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 placed 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 provide a rough overview of the company business segments, and then talk a little bit about the quarter and then add some color about our operations and then open it up to a bit of Q&A at the end here. So, for those of you that aren't familiar with the company and those that are just kind of learning about us, we operate in three complementary business segments and each of these segments actually drives 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 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 diverts it, treats it, and distributes it out to our customers. In the land development segment, we own some highly attractive land in one of the hottest areas in the Denver metropolitan area—the Eastern I-70 corridor—and we are developing that and building horizontal infrastructure for a master-planned community and selling lots to production homebuilders, mostly national production homebuilders. We also have some commercial real estate that provides exciting opportunities for us, and more recently single-family rentals, where we're taking some of those lots that we're improving, we're holding them back for ourselves, and we're contracting to construct homes that we actually list and rent to families and individuals here in the Denver metropolitan area. I'll talk a little bit about that as well, because we've got some deliveries of that product and some great successes there. Let me start out with the water utility segment. We are a wholesale water and wastewater provider. As I mentioned, we have wells, we have treatment facilities, we have a distribution network; we process that water, we distribute that water to our customers. That model generates two fee incomes. One is a large upfront capital fee, which we call tap fees, and these are current tap fees for both water and sewer, so they're right around $22,000 to $33,000 per connection. Those are paid by the homebuilder, typically amortized into the cost of the house, and our capacity—topline revenue capacity on that is about a little over $2 billion. If you take the number of connections that we can serve—which is about 60,000 connections—and multiply that by the tap fee, that's how you get that. That's predominantly about a 50% margin business, because we'll construct all of the facilities necessary to handle the water utility side of that. And once we've got that customer, we generate water and sewer monthly fees, and those fees are typically about $120 a month for a typical single-family residential home, which translates into about $1,500 per connection per year. As we get that water back for our sustainability, our most cost-effective new water sources continue to come from using and reusing our existing water source. We have two wastewater reclamation facilities where we treat that water back to a very high-quality water supply that we can then put through a separate distribution system for outdoor irrigation demand. So, we've got a use and reuse model for our water utility segment. A little bit of color on that: we continue to grow our assets in the water and the wastewater side, so you've seen tremendous growth over the last four or five years of investment into that system, which continues to develop and serve our customer base. A little about our customers: we're adding about 40 customers a month, mostly through two active developments that we are working with: the Sky Ranch community for ourselves and then the Elbert Highway 86, which is another water utility that we acquired a couple of years ago. This really just shows a projected absorption model for the number of connections. The 5,000 connections would be a build-out of just the Sky Ranch community; it certainly doesn't represent the capacity of our water portfolio, which is about 60,000 connections. We do also serve water for oil and gas operations, and that's been something we've talked about steadily over the more recent years. We happen to sit on top of a very lucrative oil and gas play in the Niobrara Formation, typically referred to as the Southern Wattenberg Field. We have a number of operators that have lease interest here, the largest of which is consolidated, a number of interests over time and is really actively drilling wells in the formation. If you take a look at what the well capacity is for where we would be servicing the water needs for that, it's about in excess of 10,000 wells in capacity. It's a very large play for us if we're looking at a footprint of a couple of hundred square miles in this area. How we sell that water is we sell it to them at a very high rate, and their demands are very large; they need that water in a very compressed period of time. They want it over maybe a two or three-week period. Currently, we're averaging about $250,000 per well for oil and gas operations, and we are seeing a much renewed strength of activity in the oil and gas space here. As oil has firmed up and I think the Colorado politics have settled in terms of how the state and the operators are going to regulate their operations, there is a lot of renewed sense of certainty as to how the oil and gas operations are going to move forward. So, we're glad to see a lot of that activity continue to come back for our operations as well. This slide will give you kind of a proximity of where development is to our service areas. We acquired these legacy water and land assets a number of years ago, and what's happened is the Denver metropolitan area has kind of grown out to where we are. This gives you a picture of how we are positioned in relation to our service area. We have a large service area; we have 24,000 acres of property