Pure Cycle Corporation (NASDAQ:PCYO) Q3 2024 Earnings Call Transcript

Pure Cycle Corporation (NASDAQ:PCYO) Q3 2024 Earnings Call Transcript July 11, 2024

Operator: Greetings. Welcome to the Pure Cycle Corporation Q3 2024 Earnings Call. At this time all participants are in a listen-only. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Mark Harding, President and CEO. You may begin.

Mark Harding: Thank you, Holly. And I’d like to welcome you all to our Q3 for 2024 period ending May 31. For those of you that are listening online, we also have a deck for this presentation. If you want to go to our website at purecyclewater.com there will be a banner on the landing page. You can click on that and you can kind of follow through with the slide deck on that. We will also post a presentation on our website for you to be able to take a look and drill down a little bit deeper as you desire. So, I will note the transition of the slides as we move through the presentation. Our first — our second slide actually is our forward-looking statements, which I think you all are familiar with. Statements that are not historical facts contained or incorporated by reference in this presentation are forward-looking statements as defined by the Securities and Exchange Act.

What I’d like to do in regard to the presentation, I’ll briefly go through quickly a bit of our strategies, really spent some time on our performance and the results of our Q3, talk a little bit about our assets and some of their trajectories and the strength and the asset potential left in those and then give you a brief update on some of those. So, we’ll move to Slide 4. Very proud of our strong leadership and Board. We have a very heavy Board that provides a tremendous amount of guidance. And then together with our managers, with me here is Marc Spezialy, who’s our CFO. And we got a picture of our Leadership team. They’ve been with our Team and our Group for quite some time. All strong leaders within their individual industries and bring a tremendous amount of experience and wealth and knowledge to the company.

We operate in three primary business segments. Our water segment, where we have a strong portfolio of water rights in a water short area. And those water rights are very valuable not only in and of how we monetize those water rights, but also in how they position themselves in working with land development interests which is our second segment where we are a master plan developer in the Denver Metropolitan Area. We build master planned communities. We have 1 active master planned communities, fairly large master planned community, which will have about 3,200 residential units and over 2 million square feet of commercial space. And then as we are also developing our single-family lots for sale to our homebuilders, we keep some of those lots and we work with our homebuilders to be able to have them build homes on those for our own portfolio.

And what we like to do is keep that portfolio for those recurring revenue streams and be able to bring in additional income, and also additional value from the appreciation of those assets. As we continue to build value in the community, it continues to add value to each of those homes. So, that’s a very emerging and very successful segment for us as well. If you move to Page 7, here’s how each segment’s positioned on the balance sheet. We have excellent liquidity. As most of you know, we have in excess of $24 million of cash, and then a very strong liquidity value with our note receivable, which is a receivable that we get as we continue to build out our infrastructure, our horizontal infrastructure and our land development segment. So, we have a little over $33.5 million of note receivable that continues to work hard for us, earning interest on that note receivable, and that gets repaid periodically through bond offerings that the municipality does as they continue to build their assessed value.

And then you see a little bit of collateral instruments from restricted cash, which is what we use for letters of credit that we use as security instruments as we work through our land development segment and how we partner with the local government jurisdictions. We also continue to grow the Sky Ranch CAB liquidity. And as that continues to grow, you should see another one of those bond offerings later this year and we will talk a little bit more about that later in the presentation. Moving on to Slide 8. Talk a little bit about our financial performance, how we do the performance metrics and what our takeaways are from that. So, moving to Slide 9. We continue to see significant growth this year through overall revenues, up approximately 45% over the same period last year.

Taking a look at our gross profit, up over 60% from the same period last year. So, this year really is demonstrating the continued value that we have within the assets and also really the performance that the company has with these highly appreciated assets. Taking a look at the P&L statement. Corresponding increases in net income and earnings per share are up over 30% from that same period last year as well. So, we continue to really have a great asset trajectory not only for value, but also performance quarter-over-quarter and then year-over-year. Moving to Slide 11. I want to break down our performance by segment. We continue to realize attractive margins from each of these segments, which are reflected of the appreciation of these assets in each business segment.

And really taking a look at how this is divided up between our water segment where we’re delivering domestic water as well as industrial water for oil and gas. Our land development segment, continuing to add liquidity to the company, monetizing our Sky Ranch asset and then also our Single Family Rental. So, continued to have great performance in each of those segments. Moving to Slide 12. Really drill down a little bit in our Water and Wastewater segment. 2024 has had significant strength in water sales, continued growth, adding new customers each year. And then we’ve had a record year in water deliveries in oil and gas. Moving to the next slide. Really taking a look at that industrial segment. We’ve got record deliveries. We’ve sold a tremendous amount of water through the first three quarters and really looking to finish the year out strong.

So, we’ve continued to invest in our water system, making sure that we have that capacity that’s available for our oil and gas customers. Colorado is a very aggressive state on the regulatory climate. And so we’ve had a lot of investment that the oil and gas operators have had to make to solidify how they do business in the State of Colorado. And I think that they’ve got a comfort level for how that is being done. We’re probably one of the strictest markets in the nation on environmental controls over oil and gas. And just the continued strength in the oil price continues to allow them to operate and perform in our market segment. We have a very attractive, very oil-rich formation that happens to be right above where our water resources are.

