Greetings, and welcome to the Pure Cycle Corporation Year-End 2024 Earnings Call. At this time, all participants are in a listen-only mode, and 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, Mr. Mark Harding, President and Chief Executive Officer of Pure Cycle Corporation. Sir, you may begin.

Thank you very much. Good morning, and welcome to our 2024 fiscal year-end earnings call. We have a slide deck available for this call on our website at purecyclewater.com. You can find it on the landing slide page, and I will note the transitions of the slides. If you experience any technical difficulties, you can refer to the website. It's also available on the Investor Page in a PDF format. Let's get started. I want to discuss our forward-looking statements. Most of you are likely familiar with these statements, which, as defined by the Securities and Exchange Act, are forecasts and plans that shouldn't be relied upon as guarantees of future performance. I know you understand this. Now, I want to mention our leadership team. I have the privilege of working with exceptional people at Pure Cycle who drive our initiatives. In the room with me today are Marc Spezialy and Cyrena Finnegan, our Controller. We're also joined by Board member Dan Kozlowski. Welcome, Dan. Additionally, Scott Lehman, who leads our engineering department, and Dirk Lashnits, who oversees land development, make up an outstanding leadership team that exemplifies professionalism in their respective areas. Along with a strong management team, we also have a great Board of Directors that continues to add value. Recently, our newest Board member, Susan Heitman, a retired KPMG partner with 30 years of experience, has provided valuable insights into our SEC reporting processes. I'm taking a different approach on this call by diving directly into the financials, as we want to highlight our excellent year. I will give a brief overview of the company for those who may be new. Most participants are likely familiar, but for newcomers or those listening to the replay, I'll summarize how we view the company and offer some insights into our future prospects. Let’s talk about our fourth-quarter results, which were record-setting. Our fourth quarter is typically our best, not because of seasonality but due to how we manage project timelines, particularly in Denver, where lot deliveries can be affected by winter conditions. We generated about $12.5 million in Q4, largely from delivering 197 Phase 2D lots, retaining 17 for our single-family rental segment. It was also a record quarter in terms of gross profit. Specifically, our total revenue for the year reached $28.7 million, marking another record. Our gross profit was around $20 million, leading to impressive gross margins, benefiting from our strategic acquisitions of land and water rights. We achieved close to a 70% gross margin. Our net income was $11.6 million, equating to approximately $0.48 per share—excellent metrics for the company. Comparing year-over-year results over the last three years shows a strong performance. Last year was impacted by a rapid increase in interest rates that affected our homebuilder partnerships, creating some challenges. However, I believe you will see more typical performance for the company going forward. Looking at further metrics, net income and earnings per share continue to show strong results from our legacy assets. The company has reached a critical mass in these investments at Sky Ranch, benefiting both from the land and in monetizing our water utility. We've made upfront investments and continue to add connections to maximize our capacity. This year's performance has been commendable, and we are proud of how we are enhancing shareholder value. Now, let's discuss the financial performance in more detail by segment. Our water utility segment had a record year, driven primarily by our oil and gas opportunities, where we supply water to industrial customers. This segment generated over $5.5 million in revenue, including tap fee revenue and recurring income from current customers. As we develop Sky Ranch, we continue to grow our service areas, adding more customers. We have a 21% compound annual growth rate in our utility customers, each contributing about $1,500 per connection annually for our reuse or recurring revenue. We benchmark our performance against leading water companies, including American Water, York Water, and Global Water Resources, and find our margins to be competitive. Notably, we utilize only 5% of our utility assets. This limited utilization shows how our assets create significant shareholder value. For our 2024 forecast, we expect the strongest performance from our oil and gas operations, with high demand anticipated during the summer. Our oil and gas deliveries utilize excess capacity without compromising water services to other customers. The water-scarce Denver area provides an opportunity for us as we can divert some excess capacity to the oil and gas industry, which is targeting approximately 200 well permits in our service area. We expect strong performance in this segment for the foreseeable future. Our land development segment also had a successful quarter, delivering finished lots for Phase 2D, including 194 for sale and 17 reserved for single-family rentals. We are currently around 92% complete, demonstrating our ongoing performance in land development. Over time, we have developed approximately 1,200 lots, with around 700 residents currently at Sky Ranch and another 700 lots under production. Our land development follows a bell curve trend, starting slowly with significant initial investment before gaining momentum. Our strategic acquisition of Sky Ranch took place during a low market point, and we are just beginning this development cycle, with only about 15% completed. Regarding our single-family rentals, we are investing and expanding this segment. Annual revenue from single-family rentals is now nearing half a million dollars. We have established a proof of concept model with about 14 completed units, aiming to expand to around 200 units. Our margins in this segment are competitive when compared to leading players like America Home for Rent and Innovation Homes, showcasing our strong execution as a smaller company. In summary, we operate in three integrated business segments: water, land development, and single-family rentals. In a water-scarce area, we maintain around 30,000 acre-feet of water capable of serving approximately 60,000 connections, generating revenue from both tap fees and recurring earnings through customer connections. This model complements our land development, as effective water utility management is crucial. Our single-family rentals add significant value to our communities. We have seen substantial appreciation in home values, positively impacting the lots we provide to homebuilders. The market for single-family rentals is growing, with our rentals averaging around $2,800 to $3,000 monthly, exhibiting a high retention rate. I want to elaborate on the water segment, which we are excited about. The overall segment is valued at $65 million on the balance sheet, underpinned by book values established over 30 years, particularly through our water rights portfolio recorded at-cost due to GAAP. We can serve up to 60,000 connections, potentially generating over $2 billion in top-line revenue with a 50% margin; however, it is recorded as just $14 million, which undervalues the asset. Our ongoing investment in water capacity is crucial to meet the demands of both one-time customers and oil and gas operations. This year, we utilized just over 50% of our developed capacity, retaining excess capacity for oil and gas demand, along with new connections in Sky Ranch. The tap fee portfolio remains underutilized, with only about 2% of the necessary capacity in action. From a land development outlook, we were strategic in our acquisitions in 2010, and our cost basis stands at around $4 million, having achieved nearly $80 million in lot sales. Our attractive land basis results in favorable gross margins, differentiating between commercial and residential components. We hold zoning for around 3,200 single-family equivalents and 1,800 commercial, yet we are only about 22% developed for residential, with commercial yet to commence. Additionally, we plan to expand our single-family rentals, aiming for about 200 units, each yielding around $33,000 in recurring annual revenue. We are currently only about 7% operational in this segment. In terms of metrics, we have 2% of our water assets deployed, 18% of land development operational, and 7% of rentals functioning. Our performance indicators suggest a solid trajectory. In 2024, we demonstrated record performance, with 2025 set for further improvements. Our short-term revenue outlook remains strong, driven by growth in land development and increasing shareholder returns. We expect client growth to reach around 2,500 accounts, with stable tap sales. Our focus on asset protection and commercial connection growth continues to create value. In land development, we are investing in infrastructure and significant projects are underway for upgrades, which we plan to finance effectively. Our single-family rentals are also set for expansion, with forecasts to grow from 14 homes to 100 within the next 18 to 24 months. Our ambitious goals include achieving 8-10% growth with additional homes. To recap our performance: In Phase 1, we offered competitive pricing to attract builders, and we’re now seeing high averages in existing home prices, which range around $140,000 per lot in Phase 1, compared to more than $215,000 recently. Our active engagement has provided valuable insights and strengthened our operations moving forward. We are committed to effective stock repurchases and leveraging our options for sustainable shareholder value. The market's value disconnect is notable, and I encourage you to consider how our active assets yield returns and the appeal of purchasing our stock. Any growth we achieve should be reflected positively. I appreciate your understanding of our story and believe there are exciting developments ahead. We have a robust balance sheet with over $57 million in liquid cash and note receivables, providing a commendable liquidity position supported by our ongoing successes. Finally, I welcome Dan Kozlowski to share his valuable insights as a Board member. Please share your perspective.