owned by the State of Colorado, owned by the state school board, which has a fiduciary responsibility to generate revenue for the Colorado public education system. This gives a proximity of where our service area is, not only in terms of our exclusive service area, which is the Lowry Range, but also Sky Ranch. You can see that, also in the pink area, a little bit north of our Lowry service area, along the I-70 Corridor, which is about four miles south of the airport. Then there are some surrounding properties that are key opportunities for us to look at both land acquisitions as well as utility operations in that corridor. We really like where we're at, we like our positioning in the marketplace, and we like how this positions itself in terms of investment activity, not only for the company but really the region as a whole. So, it gives a little context about how our assets are positioned together with the Denver metropolitan area. Let's talk a little bit about our land development operations. This has been an exciting development for the company in more recent years. We acquired about 930 acres of property more than a decade ago at the height of the housing recession. It was an excellent acquisition for us. It not only came with the land, but some of the lots we were under contract to buy when we were looking to provide utilities to it. The zoning on it allows us to develop up to 3,200 residential lots and a couple of million square feet of commercial space because we have an interchange right along the Interstate. So, that property is ideally positioned for retail and commercial light industrial uses. When we look at this property, we estimate that this roughly converts over to about 5,000 connections when you take a look at the commercial square footage; it’s about 1,800 square feet. As I referenced, it's ideally located and really is in the most active development corridor. We started development of this property a couple of years ago and embarked on our first phase of that, which was about 509 lots. We have completed all those lots and have transferred all those lots to our homebuilder customers. Excuse me, as of the quarter end, we have a little bit more right now, but there are about 405 residents out there. We've sold almost 480 of the 509 taps. We get those tap fee revenues typically at the building permit phase, and really we're adding about 40 connections a month in this. So, you'll see this absorbed pretty quickly on the build-out of that. Two of the three builders we had in our first portfolio of builders are complete with their model; all of their homes—or at least the remaining homes—are sold and awaiting delivery. I think Richmond has a few lots left; they may have a dozen or a little bit more lots left that they're still pricing out and selling through the market there. I think they're building them on specs, so that they can optimize their price for that. But we've recognized all our lot revenue and nearly all of our tap fee revenue from Phase 1. So, that's been a very successful launch for us. In spring of last year, we started our second phase. Our second phase of this development will be a total of 850 lots, and we contracted for about 804 lots with our homebuilder customers and held back a few of those lots for ourselves. We held back about 46 lots with the ability to expand for some other areas and really reserve those lots for our single-family rental markets. I'll talk a little more about that later in the presentation. What we're very excited about was that this particular phase also included a charter school, so we were working with the local school district, the Bennett School District here in Colorado, to get a charter school, and we're very pleased that partnership has been a very good working relationship for both us and the Bennett School District. We have a terrific charter operator, the Michigan National Heritage Academy, that we're looking to build this charter school on for an opening in the school year, August 2023. So that will continue to add to the community in itself. A little more about our Phase 2 here. We're looking at the contract revenues from our homebuilder partners, which will generate about $70 million in total, and about another $20 million in tap fees. Not only are we collecting our fees—lot fees from our homebuilders—but we are also doing a horizontal development of the roads, curbs, gutters, parks, and open spaces. All of these public improvements get us that investment back. In the first phase, those public improvements totaled about $33 million, which was a little bit weighted because we had to start some of that with some of those roadways, common roadways to the entire project. This second phase estimates about $61 million of public improvement reimbursables. So, we have a combination of the $70 million in lot revenues and the $60 million in reimbursement revenues, and then our costs for developing the second phase are estimated at about $73 million. This provides a high-level view of the economics on delivering the lots in our land development segment—an extremely attractive opportunity for us. This is a little more metrics about parsing out our 850 lots. We're doing that in four sub-phases just so that we are able to incrementally deliver these lots on a real-time basis for our home builders, also showing how the lot revenues go by builder. It gives you a bit more color about how the distribution of those lot revenues are, the total tap fee revenues, and the costs and the reimbursables in that. So, it gives you a feel for how those gross proceeds work for us and the cumulative aspect of not only the gross proceeds, but you need to add the reimbursables to that as well. Additionally, if we take a look