So, there’s a great partnership with us and our oil and gas operators. Moving on, I want to talk a little bit about the land development segment. Land development continues to see strong results, with 40% growth year-over-year period. Key takeaway here is we are finishing up, really have two, almost three phases that are currently active within the Sky Ranch development. We are finishing up the first sub phase of our second phase. We’ve really got to get a better naming — nomenclature for how we’re identifying these. But our second phase was about 870 units. We are closing out the first component of that, which was about 220 lots. We just have a few landscaping items to punch out, and most of the builders are completing their inventory of that.

There’s just a few lots that are under construction. We finished lots on Phase 2B, and they’re all in the process of getting their building permits for Phase 2B. So, we have active activity on making sure that that’s available for them. All the water sewer, roads, curbs and gutters are complete. So, they are actively working on getting their building permits. And will be in the ground this summer on making sure they have foundations and really selling out of some of their model homes from 2A. And then we also started 2C, so our third sub-phase of that, where we have completed the dirt work. We’ve done all the grading on that and we have our utility contractor out there right now working on the wet utilities, which are going to be the water and sewer.

We hope to have those completed before the end of the year and then try and get a portion of the road work in there, so that some of those builders can have some of those lots opened up by the end of the year and certainly by next spring into the selling season. So, what you see is we’re really looking at instead of having a couple of hundred lots in production. We’re really looking at closer to 400 lots in production. And then the fourth component of that 2D, which is another 180 lots that we have a very — that’s 184 sale lots. We have a very large component of each of these sub-phases that we are holding back for our single-family rental portfolio. So, each of these phases really translate to about 220 lots. And we’re looking to get Phase 2D dirt work started by the end of the year.

And that’s one of those seasonal issues where it’s very — it’s very easy for them to be able to move that dirt during the winter months. So, we’re going to try and capitalize on that as well. So really, what you’re seeing is an acceleration of the housing activities here in the Denver market. Just to give you a visual of that, if you take a look at the next slide, there’s no substitute for seeing it. This gives you kind of an aerial imagery of it. Taking a look at Phase 2A, which you can see is complete. Phase 2B, which you can see is complete and ready for foundations and building permits. 2C, you can see that dirt work being complete. And then really where we are going to expand into is 2D. So, tremendous growth in there. We’ll attribute that mostly to our segments.

We’re in, what we call, the entry level segment for the Denver market, delivering those lots. The homebuilders are still able to be very competitive on delivering lots that are less than $0.5 million in this market. And I think that the interest rate has stabilized in the market segment such that buyers are not really looking to time an interest rate purchase, but they really are looking for a need for housing and then really want to be in that affordable market segment. Continuing on, take a look at the single-family rentals. We continue to add to our portfolio of rental units, which really are generating positive cash flow for us, and also asset appreciation just because of the continued work that we’re doing in the community. We’re seeing 5%, 6% continued asset appreciation of the overall home values out there.

So really good, strong growth here. You’re going to see a lot of that continue to accelerate. We’ve got 14 units already. We’ve got — if you take a look at the next slide, we’ve got another 17 units coming online with 2B, and we’ve got builders that are — we are really drilling down with the model home or the style of home. We’re looking for each of our builders to help build that. We’ve got a diversity of the product classes where we own some detached single-family lots, some attached duplex lots, as well as some attached townhome lots. And that will give us an opportunity where we can have multiple price points. We have multiple appreciation of asset values in there. And then as you see, we are going to accelerate some of that in phases 2C and 2D, where we’re adding an additional 40 homes in 2C and another 26 homes in 2D.

So, we’re going to get really close to 100 homes in that portfolio within the next two years. And so we’re very excited about the continued performance and growth of that business segment. Just again, drilling down a little bit more, illustrate how that translates both in terms of the P&L on the income statement as well as asset growth, from how the appreciation of the home values in our community continue to add value to the company. And so very good segment for us and really starting to become meaningful in terms of the company’s P&L. Moving on, take a little bit about the portfolio utilization. We talked a little bit, and you’ve heard me from time to time, refer to the fact that we’ve got very highly appreciated assets on the balance sheet, whether that’s in terms of our water portfolio or our land portfolio and what the company has invested into to continue to increase that value.

I wanted to provide a little bit of color on each of those. So if we can drill down — let me outline a little bit about the — as we work into that, about what we see in the Denver real estate market. There’s a lot of press about how housing is doing nationally, as well as how housing is doing here in Denver locally. And not all segments of the housing market are performing equally. What we continue to see are supply shortages at the entry level. It really almost doesn’t matter what market you’re in. You have affordability concerns, which are really pressuring most of your buyers to qualify for that entry-level segment, whether they’re going to be move-up buyers, whether they’re going to be a second — not a second home, but the second purchase of a home.

