PCYO - NASDAQ

Okay. Good morning, everyone, and welcome to Pure Cycle's Year End Investor Presentation. If you please mute your line as Mark Harding goes through the present and then at the end, we'll -- we have a video, and then we'll open it up to Q&A. So with that, I'll hand it off to Mark Harding.

Thank you. Thank you, Marc. Welcome, everyone. We're delighted to share with you our fiscal 2025 earnings presentation this morning. With me today is our CFO, Marc Spezialy; and our Controller, Cyrena Finnegan. So if you have any tough questions, we'll have them help weigh in on the answers for all that. But we really are excited to give you kind of some insights as to how we were working through the fiscal year, and it's been an exciting year in a couple of fronts that we'll detail. First, I want to get the lawyers out of the room and remind everybody that this presentation includes forward-looking statements. I'm pretty sure you're all familiar with the forward-looking statement caveat in this. So with that, we'll get to highlighting the important thing. The most important thing is I get the privilege of working with just an outstanding team of professionals. Marc, together with Cyrena and then those folks that kind of grind out day in and day out to make sure that our -- we stay on track and really have a good customer experience in all three of our business segments. So great to work with them. And then just to remind everybody that we punch above our weight with our advisers and our Board of Directors. We've got a great team, highly experienced and specialized Boards of Directors that continue to really emphasize how best-in-class performance is for each of our business segments. So we're privileged to work with a great team. And you, from a shareholder standpoint, should get a lot of comfort as to the continuity and really the caliber of the company's Management and Directors. Let me start out with kind of some of the themes for this presentation. And I'd say continued profitability where you've got 25 straight quarters of profitability and this quarter and this year is no different. Really continued growth in each of the revenue segments, especially in the recurring revenue segments, and that's really one of the most important components of what it is that we're doing, building a stable earnings from both water and wastewater, our land development side, our rental income from our single-family homes. So terrific continued growth in that. Also, in our land development, resiliency, our business model. And when you see changing market dynamics as we've seen this year, you stress test your business model. And one of the things that we're going to highlight is kind of the flexibility of our business model to be able to risk on, risk off, turn the volume up, turn the volume down to really match our customers' needs in that segment. And that's the most -- that's the highest delivery segment for that. So that flexibility continues to demonstrate its use and its resiliency in our business model. And then our capital position and liquidity, continued strong stewardship of shareholder capital. So we'll continue to emphasize those positions and make sure that we have a solid foundation for delivering results year-over-year. Okay. With that, let's dive right into the Q4 results. And as all of you know, our Q4 is typically our strongest quarter, and that has a lot to do with seasonality and really how we deliver because of the -- our weather conditions here in Colorado, concrete and asphalt paving really do cycle themselves into making sure that you get that down before our winter season. Our perfect cycling would be kind of Q1, end of November, but our year-end happens to be end of August. So sometimes that works to our advantage. Sometimes things spill over from year-over-year. So revenue for Q4, again, it was our highest quarter, slightly down, mostly due to the housing headwinds and pushing some of that revenue recognition from our percent completion into Q1 2026. So both revenue and gross profit up, but slightly off from what we saw in 2024. Taking a look at net income and earnings per share, again, profit margins are still remaining. And really, that is some of the diversity to the company's revenue streams, and we'll talk a little bit more about that. But Q-over-Q in Q4, again, our highest quarter and solid performance on both our net income and earnings for the quarter. So let's take a look at kind of how that normalizes itself for the overall year-end performance. Year-end, slightly below expectations. And again, that was mostly due to the headwinds of housing pushing some of the percent complete. And so as most of you know, we operate on a percent complete because we develop lots over about a year's delivery schedule. Sometimes that works within our fiscal year, sometimes that carries over. And last summer, I think what we look to do is really dial up some of those deliveries. So we had as many as three different phases of our land development going on at the same time, delivering what we were looking for in 2024 and then having two phases in 2025 and spilling over into 2026, delivering at the same time. So strong results again, but slightly below expectations on revenue and gross profit. But then moving into kind of the thing that matters the most is our net income and earnings per share, which actually exceeded our expectations. So again, the most important metric is earnings per share, slightly above what our forecast was. And that's largely due to oil and gas royalty income coming in much stronger than projected. And the reason for that was we had the completion of an additional 7 -- 6 or 7 wells into the largest portion of our royalty estate and those wells came online and started producing in 2025. And that really did exceed that expectation. We knew that those were there, but you never have clear visibility as to the price of oil and then how that's going to result in. And so one of the things that we continue