Pure Cycle Corporation

good morning everyone and welcome to pure cycle corporation's second quarter 2026 earnings call as in prior quarters we'll start the presence uh we'll start the call with a presentation from our ceo mark harding and then we'll provide time for questions and answers the person you're trying to reach is not available at the tone please record your message when you have finished recording you may hang up Yeah, if I could ask everybody to mute their call. It looks like everybody's joining unmuted right now. All right. Sorry about that. So we'll start the earnings call with a presentation from Mark Harding, and then we'll open up the lines for questions and answers afterwards. Without further ado, I'd like to introduce Mark Harding, our CEO.

Thank you. Good morning, everyone. My wingmen today are Mark Spiesali, our CFO, and our controller, Serena Finnegan. So if you have any tough questions, we'll have a solid team to weigh in on all of the details here. For those of you that are looking at this, we do have a deck for this. It's on our website. I think it's on our landing page. You can click on that, and then we'll be able to advance through the presentation and give you the details on it. So with that, I'll start. Start with our forward-looking statements. Statements that are not historical facts contained or incorporated by reference in this presentation are forward-looking statements, as that is the meaning of the Securities and Exchange Act. Most of you are familiar with that. Next slide. I want to continue to emphasize the team that we get to work with, an outstanding team of professionals that really bring their game every day, and so it helps us. It helps drive value for the corporation. So a continued shout-out to our management team. Also, our board of directors, I do want to welcome. our newest board member, Dan Roller, and look forward to working with him. He is actively engaged and really working with the directors and the team, so we look forward to working with him. Let's take a look at kind of the investment snapshot here. We continue to deliver shareholder returns and returns on our assets through consistent and profitable results. continuing our streak with a 27th continuous profitable quarter here. We're growing our revenues, our recurring revenues and durable revenues through all three business segments. We continue to grow our asset base by delivering lots to our National Home Builder customers, as close to a just-in-time basis and really doing that to really match market demands. And we do see a lot of cyclical nature in the housing market. Water is a little bit more tempered in that, but we continue to really focus on our assets and monetizing our assets and build shareholder value really through our strong balance sheet and strong liquidity position. let's dive right into the results um really had a great quarter and and this year has been a a more tempered year uh to be able to even out our our revenues and our cash flows on this and that's really been a function of a very very mild winner for for my fellow skiers we're mourning the loss of uh a ski season but uh we're celebrating the opportunity for us to really do a lot of the work that we can't do seasonally in the winter by a lot of the concrete work and the asphalt work. So what you see is kind of a more even-paced development where we're able to, through our cost of completion on our project, be able to even out these cash flows on it. quarter-over-quarter revenue this first six months, about $5.1 million in revenue, about $2.8 million in gross profits. And really those are driven by those percent completions on delivering our lots to our customers. We're about – as much as six months ahead of schedule on some of the lot deliveries on that and so a lot of our builders are are equally thrilled with that because they were able to get out in the field and put up some model homes for this uh spring season taking a look at net income and earnings per share again those are going to match really exceeding our guidance typically on quarter over quarter just because of the advancements on our projects on that so net income a little over a million earnings per share about five cents per share And really, this is up by about 36%, really driven by all segments, mostly land but water, as well as single-family rentals. We're adding a few more of our rental segments in there, and we'll have a little bit more color on that later. But also seeing a bit of an uptick in our water through industrial water sales to oil and gas operators this year. Taking a look at just the – comparison to our guidance, our full year guidance. So we're right at that 50% of our guidance through halfway through the year. So that's a bit unusual for us just because the winter quarters are usually our weakest year or weakest quarter of the year just because of the seasonality of weather out here. And so we're about $14.3 million in total revenue of our close to $30 million forecast or guidance, and then profit at about $9 million to our about $19 million guidance on that. So really terrific results year over year. Moving to net income and earnings per share also, we see those pacing more evenly through the year. Margin results are showing a bit more moderated because we have advancements and investments into the delivery of lots slightly ahead of our contract delivery. So those will normalize through the rest of the year and really kind of help us temper those flows. So specifically with the quarter-end results, what I'd like to do is kind of drill down to each of these segments and talk a little bit about what it is that each of these are driving for us. One of the things I recently heard was an acronym called HALO, which is used to describe some companies that in the context of this, it's heavy asset, low obsolescence. And I found that pretty descriptive over our company. And you can't get a more low obsolescent asset than water utilities. And so we'll drill down on the water utilities and talk specifically about what we're doing. seeing in that growth and margin opportunities. We really deliver water to customers