at how we're delivering each individual sub-phase, this is the breakdown of each of the sub-phases. Our first sub-phase, one of the things that we look to do is three of the four homebuilders here are in a structure—the contractual structure—which allows us to deliver lots on an incremental basis and be paid on that incremental basis. What happens is we call that a Lot Development Agreement format, where each builder can pay us when we deliver them a finished lot or a platted lot. The platted lot gives them the title to the property, and they pay us roughly a third of the finished lot price at that time. As we deliver the wet utilities, we get that second and third payment, and finally, when we deliver the finished lot, we get that third payment. One homebuilder is in what's called a finished lot agreement, where they'll pay a little more for us to carry that cost through to the end of the finished lot and deliver that finished lot. We've completed the first two components of the first 229 lots, so we're working on the roads and curbs right now and expect that we'll be able to deliver all 229 lots by the end of this fiscal year. Our delivery dates there are sort of the October—no, August timeframe of 2022, and this gives you kind of a feel for how that's breaking down by each individual builder. I also want to talk a little about our single-family rental business. One of the things that we looked at is the value of creating an attractive community: the curb appeal, what we're doing for parks and open space, the amenities we’re providing, schools, and the commercial value—all of these increase the value of these lots. Not only for customers and homebuilders at the time, but it also increases the value for the homeowners that come out here and buy these. One approach we looked at was participating in that: the single-family rental model seemed like a very attractive way for us to do that, and that was kind of the fundamental investment theme behind it. If you take a look at dissecting that market, the housing market is extremely tight nationwide, but it's exaggerated here in the Denver market. Home prices are increasing significantly as well as the rental market. These statistics show what we see in the rental market over the last three years, both in terms of the median lease price, how many listings are available, and the price per square foot. This really was our investment theme, and we started this process out with three—really four—lots from our first phase. So, we entered into a contract with the local homebuilder to construct the first three lots. Those lots were delivered on budget and on time, and we rented each of those homes out within 14 days of listing. This is a bit of pro forma on that, but the rental income is around $2,800 a month. So, it gives you kind of an annualized basis and we do have a terrific team of professionals that are helping us construct a portion of our water system as well as our land development activities, which allow us to operate and maintain these homes ourselves. This gives you a bit of a pro forma on that where we're going to generate not only sufficient money to be able to cover the vertical cost of that and what we seek to do is roll forward the equity value that we have in the land and the improved lot as well as the utilities and then finance the vertical component of that at a very attractive rate. We were able to line up some really attractive financing for that. We financed our first three homes on that, benefiting from carrying the vertical cost for our shareholders and also having it be free cash flow for us on each incremental unit. If you look at capitalized costs, we self-performed on some of that activity, handling most of the landscaping, and we financed roughly the out-of-pocket cost to our third-party builder. Each of those units were about $330,000, and the appraisal value of those came in significantly higher. The delivery of a house on our lot is benefiting us tremendously. We financed about $1 million worth of these first three homes; their fair market value is estimated to be about $1.6 million. So, we've built up equity in each of these single-family units, and those units continue to appreciate in value. We’re seeing a year-over-year increase in excess of 4% on each of these units. With that, I'd like to talk about the quarter-end. The quarter-end was another terrific quarter for us. We continue to monetize our assets, both in terms of the land and the water assets, totaling about $4.27 million in revenue. Taking a look at our net income, about $1.5 million, and about $0.06 earnings per share on a fully diluted basis. This shows a bit how the contribution is from each of the three segments. The blue portion of that represents the water and the wastewater segment, and the green portion is the land development segment. While we don't see much because it hasn't contributed materially yet on the single-family rentals, that will continue to grow. What we want to do is provide a feel for that in this particular quarter because as we round out Phase 1 and start Phase 2, it's a little more weighted into the land development segment than the water utilities. But in Q1 from 2021, that was more evenly distributed. On an operational basis, as we deliver each increment on the land side, because the land and reimbursables for those land development activities are so weighted, those will drive a lot of those revenues. We get recurring revenue from our water utility segment as well as our single-family rental segment. The other thing I wanted to discuss is how things have gone over the last five years and particularly over the last three years, which have been transformative for the company. We've been monetizing our