that's going to be in our master plan community of sky ranch, whether that's going to be commercial users, both in sky ranch as well as another. Service area that we have a little bit south of the sky ranch area called the wild point service area. and then existing industrial customers. So we continue to grow our customers year over year. We're right around 1,000 connections to the systems today. Another important customer that we have is our industrial customers. We happen to be on a very prolific oil and gas field that sits right on top of where our water supplies are. We have multiple operators that are developing the field in this area. multiple formations, and so we distribute raw water and reclaimed water sources to our oil and gas customers and generate high volume of water supply as well as high volume for selling that water to our customers. And really had a record year this year in selling water to the oil and gas segment, and that's largely a function of the price of oil, the regulatory climate in Colorado kind of settling down, operators being more comfortable with how they're operating within the heightened regulatory climate that Colorado offers them. One of the things I'd like to highlight is kind of where we are geographically in the Denver metropolitan area. As most of you know, we're along the foothill areas, and we might as well be along an ocean because we really can't grow to our west, the mountains, and we have a geologic barrier there that prohibit really any substantive growth in the Denver area. And so really, we're constrained to really a 180-degree semicircle for growth activity in the Denver metropolitan area. If you looked at the map over on the right side of this, The difference between the orange and the green there, you see a really green line there. That's Interstate 70. That's the east-west transportation corridor in the Denver metropolitan area. And then we have belt loops. You can see the 470 belt loop. Right at the top of that is going to be the Denver International Airport. So our Sky Ranch project is four miles directly south of that. And then our Lowry Range service area, which is that large pink area, And this kind of gives you a feel for where development has grown in the Denver metropolitan area, not only to the Sky Ranch property, which is our master plan community, but also opportunities for the Lowry service area and being able to take a look at new development activities in that Lowry service area. So that's kind of give you a perspective on kind of where we are positioned in the residential area. I'm going to turn the call over to Dirk. He's going to give you a bit of an update on our land development segments and all of the exciting activities that we have in there. Dirk, why don't you go ahead and take it over. All right.

Thanks, Mark. Good morning, everyone. Land development, this is the SkyRange project, our master plan community. This information is probably a little old hat, but it will stay the same for the duration of the project. So see this slide is information for the next several years to come. So Sky Ranch is 930 acres. We can accommodate up to 3,200 residential lots, about 2 million square feet of commercial development.

Go to the next slide here. All right, so again, a little old hat, our first phase,

Phase of the project kicked off in earnest in 2018. I think it gives a pretty good frame of reference for the overall project and sort of a basis. So this phase encompassed 509 lots. This is wrapping up as we speak. If you can look at the top right-hand corner of the graphic on the page, you can see the last little bit of homes under construction right now. So we're finishing this project off, phases of the project off. We've sold all our taps. All the homes have been started. Last few residents are moving in. We've turned over all the infrastructure to the respective jurisdictions. We've collected all our lot revenue. That's the $36.7 million. That's for our lot sales. $14 million for our taps. We also did a bond on these on this phase in 2019. That was around $11 million, $13 million, something like that. And then we have some reimbursable costs accruing out here on these for future.

All right, so then we move over into our second phase.

This is the most current phase right across the street to the east. What you're looking at on the graphic, the lots are down in the right-hand corner, and then the upper right-hand corner is our school. So the biggest difference on going into this phase is we really took a new look at our land plan out here. You can kind of see the layout of the phase one versus the phase two. Changes pretty significantly we introduced some some new product lines our first phase that basically two product types and in this next phase we we went up to six and we really our first phase we inherited with the project and in the second phase we really took a deliberate look at how we wanted to plan this out our Motivation was largely density. Our first phase, we were looking at about three houses per acre. And if you carried that through our whole project, we really would fall short of what the whole project did, the capacity for the whole project. It would not get us up to that 3,500, 3,200 lot. So trying to incorporate more density into the project going forward. We got that up to about five or six houses per acre. And that density really helped us from a bonding standpoint and helps us on our water usage standpoint as well. So we have, like I said, some new product lines in this neighborhood. We added a fourth builder, so trying to find the right balance of Number of builders was it going to be you know three like our first phase or was it going to be six or we ended up with four builders in this phase we felt like that was a pretty good sweet spot and in our analysis that that was where we felt the best yield was so four builders in this phase it's important they got the purple lots challenger homes they are in some of the light green Lenar is the blue lots and KB is the pink lots. And each one of those builders has a unique, at least one unique product segment and then there's a little bit of overlap to get to the six. So they're competing on one product type. I think in the future we'll carry this same concept through, at least through the build-out of our second phase. So what you're seeing here on the first page is the first quadrant. This is one of four. So this concept repeats itself three more times in the second phase. And then we have our future phases, and we'll analyze whether it's a good concept and whether we carry this through. And then there's some opportunities for some other product segments as we go forward in the overall community. Those would be like a multifamily attached product and then possibly some active adults.

So we've got a lot of revenues in here, 70 million.