kind of in three various segments. We have our domestic deliveries, which is your potable water that we deliver to residential and commercial users. We have our industrial segment, which delivers water to our oil and gas operators. And then we have continued customer growth, which is our connection fees, and those are one-time fees that are paid by our home builder customers, and then that just adds to the customer growth of the overall segments. Taking a look at revenues on a quarter year-to-date basis, we continue to see some customer growth corresponding to Revenues driven by the connection fees, which is really adding new customers to the system. Our oil and gas revenues are up this year, and I think we'll see a very strong performance in industrial water sales. And then just monthly water and wastewater sales continue to grow, and that's really a function of, you know, continued growth in the rates as well as the number of customers for that. Detailing out the industrial segment, our oil and gas sales are up significantly over last year's, primarily because last year was largely a permitting year for our operators, mostly our largest operator, who was working to secure as many as 200 permits in and around our service area, and really that's translated into increased drilling and increased fracking this year, which is really turning out quite well for them, given the rise in oil prices, so they couldn't have timed that better for bringing a lot of that new supply online. The outlook looks very good for this year. I think we'll exceed our guidance that we had taken a look at this year. And I think it's going to continue into the future, right? We see, you know, rigs that we have a dedicated rig to our service area, which is drilling some of those 200 well permits. And that will probably take them somewhere around the three years to drill all those wells. You know, our revenue per well continues to strengthen. We do have a multi-year contract with our operators to deliver these water supplies. So it allows us to do some strengthened planning and then also making sure that our infrastructure is capable of not only meeting our industrial but the domestic demands on that. One of the things that we like to highlight in our water segment is the capacity that we have and the fact that we continue to grow in developing this capacity, but yet we're still only using a small fraction of our portfolio while we generate significant revenues from this segment and really at very attractive margins when we're really looking at that variable demand for oil and gas. They do have a preferential pricing on that where we do get a premium on that to make that water supplies available to them as they need that in the volumes that they need. Let me move into highlighting our land development segment. This is a nice aerial of our high school at Sky Ranch that's being constructed, so we're very excited about that. it'll it'll really deliver not just you know it's a full k-12 campus so we've got the primary school which is a k-8 as well as our high school there and and really a lot of the relocation and and Customer feedback on buying in the community is a function of the school campus that we have here. We're delighted to continue to work with our charter school operator, National Heritage Academy, who are terrific partners in bringing educational excellence at Sky Ranch. Talking a little bit about how we're delivering lots. So this fiscal year, really focusing on punching out Phase 2C, which was about 228 lots, and we're about 95% complete with that. And then also Phase 2D, which we're almost 80% complete on that. And really, that's the big advancements for this quarter. Over the winter months, we were able to get a lot of that infrastructure in the ground. Very proud of our portfolio of home builder customers. You know, all of the major home builders, including Lennar, D.R. Horton, KB, Taylor Morrison, Challenger, Pulte, Oakwood, all bring entry-level homes to the Denver market. phase two started out with about 780 homes but through some product alignments and diversification that's really grown to about a little over a thousand lots in that area so we do see a significant uptick in our density um out at sky ranch and that's terrific for us not only does that allow us to deliver more lots but it allows us to increase the assessed value which really has an impact on generating additional bonding capacity within the district to repay our reimbursables on that, which you see us continue to grow. Let's drill down a little bit on that land development by phase, period over period. You know, the revenues really did crush it. We really are generating significant Q2 revenues, more of a function of that mild winter and an opportunity for us to kind of turn up the volume and get that pavement down finish those lots so that the home builders can get those building permits and really start getting their model homes up for the selling season. We do see an uptick in traffic out at Sky Ranch. All our builders are seeing an uptick on that and a little bit more of a conversion to that. There's lots of reasons, you know, that housing has variable demands, whether that's interest rate sensitivities. And we see a little bit of volatility in the interest rate segment. I think that still is the number one incentive that our home builders are offering is a mortgage buy down. I think they're hitting that sweet spot of trying to buy down those mortgages right below that 5% range, so that 4.99. So when you see a lot of that adjustment from the Federal Reserve on interest rates, you know, that may not have as big an impact on this particular segmentation of it just because that's the primary incentive that our homebuilders are offering, our contractors. our first-time buyers in converting those into sales. The pace of our land development will normalize through the rest of the year. We really do have a little bit to complete in that phase 2d and then are really moving into grading uh the next phase which is going to be 2e uh that's about uh another uh we got another good slide on kind of the the visual aspect of uh completing