Pure Cycle Corporation

Greetings. Welcome to the Pure Cycle Corporation Q1 2024 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 telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Mark Harding, President and CEO. You may begin.

Thank you, Holly, and welcome and good morning. Balmy morning here in Denver. Happy to give you an overview of our Q1 2024 earnings call. We do have a slide deck for this call. It's on our website. If you go there, you can click on it on the front page or go to the presentations page and you can see it there. So if you want to follow along with the deck, I will try and note the transitions as I walk through the presentation. With me today is our CFO, Mark Spisali, and our controller, Sabrina Finnegan. So let's get started. First slide, second slide actually, is our forward-looking statements that most of you are familiar with, statements that are not historical facts contained or incorporated by reference in this presentation are forward-looking statements. And I think you all kind of understand we'll get the lawyers out of the room and get on to the the presentation. So we'll talk a little bit about kind of the business model and our strategies, take a look at our scorecard for Q1, really drill down into some of the specifics about our assets and the opportunities and the continuing strength that we have within our assets, and then a little bit on the updates. Over to slide four, really want to We continue to benefit from a very strong and experienced leadership team and a board of directors to maximize our highly appreciated assets through our complementary business segments. And each of these business segments really do relate to each other. And by that, what I mean is as we make an investment in one of the business segments, we benefit each of the other business segments. So we're very proud of having these vertical integration within these business segments and the opportunities that that present for us. Here's our key management team, and we have a tremendous amount of experience within the firm, not only within the various disciplines, but across the leadership board. So we really do benefit from a very strong and diversified and tenured management team. Three principal business segments. As most of you know, we have our water and wastewater segment. We have our land development segment and our single family rental segment. We talk a lot about that complementary nature and each of them do relate to each other. We wouldn't be doing our land development if we weren't in the water utility sides. We wouldn't be doing the single family rentals if we weren't in the land development segment of that. And so by us improving our water system. That improves our land development by us improving our horizontal development of our master plan communities that provides us opportunities for our single family rentals and continuing to appreciate the curb appeal for each of the homes that we or our builder partners are developing in our communities. Take a look at about our asset portfolios, and this is kind of divided up and segregated into each of our segments, and they continue to grow in value, not only in the direct investments, but each of these assets continue to appreciate in their fair market value through each of the segments. Our water wastewater segment holds more than $2 billion in top line revenue. We have the ability to provide 60,000 single family connections with our water portfolio. We have an existing system that's built that can deliver around 2,500 connections, and I think we have about 1,300 total connections in there, so we have a little bit of pedal left in developing more connections for what we're doing on the water and wastewater side. In our land development segment, the Sky Ranch project holds more than $500 million in value. We'll talk a little bit more about that in the presentation, but we have very low basis in each of these segments. about a $4.5 million basis in the land development side, mostly because we bought it right, but we continue to improve the value of that. And you see that through the direct investments on the balance sheet. And then last but not least is our single-family rental segment. Each home that we complete and deliver holds approximately 30% equity value, and that's because we roll forward the appreciation of the value of the land, the lot itself, as well as the water connections, water and wastewater connections there. So what you see is we have a recorded book value of about $5.4 million, but we have about $2 million of equity in that segment, and it really comes from each unit that we do, that we deliver on that. And so we get fair market value rents for those, and that covers not only the debt service on that, but provides us margins on it. So that's another summary of the asset values. We'll take a look at our scorecard, see how we did in the first quarter. We had an excellent first quarter. Take a look at slide nine. Delivered very strong revenues as well as impressive gross margins at a little over 60% on that, about 62%. But Q1 revenues are 5.3, almost $5.4 million. with a very high margin on those at about $3.3 million. So if you take a look at that, that's a strong quarter for us, even historically, when you look at the last four years of our performance on that. Taking a look at slide 10, the net income on that, a little over $2 million and about $0.09 per share on earnings per share. So we carry through to our net income, and our combined segments are delivering over 38% profit margin. very healthy results from our assets and they continue to demonstrate their strong equity and strong appreciation value for our shareholders. You take a look and break that out by each individual segment. So if you take a look and drill down on that, really looking at where the revenues come from, you know, a little bit weighted in the water wastewater side, I think that the strength in the oil and gas deliveries will buoy that a little bit, but It's almost split between our water segment and our land development segment. Our single family rental