Pure Cycle Corporation (NASDAQ:PCYO) Q4 2023 Earnings Call Transcript

Pure Cycle Corporation (NASDAQ:PCYO) Q4 2023 Earnings Call Transcript November 16, 2023

Operator: Greetings, and welcome to Pure Cycle Corporation’s Year-End 2023 Earnings Call. At this time, all participants have been placed in a listen-only mode and the floor will be open for questions after the presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Mr. Mark Harding, President and CEO of Pure Cycle. Mark, over to you.

Mark Harding: Thank you, Jenny. Good morning, and welcome. As we mentioned, this will be our fiscal year-end 2023 call. Excited to be able to highlight some of our activities, the financial results for the last fiscal year and really kind of give you guys an idea of how the company is doing with each of its business segments. For logistics, there is a slide deck for this presentation. If you go over to our website at purecyclewater.com, there’ll be a tab on the landing page that says join the live presentation. You can click on that, and you’ll see the slides for that. I’ve been asked to note for those that are going to be listening to this after the call or listening to the rebroadcast, we’ll have the audio presentation put up on the website, so you can click on the audio, and then you’ll have the slide deck as well, so you can click through the slides and kind of match the audio to the slides as well if you’re listening on a rebroadcast of it.

So with that, I’m going to start. And the first thing we’ve got to do is talk about the forward-looking statements and the fact that statements are not necessarily historical facts or may be incorporated by reference in this presentation. I think most of you are familiar with the forward-looking statements, but we’ll get the lawyers out of the room and kind of get on with talking a little bit about the year. Do a little bit different this year. I know most of you are going to be familiar with the company. And so for those of you that are going to be new to the company, you can kind of see — run to our website. There’s a ton of different resources on the website that will be a little bit more in depth about the company, what each of our business segments are and sort of the portfolio that we have.

What we’re going to do is talk a little bit about our strategies, talk a little bit about how we measure performance, a little bit about the asset trajectory and then kind of the objectives and the capital plan the company [charts here] (ph). One of the things that we do describe a lot of is kind of our highly valuable assets. And as many of you have heard me talk from time to time, our most valuable asset really is who we get to work with at our company, our people here. You’ve heard me talk about the growth of those assets and our leadership team continues to grow. So we continue to add human capital to the company to continue to execute all of our business segments. We have just a tremendous Board of Directors, very strong punch above our weight necessarily for a small company with the caliber of the Board of Directors that we have.

And each of our business segments are really complementary where we add value in one, we add value to all. And so you’ll get a little bit of flavor for how we invest in each of our business segments. And then a little bit about how the investments and the assets are performing. So with that, want to talk a little bit about our leadership team. I want to welcome Marc Spezialy to the team. This makes three Mark’s in leadership positions in the company. And I’m not sure if there’s a correlation to the name and the smart factor. I’m just saying we’ve got a lot of smart folks here, and a lot of them named Mark. But Marc joins us as our CFO. We continue to rely on the wisdom and experience of Scott Lehman to direct our Engineering and then Dirk Lashnits who handles our Land Development segment.

So continued strong leadership team within the company. We operate — as most of your know, we operate in three complementary business segments. The water and wastewater resource development segment, where we have a strong portfolio of water rights. We develop those water rights under a cradle-to-grave approach where we own the water. We develop the infrastructure that diverts it, that pulls it to the surface, treats it, delivers it to our customers. We collect that back and we process that water and reuse that water supply. We have — in the last few years, really excelled that land development and we’re developing one of the more highly respected master planned communities in the Denver metropolitan area and really succeeding not only for developing the land in a smart and efficient way, but also making sure that we’re developing that land in an affordable entry-level market segment, which is really benefiting us in kind of a diversity of market segments in the housing business.

And then more recently, really adding single-family rentals to that holding back some of those lots that we have that we’re developing and delivering to our homebuilder customers and keeping those lots of ourselves to have homes for single-family rental. So each of these segments really do relate to the other one and as we invest in each of them, all of them are benefiting. So you see a strong leverage effect on how these investments add to the entire portfolio to the company. Taking a look at the next slide, strong asset portfolio. And what’s important about our assets is not only how valuable they are in our business segments, but how we continue to grow each of them and that we’re still very early on in each of these segments. You hear me talk a lot about our highly appreciated assets that we’ve had.