I think that's up from our first phase on a per lot basis by about 15%. Threw in reimbursables in here, and then we did another bond in 2022 on this Phase 2. This was the 850 lots. And that was a $29 million bond on that. And that, again, was up from our first phase. We saw some good appreciation going from Phase 1 to Phase 2. So this next slide just kind of shows a breakout of the four different quads that I mentioned. So if you look at that center pie chart there, those different colors represent the six different product types that we're building. The next pie chart over to the right, that's our builder segmentation. So I think we got a good parity across there, a good distribution of product types and a good distribution of builder lots. And you can see the numbers of each phase. So 2A was that on the previous slide that represents that first quad that we're building there. And so these will roll out roughly year over year. So 2A is underway right now. And actually that's nearing completion. We have received all our lot revenue, less a few little outstanding items here and there. then we're we'll move into our next phases as we move through that mentioned the school so this this is a view looking towards the west so more towards the left hand of the screen you see the streets stage of completion for the for the phase 2a there's one little model house in there that's a challenger house there this was a a few months old we got a significant um significantly more amount of vertical construction going on there but the uh on the right hand side of the screen you see the uh graphic layered in there for the academy um the charter school for sky ranch and we are in sort of the center of the screen there's the gray h-shaped um object that that's going to be the elementary school that is that has started construction. They've built that foundation and they're going to go vertical on that here in just the next couple of weeks. So that's pretty exciting. That'll open next fall as a K through seven, and then they start to add years. And a year later, we go over to the high school phase, which is the E-shaped gray structure.

That'll come online subsequent years.

All right, real quick, talk about some market conditions that we're seeing. Everybody's pretty attuned to this right now. This slide's a little funky here. So we're in a contracting market. Some experts are calling it a housing recession. So some quick indicators, you see these all over the internet. But I pulled out a couple of key metrics here. Our new home sales across the country are down 17% year over year. New home, I'm sorry, mortgage applications are down 40% year over year. And our builder confidence levels are down for a 10th month in a row. So I'm watching those sort of sentiments. To talk about interest rates, we had a pretty abrupt uptick in 2022. It went from basically 3% to 7%. And looking at those interest rates kind of across historically, we're not crazy out of line. If you go back through the decades, from the 70s, we had about an average interest rate of 7.76%. 1970 so you know in the 80s some of us remember we we hit that 18% mark in the early 80s but they've been right around that that 7% for for the last half century or so and then our material and labor costs we're seeing so typically we would see probably a couple of percentage point increase year over year That's something that we build into our contract and anticipate. So that's pretty typical. But just the last year, our material labor costs have been up 20% over last year and up 40% since the start of the pandemic. So those are affecting our builder partners and how they can sell a house. And kind of the net of that is our... Our product costs are up, and our customers' buying powers are down. That's kind of the bad side. On the good side, we still have seen a strong demand for new home sales, just as a comparison. We peaked in the 2005-2006 time period. We were producing about 1.4 million units a year, new houses per year. And in 2021, this last little run-up, we were only hitting about 600,000. So there would appear to still be some pretty good capacity in the market there. A couple other positive indicators are average days on the market for a home. Typically, we see like a 60, 90 days on the market. So that's seasonal. So in 60 days in the high selling season, which is summer, and then 90 days takes a little longer in the winter. And just to know we are on the downward trend on that right now going into the winter. So our current sales cycle is on the way down. And then it starts ticking back up late winter, early spring. So that's typical, but we're currently seeing like a 30, 60 base on the market. So that's going in the positive direction. We are still seeing positive home appreciation. It's less than what it was, but I think a lot of us were seeing or inclined to think that that appreciation was probably pretty unsustainable. So that's coming down a little bit. could be seen as a pretty positive thing. Short-term mortgage options, we're starting to see some creativity on the lending side to help compensate for the other increased costs. So doing these 2-1 buy-downs now, so figuring out other creative ways to help our buying customer. And then still seeing the low unemployment, especially here in Colorado. So our takeaway is that a correction is necessary and hoping it's not going to be a collapse. So market's kind of recalibrating on all fronts for that correction. And out of Sky Ranch, what we're looking at doing is re-evaluating the timing on the next set of lots that we deliver to our builders. So as those builders see a slowdown in their sales and when they'll need to take the lots on from as far as that next phase, that'd be our phase 2b. Next slide, just a little bit more graphic representations of some of the market stats. First ones are housing supply, lending standards, hopefully significantly different from the 2008 recession, some of those loose lending standards there, and then not seeing any foreclosures really at this point. So that's a good sign, and that unemployment back is a function of that. I'll turn it back over to Mark.