All of those are really competing for that entry-level product, and there is really just a supply shortage of that. So, what you have is an inventory imbalance about those projects, particularly here in Denver that are capable of delivering lots for entry level. And we find ourselves positioned very nicely in that segment. We see this translating into demand from each of our homebuilders, such that it gives us the confidence to start multiple phases, and so that’s why you’ve seen us accelerate our phasing in the Sky Ranch development. Talk a little bit about our water segment. I want to summarize some of our investments, which continue to monetize the water segment itself. We talk about the overall service capacity here. We have the ability.

Our portfolio can provide 60 — service to 60,000 connections. We currently have a water system that can serve about 3,600 connections. Our current connection tap base is — our domestic customers are right around 1,800. So, we still have plenty of pedal left in our water system and our wastewater system. A little bit about our land development. We have total master plan zoning for 3,200 single family units, a couple of million square feet of commercial space, and that’ll be a mix of retail. We’re still a little bit early on the commercial. We continue to add to that customer base by our single-family units out there and accelerating that demand is certainly going to help accelerate the demand for the commercial aspects. And then a little bit about where we’re planning to go on the single-family rentals.

If you look at the water system, record year and well positioned to continue that growth. So, we are using about 50% of our capacity in what we’ve developed to deliver water to customers. And so what happens is we continue to invest in that for the oil and gas segment, and then as we continue to build the customers in the residential segment, we just — we have that capacity available and reallocate that over to the residential side. So it’s a terrific opportunity for us to get that system up and running, and it increases the margins that we’re going to see as we add our new connections and our tap fees on that. So, you’re going to continue to see a very favorable development of our margins as we continue to add customers from our retail development.

Tap fees, the overall portfolio, significant growth, adding new customers, multiple phases at Sky Ranch. And then you’ll start to see — because we’ve got two phases going on at the same time, you’re going to start to see a lot of those tap fees accelerate into the P&L. And those are really concurrent with building permits. As our developer partners apply for building permits, they have to purchase those taps so that they can demonstrate to the local jurisdiction that they have sufficient — they’ve secured all of their entitlements to be able to build that home. Talking a little bit about the land capacities, land inventory and active development. We’re about 18% complete in our overall residential portfolio, and then we have about that equal amount under construction.

So whether that’s under construction or were zoned and were phased into starting that, you’re going to see that accelerate. So, we’re very excited about seeing that. Again, that commercial capacity, we translate that commercial capacity, both in terms of the amount of lots that are available, which is not a direct correlation, but it gives us the ability to talk about how we would look to monetize that on a valuation basis compared to our residential units, both in terms of water and the land value. And that really translates into what that’s going to look like for the overall project. And so when you take a look at how built we are, we’re only about 12% built. We have about 15% of that pedal that’s under construction and under delivery. So we are really — we have a lot of capacity left in there, and we are seeing tremendous demand for that.

So, we’re going to jump into the market and continue to try and meet that. On our single-family rental portfolio, as I mentioned, we’ve been much more aggressive about continuing to add to that portfolio and working with our homebuilders to be able to get some of those lots under construction with their models. And they are tapping the market. They’re much more attenuated to what the buyers are looking for out there, which is helpful for us because it fits on the lot. They’ve got all of the demand characteristics in the market, studies that show them what these buyers are looking for and it translates directly into what these renters are going to be looking for. So that’s a great relationship with them, and we’ll continue to grow that portfolio to 200 and possibly even more than 200 at Sky Ranch.

So, that’s kind of where our trajectory is looking for on the single-family rentals. Just want to emphasize the punch line here. The company is doing great with our margins, as well as continued cash flow. So, you look at 62% gross margins. Our return on assets and our asset growth are all continuing to do terrific performance. If I take a look at anything, there just seems to be a disconnect, and I know you all are equally as frustrated with the disconnect between our growth, our performance, our outlook because our outlook looks continued, terrific, just given where our asset appreciations have been and where we continue to invest. And it just seems to be a disconnect with our share price. So, that’s a bit disappointing and continues to lead into what we’re doing with our stock repurchase program.

So, we continue to be in the market. We continue to buy stock each week. We have standing orders with our repurchase program and have accelerated that with the weakening of the share price to continue to take advantage of that and we will continue to do so. So you see — we’ve been in that 15,000 to 20,000 share quarter repurchases. We were a little bit more aggressive in the first couple of weeks or the first month of our fourth quarter here. And we are going to continue to be in the market as that continues to demonstrate its weakness. But we are very optimistic that what we focus on is continuing to build value within our assets and continue to perform through each of our business segments. If you want to welcome our newest Director, we had a retiring Audit Chair Board Member, Peter Howell, and welcome Sue Heitmann to the Board.

She has tremendous experience, is a retired partner from KPMG, really hit the ground running and is bringing tremendous value each and every time. She’s a tremendous asset for the company, and we really look forward to her tenureship on the Board as well. So with that, I guess I’ll turn it back over to Holly. And if you guys have got some specific questions, I’d be more than happy to drill down and provide a little bit more color if there was something I covered too quickly or something that I just didn’t identify enough. So, I’ll turn it back over to you, Holly.

Q&A Session

Operator: Thank you. At this time we will be conducting a question-and-answer session. [Operator Instructions] Your first question for today is from John Rosenberg with Loughlin Water Partners.