And some of these we’ve had for a very long time. Our water and wastewater assets we’ve had for more than 30 years. You take a look at just that segment alone, that’s — we continue to grow that segment. We’ve got about $64 million in total assets in that particular segment and at our current rates and charges, and we’ll talk a little bit more about this later in the presentation, but it has the capacity to generate over $2 billion in revenue potential. Our land development segment, we bought those — bought that land right. We bought that at the height of the — Great Recession in 2010, very low basis in that, about $4.5 million and as we’ll highlight a little bit more, that asset continues to generate very strong returns and has more than about $500 million of asset potential or revenue potential in its continued development.

And then taking a look at our newest segment, where we continue to grow. We have about 4 — about $5.4 million in 14 single-family rental homes currently to date. We have a unique ability to carry forward some of the equity value that we have in the land and the water side of that. And so what we have is a strong leverage opportunity and a tax advantage way of renting those out and having that asset, which has a fair market value of about $7.2 million continue to grow. We’re looking at growing that segment up to more than $100 million with a couple of hundred units in our Sky Ranch community, and we’ll talk a little bit more about that. What I want to do is jump straight into some of the financial results for the year and some of the key performance indicators.

I’ll let you know a little bit about the key takeaways and kind of how we think about that. So this year, we generated about $14.5 million and about $8 million in gross profit areas. Revenues are down just a bit, and it’s largely due to timing of the starting of Phase 2B. As interest rates started to get really wonky about this time last year, some of our homebuilder customers really wanted us to give them a 90-day breather to see how this was going to stabilize out. And so that, on a percent complete basis on how we develop our lot revenues really was the reason for a lot of the shift in some of these revenues. Also, they had some timing gaps in some of our fracking last summer, and it was really due to advancing technologies on now drilling and fracking even longer laterals.

They started out at a mile. They were going to two miles and in some wells there now at three-mile laterals. And so there’s a little bit of learning curve on fracking those three-mile horizontal wells on that. They haven’t really lost any of these revenues. We’re sort of just pushing and adjusting the timing variances of these into Q1 and into fiscal ’24. Net income and earnings per share continue to generate strong net income and earnings under great margins and return on our assets, and I’ll highlight a little bit of that in some of the details here. Taking a look at — we often talk about our highly appreciated assets and the healthy margins. And one of the things I thought I’d do is really try and highlight them for you. Taking a look at each of the three segments, our water segment, our land development segment and our SFR segments, our gross margins in here are tremendous opportunities.

A lot of it is just because of the length of time and our disciplined approach to acquiring these assets and how we develop these assets in each of the segments, our water assets, how we look at those. We look at those on gross margins, excluding depreciation. So it’s kind of a gross margin EBITDA approach to it. And we have both tap fee margins in there as well as the usage revenue margins. In our land development segment, our gross margins there are extraordinary. Those do include not only the opportunities that we generate when we sell lots to the builders, but also through the public improvement reimbursables that we get. We’ve talked a lot about that through as we build the roads, curbs and gutters. We turn those over to the governmental jurisdictions and then we get paid back for those investments through various funding mechanisms and municipal bonds and those types of activities.

And then recently, our SFRs, which continue to generate high margins for us, largely because of the equity roll that we have in carrying forward the land and the water opportunity there. So it gives you kind of a framework for not only how we’re generating the revenues on that, but what the margins are on each of those business segments. Talk a little bit about where our revenues come from. In our water and wastewater segment, as you can see through this illustration, really three-quarters of our revenues come from sales to oil and gas and then really taking a look at the water or the residential wastewater treatment and commercial water that are allocated from taps largely due to irrigation. Tap fees are largely generated through our land development segment at Sky Ranch, although we do have continued growth in some of our other businesses acquisitions in the Wild Point sector where that’s an existing community, and we’re building out — I think most of the residential is completed there, but we continue to build out some of the commercial in there and some of those commercial water customers.

And then what this continues to show is a tremendous continued growth in our customers year-over-year. So we’ve got a 20% customer growth, and that’s largely driven by the Sky Ranch project, but great organic growth in our customers. Land development, talk a little bit about — we delayed the start of that Phase 2B, which we talked about. There was about a 90-day delay at the request of our homebuilders. And really, it was just because they wanted to kind of see how the market segmentation was going to shake out with the rising interest rates. And then all this really did was pushed a little bit of our percent completion in Phase 2B into fiscal ’24. Market, I’d say, is fairly stabilized. When you take a look at interest rates, they are more attuned to kind of a historical average at that 7% rather than what was an anomaly at the low rate.

But what we are seeing is the strength of our market segmentation, that entry-level market segmentation is really enhancing the Sky Ranch project. It’s really providing our homebuilder partners the opportunity to continue to build and be aggressive in the marketplace. And so one of the things that we’ve seen is a demand for not only what we’re doing in 2B, but to start 2C and overlap the next 211 lots with the 200 that we delivered or that — with the 211 in Phase 2C with about the 215 lots that we’re doing in Phase 2B. So you’ll see a little bit of that overlap in coming quarters in fiscal ’24. Single-family rentals. One of the things that we’re able to do with this delay in the start of the 2B project was expand our portfolio of single-family rentals in Phase 2.

