Greetings. Welcome to the Pure Cycle Corporation Q1 2024 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. 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 good morning everyone. It's a pleasant morning here in Denver. I'm pleased to share an overview of our Q1 2024 earnings call. We have a slide deck available on our website that you can access from the front page or the presentations page. I will indicate the transitions as I go through the presentation. With me today are our CFO, Marc Spezialy, and our Controller, Cyrena Finnegan. Let's begin. The first slide, or actually the second, covers our forward-looking statements that many of you are familiar with. These include statements not based on historical facts and will be addressed in the presentation. We will move on to discussing our business model and strategies, review our scorecard for Q1, and delve into specifics regarding our assets, opportunities, and updates. On Slide 4, we highlight the benefits of our strong and experienced leadership team and Board of Directors, which help us maximize the value of our highly valued assets through our interconnected business segments. Each segment relates to the others. For instance, investments in one segment positively impact the others. We take pride in our vertical integration, which creates numerous opportunities for us. Here is our key management team, which brings vast experience across various disciplines. Our three main business segments are water and wastewater, land development, and single-family rentals. We often discuss their complementary nature; for example, our land development is linked to our water utility activities. Enhancing our water system improves land development, and our master-planned communities create opportunities for single-family rentals, enhancing the appeal of the homes we develop. Turning to our asset portfolios, which are detailed by segment, we see continued growth in value, both from direct investments and through market appreciation. Our water/wastewater segment generates over $2 billion in revenue, with the capacity for 60,000 single-family connections. We have a system capable of delivering approximately 2,500 connections, and we are currently using around 1,300 of those. There is still room to develop more connections in this area. In the land development segment, the Sky Ranch project is valued at over $500 million, which we will discuss further in the presentation. We have a low basis in these segments, with around $4.5 million in land development costs due to our strategic acquisitions and ongoing improvements, reflected in our balance sheet. Finally, in our single-family rental segment, each completed home carries about 30% equity value, thanks to the appreciation of the land, lots, and water connections. The recorded book value is about $5.4 million, with around $2 million in equity from the units we deliver. We achieve fair market rents that cover debt service and generate margins. Now, let’s examine our scorecard for the first quarter. On Slide 9, you’ll see we posted strong revenues and impressive gross margins exceeding 60%, around 62%. Q1 revenues were nearly $5.4 million, with a high margin of about $3.3 million, marking a solid quarter compared to our performance over the past four years. Slide 10 shows a net income of over $2 million, equating to about $0.09 earnings per share. Our combined segments delivered over a 38% profit margin, demonstrating robust results that highlight the strength and appreciation of our assets for our shareholders. If we break this down by segment, we observe revenue is somewhat weighted towards the water/wastewater side. The strength in oil and gas deliveries supports this, with revenues nearly split between our water segment and land development. Our single-family rental segment is still in its early stages with around 14 units. However, gross margins across each segment illustrate the value and opportunity for converting these into profits for our shareholders. The graphs further clarify our gross profits, indicating the nascent involvement of single-family rentals. Moving over to Slide 12, we can see that water deliveries and the associated revenue are generated from three main sources. The first is tap fees, which represent a significant capital charge that we collect, and we had a few this quarter. However, I wouldn’t classify it as an extraordinary quarter for tap fees, primarily because we are wrapping up Phase 2a, which is the initial part of our second phase. This quarter, we also saw a strong presence from the oil and gas sector, and the outlook remains positive. We are steadily expanding our base of recurring customers, which will increasingly become a significant part of our business. Currently, we are providing water and wastewater services to around 1,300 to 1,400 customer connections each month. Moving to Slide 13, it highlights our oil and gas operations, which achieved record deliveries in the last quarter. We came close to generating $2 million in oil and gas deliveries within a single quarter. The outlook for this sector remains strong as operators in the area have a dedicated rig capable of drilling over 20 wells annually due to the pad site development strategy. Many of these locations can accommodate up to 16 wells per pad. They will drill, then move on, with fracking to follow. We are still averaging over $250,000 in revenue per well, not per pad. These large pad sites require significant water and have a substantial footprint. The drilling is taking place in Adams and Arapahoe counties, right within our service area. Now, shifting to our land development segment, with Phase 2a nearing completion, we represent progress in terms of percentage completion, which helps to smooth out the revenue reporting. It’s important to note that revenue timing does not always align with cash flows. We prioritize receiving cash flows from our builders to mitigate upfront costs associated with the expensive horizontal development. This allows us to more closely align revenue delivery with actual cash inflows. We are finalizing Phase 2a, comprising approximately 230 lots. Some landscaping is still outstanding, but we expect to address this as weather improves in the spring and summer. Most of the wet utilities for Phase 2b are completed, and we anticipate starting to deliver lots in Q2 and throughout the remainder of the year. We plan to deliver all Phase 2b lots within this fiscal year. Additionally, we have already begun Phase 2c, creating overlap with Phase 2b, largely due to sustained demand in the Denver market. We will continue to overlap development phases, with each phase advancing based on the total number of single-family lot deliveries. Phase 2d, which includes an additional 860 lots, is also part of this second phase, and we aim to initiate that next year to ensure we can meet demand concurrently. Now, I will hand it over to Marc Spezialy, who will provide an update and overview of our strategy concerning single-family rentals. So, Marc, the floor is yours.