John Rosenberg: Yeah, good morning Mark. And thanks for taking my question.

Mark Harding: Good morning.

John Rosenberg: I appreciate your presentation and I also really appreciate, actually, the depth of detail that you go through about the company each time. And of course, very nice quarter and good progress. And I share your frustrations about the share price. But a couple of things. Could you go into a bit more detail or granularity about the public improvement receivable and exactly how that works? And I suspect maybe that payments might accelerate as you grow your tax base. But I’d like to hear a bit more about that if I could.

Mark Harding: That’s a great question. And the simplistic answer is that when we build infrastructure that is owned by the government entity, in our particular case, there are multiple agencies that will own this infrastructure, whether it’s the local drainage authority, whether it’s the county which will own the roads, or whether it’s the parks and the open space that are owned by the local government agencies that manage Sky Ranch, each of those are reimbursable. And so what that does is we make that investment. We have a third-party independent engineering firm assess that, that does indeed qualify for reimbursable that allows us to book that note on our financial statement. So it’s been verified by a third-party that, that qualifies for reimbursements.

And how that gets paid back is, as we build homes there, those homes contribute to the assessed value. And so each home — and I’ll just make the numbers simple. Let’s say, each home out there is $0.5 million. And if we had 1,000 homes out there, that translates into five — my math right, $500 million of assessed value. And then the tax implications of that are, you get assessed based on the mill levy rate, and this really dives down. The simple answer is that we get paid back. The complex answer is, it is a formula that’s based on the mills. So, that’s what the property tax level is. And then that assessed value qualifies for both annual revenues that come into the district, and we take those annual revenues and we pledge them to a bond offering.

So, that bond offering takes a certain number of those units, and it monetizes that at a point in time. And then you build the next phase, and then you bond the next phase and then you build the next phase and then you bond that phase. And so it’s about a two year lag in that process. And we will take a look at another one of those bond offerings later this year, which will really be a refinancing of the first 500 units that we have out there. And that’s because we’ve run down our call premium on those. Those are typically five year calls on those. So, we’ve got that running down. We did that bond offering in 2019, I think, 2018-2019 timeframe. But there’s — as the market continues to appreciate, as these homes continue to grow in value, that assessed value is applied to the same mill levies, and it just has more capacity to repay those bonds.

And so we should see something in the $8 million range of refinancing of that bond offering on that one later this year. We roll that balance down, and then we continue to accrue that out. One of the things that we look at each period is the overall recoverability of that note receivable. And so we have a third-party that takes a look at that on an independent basis, so that our auditors are comfortable with the recoverability of that. And we have plenty of bond capacity. If you take a look at the overall from Sky Ranch, the overall bonding capacity of Sky Ranch is close to $400 million worth of bonding capacity at build out. And we project we’ll have somewhere of an investment and we won’t accrue it. But we have projected our total public improvements to be somewhere around $300 million.

So, we’ll have plenty of capacity to repay these on an incremental basis, where we will continue to make those improvements, build that assessed value, bond those out on each cycle. And commercial adds even more value in that. Colorado, as I’ve talked about in the past, is a sales tax incentive state. So we get 4 times the amount of revenue from commercial taxes as we do residential taxes. So as that gets going, you’ll see a lower overall retained balance in the roll forward on our public improvements because the commercial has much higher capacity to repay.

John Rosenberg: Okay. Thank you for that. And that is very enlightening. Just a quick housekeeping on that, though. What items would I — would we see that in your statements? Because I’m not — I can’t identify any items in your income statement, nor cash flows where it looks like the payment back from the sales tax — or, excuse me, from the assessed tax from the mill rate?

Mark Harding: It will be in the note receivable, and then the payments to the note receivable. So we haven’t had –.

John Rosenberg: Okay. You certainly had a revenue item of that in this last quarter, but it was mentioned as lumpy.

Mark Harding: It is lumpy. That’s exactly right.

John Rosenberg: But in the nine month cash flow statement, I’m not seeing, I guess.

Mark Harding: There is some. There is some. You’ll see because we –.

John Rosenberg: We can take that offline sometime.

Mark Harding: No, that’s okay.

John Rosenberg: Notes receivable as a negative number. But…

Mark Harding: Yes. And your question is very – it is a great question because I get a lot of folks asking the same question. And you will see, even interimly, between bond offerings, the local municipality will pay us interest because they have excess revenues. And they are not — I would say they’re not insignificant. Sometimes there’ll be hundreds of thousands of dollars. And then when we do a bond offering, we’ll get millions of dollars. And so you’ll see periodically that, that runs through the P&L, through — when we book the note receivable, but then you’ll see the recovery of that note receivable just in the statement of cash flows.

John Rosenberg: I see. Okay. I do see an item payment on note receivable related party.

Mark Harding: Yes. Yes.

John Rosenberg: Okay, thank you very much. And just to keep it kind of brief for other people, what is the enrollment of Sky Ranch Academy right now?

