PCYO - NASDAQ

Good morning. I'd like to welcome you all to our Second Quarter Fiscal Year 2025 Earnings Call. For those of you that are listening on the phone, I think most of you have connected through this through our website, but we do have a deck for this that is on our landing page of the website. So if you go to purecyclewater.com, you can click on that link, and that'll take you directly to the presentation. And I can walk you through the presentation, as we move through our slides. With me today, is our CFO, Marc Spezialy, as well as our Controller, Cyrena Finnegan. So I'd like to thank them for joining us early morning and, really want to welcome you all to the call. I'll get started. Well, first thing we'll do is and it's a slide here. Talk a little bit about our forward-looking statements. Statements that are not historical facts contained or incorporated by reference in this presentation are forward-looking statements. I think you're all familiar with the forward-looking statements. With that said, certainly want to, highlight, our leadership team. You know, the success is driven by, you know, the people that we get to work with, both in terms of our management as well as our board of directors. We have a great board of directors, which bring a tremendous amount of experience and guide and leadership to the company, and it certainly helps to be at this the helm, in calm waters and rough, seas. And I'm not exactly sure where we are with this market, but, it is comforting to have a great leadership team, as well as a great board of directors to help, steward, the company through, managing these assets. I want to jump right into the financial here and see if we can highlight our second quarter. We had a terrific quarter. So we really want to highlight our financial performance. Again, just continuing to execute on monetizing our assets, both our water assets as well as our land assets and then our single-family rental assets. So taking a look at it. Q2 quarter, about $4 million in revenue, about $1.5 million, about a 38% gross margin. A large portion of that margin is really going to be from the royalty income. We continue to see a very strong performance out of our mineral royalties that we had when we acquired the Sky Ranch property. Really flowing down to the bottom line with continued net income and earnings per share. So both our three months and our six months year-to-date, we're about $10 million, $9.7 million in revenue, gross profit, again, a very solid gross margin around 50%-plus and then continuing growth in our earnings per share. Taking a look at that, it's Q-over-Q. And so this kind of gives you a performance. As most of you know who follow the company, our second quarter is usually our most -- our softest quarter. And it really is a seasonal issue. We are in the construction business where we construct and deliver lots for our homebuilder customers. And that's a little bit more challenging in Colorado in the winter months. But again, we see a solid performance on this quarter over our trending quarters for the last three years. The profit -- and that's probably going to be a seasonally adjusted issue, and that's kind of a timing of how we're recognizing some of this revenue on a percent complete basis, but nothing really of concern on the Q-over-Q on the gross profit, just really continuing to develop these lots. We've got three phases under construction simultaneously. And so really investing in that segment for us so that we can continue to drive revenue. Taking a look at net income. Again, that's really going to be a solid performer, really indicative of both having three phases under construction at the same time as well as some of that royalty income that's coming in from oil and gas just because that's a high -- it's almost 100% profit margin for us on that. So we get to roll that right down to the bottom line on that. And then continued growth on earnings per share. So that's a quarter-over-quarter performance on earnings per share. This will really drive into year-to-date and really kind of showing you year-to-date, both in terms of prior fiscal year as well as our guidance. We had guidance for fiscal '25 at around $30 million, close to $31 million. We're about $10 million into that. And that's about where we are. We're on track to meet that goal, knowing that Q2 is that seasonally adjusted and Q3 and Q4 are usually our high-growth areas just because of how we sequence our lot deliveries on each of these phases. Taking a look at gross profit also, we're on track for that in terms of our guidance as well. Year-to-date net income again, really solid continuing performance in all segments of the business, whether that's land development, water utilities as well as single-family rentals and then earnings per share. So we had about $0.20 earnings per share, a little bit shy of about 50% of our guidance, but really looking to meet that guidance through our fiscal year-end. So if we want to break this down by each individual segment, taking a look at our Water Utilities segment, a very good quarter for us on that. That's largely driven by the receipt of tap fees as we open up each new phase of our development. that's when we start to recognize a lot of those capital fees that we have for the Water business. And so we get those tap fees in. Those are paid by our homebuilder customers at the time of building permit applications. And so we have probably about half of the tap fees receded from filing 5, which we delivered sort of end of last fiscal year, last summer. And I'd say we've got close to maybe 75 vertical homes in there. So the builders are very aggressive. They're getting out there, building a number of spec homes as well as homes that are sold. They have model homes up in both the filing four, which is our Phase 2a as well as some of those in 2b, which is the more active one. What you'll note in this segment for Water Utilities is oil and gas deliveries are a little bit weak. That's what we did forecast. We knew that, that was going to be a little bit weaker than we had last year, and that was predominantly because most of our operators really working on a large block of well permits. And I think there's more than 200 well permits under production, both for the Lowry Ranch and the surrounding areas of the Lowry Ranch. So we've got a lot of that activity that is going to occur in fiscal 2025, which will start drilling probably late '25, early '26 to see a bit more of that activity in fiscal year 2026. But again, the Water Utilities segment doing great, continue to add new customers to the segment. So we continue to build that recurring revenue segment for that. This is kind of a little bit of a comparison of the oil and gas, which we did forecast that was going to be a bit softer. And so you see that by comparison over year-over-year activities. Oil and Gas, as you know, very, very -- it's a variable segment. And a lot of times, it really is a -- both global price comparison to how the price of oil is to how quickly these operators dial this up. The field itself continues to just perform great for all the operators. And I think that it's derisked. They have a very high degree of certainty as to how each of these wells perform. We can see that in terms of our royalties off of the wells that were drilled on Sky Ranch in 2024. And so you see a lot of that continuing activity where they will continue to invest in that based on their permits and kind of their internal processes to how they want to deploy their capital. But very good segment for us, very high margins for us, and it continues to allow us to monetize and pull forward some of that infrastructure that we continue to invest in our Water Utilities segment. Moving on to Land Development. This kind of highlights each of the phases. We have four phases that -- actually, we expanded. So we added another 5th phase. So you'll see a 2e coming up in the presentation in our second round of investments into infrastructure for Sky Ranch. But this really illustrates where we're at in terms of three phases concurrently going on. We have Phase 2b, which is we delivered those lots last summer, and we have a bit of a punch-out items on some landscaping issues and things like that, that will round out the rest of this year as we roll into the spring. But that's where most of the builders are currently going vertical. They've got a number of homes that are up available for sale or at various components of that. And it seems like once they finish those homes that there's a ready and robust market for those. And