Great. Appreciate that. Thanks, sir. So I want to talk about our last business segment, single-family rentals. More recently, we've added this new business really through retaining lots in our master plan community. And so we want to develop these lots into single-family rentals mostly for the appreciation that we're getting and seeing in the master plan community. We're actually causing that appreciation as we do What we do well on the development side, creating a nice place of home on that, we see a significant increase in value for those. And then it's a great opportunity for us to continue to invest in the company and provide ongoing cash flows. So, we really like that complement to our water and land development activities. And so, we're going to continue to see some more activity there. Some of the specifics on this are, you know, the trends in the consumer preferences. Home versus apartments. You know, we have a significant recalibration of consumers seeking more space rather than location. Affordability is a key driver in this area. And as Dirk mentioned, we've really concentrated in a broader product class. We've got more, we've got paired homes, we've got townhomes. Those are all going to be delivering at an entry-level price point that's going to be more flexible for the consumer. as well as for the renter. And so we have a number of different product offerings so that when somebody comes to us with an interest to rent on a single family home level, we have everything from a large four bedroom home with a den to maybe a two bedroom home that would be in a townhome type product. So those price points will be flexible for all sorts of customers in there. And really a continuing strengthening of market for home rentals so we like that on both a local and national trend for the single-family rental market this is just some of the statistics on our single-family rentals and how those cash flows come to us and so if you take a look at it on an average home you know we're generating about thirty three thousand dollars in an annual revenue income this is a little bit of our operating costs which are going to be our taxes and our dues and then appreciate the Interest cost depreciation expense and then when you're adding back those cash flows, we end up getting very high margins in this thing. So we are able to carry forward the, uh, the. Equity value of the land and water in the rental segment to provide those free cash flows to us. So we really like this segment. We're going to continue to invest in that. We have currently four rentals up and available. We had three last year. We just added one this week, actually, and we have another 10 under construction. So, to give you a bit of metrics on what we're looking for on carrying forward that into this next phase. Again, the diversity of the product makes this, this is phase 2A. So, if you look at what we're getting In terms of our products on what we've sold to our builder customers, we're also retaining some of those for our own purposes. So we have duplex homes, we have small 35-foot alley load product, and then we also have more of the same product that we had in the first phase. And our rents are going to range anywhere from slightly less than $2,400 a month to $3,000 a month. Great opportunities for us on the single-family rental market. I want to drill down on some of the specific financial highlights. We've had a fantastic year. As you saw from some of our press releases, continued execution, continued growth in the water and the wastewater segment. We continue to invest in that. We have around $67 million in water asset capitalized costs. Again, we continue to grow that segment. had a little opportunistic acquisitions in that area, so we purchased a little more water that was regionally in an area that was located for some other water rights that we had. Water has never been more relevant. I know that many of you, I'm sure, have seen all of the press about western water and the supplies on the Colorado River. Most of our supplies are not on the Colorado River. They're more on the Platte River. We've had a relatively normal water year, but water continues to be one of those high-value investments and those highly sought-after opportunities. So we continue to look at that. And then water deliveries, we had a record year in water deliveries, over 400 million gallons of water deliveries, generating record revenue for us in that segment. Excuse me, I got a frog in my throat. So continuing with our land development activities, as Dirk was highlighting, we've delivered 100% of the phase one, both in terms of the water and the land development revenues. On phase 2A, we're about 76% complete on that, maybe a wee bit more than that, and really have delivered all of those lots to our home builder customers. As we also highlighted, we had another bond reimbursables to recover some of those public improvements that we continue and invest in, not only carrying forward some of those from phase one, but also some of those in phase two. And then we continue to generate very nice gross margins on our lot sales when you take a look at both the lot sales as well as the reimbursables that come back to us on that. So very high opportunity on the land development side that has generated record liquidity for us. We've had some outstanding execution and really very low exposure. You know, our business model here is allowing us to be able to develop this infrastructure and deliver that in real time. So neither we nor our home builder customers are exposed to anything other than what we've delivered. And the opportunity for us is really to continue to partner with them on market demand forces on that. And then the single family rentals, uh, again, continued growth in this home rental market. So, uh, we like very much delivering more homes in that area. Take some, uh, some highlighting, some financial metrics again, uh, you know, revenue, we have about $23 million in revenue. Eight of that came from water and wastewater. And then 15 of that came from primarily our land development segment, uh, great growth in our net income. Uh, as you can see, from very modest means as we started this endeavor in 2018. That big highlight in 2021 was kind of an accounting recognition issue of being able to be comfortable with recurring or recapturing those public improvement investments. So those are more real-time recognized revenues as opposed to accrued those And then recognize some of those in previous years into that 2021 area and then our margins continue to improve. So. We're very proud of our team and the ability to continue to execute on both the water utility. The land development segment, then we look forward to continuing to highlight as it becomes more material, the single family rental segment. Again, more asset growth, you know, we continue to. invest in our assets, water, wastewater, water rights, and then ultimately showing you record liquidity right around that $35 million of cash and cash equivalents for year-end. So an outstanding year for us, and we're really proud of kind of how this was timed out for us. So we're in a very good position as we're taking a look at being opportunistic on some of the investment side. We want to talk a little bit about our ESG initiatives. So we've hired an ESG initiative specialist who continues to really develop our documentation for ESG activities. We want you to be on the lookout for that. So we'll have our first annual ESG report coming up later this month. We'll post that to our website. So be on the look for that. We want to be on the forefront on some of this. disclosure and this documentation, both from an SEC guidance standpoint, as well as what the NASDAQ exchange are going to be looking for. So you will see significant documentation and really how the company perceives that. It's a high initiative for us. Things to look for specifically are assessing, tracking, and disclosing energy management uses, network efficiency, water usage, water recycling, wastewater collection data, those sorts of things. We are going to track and assess employee satisfaction, water affordability and access, staff diversity, all those sorts of highlighting issues, and then continue the board diversity matrix as required by NASDAQ. So you'll continue to see more on that. A little bit on some of the highlights here. Balance sheet, you know, terrific balance sheet, $35 million in cash, very low debt position, low debt position at, you know, some favorable interest rates. So we locked in a lot of that financing at those four, you know, four and a half percent interest rates. So those have worked well for us. Total revenues, if you take a look at the income statement, again, $23 million. for 2022. And then, you know, nine, almost 10 million in net income, 40 cents per share on a diluted basis. I also want to talk a little bit about some other tools. So, we are adding a new tool to our box through a board authorization for a share repurchase program. And And really looking at this as being kind of the anti-dilutive nature of it, we are very, as many of you know, we're very hawkish on our denominator and our capital currency. We have not raised capital through the sale of stocks since we acquired Sky Ranch back in 2010. And we're very modest on our stock option plans. We do want to incentivize our employees to be owners of the company. And so this is an important component of that. But you know, we're also being opportunistic to invest in ourselves. And so this is an authorization that the board took as an opportunity for us to take a look at some of our liquidity and take a look at some of the market valuations and the disconnects that maybe we believe that the market may perceive compared to what our intrinsic value is. So you'll see a little bit of that, and you'll see that disclosure as we move take advantage of that through the next several quarters. A couple of upcoming important dates, proxy statements and proxy cards will be mailed out on December 2nd. We'll have an annual shareholder meeting in January. So this year's meeting will be January 11th. And then again, the ESG report initiatives will be later this month. take a look at kind of our leadership. You know, we continue to have very solid leadership, both at the staff level as well as the board level. You know, we have a, we're highly complimented by just an outstanding intellectual capital within our board of directors. And so they provide great governance and great direction for us on an ongoing basis. So I couldn't be more thrilled to have their continued leadership and scouts. Okay, before I finish with my closing remarks, let me just give you a bit of a recap here. You know, we had a terrific year delivering lots that really were on schedule and in budget. We were able to generate significant liquidity through the sale of the cab bonds. And really, that was a direct result of our excellent credit quality, how we develop, how we do land development, the opportunity for us to invest and then be reimbursed. Those That business model really paid dividends for us, not only delivering these next set of lots in a real-time fashion, but also being able to recapture some of that liquidity through a bond offering. And really, how do we know our business model is working? Because when you see markets shift like this, neither we nor our builders are overly exposed. have tightened their budgets for 2023, but we're one of the few developers that actually are providing finish lots in this market, and providing them at the entry level, where everybody wants to be. Prior to, and I'll give you kind of a dynamic here. Prior to 2007, prior to the recession of 2007, the Denver market here, home starts and entry-level home starts represented about 50% of the overall market. you really had a concentration of builders and developers really pursuing that first-time buyer market. And that number has fallen to closer to 5%. So we have an affordability problem in Colorado, and that's primarily because of a number of reasons. And really, Sky Ranch is one of the few projects out there that's delivering lots for home builders in that starter home market. The demand for housing in Denver remains strong. So we're well positioned at that entry-level market. We're selling, you know, homes. Our home builders are selling homes to new buyers versus a trade-up buyer. You know, new buyers that, you know, will have to get comfortable with what is going to be this recalibrated mortgage. The anomaly isn't 7%. The anomaly was, you know, 4%, 3% mortgage. I think that 7% number, as Dirk highlighted, is really more of a traditional average on that. And then we're not really selling to buyers with an existing rate, right? They're not a trade-up buyer. These are new buyers in the market. We have a lot of optionality in this company and terrific balance sheet, great liquidity to make disciplined acquisitions both in land and water. And now with our new tool in the box, we can invest in ourselves. So we're very delighted to have the liquidity that we have right now. And, you know, we'll continue to look at opportunities to continue to grow the company. So with that, I think I'll turn it back over to Ali and see if you all have some questions that we can drill down to and answer some specifics.

