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.