Greetings and welcome to the Pure Cycle Corporation 2020 Second Quarter and 6-Month Financial Conference. [Operator Instructions] It is now my pleasure to introduce you to your speaker, Mark Harding. Mr. Harding, you may begin.

Thank you, and I'd like to welcome you all to our second quarter call. Some housekeeping measures. We do have a slide deck for this. So if you want to log in to our website, it should be on the front landing page. It'll just say second quarter presentation. If you don't see it there, then you can surf over to the Investors section, and there'll be a link there as well. So that'll allow you to follow along with the presentation and the prepared remarks. I'm going to beg forgiveness for those of you who are new to the company. Probably just jump into sort of the quarter end without giving kind of the overview -- typical overview of the company. We've got some excellent resources on our website if you're new to the company and want to get a little bit more color about sort of how we do things and how we got to where we are. There's a couple of podcasts on there that will give you that presentation. But with that, let me go ahead and start the call here. And the first thing I need to do is while I said I was going to go through the presentation quickly, I got to get through at least the second slide, which is to get the lawyers out of the room, saying that this is our safe harbor statement, and really, these are our forward-leading statements not intended to be policy or direction or guidance to our investors. So with that, I'm going to roll -- scroll you guys down to Slide 6 and really start by giving you all an update into our land development segment and give you kind of an update of the activity that we've had. As you all know, we've…

[Operator Instructions] Our first question comes from [ Elliot Knight ] of [ Knight Advisors ].

You haven't said anything on the call about the commercial. You've got 160 acres that you highlight there. Could you tell us what your plans are there and what the time table -- what timetable do you anticipate?

Great question. So while I'm very excited about the residential component of that, and that's kind of where a lot of my attention has been occupied just solidifying those contracts with the builders. You're right, we have a very large commercial component to this property. And commercial usually lags residential development. I would say we've gotten a significantly more interest this year than last year on our commercial piece but not really to the point where we have found the right opportunity yet. A lot of the interest, I would say, 70% of the calls and the serious calls on it have been people that want to put it under contract and then they want to market to somebody who's actually going to develop. And we have the flexibility to be able to go from our position to a direct user rather than having an intermediary in there, not that we're going to be building it or not that we think that we have for -- significant value independent of somebody that would say, I want to buy 5 acres and then I want to bring a deal to Walmart or to Kroger. Certainly, those are the opportunities to do that. And if they have that type of structure, that's where we are interested. We look at commercial where it has opportunities for both retail and commercial. So you'll have a lot of employment base. It'll have a lot of product offerings where you can get -- you'll have the typical Walmarts, Targets, big-box stores, Home Depots, the fast casuals, on the restaurant side, sort of a mixed use of really all different types of retail and commercial uses out there. And so we're looking at kind of the right model. And each time we kind of configure our land…

So we're there now. How far do they have to drive to a supermarket, to a Home Depot, to a theater?

So it will be -- it's almost triangulated, and it's almost about 10 miles in 3 different directions. There'll be 10 miles to the west, or I'll call it, 8 miles to the west, 10 miles to the south and 11 miles to the east to find those types of installations. So we're very well located on that. And really, there's not much opportunity on land other than ours because they don't have the interchange that would give you that accessibility and that kind of the transportation network to the site itself.

Which makes our commercial all the more attractive.

It does. And it has several things. I mean, one, you do benefit a lot in the value of commercial real estate. And we also benefit from the value of a commercial water user out of that. So we see value not only in the land. We see value in taps. We see value in selling water. But then there's a tremendous value here in Colorado for reimbursables. And I know I've talked about that in the past. But when you take a look at how Colorado is incentivized, our commercial real estate generates 4x the equivalent AV that a residential AV has. And so it does allow us to really capitalize on our full reimbursables. And we did do a bond offering. I talked about that in our last call, which really encompassed about 35% of the reimbursables that we accrued for the first phase, but that was valuing all of that residential. So when you look at it, we'll have -- we should have surplus revenue when you add in the commercial component. So that will become a very important component for us to help realize and help monetize some of those accrued reimbursables.

[Operator Instructions] Our next question comes from Bill Miller with J.M. Hartwell. William Miller;JM Hartwell LP;Principal/Portfolio Manager: Things sounds they're going really well. If you looked out 3 years, let's say, I want to know how -- what percentage of your revenue at that time will be recurring. And not the tap sales or land sales or whatever. But what percentage will be recurring at that point?