water and our land assets, driving significant value for our shareholders. While there's plenty to be optimistic looking at our trajectory here, what's most encouraging to us is we're still in the early innings of this effort. If you take a look for a second, we've roughly delivered 10% of the lots from our land holdings, roughly 500 lots out of 5,000 lots, and our most valuable commercial properties are still yet to come. We're extremely excited about that. We've delivered an even smaller percentage of our water assets with excess capacities in both our water and our wastewater systems continuing to drive cash flow in the upcoming quarters and years, and even smaller asset potential in our single-family rental segment. We've only delivered three units in this past year. We're focusing on delivering another 11 this year and then continuing to grow that into somewhere between 200 and 300 single-family units. Looking year-over-year, last year, we recognized what I would call a significant value in earnings. We were able to record our public improvement reimbursables of income, demonstrating where that land development activity was driving earnings. This year, we now have approximately $30 million in reimbursables and expect to see significant increases in cash flow. Delivering our next 229 lots this year will enable us to fully monetize all of those and then a portion of our reimbursables from our second bond offering that we are anticipating later this year. I know many of you have asked, appropriately, what’s next? How do we plan to add to our success moving forward? With that, I would describe how we think about each business segment and how we prioritize our liquidity, at both the office and Board levels. We look at investing our returns into opportunities that we control, right? We’re blocking and tackling our day-to-day operations; optimizing our lot deliveries, investing in the incremental expansion of our water infrastructure to increase capacities for industrial water sales to our oil and gas customers, and continuing to expand in our single-family rental market. Typically, we refinance those costs—of the vertical component of the single-family—but we do have timing issues on that. Each of these delivers very high margin returns to you, and all of these are within our control driving value. These have liquidity demands that take a portion of our cash position on a quarter-over-quarter basis, but the exciting thing is that each has a very quick return of capital year-over-year. What you'll see is continuing growth in the cash position of our balance sheet. I would classify this as management keeping our eye on the ball, doing what we do well every day, and how we build and maintain a profitable company by optimizing and increasing the returns from the assets that the company acquires. The second category we look at is M&A growth. Over the past three years, we've become a respected long-term player in the Denver market, delivering outstanding financial results. If you peel back our results, what you see are outstanding assets and outstanding revenue engines. Our land development segment, Sky Ranch, is only 10% built out recognized as one of the leading master-planned communities in the market. We continue to look for other opportunities in that area; our water utilities have sufficient capacities, both in water and wastewater, which will add significant cash flows for us. This has led to, what I'd classify as some balance sheet muscle for our M&A discussions. Having liquidity with high-margin asset-producing revenues not only leads to acquisition but probably better described as a pipeline of acquisitions. We want to control the single-family rental side in our day-to-day operations, but focus on continued opportunities in land and development. We seek to sustainably grow through additional acquisitions. We're vertically integrated in very interrelated business segments that add value to each other, wanting to continue to drive that value growing each segment sustainably. Water drives land, land drives the single-family rental. Each of these opportunities creates shareholder value. Finally, we acknowledge ways to continue creating value through share repurchases and dividend payments. These are important drivers for shareholders and the company as well as our Board. We are focused on the first two components, making sure that we’re executing effectively on a day-to-day basis, increasing margins with our existing assets and searching for opportunities on the M&A front. For now, our priority is ensuring we have enough capital for business activities and adequate capital for growth through acquisitions. The return of capital will be our next and highest priority, generating value for shareholders. This is a view of how we've grown over the last three years and how we continually leverage that strength in the balance sheet. This is our balance sheet, and I'll let you dissect that. We truly have a strong balance sheet with very low debt-to-assets. Here's our income statement showing our particular revenues coming from not only our water segment but from lot sales and the single-family rental, all of which will continue to grow over time. A little about our Board: we have an outstanding board, far better than I deserve. A terrific group of men and women continue to provide the advice and checks and balances that you want to see for a company to continue investing and growing this business segment. With that, I'd like to turn it back over to you all to see if you have any questions that I can drill down on for either the quarter or what the company is looking to do moving forward. So, with that, I'll turn it back over to Holly to see if there are any questions.