I think that's attributable mostly to price point that we find ourselves in that Entry Home segment, and I think that's the most attractive segment in the market, not only in the Denver area, but nationally. But this also highlights where we're at with the other phases of this. 2c, 2d really highlights both the lots for sale as well as our single-family rental lots. And so as you see those accumulating on each individual phase, we have 17 units that we've got under contract that are at various phases of permitting and starting of construction in Phase 2b. And then we're rolling into Phase 2c, where we delivered the over lot grading. We finished the utility side and really now down to the curb and gutter and the paving side of that. And so that should deliver by fiscal year-end. So that will -- that we're currently about 48% complete there. That will round up to the mid-90s by fiscal year-end. And then we finished the grading on Phase 2d and have started our utility work on that. So we're midway through our lot delivery contract structure where we get payments from our homebuilders on increments of phases of delivery. So about 1,300 lots on the for sale side and about 100 lots on the single-family rental side. So it gives you kind of a very strong picture of how we're accelerating the development of these land assets and delivery of lots. And then the Single-Family Rental, highlighting that Q-over-Q performance, really not a lot of change there. We still have the same 14 homes that have been completed. Our rentals are still very strong. So we continue to have a high occupancy rate there. And then, again, very great margins on how we do that. And I think we've talked about this a lot in the past on why this is so attractive. And it really is a formulation of being able to roll in the equity value that we have on the land side, as well as the water utility side, being able to deliver these lots where our homebuilders who are our partners on buying the lots are also our partners on helping us build these homes. And so they have a great delivery device on building the homes. And then we have the advantage of keeping that equity within the lot themselves and renting them out at the full fair market value of those assets. So the book value of those assets are about 80% of the fair market value of those assets. So we very much continue to enjoy a great segment on the Single-Family Rentals. I just want to quickly review kind of take this up a few after the financial performance and really highlight kind of how the company is structured, how we look at each of these individual segments and how they interrelate to each other. And at a DNA level, most of you know, we're a water utility company. We have a portfolio of water rights that we have acquired many, many years ago, some more than 30-years ago. And then we take those water, we bring that to properties, both properties that we own as well as properties that are in our service area and properties that others own that we can be delivering that as a water utility service, both water and wastewater service. And then in some cases, where we own the land, we actually are developing that land. So right now, that's confined to the Sky Ranch community. It's about 5,000 single-family connections. We're about 20% built out there. But that allows us to be able to vertically integrate ourselves and do the horizontal infrastructure. That's a very valuable component in the marketplace because there are very few people that are doing that. Homebuilders really prefer having a fixed fee where they have someone that will deliver that lot for them. And so we partner with them to deliver those lots. They sell those -- they build the homes, sell those that generates a water customer for us. And then in a portion of that portfolio, they also build that home for us, and then we rent that out as a single-family business. So each of these segments interrelate to each other. They're really building on each other, and they're complementing each other. So one does really feed into the next, and I think it has a great business value-added proposition for both us and our shareholders. Let me drill down to each of these very specifically. I'll try and go through these quickly because I know many of you know this. Our Water segment, if you just look at the balance sheet side of our Water segment, that has about $65 million in total assets, kind of breaks itself out in terms of the water rights, the bricks and mortar of the pumps and the wells and the pipes and the water treatment facilities that deliver that potable water. Our portfolio allows us to provide service to about 60,000 connections. So we're very early stage in monetizing this portfolio and getting our share value out of that, but we continue to add connections each year. take a look at the system capacity. We have more capacity. We are fortunate to be able to stay ahead of that capacity where we're developing water -- wet water deliveries in greater than the potable demand for those services are. And what we use that excess capacity for is typically providing that service to industrial applications such as oil and gas. And then taking a look at our portfolio capacity in terms of the capital fee, how many taps that 60,000 caps can generate. We're very, very early on in that. We have tap fee capacities that can generate about $2 billion, a little more than $2.3 billion worth of that. And that's about a 50% margin business on the capital side, as well as on the operating side. So it gives you guys a pedal amount of what that Water segment can do for us. Taking a look at our Land segment. Land segment, we have constructed about $77 million of lot sale revenue since we started the project, and we're about 20% built on that. So we still have a ton of pedal left in the Land Development segment. And again, that's a very good gross margin segment. The reason I think that's gross margins as good as it is, is probably because of the buy. We acquired Sky Ranch in -- at a good price, at a fair price at the time when a lot of people weren't interested in buying it. We bought it in 2010 during the Great Recession. And really take a look at monetizing that asset being opportunistic about our capital allocation and how we look for additional opportunities. And so with a very uncertain market out there, that sometimes presents great opportunities for those that are well positioned, and we think that we are well positioned for that. So we hope to see if we can continue to add to this portfolio and continue to expand in the Land Development segment. This is just a little bit of highlight of each of the phases that are subcomponents of that. We completed Phase 2a. All those homes are fully occupied. Phase 2b, as you can see there, there's about 70 homes that are up and constructed. Phase 2c, you can see some of the alleyways being poured, many of the streets that are graded out. And so a lot of the utility package there has been complete, and we'll really have that strong push to deliver those finished lots before fiscal year-end together with the weather. So we time that out such that we can be in that season where we can do the concrete and asphalt where we're not competing with mother nature on that. And then Phase 2d, that's fully graded. And equally, we're going to get the utilities in there and look to see if we can get those lots finished by the end of the calendar year. Sometimes we have to race against mother nature. It depends on whether or not we get an early season winter in October versus a late season winter after November time frame. So we'll continue to press on 2d. And then we will have another phase of this. We have a subphase of that, which is about another 150 plus or minus units that are Phase 2e, which we are planning right now, and then we'll extend those opportunities to our existing portfolio of builders. This kind of highlights the overall capacity of our land assets. And as I mentioned, we're about 22% developed. If you take a look at the residential side. So we've delivered about 1,300 single-family residential lots through Phase 2. Our commercial lots, we have about 800 single-family equivalent commercials. We're just converting those to a commercial. Those are done a little bit differently. Those are usually priced per square foot as opposed to per lot, but this allows us to do some forecasting to give you guys a comparison as to how the overall opportunity relates in the Land Development segment. And so combined, we look at that being a very strong performance. The overall combined performance is