out each of these and so as you see you can see that in the lower left uh cell there where we've got a number of homes that are up and uh constructed for um That phase 2C and then phase 2D, well, it's a little bit out of the picture on this. We do have model home lots being developed in there. So we have really two active phases that are complete where they're developing lots. So we've got about maybe 430 lots available for home builders to really tap the market on a variety of products. We've got all phases of the products, whether they're a standard detached 45-foot front load, 45-foot rear load, 35-foot rear load. Duplexes, townhomes, we really have a very strong portfolio of diversity of product type out there, which is really creating opportunities for almost every type of home buyer in that. Moving on to kind of the development timeline here, this gives you kind of an overview of our phasing. And as most of you know, most of our contracts are geared towards a system of developing a portion of the infrastructure in phases and then having once that's complete having our home builder customers reimburse us and support the next phase of the development activity and so we get payments at the plat stage which is when we finish the recorded plat and there's a real property interest that they acquire And then a second payment, which is at the completion of wet utilities, once we're done with the water, sewer, and storm facilities on the phase. And then finally, that third payment at finish lot phase. And so that's where you saw some of those lots being pulled forward on being able to finish a number of those lots. On Q2, as I started to allude to, we are starting Phase 2E, so our grading contractors mobilizing on site will be hitting that this month. And really, those are about 160 lots that we're looking for delivery and continuing pacing that so that each of our builders can have a year's worth of inventory. Those will be 2027 lots, so we expect those to deliver sometime in the summer of 2027. That Phase 2E here is to give you kind of an orientation of where that's at. It's directly across the street from our school, and this is really more of an infill site. We have most of the infrastructure done on that. A lot of the road network is done. Most of the main lines on the water and the sewer system are already in place. That kind of gives you a That's our peak hour water storage tank and pump station there in the picture as well. But that's a very streamlined process for us to be able to bring this online. You know, it's about another $14 million in lot revenues, correspondingly $4.3 million in tap fees, and about $240,000 in recurring revenue from the number of customers that we have on that. This was kind of a celebratory opportunity for us, together with National Heritage Academy, really on the ground breaking for that, and really partnering with our local school district, the Bennett School District, as well as, you know, the National Heritage Academy to bring this K-12 campus to our development. I wanted to show continuing one of the most underappreciated assets I think we have in our portfolio is our service area. And as many of you have heard me talk through the years, you know, the Denver metro area continues to grow out on the eastern plains. We really live on an ocean. We can't grow west as a metropolitan area. really moving to the east side of it, this really kind of gives you an illustration of the level of activity that's occurring around our service area on the Lowry Ranch. As you all know, the state of Colorado owns the Lowry property. It is owned in the school trust, and they develop their assets to generate revenue for the public education system here in the state of Colorado. And there's a couple of parcels that are really just highlighted here One on the south side of the property, and that kind of gives you that bottom picture is an organization looking north. And that, you know, is a very active development on that. That's about a half section, 320 acres. And then also properties that, you know, you've seen the – what's occurring on the west side with all the development from the city of Aurora that's on the west side, but then also projects starting on the north side of the property as well. And so there's substantial opportunities all around the property and it's well positioned. for whenever the state looks to find opportunities for the Lowry Range. You know, we are the exclusive water and wastewater provider for this particular property. And, you know, having been able to develop Sky Ranch, I think we can demonstrate that we would love to partner with them on opportunities for land development. should that occur, but we really do want to kind of give you a perspective of kind of the growth of the metropolitan area and how that grows in relationship to where some of our assets are, whether that's Sky Ranch or whether that's our service area at Lowell. Moving into our third segment, single-family rental, there's a bit of an update and what I probably call a realignment for a couple of reasons in the single-family rental segment. As many of you know, the current administration has had some strong comments about corporate ownership of homes. You know, I probably would push back a little bit on that, on kind of the justification for that. But, you know, they were sort of concerned about corporate ownership and what that is doing to housing affordability. And so we took a strong look at how we were positioning the growth trajectory of this particular segment and really decided to slow our growth of this segment and take a look at these assets in a couple of ways. We wanted to really – get a strong look at what the return on the investment is for these segment assets. And as they settle in, as we've got them constructed, as we've got them leased out, we really want to understand, well, what is the return for this particular asset? And is that going to meet an acceptable level of threshold here for the company and making sure that that delivers effectively? the returns that the shareholders are looking for in that. And so what we've done is push back a number