Thank you, Mark, and good morning, everyone. We continue to see high demand in our single-family rental units, and we're encouraged by the results we've seen in the first quarter. As you can see from the chart, we started as a proof of concept just a few quarters back, and in Q1 of 2024, we are beginning to see the compounding effects on revenue as we scale to a larger number of completed units. We'd also like to highlight that the single-family rental unit segment complements our other segments by utilizing our portfolio of assets. Each completed unit adds an average of $150,000 in equity by capitalizing on our well-priced lots and our water availability in this competitive housing market. This table takes what we've built to date in our Phase 1 proof of concept as well as what we've completed in Phase 2a, and checks out where we see this segment going as we continue to develop the rest of Phase 2. Not only are we able to control our building costs because of our position in land development and water, but we can also keep all of our operating costs down by maintaining these units in-house, really utilizing this portfolio of assets. The next chart is a graphical representation of the previous table. It charts out where we project recurring revenue from our rental income could be as we continue to build out Phase 2. We also project our increase in asset value with the equity we add in with each new unit that comes online. And with that, I'd like to turn the call back over to Mark Harding to discuss the portfolio of assets further.

Great. Thanks. As Marc highlighted, one of the key things is, and it really is indicative of all our assets, is the value of our assets, the difference between what we carry the assets for on the balance sheet together with the fair market value of those assets. That's why we like each of these segments, whether it's the water utility segment, land development segment or single-family rental segments. What this allows us to do is punch a little bit above our weight on income relative to the book value of the assets. This is a narrative we want to continue to emphasize for the market, so that everyone understands why we're doing as well as we are with each of these assets. The operating results here are indicative of the appreciation of the asset value. We want to highlight that in the stored value we have, not only in the assets themselves but in the capacity of those assets to continue to generate revenue. Looking at the water and wastewater side, there's tremendous value in our water rights portfolio. We hold about 1,300 connections of a 60,000 connection capacity. If you do the math on that, that's about 2% of the capacity that the portfolio can generate. We have a tremendous stored value in that. If you consider the land development side, Sky Ranch is hitting its stride, but still only about 14% of the total capacity of Sky Ranch has been developed. In our single-family rentals, while we continue to expand that portfolio, we're still only about 7% towards our goal, which is closer to 200 planned units in the community. In the water segment, we have two revenue sources: recurring revenue, which is really from water deliveries to our residential customers and on a monthly basis to our oil and gas customers. We had a great record quarter to our oil and gas customers, but we still have plenty of capacity left. If you take a look at our annualizing 15% of our capacity over the year, that's still around 60% of our transmission capacity. We look forward to meeting the demands of our residential customers as they grow month over month through new home deliveries at Sky Ranch and at Wild Point, as well as commercial customers. We also want to keep serving the oil and gas community and their portfolio needs. On the capital fees, water tap fees continue to grow, illustrating the scarcity value of water and increasing costs as we reach farther out to deliver new water supplies. We're around 2% of the capacity of our portfolio at 1,336. The additional capacity with that transmission can serve up to 2,500 connections, so we have the ability to get more connections without further investment. We continue to invest in that delivery segment to keep ahead of the demands for our oil and gas customers. I want to illustrate our land development side. If you look at our opportunities for the full build out of Sky Ranch, that's closer to $580 million. We have monetized a portion of that. About 725 units are currently built, which is roughly 14% of that capacity. Phase 2 will carry us through the next 650 lots, and there are still another 800 residential connections and commercial connections, which is a valuable part of the portfolio. While we're still a bit early on the commercial side, we're preparing and making sure we have a good structure for delivering value for those commercial lots. Bids on the single-family rentals, if we're targeting our 200 units, represent a little over $6 million in rental revenues at that full figure at about $2,800 per connection per unit. We will continue to add value there, increasing both book value and asset value, alongside a lot of strength to our P&L, which will be apparent in our continued investment. What are our key takeaways? As you've heard us discuss, executing our strategic approach to growing the water utilities together with land development and single-family rentals maximizes our returns for years to come. We not only generate significant asset value but also significant recurring revenues at very high gross margins. The strength of these assets is reflected in our continued delivery of strong results. We are pursuing acquisitions actively, looking to add to the portfolio, whether in water rights or infrastructure in strategic areas that complement our existing investments. Finally, on 26, we are also continuing to reinvest in ourselves by purchasing shares with a disciplined strategy. We set benchmarks for our traders. They're in the market where it meets our requirements, and while it can be a mystery how it trades, we do have certain rules for repurchasing shares, and we will continue with that. This closes out the presentation with the list of our Board of Directors. We continue to benefit from their wisdom, experience, and strength in guiding our principal business interests. A shout out to those folks who are overworked and underpaid; we are grateful for their service. I'm turning it back over to Holly to see if you have any questions we can drill down on and give you more insights.