Hello. My name is Dan Kozlowski. I have been on the Board for four years and represent the largest shareholder, Plaisance Capital LP, which has invested with me in Pure Cycle through my firm. I would like to share my perspective, as I have witnessed our progress over the last four years. There are many topics we can discuss, but from an investor's viewpoint, I have known Mark for over a decade. I commend the strategic purchases of water and land over the years, which have yielded extraordinary returns. I am surprised that the share price has not reflected the company's underlying progress. Over the past five years, we have transformed into a much stronger business. We have evolved from being in our early stages to becoming a well-defined and capable operator. For various reasons, including market structure and passive investments, a disconnect has developed. However, today’s numbers indicate a critical turning point, demonstrating our high-end potential and the successful execution of our business model, particularly in the water utility sector. Pure Cycle is an inflation-protected asset; with recent inflation trends, the appreciation of assets, especially in water and land, should yield high ongoing returns that go beyond mere figures, relating to our societal needs. I would also like to mention our approach to share repurchases: historically, we aimed to gradually reduce the share count while building viable cash flow and income for returns. In the past, we refrained from buying back shares, but now we are committed to doing so prudently. Mark and the Board are dedicated to continuing this practice in the future. We are becoming a more robust, earnings-generating company that reflects the growth of our water utility and land operations, positioning our business to benefit from significant recurring revenue in the single-family rental segment and beyond. We take pride in our ability to negotiate and partner effectively with homebuilders, who have significantly benefited from our models, making us a more sought-after business. We are creating value for all stakeholders while ensuring future opportunities. With this positive outlook, I want to emphasize that we are strategically positioned to help Colorado grow sustainably and to explore opportunities to leverage our skilled water assets for land development. There is indeed a compelling future ahead.