Thank you. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star one on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions. Thank you. Our first question is coming from Bill Miller, who is an investor. Sir, please go ahead.

Hi, Mark.

Good morning, Bill.

I congratulate you on a great quarter, and I'm just curious about a couple of things. One is your acquisitions that you alluded to, and where are you on any big further land acquisitions along I-70 or anywhere else? And secondly, the home rental market is obviously a home run for you. Are you going to expand beyond the 10 a year or whatever number you have? Because that's certainly your highest return investment opportunity you have. So will you reallocate resources there? And finally, are you going to stop at $200,000 or are you going to go beyond that? And how aggressively do you plan to pursue that at this price?

Yep. So let me take them in the order presented, if I can remember that. So on the land acquisitions, we certainly do have a high degree of interest for that. And as we've talked in the past, you know, we're very, I think we're very well known in the market segment. You know, we have water, which most of these surrounding land interests do not have water. So the intrinsic value of us being able to acquire a piece of land, add our water to it, does add value in the equation. And while we have not broken any of those three yet, we are seeing a lot of movement in this area. So we're very interested to continue to pursue that. We're very active in pursuing that. And we have a high degree of liquidity to pursue that with. So we very much like that optionality and being able to do that. As you see, we continue to try and do some tuck-in acquisitions on the water side. I'd say our preference would be more land than water, but when water is available that we have that's going to be located near where our existing supplies are that makes sense for us to add, we'll continue to do that. And taking a look at the single-family rental market, that's also a great opportunity for us. And what we're looking at with our builder partners is, They've all done very well. You know, we're concentrated in the right market segment of that at the entry-level home. Each of the builders did very well in phase one. We're continuing to roll that forward. And really what we want to try to do is if somebody finds themselves to be overweighted in that segment, that may be an opportunity for us to take some of those lots back and continue to invest in that single-family market. Yes, we are interested in doing that. Currently, all of our lots are under contract, but this is one of those opportunities. So you may see us continuing to invest a little bit more in that area in phases 2B, C, and D. So those are opportunities for us. As it relates to share buyback, you know, one of the things that the board is very cautious of is, you know, we want to make sure that we have that optionality in investing in all elements. of the company, water, land, and our own currency, to the extent that the market continues to have a disconnect there. Can I attest to 200,000 shares? 200,000 shares was picked because it was an anti-dilutive number, but we'll wait and see. As you've seen, and Bill, you've been with us a tremendous amount of time, You know, the stewardship and the governance that we have are very disciplined. You know, we take a look at these things incrementally. We see if they're working. And then where they are working, we continue to reinvest in those areas. So, you know, this share buyback was, you know, very, very well thought through through a number of quarters. And, you know, it's an opportunity for us to continue to. invest in our own currency. So I can't give you any more specifics other than that. Other than you kind of see our past performance and our history of how we do things thoughtfully, carefully, and then we continue where we see successes. So those are going to be our metrics that we continue to roll forward.

Mark, how big a portion of your company do you want the rental business to be?

It's a good question. You know, if you take a look at the 3,200 single family lots out there, you know, a good growth target would be somewhere around that 12 to 15% of that market can be in our portfolio.

Okay. That's going to be a big business for you.