At this time, we will be conducting a question-and-answer session. Your first question is coming from Bill Cunningham. Please announce your affiliation, then pose your question.

Hi. This is Bill Cunningham. I'm a private investor. My first question is about your fracking revenue, Mark, which was very good this quarter. I saw $2 million on that, which means that $250,000 per frac, as you showed us in your presentation means, eight wells last quarter. I remember there is a 16-well site right near your office that you were planning on starting in the fall, and in fact it started. I'm wondering about the other eight wells there and whether they are fracking through the winter, whether the weather is impacting that, or if you can provide any general guidance on what the fracking water sales revenue might be for this quarter and possibly a bit into the future.

That's a good question. The frac and drill crews are quite resilient, working around the clock even in winter conditions. The last few days of temperatures dropping below zero definitely qualify as hazardous. Yes, they do frac even in these conditions. The water gets a bit thick at those temperatures, so they preheat it before it moves through the exposed line, which can be affected by snow. However, they are managing to flow a significant volume, up to 4,000 gallons per minute. When it flows at that rate, it remains liquid, and they keep operations running continuously. Looking ahead, we expect Q2 to resemble Q1 closely. Oil and gas companies pay for availability but may not always utilize it. The stable regulations in Colorado encourage ongoing investment from the oil and gas sector, supported by the overall strength of the market. Although conditions aren't as favorable as when oil was priced at $100 per barrel, operators feel confident in maintaining their investments at the current pricing levels. While I can't provide a specific dollar figure, they haven't shared exact numbers, but their forecasts indicate similar outcomes to Q1.

I would be thrilled with $1 million or $2 million of water sales to those companies. I believe Civitas is your major customer or one of the major customers, and they have some pretty aggressive goals on their website. So, this all looks good from my perspective.

Yes, Civitas is our largest customer, and they do have a number of wells drilled. The next pad that they are going to shift to happens to be our Sky Ranch pad. Not only will we see an uptick in our frac revenues but also an increase in our oil and gas royalty revenue because those will get completed.

Okay. Are they new wells or are they re-fracking of old wells?

These are all new wells.

Okay. And then, I have a question on your development at Sky Ranch. I know you've got multiple phases going on right now, particularly 2b and 2c. I assume that 2b must be going full speed ahead; I saw that Lennar has totally sold out. Your other builders are in various stages of almost sold out. Some of them must be chomping at the bit to begin selling homes in 2b, and I'm curious about the physical status of 2b right now.

You're correct. I often lament on the builders because they're like a light switch, turning on and off their sales team, which doesn't exactly align with the delivery of lots. They asked us to take a 90-day pause between 2a and 2b on starting that, and now they're saying, could you please hurry up and deliver 2c? It’s a bit of a hurry-up-and-wait mode. The model allows for incremental delivery, and we have most of the backbone infrastructure constructed. Much of that is carried on our balance sheet through reimbursable notes receivable. They are eagerly waiting for deliveries, and due to the backbone infrastructure being already done, we are likely to deliver a couple dozen lots that are on streets already completed, allowing them to start construction this winter. The timing of that is discretionary for them because the hardest task is getting those foundations poured. Concrete doesn’t perform well in these temperatures, but they can be optimistic about starting those foundations. Once that’s done, they can work on framing in all temperatures. You will see some phased incremental deliveries on 2b. As for 2c, grading is optimal in winter, and our team is moving forward with that this winter. We decided to pull the trigger to optimize the winter timeline, and we want to be ready to deliver lots toward the end of this calendar year in 2024 for 2c.