Good morning, Mark. One of the growing water consumers are datacenters. Have you had any interest? I believe you previously held the largest undedicated water supply in the Denver area, so I'm curious if datacenters have shown interest and, if a datacenter were built, could it operate on non-potable water?

That's a good question. I'm not sure about the latter part on non-potable water. I know that the majority of their water demand is typically for cooling. However, scaling may present challenges. You're correct, there are critical components for datacenters – energy and water. We have substantial capacity in both. The utilities at Sky Ranch utilize both gas and electric provisions. Our commercial area is set up along the interstate, primarily featuring vacant structures with limited staffing. This likely reduces transportation value, rendering even housing less meaningful for datacenters. We have made it known to several datacenter entities that we’re open to potential opportunities. However, traction has been limited. Yet, we recognize the significance of water in their due diligence process, which could represent a valuable customer for us if we proceed with datacenters in the future. Currently, we are focused more on maintaining our industrial sector’s water requirements.

Thank you, Mark. This presentation has been incredibly helpful and insightful.

Mark, good morning. Great quarter, great year. The outlook is terrific. I'll pivot to a concern – your stock repurchase activity seems to have resulted in more outstanding shares when I check year-end '23 versus year-end '24. Could you clarify how this is being addressed as your recurring revenues climb? It seems reasonable to leverage your position for acquisitions as it could lend itself well to your needs moving forward.

That's a fair question, Bill. We certainly feel undervalued as a company. We are backing that belief with share repurchase activity. However, we also want to keep some liquidity on our balance sheet to execute on acquisition opportunities. We had a strategic acquisition recently that was important for our liquidity posture, and that transaction needed funding within a short timeframe. It’s essential for us to maintain liquidity while being in a strong position to act swiftly as an opportunity presents itself.

Do you have a line of credit?

Yes, we do have a line of credit.

Wouldn't that line be the liquidity source if faced with a major acquisition or unique opportunity?

Absolutely, those options remain available, and we’ll continue to be aggressive yet conservative.

Yes, good morning, Mark. Thank you for the presentation. My questions were largely answered earlier, but I wanted to touch on a point regarding datacenters. While I realize the development of a datacenter is significant for a company, do you see potential opportunities given your land, water, and solar capabilities?

Indeed, John, you raise valuable discussion. Water resources are precious; we have ample sunlight in the area with 300 days of sunshine a year. Datacenter opportunities would need substantial space – typically ranging from 10 to 30 acres depending on size. Therefore, it’s pertinent for us to recognize how we can play a role in this landscape. The Lowry Ranch has existing solar farms, and datacenters could be suitable for land availability. Our ability to coordinate water utilization alongside such potential stands as a unique opportunity for growth. We aren’t positioning ourselves as developers of datacenters, but facilitating these projects is something we’re eager to explore.

Thank you, Mark. I also wanted to touch on commercial developments. With approximately 700 residents now at Sky Ranch, are there large retailers, such as supermarkets, looking to position near your property with anticipated growth?

This certainly adds value to the commercial aspect. Typically, retail investors look for targets around 1,500 residents. We currently have 700 living at Sky Ranch and another 700 lots under production, which gives us confidence that in the short 3-to-5 year range, numerous commercial spaces will evolve.

I'm Dan Kozlowski, a Board member who has representation as a substantial shareholder here. It's interesting to see how Pure Cycle stands as a valuable player in the water market with prominent elements of growth that can't be overstated. I'm excited about how we are scaling and integrating these opportunities for Colorado's sustainability efforts.

We appreciate Dan's insights on our continued growth trajectory. If anyone else has insights or questions following today’s earnings call, do not hesitate to connect with us. Thank you for supporting the brand, and we’re eager to move forward. On that note, I’ll conclude our call.

Thank you, sir. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Have a wonderful day, and thank you for participating.