Greetings. Welcome to the Pure Cycle Corporation Q3 2024 Earnings Call. At this time all participants are in a listen-only. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Mark Harding, President and CEO. You may begin.

Thank you, Holly. And I'd like to welcome you all to our Q3 for 2024 period ending May 31. For those of you that are listening online, we also have a deck for this presentation. If you want to go to our website at purecyclewater.com there will be a banner on the landing page. You can click on that and you can kind of follow through with the slide deck on that. We will also post a presentation on our website for you to be able to take a look and drill down a little bit deeper as you desire. So, I will note the transition of the slides as we move through the presentation. Our first -- our second slide actually is our forward-looking statements, which I think you all are familiar with. Statements that are not historical facts contained or incorporated by reference in this presentation are forward-looking statements as defined by the Securities and Exchange Act. What I'd like to do in regard to the presentation, I'll briefly go through quickly a bit of our strategies, really spent some time on our performance and the results of our Q3, talk a little bit about our assets and some of their trajectories and the strength and the asset potential left in those and then give you a brief update on some of those. So, we'll move to Slide 4. Very proud of our strong leadership and Board. We have a very heavy Board that provides a tremendous amount of guidance. And then together with our managers, with me here is Marc Spezialy, who's our CFO. And we got a picture of our Leadership team. They've been with our Team and our Group for quite some time. All strong leaders within their individual industries and bring a tremendous amount…

Thank you. At this time we will be conducting a question-and-answer session. [Operator Instructions] Your first question for today is from John Rosenberg with Loughlin Water Partners.

Yeah, good morning Mark. And thanks for taking my question.

Good morning.

I appreciate your presentation and I also really appreciate, actually, the depth of detail that you go through about the company each time. And of course, very nice quarter and good progress. And I share your frustrations about the share price. But a couple of things. Could you go into a bit more detail or granularity about the public improvement receivable and exactly how that works? And I suspect maybe that payments might accelerate as you grow your tax base. But I'd like to hear a bit more about that if I could.

That's a great question. And the simplistic answer is that when we build infrastructure that is owned by the government entity, in our particular case, there are multiple agencies that will own this infrastructure, whether it's the local drainage authority, whether it's the county which will own the roads, or whether it's the parks and the open space that are owned by the local government agencies that manage Sky Ranch, each of those are reimbursable. And so what that does is we make that investment. We have a third-party independent engineering firm assess that, that does indeed qualify for reimbursable that allows us to book that note on our financial statement. So it's been verified by a third-party that, that qualifies for reimbursements. And how that gets paid back is, as we build homes there, those homes contribute to the assessed value. And so each home -- and I'll just make the numbers simple. Let's say, each home out there is $0.5 million. And if we had 1,000 homes out there, that translates into five -- my math right, $500 million of assessed value. And then the tax implications of that are, you get assessed based on the mill levy rate, and this really dives down. The simple answer is that we get paid back. The complex answer is, it is a formula that's based on the mills. So, that's what the property tax level is. And then that assessed value qualifies for both annual revenues that come into the district, and we take those annual revenues and we pledge them to a bond offering. So, that bond offering takes a certain number of those units, and it monetizes that at a point in time. And then you build the next phase, and then you bond the next phase and…

Okay. Thank you for that. And that is very enlightening. Just a quick housekeeping on that, though. What items would I -- would we see that in your statements? Because I'm not -- I can't identify any items in your income statement, nor cash flows where it looks like the payment back from the sales tax -- or, excuse me, from the assessed tax from the mill rate?

It will be in the note receivable, and then the payments to the note receivable. So we haven't had --.

Okay. You certainly had a revenue item of that in this last quarter, but it was mentioned as lumpy.

It is lumpy. That's exactly right.

But in the nine month cash flow statement, I'm not seeing, I guess.

There is some. There is some. You'll see because we --.

We can take that offline sometime.

No, that's okay.

Notes receivable as a negative number. But...

Yes. And your question is very – it is a great question because I get a lot of folks asking the same question. And you will see, even interimly, between bond offerings, the local municipality will pay us interest because they have excess revenues. And they are not -- I would say they're not insignificant. Sometimes there'll be hundreds of thousands of dollars. And then when we do a bond offering, we'll get millions of dollars. And so you'll see periodically that, that runs through the P&L, through -- when we book the note receivable, but then you'll see the recovery of that note receivable just in the statement of cash flows.

I see. Okay. I do see an item payment on note receivable related party.

Yes. Yes.

Okay, thank you very much. And just to keep it kind of brief for other people, what is the enrollment of Sky Ranch Academy right now?