of those lots that we were having our home builder customers build for us. And as an illustration here, this kind of shows you the lots that were identified in blue are the ones that are either constructed or under construction. And so that will total up to be about 60 units. The lots that we have that are kind of highlighted in this light yellow, light green color, those are the lots that we kind of re-evaluated and were able to resell back to each of the home builders that are building their product classes in there. And so what we've done is kind of pair that back from a growth strategy up to about 90 units and really scale that back to about 60 units. And so that will allow us to have a little stronger performance on the revenue from the land development segment because, you know, we're getting about $100,000 to $110,000 a lot on that. And so we'll see that come back to the company and then really take a look at really what the performance is on this segment, be able to get our returns on that and really report that to you and make a decision as to how this segment continues in the future. So that's been really the key realignment here is to take a more measured growth approach to our single-family rentals on that. You know, we've got 19 homes completed to date, and they are all completely rented. We are seeing extremely strong demand for rentals in this unit. So, you know, I'm very optimistic about the continued performance of it. Each of the homes as we bring them on market are already rented. I think we've got homes rented for home deliveries that we're seeing up through August right now. So we do continue to see that as a strong performer in the segments. And then, you know, this will instruct, you know, us on how the appreciation of the homes are going as we continue to add value to the community, not only from the schools, but then all the commercial development and open space and trails and the recreational opportunities that we deliver. We are seeing continued strong growth of these home values, and that's an opportunity for us to really measure that within the overall segment. You know, one of the most attractive features of the single-family rentals is the recurring revenues and the asset appreciation. So period over period, revenues are up 20%. Mostly as a result of additional units, we continue to see growth in the monthly rentals on this. And, you know, what we really like to do is make sure that we get all these units fully leased and have 100% occupancy in that. uh showing the growth trajectory this is uh kind of how each of the phases are performance and and this is a bit of an update from uh from our previous uh uh position on that where we were growing up to about 90 homes and i think we really took a look at that and payer back almost all of the units in Phase 2D, a portion of the units in Phase 2C, really just as a reactionary element to some of the pressures that this segment was receiving on ownership, corporate ownership, and then also opportunities to demonstrate to you all what the return of this segment is going to look like. Talk a little bit about shareholder value, our assets, and kind of what we have in use, and really a little bit about where we're headed. As most of you know, we are extremely hawkish about our equity, with our last issuance being more than 15 years ago. And so we really do fund our operations through our balance sheets. If you take a look at really all of the components of this, we maintain a strong balance sheet. uh believe our assets are significantly more valuable than their recorded value and that's mostly because they're legacy assets they've been acquired you know many many years ago more than more several decades ago and taking a look at each of these individual segments if you take a look at our water segments You know, we have about 74, 75 million in total assets, and that's about 44% of the total assets of the company. But then when you take a look at kind of what's developed and what that contribution is, you know, that's only about 4% developed. So you see how that kind of, you know, the pedal that we have left in the water segment and really the opportunity that we have to continue to grow that segment in our business. uh land segments you know we we acquired uh sky ranch in 2010 uh you know it's about a five million dollar uh acquisition of the land we did get some water beneath that as well uh and then taking a look at kind of the developed land for sale how we do the percent completion on that you know that that represents about six percent of our total assets and it's about 20 developed so you know while we continue to generate strong returns year over year on that we still have a good amount of land that we have developed more homes and then the commercial value on that so really terrific opportunities to continue to grow the land development segment and as many of you know we continue to look for other opportunities in the land development segment uh taking a look at our single family home segment that's a relatively small segment uh about total of uh five percent of the total assets and and you know had a little detailed discussion about that on kind of how we're gonna uh really mark that performance of that segment but really the the biggest opportunity for us here is our total liquidity here and taking a look at the cash and receivables you know it's about a 44 asset and and you know largely largely held in that note receivable from the municipality where we continue to develop the infrastructure those public improvements are reimbursable to us and and we take a look at you know building the assessed value through adding additional homes there our next opportunity for monetizing some of that assets likely to be in 2027 where we're taking a look at financing and refinancing. We'll have a financing on the interchange. As many of you know, we talked about kind of how we're going to construct a new interchange on the interstate there, but also being able to refinance some of the phase two bonds and really capitalize on The opportunity, we financed our first bonds on phase two at about 780 units, and growing