to show is that diversity of revenues to the company where we have multiple shots on goal here and are able to drive revenue and earnings from our assets in a number of different ways. Let me go over kind of the earnings bridge of where that -- where the headwinds and tailwinds came in from each of the revenue sources. So our forecasted net income was right around $12.5 million, slightly lower revenue from our land development segment, and that wasn't that we lost that revenue. It was really more that it was pushing into 2026. Some of that was Q1 2026, but some of that's going to be in the first half of 2026. Slightly higher costs of revenue, and that's really driven by a little bit by tariffs, a little bit by inflation. So we saw a little bit of slightly higher costs on that, but then lower G&A expenses. So those things that we can control, particularly when we have a headwind type environment, we pay a lot of attention to SG&A. And then we're given a little bit of tailwind from royalties on the oil and gas to allow us to bring that net income -- even not only above -- slightly above that forecast but continuing to drive earnings to the company. I want to move into kind of taking the view up a few feet and really highlight each of the business segments so that you get a flavor for not only where our investments are going, but how each of these segments are performing. So in our Water Utility segment, really the main drivers there are where we get our revenue from. And so the recurring revenue side of it, we have a little over 1,600 commercial connection points on there out of a total of 60,000 potential given our water portfolio. So we're just getting started on that. Industrial water sales, water sales to oil and gas customers and then connections, and that's largely driven by our land development business, and we get tap fee revenue that's attributable to that and delivering high margins there as we continue to invest year-over-year into our water system and really deploy that capital that we're receiving from maybe some of the one-time sales to oil and gas to make sure that we get high margins and continued profitability into our tap fee connections. If you look at kind of how that portfolio -- our water portfolio performs. We've talked about this a number of times. We believe we can serve 60,000 connections, probably can be a little bit stronger than that given the trending in the amount in water consumption per single-family equivalent, but we continue to really pace our guidance on this at 60,000 connections. And as most of you know who are familiar with the company, we get two fee incomes from that. We get a large [ whomp ] upfront capital fee component and our tap fees now, our combined water and wastewater tap fees are right around that $40,000 mark. So those continue to grow and appreciate based on the scarcity value of water and the cost of incrementally delivering those supplies, which are farther and farther out and harder and harder to bring on board. And then annual revenues. And our annual revenues are pretty consistent. We're probably growing that a bit. That's about $1,600 per connection per year. And so when you take a look at that, the connection of 60,000, that's about $2.5 billion worth of top line revenue, cost us about $1 billion to build that full system over time and then our connections year-over-year revenue. So overall, we're still a very small fraction of our total capacity, close -- a little over 2.5% of what we're really deploying depending -- compared to our capital and our capacity. And then the production year-over-year. We continue to invest in that system. We had a pretty light year, which we knew that was a forecastable gap in oil and gas deliveries. So we still have plenty of pedal on what we've developed in our production capacity to deliver that water as that water increases. And we look to see a bit of increase in that in 2026. As that applies to kind of fiscal year-end year-over-year, really, the interesting thing about the water side is some of the diversity in the mix of customers. When you take a look at that, we're sort of looking at the domestic customers, which is that dark blue, and that will be what we're delivering to that 1,600 connections year-over-year, some of the oil and gas deliveries and then the tap fee deliveries, which are attributable to our land development segment. And so while our overall revenues stay in line, the mix of that, as you can see, between year-over-year is variable. And so you're going to see a diversity there that allows us to kind of continue to grow that asset base, not only from the recurring standpoint, but also in capitalizing on other business segments and being able to put some of that idle capacity to use either through oil and gas or in the development side. And then good customer growth. Again, we've got about a 22% CAGR on our customer growth. So we continue to really leverage out building that recurring and perpetual customer growth in the recurring revenue side. Just a small snapshot of the oil and gas side. We did have a forecastable decline for oil and gas deliveries in 2025, and that was largely due to a strong push of permitting oil and gas wells on the Lowry Ranch in our service area. And oil and gas operators have close to 200 permits now that they're actually drilling. So we have a drill rig that is, for the time being, committed to drilling nothing but pad sites on the Lowry Ranch. And so we do see for 2026, a significant increase in oil and gas deliveries for that segment. So you'll look forward to seeing some of that action in 2026. Let me move over to the Land Development segment. Taking a look at each of the phases of that, one of the carryovers on Phase 2C. So we did deliver the 228 lots of Phase 2C that we had forecasted for 2025. And we had a small about $800,000 of deferred revenues that spilled over into Q1, and that was a function of sort of the regulatory climate in permitting and getting some lot