Pure Cycle Corporation

Good morning everybody and welcome to the Pure Cycle Corporation second quarter 2023 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference please press star zero on your phone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Mr. Mark Harding, CEO and President of PureCycle. Mark, over to you.

Thanks very much, and good morning, and welcome to our second quarter 2023 earnings call. A couple of housekeeping logistics. If you haven't already, we do have a deck for this presentation, which you can find on our website if you go to PureCycleWater.com. It'll be in the investor tab. You can click on that and follow along the presentation with the slide deck. Our first slide is our safe harbor statement, which includes the fact that historical statements that are not facts contained or incorporated by reference in this presentation are forward-looking statements. I think you're all fairly familiar with the safe harbor statement, but with the lawyers out of the room. We can move on to the presentation. What I'll do is give you just a very quick overview of kind of the business enterprise for those of you that are new to the company. We operate in kind of three complementary business segments. Really the foundational segment of that is the water and wastewater resource development segment. What that is is we own water supply in the west in an area where water is very limited and a very valuable resource. Here in the Denver metropolitan area. We've accumulated a fairly large portfolio around 30,000 acre feet of water that For our purposes and for your all purposes allows us to provide water and wastewater service up to single or 60,000 single-family equivalents and so when we take a look at a customer whether that customer is a residential customer or a retail customer commercial customer or we convert that over into what would be the average demand and the average revenue cycle for a single family equivalent unit. Some of the unique elements of water here in Colorado are its connection with not just the water utility and the fees that that generates, but also what it does for land development interests and how water and land entitlement are tied just because its limited availability and its difficulty so we have a lot of connection between that not only with what our other business segments are but what we do here in the West and then we provide water to the full spectrum whether that's going to be a residential user a commercial user you know parks and open space or industrial users like oil and gas our second segment is the land development segment where we own about It started out as about a 930-acre parcel, and we've been developing that as a full master plan community. It includes about 3,200 single-family residential units. It is right along the Interstate 70, right in the Denver metropolitan area. It is one of the more ideal locations where most of the development activities are occurring in the Denver area along the I-70 corridor, with about 2 million square feet of retail, commercial, and light industrial at the site as well. And we develop not only the land, but we develop the utilities there. So we're vertically integrated in that side of the business. And then our most recent segment, which I'm going to highlight a little bit more in the presentation, are our single family home rental segments where we're retaining some of the lots that we're delivering to home builders and then building homes on those lots for our own portfolio where we're renting them out to residents and folks that are looking for expanded housing for their needs. So just a little bit more on the water utility segment quickly. We're kind of cradle to grave, you've heard me talk about that before, where we own the water resource and we develop the wells, the treatment facilities, the distribution network to deliver that water to our customers. They use that water. We collect that water back once they turn it from water to wastewater. We treat that wastewater and have really a state-of-the-art treatment facility where we take that water from wastewater and treat it all the way back to a reasonable quality. And we have a dual distribution system within the community that we're building where we're redistributing that to irrigation customers. We don't do irrigation at the single-family house level, but We do have the parks and open space areas and school areas that all operate off of that reuse system. So we get to resell that water back out. How we generate revenues from that, we have two sources of revenue attributable to that. We get a connection charge, which we call a tap charge. So we get water and tap fees on that. So those combined fees are right around $33,000 per connection. And then we get usage fees, which are that recurring revenue that is really in perpetuity. We get a base fee, whether you use water or not, and that's really to sustain the operating cost for the system. And then the consumption charge, which is a tiered scale where the more you use, the more incremental cost per gallon that you see on that. And those fees generate about $1,500 per unit per connection, about $1,000 a month. I'm sorry, $1,000 a year. There are some customers that get $1,000 a month bills. They're very, not necessarily in our community, but in the Denver metropolitan area, water does get that high here. But we generate in our community, in the size of our lots, about $1,000 a year for the water side and about $500 a year on the wastewater side. If you look at this kind of on a sustainability basis, it's really a water balance system where we're using the water, we're diverting it, whether we divert that from a well or from our surface water features, we treat that, we deliver that to our system. There is a bit of outdoor irrigation, but we're really, as a water community, continuing to lower that loss parameter, whether that's evaporation loss from our storage of our supply on surface water supplies, or whether that's outdoor irrigation. We're seeing our outdoor irrigation continue to decline at the residential level just because of the lot sizes and really, you know, living in a semi-arid area, most consumers are lowering their overall consumption of turf and outdoor irrigation, which is an advantage to us because we get that water back, we can treat that water, we can reinsert that into our supply and continue to be able to use and reuse that system. So, it kind of gives you a feel of ideology of how we manage our water systems. The next slide, really continue to invest into our water system and our water infrastructure. We continue to grow those assets so that we can continue to deliver that. This is kind of an inventory of what it is that some of those investments are. Taking a look at the customer base, we continue to grow our customer base. We've kind of got three areas of concentration within either our service area, which is the Lowry Ranch. Certainly our largest is about 24,000 acres along the metropolitan area. The Sky Ranch project, which is where we also own the land, and then also a water utility that we acquired about five years ago that we continue to build out and deliver water to each of those customers. And really, whether it's residential, commercial, or industrial, we're able to continue to grow that base through both taxi connections as well as the recurring revenue from the delivered metered water sales. Next slide. One of our industrial segments here where we're delivering water to the oil and gas industry. A bit of a seasonality in this. We just came through the winter and Colorado still has the problem that water tends to get a little stiff in the winter. And so the deliveries of that are typically a little bit lighter in the second quarter and we saw that continuing this year. Really since the end of the second quarter, deliveries in March and April, really through May, June, July, significant demand in the oil and gas sector, a lot of stability within pricing of oil and gas, continued expansion within the oil shale play. And really, you know, we sit right on top of this oil shale play here. The southern Wattenberg field sits right on top of where our water supplies are. So it's very efficient for us to deliver those water supplies. for our oil and gas customers. So you'll continue to see significant growth in this segment, and we do forecast this year to be another continuing year of growth and expansion, a record year for water deliveries for oil and gas, even though this doesn't show that, but really is a little bit of the seasonality into it. This kind of gives you a bit of proximity to where we are in relationship with the metropolitan area. We're kind of on the east side of the metropolitan area. Substantial amount of growth to this area in recent years. And it gives you the picture of not only how we position ourselves on the water utility side, but also from a land development side. Sky Ranch is up at the top. You can take a look at those kind of the red shaded areas. The green line will be the Interstate 70. And you see where we're really kind of building out that we're right along the interstate. We have about a quarter of a mile frontage along the interstate. And then kind of where our service area is positioned. You have a lot of the Denver metropolitan area growing out into this southeast area and really positioning our service area, which is owned by the state of Colorado. It's owned by the state school trust. And so they look at, you know, what they would like to do with that property. to continue to generate revenue for the K-12 education system. So gives you a bit of proximity on that. So I'm going to roll into our land development segment. I'm going to turn it over to Dirk Lashnitz, who's the vice president of our land development segment. He's going to give you a bit of an update on our activities on land.