That's great. I assume on 2b that you probably haven't paved the internal roads yet, but I assume you'll be doing some of that in the spring once the weather improves?

Exactly right. We'll be grading it and fully prepping it, and then the paving will go very quickly. It's impressive how fast the site transforms from looking like a construction zone to fully laid lots with streets, curbs, and gutters. But timing is dependent on temperature. The paving is expected to start around April and should finish within a 60-day timeframe.

Great. Thank you very much, Mark.

Thank you, Bill.

Your next question is coming from Geoffrey Scott with Scott Asset Management.

Good morning, Mark. How are you?

I'm great, Geoff. How are you?

Very well. Thank you. What is the timing on commercial development? We've talked about this for a long time, and it always seems to be 'out there in the future, but we don't know when.' Can you provide some updates on current plans and projections?

Absolutely. This is a high-value component for us. We continue discussions with commercial developers. There's a bit more interest in the industrial side than in retail or big box stores. It’s all about the number of rooftops. We've delivered 700 rooftops as captive markets, but they seek closer to a couple of thousand. Two things will positively affect that connectivity. The new interchange at the highway is something we're working on to get permitted with CDOT, and that should be completed toward the end of this year. The second component involves extending one of our major roadways, connecting west to another north-south arterial, which is the developer's responsibility directly south of us. They plan to kick off that corner of activity sometime this year. A late 2025 timeline is looking likely for some of that commercial activity. I would love to see it accelerate quicker, but that is the outlook for now.

Okay. If I understand correctly, by the end of 2025, some of the infrastructure will be completed. How many rooftops do you expect to have by then?

If we maintain our current pace, we're probably delivering about 200 homes a year. That would add another 400 homes, which would bring us close to a couple of thousand connections.

Okay. So, realistically, we may be looking at 2027 for substantial commercial developments.

Yes, while we're eager to speed up the process, I believe we will see transactions in lots and tap transactions, along with our involvement in developments where we can hold equity value of the land. This will allow us to partner with others to go vertical and then exit once facilities are leased. We're exploring various avenues in commercial development.

Good morning, Mark.

Good morning, Elliot. Good to hear from you.

You’ve done a beautiful job outlining the values that Pure Cycle has control over. The question remains how rapidly they can be monetized. One topic we've discussed is the potential for cash dividends. You've mentioned the Board wants to ensure adequate recurring revenues before initiating a dividend. Aren't you already there? Could you begin a small, annual dividend? I’d like your thoughts on that.

You make a good point. We aimed to accelerate recurring revenue through single-family rental side, which continues to grow meaningful. We're adding new customers and connections each month, which brings us closer to that determination. I can assure you this is a topic discussed at every Board meeting; the right benchmarks are two-fold: recurring revenue and our capital needs as we kick off individual projects on land and water utilities, as well as single-family rentals. A pause is partially due to our aggressive start for some single-family rentals; we moved from initially anticipating 40 rentals in Phase 2 to 90—double that capacity. While that's attractive for our income side and allows us to leverage financing instruments, delivering the homes poses challenges. We plan to seed the growth of these relationships with banks to finance this smoothly. So, quadrant by quadrant, as we deliver units and develop a strong relationship, we can reconsider dividends.

What would the timing of that consideration be?

I would say we will bring this to serious consideration in the Board meeting this January.

Okay. Thank you. That's very helpful.

I know that this may not sound as promising, but I want to give you the expectation this is part of our agenda. It’s also key to building these segments appropriately alongside our capital commitments. We're committed to protecting that balance.

I think that's a fair answer. I truly appreciated the slide on stock repurchases; I've never seen one like it. Thank you for sharing it, and I hope you'll continue to do so.

You bet. We’re trying to balance buying shares at attractive prices, understanding it's all about that value for our shareholders.

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

Thank you. If you're listening to this on a rebroadcast or encountered technical challenges or it was just too early and too cold to join us live, please reach out if you have any follow-up as you work through the deck or comments. We're happy to drill down on specifics. Thanks again for your continued support; we will keep adding value and do our best with these assets of yours. This concludes our earnings call, and I wish you a great day.

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