Mark Harding: Good question. It’s right around 500 students. So, we had a limited offering of grades. So the middle school, which offers K-8, we opened up K-7. Next year we’ll add the eighth grade. Following year, we’ll add the ninth grade. And so incrementally, we add one grade of students per year.

John Rosenberg: That makes sense. Okay. Well, I appreciate it. I would actually love to come to your event next week, but I can’t. So, good luck with that. Good luck with everything else. Thanks a lot.

Mark Harding: And then just as you’ve highlighted that for all the other folks listening, we will have a Q&A session on there that will be a webcast. So if you can’t make it out, but want to listen in on some of the Q&A, sometimes that’s helpful as well. So if you can’t make it, also take a look at that. And I think we’ve got that scheduled at 1:00, but we’ll send another announcement out next week on that just to remind folks.

John Rosenberg: Great. Very well. Thanks a lot Mark.

Operator: Your next question is from Tucker Andersen with Above All Advisors.

Tucker Andersen : Good morning Mark.

Mark Harding: Tucker, nice to hear from you.

Tucker Andersen : A lot different company than when I first met you, I guess.

Mark Harding: Yes. I think you and I met, and I may have been flying solo. No, we had a much more skeletal staff. But yes, we’ve grown quite a bit. And thank you for your continued loyalty.

Tucker Andersen : I don’t think land development was even on your long-range plan at that point. But anyway, and once again, as the previous caller, I apologize, I can’t get there. I’ll try to get on the Q&A, but will actually be somewhere on the Great Lakes at that point, visiting different ports. So it’ll depend on where I’m, whether I can join you, join you remotely.

Mark Harding: One of these times we might have to try and do it in the winter, so you all can kind of parlay that into a ski weekend as well.

Tucker Andersen : Well, I think I told you I feel even worse about it because my daughter lives in Denver and I should be able to coordinate with a visit for her. But anyway — and I once again want to thank you for the detail, too. And the first thing I wanted to drill down on was that segmenting of the Phase 2 was very, very helpful. And as you go through that, what will be happening to the average price of your lot sales? Because it seems to me, we’re sort of — the irresistible force moving to meeting a movable object in terms of prices continuing to escalate, but affordability to continue and decline. And do you think you can continue to get escalating prices as you go through the different phases and sell the lots?

Mark Harding: Yes, we do. And so what we’re experiencing, we have built in inflators to each of the phases. I have my builder contracts in there for Phase 2B and 2C as we’ve broken ground on each of those and we’re pricing our Phase 2D specifically. And so we want to make sure that we maintain margins. But we’re also partnering with our homebuilders, and so we really do want to be competitive in the marketplace and make sure that we’re offering value to the proposition for our shareholders, but also give the homebuilders the opportunity to continue to compete because we want a high absorption on those homes. We want their participation in this. And so there’s that delicate balance of getting the right number to maintain our development margins, getting the right number so our builders can maintain their margins and getting the right numbers so our homebuyer customers are aggressive and attractive for absorption of those.

So, that’s the line we walk. We continue to see price increase, and that’s just a function of affordability in any market. Denver is no different than any other market, but we look at all three of those as we continue to add additional phases.

Tucker Andersen : And does that mean as some of the other entry-level builders that, that you see more of a movement in terms of to keep that affordability in your builders towards duplex and rowhouses? Or is this sort of viewed as being the same mix as you go through the different phases?

Mark Harding: No. I mean, I think that, that mix, when you throw that mix in there, what it does is it allows them to be in a position and us as a single-family renter on there, it allows us to cater to a broader market of that entry-level segment. So, you have entry-level buyers for a traditional 2,400 square foot detached house, and maybe that is in the low-to-mid 5s. And then if you’ve got a 40-foot house and that may be at 2,000 square feet, they have a different price point. If you’ve got a duplex, that’s a different price point. If you’ve got a town-home, that’s a different price point. They’re all entry level, but they’re really trying to flex into having once somebody comes out here, they love it. They see the community and what we’ve built, and the attractiveness of a charter school and all those elements that we really have built into it. And you want to make sure that you have a variety of products that are available for all those types.

Tucker Andersen : And is there any change or anticipated change in the mix of the builders that you’re using?

Mark Harding: We continue to add builders. The thing that is really flattering is there almost isn’t a week that goes by that I don’t get revisited by a builder who’s not here, who wants to be here. We have four or five builders that are in this portfolio. And as we move from Phase 2 to Phase 3, we may look to increase the capacity of that. Now that we’re very well established, we have a very large and developed network of transportation. Instead of building 200 lots a year, growing to 400 lots a year, we may be looking at 600 lots a year and we may have six, eight builders in that portfolio. And so, yes, we’ll continue to add to that portfolio and we’ll continue to accelerate just because of the maturity of the project.

Tucker Andersen : And as you add the single-family rentals, have you been and are you continuing to do all the management of those single-family rentals in-house? And do you view that as a sort of another division of the company? Or are you outsourcing that, or do you plan to outsource that, the management?