templates on some of the lots that we had for one of our builders, but that did come in, in Q1. Overall, sales in Land Development were off then from our expectations, and that was largely attributable to some of the headwinds that we're seeing in housing and really trying to provide that customer service to our homebuilders and making sure that we're pairing inventories at appropriate levels where we're not overinvesting in roads, curbs and gutters, and they're not inventorying finished lots beyond sort of those annual increments that we like to deliver them to and they like to receive in. Taking a look at 2026, we're working on completing Phase 2D. And so we'll see -- we're about 43% on that. So that was some of the rev rec in 2025, but you'll see the completion of that rolling into 2026 and then visibility from there, taking a look at not only 2D, but 2E, which is going to be the next phase. On the land development side, this is kind of a breakout of which phase is contributing to the revenue streams. As we had this Phase 2, we subphased that out. We initially had that sub phased into four sub phases, but we were able to add a fifth one with that with this 2E. But it really does show you that bulk of '25 deliveries was from Phase 2C and some of those forecastable revenues that we had that we were able to dial down just a bit because of the housing headwinds will push into the first half of Phase 2D on that. And so it gives you kind of the total land development revenues and how those occurring for the trailing three fiscal years. So it kind of gives you a profile of some of the developments and really how that's maturing, and you're seeing this slide where we're carrying it forward on not only the land development side, but then kind of how that vertically integrates ourselves into the water side from the tap fees. We haven't fully received all the tap fees from Phase 2b. So we still have some contribution on those -- from those deliveries, which were in 2024, that will come in, in '26 and then taking a look at 2C and 2D on the tap fees for that and then also single-family rentals. And last year was a bit of a struggle for us on single-family rentals. Again, another regulatory issue for us as the county, which is our jurisdiction, updated their building codes and really had difficult time processing homebuilder permits on that. And so we're through that phase. Most of our homebuilders have got what we call Masters approved. So each housing plan will be approved and then they can build that same house, different elevations so that they change the look of that, but the building department's approval of that Master allows them to build that on any number of different lots. And so each of our builders have got their Masters approved, which still accelerate into our single-family rentals. So you'll see a substantial increase in the number of single-family rentals in 2026 and into 2027. I'll highlight a little bit more of that later. What I wanted to do is this will help illustrate kind of how our percent completion works. And most of our builder contracts are structured in a [ Flow ] Funding Agreement where we get paid in three installments. We get paid once we do the Plat, which is a recordable property interest to an individual lot. It's a paper lot, but it is that they own that address lot. And then we use those funds to be able to really do the land development side. So we're really working in a partnership with our homebuilder partners to be able to deliver these on a real-time basis. As we complete the wet utilities, which includes the overlot grading and the overexavation for the soils, then we make that second payment. And then as we deliver the roads, curbs and gutters, we get that finished lot payment. And so this kind of shows you some of the timing of how those payments go and really that work product over the POC. And sometimes those will span quarters, sometimes those spans year-end. And when you take a look at delivering each of these individual increments of lots, it's not always clean enough to deliver in one fiscal year, but it does deliver in a year, and that year may be 12-month period as opposed to matching with our fiscal year. But that kind of gives you an illustration of how some of that -- how we can dial up and dial down to the market depending on how the strength of that market goes. This is kind of the location of where our next phase is going to be. So it's going to be directly across that Phase 2E, and that's about another 150 lots that will be directly across from the high school. The important component of this is we're really almost complete with most of the major infrastructure on that. The roadways were complete pursuant to some of the other phases. So this should be a high-margin area because most of the off-sites and arterials are all completed and the roadways are completed, the water, sewer, all that system expansions are already to this property. So that will be a nice phase for us. One of the key milestones for 2025 was really groundbreaking for high school. And as you can see from that aerial drone shot, it's right adjacent to our primary school. So it's a full campus. It's a full K-12 campus and really excited to continue to work with National Heritage Academy. There, our charter partner and really -- that's one of the high-value commodities for our development here is that we've got a full walkable K-12 campus right on site for the development and outstanding delivery of education here at Sky Ranch. So we're very grateful for that. We're very grateful for our charter, which is the Bennett School District and our partnership with Bennet School District on bringing this education system to Sky Ranch. I continue to want to kind of illustrate our service area and kind of where Sky Ranch is in the metropolitan area. And so the map on the right here, the black line at the top of that really is the I-70 corridor. And Sky Ranch is the development in the blue there, and that kind of