Pure Cycle Corporation

Good morning. I'd like to welcome you all to PureCycle Corporation's earnings presentation for the three months ended November 30th, 2024. We're doing a little bit different format for this particular call through our teams meeting. And what we wanted to do is allow us to go ahead and have all of you participate. And then as we go through the presentation, there's a slide deck for this for those of you who have dialed in and are not on the call through our teams through the website, you can see this presentation deck if you log into purecyclewater.com and you go to the opening page there, there will be a link that'll allow you to join us and see both the slide deck for this and then we will have a camera that we'll turn on after the presentation and then we'll handle that through a visual format through a Q&A session. So it'll allow us to have a little bit more interactive presentation with you for this earnings call. With me today is our controller, Sarita Finnegan, who makes sure that all of these numbers get presented accurately and fairly. And also with me is Mark Bezali, who's our CFO. And then joining us will be also Dan Kozlowski, who is a director and one of our shareholders. And as we did with our annuals, make presentation for our year-end presentation. We had kind of more of an interactive format for that, and we'd like to carry that forward. Got a lot of good feedback from shareholders about that format, so we'd like to carry that forward and be a little bit more interactive in presentation with that. So with that, I'll go ahead and start the presentation. We do have our forward-looking statement that incorporates statements by reference that are forward-looking statements within the meaning of the Securities and Exchange Act. You're all familiar with forward-looking statements on that, so I'll move forward and get the lawyers out of the room. I want to continue to acknowledge our leadership team. It's my pleasure to get to work with an outstanding team of professionals that really are executing our business model with great success. It's really a privilege to work with these professionals who have industry experience that are decades long, and they bring that experience to the work environment every day. So the true success of the company is really by the employees and the people that make it happen each day. Also want to acknowledge our board of directors. We continue to punch above our weight on an outstanding board who provide just terrific leadership for the company. And each of them have industry experience where they've spent their careers doing business. the key elements of what it is that we're doing, whether it's in land development, whether it's in water rights, whether it's in corporate governance and just SEC experience. So pleasure to work with a great team of professionals. So I wanna dive right into the financials on this. We'll talk about the quarterly performance. And again, we're continuing the momentum that we had with fiscal year in 2024 and doing just a terrific execution of our business model. So we had record revenues again for our first quarter. So revenues about 5.7 million gross profits, looking at an outstanding gross margin on these assets. We've got sort of these legacy assets that we purchased and really have seen a tremendous increase in value on that. And they're really driving revenue from a number of operating business segments. So we're really having a great execution on all this stuff and seeing these great gross margins. So maybe about $3.67 million, 64% gross margin. We had an outstanding quarter in terms of royalty income. And so what that is, I'll give a particular call out here on these numbers because we earned about two point six million in oil and gas royalty. So we do have mineral interest that was associated with some of the land interest that we acquired. So our mineral interest for oil. the oil play that we have at Sky Ranch. And so we had an additional six wells drilled in that formation that were pooled with some other mineral interests in that. So those are starting to produce revenue royalties there. And that really is aiding in our gross margins and then also our quarterly income on that. And then, you know, great net income for the quarter, almost $4 million or 16 cents per share. excuse me continuing on with kind of the revenue picture really comparing this quarter over quarter our revenues are up almost 7% 5.7 million dollars gross profits up almost 10% from quarter over quarter from 2024 our momentum continues to carry that forward in all metrics so we're really pleased with how that's executing quarter over quarter and year over year drilling down into Some of the other metrics here, the taking a look at net income, sorry. Quarter over quarter on net income, Q1. For 25 over 24, we almost doubled those performance numbers, taking a look at that. So gangbuster increase in net income as well as earnings per share. So we had about 78% increase in earnings per share when you take a look at that on a period over period basis. And then, you know, really taking a look at this on a 12-month rolling average basis, we're really, again, hitting some key drivers here where we're, putting up record revenue year over year, 12-month rolling average over 12-month rolling average. Taking a look at sort of how we gave guidance in this, rolling that forward. So our 2024 results compared to our guidance for 2025, we are on pace to continue to perform on that guidance. So what you're going to see is our positive performance on that and really continue to roll that forward. We gave guidance right around 31 million in total revenue. So we got about 5.8 