Mark Harding: It is 100% done in-house, both the leasing as well as the maintenance side. Fortunately, we don’t have much maintenance because they’re brand new homes. But the leasing side, we do have a separate website that we direct folks to through the affiliate residential network here, and it shows each of the model homes that we have available. It shows each of the model homes that are coming online, forecast dates for that sort of stuff and really have had very high success of renewal rates. So, we continue to be attractive, and that’s another one in terms of pricing, right? We want to make sure that we’re pricing our rentals in there at such a rate that it gives us a good return on the investment, but also gives an affordability index for the people that are renting such that we have multiple year tenants on that.

And each of our rental structures are structured as a one-year lease so that we can make sure that the tenant is right for us, we’re right for the tenant and we make market adjustments as appropriate.

Tucker Andersen : Any thought on making any of those leases rent-to-own in terms of turning over that rental inventory?

Mark Harding: That’s something that would be — we do evaluate that. I think what we look for is that we want to continue to build that portfolio. And if we have a liquidity event where we would need an acquisition or something like that, then we can carve up a group of those and maybe roll those out to another institutional player. It depends on the liquidity needs and the cash needs. As it continues to generate double-digit returns for us, both in terms of cash flow as well as the appreciation of the homes, we’d like to keep those on the portfolio, but there is always opportunities and very liquid market to spin them off either individually or as a portfolio.

Tucker Andersen : Yes. Well, that’s exactly what I was thinking in terms of, if there was a bump in your cash flow needs and then you would capture the appreciation at one time is through a gradual increase in the rental stream. Because one of the questions that’s been asked on previous calls and that you implicitly put into your presentation, but didn’t expand on it as saying you now view a real leg of your company as land development. And with regard to cash needs and things like that, is there any reasonable possibility, given how tight the Denver market and the environments are that you would be able to find another project with similar opportunities to King Ranch and expand beyond being a King Ranch land developer?

Mark Harding: Yes. You bet. You bet. I mean, I didn’t highlight that, but we are very aggressive about being in the market for additional acquisitions. I will say, we’ve been very disciplined about it and we haven’t lost an opportunity. But by the same token, we also haven’t acquired an opportunity. And so the same conversations that we have with our strategic marketplace on where we want to acquire more land and more water, the priorities are probably more towards land than water, but we still are very much in the forefront of making those investments and keeping some dry powder to be able to do that. And our liquidity does provide us an excellent opportunity to sit down at the table and take advantage of that.

Tucker Andersen : Well, as I think you’ve pointed out in the past, if I understood your comments correctly, that your water division perhaps gives you a synergistic advantage over other land acquirers.

Mark Harding: That’s right. Absolutely right.

Tucker Andersen : Yes. Okay. Just my final comment would be on what you said, the frustration with what appears to those of us who’ve been around for a long time a significant undervaluation of the stock. But on the other hand, you have done very well for me, and I thank you. That sort of I think — I always hope that you keep in mind what you seem to be doing. Warren Buffett’s admonition that in the short term, the market’s a voting machine. In the long term, it’s a weighing machine, and it’ll figure out what your company is worth. And I just hope that long run isn’t so far away because it’s long run. We’re all dead, as you know. But in that regard, are you just going to continue along the current path of adding value? And if the market doesn’t recognize the value and you have liquidity gradually shrinking the share base, as you point out, you have a very talented Board.

Are there other discussions underway about how you might make the market more aware of the value you’re creating?

Mark Harding: You bet. And we evaluate that every quarter. We evaluate that every month. We take a look at our strategies on that, our IR outreach, my conference participation and getting out — excuse me getting out, talking to folks that would be new to the company, taking a look at our industry peers and leveraging holders of our industry peers, taking a look at investor days, taking a look at non-deal roadshows and all aspects of that. And I guess it has great opportunity because we don’t need capital and folks can understand that an investment in here continues to add value, and the company has the ability to continue to shrink the denominator on that and we’re going to continue to do that. There’s always calls for being more aggressive on that, and I hear those loud and clear.

We continue to try and do that. We’re not going to make the market in the stock. But at the end of the day, we are going to continue to add value and returns to the shareholders by doing that. Again, it’s a longer tail on that. We continue to look at the dividend policy and the timing of declaring dividends, and we will be looking at that. We continue to look at that. And that’s still on the agenda. We would like it to be a little bit closer — closely aligned to making sure that what we’re doing on the dividend side is at a point where our annual revenues exceed our annual overhead. And so that allows us some free flexibility on that. And we are getting very close to doing that. So, we’ll be all-of-the-above approach. And I think you are right.

That weighing metric will come into people as we continue to put up good results.

Tucker Andersen : I’m sorry to monopolize so much of your time, but thanks for everything you’ve done. And I think continuing to provide additional detail is one of the things that’s going to help the valuation. So, good luck.

Mark Harding: Thank you, Tucker.

Operator: Your next question for today is from Geoffrey Scott with Scott Asset Management.

Geoffrey Scott: Mark, how are you?

Mark Harding: Geoff, great. Thanks. That was my favourite – resident.

Geoffrey Scott: Yeah, every time I drive bike, keeps getting bigger and better, so congratulations. A couple quick questions. On the commercial side, you said you are still a bit early. Is it going to be a 2025 event when we see activity or 2026?