illustrates really where we are. We talked often about the fact that Denver really situates itself on kind of an ocean-like framework because we can't grow West. And so all the growth is concentrated to the Eastern Plains area. And really, our assets, whether it's our land development assets or our service area are located in the most ideal section of the Denver metropolitan area. And the aerial to the right really kind of shows the encroachment of development on our service area. This is owned by the State of Colorado and its development and its revenue opportunities really benefit the education system here in Colorado, the K through 12 education system, but you can continue to see all of the development that surrounds the surface area for that. So our assets are ideally positioned in the right location, and we continue to really look forward to how these will grow and monetize over time, both for the State Land Board as well as to expand our systems. As I mentioned, we want to talk a little bit about single-family rentals. And so this kind of illustrates where that portfolio of single-family rentals are. A, that 2 Phase -- sorry, Phase 2a really was where we had the 14 units. We have about 4 units in filing 1, but then 10 units in A and really the acceleration of how B, C, D and E are going to add to the portfolio. And so with that bit of a delay because of the building code upgrade, we have about 40 homes under contract now that are delivering from several of our homebuilders. And what we've tried to do is pace that out so that they can deliver those on 5 units a month. We had 5 units delivered in Q1 of 2026. And of the deliveries, those delivered in late October, I think we've got three of those leased. Two of them are on the market, but we're continuing to show strength in the rental market on single-family rentals. And then those will pace out and deliver those units through fiscal 2026. Steady rental income stream from that. We really like that asset-light appreciation model where we can lever up the vertical cost of that and continue to keep our balance sheet clean and strong. So this is what you're going to see in 2026 and the real story for performance on 2026 is continued pacing with our land -- our homebuilder partners and our land segment and then acceleration of growth in the single-family rental segment. It's a bit of the fiscal year performance year-over-year. So we're seeing a slight increase in growth on the rents. But for the most part, our occupancy is very, very low. I think we've got a 97% occupancy for the portfolio to-date and then continued asset appreciation. The nice thing about this segment is -- we carry forward the equity of the lots as well as the water utility side and then are leveraging up the vertical cost of that and really have a nice relationship on that because we have a high loan-to-value ratio there and then that asset continues to appreciate together with the market. We're seeing continued growth in that, not only just because of housing growth, but also because of the continued investment that we have in the community. This will kind of show you the growth of each of the phases and how we do that. And so that Phase 2b, where we were looking for a stronger growth in 2025, really pushed over into 2026. So we'll have a bit more than the 31 homes. We'll probably have 40 homes accelerate in that area. And then how it continues to grow from Phase 2b and C. So those are where we're looking for, for '26. And then continuing on through the second phase. And if you take a look at this whole portfolio as it relates to the overall development, we're looking at being in that 8% to 10% of the total homes. And so if we have about 3,000 single-family equivalent units out there, somewhere in that 250 to 300 homes would be our target for this portfolio. Talk a little bit about stewardship of shareholder capital and our balance sheet. We continue to invest into these assets. So you'll see continued asset growth and strength to the company. Water segment is around $68 million, land development segment. That continues to mature. So as we're bringing assets into the portfolio, we're also taking them off our balance sheet because we're selling them. But we continue to make sure that we maintain liquidity. And as our capital stack goes, we want to make sure that we're investing into monetizing these legacy assets that we acquired over the years and really generate the high-margin incomes from each of the segments and then continuing to build into our single-family rental and continuing to maintain a strong liquidity portfolio, really balanced out between our cash, which is inclusive of restricted and unrestricted. And the restricted cash is really just letters of credit that we have for performance to the local municipality on the roads, curbs and gutters. It's how we warranty out those during our 1-year warranty period. And then the note receivable that we get as that comes in periodically in sort of increments as we build assessed value within the community, more homes, more assessed value, more tax revenue that's available for us to issue bonds through the local municipality and reimburse us for all of those receivables. And then a small amount of debt, our debt is really attributable to most of the single-family home rental side of the business. So continued strong balance sheet. Capital allocation, if you take a look at how that composite makes itself up, cash and investments and the note receivable and then just growth in the infrastructure, making sure that our water systems continue to grow so that we can continue to add those recurring customers. And then we continue to reinvest in ourselves, probably a little more conservative in 2025, mostly because of the housing headwinds and wanting to make sure that we're pacing. We had a lot of chips on the table last summer, really dialing up the absorption of our lots. And we wanted to make sure that we weren't pushing our homebuilder customers into a