that to the 1,000, 1,030 units gives us an opportunity to have a significant reimbursement for refinancing those bonds now that they'll be mature and more assessed value than we originally planned in the first financing. So that'll be a great opportunity for us moving forward. You know, the low obsolescence in the recurring revenue really come from water and wastewater revenues and rents from our single-family home rental segments. And so you do have strong, sticky revenue on those sides and really a lot of the growth revenue from selling lots to national home builders as well as the connection charges to add our customer growth into our water utility segment. Talk a little bit about shareholder value. You know, we consistently grow our balance sheet and income statement quarter over quarter, year after year. and really generate kind of leading, industry-leading margins from all segments, whether that's going to be the water segment, the land development segment, and the single-family rental segments. And so we're very targeted to continue to monetizing our assets, taking a look at where we're at in our guidance. So we're taking a look at our guidance for 2026 at about – $2.7 million in recurring revenue and asset growth, bringing that a little over $160 million. So those still look strong. Profitability trends, we continue to build shareholder value on really each of these segments and really on pace for delivering our fiscal year-end results. We will share some guidance on 2027 at our Q3. as we get a little bit clearer picture of kind of how the Phase 2E is going to come along and the tap fees and the oil and gas deliveries for Physical 27 become a little clearer for us. Taking a look at kind of that total gross revenue, our guidance is going to be in that $26 to $30 million range. We're still supporting that earnings per share in that same range, $0.43 to $0.52. And, you know, upside in some of that acceleration of that is really going to be probably going The timing of the delivery of lots as well as I think oil and gas, and so we'll have a much stronger year in selling industrial water sales just because of the The permitting that was done last year and really I think the strength and the price of oil will really reinforce the fact that our operators are going to really try and capitalize on that, keep those rigs in active service on our service area and in and around our service area. So we don't have just the one operator. We do have several operators that are looking at programs in multi-well fat sites this year. So we believe we'll have a strong performance on that industrial set. We continue to reinvest and repurchase shares. I believe our stock is undervalued, significantly undervalued. We're encouraged by some of the recent strength in the stock and really do believe that the assets do have continued support and really focused on continuing to deliver that shareholder value. And some of the ways of doing that are really going to be kind of the development of our commercial opportunities, getting this interchange completed. We're really at the final stages of that permitting process and getting that into CDOT and Arapahoe County, who are regulatory agencies here. But it does allow us to accelerate not only the commercial opportunities, but also continuing on on the residential side. So that's another thing to keep a lookout for. in the next fiscal year. And also, I did want to kind of give you a revised video. We're trying to kind of keep this video as part of our format to kind of share with you the progress that we make. So, it's about a minute long, but I'll give you kind of an opportunity to see. It gives you a perspective that should be an all-white picture there in the background, and it's just not. So, that gives you an illustration of kind of the dry year that we've had and And it also gives you kind of a picture. You can see the landscaping is fairly dry throughout the community. You know, it's pretty typical, but I think we're going to have a challenged year for some of our water supplies and other providers. I think we're strong in our position and our portfolio, but, you know, other providers are going to see very seasonal water deliveries. Just kind of drills in on that Phase 2C number. We've probably got more than a third of these homes permitted and and start it. And then it also gives you kind of where we're taking a look at 2D, where you've got home builders really starting construction activity on that project as well. And really, this is the unusual aspect. We would not expect to have all these roads paved and these lots available for that. But we were able to capitalize on that this year with the mild winter. And so that's a great opportunity for us and our home builders. And then moving into kind of phase 2b, we're nearly complete here. We probably only got maybe half a dozen home lots that are yet to be constructed in that phase. And then this kind of rolls up into a good view of the high school and construction progress on that. We've enjoyed that opportunity as well. They are ahead of schedule with the mild winter that we've had as well. So that will open up in August for our school kids for the next 26, 27 school year. So that's exciting for us. and then ultimately kind of a shot at where we're going to be with that uh interchange and our commercial properties up there in that area so we are actively marketing our commercial properties we've got uh you know both retail and industrial brokers engaged and are seeing uh some exciting opportunities you know we're we're out there pitching a lot of those um a lot of the retail and some industrial opportunities for distribution centers, a number of different types of uses, whether that's going to be a heavy water user or just access to that interstate is a terrific asset for us. So with that, I guess all those are prepared remarks. So what I'd like to do is open it up for Q&A. I think the easiest way to do the Q&A is You know, if you want to un-mic and just shout out a question, and then we'll coordinate seeing how that technology works for everyone.

So, with that, I'll turn it over to you all.