Mark Harding: I would push probably to ’26. We have some small retail commercial that would be — it can be a C-store or convenience store. But when you take a look at really the major commercial up by the interstate, that’s still a year plus out.

Geoffrey Scott: So 2026 activity?

Mark Harding: Yes.

Geoffrey Scott: The price of a home is a function of the land cost, the water tap costs, the building cost and some profit margin. It seems like the tap fees have been fairly flat. Is that a fair characterization?

Mark Harding: No.

Geoffrey Scott: Have your tap fees have gone up in the last 12 months?

Mark Harding: They have. They have significantly. And so you take a look at it — I would say our — and it’s a couple, it’s by a couple of ways. When we started Sky Ranch, our average tap — water tap fee was around $26,000. And I think our –.

Geoffrey Scott: That was combined? Combined.

Mark Harding: Yes, it was combined.

Geoffrey Scott: Water and wastewater?

Mark Harding: Water and wastewater. Right. And I think we’ve got a rate evaluation this month for our water tap fees that will take that up close to $30,000. So, $30,000.

Geoffrey Scott: Is that $34,000 for water and sewer?

Mark Harding: I think that’s the water. Yes. So, I think it’s going to take it closer to about $38,000.

Geoffrey Scott: Combined?

Mark Harding: Yes.

Geoffrey Scott: Okay. What about the selling price of lots?

Mark Harding: Selling price of lots continue to –.

Geoffrey Scott: Lots are all different.

Mark Harding: They’re different because there are different front footages and the categories. But we are continuing to see about a 10% or 12% increase in each of the phases that we have coming online. So, we started out with selling lots, and we knew that we needed to be aggressive because we were establishing ourselves both in terms of the market as well as a developer. And so I would say the lots that we sold in our first phase at $75,000 are now closer to $120,000.

Geoffrey Scott: Okay. So they have continued to creep up nicely.

Mark Harding: Yes. And keep in mind, we’re balancing that. As I tried to detail earlier, we’re partnering, balancing our margins, making sure that our homebuilders are making money on this, that are commensurate with their margins and making sure that our homebuyers are very — that the price of the home adds to the velocity of the home. So, we want to make sure that, that velocity because — that overall IRR is the important component of this.

Geoffrey Scott: Very true. Okay, thanks very much. Appreciate it.

Mark Harding: You bet.

Operator: [Operator Instructions] Your next question is from [Greg Vennett] (ph), a Private Investor.

Unidentified Analyst: Good morning. Thanks for the presentation. The school, did we pay for the school or do we get reimbursed for the school? How does that work?

Mark Harding: Great question. No, we did not pay for the school. We did dedicate some land. So, we donated the land that the school sits on for the building of the school. But we partnered with one of the largest charter school operators in the country, and it’s a group out of Michigan called National Heritage Academy. They have over 100 schools nationwide. They have over 60,000 students. They have a very well matured, developed curriculum. We were actually their first K-12 campus, and they liked it so much that they’re continuing to do K-12 campuses. Most charters are really focused in that primary school stage, K-8. And we really wanted a full campus and we wanted one single operator. And so we were thrilled to partner with them.

They made the investments into the school. They handle all of the school activities. I do sit as the Chair of the charter school Board, and we continue to maintain that interface such that we — we want to demonstrate that value to the charter school. And so it’s a great partnership. We’ve been thrilled with the first year of operation. Really looking forward to continuing to roll that into the high school, which will probably start construction in 2026 for 2027 school year. So, we’ll continue to update you of those results.

Unidentified Analyst: The capacity of the school we have now, the K-8 or K-9, I believe you said there’s 500 students there now. Is that correct?

Mark Harding: Right. That’s right.

Unidentified Analyst: Yes. What’s the capacity of the school?

Mark Harding: It’s closer to 850.

Unidentified Analyst: So you might be at capacity for that school in the next two years.

Mark Harding: Yes. That’s right. That’s the planning of then transitioning to the high school.

Unidentified Analyst: So, this is a private school or is this the real estate? Is this a public school that –.

Mark Harding: It is a public school — it is a public school. So it’s a non-tuition based school. It’s free for the students to attend there. And we have — I’d say we’ve got the majority of the students that live in Sky Ranch that are at those grades that we service them, go to the school, but then we have kids coming from outside the neighborhood coming to the school as well.

Unidentified Analyst: Okay. So are there plans for another? There’s the plans for the high school, but are there plans for another K-9 school?

Mark Harding: That’s a good question. I don’t know. We have another site that we can do another K-8 on. And typically, what happens is you have two primary schools that will feed to a high school. If we did develop the other — and this is really a discussion for us in conjunction with NHA. If we developed additional capacity, we’d be serving students beyond the students that live in Sky Ranch. And so we would be picking up students from the surrounding area, surrounding land development areas. And so there’s an opportunity to do that. How we do that, and in conjunction with NHA, we want to make sure that. And personal belief, but if I spill over, there is no more valuable investment than to invest into education. And so that investment in education will continue to make the Sky Ranch community more and more valuable.