Thanks, Mark. Good morning, everyone. For our regular listeners, it's going to be a little repeat information in a little redundant to what Mark Already talked about this is our sky range project, uh, located on the east side of the metro area along. The I seventy corridor, you can see that, uh, running along the north side of the screen there. Uh, nine hundred acres, um, with, uh, residential and commercial use. Um, and situated, uh, on the, um. The frontage of of the new development area. So we started development in 2018. We have our first phase in the books. That's the western square on this image here. And that was about 509 lots. We've started our second phase, which is roughly 850 lots that we've We've subdivided into four sub-phases. Those are the phases 2A through 2D, roughly 200 lots each. Our first sub-phase, 2A, all those lots have been delivered. We've been building those out. Our second quarter was pretty uneventful through the winter. We had a pretty brutal winter. We're working on the infrastructure for that 2A phase and then starting to kick off our phase 2B. So we did probably our biggest milestone this period was the award of our utility contract for phase 2B. So that's a $4 million contract for our water and sewer infrastructure that we're going to be kicking off here. We also have been making some progress on our K-8 charter school. That school site shown on here, that's going to open here in August, K-7. Looking at about 300 students starting there in August. That's pretty exciting. We've also expanded our rental portfolio, so we have added some lots for that build to rent segment that Mark mentioned and then you can see our builder partners listed here we've got a pretty good group good diverse group to help us build our lots next slide is kind of the numbers breakdown you can see the diversity in our product lines a big A big change we made from our first phase to our second phase was going from two product types to six product types, really trying to optimize our land and get absorptions out as quick as we can, which we did achieve from our standpoint in terms of delivering our lots. We were able to do takedowns of about twice as many lots as our first phase. These these have kind of come online from the builders standpoint right in the housing recession. So we're still waiting to see if the the End of that deal with selling to the the retail buyer is going to how that's going to work out You can see our numbers for each of the sub days is there Okay And then carryover from last quarter as well. We, you know, the gist of it is we still think that there's a lack of supply of homes in this area. So we're here to supply that. We have good partners to help us build that out. And then one little new interesting tidbit that we're watching this existing home inventory with pretty interesting phenomenon with, I don't know, something like 70% or 80% of existing mortgages having a current interest rate of less than 4%. So we're not expecting to see a lot of existing houses turn over and come on the market. So really, the inventory issue for any new home buyers is going to be new builds. So that's going to be real interesting to watch, and we think we're positioned well to supply that demand on the bad side you know the interest rates that they're still still hovering around the high sixes which is still even below average rate and probably move that into like an almost a good category I think that the issue is just the abrupt uptick on those and how everybody's kind of the perception on that and how everybody's recalibrating to the newer higher interest rates. But then this quarter we did, it's a slow selling season, so we did have a pretty typical slowdowns in traffic and contracts. And hopefully next quarter we'll have some new information on how the spring selling season goes. Next slide is just a quick shot of our school that we mentioned. So this is the charter school. It's under construction, opening in four months. You can see it's got a roof on and windows on, all dried in adjacent there to our first 2A sub-phase there. That's about it for land development. I think Mark and Kevin want to talk about our rental segments.