Good question. It's right around 500 students. So, we had a limited offering of grades. So the middle school, which offers K-8, we opened up K-7. Next year we'll add the eighth grade. Following year, we'll add the ninth grade. And so incrementally, we add one grade of students per year.

That makes sense. Okay. Well, I appreciate it. I would actually love to come to your event next week, but I can't. So, good luck with that. Good luck with everything else. Thanks a lot.

And then just as you've highlighted that for all the other folks listening, we will have a Q&A session on there that will be a webcast. So if you can't make it out, but want to listen in on some of the Q&A, sometimes that's helpful as well. So if you can't make it, also take a look at that. And I think we've got that scheduled at 1:00, but we'll send another announcement out next week on that just to remind folks.

Great. Very well. Thanks a lot Mark.

Your next question is from Tucker Andersen with Above All Advisors.

Good morning Mark.

Tucker, nice to hear from you.

A lot different company than when I first met you, I guess.

Yes. I think you and I met, and I may have been flying solo. No, we had a much more skeletal staff. But yes, we've grown quite a bit. And thank you for your continued loyalty.

I don't think land development was even on your long-range plan at that point. But anyway, and once again, as the previous caller, I apologize, I can't get there. I'll try to get on the Q&A, but will actually be somewhere on the Great Lakes at that point, visiting different ports. So it'll depend on where I'm, whether I can join you, join you remotely.

One of these times we might have to try and do it in the winter, so you all can kind of parlay that into a ski weekend as well.

Well, I think I told you I feel even worse about it because my daughter lives in Denver and I should be able to coordinate with a visit for her. But anyway -- and I once again want to thank you for the detail, too. And the first thing I wanted to drill down on was that segmenting of the Phase 2 was very, very helpful. And as you go through that, what will be happening to the average price of your lot sales? Because it seems to me, we're sort of -- the irresistible force moving to meeting a movable object in terms of prices continuing to escalate, but affordability to continue and decline. And do you think you can continue to get escalating prices as you go through the different phases and sell the lots?

Yes, we do. And so what we're experiencing, we have built in inflators to each of the phases. I have my builder contracts in there for Phase 2B and 2C as we've broken ground on each of those and we're pricing our Phase 2D specifically. And so we want to make sure that we maintain margins. But we're also partnering with our homebuilders, and so we really do want to be competitive in the marketplace and make sure that we're offering value to the proposition for our shareholders, but also give the homebuilders the opportunity to continue to compete because we want a high absorption on those homes. We want their participation in this. And so there's that delicate balance of getting the right number to maintain our development margins, getting the right number so our builders can maintain their margins and getting the right numbers so our homebuyer customers are aggressive and attractive for absorption of those. So, that's the line we walk. We continue to see price increase, and that's just a function of affordability in any market. Denver is no different than any other market, but we look at all three of those as we continue to add additional phases.

And does that mean as some of the other entry-level builders that, that you see more of a movement in terms of to keep that affordability in your builders towards duplex and rowhouses? Or is this sort of viewed as being the same mix as you go through the different phases?

No. I mean, I think that, that mix, when you throw that mix in there, what it does is it allows them to be in a position and us as a single-family renter on there, it allows us to cater to a broader market of that entry-level segment. So, you have entry-level buyers for a traditional 2,400 square foot detached house, and maybe that is in the low-to-mid 5s. And then if you've got a 40-foot house and that may be at 2,000 square feet, they have a different price point. If you've got a duplex, that's a different price point. If you've got a town-home, that's a different price point. They're all entry level, but they're really trying to flex into having once somebody comes out here, they love it. They see the community and what we've built, and the attractiveness of a charter school and all those elements that we really have built into it. And you want to make sure that you have a variety of products that are available for all those types.

And is there any change or anticipated change in the mix of the builders that you're using?

We continue to add builders. The thing that is really flattering is there almost isn't a week that goes by that I don't get revisited by a builder who's not here, who wants to be here. We have four or five builders that are in this portfolio. And as we move from Phase 2 to Phase 3, we may look to increase the capacity of that. Now that we're very well established, we have a very large and developed network of transportation. Instead of building 200 lots a year, growing to 400 lots a year, we may be looking at 600 lots a year and we may have six, eight builders in that portfolio. And so, yes, we'll continue to add to that portfolio and we'll continue to accelerate just because of the maturity of the project.

And as you add the single-family rentals, have you been and are you continuing to do all the management of those single-family rentals in-house? And do you view that as a sort of another division of the company? Or are you outsourcing that, or do you plan to outsource that, the management?