So that’s a discussion, Greg that we’re having and a discussion that we are having with NHA, something that we would be willing to make the investment on the land side and they are willing to make as long as their student capacity — as they start to turn away students because they’re at capacity, then that’s something that they’d be interested in.

Unidentified Analyst: Okay. Are there any — so if you’re a young family and you’re looking at — and you’re in Denver, are there other competitions when it comes to education as fine as The Academy? Or do they have other choices if you are a young family?

Mark Harding: So, Colorado is a choice state right? So the student can go where it wants to go, and the state funding actually follows the student. So it’s there. You can go to your local neighborhood school. You can go to a charter school that would not be in your neighborhood. You can go to a public school that’s not in your neighborhood, and they’re all based on capacity. And so if you start — if a school starts to run into a capacity issue, then they have a priority of who they serve. And so from our standpoint, and this really dives into the detail on schools. But you look at Sky Ranch Academy, our preference is the students that live in Sky Ranch. And once we meet all the needs of the students that live in Sky Ranch and if we still have capacity, then it’s students that live in the district that charters us.

Now, the district that charters us is the Bennett School District. So, those kids that live in the Bennett School District, then have the next priority. If there is still capacity of student availability and no additional residents in the district, then you can open it up to the neighboring school district, which is in the City of Aurora. And those students that live in the City of Aurora that sit within a geographic priority of Sky Ranch, get the next priority and then the next priority. So it cascades down into both the school district, the local jurisdiction that’s building it and then the proximity of students.

Unidentified Analyst: Okay. So a different question. I think none of us are familiar with the Denver market. Is there new competition coming in? Or is there absorption at your price points that’s occurred in other communities where — I’m just wondering if you’re going to be the choice because there is nothing else available under $600,000. Or do you know of communities that are coming online that are going to be competitive against Sky Ranch?

Mark Harding: I would say that, given our basis in the land, given our location, given the characteristics of the ground, we probably have a very competitive advantage to continue to compete against any new project that comes out there. There are always going to be more projects coming online, but the time lag of getting entitlements and getting through the process is tremendous and costly. And so you have fewer and few people that are actually doing what we do just because the market is so frustrating and every new project takes longer, costs more than it did the last project. That’s not to say that there’s not new projects out there, but I do think we have a stronger competitive advantage because of location, because of transportation access, because of how we handled the schools and because we’re developing a damn good product.

Unidentified Analyst: Okay. So the entitlements for the property, is it to the 3,200 homes? Or is it per section, Phase 2, Phase 3? Because you –.

Mark Harding: No, it’s fully entitled.

Unidentified Analyst: So that frustrating long process, you have a two-year or three-year whatever advantage, I guess or?

Mark Harding: I would think so. I would say that’s probably accurate.

Unidentified Analyst: Okay. All right. Thank you for taking my questions. Appreciate it.

Mark Harding : You bet.

Operator: Your next question for today is from Elliot Knight with Knight Advisors.

Elliot Knight: Good morning Mark.

Mark Harding : Elliot, nice to hear from you.

Elliot Knight: Thank you. Just a very quick question. On the slide, Metro Denver real estate shortage. There is a bullet point, legislative support. Could you explain that?

Mark Harding: So, what we really have is Colorado. They continue to try and push the envelope on housing types of projects. And so what we have here is the occupancy limits. The biggest issue in Colorado for multi-family housing has been product defects legislation and the ability for bright young lawyers to be able to get class action lawsuits against homebuilders. And so the legislature is really trying to limit that type of loophole, I guess, such that it’s not so easy to get a class action suit. Clearly, if there is a construction defect, they should be held accountable. But that’s not the way it’s been working in the past. And so we are seeing a little bit of support for that on how — being more aggressive about town-home, getting a smaller footprint, continuing to press the envelope on affordability because it is — Colorado is experiencing a challenge with affordability.

If you say an entry-level house is anything less than $500,000, that’s still a pretty high number. And the way to reduce that is going to be to have higher density, higher occupancy. And so that’s where we’re seeing the Colorado legislature recognize some of these problems.

Elliot Knight: Okay, thank you so much.

Mark Harding: You bet. Good to hear from you.

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

A – Mark Harding: So, I do want to, just to reemphasize, we are having our Investor Day next week. We’ve got a number of folks that have registered for that. Thank you. Look forward to seeing you out here next Wednesday. We will send out a reminder on the web link, or if all of you want to just jump over into our press release page on the website, that’ll give you the link to the Q&A session. So if you can’t make it out here for that, it’s always helpful to hear how other folks are seeing it. And it’s helpful once somebody comes out and sees the progress that we’re making to get to their view of it as well. So don’t hesitate to link in on that. And I’ll be hitting various markets, whether that’s going to be East Coast, Midwest or West Coast for a bit more, just investor chats and really trying to get out into the market and meet with investors and meet with new institutions on just non-deal roadshows and things like that.

So as we get those scheduled, I’ll shoot that out to you all and look forward to an opportunity to see you in person. But with that, I will close. And if you are listening to this with a rebroadcast and something piques your interest, don’t hesitate to give me a call.

Operator: This concludes today’s conference and you may disconnect your lines at this time. Thank you for your participation.