I'll turn it back over. Thanks. Yeah, I did want to highlight a little bit of the activity. One of the key takeaways in this quarter is, as Dirk was mentioning, our second phase of this, we divided up that into four sub phases where we delivered the 229 lots in that phase last summer. And that was very timely for us. You know, we delivered that right before some of the heavy weight started to hit the market on that. And it was a timely thing for both us and our home builders. And if I take a look at anything on the delivery of our model here, one of the things that as we look to deliver lots for our home builder partners on this, we try to do this on a real-time basis where neither we nor our home builder partner retains a lot of that inventory. As we're delivering each sub phase on there, we can accelerate or we can decelerate depending on market conditions. And when we delivered those, we were working towards the next phase of that. Our partners, our home builder partners asked us to kind of give them three months over the winter, which is a typically poor seasonal time for us. And then what we were looking for was, because of the success in our single-family rental market, we were looking, we had reserved 40 lots in our whole second filing, 10 in each sub-phase of this thing. And we have 10 units under construction in where we're at now, delivering lots right alongside our home builder partners for rent and their for-sale product. And we were interested in increasing that portfolio in the subsequent phases. And it turned out to be a real opportunity for both us and the home builder partners because we would be able to go to them and say, hey, here are the lots that we've retained previously. We'd like some additional lots right next to those. And in fact, we could be one of your customers. You can roll into this next phase and start out with, instead of maybe 10 homes, we were looking to increase that inventory up to 20 homes in the second phase, in the second sub-phase, and really give our home builder partners an advantage where they could pre-sell those and fee build for us on that. Now, we're still working on those contracts with fee build, and we're still working with our existing partner. Some product lines fit within that portfolio. Some product lines don't. But that's a great opportunity for us. So one of the takeaways from this quarter is that we did more than, I think we were more than doubling what we're expecting to deliver on our fee bill for all of the second phase. In this particular sub-phase, I think we went from 10 units to 17 units, maybe up to as many as 20 units. We're working on a few more of those lots. Our interest in this is really why we're in this segment is because it allows us to leverage the things that we're already doing. We're in the business of delivering a master plan community, and we're enhancing the value of the community with everything that we do out there. And each phase of this gets better and better for the community. whether that's parks, open space, a charter school, bringing on commercial, all of that is increasing the value of the community, increasing the value of these homes. And this is really a tax advantage way for us to continue to grow the company because we're able to cover the cost of the horizontal improvements from the sale of the for sale lot and then be able to go vertical on that with a very advantageous way of, you know, having positive cash flow for the renters not only covering the mortgage on it but because of the equity value that we're rolling forward into the lot and the water utility connections it gives us free cash flow on each unit so it's it's very strong for the company it's strong for the income statement it's strong for the asset growth because we continue to see good asset appreciation for every individual lot so It's a terrific opportunity, and really one of the takeaways are that we were able to successfully almost double the portfolio for that as we roll forward. It gives you a few metrics on where these lots are, how they're contiguous with some of the other areas that we're building. We have the debt financing, so the vertical cost on this, we really have the advantage of being able to finance that with Pretty low cost, you know, even still taking a look at the mortgage rates, you know, our mortgage rates on the lock that we had are pretty advantageous rates. Those rates have gone up a bit, but they're still mortgage type money. And that's still some of the cheapest money in the market. As we're building these, we have about a $325,000 financing component. So we're at 68, 70%. loan to value on that. So the bank loves that. And then we have tremendous equity in it. So a lot of these that we're delivering are close to 550,000. And you're seeing that 550,000 continue to appreciate at a significant rate, 4% or 5% per year. And then the price range for our rentals, you know, is very competitive with what people are seeing in apartments and multifamily. So a bit more space, certainly a lot more amenities for lifestyle issues. And so we are finding continued demand. We have a ton of applications for everything that we're bringing online. We get multiple qualified applications for that. So we're very excited about that. Really, it's kind of a win-win working with both us and our builders on that. This will be some of the metrics on each of the units and really focusing in on that middle column. What are we seeing per unit home? You know, average rental income per home is about $33,000 per year on that. And we have some operating costs budgeted in there, but these are pretty low maintenance because they're brand new homes. You know, we still accrue some of those costs, but when you can take a look at what we're delivering, we get about $20,000, those next two columns between the add back from interest and depreciation expense and the actual net income on that, that are free cash flows to the company. So that's one of the reasons why we like this segment and one of the reasons why we're continuing to expand that segment. So that's a little bit more about kind of one of the things that we were excited about on the delivery of this next phase. What I'd like to do is turn the call over to Kevin McNeil, our CFO, and he's going to give you a highlight of some of the financial results.