about 18% right there, around close to 20% of the build-out of Sky Ranch when you combine both the residential and the commercial. Single-Family Rentals. I've highlighted some of the opportunities there and really the attractive nature of it, and it's maximizing the land development as we continue to provide value to the community for what it is that we do on the parks, the open space, partnering with our national charter, National Heritage Academy for schools. It generates continued recurring revenue. So each unit provides close to a little more than $30,000 a year in recurring revenue on the rental side. And it really does leverage the market demand and produces great returns for the company. So we will continue to invest in this segment. You'll see a little bit more acceleration on that through the latter phases of this as we continue to build out the site Phase 2. Some of the metrics on our existing portfolio. This really highlights the difference between fair market value and really the balance sheet impact. So we have about $5.3 million of capital costs on that and a fair market value of about $2 million on that. So we still have a lot of appreciated assets on there that are not able to discern through the balance sheet. This is kind of a highlight of where we're headed with that single-family portfolio. So you're going to see Phase 2 grow substantially here in 2c -- b, c and d. So we're going to move from about 1,400 homes close to 100 homes on that. And really, this is some of the metrics that will drive to that. And the fortunate thing for us on this one is because of the equity value that we have in the land and the water utility, this is a great one where we can leverage that portfolio. We have relationships with 3 different banks that are very excited to help with this portfolio and really give us a lot of that capital and a little bit of leverage to be able to capitalize on using that above our balance sheet capacity. So we're very excited about that. One of the great things about the company is our balance sheet and our liquidity position. So you take a look at where we're at between the cash that we have, we have more than $20 million of liquidity. We have cash and investments right at $17 million. The restricted cash that we have and how that's used is we secure lines of credit, letter of credits for the county on our performance of building out the infrastructure on delivery of the Land segment. And the reason that the county likes to do that is that they are allowing us to get building permits in some cases, in advance of finishing some of the back-end side of the land development. Some of the -- most -- all of the roads, curbs and gutters and water, sewer, storm, all that stuff is completed. But some of the landscaping and things like that, that usually come in seasonally as long as we assure the county through a letter of credit that we'll complete all that stuff, then they're releasing those building permits to us early. And that's really advantageous to our homebuilders because we can concurrently build those homes while we're doing that landscaping. And so there's really no -- very, very little risk on that restricted cash. Really, we do count that as a component of our balance sheet. And then again, we talk a lot about this note receivable from the reimbursables. So not only do we receive revenue from the sale of lots from our homebuilder partners, but a lot of the infrastructure that we complete, we do get reimbursed for that. We get reimbursed for that from the local municipality as they issue bonds. And so we had a bond offering in 2024 that gave us -- it was about a $25 million bond offering, paid that down, but that's a nice liquidity element for us. So when you take a look at the overall liquidity of the company, we're in a great position not only to navigate challenging markets, and I'm not sure if this is a challenging market, but it does give us not only a great asset base there, but also opportunities to continue to invest into land and water assets. I'll talk a little bit about outlook, and this is kind of a repeat of slides from our fiscal year-end. So we take a look at our short-term outlook, and that's kind of a three to five year outlook, customer growth, so development of Sky Ranch up to about 2,500 units, consistent tap sales through the remaining phases of that. And then as those customers come online, it increases the overall recurring revenue. We've got annual tap fees that increase year-over-year. And so you've seen that as we continue to add new connections to the system. And then longer term, with the build-out of Sky Ranch, we've really kind of tried to highlight what we have in the book, what we have in our portfolio for full build-out and monetization of these segments. And so they're very attractive returns for us on that. That build-out of Sky Ranch could be in that seven year range. So it depends on kind of how we build out that commercial segment and some of our participation in there. And so we like opportunities where we can joint venture some of that commercial opportunities. We are working on those commercial opportunities as well as developing a new interchange right there at the interstate where we've got some mill levies that are set aside for that, so that can come off of an independent bond financing, but that's a project that we're looking at in this short-term aspect that will increase the overall accessibility of the site as well as the commercial opportunities. Land development, steady lot sales through the next five years. We continue to increase our lot margins. And I think that's largely because most of the heavy lift is complete. We've got most of the off-site infrastructure. I think the last remaining key element will be that interchange. And so we do have a bonding teed up and ready to go for that, that will cover that cost. And then we really still have the most valuable land yet to come, which is going to be the commercial development, and we want to continue to look at all of our opportunities on the commercial side. And then single-family rentals, we talked significantly about that. But going from what we have today to maybe more than 200 homes and continuing to look at the strength of that, so 200-plus homes through the build-out of Sky Ranch. And we would look to do each of these elements and a future acquisition. So to the extent that we continue to expand our land portfolio, we look at all three of these segments being able to be contributors to what it is that we're looking for. This will be a little bit of the guidance on what we had for 2025. So you take a look at the trailing three years and how we're continuing to accelerate and really grow our revenues year-over-year and really look at not only another good year in 2025, but then how we look at that short-term aspect where we're starting to bring in some of that commercial land development and the punch that that's going to have for the company revenue as well as earnings per share. So really continue to execute and highlight the value of these assets. Again, shareholder value kind of a little bit both year -- fiscal year guidance, short-term guidance and then build-out guidance for Sky Ranch. And again, that build-out is sort of what we have in inventory. That's not something that we need to grow. It's really just to execute on continuing to build out Sky Ranch. We continue to be in the market. So our share repurchases I'd say that in Q3, as we're rolling into that, this current market was a bit choppy, and we continue to have a bid in there to buy those shares. But we're also continuing to look at opportunities for reinvesting into land and other opportunities. And oftentimes, when you get turbulent times, it does create some of those opportunities. And I will say that we've had an increase in the interest level on some of our target acquisitions. So we want to make sure that we have both capital to invest in the 3 phases that we've got under construction right now. And then as these opportunities present themselves with an acquisition really to be in a position to perform on that. And those are kind of how we look at our capital stack on that. So with that, what I'd like to do is open it up to questions. I think what we'll do is we'll make everybody's mic live. If we get some feedback or something like that, we may change that format. But if anybody has got a question, you can either raise your hand in the bar up there. And then we can identify you, you can call out or just kind of sing out and we'll see if we can have an orderly Q&A here.