segment is still coming on early. We have about 14 units on that. But if you take a look at our gross margins in each of these segments, again, it really demonstrates the value that we have and really the opportunity to turn those into margins for our shareholders. So the gross profits there are also illustrated on the graph there. And again, you start to see the single-family rentals getting in the game here, but they're still pretty early. Moving over to slide 12, if you take a look at kind of water deliveries and where those water segment revenues are coming from, they come from really three principal areas. Tap fees, which are that large capital fee that we get, and we had a few tap fees in there. I wouldn't say that it was an extraordinary quarter for tap fees, mostly because we're closing out and finishing up the phase 2A, the first phase of our second phase. So that sounds terrible. We've got to find a better way to identify each of these phases. But you'll see there's a healthy segment in there for oil and gas this quarter. And the outlook for that continues to look robust and strong. And then we continue to grow our customer growth for our recurring customers. customers and so you're going to see that continue to slide into a meaningful component of the business, but we continue to deliver water and wastewater for our 13 closer to 1400 customer connections each month. Moving on to slide 13, that'll kind of highlight the oil and gas operations on this and so we've got really what was a record quarter for oil and gas deliveries. If you take a look at that, we almost had $2 million in just a quarter for oil and gas deliveries. And really that outlook continues to look strong. The operators that are drilling in this field, they have a dedicated rig. That rig can drill maybe a little bit more than 20 wells per year because they're really at pad site development. So a lot of these a lot of these pads are going to hold up to 16 wells per pad. And then they'll drill those, they'll move on, and then the fracks will follow that. But we're still averaging a bit more than $250,000 per well, not necessarily per pad, per well. So these pad sites with a large number of wells do consume quite a bit of water. And the footprint for this is very large. So They're drilling in Adams and Arapahoe counties, really right on top of our service area. Take a little bit about our land development segment. So with phase 2A nearly complete, so we illustrate this by a percent complete basis. And that kind of smooths out the revenues. The revenues don't always match the timing of the cash flows. And as you've heard me speak in the past, we try and get our cash flows from our builders so that they're able to help us with some of that very expensive horizontal costs. And at the same time, we don't incur or we don't burden them with a large inventory of that cost upfront. So it's more of a, it's close to a real time delivery of the revenues to the improvements as you can get within this business. And so what we see here is we're closing out of phase two A, which is the first 230 lots in there. We have a little bit of landscaping left, and it's a little bit difficult to do that when it's below zero. But we'll catch up on that towards the spring and the summer months and punch out that one. We've got most of the wet utilities done on Phase 2B, and we should be starting to deliver lots in this quarter, Q2, and then through the rest of the year. So we'll deliver all of the Phase 2B lots in this fiscal year. And then phase 2C, we've actually started so that we're going to overlap that with phase 2B, mostly because of, you know, the continued strength of our particular product in our segment, which is an entry-level product here in the Denver market. And so, you're going to continue to see us overlap some of those development phases and Each of these phases continue to get their progress based on a total delivery of the single family lots. And then we still have phase 2D, which is a component of this second phase of the 860 lots on there. And we're looking to start that sometime next year as well, where we can continue to make sure that we're delivering all of those lots concurrently with the demand. I'm going to move into the single-family segment here, and I'm going to turn the mic over to Mark Spisali and have him give you kind of an update and an overview of our strategy with the single-family rental. So, Mark, I'll let you take it.

Thank you, Mark, and good morning, everyone. We continue to see high demand in our single-family rental units, and we're encouraged by the results that we've seen in the first quarter. As you can see from the chart, we started as a proof of concept just a few quarters back, and in Q1 of 24, we are starting to see the compounding effects on revenue as we scale to a larger number of completed units. We'd also like to highlight that the single-family rental unit segment complements our other segments by utilizing our portfolio of assets. Each completed unit adds an average of $150,000 in equity by capitalizing on our well-priced lots and our water availability in this competitive housing market. This table takes what we've built to date in our Phase 1 proof of concept, as well as what we completed in Phase 2A, and projects out where we see this segment going as we continue to develop the rest of Phase 2. Not only are we able to control our building costs because of our position in land development and water, but we're also able to control all of our operating costs as of By maintaining these units in-house, we're able to keep the operating costs down and really utilize this portfolio of assets. The next chart is really a graphical form of the previous table. It charts out where we are projecting the reoccurring revenue from our rental income could be as we continue to build out phase two. We also are projecting our increase in asset value with the equity that we add in each of the units that we bring online. And with that, I'd like to turn the call back over to Mark Harding to discuss the portfolio of assets further.