risk profile that really shifted most of that from our risk to their risk. So we wanted to balance that out. So we were a little bit more conservative than I think we would have otherwise been, but we continue to reinvest in the share repurchase program. Give you kind of a profile of how we were performing quarter-over-quarter in that. And then the diversity, I think one of the things that we want to continue to emphasize is the number of ways that we generate revenue from these assets, whether that's on the Utility segment, where we have a number of segments, subsegments in there, whether that's the domestic side of the business or the industrial side of the business, rental income revenue from our single-family homes, and you're going to see a strong acceleration of that, land development and the synergies that we get on doing just a fantastic job of the Master Planned Community and adding value to the community and really partnering with our homebuilder customers and then making sure that we are good stewards of your capital. Taking a look at kind of how we see things rolling out not only this year, but then how it's going to roll out through a midyear forecast as well as a builder forecast. I think we tried to foreshadow some of this last year, but 2026, if you take a look at the recurring, we do have an expectation of continued recurring revenue growth, not only from our water customers, but also some of our single-family rental. And that's going to become a better -- a bigger component of our recurring revenue. You're going to see that continue to accelerate where we're going up to 100 units in Phase 2 and then maybe up as many as 250 to 300 units through build-out. And so that will continue to add to the asset growth. So when you take a look at how that translates, that asset growth is a tremendous opportunity for the company and particularly compared to the percent of each of these assets that we're currently developing. And so as we can accelerate that development, we do that, and we try and pace that with making sure that our inventories are appropriate. This is a little bit more highlight on kind of how the profitability trends from each of our business segments, the Water, the Land Development and then also kind of continued emphasis on recurring revenues. So you'll see that continued growth. We're looking at 2026, depending on sort of these housing headwinds, that might be slightly down from 2025. We do believe we have some pedal in the oil and gas deliveries this year. So we'll see how that goes. We didn't want to be overly optimistic just because of the visibility of the price of oil, but we're really optimistic about continued monetization and continued growth in this segment. And really, the transition going up to this -- what would be a tantamount change to the monetization of these assets are we continue to pace our growth on the residential side. But moving into 2028 with the delivery of our interchange, which we're working through in the permit process, but we're fairly close to getting that finalized. And we'll work through the financing of that through the Metro District. So we reserved some bonding capacity in that to make sure that we have the funds that are available to bond that out in 2026, start construction of that in 2027 and then really layer in and almost double the deliveries of our Land Development revenues maintaining the same pace with our residential development, but then also delivering a like amount of equivalent lots for our commercial development. And then the valuation on those commercial lots, we're forecasting that to be about 2x the valuation of our residential lots. So that's the real delta in how we look to change the composition of the land development and how we're almost doubling that land development -- a little more than doubling that land development revenue is because of the bringing online that commercial lots. And that's a function of two things. One is going to be rooftops. Most of the commercial players are going to want a certain number of rooftops to be able to generate revenues from what their investments are going to be, but then also access and making sure that we have a large volume of transportation access and really capitalizing on our location being right on the Interstate with an interchange, an exit ramp right where our project is. So that's kind of how we gain some leverageability and some scalability to the Land Development and the Water Development side of the businesses. Valuation sensitivity. So 2026, our gross revenue, we're going to show a range there of 26% to 30%, and that's going to be a function of some of that sensitivities on lot deliveries as well as some of the industrial water sales activities. So a range of earnings per share that corresponds to that. Upside and the timing of the acceleration is really going to be how we look to deliver and maintain those inventories of lots so that we're not investing into that -- the capital cost of delivering those in advance of having those deliveries for our homebuilder customers. And really, we started out with delivering this project with -- started out with 3 builders, 4 builders, and now our portfolio is closer to 7 builders. And so each of the builders would like to maintain a year's worth of inventory, which allow us to have a bit more of an acceleration to our Land Development side that serves more diversity of product mix. And so as the community continues to mature, we look forward to continuing to serve the whole portfolio of our builders. Short-term outlook, I won't spend a lot of time. I think we've covered a lot of what this is. But our Water segment growth, we're going to take a look at the 3- to 5-year period where we're going to get up to about half of our total water recurring customers. Sky Ranch in total will be about 5,000 total connections. So we look to see that come into about that 2,500 units. Land Development side, we should get to -- we're right around that 18% of