So with that, we'll open up the mic. And if anybody's got a question, go ahead and sing out.

So you have the ability to unmute yourself. It's not disabled.

Yes, I see everybody.

Mark, it's Bill Miller. Good morning.

Good morning, Bill.

So getting back to the recurring themes, where do we stand on I-70? We keep talking about it, it's going to be great. But when do you think that will come to any kind of fruition? Secondly, we've talked historically about acquisitions and you say there's a little bit more appetite on the part of the seller. And is that going to result in some transactions sometime? Or are we just still talking about people that are reluctant to sell their land because you've done so well?

Let me take the sort of -- so your first question was about I-70?

Yes.

So that interchange, there's a -- I know this is going to surprise you all, but there's a pretty robust regulatory climate when you take a look at this. And so we've been together with Arapahoe County, who's kind of our partner on this. They're really the sponsor, but we've been working on the 1601, which is the permit regulation for that for the past three years. We're about ready to submit that 1601 to CDOT. It will take them, call it, four or five months to review that. But I think we're forecasting that we'll be in a position to get clearance on a permit for construction of the interchange by the end of this year. And then I think what we would do is we go to market for those bonds end of this year, first part of 2026 and really start construction of that. We have an existing interchange. So it really won't be a gap in that. So it's one of those ideal scenarios where we can we can build an interchange without any disruption. We'll keep the existing interchange they'll be about 600 feet apart, but we're moving the interchange along the alignment of the section lines, which is really what CDOT wanted. So that's what we really look for. We'll look to see that happen. We think that, that's going to be a very orderly transition of that infrastructure. As it relates to acquisitions, we keep very close to target acquisitions and the owners of that. And the opportunities are there. The sellers just have different personal requirements as to when it makes sense for them to try and sell, whether that's estate planning or just lifestyle issues that they're looking for. And one of the things that I can say is that can highlight the fact that we are the beneficiary of an uncertain time with Sky Ranch. We were in a great position at the time to be able to buy Sky Ranch when nobody else wanted to buy land. And so usually, there's -- opportunities are created by uncertainty or change of circumstances. And this has been a very interesting time. So we'll see if that yields any interest for sellers to move forward with the transaction at that time. I can't give you any guidance because I don't have it. If I had something under contract, I might be able to tell you that. But it is the number one thing that we're -- well, it's the number two thing that we're looking at. The number one thing that we're looking at is continuing to invest and accelerate the development of Sky Ranch. The number two thing that's important to us on the capital stack would be continued acquisitions in land, emphasis in land more than water. But to the extent that water is strategically oriented to our existing portfolio, then we would be interested in that. But -- and then continuing to invest into the company through the share repurchase. Yes, the land acquisition is very foremost on what we're looking for.

Just before we go into the next question. So we have allowed you guys to unmute yourself. But I we don't have the ability to unmute you. So if you are on the computer, you'll still have to click the mic microphone button to get unmute. And if you're on the phone, you could dial 6, as well as making sure your phone is not on mute.

Looks like we have a question from Nigel.

Hey, how are doing guys? Looks like a decent quarter for the seasonality issues. One piece of information I find very helpful is essentially what your builders are telling you about demand. So if you could just give us a little bit of an update on demand in the Denver real estate market overall. Is your price point advantage holding up against that market? And I'm a little puzzled because I've always perceived that it would be a very heavy rental demand, a little puzzled even in a winter quarter as to why there isn't demand happening on the family rental side. So just wanted a quick update from you on the demand situation there as well?

Good question. And you're right, I think our biggest opportunity is our price point. One of the things that we have seen is a push for affordability from the administration and component of that is going to be the interest rate environment. And so I think interest rates have -- they've been all over the map, but they've been trending a little bit softer, allowing that price point in there. And a lot of the builders when interest rates went from 3% to 7% found themselves in a position of really competing by buying down that interest rate and offering the incentives as an interest rate environment. And I think that, that has kind of -- that's burned off. I think the buyers out there are more acclimated to this being the current interest rate environment or the normal interest rate environment rather than to have an expectation to try and time that out. And so as a component of consumer sentiment, I think that's a favorable outcome, both for the builders as well as for people that are delivering these lots. We can take a look at a number of investments that are being made, and there's a number of projects that continue to focus in the I-70 corridor. And so the majority of all of the development activity, whether that's going to be master planned communities, whether that's going to be infill projects or any of that stuff is really concentrated in that I-70 corridor. So we find ourselves in the right segment of the market, not only in terms of the price of the delivery, but also where most of that development is occurring. Traffic, throughput, and I will tell you, our builders, we've got prob of the 70 homes out there, they're building like crazy and they're building on spec. And so they have a lot of confidence to put that investment in there and an understanding of, okay, this is the right price point for us to be able to take that inventory. And so those are all those things that are -- and having three phases under construction at the same time, all of that activity is really giving a lot of incentives for Sky Ranch to be among the high performers out there. And so we'll see how that continues to absorb over the next 18 months, but that's really what we're trying to do is in that market. Your second question relative to the single-family rentals, we had a bit of a gap between Phase 2a and Phase 2b, and that was when interest rates went up. And our builders asked us for a 90-day pause on delivering some of those lots, and that's gapped us out on that. And so we really -- we would -- we are seeing very strong demand for each of these units that we're bringing online. And the problem is that we've been trying to get these permits and phases online. And so delivering the Phase 2b last summer we went straight into contracting for another 17 units. And then the county updated their building code. And so I think our builders -- some of our builders got grandfathered in. So that's where they have like that 75 units out there. Some of the builders were in the process of making those applications. And so a lot of those things are getting released right now. And so a lot of the inventory of the 17 homes that we have in that phase are going to come online now. And so a little bit of a gap there. It wasn't certainly from a market standpoint or from a desire standpoint. It's just a little bit of timing variance on that. And then we're teed up for the rest of the phases to be able to continue to accelerate that.