Ladies and gentlemen, the floor is now open for questions. 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. 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. 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 set up. When we were first looking at our Phase 2, I went to the market with 850 lots, probably two, two and half years ago with our builder partners on that, and it was at the in the middle of the pandemic—call it maybe January, February—literally January or February of 2020. We were just starting to roll out the single-family rental market, where that was a concept we thought we were seeing a lot of increase in value in terms of these homes, which a brand new community can go either way. It depends on how well the community has delivered and the positioning that you have in the marketplace. How does our submarket perform? We found that it performed terrific. 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. It was kind of a late-stage pullback in our discussions with our builders. We had said, okay, we had 850 lots here and they said, okay, we'll buy them all, and it was the distribution of those lots. As we were getting more and more analytic about the single-family market, we 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. 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. We will see higher weighted portions of that where we'll hold back maybe 100 in the next phase and continue to accelerate that growth. The reason why I don't have more than 40 in that is because, a couple of years ago, when we were contracting for that, it was still very early on in that process.

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

Each of the core—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, as well as filing three and filing four, we'll have a weighted percentage of more of those lots. While Phase two is 40, filing three might have another 100 of those lots. You’re going to see us building out the first 40 at the same time as we're building out a portion of the next 100. They will 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 is going to be from the rental market?

Great question. If in three years we're executing, we'd like to have 50 units, 60 units occupied and another 60 units under construction. If you take a look at that in a short timeframe, that would be going from three units to maybe 100 units in three years. This will depend on how each of these individual phases roll out, as well as overlapping Phase 3.

Okay. And the recurring revenue?

Good point on that: each of these units generates about $15,000 per unit per year in free cash flow. So, that equates to about $1.5 million in free cash flow if my decimal is correct there, $15,000. That leads to typically about $50 million worth of asset value added to the balance sheet.

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

You are very diligent about that, and we—as you see our cash position fluctuates quarter-over-quarter when executing our existing business. We had a $20 million balance at year-end, maybe a $12 million balance at quarter-end. A lot of that quarter-over-quarter activity gets invested into our operations, resulting in some fluctuation. Once we get the next round of bond reimbursables out, it will help us monetize and keep a stronger liquidity position to consider various things. But really for now, where we’re positioned with the balance sheet and the opportunities we're pursuing on the acquisition front, I think we’re leveraging our liquidity to its best purpose. That’s why we’re not quite in position to do both.

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 the current portion of that, which is about $16 million of the $30 million. 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 the $16 million or whatever coming back and starting now when the stock seems to be getting no attention from the investing world?

Yes, I get it, and it's frustrating for us as well. What we're really looking for is making sure that we have liquidity for sitting down with these acquisitions, Bill.

On the other hand, they're looking at the same dynamics you are. Why are they going to sell out cheaper, sell out now?

That is the discussion. They are looking at whether it's going to be worth more tomorrow than it is today, and by how much. This is a very private decision for landholders in the area, and many of these are long legacy generational landowners. If they don't have it, they don’t want it; opportunities for them are mostly estate planning and intergenerational planning activity. This gives them ways to do planning, tax planning, and estate planning activities, which we work together with each dynamic that each landowner or farm owner has regarding water supply and rights. They’re each unique, each has their own circumstance. But I’d say, over the last three years, our visibility in the Denver market has increased significantly.

Okay. Well, thanks for the great quarter.

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. I 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—are prices creeping up or what does that look like?