So what I would say is that really drills down into kind of the water connections, the monthly -- month-over-month, year-over-year connections that we have into the system. Today, we stand somewhere around -- pretty close to 500 water connections and then I think maybe 180 sewer connections. And the reason we've got a disconnect between the water and the sewer connections is we have a lot of irrigation connections. So we have more water that doesn't create sewer than water that is in a house creating sewer. Those will catch up as we get more of the single family residents, but we'll still have more water connections than we'll have sewer connections. But within 3 years, I think we're built out on at least the first phase of the 500. So adding -- that would probably add another 400 connections. So we'll more than -- I would say just in the first phase of Sky Ranch, we'll more than double the size and the connections that we have there. We continue to do well on our acquisition down at Wild Pointe. So that continues to build out. So year-over-year, I think we're up almost 70% from when we bought that in terms of the number of connections that are adding. We're getting close to build out on the residential component of that. There's still a little bit of [ tattle ] left in that on the commercial side. So that will continue to build out. We'll add more connections. So that gives you kind of an indication, we could be in the 1,000 to 1,200 range on that and then continuing to grow. And what we'll likely see, Bill, and I know we've talked about this, but we'll likely see -- we'll have multiple phases going on at Sky Ranch. And then as other properties that we don't necessarily own, but that we extend our utilities to continue to add and grow to the system, that really builds into sort of the capacity of our water portfolio. And so we want to have multiple projects going on at the same time that add capacity to our system in that. And so that's where you're going to see -- if you look at our capacity of our portfolio serving 60,000 connections, and we're serving 500 today, we'll have a bell curve on that well where that will continue to grow slower on the front end, then you get up to some very high numbers for a number of years, and then it'll trail off as we get to some of the build-out scenarios on our portfolio. But to get out 60,000 connections, that still probably 30 years out, but I think we still look very good in the short run. William Miller;JM Hartwell LP;Principal/Portfolio Manager: Are there any other easy pickings on the acquisition front?

I was hoping somebody would ask me, what am I going to do with all our cash? William Miller;JM Hartwell LP;Principal/Portfolio Manager: Yes. Well, that's the point, isn't it?

Yes, it is. It is, honestly. And I know we've talked about this in the past in terms of our philosophical view of how we manage our cash. And if I'm at $3.5 million a year in my overhead, and I've got $25 million, $30 million of cash, that's a little bit long on the cash side to be sitting on the balance sheet. It's a high quality problem, and I'm not going to make any money investing at T-bills. Right now, I've got to give money up than invest that in T-bills on the short stuff. So we're looking to be opportunistic here. We're looking for acquisitions that may have otherwise not been available to us or added pricing that might be a little bit more advantageous, much like when we acquired Sky Ranch. I'm looking for land interest that don't have water to them where we can pick that land interest up. I'm looking for water systems that are going to be stressed in this market condition and may need somebody to come in and help make some improvements to them -- that have the liquidity to make some improvements in them. So the acquisition costs are going to be a little bit more favorable for us. And opportunities where we can extend infrastructure to areas that give us more connections and more customers. So I know that's been my mantra that we've got our nets out there, but this is an opportunity where when you get this kind of stress into the system, that those usually present good opportunities. And so we'll take a look at those. We still want to be disciplined about our metrics and take a look at -- whether I get excited about it or not, I think my Board is very, very disciplined and very acclimated to throttling back some of my enthusiasm at times, but they're also looking for opportunities and -- to maybe risk on with some of that stuff and be opportunistic with this current condition. We'll see. William Miller;JM Hartwell LP;Principal/Portfolio Manager: If there was ever a time to be aggressive about the whole thing, aren't we approaching that at the moment?

I tend to indicate -- I tend to agree with you on that. I think the proof of being the putting to see what happens and how this current market condition impacts businesses, property owners, entrepreneurs, the whole 9 yards are going to -- it's going to have a very significant trickle down effect. And you just got to know that the liquidity will get a premium today. And so us having a very healthy balance sheet, we have a very solid liquid balance sheet that we can pounce on deals and solve other people's problems. And some -- it's not necessarily a win, lose relationship because current market conditions are what they are. I would say that when we acquired Sky Ranch, we were in a very similar situation. And having the access that we had then and having sort of a longer time horizon to be able to make sure that we can get those assets and not impact the shareholder value and really use those assets to create more shareholder value by adding water to it and increasing the value that way and then adding infrastructure on the utility side where we acquired some utilities in the past as well, all of those are great opportunities for us. William Miller;JM Hartwell LP;Principal/Portfolio Manager: Well, your record is superb, not only with Sky Ranch, but with the acreage you bought down on the Arkansas River. So I hope the Board isn't being throttle on your -- or constraint on your activity now. Now is the time when you should have somebody devoted to looking at these things. If not you, you have somebody else who is -- whose assignment is to go out and scout for these opportunities?

Well, Bill, you just gave me another wild softball there. So that gives me an opportunity to introduce Kevin McNeill who's -- we welcome back to the company. He was our Controller about a decade ago, but he's going to be our new CFO, and that's exactly his charge is to get out there and start combing the landscape and see what opportunities are going to be available to us and put some metrics to it and see if we can generate some action there. So that -- it's exactly a great time for Kevin to come back to us on that, a lot of activity, and there's going to be plenty of deals that we can comb through. So while I think I still have a little bit of game, and I appreciate your kind words there, I might give you my wife's phone number so that you can give me a slug. But yes -- I mean we really -- we are taking it very seriously, and we are staffing up to be able to be aggressive on that. William Miller;JM Hartwell LP;Principal/Portfolio Manager: Great. I'm glad to hear that because you'll get paid ultimately for recurring revenues.

