Good morning, ladies and gentlemen and welcome to the Pure Cycle Corporation Quarter Ended November 30th, 2021 Earnings Call. At this time, all participants have been place on a listen-only mode and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Mark Harding. Sir, the floor is yours.

Thank you very much. Good morning and Happy New Year to you all. I'd like to welcome you to our first quarter for our fiscal year 2022 earnings call. Just some housekeeping items. We do have a deck for this presentation. You can find it on our website at purecyclewater.com and you can click on the landing page there and it will direct you to where the presentation is. And so with that, I'll get started. Moving to our first slide, which is our Safe Harbor statement. Statements that are not historical facts contained or incorporated by reference in this presentation are forward-looking statements as that meaning from the Securities and Exchange Commission. I think most of you are familiar with the Safe Harbor statement. But now that we get the lawyers out of the room, what I'd like to do is really or roughly overview of the company business segments, and then talk a little bit about the quarter and then a little bit of color about kind of our operations and then open it up to a bit of Q&A at the end here. So, we -- for those of you that aren't familiar with the company and those that are just kind of learning the company, we operate in kind of three complementary business segments and each of these segments actually drive operations for each other segment. So, it's an opportunity where we're continuing to leverage the value of our longstanding assets that we've acquired in water and land development. Our water -- water and waste wastewater resource development segment is that we own a portfolio of water in an area where you can own water rights. We develop that water on a cradle to grave model where we own the water, develop all the infrastructure that…

Ladies and gentlemen, the floor is now open for questions. [Operator Instructions] Your first question for today is coming from Bill Miller. Please announce your affiliation, then pose your question.

Hi Mark.

Good morning, Bill.

Good morning to you. You're quite early this morning and congratulations on another great quarter. I'm just looking at the opportunities you have and I would think that maybe the rental market is by far the--

Bill, are you hearing feedback on your side?

Yes, I am. Sorry.

Yes. Holly, I am not sure if there's a mute on your side or if there's a way that we can improve that sound quality. Okay, try that, Bill.

Okay, let's try it. Got it?

Yes, that's much better.

Okay. But just looking at the three elements of your business, land development, supplying water to various utilities, et cetera, and then the rental market, I am surprised that isn’t your highest priority, because you have recurring revenue, it's by far the best returns. You can get good financing, you get inflation protection with the increase in the price of the homes. And why isn't it going to be a bigger part of your business? You say 11 this year, which is terrific and maybe you think you'll get there, what 200 or 300 eventually? Why aren't you trying to accelerate that right now?

That's a great question. So, a lot of what we're doing on the land side, it's a long lead in terms of planning and getting all of the relationships with the builder setup. So when we were first looking at our Phase 2, we -- I went to the market with 850 lots, probably two, two and half years ago with our builder partners on that and really, it was at the in the middle of the pandemic, call it maybe January, February -- literally January or February of 2020. And so we were just starting to roll out the single-family rental market where that was a concept where we thought -- we're seeing a lot of increase in value in terms of these homes, which a brand new community, it can go either way, right? It depends on how well the community has delivered and really the positioning that you have in the marketplace. So, how does our submarket perform and we found that it performed terrific. And so I would say, it was more us holding back some of those lots where we were able to hold back, call it 40 plus of the lots on our builder contract, and it was kind of a late-stage pullback in our discussions with our builders. We had said, okay, just we had 850 lots here and they said, okay, we'll buy them all and it was the distribution of those lots. And then as we were getting more and more analytic about the single-family market, we actually went to each of the builders and pulled back some of those lots in each of the blocks that they were working with, not actually having delivered that single-family market just yet. So, while Phase 2 could have been stronger in that area, it was still early on for the company and frankly we've got another 3,000 lots to be able to deliver in that area. So, I think, we will see higher weighted portions of that where we'll hold back maybe 100 in the next phase and be able to continue to accelerate that growth. And so, the reason why I don't have more than 40 in that is a couple of years ago when we were contracting for that, it was still very early on in that process and so, as we're expanding that, you're going to see a higher weighted portion of that.

Okay. So, if you're only going to do 11 this year, when do we see the acceleration to 30 or 40 rental units?

So, each of the core -- each of the sub phases, we've got four sub phases where I pulled back 10 lots in each of those sub phases. So, you're going to see that consistently. But the overlap between filing two and filing three and filing three and filing four, we'll have a weighted percentage of more of those lots. So, while phase filing two in this 850 is 40, filing three might be another 100 of those lots. And then you're going to see us being building out the first 40 at the same time as we're building out a portion of the next 100. So, they're going to be cumulatively in terms of how we rolled out each subsequent phase.

So, Mark, in three years, without counting acquisitions, what percentage of your revenue and particularly free cash flow are -- is the rental market going to be?

Great question. If in three years we're executing, we'd like to be in a position of having maybe 50 units, 60 units occupied and another 60 units under construction. So, if you take a look at that in a short timeframe, that would be going from three units to maybe 100 units in a three-year period. And that's going to be a function of kind of how each of these individual phases roll out as well as overlapping the next phase, Phase 3.

Okay. And the recurring revenue?

So, the recurring revenue, good point on that, is each of these are generating about $15,000 per unit per year in free cash flow. So, that'd be a $1.5 million in free cash flow is my decimal right there, $100 -- $15,000. I think that's right. And then typically if there are about $0.5 million each, that's $50 million worth of asset value that we would add to the balance sheet.

All right. Now, Mark, just second question. You've talked consistently about having a pipeline of acquisitions. Well, I've been hearing that for several years and versus the immediacy of being able to buy back shares, what I'd hope is a bargain price. Why can't you do both, why can't you have your cake and eat it too?

Yes, you are very diligent about that and we -- as you see our cash position fluctuates from quarter-over-quarter when we're dealing with executing our existing business day-to-day. So, we had a $20 million balance at year end, maybe a $12 million balance at quarter end. And so a lot of that quarter-over-quarter activity gets invested into our operations and so there is some of that fluctuation. Once we get the next round of bond reimbursables out of that, that will help us monetize and keep a stronger liquidity position to be able to consider some things like that, but really for the time being, where we're positioned with the balance sheet and the opportunities that we're pursuing on the acquisition front, I think we're using our liquidity to its best purpose. So, that's why we're not quite in a position where we can do both. I can't have my cake and eat it too just yet.

Well, when do you get the reimbursables back?

That's a good question. We're forecasting that sometime this year. I think within the next fiscal year, we're taking a look at what we think is the current portion of that which is about $16 million of the $30 million. So, we believe at least we'll get that much back and we'll see how the next bond positions itself out.

So, there's no appetite for anticipating in the $16 million or whatever coming back and starting now when the stock is seemingly getting no attention from the investing world?

Yes. No, I get it and it's frustrating for us as well. And I think what we're really looking for is to make sure that we're keeping some of that muscle for sitting down at the kitchen table with some of these acquisitions, Bill.

On the other hand, they are looking at the same dynamics you are, so why are they going to sell out cheaper, sell out now?

That is the discussion. They are looking at, well, is it going to be worth more tomorrow than it is today. And how much more and if -- it's a very private decision for land holders in the area and many of these are long legacy generational landowners. And so typically if they don't have it, they don't want it and the opportunities for them are mostly estate planning and intergenerational planning activity. So, this does give them a way to do some planning, some tax planning, some estate planning activities. And so we're working with that together with each dynamic that each individual landowner or farm owner in the case of water, water supply, water rights have. So, they're a little bit unique and everybody has got their own circumstance. But I would say that certainly the last three years and our visibility in the Denver market has increased significantly.

Okay. Well, thanks for the great quarter.

Yes. Thank you as always.

Your next question is coming from Robert Howard. Please announce your affiliation, then pose your question.

Hi, it's Rob Howard from Boiling Point Resources. Just wanted to check in--

Good morning, Rob.

Hi Mark. I just wanted to check in on what the wholesale water rights market is looking like right now in the Denver areas. There have been -- price has been creeping up or what's that look like?

It is. It's increasingly competitive. It's more costly, more difficult each year that goes by and I'll give you just one anecdotal reference point. We bought a small farm, had about 300 acre feet of water in a little -- it's about 30 miles north of where we're at strategically positioned for us on one of the tributaries that we have existing water rights at Lowry. We bought that for about, call it, $9,000 an acre, which translates into about an acre-foot. Of that, so I got about 300 or so, 320 acre feet that we bought for about $10 million and really looking at some of the transactions and really talking with some of our neighbors right around that particular farm, that's trending at about $15,000. So, we've seen about a 50% increase in three years on that. So, the wholesale market for water continues to just skyrocket on that, on a per acre foot basis. And also the cost of developing and delivering it because we have to reach farther and farther out and one of the advantages that the company has is that our point-of-use for our water rights is right where our waters originated. So, we don't have a lot of that costly infrastructure. And as we continue to reach farther and farther out for water, we defer that capital costs for a number of years, because we can continue to use -- of water that's close in and so we're really looking at a balance of making sure that we keep growing that portfolio, we keep partnering with regional entities such as the WISE Project that you see in our financial statements from the disclosure in our MD&A sections and really working with other providers to be able to bear the cost of some of that infrastructure on a regional project basis.

Okay, that sounds great. And are there opportunities for, I don't know if some other entity is short water this year and in the near term before you're using up all of your water rights for your own internal uses. Do you -- are you able to sell stuff for a year and is that somewhat profitable or how many -- what the margin is going to be for something like that?

So, we do, do that on a -- to our industrial customers. So, I would say when you're selling water on a one-time one-off basis, that's going to be somebody that uses water and then doesn't have a continuing need for that one-time use of that. And that's really our oil and gas customers and they have tremendous water demands. And so we continue to grow our water system. The plumbing of our water system, the wells, the pipelines to storage reservoirs, the pumping capacity, all of that, we continue to grow and use the oil and gas revenues to be able to finance that. And then what that does for us is it leverages the margins and the opportunities that we have when we get our permanent connections. When I get our residential or commercial, our retail customer connections that are permanent connections and they generate that tailing $1,500 per connection per year revenue, those tap fee margins are much higher because we continue to incrementally expand our system for our one-time use customers oil and gas. And so, those are great opportunities and we are capitalizing on those.

Okay, great. Thanks for your time. Keep up the work.

Thanks.

Your next question is coming from Elliot Knight. Please announce your affiliation, then pose your question.

Elliot Knight, Knight Advisors.

Elliot, nice to hear you.

Hi, there. Speaking of hearing me on a personal note, Mark, it was 29 years ago next month that I flew out to Denver and we met for the first time and I just want to say listening to you today and listening to this presentation, it is really extraordinary what Pure Cycle has become. Now that's the end of my speech. My question is -- my question is having to do with the oil and gas business. When well started to be drilled out there, we were told by the industry that these wells would be re-fracked after about five years. So, question number one is what's going on? Have they begun re-fracking? Question number two is can you tell us what you know about the operators' drilling plans, number of wells that are planned for the next 12 months, what their overall thinking is? And number three is availability of labor and frac crews, which are said to be in short supply. What do you know about that? Thank you.

You bet. Thanks. And again, time flies and I do remember that that fated day though those 30 years ago and I think you and many others on this call and that our shareholders of this company for their continued support through the years here. In the oil and gas space and your first question was, you're right. A lot of these wells where we are in shale deposit and so what makes this the whole thing work are fracking and well stimulation and when they go in and they do that, it creates an opportunity for the well to flow to the wellhead much, much quicker and they do typically or that shale deposit lend itself very well for re-stimulation. And Colorado as a whole has seen that in probably the northern market in the Northern Weld County Niobrara area. We have not seen that yet in the Southern Niobrara field. And really that our particular area, I think is as attractive, if not more attractive than what you've seen in sort of the core Weld County area and really we suffered from operator issues. And so we had a very -- we had a major in this field who came in, spent a ton of money defining the field, putting infrastructure in and really putting it all together, but it just never was something that became big enough for them. And so they -- while they did a great job on defining it and really starting the process and proving out and de-risking it, they didn't -- they did a terrible job on developing it. Because it just didn't meet their threshold, it just didn't seem like you could compete, because it was too big -- the operator was too big, not the field, but the operator was…

Thank you very much. That's great answer. I have no further questions.

Thanks Elliot. Best to you.

Your next question is coming from Bill Cunningham. Please announce your affiliations, then pose your question.

Bill Cunningham, I'm a private investor and occasional Seeking Alpha author. Hi, Mark.

Bill, nice to hear from my favorite Seeking Alpha writer.

And your least favorite all at the same time. I'm the only one. So, in any case, I have a couple of questions on the water. One is I believe to the extent you get water from the Lowry Range, you have to pay your royalty of 10% to 12%. Is that correct?

That is correct. So, 10% if it's delivered to a public entity, 12% if it's delivered to a private entity.

Okay. And to the extent you're getting -- you're taking it from Sky Ranch property, obviously, there is no royalty to pay. I've been looking at your financials and I don't see the royalties broken out separately. Is -- are they so small that they are insignificant or am I missing it?

No. Yes, so typically, we record that net of revenue.

Okay.

You don't see a separate category for that. So our revenue number is net of that royalty and it is pretty small right now. Not only do we not pay royalty on Sky Ranch water, we don't pay royalty on our Lost Creek Water. We don't pay royalty on our WISE water and those are the lion's share of what we're using. A lot of it we're delivering to oil and gas will come from Lowry and so that has a higher rate. We get about three times the price that we deliver water to our residential customer delivering it to our oil and gas customers. So, it almost washes out in terms of the revenue.

Okay. Okay, good. The second question has to do with the tap fees and I'm looking at the numbers for Phase 2. You're showing over $33,000 in tap fees per home, but when I do the math, I come up with less than $25,000 per home. Now, I think the answer is that these are less than single-family equivalents, but just wanted to check on that with you.

That is correct. And so when we look at a measured -- a metric here, we look at that at a 0.4 acre foot equivalency and that would be, what is -- what was historically the average for a single-family lot. At Sky Ranch, our lots are a little bit smaller. And so we're averaging about 0.3 as opposed to 0.4. And so what that does is it means we can serve more connections with the same water supply and when you look at that maybe that we still get the same dollar per acre foot, but when you have more connections in our recurring revenue model, what happens is we have a fixed fee portion of that. So, a customer might pay $45 per month if they use no water and then a consumption charge based on how much water they use. And so what that -- what the smaller lot size and more customer connections do for us is it has more revenue potential for us on a continuing basis for that standby fee for reservation of that connection.

Okay. So, then do the builders pay different amounts for a tap fee depending upon the size of the unit they're building?

They do. So, we have five metrics that go into calculating, each individual tap, each individual lot and it's based on size of the lot, size of the house, the number of car garage it has because then there is going to be concrete portion of that which takes out irrigated portions of that, how much zero escaping they have and how many square foot of the house it is. So, all of those metrics go into our tap calculator and then they -- it actually comes out and splits out. Okay, this house on this lot we know we know, we calculate, estimate the average annual demand to be this much and that -- then is factored to 0.4 acre foot. So, some of them are higher, if you have a large lot. I remember when we rolled this model out, we had one homebuilder and the very first house they came out with ended up being on a corner lot and they ended up having like a $45,000 tap as opposed to $25,000 tap and they said, we don't like it. And I said, well, if you want me to fix it at $32,000 for every one of your lots, we will, but it's not going to be in your interest to do that.

Interesting. Great. Thanks. And then I finally have a question on the commercial development, particularly on supermarket. I know at one point you were mentioning that you needed 2,000 rooftops for a supermarket chain to be interested in going in there. You've got 500 in Sky Ranch now and adding there is that trailer park that's near you, that's another couple of hundred. There is Harmony almost adjacent to you. There is the whole area where that Vista PEAK Prep school is, where there's thousands of homes in there. And looking at Google Maps, it appears that the closest supermarket to Sky Ranch right now is over 10 miles away and a couple of stops from the interstate away. So, I'm wondering what the thought process might be now for at least a supermarket going in on some of the commercial property.

We have engaged with a number of grocery retailers on that platform. They are very interested in what it is that we're doing. And while I would like to say I could give you a timeline on that, the model would be one of them used to put their flag pole in early because they wanted to be kind of the first one there and establish their position and the bigger operators now are a little bit lagged on that. They want to be -- instead of six months early, they want to be six months late, but they want to reserve the site. And they say, okay, yes, we're going to be there. And I want to be right here. They know exactly where they want their lot and I think we've got some land plans around that lot and then it's just going to be a timing of when that works for them and how that pricing works. So--

Okay, great.

What I'm not interested in doing, I'm not interested in selling them the land at a lower price and then having them wait two, three years to build on it. I'd rather wait until they're ready to build on it and optimize the land value on it.

Yes. Well, it also adds to the value I would think of the homes being sold in Sky Ranch if there is an active supermarket there.

I -- yes, intuitively, that's true. But honestly, that's not what we suffer from. We don't suffer from enthusiasm in our market. I think the price point that we're in, the entry level where I would say when we started this product. There were Taylor Morrison and KB, some of their first home. They were selling at $360,000. You can't buy a home out on our site for less than $500 now. I mean it's -- it is that attractive in terms of the building cost, the delivery cost, all those costs aren't materially higher. It's the community that we're creating out there, the attractiveness of it, its location, its access to transportation, all those things are increasing the value of those lots.