Great, thanks, Mark. Yeah, so the slide we're looking at now shows the three segments, just a highlight of them, the three segments Mark talked about earlier of water and wastewater, land development, and single-family rentals. You know, Mark went over that each three, all three are continuing to grow. This, for the year to date, we've provided about 79, sold about 79 million gallons of water this year, which is lower than the last couple of years, but as Mark talked about, oil and gas was a big part of that. Dirk went over the land development. Where we're at on that, we're about 87% complete on phase 2A. Phase 2B, which is the next one in there, will start sometime in the next few weeks. And so during our third quarter, we'll see a pretty good pickup in the revenue from that. And then the rental homes continue to do. We have four rented right now in that $2,400 to $3,000 a month under one-year non-cancellable leases. And the next 10 should start coming on here in the next few weeks with two or three each week for a month. And then by the end of the year, we should have all 10 of those rented out as well. The next slide shows our revenue for the six-month period for the last few years, just as a comparison. And you'll see, obviously, 2023 is lower than the last few years. 2020 was an anomaly year. That was when phase one, which was 509 homes, was really going. And what we do is we recognize revenue as a percentage completion. So as we complete a section, of ground and we sell off the lots, we get to recognize it as construction proceeds. So as Dirk talked about, it was a very tough winter this year, very hard to do a whole lot of construction outside. And then the oil and gas revenue was down for the first six months, which we expect to pick up pretty substantially in the second half of the year. We've already seen a very large increase just in March and April alone, so that should come back up. Uh, net income and deliver journeys for share here and you'll, you'll see these in our ten queue at which we plan on filing tomorrow. I will point out 1 thing for 2021 that was a, a year where we determined based on the way the reimbursables work is as we complete. Certain infrastructure that will be turned over to various municipalities. We get reimbursed for that. And in 2021, we determined that Sky Ranch was doing so well, we will get reimbursed. And so we were able to recognize about 20Million of of other income as a 1 time effect. Which is now running through our balance sheet because we now we can prove that we're going to get it. And so we don't have to take big swings in our. And so that helps the look a lot better and keep it more normalized. The balance sheet and income statement you'll see again, we'll, we'll file our 10 Q tomorrow. So this will all be in there a couple of highlights. I'll point out is the cash. You know, we invested a fair amount of 15Million in Treasury bills and so those matured in March. We'll. You know, we're holding them in a fully insured, fully FDIC insured packages. It's called ICS program. So with all the banking stuff that went on this last month, few months, we feel pretty confident because we have everything fully insured. We've been using most of that cash for some land development. You'll see, you go down a few lines and look at the reimbursable public improvements. It's up about $3 million because we did spend, you know, $2 to $3 million in the last few months on land development. It hasn't stopped. It's just slowed. We're also investing, continuing to invest in water, as Mark pointed out in a few slides ago. You know, we've been buying and making sure we'd have enough water for the future. P&L-wise, you'll see, again, the revenue and net income are down this quarter and year to date. A lot of it you can see right in the middle, you know, from the water sales. You'll see last year's six months, we had about $2 million in commercial sales. This year, we're about 500,000, so that'll pick up pretty substantially in the second half of the year. Otherwise, our operating costs, our G&A costs are staying fairly consistent. We're keeping running with the same amount of staff we had before. We talked about the stock repurchase program. It's been approved. We haven't bought anything yet. Luckily, the stock has stayed above our limits, so as long as that keeps going, we'll keep it in place, but don't need anything, and then Couple important upcoming dates we'll announce. We'll get started on emailing everybody as of July 19th, Investor Day. We'll get that set up and start, you know, get everybody notification of how to sign up for it if you want to come. We'll let you, give you more information. And then our 10Q should be filed by tomorrow. There's our leadership and board of directors. And I'll turn it back over to Mark for questions.

Great. So really, a couple of the significant key takeaways here are even though we've got a rising interest rate market and kind of a bit of headwinds in the housing industry, one of the things that we saw was just an enthusiastic response from our home builder partners to continue to build out at Sky Ranch. And we see that not only in terms of the existing development that's underway, we've got Even the lots that we delivered going through the difficult construction season through the winter, we've got more than 100 starts out there. We've got residents who have already moved into that filing. And each of our home builder partners were really supportive on continuing to build out at Sky Ranch. And I think Dirk highlighted this a little bit is, you know, it really is an issue of segmentation for us. You know, we're an entry-level product. You can buy homes out there. In the 400,000, there's townhome products that actually even start with a three out of Sky Ranch. And that's really unheard of in the Denver market. That's probably one of the most affordable master plan communities in the Denver metro area. And because of our structure and how we're delivering these lots, the home builders really like partnering with us because we do manage the deliveries very well. We manage them. on a real time basis so that they can keep track of their absorptions on not only what they have, but then how they build on those. And really continued development with delivery of the charter school, continued enhancements into the community really emphasize the differentiation that we have in the marketplace. So we're thrilled that all of our home builder partners are continuing to move forward. We've started the second Delivery and and we sequence those pretty much every every year. We're delivering those and we'll still deliver We'll probably have two of the three deliveries where we're taking a look at the plat deliveries, which we closed subsequent to our quarter in and and and that generates of all the revenue that we need for the investment into the water utilities that Dirk was doing so and know we continue to be able to leverage the revenue that we're generating from how we have our delivery of uh lots for our home builder customers so that we match that investment with what we're putting into the ground so that we've got that covered and um and then also the clawback on some of the lots for the btr segment those are great and then i think you know what you're going to see is uh significant uh improvements and and opportunities in the oil and gas space so With that, I'm going to turn it back over to Jenny and have her take a look at any questions you might have where we might be able to add a little bit of color.