It is 100% done in-house, both the leasing as well as the maintenance side. Fortunately, we don't have much maintenance because they're brand new homes. But the leasing side, we do have a separate website that we direct folks to through the affiliate residential network here, and it shows each of the model homes that we have available. It shows each of the model homes that are coming online, forecast dates for that sort of stuff and really have had very high success of renewal rates. So, we continue to be attractive, and that's another one in terms of pricing, right? We want to make sure that we're pricing our rentals in there at such a rate that it gives us a good return on the investment, but also gives an affordability index for the people that are renting such that we have multiple year tenants on that. And each of our rental structures are structured as a one-year lease so that we can make sure that the tenant is right for us, we're right for the tenant and we make market adjustments as appropriate.

Any thought on making any of those leases rent-to-own in terms of turning over that rental inventory?

That's something that would be -- we do evaluate that. I think what we look for is that we want to continue to build that portfolio. And if we have a liquidity event where we would need an acquisition or something like that, then we can carve up a group of those and maybe roll those out to another institutional player. It depends on the liquidity needs and the cash needs. As it continues to generate double-digit returns for us, both in terms of cash flow as well as the appreciation of the homes, we'd like to keep those on the portfolio, but there is always opportunities and very liquid market to spin them off either individually or as a portfolio.

Yes. Well, that's exactly what I was thinking in terms of, if there was a bump in your cash flow needs and then you would capture the appreciation at one time is through a gradual increase in the rental stream. Because one of the questions that's been asked on previous calls and that you implicitly put into your presentation, but didn't expand on it as saying you now view a real leg of your company as land development. And with regard to cash needs and things like that, is there any reasonable possibility, given how tight the Denver market and the environments are that you would be able to find another project with similar opportunities to King Ranch and expand beyond being a King Ranch land developer?

Yes. You bet. You bet. I mean, I didn't highlight that, but we are very aggressive about being in the market for additional acquisitions. I will say, we've been very disciplined about it and we haven't lost an opportunity. But by the same token, we also haven't acquired an opportunity. And so the same conversations that we have with our strategic marketplace on where we want to acquire more land and more water, the priorities are probably more towards land than water, but we still are very much in the forefront of making those investments and keeping some dry powder to be able to do that. And our liquidity does provide us an excellent opportunity to sit down at the table and take advantage of that.

Well, as I think you've pointed out in the past, if I understood your comments correctly, that your water division perhaps gives you a synergistic advantage over other land acquirers.

That's right. Absolutely right.

Yes. Okay. Just my final comment would be on what you said, the frustration with what appears to those of us who've been around for a long time a significant undervaluation of the stock. But on the other hand, you have done very well for me, and I thank you. That sort of I think -- I always hope that you keep in mind what you seem to be doing. Warren Buffett's admonition that in the short term, the market's a voting machine. In the long term, it's a weighing machine, and it'll figure out what your company is worth. And I just hope that long run isn't so far away because it's long run. We're all dead, as you know. But in that regard, are you just going to continue along the current path of adding value? And if the market doesn't recognize the value and you have liquidity gradually shrinking the share base, as you point out, you have a very talented Board. Are there other discussions underway about how you might make the market more aware of the value you're creating?

You bet. And we evaluate that every quarter. We evaluate that every month. We take a look at our strategies on that, our IR outreach, my conference participation and getting out -- excuse me getting out, talking to folks that would be new to the company, taking a look at our industry peers and leveraging holders of our industry peers, taking a look at investor days, taking a look at non-deal roadshows and all aspects of that. And I guess it has great opportunity because we don't need capital and folks can understand that an investment in here continues to add value, and the company has the ability to continue to shrink the denominator on that and we're going to continue to do that. There's always calls for being more aggressive on that, and I hear those loud and clear. We continue to try and do that. We're not going to make the market in the stock. But at the end of the day, we are going to continue to add value and returns to the shareholders by doing that. Again, it's a longer tail on that. We continue to look at the dividend policy and the timing of declaring dividends, and we will be looking at that. We continue to look at that. And that's still on the agenda. We would like it to be a little bit closer -- closely aligned to making sure that what we're doing on the dividend side is at a point where our annual revenues exceed our annual overhead. And so that allows us some free flexibility on that. And we are getting very close to doing that. So, we'll be all-of-the-above approach. And I think you are right. That weighing metric will come into people as we continue to put up good results.

I'm sorry to monopolize so much of your time, but thanks for everything you've done. And I think continuing to provide additional detail is one of the things that's going to help the valuation. So, good luck.

Thank you, Tucker.

Your next question for today is from Geoffrey Scott with Scott Asset Management.

Mark, how are you?

Geoff, great. Thanks. That was my favourite – resident.