And we went from what we originally had reserved as 40 lots to 65 lots and really was an opportunity for us to become the first customers in Phase 2B for our homebuilders. And that’s great for us because we’ve got an efficient way of delivering those homes to the market and then also our homebuilder customers are really adding to their portfolio and how they’re building these units and getting started with the rental homes that we actually hold in our portfolio. So we’re very excited about this segment, how it continues to grow and the opportunities for us in renting these out and seeing continued strong demand, as I spoke from time to time, the thing that we are able to do is really rent these out as if they were a fair market value home at that $500,000 level when, in fact, we’ve got incremental investment that we can finance with very affordable capital.

It’s mortgage-based capital and be able to leverage the continued expansion, not only to the balance sheet, but the income statement here. So we really like this segment, and we’ll continue to grow it. We talk a lot about where our revenues come from and that we earn great margins, but that isn’t the whole story. It might be helpful for us to illustrate where we are in the cycle of development of these assets, i.e., how much pedal we have left in each of these business segments with what’s currently baked into the company, with what we own, with what we control. And so highlighting some of that’s going to be really giving you a flavor for how we look at it and the enthusiasm and excitement that we hold not only for each of the business segments, but for how we grow this company.

If you take a look at our water and our wastewater segments, you’ve heard me talk about this in many, many times where our water portfolio can provide service up to 60,000 connections. We’re currently a little over 1,300 connections out of 60,000 connections, so it gives you kind of an understanding of where we’re extremely early on in the development of that utility segment. And our rates and charges, the tap fees, the cost of developing new water supplies and bringing them from farther and farther distances really are the reflection of the cost of those tap fees continue to rise. We continue to mark and set our rates at a competitive rate to the market, but they continue to grow. And so we’re very excited about that continued growth and the continued value of that asset.

In the land development asset side and Sky Ranch, as we highlighted in some of the previous slides, we’re at about 700 out of 5,000 units. So we’re still very early on in that. We’re about 14%, 14.5% of the total number of lots developing in that, and we continue to grow. If you take a look at our balance sheet, we have a very, very strong balance sheet with a strong cash position and an even stronger liquidity position when you add in the receivable that we have for the municipalities that we build that infrastructure for. And then in our single-family rental segment, as we talked, we’ve got 14 completed units and really — we’re looking for 200, maybe even more, 200 to 300 units in that segment. So we’ll continue to grow that segment, which really, again, illustrates how we’re really early on in each of these segments.

Water and wastewater customers and capacities, continued customer growth in utilities. Really what this is going to illustrate, we have 1,326 to be exact. And it really shows you where those are coming from. We got Wild Point Sky Ranch and our Lowry branch service area. And really one of the more hidden assets of the company is our service — our exclusive service area to over 24,000 acres of property that’s in the right location in the Denver metropolitan area. As you take a look at some of the graphics on our website, it’s that large pink area that really represents continued growth and really this kind of illustrates both the existing and new residential as well as existing and new commercial growth in these segments. Our largest customer in the Water segment comes from oil and gas and the outlook in oil and gas continues to look positive.

Looking at it, the field ownership has consolidated. It’s changed hands several times over the last few years. but now is consolidated into kind of a couple of large local operators. The field is mostly de-risked where you’re seeing large pad site development, where they’re now on each individual pad site. They’ve got all the takeaway infrastructure installed, the gas takeaway system, so they don’t have to flare any of that gas, they take it away into the large distribution systems and really developing it based on the backbone infrastructure they’ve got. So it’s in that field development stage in the oil industry. And we have something along the lines of 1.5 rigs working this field on a continuous basis. A lot of that is going to be drilled in and around our service area in and around those Arapahoe County area.

So we’re very optimistic about how this continues to add revenues to the company and really for the foreseeable future. So look for continued growth and continued high performance in the oil and gas sector. Let me talk a little bit about some of our delivery capacities. We continue to — when we take a look at the capital allocation, we continue to invest in wells and pipelines and storage, which add to the total availability of us to supply water. And so when you take a look at that, this is really an illustration of our supply and diversified sources of supply, where we generate infrastructure in our surface water system, which is in the Box-Elder Creek system, our groundwater system out at the Lowry Ranch, some of our groundwater assets out at Sky Ranch, and our existing customers on Lowry at the DHS facility.