Thank you very much. We will now open the floor for questions. If you would like to ask a question, please press star 1 on your phone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using any speaker equipment, it may be necessary to pick up your handset before pressing the keys.

One moment whilst we poll for any questions. Just as a reminder, if you do have any questions, please press star one on your phone keypad. And we have a question come in from Elliot Knight of Knight Advisors.

Elliot, your line is live.

Thank you. Good morning, Mark.

Good morning, Elliot.

Somewhere in this press release, and I can't find it right now, I think I saw something about you bought some water in the corner. Is that right?

Yeah, it was a very small acquisition. It was just a well that was right next to one of our other wells. It was like $300,000 or something like that.

Okay. Does it make any sense to think about how much you paid per acre foot to sort of estimate the value embedded in the company given the vast water reserve that PureCycle has?

Yeah, it's a good question. One that we get a lot is to say, how do you take a look at your inventory and what are the comparable sales for those types of water rights? This particular well was a one-off type opportunity. It had been idle for a number of years, so This will be a little bit of inside baseball for water utility, but it didn't have a lot of consumptive use on it. And it has a very good appropriation, which means there's a high level of water you can take from it, but it hadn't had a lot of water taken from it. So it allowed us to be able to optimize the acquisition price on that. The water that we have been buying in this particular area has gone up significantly. It's nearly doubled in the sort of the five years that we've started acquiring water in this particular reach of Colorado. You know, we bought some wells maybe five years ago that we paid, you know, say $8,000 an acre foot for. And those wells are now trading for, you know, $14,000, $15,000 an acre foot. And so that's why we like that particular area on that. And when you take a look at trying to transpose that over to the full portfolio that we have at 30,000 acre feet, gives you kind of a sense of scale on that. You know, water's a lot like real estate. When you take a look at valuation, it kind of depends on where and what you're doing with it and when. But certainly the value of the portfolio continues to grow year in and year out. And even more so, more recently, right? You see a lot of press and a lot of people are focusing in on the value of water in the West and trying to figure out, you know, how do you participate in the scarcity value of water? And, you know, as we've talked and really highlighted, we're not in the business of buying low and selling high. We're in the business of buying right and developing forever so that we have a customer and a revenue source that continues to generate revenue for our shareholders.

All right, Mark. If you tried to come up with some range of what the average current market value of that 30,000 acre feet is, what would you say that range might be?

You know, I like to think of it in the high end of that range, you know, that $15,000 an acre foot range. Certainly when we're selling that water to our industrial segment, we're generating something close to $5,000 an acre foot per year on it. And so when you take a look at, you know, is it Is it fairly valued or undervalued at $15,000? You know, I certainly could make a case that it's undervalued. You know, one of the challenges that the optics of the company has is that we have had these assets for 30 years, and they're recorded at cost. And you look at our cost basis on it, and it may be $20 million, where you have a billion dollars worth of potential on that balance sheet, and the cost, because you know, we were so early in getting it. And so, you know, uh, the, the market has appreciated so much over time on that, that that is a fairly low value recorded on the balance sheet. So that, that's kind of how I, I, we look at that question.

So it's really a matter of time. The value is there. I mean, you and I have been talking for all of those 30 years, uh, and, uh, it's almost inevitable that at some point that value is going to be realized.

Well, that's true, you know, and we are seeing that, you know, we're seeing that as the metropolitan area has grown out to where our service area is, you know, as we vertically integrated some of the development activities and continue to leverage what the value of that water does for land. Uh, we're seeing that in our connection charges, you know, that's the real tangible way to value this thing is to see, you know, when we were looking at some of these acquisition tap fees were $6,000 a tap. And now most of the market is, you know, our taps are around $35,000. Most of the market is north of $40,000. And, you know, we'll continue to pace our connection charges with the market so you know we do that every couple of years and this is one of those years that we're going to take a look at at benchmarking our tap fees compared to our neighbors on that you're going to see some strength growing in that and so those are ways that not only you can track the value but also ways that we can extract the value of that water okay thanks very much as always

You bet.

Thank you, Elliot. Just as a reminder, if anyone still has any questions, please press star 1 on your phone keypad. Okay, we have another question come in from Greg Sterling. It's a private investor. Greg, your line is live.

Yeah. Hi, Mark. Thanks for taking my call. I'm just curious on the lot pricing adjustments with the two home builders. Was that purely a function of the taking back those homes for rental or was there an actual price adjustment in the lot per lot pricing itself?