That is going to be a good business for us. And, and, and, Much to your point, you know, I mean, it is one of those things where that asset continues to appreciate, you know, our customers paying down the vertical cost of that through the mortgage rentals on that. And then it also provides cash flow to us. So it's going to be one of those, you know, it is a win-win segment. And it's one that we actually have a reason to be in. You know, if you take a look at us being in the business just to be in the business, I would say it's a good business to be in, and a lot of money is going towards that segment. But given the fact that we are able to carry forward the equity value that we have in the land and the equity value that we have in the water, it's a highly tax-efficient mechanism for us to invest in. So we're carrying that forward, and it's appreciating. And so if it turns out that we find a great acquisition and we've got a few hundred people homes that are out there, that can be an opportunity for us to spin that off and use that as monetizing for another land acquisition that might be a bit above our punching weight at the time, and then continue to grow that back. So there's a real flex there for us on that business segment.

Sounds terrific. Thank you.

Well, thank you.

Thank you. Our next question is coming from Jeffrey Scott with Scott Asset Management. Please go ahead.

Hi, Mark. How are you? I'm great, Jeff.

Good to hear from you.

Two questions. You didn't mention much about the commercial side. Can you talk about the development and potential timing of that?

Great question. We have... We're continuing to build up on that residential side. The commercial segment, I'd say, still a bit out. I think they're looking for about most of what we would be putting up there would be looking for about 1,000 rooftops in and around the area. We do have neighboring developments that do provide a lot of density to the equation on this thing. And really we're looking for the higher value commercials there. We're looking for the big boxes. We're looking for the big, you know, not just a small grocery store. We want a big grocery store. We want big retail centers out there that are really high volume stuff. And we also want to be opportunistic to be able to maybe partner on some of that where we're able to bring the utilities and bring the land to the venture, much like we're doing in the, uh, single-family rental segment, carrying forward some of that equity value. We're not going to go vertical on the commercial as like we are in the residential, but we do have opportunities to take a look at that and high-value margins for us being able to do that. So, you know, it's still a bit off, and I think that our patience here is going to be well-rewarded by bringing in some of that big, big commercial, not just you know, some small retail commercial that usually does like to lead that. And then they end up getting in some preferred positions because people really pull that trigger a little too early. And then a lot of times those sites get redeveloped. We want to really kind of be patient and develop that out as a big commercial opportunity. And mostly because of our location, right? Where we're located, we're located locally. right off the interstate. We're located right next to the belt loop on it. We're just south of the interstate. Sorry, just south of the airport. And so that does pretend it's high-value use for large commercials. So I know I've said we're being patient on that, and we continue to be patient on that. I don't have a start date on that, but we continue to be very active on pursuing market opportunities for that?

If I understood correctly, you know, the big box kind of people want a lot more houses built, right? So they wouldn't be in a community of multiple thousands. So we're talking about development kind of four and five years away from now.

Yeah, that's a hard one for me to say it's that far out. I'd say it might be a couple years out, but not four or five years out.

Okay. Next question. On page, whatever it is, 26, you said you had 404.9 million gallons delivered. If my math is correct, that's kind of the 1,200 acre-feet, 1,300 acre-feet. and you have 30,000. So, you know, you're selling, what, three to four percent of the acre feet that you currently have. Why additional water acquisitions?

It's really just where we can, once the water is purchased by a city municipality, you know, the it's gone forever. And so what we're looking at is not necessarily expanding the portfolio just anywhere. We're expanding our acquisitions where it's next to areas that we're already vested with. And so, you know, it's an opportunity for us to continue to build that portfolio. We do know we're long on water. We don't want to be overly invested in that area. But, you know, we're Where it's a strategic acquisition, we'd look to consider those. And it's a function of price. Is it a good price? Are we able to bring value with our infrastructure and our other water rights to that particular asset that really builds value beyond the acquisition cost of it?

If I hear you correctly, it's really a defensive move to keep it out of governmental control.

Not necessarily out of governmental control. I mean, once the other water providers, so it's very competitive. So, you know, we have 70 different water providers who are all out scouring opportunities for water supplies. And so you have diminishing acquisition opportunities and an increasing number of folks that are looking for those acquisition opportunities. And so we're looking at making sure that we can continue to grow that side of the business through, you know, logical acquisitions.

Okay. Anything happening down on the reservoir?

No. You know, we still look to partner with other regional interests on the reservoir assets that we have. And, you know, whether that's with our neighbors or with – Our partners that we have in WISE with the South Metro Group, all of those studies, evaluations, and smart consultants continue to take a look at that, but nothing really exciting to update you on.

Okay. I'll let somebody else jump in. Thanks.

Thanks, Jeff.

Thank you. Our next question is coming from Greg Malachowski with Benchmark. Please go ahead.