And then also our WISE infrastructure and water supply, which you hear me talk a little bit about, and you’ll hear discussions in the 10-K about which is our regional water supply. And when you take a look at the total capacity and what we’re — how we’re using that water, we’re really only using a collective 15% of our capacity. So we still have lots of opportunity for adding more supply, and that’s largely going to come from oil and gas as that continues to grow. But as we continue to add more connections on Sky Ranch and more residential customers, really, you’ll see that capacity ratio between our residential and our commercial customers kind of readjust. So it gives you a framework where we still have lots of ability to generate additional revenues as we continue to see that demand for water grow in our service area and amongst our areas that we serve in unincorporated Arapahoe County.

And then there’s also kind of how we generate tap fee revenue from that. So we have the ability at current rates actually I think that $88 million really illustrates what we were looking to develop at the tap fee revenue of the same source of supply that we’ve got developed. And with the fee increases that we had, I think that exceeds more than $90 million now. So great capacity in our developed water system is just why we continue to pay attention and make good investments there because there’s great capacity for us to grow. This illustrates kind of where we’re at in our water portfolio. And so as you’ve heard me talk about, we’ve got about 30,000 acre feet of water. And that can serve about 60,000 connections. And when you really look at what we’re using on that, and we’re developing that largely through Sky Ranch, the existing number of connections at Sky Ranch, the total allocated supply is about 1,100 units, which is roughly only 2% of that supply.

When you take a look at what we’ve got developed capacities for, we can supply another 2,500 taps of that water supply from what we had on the previous slide. So that’s another $90 million, $95 million worth of tap fee revenue. And so we’re really still just starting out on the water allocation in our portfolio. We have one of the largest unallocated portfolios in the metropolitan area. And really because of the growth of the Denver area out to our service area, this continues to be one where we have growth opportunities, not only in the water — the tap fee connection charges but also in the usage charges. And then a little bit about the land side. So when you take a look at the land capacity, we’ve been developing that over the most recent four years, and taking a look at delivering lots to our homebuilder customers.

Currently, we’ve got about a little over 720 lots that have been either delivered homes on or homes under construction on. And so that’s about 14% of the total capacity at Sky Ranch. When you take a look at adding everything into Phase 2, which is going to be how we deliver [Phase II A/B] (ph), A is 100% complete, you saw that illustration earlier. B is about 30%. C is just getting started at around 9% and then B. So you look at that with all of Phase 2, that would roughly add about 25% — 27%. So about a-quarter of the total capacity at Sky Ranch. And when you translate what we’re making there to the balance of the residential and the commercial portfolios, that’s where you get that roughly looking at about $580 million at current rates today.

So a lot of pedal left on Sky Ranch, and we continue to be aggressive on continuing to deliver those on a just-in-time basis. So our homebuilder partners really continue to enhance their margins on that without taking these large inventories. So it gives you a bit of feel for how our land side is. And then where we look to be and where we’re going on our single-family rentals. If you take a look at that and we’ll peg a market at 200 units. And right now, we’ve got just 14 units. So we’re about seven into those. And that 200 units is still less than 10% of the overall capacity of the residential units at Sky Ranch. And so we think that’s a very conservative number to add to the portfolio. There’s room for us to be expanding beyond the 200 units.

But this gives you kind of an illustration of where that looks to be with Phases 1 and 2A and then really all of 2B, 2C and 2D with that other 55 units. So that would again carry us up to about 27% of the overall portfolio. And then still have plenty of pedal left on that to generate annual revenues in excess of $6 million, somewhere close to $7 million. And then it’s going to be about a $100 million portfolio when you take a look at a couple of hundred units on an average sale price at that $0.5 million, and it continues to grow and appreciate it 4.5%, 5% a year in these housing markets. So a very good opportunity for us to continue to grow within that segment. This is some of the highlights of just the single-family rental. You’ve seen me illustrate this before, but it shows our existing units, the average home per year, the projection into Phase 2 and then on through the balance of the project.

So I’ll give you a bit more metrics on that. So some of the key takeaways here. We’re looking at some very attractive gross margins, not only gross margins, but return on assets and making sure that — we continue to invest in those assets. That’s part of our capital allocation plan, continued asset growth and really gives you kind of the strength of our ability to take advantage of the investment opportunities here. and really a clear path to continue to maximize returns with this large asset portfolio and our historically low cost basis each segment allows us to generate above market returns and substantial organic growth within those things that we can control. Next slide. What’s important is not only for us to understand how you all measure our success, but also probably a little bit helpful for you to understand how we measure our success.