complete. So we'll probably get closer to 30%. So we're looking at doubling of that. And then once we've got that commercial in play, you'll see that accelerate through the longer term. So build-out of Sky Ranch is in that 7- to 10-year window. But in the short-term, we look at kind of getting up to about that 30% and then having a faster acceleration once we're layering into the commercial component. And then single-family rental, we see up to about 100 units in this short-term outlook. Longer term, this kind of gives you a perspective of the total build-out. And then when you take a look at our build-out potential, really monetizing our net revenues from land development get close to $700 million. And the recurring revenue is going to be around that $15 million, $16 million. And that's really a function of kind of the -- you take a look at a $250 million market cap and really what we've got in production of our assets it really is the story for us. We've got a tremendous asset here. We're very aggressive about making sure that we're building this thing out and monetizing it and making sure we can do that as quickly and as profitably as we can. So one of the things we're going to do is give you kind of a video tour here. And really, this will kind of give you a view. I'll probably try and stop and kind of highlight a couple of the areas on there. So if we want to get that started, this will be an aerial representation. As you can see, this is our first phase. And so this was the more mature side of the community. It really kind of gives you -- stop it right here. It gives you kind of a profile of where we're at relative to the metropolitan area and the growth of the metropolitan area. You see the mountains there in the background, and that's what we get to wake up to every day, which is wonderful. But the other key aspect here is if you see kind of at the top of the development there, hard to illustrate, I don't know if you can see the cursor where our wastewater treatment plant is right there. And really, that's a unique asset in and of itself because 100% of the water that comes from our community is treated and reused. And so you don't see any stream that's discharged to that. We bring that back. We reuse 100% of that water supply either through irrigating our open space, which you can see our beautiful open space here for our community or taking that back and selling that to our individual customers. So if you continue on, on that, you'll see panoramic view of kind of the continued growth. We'll stop it right here. And this kind of gives you a perspective of really the deliveries of the phases of the land development segment. Right to the left there, where the cursor is, that was Phase 2A, and that delivered in 2023. And then to that, the next slide, that's 2B. And then what we delivered in 2026 was 2C. You can see the roads, finished lots. You can see some vertical homes just starting in that from one of our new builders. I think those are Taylor Morrison lots in there. And then you can kind of see 2D under construction where we're really starting -- we're finishing up the wet utilities there, and we'll be moving into roads, curbs and gutters on that. Continuing on, we'll see kind of that -- all the land you can see that's farmed there, that continues to be our portfolio. So that's the continued growth of the project. And so that will be our build-out, plenty of inventory of land that we have on the residential side. So that will continue to grow on the residential side. And then you can kind of get a perspective of how our infrastructure is there. We've got most of the main roadways developed. That's the Boulevard area. Stop where the cursor is, that's kind of the oil and gas and that we bring all our water, our treated water back to that reservoir there at the top, and that maintains the flow for our irrigation system. And those are kind of some of our oil and gas wells that we have in the site. So Colorado has a rich history of coexisting with oil and gas and residential and commercial development. We can see kind of rolling into Phase 2E there right next to 2E rolling right there, roll right into there. That's our water tank, but that Phase 2E will be between our water tank and the school. That gives you kind of a sense of -- there's our primary school and then the construction of the high school. And it kind of shows you we've got most of the road network developed for that. We'll have a little bit of extension on the road up through the high school and continuation of one of the Boulevards. And so this kind of gives you a good feel for that campus is right in the middle of where we're looking to go, right in the middle of all of Sky Ranch. There you go. So really accessible for all the students to be able to walk there. This is kind of a view of the commercial area, right? So we're really flying into that 150 acres, which is adjacent to the Interstate. It gives you a strong profile of what the transportation access is and the value of that transportation access. Up in the top of that is the airport. So it kind of gives you a feel for how close we are to the airport. We're 4 miles directly south of the airport. And then kind of where that Interchange is going to go, it's going to go straight along the alignment of the Boulevard there, where the -- yeah, so where the existing Interchange is, we'll keep that up and operating. We'll build the other Interchange and then we'll ultimately remove the existing Interchange, but it gives you kind of a flavor for really all of the physical features of the Sky Ranch development. So with that, what I'm going to do is kind of turn it over and see if there's any questions. We'll open up everybody's mic. And I guess if you have a question, just shout it out. We can't mute them. Yeah, you have to unmute. So the technology here is just unmute your mic and then shout it out and we'll drill down on some of the details or raise a hand and you can type it in the comment section.