Hey, Mark. How are you? That's good. Good, good, good. Just a couple, mainly one general question. And that kind of involves the single family rental business. Has your approach to financing that changed at all with the, I know the mortgage rates you mentioned were in the high threes or low fours. Has there been any change in approach through how the company is anticipating funding future ones? with the rise in mortgage rates, or how are you guys evaluating that? That's a good question. It has. You know, the opportunity for us, you know, we did lock in, you know, maybe that $4 million at some very attractive rates, and so we like that, and we will continue to keep those out there. You know, as mortgage rates have gone up to 7%, because we have such strong equity value in that area, you know, we may look at, instead of financing 80% of that, we may drop that down a bit and finance maybe 50% of that. So we will still use that financing mechanism. And, you know, I'd say we're going to be indicative to everybody else. It was better for it to be at 3%, 4%. It is not awful for it to be at 7%. And it's not always going to stay at 7%, right? This is the type of financing activity. And I think that that's where the millennials that are going to really be looking at buying a house, and they may be making the decision to buy a house for other reasons other than it's an investment or it's that there's a significant utility value in owning a house. And so taking a 7% mortgage on a house is more traditional and more in line with the long-term projection of that. And so I'd say, yes, we do have an appetite for continuing to finance those out. You know, to the extent that we're getting four, four and a half percent on that, you know, we may be able to get a better return by financing some of those ourselves because that's going to provide more cash flow to the bottom line when we have those opportunities to do that. But we're not going to be overweighted in it either. You know, we'd like to continue to grow that segment. Our board has said that this is a great segment for us, but we want to be able to leverage the vertical cost of that. We're going to carry forward the equity value, but we want to leverage some of that vertical cost. And seven is still a very good rate for us to do that. It's some of the cheaper money because of the mortgage-type lending activities there. So you're going to still see us pursue 50%, 60% of that into the mortgage side. okay and how do you see the overall rental market right now and maybe maybe projecting going forward what is the strength or weakness um associated with that versus kind of what you guys um loosely would underwrite when you're looking at picking up um it's a great question and it is strengthening so what you're seeing is you know to the to the extent that those those former buyers that would be out there and maybe they lose the ability to qualify for the same house that they would have wanted at 4% compared to 7%, you know, we're really getting a lot of referrals from our home builders to say, well, if you like the community, you know, why don't you go talk to the developer who's got some units that are coming online for rental? Because it puts them, it locks them into the market, right? There's that as a component of it. And then the second component of it that I think we're really excited about is really bringing online our school, right? That's a sense of community. That's a sense of place. That's a sense of, you know, education being the initiative of every new subdivision, new community. And so that's a strong driver for new families, particularly because we're opening up this K7, it'll be a full K8 facility. You know, we may not open all those grades all at once, but, you know, that's what the capacity of that is. And so we find that to be some good traffic flow on the single family rental business, which is kind of putting a little bit of wind in our sail on why we may partner with some of our builders to claw back a few of those lots themselves. Okay. Yeah. Cause that's what I was thinking. So you're saying the financing is still favorable. The rental market is robust. So I guess if I can float something that maybe I'm sure, I'm sure you guys have thought of something that was really attractive. Um, you know, you look at capital allocation and you've talked about the land. Um, the problem with land is one land still is by no means cheap at all. And two, as you guys are obviously aware, um you know you buy the land and one it costs a lot of cat it requires a lot of capital to develop and two it takes a lot of time um so with what you know kind of is already on our plate i'm not really sure land is the best use of capital at this point you look at the water rights and similar to the previous caller you know it's it's nice but when you're a public company in the market just gives you no credit for the water assets you have, that might not be the best use of capital either. We've been over the buybacks. And, you know, one thing I think, you know, just in terms of looking at how you guys are approaching this, you know, you mentioned investing in your own currency, but really I think the correct way to view that is if you put the first sale sign up and the company is worth, say, $25 a share, if you're capitalizing on an $8 print, you know, you're creating immense value for the shareholders that continue to, you know, stay along for the ride. So you're doing that now, which I commend that. I think that's great. And I think you guys should be, um, you know, aggressive at these prices, but then you get into the single family rental business. And again, it's like buying back stock where you're basically able to create a four or $500,000 asset at a fraction of that cost. You own the land, keep the developer margin. And then on top of that, you have tremendous optionality with the, the, you know, the financing. So let's call it, if you can put one of these things up for, let's say 250,000, 300,000, and most of that you can finance with bank money, you know, you're able to not only create value, but you're also keeping the momentum at Sky Ranch moving. I think one of the biggest and most important things in an environment like right now is keeping things moving in an efficient manner. And, you know, even leading into the commercial, keep, you know, keep the rooftops coming. So if there is a slowdown, like you've mentioned, and maybe some of the builders are, aren't, they're not selling as many homes or whatever, you know, you guys could realistically take down, you know, a hundred homes. And if you break out what that would actually cost you guys, and then you back out the financing, you know, even something like that, wouldn't be that expensive. Wouldn't cost that much money. You build the water business, you keep, keep the roofs coming. And you'd also be making money doing that. So I think that this is really an opportunity where you guys should heavily evaluate, you know, stepping up the rental business because, as you said, it's a win-win. And I was just curious if kind of, you know, with what I said, you had thoughts on that or followed along or where maybe you would disagree with any of that. You know, I'm just curious because I've been thinking about that and it just looks like a no-brainer type of opportunity for you guys right now. Yeah, no, I agree with everything you said. You know, what I do and what we are looking at is, you know, working with each of our builders to say, okay, let's take a look at this next takedown. If we're ready to move forward on this next takedown and you guys find yourselves to be a little bit long on your lot inventory, longer than you think you'd want to be, then we can pull back. Not pull back on the start, but we'll pull back some of those lots. Instead of having 10 in that next subsection of that, maybe we have 50. Maybe we pull back some of those and We can develop those or we can have them build on them, you know, the same the same way they would be building right next door and then just deliver that house to us. And it's never been more relevant for them to have a guaranteed buyer. So that conversation is there, Greg, and we will take a look at something like that. All right. Yeah, that's good. That's it for me. I just I think it's awesome. I think, you know, right now, right now is where having been a conservative company, being responsible with capital. you know, you're going to win down the line by playing offense and being in a position to really capitalize on these things. So it's good to see you guys start looking that way. And, you know, the previous 12 months was excellent. So, you know, I'm excited about the new developments. And I think, again, you can look at the overall macro situation. But, you know, I think given what you guys control, I think it matters a whole lot less than people might think. So I'm happy to see you guys kind of looking at things through that lens as well.

So take it easy and I look forward to the next call. Great. Thanks.