Yeah, every time I drive bike, keeps getting bigger and better, so congratulations. A couple quick questions. On the commercial side, you said you are still a bit early. Is it going to be a 2025 event when we see activity or 2026?

I would push probably to '26. We have some small retail commercial that would be -- it can be a C-store or convenience store. But when you take a look at really the major commercial up by the interstate, that's still a year plus out.

So 2026 activity?

Yes.

The price of a home is a function of the land cost, the water tap costs, the building cost and some profit margin. It seems like the tap fees have been fairly flat. Is that a fair characterization?

No.

Have your tap fees have gone up in the last 12 months?

They have. They have significantly. And so you take a look at it -- I would say our -- and it's a couple, it's by a couple of ways. When we started Sky Ranch, our average tap -- water tap fee was around $26,000. And I think our --.

That was combined? Combined.

Yes, it was combined.

Water and wastewater?

Water and wastewater. Right. And I think we've got a rate evaluation this month for our water tap fees that will take that up close to $30,000. So, $30,000.

Is that $34,000 for water and sewer?

I think that's the water. Yes. So, I think it's going to take it closer to about $38,000.

Combined?

Yes.

Okay. What about the selling price of lots?

Selling price of lots continue to --.

Lots are all different.

They're different because there are different front footages and the categories. But we are continuing to see about a 10% or 12% increase in each of the phases that we have coming online. So, we started out with selling lots, and we knew that we needed to be aggressive because we were establishing ourselves both in terms of the market as well as a developer. And so I would say the lots that we sold in our first phase at $75,000 are now closer to $120,000.

Okay. So they have continued to creep up nicely.

Yes. And keep in mind, we're balancing that. As I tried to detail earlier, we're partnering, balancing our margins, making sure that our homebuilders are making money on this, that are commensurate with their margins and making sure that our homebuyers are very -- that the price of the home adds to the velocity of the home. So, we want to make sure that, that velocity because -- that overall IRR is the important component of this.

Very true. Okay, thanks very much. Appreciate it.

You bet.

[Operator Instructions] Your next question is from [Greg Vennett] (ph), a Private Investor.

Good morning. Thanks for the presentation. The school, did we pay for the school or do we get reimbursed for the school? How does that work?

Great question. No, we did not pay for the school. We did dedicate some land. So, we donated the land that the school sits on for the building of the school. But we partnered with one of the largest charter school operators in the country, and it's a group out of Michigan called National Heritage Academy. They have over 100 schools nationwide. They have over 60,000 students. They have a very well matured, developed curriculum. We were actually their first K-12 campus, and they liked it so much that they're continuing to do K-12 campuses. Most charters are really focused in that primary school stage, K-8. And we really wanted a full campus and we wanted one single operator. And so we were thrilled to partner with them. They made the investments into the school. They handle all of the school activities. I do sit as the Chair of the charter school Board, and we continue to maintain that interface such that we -- we want to demonstrate that value to the charter school. And so it's a great partnership. We've been thrilled with the first year of operation. Really looking forward to continuing to roll that into the high school, which will probably start construction in 2026 for 2027 school year. So, we'll continue to update you of those results.

The capacity of the school we have now, the K-8 or K-9, I believe you said there's 500 students there now. Is that correct?

Right. That's right.

Yes. What's the capacity of the school?

It's closer to 850.

So you might be at capacity for that school in the next two years.

Yes. That's right. That's the planning of then transitioning to the high school.

So, this is a private school or is this the real estate? Is this a public school that --.

It is a public school -- it is a public school. So it's a non-tuition based school. It's free for the students to attend there. And we have -- I'd say we've got the majority of the students that live in Sky Ranch that are at those grades that we service them, go to the school, but then we have kids coming from outside the neighborhood coming to the school as well.

Okay. So are there plans for another? There's the plans for the high school, but are there plans for another K-9 school?

That's a good question. I don't know. We have another site that we can do another K-8 on. And typically, what happens is you have two primary schools that will feed to a high school. If we did develop the other -- and this is really a discussion for us in conjunction with NHA. If we developed additional capacity, we'd be serving students beyond the students that live in Sky Ranch. And so we would be picking up students from the surrounding area, surrounding land development areas. And so there's an opportunity to do that. How we do that, and in conjunction with NHA, we want to make sure that. And personal belief, but if I spill over, there is no more valuable investment than to invest into education. And so that investment in education will continue to make the Sky Ranch community more and more valuable. So that's a discussion, Greg that we're having and a discussion that we are having with NHA, something that we would be willing to make the investment on the land side and they are willing to make as long as their student capacity -- as they start to turn away students because they're at capacity, then that's something that they'd be interested in.