So you're expecting a stronger environment in terms of sales and rentals through this calendar year versus last year?

Yes. Very much so. Yes. So we got a -- 917 -- ending at 2446...

Elliot had a question.

Okay. The 2446, you're on mute. So you'll have to hit your mute button. If anybody else has got a question, is that -- did I hear Elliot breaking in.

Mark, Yes, this is Elliot. Can you hear me?

I can.

I'd like to go back to your answer to question number 1, when you said that your second most important priority is to acquire new land. And just for those who may not have heard your February call, which was recorded -- hang on just a minute. Okay, which was recorded and is available on the website. You had a luncheon meeting, and it was available on

Yes. No, I appreciate that. One of the challenges that we have is I think we're a partial victim of our own success because we have acquired these assets, and I think we've done a very good job of acquiring assets that are favorably valued for us and then also been able to be good stewards of that over time. And the market of those assets have appreciated significantly. And not only is that call a little bit helpful for some of that. But when we try to articulate some of these numbers, if you take a look at the back half of these slides, that really also tries to monetize this. It's tough for us to be able to give you full guidance on that. But what we can do is say, hey, here is what we make per lot. Here is what we do on the water side. Here is what we're doing on the single-family rental side. Here's how that generates the monetization of those legacy assets as well as here's what it does on the recurring revenue side. And so I would say, and the company has had a strong disconnect between what certainly we believe the value of those assets are and what the market capitalization is for that. And we try and allocate some of that money to bridge some of that gap in now. So, Geoff. I see you.

Well, what I was going to say, Mark, is just as a tease, if you like it to those who are listening who didn't hear it, you came up with actually the analysts on the call came up with impressive numbers for what the pile of cash the company would have with Sky Ranch fully developed with roughly 85% of its undedicated water reserves not still undedicated and available for sale. And you also came up with a number for ongoing revenues per share at the end of the development of Sky Ranch. So it was very specific and it was very helpful.

I appreciate that. Geoff, I see Geoff Scott has got his hand up and I see his smiling mug. I like this format by the way.

Good morning. How are you.

And good morning.

Elliot, I think I'll take some credit for the luncheon analysis, but I want to ask Mark if...

You were -- Geoff, you were brilliant. You were brilliant.

You just made my whole day, Elliot.

Pat on the back keeps you going.

Mark, I want to ask a couple of chicken and egg questions. I'm assuming that the development of the interchange is the egg and that the commercial development is kind of the chicken. The value of the commercial development goes up after there's an interchange in there. Is that basically correct?

Yes, I think that is true. I mean I will say that I think the value of the commercial, we have an existing interchange. The new interchange gives you more capacity. It's a freer flow of traffic. But the proximity and the location along I-70 give you both of those elements. But the interchange is kind of a component that we do need as we continue to build out. And what we've tried to do on that, Geoff, because commercial needs a certain amount of demand from the residential side. And so we've been bringing that up at the same time as we're paralleling the permitting for that interchange so that we don't have a gap out in that issue where we have the demand from the residents, but not the infrastructure for the traffic capacities.

Right. I'm assuming that the demand for the commercial will go up when they see a bigger and better interchange.

Absolutely. I would not argue with that thesis.

Okay. That was the first chicken and egg. The second one was kind of interesting because I think for the first time, you said that the land acquisition is a higher priority than additional water right acquisition. I don't think I've ever heard you actually say that before. Is that because the -- what you'll be able to do with land is going to be faster than what you're going to be able to do with additional water? I mean you have water for 60,000 units. You don't have land for 60,000 units. So presumably, you have water and inventory. And in order to utilize that water, you need additional land. Is that the correct interpretation of the chicken and egg?

Yes, exactly right. I think we're longer on the water side than we are on the land side and really want to be more aggressive on the land side.

Okay. Thank you. That's all I had.

Okay, thanks for chiming in. And due thanks for your comments and kind of the filter that you as a shareholder and really a long-term shareholder have in terms of the company and really aligning with kind of how we think about the world and how we steward some of these assets was very helpful in that February call. So keep up the good work.

Thank you.

Bob Schloss is trying to ask a question.

Who is?

Bob Schloss.

Yes, I tune in late. So this question has been answered. Let me know. I'm interested in how the school is doing. I think it's a key component of the entity. So tell us about the school, I'll go back on mute.

Okay. Great. It is a great question. And you're right. Having a local school, having a K-12 campus right in the middle of what it is that we're doing, tremendous value. I will say our partner on that National Heritage Academy, a great partner in that. We are their first K-12 campus. And they have other campuses that are K-8. They have high school campuses, but we're the full K-12 model. And so we're looking at breaking ground on the high school of that later this year for the delivery of high school in the 2026, 2027 year. And so what we've got is the existing K-8 system. They'll go K-9 next year because they want to make sure that they can continue to keep the kids there as they start there and then have that high school for full build-out on that. And so the capacity of the full K-12 model will be something like, I think, 1,700 kids. So it will accommodate all of the kids in Sky Ranch, full build-out of Sky Ranch plus a little bit more so that we can service some of the surrounding areas. But wonderful group. I think the overall feedback I'm part of -- I chair the school Board on that. So I attend a lot of the parent conferences that they have there. And the feedback that I get is the school is just a terrific asset for the community, a terrific model. They love kind of the NHA model, how they deliver the education, the moral focus that they have, everything that they do, I think, is a terrific opportunity. And I'm learning a ton about schools as well. So it's great. I thank you for your continued support on that school. I know you continue to reach out with me on that and continue to touch on that. So thank you for that support.

There's one caller that ends at 6841 you're off mute. I don't know if you had a question.