million in that for the first quarter. Gross profit right around that 20 million or 23 million. So we'll continue to demonstrate that and keep you guys appraised on a quarterly basis as to how we want to meet those metrics for our fiscal year end. Those performance metrics for net income and earnings per share. Again, we had a record year $0.48 a share last year. We forecast out $0.52 a share and $0.16 in the first quarter gets us off a great start on that for continuing to execute and deliver that for our fiscal year end. So it gives you perspective of how that compares to previous year as well as how that compares to our guidance. Want to break it down a little bit in terms of each of the individual segments. So this is an analysis of our water utility segment. And we've got a little bit weaker here, but I think our guidance for the water segments will still be very strong on that. That's primarily attributable to a trade-off between monetizing tap fees which are the continued growth of Sky Ranch and and adding new connections to that so as we've talked about we've got three three phases at Sky Ranch under development and and then the oil and gas revenues and so when you take a look at the oil and gas revenues we're a little bit weaker on that which is what we anticipated we did forecast that a little bit weaker this year that's primarily because our oil and gas operators are really expanding their coverage and they've been working on the next set of permits, and they've got a tremendous number of permits. They've got about 180 wells permitted on the Lowry Ranch, which they're expanding their infrastructure to, getting pad sites structured over there. And so you're going to see a little bit more of that activity in late 2025 and into 2026 through 2030. So that was kind of a forecasted area. We did see a significant uptick in the number of new connections, and that's because of the Sky Ranch. Our tap fees are up about 150 percent in that area and then continuing growth in our recurring customer base with about 12 percent increase in customer revenues on that. Just a little bit of highlight on the oil and gas. We did anticipate that to be a bit weaker, but the outlook for 26 through 30 continue to look very strong because they've got a tremendous amount of petal that they're looking to continue to develop this. A very proven field, so they have a very optimistic outlook. runway for continued drilling and continued tracking right within our service area where we're very efficient on delivering those water supplies for that well field enhancement. A little bit more on sector performance. This is Kerry Ford from our URAN presentation. And one of the things we wanted to do is kind of give you guys a perspective of how we are executing on each of these business models compared to our peers in this. And so when you take a look at this, this really describes how each of our segments perform compared to what can be considered best in class performance on that. And we're very competitive to our much larger peers in each of these business segments. So this shows you our deliveries of gross margins and return on assets in our water segment. And you can see, we're really in that category of delivering good, margins with the assets that we have. So we continue to do that. The biggest call out in the water utility sector is really just the utilization. We're just still getting started. We're really only utilizing about 5% of our assets. So we've got tremendous opportunity to continue to grow this segment, not only serving land areas that we're developing, but other land areas in and around our area, as well as our service area. So we're really excited about that opportunity. Taking a look at our land development, if you want to take a look at call-outs there, as we mentioned, we've got three phases currently under development. So we've got phase two, which is about a total of 850 90 units and that really is in four sub phases. The first phase 2A is fully completed and we've got homes constructed and they're all sold and occupied. Phase 2B, we delivered end of last summer. And so what you will be able to see is kind of vertical construction on that. And so we've probably got about 35 homes vertical in phase 2B. Phase 2C is what we're most active on, so we finished the grading on Phase 2C. We're about 70% complete on the utilities, and then we'll move from utilities to the pavement curb and gutter on that. and then be able to deliver those homes for building permits on phase 2C. That's another 200 lots where we've got about 190 of those lots that are going to be for sale and about a real strengthening of our single family rental segment in there where we've got 40 units that we've reserved for us to go vertical on that phase. And then phase 2D, which we are currently grading. So we're about halfway through the grading of that segment as well. This is a comparison of taking a look at how we stack up to some of the peer performers in land development. And so again, tremendous execution. Really, this is a testament to the high equity value that we have in the land. So just because of the strategic acquisition and execution of our horizontal construction, we're very efficient and pleased that we're delivering these lots at that entry-level price point, which is really our most competitive advantage in the master plan community here in the denver area which is no different than most other major metropolitan areas it does it does challenge itself through affordability and we're probably one of the most affordable master plan communities in the denver metropolitan area where we're actually delivering lots and you can buy a home um sub 500 000 and then