It is. It's increasingly competitive. It’s more costly and more difficult each year that goes by. 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, and it's strategically positioned for us on one of the tributaries that we have existing water rights at Lowry. We bought that for about $9,000 an acre, which translates into about an acre-foot. I got about 300 or so, 320 acre feet for about $10 million, and talking with some of our neighbors around that farm, that’s trending at about $15,000. So, we’ve seen about a 50% increase in three years on that. The wholesale market for water continues to skyrocket on a per-acre-foot basis, and also the cost of developing and delivering it because we have to reach farther out. One advantage the company has is that our point-of-use for our water rights is where our waters originated. We don’t have a lot of costly infrastructure; as we reach farther out for water, we defer that capital cost for years because we can use water that's close in. We continue to grow that portfolio and partner with regional entities like the WISE Project, seen in our financial statements from the disclosure in our MD&A sections, and work with other providers to bear the cost of infrastructure on a regional project basis.

Okay, that sounds great. 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. Are you able to sell stuff for a year, and is that somewhat profitable? What's the margin going to be for something like that?

We do sell to our industrial customers. I'd say when you're selling water on a one-time basis, that's going to be someone who uses it and doesn't have a continuing need for that—often our oil and gas customers, who have tremendous demands. We continue to grow our water system; plumbing our water system, the wells, pipelines, storage reservoirs, pumping capacity, all of that continue to grow, using oil and gas revenues to finance that. This leverages margins and the opportunities we have when we get our permanent connections. When I get residential or commercial connections that generate recurring $1,500 per year revenue, those margins are higher because we continue to incrementally expand our system for one-time users and oil and gas. These 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 from 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 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 wells started being drilled, we were told by the industry that these 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 planned for the next 12 months, and their overall thinking? Third, regarding the availability of labor and frac crews which are in short supply, what do you know about that? Thank you.

You bet. Thanks. Again, time flies and I do remember that fated day those 30 years ago. I think you and many others on this call and our shareholders, we extend gratitude for their continued support through the years. In the oil and gas space, your first question isn't wrong. A lot of these wells are in shale deposits, so fracking and well stimulation creates an opportunity for much quicker flow to the wellhead. They do typically lend themselves well for re-stimulation. Colorado has seen that in the northern market, in the Niobrara area. We have not seen that yet in the Southern Niobrara field. While our area is as attractive, if not more attractive than what you’ve seen in sort of the core Weld County area, we suffered from operator issues. We had a major player who came in, spent extensively on defining the field, putting infrastructure in, starting the process, and primarily, they ended up selling to a private enterprise. So, what we have now is a combination of a company called Civitas, who now operates here. They have a rig that’s dedicated to this field, have been drilling wells. The prioritization is drilling wells close to the revised Colorado setback, focusing on west and moving east. The labor shortage, I don’t see a limitation. There's repositioning of interest over the last four years, making with this consolidation and new entity, it should lead to a much more continued activity. If we have one rig drilling continuously, they can drill about 30 wells per year. A lot of the wells were always intended to hold by production. The operators are drilling in an efficient manner, so we believe there should be good renewed development interest here. The recent consolidation and a focus for profit should lead to increased activity for us.

Thank you very much. That's a 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 author. Hi, Mark.

Bill, nice to hear from my favorite author.

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. To the extent you're getting water 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. Are they so small that they are insignificant, or am I missing it?

No. So, typically we record that net of revenue. You don't see a separate category for that. 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 constitute the lion’s share of what we're using. A lot of it we deliver to oil and gas from Lowry, which has a higher rate. We get about three times the price delivering to our residential customers versus oil and gas customers. So that almost washes out in terms of the revenue.

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. When we look at a metric, we look at that at a 0.4 acre-foot equivalency—that was historically the average for a single-family lot. At Sky Ranch, our lots are a little bit smaller. We’re averaging about 0.3 as opposed to 0.4, meaning we can serve more connections with the same water supply, and when you look at that, we still get the same dollar per acre-foot, but more connections imply more revenue potential for us on that continuing basis.