[Operator Instructions] But yeah, this concludes obviously, our slides. So we'd like to provide this opportunity to anybody who has questions. [Operator Instructions] I see that you're on mute. Are you able to talk just so we know everything is working.

Greg, can you unmute and see if your mic works [indiscernible].

I'm testing this out. Does it work?

There you go. Okay. At least I know we're working.

Yeah. Anyway, this is Greg Vennett. I'm one of your long-time shareholders. I just wanted to test it to see if people are having problems with the technology. I came in late in the call, so I'll have to relisten to the replay in order to call you back and ask questions. One quick question. Has -- and maybe you said this in the beginning, but with -- has housing sales in your areas slowed down due to affordability or -- I guess my sense is the builders are still building. So if you could answer that, that would be great.

That's a good question because really, you have two variables in the housing industry. And I think Denver is probably on the high side of unaffordability. When you take a look at most housing markets and Denver is in probably the top 10 cities of housing markets, people generally take a look at Denver is pretty high in affordability. And that has been a challenge for us. I would say that's also one of our strengths because we have that entry-level price point and of all of the markets that the builders are looking to serve, when you have an interest rate-sensitive market and when you're looking to buy down interest rates on higher mortgages, the incentive packages that they can offer really have more impact on an entry-level house than they do at kind of a move-up house. And so I would say the resiliency of our builders and our project is strengthened by the fact that we are in that affordable market segment. And that's not saying much when you have to say affordability is anything less than $500,000. That's still a high, high number for an entry-level house, but we are one of -- probably in that 4% of homes that are delivered on an annual basis are in that affordable price segment. So that's why I think we're performing slightly better than maybe some of the other master planned communities and then also our business model being able to time that out. So yes, housing has some headwinds. We've probably managed that a little bit better just because of how we can deliver lots on an incremental basis.

I also want to point out sorry, Greg.

No, sorry, go ahead and point it out.

[Operator Instructions]

On acquisitions and land acquisitions and where you are on those? And any progress throughout the quarter? I know it's hard to time when you're going to have the ability to acquire land and at what price you're willing to pay for it. And then additionally, on the commercial side, I know you have a big hockey stick in '28, but is there anything that's materialized with any commercial players throughout the last couple of quarters?

[ Craig Weinert, ringing an E ]. Good questions. As you take a look at these acquisitions, as we have commented, we really do have our nets out, and we're saving a bit of liquidity just for that. And I'd love to be very detailed about that, but I would say our conversations continue to strengthen with our target areas of acquisitions. It's an interesting profile. If you had the nation as potential acquisitions, your sandbox is much, much bigger. Our sandbox is very small and very targeted. And that's on purpose because we think that that's where we can provide the best leverage on that. And yes, we would like to be as aggressive. We do have the ability to probably pay more for land than any other developer just because of our ability to bring value to that land from our water portfolio, but we also like to make sure that we're paying for that on land acquisitions that we find to be appropriate for the timing of development. And so we're balancing that out to give you that flavor for it. And I'd say I'm more optimistic this year than I was last year, but I say that every year. So we hope that we can see some movement in that area. To your second question in terms of the commercial, we are in the market. We do have listings with the commercial folks that really represent 70%, 80% of the transactions that are in the Denver area. We are seeing interest from a lot of those. Our interest in the commercial is to go directly to the end user. There are a lot of folks that like to get between us and the end user. And really, those aren't as interesting to us as really going strictly to the end user on that just because of value propositions. And our balance sheet is strong, but we want to make sure that we maintain some flexibility to participate in some of that on the commercial side. So whether we sell the land, whether we partner and participate in some of those horizontal improvements are the types of structures that we're looking at for some of those commercial transactions. Understanding, Craig, that those are going to take some lead times. And so there may be transactions that we're pursuing that would be in 2026, 2027 that would really start to monetize and show that scale of revenue growth in 2028.

I would just add to that, though, the growth you're seeing that we're projecting in 2028 is mostly a factor of being able to open up Phase 3 with the interchange and less to do necessarily with some of the timing. So we still have a strong portfolio of commercial lots that aren't really showing up in the projections yet.

It's interesting because the near-term weakness that you're seeing from some of the homebuilders may be a long-term benefit for you guys in that the land may not be as expensive as it was when things were so hot.