And these objectives that we go through, as you’ve seen in this presentation, are very discrete measurable objectives. They have synergistic effects with these complementary business segments. We look to allocate capital through expansion of these assets and continue to realize these great margin returns and also look for acquisition opportunities, which will complement our existing segments. You heard me talk about the fact that we’ve got our nets out — and these asset values have been very, very high historically. And then with kind of a softening of the housing market, mostly in market segments other than the entry level. I think the entry level is still highly sought after just because of a lack of inventory. And we’ve talked from time to time about just the anemic level of affordability in the Denver market.

And I know that other major metropolitan markets struggle from that affordability factor as well. But it continues to give us opportunities to be in front of land owners that may have an interest in selling, continues to be in the front of water owners as we can continue to expand our water portfolio and then invest in our own assets so that we can continue to generate margins in each of our segments. We want to highlight also that we are investing in ourselves. As you all note that, we did authorize a share buyback program and typical to the company’s profile. We’re doing that in a measured and consistent allocation, continuing to invest in buying back shares quarter-over-quarter. So you’ll continue to see us do that. We’re not in it to support a particular share price, but by the same token, to illustrate to you, regardless of the share price that we continue to think that we’re extremely undervalued for what the company is doing, what our company opportunities are and if the market doesn’t continue to understand that, then we will continue to make that investment in ourselves.

Finally, kind of a listing of our Board and our management. We continue to benefit from the terrific expertise and guidance and experience of a very diversified, very significant Board of Directors. And so with that, I’m going to turn it back to Jenny. We can see if we can open it up to some Q&A and really highlight any specifics that you all want to focus on.

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Q&A Session

Operator: Thank you very much. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Your first question is coming from John Rosenberg of Loughlin Water Partners. John, your line is live.

John Rosenberg: Thank you. Good morning, Mark.

Mark Harding: Good morning, John.

John Rosenberg: Nice to speak with you. One comment and one question. First, I’ll get to the question. And by the way, nice to see the progress that you guys are making. What you didn’t update and I’m very curious about is how is the school going — the charter school.

Mark Harding: I hate it when I do that. Yeah, it’s one of the true successes. One of the things that — I think it was one of my very first meetings that we did when I — when we sort of made the decision that we were going to do the land development ourselves was really to center this community on two key principles. One — well, three key principles. One would be location. Being right off the interstate. We have just great transportation location. I mean, we are literally — our residents are literally on the interstate within a minute and can go wherever they want to go. The second one was affordability, making sure that we — affordability, I use that term loosely in the Denver market because nothing is affordable in the Denver market.

But when you look at entry level, we wanted to make sure that our homebuilder customers would be competitive at that entry-level product. But the third one was education. And so — we had our — when I sat down with our land planners, what we wanted to do was really center the community around — and do I have a — I might have — I guess I don’t I was going to — it is on our website. You’ll see a lot of the pictures of the school site. But in terms of the land plan, the school was at the center point of the community, such that every child would have a local community. A local school within the community that they could walk to. And so we went out and kissed a lot of frogs on the charter school opportunity, ended up partnering with what was the true prince.

The National Heritage Academy is a group of charter schools that are headquartered out of Michigan, and they have over 100 schools in nine states, 60,000 students. And we set a fairly ambitious goal of making sure that we could open and open early and make sure that, that was a selling point for all of our homebuilders, and we were able to achieve that this year. So we did open up those grades. I was privileged to be able to cut the ribbon on that and open up grades K through 7. We have something like 400 students there with a weighted percentage of those students walking to school from our community, but we’re drawing from all over. And so we get — we’re getting students coming in from all aspects of the Denver area and really liking the model that we have with that school.

So continuing with that, what our objectives here is we have a full K-12 campus and we’re the first K-12 campus for NHA in this — in their national platform. They’re very excited about it. They’ve got other K-12 campuses that they’ve got planned and are working towards, but we were their first K-12 campus and we’ll start — not to rest on our laurels on opening the first phase of that school. But really, we’ll start working on the high school portion of that with the planned opening of the high school in August of 2025, such that our seventh graders will be able to go to eighth grade at the existing school and then transition directly into high school for nine through 12, right. But we’re very excited about that opening of the high school — I mean the school.