in some cases on the On the duplexes and the paired product and townhomes, some of those products you can deliver sub 400,000. So very, very advantageous for us in this market segment. And then also taking a look at continued growth in our single family rental segment. We continue to improve those. We've got rental incomes up about 14%. And so that's a combination of strengthening in the rents as well as bringing on new units. And then this segment is also very attractive for us because not only does it provide that recurring revenue for us, it also has asset growth from the portfolio. So we have a strong equity position in there because we're keeping the equity value of the land that we have, as well as the horizontal development of the community. And so those are rolling forward on the appreciation of each individual home, as well as the ability to continue to rent those out. And so we've got higher than a 90 percent renewal rate of our lessees on that. So we have a great customer experience for the single family rental. And again, this is a carry forward from our year end presentation, which compares us on this particular segment to kind of the larger operating groups that are in this space. And so, as you can see, we have very favorable comparisons to some of those that are best in class. So that kind of gives you a great summary of really how the quarter went. And again, another record quarter for us, a great experience for delivery of these asset values. Maybe what I want to do is for those of you that are just learning about the company or just getting familiar with this, really take this up a few feet and give you kind of an overview of really the company's strategic positioning here. We operate in three different business segments. We have the water and wastewater utility segment, which allows us to own water rights in a water short area and really be able to participate not only in the appreciation value of water, but also what water does. That water allows us to be able to bring service to land that could not otherwise develop and be able to change the composition of that land. And so we look at participating on a vertical scale on all elements of that. And so that led to our entry into the land development segment. We've been in this segment for probably five years. I think we've done a very good job. really entering the marketplace. We're in the right set sub-market of the segmentation of that as an affordable product out here where we're developing land, we're delivering that to our home builder partners at very competitive rates. Our home builder partners are able to execute and really compress their timeline from when their money comes in to when they're able to go vertical on a house. And so that's very important for them. And really, this partnership is really delivering things just in time where we're not overburdening them on inventory of some of that horizontal infrastructure. We're able to carry forward the strategic acquisition costs of our land opportunities and be able to carry that into the model where they can be competitive and have a lot of absorption and some velocity of sales. That's one of the key metrics for them. And then the most recent segment is our single family rental segment where we're holding back some of those lots and we're partnering with our home builder partners to go vertical on those and be able to deliver those lots. And again, when we're doing that, we're seeing each individual home that we're bringing to market we're carrying forward as much as $150,000 of equity value in each of those homes. And we're able to rent those out at fair market value, brand new homes where renters are coming in. We see a very strong qualifying marketplace for those. The folks that are applying for rent on this are choosing to rent for various reasons. And so we've got a very strong portfolio of that and we're continuing to grow that. If you want to take a look at each of these in some of the real specifics, if you take a look at our water segment here, these are just some of the metrics on that. You know, we've got tremendous value in our water segment. You know, you take a look at the asset value here and what we're generating. in revenues and there seems to be disconnect, right? You can imagine, you say, how does a company that has $65 million of total water assets start to generate 10, 12, $15 million a year, year over year revenue from this water segment. And it's really because of the low basis that we have in that. We've acquired these assets some 30 years ago These assets have appreciated significantly in the market. You know, we can serve about 60,000 connections here and we get two revenues from that. We get a tap fee from that, which is a system development charge. And that's about forty thousand dollars combined water sewer. And so when you connect that over to 60,000 connections, that's a that's a very large top line revenue. That's you know, that's almost two and a half billion dollars worth of revenue. And that's about a 50 percent margin business for us. And then we have the continuing water revenues on that, right? We have a perpetual customer there where we're delivering monthly water and wastewater service fees. Those fees are around $1,500 per connections. And, you know, that's about a 50% margin business on the water utilities side. So very attractive business segment for us. And it's really driven by, you know, the early recognition of the value of water a number of years ago. A particular note in this particular segment is also percent utilization. So we're still very early on in that. As you can see, our capacity that we're delivering, we have about, I'd say another 50% capacity