Thank you. Ladies and gentlemen, if there are any remaining questions or comments, please press star one on your phone at this time. Our next question is coming from Bill Cunningham, who is an investor. Sir, please go ahead.

Hi, Mark. Hi, Bill. How are you? Good. I actually have, for starters, just a very basic financial presentation question for you. You earned 40 cents a share in the most recent fiscal year. The first three quarters were 17 cents a share, which I think means you had an absolutely fantastic final quarter of 23 cents per share. But it doesn't appear that you actually lay out anywhere the actual numbers specifically for the fourth quarter, unless I'm missing something.

You're right, we don't, and I apologize for that because it's always helpful for us to take a look at quarter over quarter. In this particular case, and, you know, one of the things that the fourth quarter did for us that really boosted that up was the ability, well, liquidity-wise, it was the ability to get that next bond offering from the cab, the delivery of all those finished lots, and so it was weighted into the the finished lot category. So when we take a look at our builder agreements, three of the four builder agreements are lot delivery agreements where they pay us on that third to third to third principle. And the reason that that fourth quarter, and it will always look like that on a quarterly presentation, it won't always be the fourth quarter, but it will always look like we get this huge weight because one of our builders is a finished lot delivery. They pay a premium. for that, but that's why we'll always wait in one of the delivery quarters.

Okay. I'm also looking at your Sky Ranch Co. website, which it shows that two of the four builders in phase two are simply coming soon, D.R. Horton and Lennar. So I'm wondering, is that actually updated that they're not selling homes there yet, or what's the situation with those two?

So, Lennar's probably got, I'd say they've got eight. Is it eight? Are they in four-packs or six-packs? Four or five-packs. Okay, so they've got two, call it ten townhomes under construction, and I would say six or eight detached single-family homes under construction. So, they just haven't opened yet as a, you know, for sale. They have a They're not doing sales trailers. They're going to be selling out of a model home. I think their model home will be open before, say, the holidays. D.R. Horton is really, they have yet to start out there. They were a little bit slow on getting their approvals for their home products through the county. So I think that they're set to get out there within the next two or three weeks to start their start their product. Horton typically has a more aggressive build cycle on that. They build more spec homes than most, but we'll see what they do in this market.

Okay. So with Lenore actually building homes, obviously they've purchased tap fees from you, but they haven't sold the homes yet. And DR, I mean, How many tap fees have you sold in phase two, I'm wondering about?

Of the 230 lots, I think we've sold about 110 taps. That will give you an idea of the building permits that are in that sub-phase.

Is there likely to be a lull then? It sounds like you've kind of got to – You're ahead of the ball there with a lot of tap fees already being sold for homes that have not yet been sold. So I assume there might be a bit of a lull on tap fees the next couple of quarters.

If you're looking at a quarter over quarter, I probably wouldn't disagree with that. I try and caution you, as well as the rest of the market, that Quarterly management of a company like ours is a little bit harder, but, you know, we still look at a great year, year over year.

Yeah. Okay. Okay. Very good. Thank you.

Great. Thanks, Bill.

Thank you. Our next question is coming from John Rosenberg, who is with Lachlan Water. Please go ahead.

Yeah. Good morning. Hi, Mark.

Morning, John.

Most of my questions have been covered. Also, congratulations on your year and your results and your strategy. One of your last callers talked about, questioned you and talked about your flexibility in moving more towards the rental segment as market conditions demand. And I just want to, well, first I wanted to congratulate you on that segment and also ask you, so drill in a little bit more. So you have absolute flexibility in doing that.

We do.

Is there any cap on how much you can do that per period or?

No, we really don't. And the reason we like it so much is that, you know, we have an advantage to roll forward some of that cost. And so You know, as Greg was mentioning, when we're carrying forward the equity value of the land and the water on that, and really that's a tax-efficient strategy to be able to do that. And he's right. We're delivering a home that might be a $550,000 home if you take a look at the standard detached product base. And we've got a number of different categories. The reason we like really concentrating a bit more into the rental market here in the second phase is we've got six different product classes. And so we're not constrained to just the same type of rental customer, right? It can be just – it can be an individual that comes out and is taking a look at a townhome or a duplex. You know, it can be we've got duplexes together, and it could be, you know, a family bringing – say, renting both sides of it, where the parents may be on one side and the new family would be in the other side. And you have great opportunities for them, shared spaces and things like that. So, you know, that's why we like, not only is it that it's a great opportunity for us, but the diversity of the product mix in our second phase of this thing gives us a ton of optionality in what we're offering to the marketplace. It's not a homogeneous customer for us.

No, that's great. I do appreciate that. And I think, yeah, that was a very, uh, uh, uh, thoughtful move in terms of expanding your product range in phase two way. Um, additionally, just kind of a little bit of housekeeping, um, your receivables from the CAB, I presume that's going to be very lumpy over time as needed.

It is, it is, you know, it's every couple of, a couple of three years cycles between the two as your starts and you build up AB, You know, each of these bonds have kind of five-year call restrictions on that. They're really three-year plus premium calls in years four and five. And as you do them, you know, what happens is the AV, so the value of each of these homes continue to grow, and you have the same number of mills, so you increase your bonding capacity. So they are lumpy. You know, I will say that our underwriters could not have been more complimentary about our business model, and they – you know, they took a look at it and we were in a tough, tough market where not so much in terms of the interest rate market, but a lot of outflows from invested capital for municipal bonds. And so when you have all that money coming out and you have, you know, deals trying to hit the market, you know, we were oversold 400% on our bond offering. So it really is a validation of, how we do it, you know, the care with which we do, you know, how we're investing in this infrastructure. We're maturing that we're not over our skis on any, any component of the infrastructure or the delivery of lots. And we have great partners in our home builders.