John Rosenberg: That’s great. And good to hear that you guys are making progress in that area. I’m sorry, one more question came to mind, something you’ve talked about in the past, just for an update. What about a big box store locating in proximity, you probably have some retail by now in Sky Ranch or you don’t, but Kroger and…

Mark Harding: Yeah. We have. We have big box Kroger big box retailers, whether that’s a Lowe’s or Home Depot or Walmart, any number of those. And surprisingly, they’re looking. I’m trying to work on incentivizing some of those folks to come on and they’re sort of saying, listen, there’s really not much you can do to incentivize us. We’re looking at rooftops, we’re looking at pull within the region. We’re looking at infrastructure and all those sorts of things. And so we do have a good land plan for that commercial. Our residents are dying to get grocery and a fuel station there, but we’re probably still 18 months, two years out from getting some of that stuff into a groundbreaking form. But there is a lot of interest and a lot of folks. We — it isn’t that we’re not talking to them. We are. They’re putting pins in it. They really want to be here. but they need a little bit more rooftops to be able to get their flag in the ground on those.

John Rosenberg: In other words, everybody wants to be first to be second.

Mark Harding: That’s exactly — that’s a great way to phrase it.

John Rosenberg: Okay. And just lastly, just a comment, Glad to see you guys started on the share repurchase, and I think that’s a great validation of your model and cash flow capabilities.

Mark Harding: Thank you.

John Rosenberg: I’ll pass it on. Thanks. Good to hear from you.

Operator: Thank you very much. Your next question is coming from [Bill Cunningham] (ph), he’s a private investor. Bill, your line is live.

Unidentified Analyst: Hi, Mark. Thank you as usual for taking my call. I greatly appreciate it. And I had — actually, my first question was going to be about commercial, which you just mostly answered — but I do remember during your Investor Day, I think you made some general comments about the southern section of that commercial being possibly some sort of apartment development which I think was a fairly significant number possibly. I wondered if you might be able to say anything about that.

Mark Harding: Yeah. We do have a placeholder for that and can go somewhere between 400 and 600 multifamily units there. And it’s a good spot for it because not only does it add density — and that helps us in terms of assess value and mill levies and taxes that help us with the reimbursables, but it’s also a great spot for us on the transitioning between commercial and detached residential. So it will be right along that southern border of that. And you’re right. I get lots of interest from folks on that. And really, we want to be a little bit more mature before we put that product up because we want to be we’re looking at kind of that being another one of the affordability factors in there. We want to make sure that that’s an opportunity for folks that can transition from.

And as we look at it, transition from a multifamily to a single family, multifamily rental to a single-family rental to a single-family house and really doing that all within the same community and the same opportunity. And so good that you continue to highlight that, and I apologize for not being more specific about that in some of my commercial detail.

Unidentified Analyst: No, that’s fine. I just thought I know you’re still working out details. So that’s why I would kind of ask the question the way I did because I know sometimes your plans constantly — you have to shift things as markets change and what your current thought is and what kind of feedback you’re getting. So that’s why I kind of asked the open-ended question than I did. So this was very helpful. And also the school — I mean the apartment location would be directly adjacent to the school site also, right?

Mark Harding: It would. It’s not going to — maybe some of the units may be directly across the street, but some of them are going to be on kind of the eastern portion of that area, really south part of the commercial north part of the residential.

Unidentified Analyst: Okay, which is what like a five-minute walk to school from there?

Mark Harding: Yeah. Yeah, exactly.

Unidentified Analyst: Yeah. So I think — I guess my point is just it’s a very good close location for a dense population to where the school is. So that looks interesting. You’d also — go ahead.

Mark Harding: I was just going to highlight the location of the school is a five-minute walk for everybody. But it’s got to be — it’s a five-minute walk uphill for everybody.

Unidentified Analyst: Okay. But going home, it’s not though, right?

Mark Harding: No, no, it is. It’s uphill both ways.

Unidentified Analyst: I’m going to walk in both directions, uphill in both directions?

Mark Harding: It’s echelon.

Unidentified Analyst: Okay. So the other item that you had pointed out right next to your offices at the Investor Day was that large pad site that you thought, I think work would start there in November was your estimate in July? And I think it was something like maybe 16 wells or something would be drilled there. I’m wondering what things might look like with that at the moment.

Mark Harding: It is currently fracking.

Unidentified Analyst: Good. Great.

Mark Harding: And we are delivering water to that one. And then we’ve got — I mean, we’ve had literally our water system on for the entire since really fiscal year-end, all of September. We had a bit of a just because of the technology on that three-mile lateral. They were on a pad site that was in the city of Aurora that we don’t provide because that’s a city of Aurora issue. But then they had another — and then they were rolling off that one to one that was in our service area, and that was the gap because they were having some technical difficulties on it. But you’re going to see some healthy revenues on the Q1 call in January on the frac.

Unidentified Analyst: Good. That’s great. Okay. Which is always your slow period on the home sales and things that — so good. And then let’s see, there was — I think that’s it, Mark. So thank you very much.