Both. You know, when we did do these contracts originally, we incorporated some time value of money component in that, understanding that inflation would be there. And I think our inflator is 4% in most of these contracts. So you do see that gross number continue to roll up. And so even though we had a three-month sort of deferral of starting our wet utility package, that continued to grow. We continued to grow that price in there because We wanted to make sure that as a multi-year contract, we weren't stagnant in our price on that. And then the clawback of some of those lots, you know, we wanted to make sure that we could continue to grow that segment given the success that we've already seen in the first 14 units. So, you know, as we get into this a little bit more, we're looking at, you know, getting up to 80, maybe 90 units from this first and second phase and then growing this up to maybe 200 units plus in our single-family rental segment.

Okay, thanks for that clarity. And then another question, I seem to notice that it doesn't look like DHART Horton has started selling their homes yet. Is there any update on that?

They were, so they had new product lines that they were bringing out here. And it just was, they were, I think, a little bit late getting those home plan sets over to the county and getting approved. So the other two builders or the other three builders, I think, were first in on some of that. Certainly KB because they were continuing out here. And then I think, you know, Lenar and Challenger were both very aggressive on getting model homes up. before the winter, it was just a timing inference on that. Horton, you know, one of the largest in the country, you know, they typically are probably the most aggressive on the spec build. So you're going to see, and they've kind of, we see that by virtue of the taps that they're buying and the building permits that they're doing is, you know, they're going to get it all done all at once and then they're going to just line build in there. They're also one of the most excited about moving forward with additional lots. You know, they're beyond all of the 850 lots of phase two and really excited to partner with us on our next phase, phase three of this thing. And so, you know, good builder, all our portfolio of builders are being good. I mean, they're all, you know, solid top 10, top 15 national home builders that are terrific to work with. And so, You know, we like continuing those relationships. And I think we really are a good partner with them because they make money in this transaction without having a huge burden of inventorying, you know, 800 lots that they have to then take a look at how they're going to deliver some of that infrastructure. Many of the markets, even in Denver, in the recent years, most of the home builders themselves have had to do a lot of the horizontals. And that's something they're loathe to doing. they're good at building homes. When they have to, they'll work on delivering the roads, curbs, and gutters. But our particular project, we're being paid to give them that product. And that's one of the products that they really want to add more to their portfolio on. So it's been a good partnership for them. But no, there's no particular reason why Horton or other than, you know, just a logistical issue of them getting their plans through the county in terms of the building permits.

Okay, that sounds great. That's actually very helpful. And has there been any speculation around the demand that the school is going to be fully open starting the school year and whether they've actually started recruiting students or if there's been any increase in demand for for homes in the area because of that?

There is, there is. You know, I mean, one of the, that slide that we had up there that was really referencing not only the status of the build on it, had a little graph there that showed the admissions on it. So I think they've gotten, this is just opening the K-8 school and then they're anticipating starting with grades K through seventh They really were hoping to have around an opening of around 500 students. They've got about 400 applications. They're exceeding their benchmarks of where they thought they would be. That little scatter diagram shows you kind of where those applications are coming from. And so the concentration of them are really coming from our development, right? They're coming right with, which is what you would expect. They're coming right within the, call it the 600 homes that we've got up, but they're also pulling and drawing from other areas. You can see there's some coming from the town of Bennett, which we're a Bennett charter. So, you know, it is a Bennett chartered school system. So some of those kids are coming in and moving toward the metropolitan area and then, you know, all around the surrounding areas. So the penetration of the school and the marketing of that has been, you know, fairly wide distribution. And any new community, you know, you're looking at an entry-level buyer here at Sky Ranch. Those are going to be new home, first home buyers, starter families. Most important thing for them is going to be access to school. And very early on, you know, we recognized that that was going to be the centerpiece of this community. We located the school in the center of the community so it would be walkable for each of these students. We've got trails and underpasses that deliver anybody that wants to walk to school, parents that want to be able to just drop off their kids, any number of things. So we've been very thoughtful about that and high kind of absorption rate for all of our families that are at Sky Ranch. And our home builder partners, you know, are the first ones to be the highest marketer of the charter school because they know how quickly that conversation gravitates to, you know, what is the school system and what are the opportunities for education here. So, yes, it's going to continue to accelerate the demand and the attractiveness of the overall project.

Okay, yeah, that sounds great. And then if I could just ask one more question, which is, I know you've been kind of hesitant to use the share repurchase program, but what would be the impetus to actually make you do that or, you know, give you some incentive to actually do that, especially with the stock pricing, you know, where it is currently?