Okay. Are there any -- so if you're a young family and you're looking at -- and you're in Denver, are there other competitions when it comes to education as fine as The Academy? Or do they have other choices if you are a young family?

So, Colorado is a choice state right? So the student can go where it wants to go, and the state funding actually follows the student. So it's there. You can go to your local neighborhood school. You can go to a charter school that would not be in your neighborhood. You can go to a public school that's not in your neighborhood, and they're all based on capacity. And so if you start -- if a school starts to run into a capacity issue, then they have a priority of who they serve. And so from our standpoint, and this really dives into the detail on schools. But you look at Sky Ranch Academy, our preference is the students that live in Sky Ranch. And once we meet all the needs of the students that live in Sky Ranch and if we still have capacity, then it's students that live in the district that charters us. Now, the district that charters us is the Bennett School District. So, those kids that live in the Bennett School District, then have the next priority. If there is still capacity of student availability and no additional residents in the district, then you can open it up to the neighboring school district, which is in the City of Aurora. And those students that live in the City of Aurora that sit within a geographic priority of Sky Ranch, get the next priority and then the next priority. So it cascades down into both the school district, the local jurisdiction that's building it and then the proximity of students.

Okay. So a different question. I think none of us are familiar with the Denver market. Is there new competition coming in? Or is there absorption at your price points that's occurred in other communities where -- I'm just wondering if you're going to be the choice because there is nothing else available under $600,000. Or do you know of communities that are coming online that are going to be competitive against Sky Ranch?

I would say that, given our basis in the land, given our location, given the characteristics of the ground, we probably have a very competitive advantage to continue to compete against any new project that comes out there. There are always going to be more projects coming online, but the time lag of getting entitlements and getting through the process is tremendous and costly. And so you have fewer and few people that are actually doing what we do just because the market is so frustrating and every new project takes longer, costs more than it did the last project. That's not to say that there's not new projects out there, but I do think we have a stronger competitive advantage because of location, because of transportation access, because of how we handled the schools and because we're developing a damn good product.

Okay. So the entitlements for the property, is it to the 3,200 homes? Or is it per section, Phase 2, Phase 3? Because you --.

No, it's fully entitled.

So that frustrating long process, you have a two-year or three-year whatever advantage, I guess or?

I would think so. I would say that's probably accurate.

Okay. All right. Thank you for taking my questions. Appreciate it.

You bet.

Your next question for today is from Elliot Knight with Knight Advisors.

Good morning Mark.

Elliot, nice to hear from you.

Thank you. Just a very quick question. On the slide, Metro Denver real estate shortage. There is a bullet point, legislative support. Could you explain that?

So, what we really have is Colorado. They continue to try and push the envelope on housing types of projects. And so what we have here is the occupancy limits. The biggest issue in Colorado for multi-family housing has been product defects legislation and the ability for bright young lawyers to be able to get class action lawsuits against homebuilders. And so the legislature is really trying to limit that type of loophole, I guess, such that it's not so easy to get a class action suit. Clearly, if there is a construction defect, they should be held accountable. But that's not the way it's been working in the past. And so we are seeing a little bit of support for that on how -- being more aggressive about town-home, getting a smaller footprint, continuing to press the envelope on affordability because it is -- Colorado is experiencing a challenge with affordability. If you say an entry-level house is anything less than $500,000, that's still a pretty high number. And the way to reduce that is going to be to have higher density, higher occupancy. And so that's where we're seeing the Colorado legislature recognize some of these problems.

Okay, thank you so much.

You bet. Good to hear from you.

We have reached the end of the question-and-answer session. And I will now turn the call over to Mark for closing remarks.

So, I do want to, just to reemphasize, we are having our Investor Day next week. We've got a number of folks that have registered for that. Thank you. Look forward to seeing you out here next Wednesday. We will send out a reminder on the web link, or if all of you want to just jump over into our press release page on the website, that'll give you the link to the Q&A session. So if you can't make it out here for that, it's always helpful to hear how other folks are seeing it. And it's helpful once somebody comes out and sees the progress that we're making to get to their view of it as well. So don't hesitate to link in on that. And I'll be hitting various markets, whether that's going to be East Coast, Midwest or West Coast for a bit more, just investor chats and really trying to get out into the market and meet with investors and meet with new institutions on just non-deal roadshows and things like that. So as we get those scheduled, I'll shoot that out to you all and look forward to an opportunity to see you in person. But with that, I will close. And if you are listening to this with a rebroadcast and something piques your interest, don't hesitate to give me a call.

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.