I think that's true. And as much as I'd like to say, we're very disciplined in what we pay. And it's also a function of having people -- all of the folks that we talk to usually come back with -- and it's an appropriate retort to a land acquisition is, look, it's going to be worth more tomorrow than it is today. And when you get cycles and a lot of these folks have seen cycles in the past and some of these cycles are short-lived in months. Some of these can be long-lived in terms of several years. And so if they're close to looking at selling and they see a cycle, regardless of price, I think that that's a psychological determination for is to say, listen, it's time, we need to move on. And that's really, I think, what we're seeing more than a function of, oh, we can capitalize on a weak market and benefit there. I want to be disciplined, but I also want to make sure that this is a transaction that works for both them and us. And sometimes that's more timing than it is [ amount ].

Mark, let me ask you a question. This is Greg Vennett again. For land acquisitions, you're basically -- it's dirt. And are you looking at acquisitions where they don't have any access to water and you're the value creator or would you guys consider buying dirt that already has access to water?

I would say we would probably wait those acquisitions where we can bring added value for water. I feel very confident about our land development segment and really building that value in the land development. So if we were, for example, buying a piece of property that we're in an incorporated area where we were getting water service -- water and wastewater service from another provider, we would still do well in that scenario, but it wouldn't give us the vertical integration of leverage on accelerating not only that segment and monetizing investments in land, but also monetizing investments in water. Not to say that we wouldn't consider that, but I think that there's plenty of opportunity for us to be more aggressive on acquisitions where we can bring water to the table.

So the person who owns that dirt now, are you the only logical provider of water or can they get water from somebody else? Is there competition? Are you the only provider? Is that your moat?

I would say we're the best provider, but we're not the only, right? I mean they come out -- they can go out and find water themselves and do the heavy lift of building a water utility. That's probably not any of the land interest that we're seeing. It isn't a picnic. And it's -- as you've seen through what we've done over the last 30 years, it's a difficult and expensive proposition to build your own utility. But there's competition from the neighboring city, City of Aurora. That's probably our only competition. So if they don't look to value our providing water service to them, they would have to consider an annexation. And that carries with it its own risks and its own costs, which then weigh into kind of the cost of land. And so we can deliver lots much cheaper in unincorporated Arapahoe County than any developer could deliver in the City of Aurora just because of our structure. And I think that continues to emphasize the price of a home and the affordability of that home. So when other people look at it, they have to look at it through the full development cycle and sort of say, am I competing for developing $800,000 homes or am I competing for developing $400,000 homes, which is what we're looking at. And so we have a competitive advantage to doing that, which then translates into being the best choice.

So a new home in the Aurora area is $300,000 or $200,000 more than Sky Ranch. Is that the way?

It will vary. But I would -- some of the newer projects that are getting started in Aurora are getting started at that much, much higher price point. Some of the homes that are directly adjacent to us might only be $60,000 or $70,000 more. So you'll run that -- you'll run a gamut on that. But we certainly have the better location. We have better cost basis. We have better utility rates. Overall structure is much cheaper and much more efficient in unincorporated than it is in the incorporated area.

The future for commercial development, along I-70 where you're going to build the interchange, is there other commercial development that you see in the future that could be competition for you or are you the bull's eye? Do you have the bull's eye -- commercial property?

So interchanges benefit all land in the area, and we have kind of a strong footprint in there, but there are other lands that are adjacent to us that we don't own that are looking to develop, and they will have to pay their pro rata share of the cost of that interchange, too. We might be advancing that. But ultimately, as they come online, they'll have to reimburse us for our covering that cost upfront. And so that was our structure is that we wanted to make sure our timing was our timing and that we would be advantaged in there and then somebody else coming in there would have that cost component as well. That would -- they would have that off-site investment, which would accelerate some of the reimbursable repayments to us as that competition came online. So we wanted to equalize that to say we weren't carrying them. But at the end of the day, as they come online, I think we have the competitive advantage.

Mark, can you hear me? [ It's Matt Reiner at Aranda ]. A question on Slide 34, the profitability trend slide. When I look at 2026, I mean, it seems like every category, the revenue is up a little bit, but yet the earnings forecast is down a little bit. And I'm just trying to -- is it the margin differences between the different segments? Is it -- I mean, it seems like you're buying back some shares. So I don't think it's a share count thing. So just curious as to what I'm kind of missing there.