this shows that you know the acre foot of production for the year end and this shows a ferry you know we use about 25% for the first quarter but you know we do have excess capacity in here which we continue to deliver to our oil and gas customers on that excess capacity and it's a good partnering relationship where Their utilization of water does not come at the expense of our other customer base. And then when they're done using that water, we have existing capacity to reallocate to our permanent customers. So there's a very good relationship there. for us continue to expand and invest in our system for a current customer and then have the utility value of that investment in perpetuity delivering that system capacity to our residential customers as those come online at sky ranch and other places Really highlighting our land development segment. Historically, this is really an opportunity where the company saw a strategic opportunity back in the depths of the recession. We were able to act and strategically purchase a particular piece of property which we could deliver water service to. Our basis in the land is very, very low. We have a land basis that is less than $1,000 a lot and then we're able to carry that forward with bringing utilities to it and then getting into executing on the land development, the horizontal infrastructure where we're delivering a finished lot. And that's very rare. What you're seeing in the marketplace is that it's because of the complexity of land development and the investment in both water utilities here locally in the Denver area as well as just all the other phases of that that it's very difficult to manage all of those investments. Who carries that inventory? And so the relationship that we have with our home builder partners is outstanding, mostly because we're one of the few that actually do do that work in this market segment. You know, we've seen almost 80 million dollars in lot sales to date. We've got great gross margins in there. So we're executing on all aspects of how we're delivering that, both on a real time basis so that home builders don't carry too much inventory. And then we don't have to carry that inventory as well. So both of those are working very well for us. this is a little bit of of how we're executing so we typically are looking at you know about 250 lots per phase and so this will really show you that annual delivery capacity and what we've seen is you know the the strengthening of the entry-level market and the opportunity on the entry-level market is it's really because of our land basis and because we're controlling the investment in the utilities on a real-time basis. We're able to do that together with our home builder partners. This will give you a progress of that. We've got that phase 2A, which we talked about is fully built out and occupied, phase 2B, some of the vertical going on there. You know, we've had a fairly mild winter so far. So the builders are out there continuing to pour foundations and go vertical on phase 2B. We're finishing up the utility side of that phase 2C and then the grading of phase 2D. So it really does give a good inventory of both existing opportunities as well as continuing to sell through all of those phases for our homebuilders. And this would kind of give you a little bit of sort of the capacity of that. You know, when you take a look at Sky Ranch, a fairly big project, it was started out as a thousand acres originally and a total of about 5,000 single family units. It'll be about 3,200 residential units. And then some commercial were very, We're privileged to be able to have the land located in really the most active sub-market of the Denver metropolitan area, which is along the I-70 corridor. We have an interchange right at our property. We're improving that interchange. And so we'll have about 1,800 to 2,000 really lots and water utility connections attributable to that commercial, which is yet to start. We're about 22% done with the residential side. And when you add that over to the total, 18% done with the project as a whole. And so we still got four-fifths of this to go and really looking at a very favorable climate because we've got most of the hard offsite infrastructure built. So expanding that is a lot easier than coming out of the ground. Lastly, if we really drill down a little bit on the single family rentals, this really is an opportunity for us to maximize our land development opportunities where we're carrying forward all the hard work to build a great community, bring good schools out there. We've got a great school partner with National Heritage Academy on a charter school out at Sky Ranch and Carrying forward the parks, the open space and then ultimately the commercial so that, you know, we're bringing that retail commercial opportunity to not only the residents that live at Sky Ranch, but also in the regional area. And it really allows us to leverage some of that market demand on those. So good, good return on investment there. through single-family rental segments. If you take a look at the numbers on that, we've got about $5 million worth of homes that are constructed and that's what it cost us to build those homes. And then when you look at the equity value on that, we really have about another 50% margin in there in the equity. So that fair market value, we're seeing that $7.6 million continue to rise just because of the value that we're creating within the community itself. And then, you know, what it's generating to us on monthly recurring revenues on that. So very good segment for us and continued execution on that. This will kind of give you a foreshadow of really how we look at phasing this