You are very astute on that and never fail to point that out for me. William Miller;JM Hartwell LP;Principal/Portfolio Manager: Well, pointing out the obvious is a skill I have.

Well, thanks for kicking in and stay healthy. William Miller;JM Hartwell LP;Principal/Portfolio Manager: You, too. Great job.

Our next question comes from [ Bill Cunningham ].

I have actually a question on what's going on with the actual contracts being signed. My most recent article on Seeking Alpha talked about what Richmond American is reporting. It's great that they report in real time what's happening with contract signings. And I've been monitoring carefully recently because I expected to see potentially cancellations because that's what I've seen all along with their website is you'll see something reported as sold because the contract has been signed, and then it goes out because of assuming maybe the purchaser doesn't qualify or something else goes on. So there's a lot of changing there. So I was -- I've been looking at the site the last couple of weeks and expecting to see cancellations with everything going on in the market. And instead, there's been 0 cancellations, and there's actually been a number of new contracts signed in the past week. So I'm kind of curious as to what your general spin is, not just with Pure Cycle and Sky Ranch, but what you're seeing with the market overall and housing and how some of this may want to look at the real estate market in general the next few months or couple of years.

Great question, one that it's probably -- I can only give you anecdotal comments on. But if I referenced anything, and this will be kind of a first-hand experience. Kevin coming back, he moved back, he relocated back from Austin, Texas. And we typically don't like to welcome Texans in here, but at least they have the right voting pattern. But anyway, he come back and he really wanted to buy a house in Sky Ranch. And so if he was moving back, he went out and met with all 3 builders and said, "Hey, listen, I want to buy a house." And they said, "Great. We're 9 months out." He said, "But I need a house in March." Then they said, "Well, good luck. You can't get one." And not only did he find that experience here, but in kind of the surrounding area. And so one of the things that we know is that there is strong demand at Sky Ranch. There's strong demand in the I-70 corridor. And so you look at where we're at, we're in the right location, and I think we're in the right price point in that. And so I firmly believe that we will continue to see that same pace of contracts. I know that their traffic is going to be down just because everybody is staying at home. But I know a bunch of people are sitting around the kitchen table talking about, you know what, this house is too small. The kids are home, and everybody is sitting around. They're climbing the walls, going, I want something else. And so I think you're going to find some pent-up demand, and some people are going to -- I think our Governor extended it to another couple of weeks. But even outside that, they still have showings. They're still out there on site. They still have showings. They still have people that have a need, and I really believe you're going to see a rush of people coming out, putting the stuff under contract. And then everybody is going to be beat me up saying, "Why didn't you get that second project online sooner?" So I think it's going to be a high-quality problem for us. We want to be very reacting to it. We want to be able to invest some of that liquidity position we have into some acquisition opportunities as well as be able to invest into some of our next phase lots. I try and time those contracts, so we play on the house's money, and then we take our equity in the back end. But I think that structure will still serve us well and give us some strong rope to go out there and lasso some of these deals.

It was truly surprising to see no cancellations and new contracts being signed in the last few weeks. Totally separate question. I also noticed you've still got some revenue coming in from your oil and gas activities. And although the whole fracking industry, it's an unprofitable industry at this point, every dollar of revenue basically you get in is just income. You're not dealing with costs against it. So although revenue was down, you're generating a certain amount of income from it. It's not -- it's never going to generate a loss for you, and I think that's a rather important concept [indiscernible]

That's right. It's a very important distinction. And there's -- it's all a variable cost to us, right? So I don't have a lot of fixed costs that are outside that. So I can dial that up. I can dial that down. And you're right, if I'm not getting any revenue in, I'm not incurring the cost attributable to that. So that is a very attractive segment for us.

Mr. Harding, it looks like we have no further questions at this time. Would you like to make any closing remarks?

I would. Thanks. So again, I want to thank all of you for your continued loyalty and your continued support. We're very proud of being in this position, and really, it's a -- it's really a discipline of you guys having patience, the company having patience, the Board sticking to its metrics, management sticking to their metrics and being able to rightsize the company and grow the company and acquire valuable assets. We will continue to do that. We're very thankful of having our liquidity and our highly appreciating assets in times like these, and we will continue to try and make good decisions on your behalf. And what we'll be -- to foreshadow anything coming up assuming that we return to a bit more normal, I'd like to have another Investor Day for you all to come out again over the summer when you can see a ton of things going on, much more activity on the site. So as we get a little bit closer into that, maybe over in the July time frame, I'll send out a little save the date, and we can welcome you all that have been following the company if you haven't had a chance to come out, and those of you who are new to the company, have a chance to kick the tires because there's nothing quite like seeing it and getting your arms around it for a real tangible view of what we do. So thank you. And with that, I'll sign off. And I look forward -- if anybody who had a question that couldn't get through, that had a technical challenge, don't hesitate to give me a holler. Thanks.

Thank you. At this time, this concludes today's teleconference. You may now disconnect your lines. Thank you for your participation.