Mark Harding: Thanks, Bill.

Unidentified Analyst: Okay. Bye.

Operator: Thank you. Your next question is coming from [Bill Miller of Will Mill Design] (ph). Bill, your line is live.

Unidentified Analyst: Mark, another great quarter, another great year. Congratulations. .

Mark Harding: Thanks, Bill.

Unidentified Analyst: And also on your repurchase of stock, my goodness gracious, that is dramatic. I love it. My question…

Mark Harding: He can be taught.

Unidentified Analyst: You can be taught? I really can’t hear that.

Mark Harding: He can be taught. Well, you might get a different opinion from my wife.

Unidentified Analyst: Well, we didn’t ask her this question. You almost always made reference to the acquisition pipeline. And here with interest rates higher, homebuilding seemingly, except in Denver, a [indiscernible] item on anybody’s agenda. What about some of the neighboring land at this point?

Mark Harding: So that’s a great question, and I do — it’s odd that I keep referencing it nothing happening. But what I can tell you is they also haven’t sold anybody else. And so it hasn’t hurt us not to have acquired those. And in fact, I think that overall raw land prices have weakened just because interest rates have gone up, and it makes it more difficult for as — for a typical master plan developer. And in our particular case, it’s really not that interest rate sensitive because of how we design our product and the price point that we try and compete in. So I would say all of the opportunities that we have been and are continuing to pursue, our continued — they’re still all on the table.

Unidentified Analyst: Okay. Great. What do you have to pay for your mortgage now? On your homes rent?

Mark Harding: I think we’re right — some of ours, we locked in, I think, four of the units we locked in at that nice attractive interest rate, like 3.5%, something like that. And then the additional 10, I think we’re right around 7.5%. So we don’t have a builder that wants to buy down our mortgage.

Unidentified Analyst: No, that’s great. Okay. Well, just keep going, sounds terrific. How are you going to get people to recognize your stock in your company and what you’re doing?

Mark Harding: Well, we’re going to — as you saw with this presentation, we’re trying to highlight some of the — what you all know and have done the work to find out, but really try and highlight the disconnect between legacy asset balance sheet value and earnings and gross margins and return on assets. So we’ll continue to do that. I’m out in the circuit doing presentations at some of the conferences and we’ll continue to put up good results and shout as loud as we can into the marketplace.

Unidentified Analyst: Great. Well, I wonder if you’re well done, and let’s talk soon I hope.

Mark Harding: Thanks.

Operator: Thank you very much. Your next question is coming from Greg Malachowski from Benchmark. Greg, your line is live.

Greg Malachowski: Hey, Mark. How is it going?

Mark Harding: Great. How are you Greg.

Greg Malachowski: Good, good. I just have one quick question in relation to partially the commercial and then also the apartments that were previously discussed. By nature, these are assets that, I guess, in terms of development are difficult for a lot of people right now just because of rates and how expensive it is for you guys, particularly going out of the loan would obviously be very capital intensive. So where do you guys stand there? Have you given any thought to potentially just partnering with people who maybe want to do some of the development or specialize in building apartments and then kind of sharing the overall intensity of the nature of those projects. Obviously, if you partner the potential profit share is less, but if you can say, hey, we’ve got the land, which for a lot of developers is a pretty big issue right now because land is expensive and rates are high.

And they can say, okay, well, if you contribute the land, we can do something on our end and then together, you guys bring some of these products to market. Have you given that any thought versus what you’ve kind of been doing now where it’s mainly you guys carry the brunt of the work and then either get reimbursed through the community developed in the district or through payback from finished lots for builders. Is partnering anything you guys have given any thoughts?

Mark Harding: Absolutely. In fact, I will tell you that that’s likely to be the way we go about it, not only just on the multifamily but a lot of the commercial. We have so much equity in this project. And with a land basis as low as our land basis is and the fact that we can not only leverage less than $1,000 a lot land basis in it, but also leverage the utility side where we’ve already been able to bring all the utilities there. We have high margin in utilities. And so we bring a wet finish lot to the equation with very, very efficient means on it, right? Because we buy all the wholesale backbone infrastructure already invested. We’ve already gotten paid back some of those reimbursables from those historic investments. So carrying that through, yeah, you’re right.

We can bring that to developer, not only on the multifamily but commercial where they come in, and it doesn’t matter. I mean we’ve got a lot of interest on industrial, where we can get a distribution center out there. And the thinking in on that is we probably need and are going to invest in upgrading the interchange. And so we’re in the middle of that right now with CDOT on expanding, and it has a government acronym. But we’ve got a 1601 study underway which will give us a permit for developing interchange. And we want to be early on that. We have mill levies specifically set aside for that, so that doesn’t have to come off our balance sheet. But distribution center there, where we’ve got higher capacity and more flexibility on truck access, they go vertical on that.