thing out. You know, we started out with phase one on a proof of concept, which is four units. And then when phase two rolls in, we're going to add nearly another, you know, 95 units to that. So that that model is proven out very well. And we've been able to partner with our home builder partners to execute on that so that they, you know, we're not competing with them and we're actually giving them. a sold product before they even start. So as they go into each of these phases, they're able to demonstrate to the market that they've got sold units contracted with us to be able to deliver these rental units. Lastly, what I want to do is continue to highlight the stewardship of the company. We've got a great balance sheet, very strong liquidity that allows us to really execute on some of these business models. And what we're really doing with some of that liquidity, really on a two-phase, all-phase front, is we're continuing to grow the business through acquisitions. We're continuing to accelerate the development of Sky Ranch and have the ability to do what others cannot, which is we can deliver the finished lot to our home builders. And then we're able to continue to transfer shareholder value by repurchasing shares and using some of that liquidity to help really optimize what the market may not be fully appreciating yet. So we continue to add to that balance sheet and be good stewards of that invested capital that you've allowed us to have. A little bit on some of the outlook. Again, this will be a little bit of the carry forward, how we look at the business model over the short term, and then really where does this look like through Sky Ranch build out. We have customer growth, about 2,500 accounts into that short term period where we'll continue to add accounts at Sky Ranch, Wild Point, and in other areas. Our tap fee increases are very modest. You know, we have those built in on a yearly basis. So those are increasing at 3%. And then you take a look at the long-term build out of that Sky Ranch. You know, there's 5,000 total connections between the residential and the commercial. And we're seeing continued growth in the value of that, not only on the residential lots, but also the continuing value of what we look to see and monetize through commercial opportunities. taking a look at the land development, we'll see steady lot sales over the next five years with the completion of Sky Ranch. We don't expect build-out. Build-out might be in that five to seven-year range, but it's certainly within a foreseeable future. When you look at what's already baked into the balance sheet, we've got Sky Ranch generating tremendous revenue for us. There's more than probably twice of what our market cap is. There's looking at maybe $600 million worth of revenue potential at Sky Ranch alone through build out. So we want to really keep our focus on that opportunity and continue to deliver shareholder value there. And then the single family rentals, we look to get to somewhere between 200 and 300 homes for that. And again, that's going to be somewhere around $100 to $125 million of asset value And then again, you know, that recurring revenue on that where we're generating somewhere close to thirty thousand dollars a year in excess of that per unit. And so that's, again, a tremendous driver for recurring revenue for the company. This is kind of translated into kind of a. a more tangible picture of how that growth looks like, not only on what we're doing for our fiscal 2025 compared to 2024. So this shows kind of a, it'll give you a three-year comparison from the growth potential in 23 through 25. And then also that short-term projection, growing that up into where we think we're going to be in 2028 timeframe. So that'll give you a continued acceleration of that moving from very modest revenues in 23 up to strong performance of over $60 million in the short term. And then how that translates into recurring revenue, both in terms of the short term and then ultimate build out of Sky Ranch. So this kind of gives you a flavor for the built in value that we have within our project and really what's within our own control here. So looking at that asset growth, you know, we're looking at, you know, almost two and a half times our current market cap just from what the company's currently got in its portfolio. Again, you know, we continue to be in the market, continuing to purchase shares. So you're going to see us continue to be in there on the disconnect between what we believe the company's value is. And then also, you know, the opportunity to continue to deliver shareholder value by reducing the denominator in our share account. Okay, so with that, what we'd like to do is kind of open it up into a Q&A and then really kind of show that more collaborative format with maybe some observations from our director and a shareholder to give you a perspective. You know, he's got a great career as an equity analyst with a number of institutions, most recently Janus, where he retired from Janus and is really managing an independent portfolio. know uh we'll we'll open it up for questions and let me stop sharing this and see if we can get it converted over to our team's presentation where you can see our smiling faces in the conference room great that worked out so with that uh yeah well this one how um

begin the Q&A of our presentation. So as you know, we're using Teams this quarter to kind of have a more interactive experience with the investor base. So if you do have a question, we've opened up our camera and our mic. And if you want to raise your hand by selecting the raise hand button icon at the top of your screen, we can call on you and open up your line.

PJ?