Great question. You know, we did want to continue to make sure that we understand and appreciate that the market may have a disconnect in terms of what the value of the equity is. And so, we did initiate that. We put our acquisition benchmark in place. And, you know, what we try to do is be patient about that and see where the market is. The market, you know, it wasn't overly conservative on that. I mean, it wasn't at our historic low, but, you know, where we thought and, you know, in consultation with us and the board, you know, where we thought would, you know, be a good level of acquisition. And it just, you know, the strength of the stock, well, I would say it's not trading in a range, and I'm sure you've not heard a conference call on any CEO that says the trading of the stock is where it should be. But, You know, it didn't, the strength of both the volume and the share price did not drop to that level. We'll likely bump that up so that we can get that. You know, we do want to invest in ourselves, and we want to lower that denominator. We have allocated, you know, a program to do that. We have some liquidity. We have a very good balance sheet. We're very protective of that balance sheet, but we also have some ability not only to invest into land, to invest into water, to invest into single-family rentals, but also invest in ourselves. So you'll probably see a little bit more aggression in that in the Q3, Q4.

Okay. That sounds good. Thanks for taking my questions. Good luck the rest of the year.

Thanks. Appreciate your support.

Thank you very much. And the next question is coming in from Greg Vennett, who's a private investor. Greg, your line is live.

Good morning. When I've been out in Denver driving to the airport, I noticed towards the west, I think it's 56th Avenue. There's a huge amount of development going on there, and it looks like it's commercial and multifamily. Where are those people getting their water from? And at some point, do you have water in that area that if that development continues that you would be a provider of water?

Great question. You know, Denver is when you, when you fly into Denver, you see a population that is four and a half million people and you say, okay, that's Denver. And, and Denver is actually made up of, you know, 70 different jurisdictions. The city and County of Denver is, is only like 650,000 people. And so that particular development that you're referring to is in the city of Aurora. And much like us, every jurisdiction has to have exclusive franchise service areas. So when you're developing on our service area, the big contiguous 24,000 acres of property that we show on that graphic, you have to get your utilities from us. That's a requirement. And similarly, when you're developing in the city of Denver, you have to get your utilities from Denver. When you're developing in the city of Aurora, you have to get your utilities from the city of Aurora. That particular project is in the city of Aurora. And, you know, does every city have a high degree of confidence that they have enough water to meet their needs? I would say no. You know, Denver might, just because they're less aggressive at expanding their boundaries. is looking to expand their portfolio. When I'm out looking for water, I'm competing with 70 other municipalities that are doing the exact same thing because they've got growing service areas. And what you're seeing is everybody, us included, are concentrating on lowering the overall amount of water that every single family house is using, primarily in outdoor irrigation. And so some of the things that have happened this year, and particularly in the city of Aurora, but Other municipalities, they're significantly limiting outdoor turf, cool weather turf, the Kentucky bluegrass type stuff. And so they're limiting it to as little as 500 square feet, which is a postage stamp typically for a single family home. And one of the things that we're experimenting with on all of our single family rentals are our turf is actually we're installing – artificial turf on that you know the quality of the artificial turf the cost of the artificial turf compared to the overall cost of maintaining an actual cool with cool weather grass is very cost competitive and so what that allows us to do is it allows us to serve more than 60,000 connections which is good for us you know we get more connection fees we get more uh base rental fees or base monthly fees on that and so each of uh those water jurisdictions each of those water providers have you know there's not an opportunity for us necessarily to provide service to that particular development because they are annexed into another jurisdiction as much as it's also an opportunity for us to have an exclusive franchise on both sky ranch and our lowry areas and expanding, right? We're looking at expanding that area beyond Sky Ranch to territory around us so that we can continue to grow that business segment.

Okay.

On the rental homes, are these financed? And you may have mentioned this. Are these homes financed with a fixed-rate long-term mortgage, or are you... Yeah, they are.

Okay, so there's no variable rate. No, no, they're not variable rate. Corporations technically can't have a mortgage, but our bank, and most banks offer products similar to this, create something that's comparable to a 30-year mortgage-type product on it, and it kind of has... We have a fixed rate, which is why we have a very advantageous rate for the first 14. And then, you know, we get mortgage type rate. I think we've got an expansion into the six, six and a half for the next 20 that we're looking at for filing 2B.

If you don't account for appreciation,

what is the return on capital for the amount that you're putting in to these rental homes based on the rent and paying the debt service so when we take a look at you know we because that's a good question our board asked me that same question when we're taking a look at how these perform for us on ir standpoint these are over 20 irr for us you know they're they're significant opportunities to It's really because we have the retained equity value of the land and the tap fee on it. So we're renting these out as a $550,000 house that would cover that mortgage, and we really only have a $330,000 mortgage on it. So not only does it cover the debt service on it, but it gives us maybe a 30% free cash flow in that. So the IRR may be You know, I guess Kevin's kind of giving me some more realistic numbers, but they may be as high as 40, 45% IRR on these.

Without any assumed appreciation.

Correct. Yeah, when we just look at the cash flow, because I'd love to be able to IRR the appreciation. Our water assets would look phenomenal. But, yeah, no, we just do it based on the free cash flow.

Are there any rules in your area about having affordable housing and that a certain number of units have to be for lower income renters or lower income buyers in your community?