We bring the pad side together with the utilities. They take the vertical investment on the infrastructure they get it fully leased out on major long-term leases, and then we exit together with them on something like that. So we’ve had some of those conversations. That’s kind of the detail of it. That’s kind of our thinking on it, where it’s not that heavy of a lift from our standpoint because of what we’ve already done on the site. And to your point, we do benefit from the increased value. So again, it’s another way for us to vertically integrate without having significant investment in there and investing in ourselves through partnerships with that. We don’t know that business. It may not be something we want to take the hits and bruises on learning that business, but there are those that do understand that business and are very good at it.

Greg Malachowski: Okay, awesome. That’s great to hear. Thanks.

Operator: Thank you very much. [Operator Instructions] We have our next question coming from Elliot Knight of Knight Advisors. Elliot, your line is live.

Elliot Knight: Thank you. Hi, Mark.

Mark Harding: Elliot, good to hear your voice.

Elliot Knight: Well, 88 years old and still going. That’s encouraging.

Mark Harding: Would we all be so lucky?

Elliot Knight: Yeah, true. I’d like to make an observation. You’ve done an excellent job on this call of illustrating how early in the development stage, the various segments of the business are. And you have built a company, this company is extraordinarily well managed. You’ve built a company that has great financial strength. I really think it’s time to get into the early stage of paying a dividend. You and I have talked about this before. It could be an annual dividend. But I think it would substantially broaden your potential stockholder base if you didn’t have to — PCYO didn’t have to have a star after it saying non-dividend paying company. I wish you’d share that thought with the Board and have them do something about it. Great that you’re buying back…

Mark Harding: You bring up a good point. And again, another — that’s another way that we continue to invest in ourselves and our ownership interest of those that own with us. And we do look at that very seriously every year. And as you’ve seen, our capital allocation strategy is pretty conservative, but we are continuing to build a very liquid balance sheet. When you take a look at the cash and the receivables, having a $50 million liquidity position is pretty healthy. We have a disciplined approach and one of those metrics are to make sure that your recurring revenue exceeds your G&A, and we’re very close to that, Elliot. And so it’s easy for us to waiver beyond established and historic metrics like you can declare a dividend once you’re recurring revenue exceeds your G&A.

And when that visual is there, maybe that becomes something of heightened consideration. But I do agree with you that we will be declaring dividends, and we will be paying them. And we’ll have a new access to people who invest in companies that are dividend pay company. So it will broaden our shareholder group. And it may help resolve some of the things that Greg and Bill and others were talking about on getting the market to appreciate and understand the awareness of the company. And so those are all key ways to do that.

Elliot Knight: Well, that’s what we all want — and my comments included the comment of the financial strength to which you are now alluding. And that’s the reason why I think the company is in a position to pay a small dividend. That’s all. I love income.

Mark Harding: Well, at 60, I do too.

Elliot Knight: Good. You’re just a young whippersnapper.

Mark Harding: That’s right. I’m just getting started.

Elliot Knight: Okay. Thanks.

Operator: Thank you very much. Well, that appears to be all the questions that we have in the queue at the moment. I’m going to hand back over to Mark for any closing comments.

Mark Harding: Thank you, Jenny. So again, a terrific quarter, as you guys can see from the presentation, really — we do have a lot of pedal in our assets, and we’re starting to use that. We’re starting to press a little of those. We’ll have some overlapping segments of the land development side. We continue to press on expanding our portfolio of the SFRs. So we’re continuing to invest in that on that side of it. And then continuing to invest on delivering more water to our industrial customers to make sure that we can continue to capitalize on that demand for oil and gas as they continue to build out that field. So all 3 of those areas, we are expanding and continuing to invest in and really continuing to appreciate and respect the health of the liquidity and the strength of the balance sheet.

So with that, we’ll look to leverage that in some acquisitions and really continue to add to the pipeline of opportunities for the company. For those that are missing our early morning presentation and picking up on this and have a question as a result of the call or the slides, don’t hesitate to give me a holler. And we will look forward to several major market visits. I’ll be back in New York probably after the first of the year and see if we can do another kind of Q&A session at the NASDAQ for some of that for our New York family and the other major metropolitan markets across the country. So with that, I wish you all and your families a terrific holidays, and we look forward to continued success in ’24. Thanks very much.

Operator: Thank you very much, everyone. That does conclude today’s conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.