That's great. And lastly, again, a bit more housekeeping, but I seem to recall from a prior conversation that when you do ultimately go to large commercial and perhaps I'm wrong, you'll be eligible for other types of infrastructure reimbursement, perhaps from the state, or am I incorrect in that?

No, you are correct. And the interesting thing about that is Colorado is what we call a sales tax incentive state. And so what we do is we weight the burden, the tax burden to the commercial base. So by a lot, I mean by 4X. So the same AV at The residential and commercial. If I take a million dollars of AV at residential versus a million dollars AV at commercial at the same mill rate, I get four times the tax revenue on that. And so, yes, it supercharges your ability to get back your reimbursables, even to the point where we would no longer have reimbursables. We would have more bond capacity that would be able to forward fund some of those public improvements.

And I take it then, if I'm hearing you correctly, that would also imply to me that the cadence of reimbursement would be somewhat accelerated from where it is now once you do start actual commercial development? Yes. Great. Okay, well, thanks again. Congratulations, and keep at it. Thanks.

Thank you. Our next question is coming from Greg Zennett, who is the shareholder. Please go ahead.

I just have one quick question about the rental. Is the product, when you're building a home, let's say a single-family home in an area that's $400,000, $500,000, is the product identical to the other homes that are, you know, does it look the same? Does it have the same amenities inside the home?

Yeah, typically we do want to have it be consistent with what the other products are. They're not exactly the same because, you know, every home builder will own their particular home plan, but it will be the same composition. So you're not going to see, you know, if we're in an area where we've got two-story homes, walkout basements, you're going to find a two-story walkout basement. If we're in an area of slab on grade, crawl space, you're going to find the same home on that same block. So it won't be out of character to the blocks and to the overall community.

Do you have any concern about the stigma of, I don't know, let's say it's five years from now. I live in an area where developers were opposed to put in affordable housing in the neighborhood. And there was a stigma in the resale market that when something came up that, you know, well, this wasn't built by the builder, this was built by, and therefore the valuation is not going to be the, the retail is not going to be the same.

Yeah. And I think that's the reason we're careful with what the product class is. And then we also, I would probably tend to argue that in large measure, we have some control over maintaining these properties. And so even after we're out of the master plan community, we're still in a position to maintain this number of homes. And if we execute the way Bill Miller took a look and called me out on getting a foreshadow of what we think the community needs might pose for us. If we've got 12, 15% of 3,000 homes, that's going to be three, four, 500 homes in that area. And so we'll have the ability to have enough staff to kind of maintain those properties. And so we will do that. We'll keep that for that very purpose. We want to have preferred rental pricing. We want to have good resale should we choose to monetize that particular asset. So we're conscious of that. And no, we don't want to be a slumlord in this area. We really very much like this community. We're vested in the community. We want to continue to invest and continue to generate the returns on that asset. So good stewardship of an asset. is the DNA of this company. And you see it year over year in what we're doing and how we're investing. And so, you know, I can't speak to, you know, what's going to happen in 20 years when I may not be at the helm, but certainly the footprint of what it is that we're doing is to continue to invest in our assets.

Are the laws in Colorado tenant-friendly or are they landlord-friendly?

Good question. You know, I think they're pretty consistent. You know, the eviction process is pretty consistent. We haven't seen that. We haven't had that experience. But, you know, I would say it is probably landlord. I'd say it's neutral. It's not one or the other. It tends to be fair in the composition. I'm thinking back to that Michael Keaton movie about that San Francisco product. I'm blanking on what the movie was, but The Nightmare Tenant. So far, I don't think we have that here.

Yeah, well, it's early. In the single-family area, do people maintain their yards themselves, or is there an HOA that takes care of the – landscaping.

No, everybody maintains their own property. Now, some of the higher density, like the townhomes and the duplexes, do have a separate fee structure that does allow them to be maintained on a common maintenance basis. But the single-family detached are maintained by the homeowners.

Okay. All right. Thank you very much. Appreciate it. You bet.

Thank you. Our next question is coming from Elliot Knight with Knight Advisors. Please go ahead. Good morning, Mark.

Good morning, Elliot.

I don't have a question, but I, as you know, have followed this company closely for 30 years. I have to say this has been the most productive Q&A session and presentation that I've heard And I'd just like to thank everyone.

Well, thank you. You know, the nice thing about it is, you know, our personality, we don't really take bell laps here. At the end of the day, I think what you've seen and I think what everybody's really catching up on is kind of the discipline that the board and management have on kind of continuing to do the right things, test the markets, reinvest in those things that are working, modify those things that need some modification. And so we're very thrilled to have this kind of liquidity moving into, you know, what will be an interesting market. I don't think that this overall interest rate market is recalibration more than it is anything else. We've got macroeconomic indicators that are much different than maybe what we saw in 2007. But more than anything, we have the ability to – we have strength going into it. And so we're thrilled. If this presents an opportunity for us, you're going to see us take advantage of it.

I have seen you take advantage of things in the past. I have every confidence, Mark, that you're going to do it and just keep up the good work. Thank you.

If that's on the back like that, keep me going.

There we go.

Thanks, Elliot. Good to hear from you.

Thank you. Sirs, at this time, there appear to be no further questions in queue, so I will hand it back to Mr. Harding for any closing comments he may have.

Terrific. Well, I'd like, again, thank you all for your continued support to the extent that you didn't get an opportunity to bring in on a technical challenge please don't hesitate to give me a call. I'd be happy to drill down on any of the specifics and continue to stay tuned. We have some exciting things that we're working on and we'll look forward to executing and bringing those to increasing the value for all of our shareholders. So with that, I'll sign off and thank you all.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation.