Good morning, ladies and gentlemen, and welcome to the Pure Cycle Corporation Third Quarter Nine Months Ending May 31, 2022, Earnings Call. At this time, all participants have been placed on a listen-only mode and the floor will be opened for questions-and-comments after the presentation. It is now my pleasure to turn the floor over to your host, Mr. Mark Harding, President and CEO of Pure Cycle. Sir, the floor is yours.

Thank you very much, Jenny. I’d like to, first of all, I will say, good morning, and welcome to our nine months 2022 earnings call. We do have a deck for this presentation. If you go to our website, purecyclewater.com and in the Investor section, you’ll find the link on that that will allow you to follow along with the slides that we have here. With me today, I have our CFO, Kevin McNeill, who will overview some of the financial metrics for the nine months ending. I also have Dirk Lashnits, who is our Vice President of Land Development, and I think he’ll highlight a little bit of our progress on the Phase 2 of our Sky Ranch development. After we’ll do the deck and after the deck we’ll have a brief Q&A for some of the color of the quarter and the year, and maybe how we’re going to close out our fiscal year. So if you have any questions, please hold those to the end. With that, let’s get started. I’ll talk about our Safe Harbor statement to say that the statements that are contained are not historical facts or incorporated or I referenced in this presentation our forward-looking statements, I’m sure, most of you are familiar with the forward-looking statements and the Safe Harbor statements. So as we get the lawyers out of the room, we can start the presentation. I’m going to just give you most of you are probably fairly familiar with the company, so I’m going to blow by kind of the overview of the company relatively quickly. What we do is we operate in really Multiple Complementary business segments and really the underpinning of that segment is our Water, Wastewater Resource Development segment, where we’re providing water utilities in an area where…

Good morning. I am Dirk Lashnits. I oversee our Land Development and I’ll give you a quick overview of our Sky Ranch project and repeat some of what Mark has already mentioned. Sky Ranch is our 930 acre master planned community on the east side of the metro area. This project will probably develop in about six phases over the next seven years to 10 years. We’re complete with our first phase and underway with our second phase right now. So we’ll get into that in later slides a little bit. At build out, we’re looking at somewhere between 3,000 and 3,500 residential lots. The -- we have about 150 acres, of that 930 acres is a commercial parcel that fronts the I-70 Corridor that Mark mentioned and then as the rooftops grow out towards that -- this area that that commercial will start coming online. So we hope to see some activity along those lines in the next year or two. And then our proximity to town, like we said that, the I-70 Corridor is the main east-west thoroughfare through the metro area and we’re -- we have an interchange right off of that and just a few miles from our E-470 Toll Beltway that kind of connects the whole metro area and real close to the airport as a business corridor. Next slide here. So our first phase, we started this in about four years or five years ago, 2018. It’s wrapping up right now. This is an aerial image and if you look at the top of that image, you can see some brown lots up there. Those are -- those of the last remaining lots that are getting built out on. So 509 lots out here. We’re about -- probably about 475 occupied houses now. So…

Yeah. So let me just detail out a little bit of the financial metrics on these two phases. So as we were talking about from the first days, Phase 1 had about 509 lots. This one has a broad mix of product classification. So we’ve got four different, we got three new builders, one returning builder, really building a very strong variety. We had a couple of different product mixes in the first phase. I think we have six different product mixes in the second phase. And we’re delivering this in increments, as Dirk was mentioning, almost four equal increments, not exactly equal. But that allows both us and the homebuilders to manage how we’re doing the horizontal costs and that’s an important component. Each builder under our lot development agreement format is really our partner with us on developing these lots. And so we get paid three equal installments on our lot delivery agreements, where we deliver a plan that lot, we will get that first third payment, then we use those funds to be able to invest into delivering the water sewer systems here and then we get the second payment, we use that second payment to really finish out a lot of developing the roads, curbs and gutters. And so that really does partner us with our homebuilder partners to make sure that that heavy lift of the horizontal infrastructure is done concurrently with their purchase of the lots. And he’s kind of detail that out is how we’re going to expect to see that over that second phase, what the gross proceeds are and then also how the reimbursable is a crude of that. And as you build a community, those investments tend to -- you always have a bit more of those infrastructure costs as…

All right. Thank you, Mark. Yeah. So the slide we are now obviously summarizes our Single-Family Rentals that Mark talked about earlier, which is new to us from November. We’ve got three built, rented, that you’ve been occupied since November. We’ve got a fourth one under construction right now. Don’t back up a little bit, sorry, this is just some metrics on the market. You will see the rental market is still continuing to be strong. We expect it to stay that way for a number of years. This shows us some pro forma information on what an individual rental house looks like. This is based really on the first three that we have running right now and this is what we’re experiencing. And we expect this to continue for the next, the fourth one and the next 10 into the next 46 that we have planned for the whole second phase of the developments. Like said right now, the first three are fully rented, going pretty well, I think, as well as we expected them to go. This is a little timeline that shows you how they progressed. So the first four pictures on the left, I will show you how the first three houses were built. That fourth -- the fifth picture over there on the far right is the fourth house that’s under construction windows just got put in yesterday, which is pretty exciting to watch. And then the next 10 and those four are all in our first phase. The next 10 are in our second phase in Phase 2A have, we’ve signed a contract with the builder. We have them, they’re getting a stake in them and start construction on them probably this month, with an expected delivery of those 10 phased in over the…

Yeah. I just want to highlight just a couple of things on the financial metrics and as we’ve talked about this in the past, just to reiterate, for those of you that are new on the call. On these public improvements, so what we do is, we build the roads, curbs and gutters and the drainage, and those are really owned by the local municipalities. And we’re able to get reimbursed on those through the tax base property taxes. Colorado’s kind of a growth pays its own way state. And so each individual development has property taxes, they have their own investment in public improvements, and the local ratepayers and the local residents that pay those taxes. And so the reason it was a little wonky for us on the front end of this thing is that we were deferring the potential for those revenues rather than recognize them on a periodic basis. And so once we were able to demonstrate to our auditors, we had full confidence, but our auditors may have wanted a little bit more definition on how we were going to get these reimbursable out and it’s really standard industry practice as to how this does occur not only in Colorado but across the country, but. Once the local municipal jurisdiction was able to get some assessed value from the homes that were there, from the residents that were there, from the tax collections, we were able to bond that. And so the reason that we recognized all that revenue very lumpy last year was due to that. Now, what we’re doing is, we’re recognizing those revenues incrementally and so those are growing and you’re going to see that much more stabilized revenue stream on our financial reporting. So that was -- that’s why some of…

Thank you. [Operator Instructions] Thank you. Your first question is coming from Mr. Bill Miller [ph], who’s a private investor. Bill, ask you a question please.

All right. Good morning. Very good morning, Mark.

Good morning, Bill.

How are you? I’m wondering how you’re going to benefit from or get hurt by the inflation, obviously, you have your energy area which is producing inflation and how many wells do you have on your CAD and what is the production revenue?

So let me kind of parse that into two segments, the inflation question, one of the things that we see, we are seeing a bit increase in costs of deliveries in kind of roads, curbs and gutters, anything that’s energy-related concrete, asphalt, those sorts of things. We do see a bit of that cost increase. We have some inflators in our lot delivery contracts with our homebuilders that naturally anticipate inflationary measures in there. So each of our lot contracts that we have we did put in a 4% insulator in each of those. Inflation is rising at a higher rate than 4%. And so bit on the low side of that, but we are keeping up with our builders on the inflationary side of the cost that we’re going to see in that. Our homebuilders are seeing a mix of inflation, lumber and those have -- prices have stabilized or come down a lot of supply chain issues in their spot and some of the supply chain issues, garage doors, for example, seem to be one of the more challenging metrics in there. But they’ve managed that fairly well. And we see that necessarily through our individual homebuilding efforts with our homebuilder, where we were taking a look and managing that with our builder to say, hey, I can take inventory of windows, I can take inventory of garage doors here and so they go out, they get those ordered for those long lead time issues. So it’s a management issue in terms of each of the homebuilders. I think the labor shortage issue has kind of worked its way out. For most of our homebuilders, they -- while I think they would love to have a stronger robust, more robust labor chain on there, it does not seem…

Yeah. Great. Tell me know about the ability to raise your rental income? I mean, you’ve got a refresh coming in November, can you raise the rents or is that not possible or how do you?

Oh!

…makes a lot of sense upfront?

That’s kind of why we look at having annual leases on this. We want to make sure one that the tenants like us, secondly, that we like the tenants and that we’re fairly priced. And so the advantage I think that we have in the Single-Family Rental market is that, we’re carrying forward tremendous equity in both the lot itself, as well as the water utilities and the first three were a classic example of that. We held the lot value for ourselves. We went and contracted to build these homes for $330,000. They appraised at around $550,000. And then we were able to rent that out as if it were a $550,000 house, which gave us significant margin in the making sure that we’re using a little bit of leverage within the company. So we financed the vertical component of that at that $330,000 and not only does our rent cover that, but it gives us incremental margins. And we do want to keep conscious of that that rental market. If homebuyers are looking at -- the demand for single-family homes is as high as it’s ever been. The demand for buying single-family homes is as high as it’s ever been. If one of those weekends, it’s going to be an interest rate sensitive market where the demand for renting those single-family home or buying those single-family, people may wait a few months to see what interest rates do or how the change in interest rates are. When you look at historical trends, interest rates at 5% to 6% are historically low. And they’re not low comparison to a 3% interest rate. But they’re certainly not what interest rates have been in the past being 8.5%, 10% on those things. So I think it’s a -- it’s going to equalize in the marketplace for buyers, they’re going to continue to aggressively pursue that. I think this -- the Single-Family Market segment is going to continue to grow, whether that’s going to be for rentals or whether that’s going to be for purchase. If we continue to see growth in the rental side competition in the rental side, you’re going to see rental rates continue to appreciate. We will continue to monitor that. We will continue to maintain a market segment in that area where we’re competitive. But we also want to have a good long-term tenants in there so that we can continue to maintain our portfolio in-house.

Well said, Thank you.

Thank you.

Your next question is coming from Elliot Knight of Knight Advisors. Elliot, over to you.

Good morning, Mark and Kevin.

Good morning.

Expanding on the build-to-rent? That was what my question was about and you’ve largely answered it. But in a rising rate environment, will Pure Cycle’s profit be impacted, because you began this program at a period of when interest rates were very low? Will your margins be squeezed by the rising rent, the rising interest rates or do you think rising rents are going to more than offset that? Anything you could say on that would be helpful?

Yeah. So, I would say that, the rising interest rates don’t directly impact our lot prices. Although, if it takes more income to qualify for the same value of home, it does impact the builder’s ability to buy home or lots at a certain price and so that’s where I think you’re going to see a lot of the weakening, softening in the marketplace for lots that are going to be $130,000, $150,000 lot that delivers a $650,000 home, $700,000 home, kind of that median home value. So the interest rate sensitivity does have an impact in home prices, and by virtue of home prices, it can correlate down to the price of a lot. But that’s kind of where I think we have our competitive advantage that we’re delivering lots entry level marketplace. Our lots -- our average loss is around $100,000. So we’re substantially not just a little bit cheaper, we’re substantially cheaper than our next nearest competitor for that. When you take a look at rising interest rate environment into the rental market that does impact that and the cost of money continues to impact players that are buying homes and renting homes at fair market value. And so, again, we’re going to be positively positioned in that, because we’re carrying forward equity value that we have in the lot and the water utilities, to the tune of 40% of the lot or 40% of the home value. So that gives us a competitive advantage. Yes, we want to be competitive, we want to make sure that that asset is producing the right revenue for our shareholders on that. But we also want to maintain consistency with income on that. And so there’s a balance there, where we want to continue to be competitive, we will continue to be market based on our rental rates and that continuing to be -- market based on that will continue to improve our margins. And so when we already start with good margins, rising interest rate environment will help us in that area.

Okay. Thank you.

Yeah.

[Operator Instructions] Okay. There appears to be no further questions in the queue. I’ll now hand it back over to Mark for any closing remarks.

Okay. You are very kind to me today. I’m very appreciative of that. I’m going to throw a question.

You have a question, Mark.

I know everybody. Hello.

We do have another -- we have another question if you want to take it.

Sure. You got.

It’s from Greg Rabalachelski [ph] of Benchmark. Greg, over to you.

Hey, Mark. How are you?

Great. Thanks. How are you, Greg?

Good. Good. Yeah. I’d say I jumped in there at the last minute. I just kind of had a quick question. Maybe two, the first one is on the economics of the Single-Family Rentals, it obviously looks good and kind of branching off of that, I’m sure you’re aware of multi-family is a rather attractive asset class. I was just wondering if you guys had given any thought to potentially either converting or adding additional capacity in future phases to potentially build a 50, 100, 200 unit multi-family complex that the company could retain for their rental program as well?

Good question. And I will -- let me answer the two phases. One, we do have a multi-family component to the overall masterplan development. And I think it really positions itself between our commercial and our residential. So it’ll be in that area on kind of the lower half of that 150 acres that’s our commercial side and transition between where we go to the detached residential stuff. It may be as many as 450 units and would we carve off one of those buildings for the company itself, one or more of the buildings for the company itself, entirely within the scope of opportunity with what we’re looking at here. I think the multi-family is a little bit different property management than the detached single-family and so we got to look at that fairly carefully as to how we would manage that, whether we would manage that in-house or contract or something like that. But it is within the range of possibility. Right now we’re going to focus in on a very diverse and wide product mix for single-family and we will have very big homes, where we have four bedroom, four bathroom, detached Single-Family Rentals and we understand that market, there’s a strong, strong market for that right now, just because of the work from remote where we can have one or maybe even two office environments for people that want to work-from-home or even kids and office from home. And then other product classes where we’ll have some paired product, we’ll have some townhome product, we’ll have some smaller lot product, 35-foot lot product in there. And so when you start to see a very broad range of product classes and you’ll have a broad range of renting entry points on that, you really do have kind…

Okay. Awesome. Awesome. And then just one other question I didn’t notice, it was kind of tucked away in the subsequent events section that there was a minor, I mean, I think, it was like a $3.5 million acquisition of some, I guess, a few 100-acre-feet of water rights. And I guess, I just wondered if you could expand on that in terms of, one, kind of what the strategic benefit of that is, and two, if in any way you can extrapolate from that valuation paid in relation to the remaining or the rest of the company’s existing water assets, because I guess one of the biggest problems people run into is somebody coming across this company, you look at the portfolio of 29,000 acre feet and a lot of people have difficulty putting a real value on that. So I’m just wondering if you could maybe, if there’s any read through in terms of the valuation or just in general, how you would tell somebody to look at that?

Great question and I’m glad you brought that up. It was going to be a component of the question that I was going to ask or a rhetorical statement that I was going to answer for that. You’re right, we’re -- one of the underpinnings of the company continued to be a Water Resource company and the value of water as it relates into water short region. And we did buy a small addition. It was three additional wells that we had, that were in proximity to the two wells that we bought three years ago. And so we liked that particular area, it consolidates a bit more water in that area for us. We found a good value proposition in there. it was a seller that we had been talking to for a number of years on that. And in acquisitions, whether that’s going to be land or water acquisitions, a lot of its relationship oriented, a lot of these are legacy owned by families through generations. And so sometimes it isn’t how much or what’s going on in values or market segments, it really does fall into the timing of the individuals. And so that was an opportunity for us. The value that acquisition, I think, I never like to say, oh, well, we did great on that acquisition as compared to the seller. We try and be fair and buy things at fair market value hold those things and we try to be fair market value and timing of our acquisitions more than we try to be really a hard driver, hard bargain driver on the purchase price of any one assets. And so, as the market continues to see these inflationary pressures, we’re seeing a lot of loosening of that conversation. And that’s a classic example…

Okay. Yeah. No. That’s…

That’s my thoughts.

I think you made a lot of good points there on just the back and forth in terms of what goes into all that, and overall, you guys have done a very good job of kind of seeing this through and really nurturing the -- in the infancy of these things, they’re very obviously risky. I mean, that’s the reason you got the Sky Ranch in the first place is because they’re not managed properly in the beginning phases, a lot of bad things can happen. But I also think as we’ve progressed, if you look at the valuation the markets assigning, we’re trading at like a 20% or 30% discount to where we were barely heading into Phase 1. And as you touched on, there’s been significant value created and I think it’s just something to look at, because obviously, you can’t stop developing lot, because, hey, we’re just going to buy back stock, that’s obviously counterproductive. But at the same time, the same way, you guys just picked up a small tuck-in acquisition of a couple million dollars, having an open authorization there, which doesn’t even cost the company anything, I think, is something worth consider, and, again, it’s free. And it’s really just an option to say, hey, we reserve the right if the market gets stupid enough to go in there and a couple million dollars a quarter even, I think, is not something that’s going to jeopardize the operation. So, I think, again, I would just stress that something for and I think the Board should consider, it costs nothing to have an authorization and it just gives the company another option at its disposal. But, overall, I think everybody should be very pleased with where this is headed. What you guys have done and just all the thought that goes into this stuff. It’s certainly not simple. So I was hoping to get out there for the Investor Day. I am not. But I wish you guys the best and just keep up the good work and we’re looking forward to this, obviously. Thank you.

Well, thank you, and you bring up some good points there. So, it is -- I feel fortunate that we’ve got a great management team with Kevin and Dirk and our engineers, and Serena as our controller. I mean, we just have terrific leadership here. But we also have outstanding talent, far better than I deserve or we all deserve at the Board level. And so these are weighty subjects that that we do take seriously and we do debate and you would be impressed with the dialogue at the Board level. So to -- while it doesn’t seem like you see that tangible results of the debates and the thoughtfulness that go into those, I assure you that our Board is just terrific and deliberative about each and every one of those and the capital allocation strategies that we approach. So continue to monitor that. We will continue to evaluate some of those opportunities and continue to add to the toolbox.

And what I’ll do is, I’ll go ahead and start to close this. And for those that are either at a technology issue that didn’t get to ring in or if something comes up that you didn’t think of on the call, don’t hesitate, give us a call. And for those of you that will be out here tomorrow for our Investor Day or those of you that are ringing in through the Q&A, we’ll have a bit of a Q&A in that, so there’s an opportunity for us to see, send out a team’s invite for folks. So if you do have an interest in that, just send us an RSVP and then we’ll send you a team’s link for the Q&A on the Investor Day as well. So, with that, I’ll ring off and hope you all have a continued relaxing and productive summer.

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, Jenny. Okay.

Thanks, guys.