Yes, this is Greg Vennett, one of your shareholders. Washington, D.C. or the new administration has talked about affordable housing and the need for it. They've also talked about the possibility of using federal land or giving federal land for affordable housing. My question is, do you have water near, or is there land near our properties that could be federal land that you could basically obtain for $1 and then with the agreement that you would create affordable housing? Thank you.

That's a good question. We are not adjacent to any federal land. But I will say that our service area is owned by the state, the State of Colorado. And State of Colorado recognizes as much as the federal government, the importance of affordable land and affordable housing. And so while we don't control the land, our water and our service area are all on that state lands. It is a massive inventory of land. It's 24,000 acres of property. It's located in that I-70 corridor. It's probably the single most valuable asset that the State of Colorado owns in the State Land Board. Clearly, they're attenuated to not only the affordability aspect, but what they do, do with that land generates revenue for the public education system, the K-12 public education system. So those are great opportunities for us to partner with them. We'll provide the utilities regardless of whether or not we develop the land in conjunction with them or somebody else develops that land. And so they're currently evaluating what opportunities they might want to consider for that. They've taken a look at that land at various segments over the last 30 years as to what the inventory and the carrying capacity of that are. And we'll see. That's an opportunity. We look at other land areas for us to be able to acquire or partner with and be able to monetize and develop that land by bringing our water to it. And then also carrying that forward within our model where we're developing the horizontal infrastructure and then we'd look to inventory a portion of that for single-family rentals. But you're right, land is a critical component to the overall development. And then just interest rates. And I think as much as the federal government has the opportunities to take a look at its land, the current administration really does have a focus on trying to do something about affordability and interest rates are a key element of that. And much to maybe their frustration, they don't have as much control over interest rates as they would like. But certainly, policy does influence interest rates.

Has the State of Colorado ever granted or sold land for a purpose like public housing?

You bet. You bet. They've sold land. They have all their interest, they sell land, they buy land, they trade it out. They have commercial properties where they have office buildings that they are for lease. They have multifamily opportunities where they've participated in either land or vertical side and then just selling land. The predominant drivers for their land interest have been oil and gas and grazing, but they own about 3 million acres throughout the state of Colorado, and this is one of those pieces of their portfolio.

What is -- how close is their land to your Sky Ranch or your interchange? Is there anything that's nearby? Or is it 10 miles farther?

Yes, it's very close. Yes, it's four miles directly South. So when you take a look at -- and we have a lot of these images on our website, you'll see where we show our service area and the proximity of our service area. And in fact, some of our presentations will have sort of some drone imaging where you see on one side of the road, you have a bunch of developed houses on the other side of the road is kind of vacant land, and that's where the state -- that's where the Lowry Ranch starts. And so the metro area has grown out to the Lowry Ranch. And so it is ideally positioned for opportunities.

Okay. Final question, Sky Ranch, the build-out, you don't need to acquire any land in order to continue growing for the next, what, five years? Is the absorption of Sky Ranch would take five years?

Yes. I would say most of the residential should be wrapped up in that cycle. Some of the commercial may still tail on depending on how we participate in that. But you're right, that's baked in. You take a look at that guidance that where we think we can monetize both the land and the land, the water and the single-family rentals on that, that $600 million really is just what we own at Sky Ranch.

Okay. I guess one of the concerns investors may have is that you're tying up capital in the rental units. And if you do make another land acquisitions provided on the deal you get, that's capital that won't get a return for five years possibly. But I don't know if you want to comment on that.

Yes, the cycle of land development, certainly, you're not wrong. When you buy raw land, the time to entitle it and start developing it could be a little bit longer. The issue for us is to make sure that we allocate that capital, so we're not over our skis and we can actually continue to invest in the land development at Sky Ranch. And I think we're ideally positioned to do that. And to the extent that we get a large enough land acquisition that would be beyond what our liquidity position might want to support, that's something that we can take a look at monetizing our single-family rental portfolio. And we can bundle that up and sell that out and be able to use that rather than our equity to be able to acquire some land interest and replace it. So it's a very attractive investment, not only because of the tax advantages to it, but the equity carryforward and then the ability to monetize it in the event that there's an opportunity to do that.

You're suggesting like a 1031 exchange where you exchange your rentals for...

Yes, something like that, yes.

Okay. Yes. I don't want to thank you for everything. Thank you for the call.

You bet. Any other color I can, layer in?

Yes, Mark.

Please.

This is Dan Kozlowski calling in, Board member. I'm not in the room today due to a scheduling conflict, but good call. I think this is one of the better calls and a good quarter in a seasonally slow time. But again, I think it speaks to the robustness of the model where these slower quarters are less slow and still stacking on some earnings growth, which is great. Just a couple of observations. I kind of listened today and the caller questions, I think, are at a higher level and everyone is kind of really understanding the business model better and better each quarter. So that's great. So just to pivot off a few things. I mean the interchange process, I'm glad you brought that up today and spoke about it because it is a big opportunity. I mean if you just drive out there, you see there's a fine off-ramp. And I guess you call it an interchange today. But obviously, the ability to control and work with Arapahoe County and have the outcome of that interchange be favorable towards our sections that we're going to develop a lot of it commercially is really a huge opportunity. I know you've put a lot of time and work on that and more disclosure today, I think, is good. It's slowed us down a little bit to do some regulatory caps and how all that works in the past. But once that is in process and moving, I think it will free us up to make us more flexible in terms of pacing of absorption. And maybe you can comment on that, a touch if you want. But -- and also a second part of that is how do you think about commercial in terms of your classic retail, commercial build-out, the grocery stores, the drug stores, the software that goes around a community versus going either earlier at the same time and doing it in an aesthetic way, but adding like industrial warehousing, that type of thing that could also be sellable at really good prices really at any time? So maybe just a little more color on how you're thinking about the classic retail software versus the industrial warehousing that there's always huge demand on I-74?