There are no mandates on that, although affordability continues to be topic for everybody, right? Denver has had some affordability issues. It used to be a very affordable marketplace 30 years ago, and that's caught up. You look at the average home value, and to say that a home starting in the $400,000 is the entry-level home market is pretty, those are hard words. But that is where we're at in the metro area. And the average, the median home value is closer to $650,000. And so when you look at that and our ability to deliver these homes in that entry-level market is why our home builder partners are so aggressive about maintaining their positions.

Final question.

Do you anticipate that the growth of Sky Ranch is where you see the future in the next three years or five years, or do you see a separate area that would be developed either by you would buy the land and develop it like Sky Ranch or another developer would come in there and do that and sell lots to the builders, but you would be the water utility. And when do you think that would happen?

Yeah, all of the above. You know, we are very aggressive in trying to acquire more land, more land that we can develop, working with neighboring landowners that may want to keep their position and and develop it themselves. And then we can be the utility on those as well as acquiring existing utilities with the customer base. So when you look at all of the things that we've done in the past, all of those are still on the table for us and very much an active part of how we look to continue to grow the company. So yes, Sky Ranch will, you know, your specific Sky Ranch will continue to grow over the next three to five years. You know, we'll continue to build that out and that will, provide opportunities for us not only in monetizing the land interest. The interesting side when you look at that, and that's why we like this kind of vertical integration, is that not only will that grow the land development segment and monetize that, but it also grows the utility segment and monetizes that, and it also grows the single-family rental segment. So each of those grow as we continue to build those out, and we have a higher degree of control over that continued growth and and so that's why we like more land acquisitions we are thoughtful about making sure that we're not too far over our skis and extending ourselves out to an area that we don't know what the market is like or that we can't efficiently provide water and wastewater services so we're concentrating our capital even if we have to spend a little bit more for it to be in the sky ranch vicinity right in that i-70 corridor because our utilities can be easily extended to serve those areas. So that's kind of our philosophy and how we wanna try and continue to grow.

You currently don't have anything in your inventory for that, is that correct?

As far as for... Not another land interest that we would develop. We do have an inventory of 24,000 acres, which is our service area, which is ideally positioned that we will be the utility provider. And if you look at, you know, just does the company have, you know, within its existing portfolio the ability to use all of its water, my answer to that would be yes, we do. And then that's a growth of the metropolitan area. And so you've seen that kind of that encroachment of the metropolitan area out to our service area. That amount of land all by itself will use – That's a 30-year portfolio of land inventory where we know we are the exclusive water provider, and then it's just a determination on the land owner as to how and when they'd like to continue to monetize that asset.

Okay. Is the world running out of water that they would need to come to you for maybe just buying water and you piping it into them, or... Do they have a lot of water?

They're a big utility. They don't have enough water to serve what they've already annexed and zoned. They don't have it by maybe an order of magnitude. They need to maybe double or even triple their portfolio to be able to provide service to what they've already annexed into the city. And they, like us, and every other water provider, you know, they like to own the water themselves. They do the same thing, right? They go cradle to grave where they own the water. They develop all of the infrastructure to divert and treat and deliver and reuse as well. So, you know, us providing water to City of Aurora, probably not. You know, the dynamics may change over time, but that's historically not been something that any of the water providers do. They're really concentrating on their own service areas and their own annexations to make sure that they can grow that portfolio. As water becomes more and more competitive, because every year it gets more expensive and it gets harder to do, that dynamic may change and there may be regional cooperations. And we're part of one of those, right? We do partner with Aurora and Denver and 10 other water providers on a project known as WISE. You read a lot about that in our disclosures where that's a regional project where everybody got together and said, okay, we're going to all concentrate our capital on this particular project. And there may be more opportunities for that. Everybody will have their own piece of that pie, but it's a regional participation rather than have everybody do their own separate project and run pipes that parallel each other and cross each other and and those sorts of things so when do you expect to generate revenue from that or are we yeah we already are oh yeah we're selling that water every day okay all right thank you very much you bet

Thank you. That appears to be the end of our question and answer session. I will now hand back over to Mark for any closing remarks.

Again, I want to thank you all for your continued support and want to just continue to highlight the achievements that we have and really the optimism that we have within what we're doing. This pairing of land development and water utilities is working out very well, not only for helping us continue to monetize these historic investments, but also within the marketplace, within our customers, within our home builder partners. Terrific opportunities there. We continue to leverage them in the single family rental segments as well. As Kevin noted, we'll have an investor day this summer. We'll post that to the website. And for those of you that are interested, if you've not been out to take a look at what we're doing out here, you know, the pictures don't do it justice. It's a terrific opportunity. You know, you can see where our assets are positioned relative to the overall metropolitan area and really how these historic investments really will continue to pay dividends for us. If you didn't get a chance to ask a question, don't hesitate to give me a holler. Happy to drill down on any of the specifics. But again, thank you all, and we look forward to seeing you over the summer.

Thank you, everybody. This concludes today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.

Thanks, Jenny. Look forward to talking to you again.