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. We have five metrics that go into calculating each individual tap, each lot size, house size, and how many car garages it has. This is because there will be concrete, which takes out irrigated portions, how much zero escaping they have, and the square footage of the house. All of these metrics go into our tap calculator, and it calculates the average annual demand to be this much, then is factored into 0.4 acre-foot. So, some of them are higher—depending on the size of the lot. I recall our model’s rollout; the first house that came out was on a corner lot, resulting in a $45,000 tap versus a $25k tap, and they weren’t happy with it. I said to fix it at $32,000 for all lots wouldn’t be in their interest.

Interesting. Great. Thanks. Finally, a question on commercial development, particularly supermarkets. I know at one point you mentioned needing 2,000 rooftops for supermarket to be interested in going in there. You've got 500 in Sky Ranch now and adding, there is that trailer park nearby—that's another couple of hundred. There’s Harmony almost adjacent, as well as the whole area around Vista PEAK Prep, where there are thousands of homes. Looking at Google Maps, it seems the closest supermarket to Sky Ranch right now is over 10 miles away and a couple of stops from the interstate. I’m wondering about your thought process regarding a supermarket going in on some of the commercial property.

We have engaged with a number of grocery retailers. They’re very interested in what we’re doing; I’d love to provide a timeline on that, yet the model is changing regarding who gets involved. The bigger operators today are lagged. Instead of being six months early, they want to be six months late but want to reserve the site. They know where they want their lot; we have land plans in relation to that lot. The timing will depend on them when that works for them as well as pricing. What I am not interested in doing is selling them land at a lower price and waiting two to three years for them to build on it. I'd prefer to wait till they are ready and optimize the land value.

Yes. It adds to the value I would think of homes sold in Sky Ranch if there’s an active supermarket there.

Intuitively, that's true. But honestly, we don’t suffer from lack of enthusiasm in our market. I think where we started off—Taylor Morrison and KB selling their first homes at $360,000—you can’t buy a home out on our site for less than $500,000 now. It is that attractive in terms of building cost, delivery cost. The community is what creates that value.

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've been sub-$3. So, I've been around for some time anyway. Follow-up on the commercial side: Have you identified specific land for that commercial development to happen?

We have. What we do is leverage the interstate and the interchange. We’re looking at about 140 acres with I-70 frontage for commercial opportunities. We spent lots of time designing our commercial parcel—the layout, transportation network—what size building spaces needed based on conversations with the users. We're looking at a nice supercenter for groceries and fuel, and coupling onto that there will be pad sites available for local pizza, dry cleaning, liquor retail, things like that. Good designs are taking place for that and optimizing land use.

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

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

A very high-level question. The fires up toward Boulder won’t affect Sky Ranch’s population. However, you must believe that with all the rebuilding activity, there’s going to be extensive pressure on labor and materials. 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 look for as a pressure point is could we deliver BTRs in that segment. We have a great homebuilder delivering our first three. He wants to grow his business, and we’re a key component of that. Together with the fact that he competes against production builders who may be positioned to expand, that would be more competitive than our existing builder. But, we’re nearing a point where we might already have building trades like plumbers, electricians, which are all needed for a particular area. There are another 1,000 homes that will need to be rebuilt, but when looking at that aggregate, it’s tragic, but it's probably not weighted significantly.

Yes. 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. For those that are listening to the replay, if something pops up that you want additional information on, please don’t hesitate to give us a call. We have a terrific website, now an award-winning website, and we continue to update that, providing color content, photos, video footage, live podcasts—a whole range of opportunities for outreach to the public and investment community. We're very active in conferences, and I know a number of you have been to those conferences, and we spoke one-on-one. We'll continue to do that and reach out to the market to ensure they understand what we're doing and the enthusiasm we have for the company. We also look forward to delivering some performance on the M&A front and activities on that. I know we’ve been working on that for a while; not all of those are within our control. But we're very excited about some opportunities. We hope we can satisfy inquiries about how we’re putting debt capital to good use. So, with that, thank you all for your ongoing 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.