Yes. All good questions and really good things to kind of throw a little color into this. And so the interchange, I think, is a great asset, a great opportunity and one that we've been planning for since we started construction of the project. So we're well positioned on that. And it's a long lead cycle. So we have really been early to try and get that through the system and through that process, both with the county as well as CDOT. And I do think that, as Geoff sort of highlighted in his chicken and egg sort of analogy is that it does open up. While it's not constraining some of the commercial activity, I think commercial activity really is a lag of some of the residential activity. We did want to time those two out such that when the residential was good, that we didn't have any constraints on the transportation and then the attractiveness of having a bigger, fuller scale interchange on that. So that's an important component on it. As it relates to some of the commercial and one of the things that Dan has been super engaged in helping us really kind of color into some of the communication style of how we can translate the value of the company to investors. But one of the other opportunities, and I talk about this all the time in terms of the strength of the Board, but one of our Board members is very dialed in on the commercial. He works with a local family office that does commercial all over the Denver area. And they have developed tons of grocery models with Kroger and King Soopers as their brand here in Colorado as well as bolting into that, the commercial that goes around that, whether that's going to be your fast casual, whether it's going to be other types of office, medical office and then building into box store where you can get the retail side, whether that's going to be big box like Home Depot or Walmart or Sam's or Costco type models. And then also in the industrial side. So while that's something that is key for the company to keep their pulse on, we also have veteran experience on that, that help guides us. And so Jeff Sheets is the Board member on that, who brings that value to the company. And really, we sought that expertise as we continue to build that Board portfolio out such that they could assist us on that. And really, through his help and participation, we've developed a commercial model for that, that really accommodates all of those. All of those things that Dan was talking about, whether you have space because we've got about 160 acres. And so we have space for the light industrial for this big distribution center that does provide tremendous assessed value that brings a lot of that revenue into the reimbursable side. We have components of that for multifamily, where we've got apartment complexes, and we've talked with a number of different apartment developers and various models where we can help participate with that. And that model looks something like where we bring our water, we bring our land in the equation, somebody goes vertical with that. We get it fully leased out and to sell it as a package. And our exit becomes fully developed when you've got a fully improved lot for a particular use like a multifamily, and that could be anywhere between 500 and 1,000 units of multifamily depending on how that configuration goes. And then the grocery, the fast casual, the services, the fuel, all that stuff gets built right around that. And those are all extremely high-value land interest where we can keep some of those units available, working with, partnering with commercial developers and then getting those facilities leased out and then selling those to maybe REITs and other types of entities that really participate in that cash flow. So as much as we look at all those options, we look at those options with some degree of expertise, somebody who's done it, who spent their career. He's got 30 years doing specific commercial development in the Denver area. And so we're very excited about that. We're very excited about that guidance. We're very excited about that opportunity. So good question, Dan, and a nice way to kind of highlight how we're transitioning from a core of strictly residential to moving into that commercial side.

Okay. Just a few other observations generally. I think this finished-lot approach that you chose to take starting back in Phase 1 or Phase A, I think is understood somewhat by the market, by the long-term shareholders. But the attractiveness even in -- we talk about times like these, I mean, Mark, there's always stuff going on, right? Whether it's interest rates moving up or down or COVID or the change of administrations with different viewpoints on how to attack opportunities and challenges of the country. It seems always more volatile when you watch social media or CNBC. But the reality is homebuilders, they have pretty good businesses, and they're pretty good at managing their risk. And so -- and they earn a lot of money. They've been good stocks for a decade or longer. And I think the bottom line is they're pretty good at managing the risk. And what they really desire is the ability to put down their cash on lots and go vertical quickly. And our model, which was slightly more capital intensive for us to finish all the lots out is just highly attractive to -- if they're looking at their entire nationwide portfolio, obviously, they like Colorado. I look at their Colorado portfolio, you continually as you develop these phases and subphases, you're shown up with buildable lots, right? Right away. And those are the ones where even when the homebuilders will go through 90-day pauses or whatnot, they want because they can buy from us and go vertical and have lower carrying costs. And it's the way we chose to approach the business, but it really protects the business in -- back to that times like these, meaning people are cautious. But if they can buy and go vertical, it's just a huge leg up on sort of the sustainability and consistency that we're delivering. And I think that's understood by half the people that look at Pure Cycle, but there's another half that's newer to it. And I got to think in the market when our stock price is bouncing around along with the homebuilders and other people, it's not completely appreciated how much -- so when we talk about demand, yes, there's general demand in the Colorado market, but there's a lot -- it strikes me, and I've watched it for five years, there's always demand for these finished lots. And that's key here for people to understand on the call and otherwise. Maybe you can comment on that in a minute. And then the second thing that I'd say is partially understood, but not fully. And it's the nature of Sky Ranch and any development is the cash flow is just very much back-end loaded. So if all we did on Sky Ranch is develop 1,000 lots, we're going to do many thousands. But if it was just 1,000 lots, I think what we have seen was the first 500 were pretty good. And then the last 500 would be massively cash-flow generative, right? As you're winding down a smaller project. And all that cash comes over the transit. And I've just done some rough math on it. It just seems very disproportionately cash-flow generative in the second half of the project and as you're closing it out. And a lot of developmental projects are like that. The last 30% that just goes straight into your pocket, you know that. But Sky Ranch is big. So it's 3,500, 4,000 homes and then the commercial. And it's really back-end loaded when all that cash comes over the transom. And now that we're inching up on 1,500 lots, we're inching up on that halfway mark as we come over the halfway development of Sky Ranch, the cash flow dynamics, the margin structure, all of it really blossoms. And I think that's going to hopefully surprise people as we get another 12, 18, 24 months down the path. And so much of the cash flow payoff from this will -- again, I'll use the word blossom in the back half. And we're pretty close to the back half now. So that's, I think, exciting. I don't know I'll stop there on those two comments if you have anything to add.