Okay, great. Thank you very much Mark.

Thank you.

Your next question is coming from Geoffrey Scott. Please announce your affiliation, then pose your question.

Mark, it's Geoff Scott, Scott Asset Management. How are you?

Great. Nice to hear from you Geoff.

Yes, it's been a while. I haven't been around for 29 years, but I was sub-$3. So, I've been around for some time anyway. Follow-up on the commercial side, have you actually identified some -- a specific land area where that commercial development is going to happen?

We have. What we really do is leverage the interstate and the interchange on that. And so we're looking at about 140 acres right up that's got that I-70 frontage for our commercial opportunities. What I didn't show in the deck and I will next call and I think we might have it posted on our website. But you can see we spend a lot of time on the design work for that commercial parcel, how the pad sites are going to lay out, how the transportation network is going to lay out, what we think about in terms of square footage for building spaces given our conversations with the various users. We were talking with a nice supercenter for grocery and fuel and then -- and coupling onto that, you're going to see a little -- some pad sites available for that, that are going to be local pizza, dry cleaning, liquor retail, things like that. So, we've got good designs for that. So, we have spent the time to land plan that, to optimize what parking is going to need pursuant to our zoning requirements and all of that. So, while it hasn't quite monetized in terms of having the connections there, the company is planning for that and development of that parcel has -- we spent a lot of time working on that and have had some great guidance from our Board. We've got some of the best commercial developer in town on our Board that really was instrumental in helping us lay that out, make sure that we're optimizing, not only the acreage there, but how that acreage gets used on parking that can be co-parking oriented. This parking can benefit multiple retailers that type of stuff.

Okay. In terms of timing, what fiscal year would be kind of targeted for actual commercial building and leasing?

I'd love to say it can be in 2022. I doubt that's the case. I think it's probably a 2023 type opportunity. We might have something to talk about this year, but I think to come to fruition, I think it's probably still 18 months out.

Okay. Then a very high-level question. The fires up toward Boulder, it's not going to affect the population of Sky Ranch. But you have to believe that with all the rebuilding activity that there is going to be an extensive pressure on labor and materials. Is that -- are you starting to see that already?

I have not seen that yet. Our production builders typically have better access to that and manage that much better. What we would look at as a pressure point for the company would be, could we deliver our BTRs in that segment and really we've got a great homebuilder that delivered our first three. He is very, very aggressive and wants to grow his business and really we're a key component of growing that business. Together with the fact that he competes against the production builders and the production builders in the next phase are much more positioned to be able to expand on that. They're building their homes next to us, they may be able to expand that if they're not able to price that out competitively to our existing builder, then I think we're positioned well for that, not to say that that won't still constrain the market because you have other trades, you have electricians, you have plumbers, all of those trades need to come out and be able to be committed to a particular area. There is another 1,000 homes that will need to be rebuilt. When you look at it in the aggregate, we're building about 15,000 homes a year in the Denver market. So, on a percentage basis, it's tragic and it's a lot of homes, but it's probably not that weighted.

Yes. I was going to say labor was tight before the fires and after the fires, it has to be even tighter.

Yes, I wouldn't disagree.

Okay. Congratulations. I appreciate the time.

Thank you for your support.

There are no further questions in queue.

Great. Well, so for those that are listening to the replay [indiscernible] on this, if something pops up that you'd want some additional information on, please don't hesitate to give us a call. We do have a terrific website. It's now an award-winning website and so there is a -- we will continue to update that. We will continue to provide color content photos, video footage, live podcast, a whole range of opportunities for us to continue outreach to the public and to the investment community. I mean, on an active basis. We're much -- we're very active on the conferences. So, I know a number of you have been to some of those conferences and we've spoke one-on-one on that. We'll continue to do that, continue to reach out to the markets and make sure that they understand what it is that we're doing and certainly the enthusiasm and excitement that we have for the company. And we also look forward to delivering you some performance on the M&A front and activities on that. I know we've been working on that for a while, and not all of those are within our control. But we're very excited about some opportunities that we're pursuing and hopefully we can satisfy, Bill Miller that we're putting debt capital to good use. So, with that, again thank you all for your continued support and please keep in touch.

Thank you. Ladies and gentlemen, this does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.

Thank you, Holly.