Yes, good comments. And you're right in terms of our homebuilder partners. The thing that they like is they want to be able to sell their home before they buy their lot. And really, we're delivering this stuff just in time for them so that their capital allocation is as good as it can be. And there's very few people that do that, right? There's very few people that are in a position to do that. Most developers are -- they sell platted lots, particularly in the Denver market, they sell platted lots, a paper lot and then they force the developer to put that infrastructure in. And so the developer has to put that capital in upfront and they're IRR driven, right? Their whole model is IRR driven. They want velocity. And so if they have projects where they can choose to build spec homes, they're going to build them in an area where they don't have to do the horizontals. That allows them a much more favorable rating. And really, that's why I think we've had such good success with all of our builders and the renewed aspect of it. And then the portfolio of builders who want to be in Sky Ranch. And so as we open up Phase 3 and we go into the next 1,500 lots, you're right, you're going to see an acceleration of that, right? We're not seeing most master planned communities grow on a bell curve. And you start out slow, you get up to a certain point where you're delivering a lot, kind of the max number of lots. And I'd say, then you come down and tail off and are milking the residual value of each of the remaining lots. And while we haven't peaked in that bell curve, we're on the upper side of that. And you've seen that by accelerating the lot deliveries from 250 lots a year to something like 500 lots a year. And that's going to go directly into monetizing that asset. You're right, if you took a look at any master planned community, they -- we continue to build that value. And when you look at our balance sheet, you see more than twice our liquidity is in the note receivable. Well, if we were on the back end of that, that would all be moved over into the cash side. And so that note receivable really is as the assessed value of the community grows, that's where you get those reimbursables and you get that high value of monetizing the final lots in there. So it is cyclical in terms of how you stagger out the overall development. But you can see from the balance sheet, that continued growth. And I think the disconnect there might be that people just are like, well, I want to see more of the lot deliveries. I want to see more of execution on the commercial side. I want to see -- and all that stuff is right within our business plan and how we're going to execute. So you're right. Our enthusiasm is high. We continue to try and communicate that to the marketplace. And the market has its own cyclical natures of it, and we want to be as transparent as we can. Looks like Geoff had a -- he wanted to weigh in on one of that observations.

No, I was just going to take Dan's thought process one step further. He said that the builders need something that they can go vertical on quickly. The other thing they need is demand. And that article that I sent to you yesterday on Link 56 had to do really with the growth of Denver going eastward and out by the airport. That was a -- the article came from, I think, the Denver Business Journal. So -- and it talked about the Link 56 development out there. You said it was, I think, 10 miles away. But nevertheless, there's going to be a population shift eastward and anything that brings people closer to Sky Ranch is going to ultimately increase the value. There was the things like a large land purchase by Microsoft for a campus that I had -- that's the first time I had heard of that. But it's that kind of development over the next fill in the blank decades that's just going to enhance the value of Sky Ranch going forward. As part of that, it said that Target had acquired land for, I want to say, a four-acre retail outlet for $7 million. I don't know the details of that and how much was -- how much for the -- it was 140,000 square foot store. They may have had to buy some parking and stuff like that. But $7 million for four-plus acres is a pretty substantial investment for somebody like Target. And I wish that would translate into value at $2-plus million an acre for Sky Ranch. But anyway, Dan, that if Mark can forward you that article, I don't know if you've seen it or not, but I thought it was very interesting. That's all I had.

Yes, no, it was great.

It keeps coming. I mean I've made this point, I think, maybe a couple of calls ago. But if you look at Denver historically, I-25 and I-70 kind of bisect Denver and where they hit was kind of the old -- 20, 30 years ago, the old industrial kind of epicenter of Denver. And that's all moved eastward now. And that was triggered by -- the beginning of that was triggered back around 2000 when the airport opened up and then the Anschutz Medical Center. And the whole -- I think the epicenter of Denver now for the future is really E-470 and I-70. So it's moved eastward, what is that? Probably 12 miles or so. And that's because DIA is right there, 3 or 4 miles. And that's why all the industrial or light industrial warehousing, Amazon center that's there is all to the East. And it's -- so that's -- and Sky Ranch is sitting right in the middle of that development to the East. And then our water is sitting right there, too. Water, we always talk about water is interesting business. Water is very valuable, but it's really is your water in the right place and our water is in the right place. It's coming right over the top of us. And that just leads me to my last observation or point I'll make, and then I'll cut off. But the State Land Board owns this unbelievable piece of property. It's 40 square miles, but it's the Lowry Ranch. And I would just note that we've been impressed with the way the State Land Board is evolving their views and some of the human capital the State Land Board has added over the last year or 18 months with real high-level real estate development expertise on the Board. And you have to think if they're adding that sort of talent and expertise, they certainly are aware of the opportunity they have with the Lowry Ranch over time. And I know, Mark, you've gotten closer with them and built a great relationship, and it's all there for the taking whenever the state wants to begin to monetize that in a thoughtful, progressive way for the community and help with this may be low income or entry-level housing. And so it's pretty exciting. And I think, Mark, you've done a great job building those relationships and the State Land Board is doing a great job bringing in high-level talent to evaluate all the opportunities. So again, I think that's been a long process. We've got a long history, but it's really on the up and up. And I think it's a tip of the cap to Mark for his patience as well as his relationship building there. So good work on that. I'll sign off. Good quarter. It should be a good rest of the year and nice work.

Great, thanks. Pats on the back like that keep me going. Okay. Well, if there's no other comments, certainly, if anybody has got something that they didn't get a chance to ask or want to just drill down privately, go ahead and give me a call. I'm always available. And we do like doing these kind of road investor meetings. So we'll try and see if we can set something up and maybe in the Midwest or maybe on the West Coast. I've got some good friends and shareholders on the West Coast. that have been itching for us to come out and organize a sit in. And I will tell you, I mean, this format is very helpful where we can engage in a dialogue and an interactive dialogue like this. But -- and I think the reaction with some of the folks that attended the meeting in New York, they were just overwhelmed when you see it, when you roll out maps and you kind of get that tangible evidence as to how the Denver market is positioned and where I-70 is and how the growth of the metropolitan area goes. It really does provide a very compelling argument as to what it is that we're doing, not only what we have in inventory, but what our opportunities are with the portfolio. So we'll continue to reach out and continue to really expand that knowledge base and that outreach to not only our existing portfolio, but folks that may be new to the story. So with that, I will go ahead and sign off, and thank you all for your continued sponsorship and confidence in your invested capital. So take care, and we'll be in touch.

Thanks, Mark.