Pure Cycle Corporation 2026 Earnings Call

Good afternoon. I'm Mark Harding. I'd like to welcome you all. What we try and do each year is give an opportunity for folks to come out and kick the tires, then it's getting harder and harder to get out and visit companies. With technology, what it is today, and our ability to show visually it through earnings presentations and investor presentations and whatnot, the actual company visit is waning. What I always like really is the opportunity to show it because when we describe it, when we report it on the balance sheet, you get a picture of it.

When you actually come out and have an opportunity to see what's going on the development side, what's going on the water utility side, a perspective of the growth of the Denver area and some of what we still continue to be, our secret value, which is our service area at Lowry and those sorts of things, it does give you a different perspective. As much as we try and describe that perspective, seeing it, driving it, getting that actual imagery is truly valuable. I know a lot of you, either on the call or who listen to us on the replay, have had that opportunity to see it.

One of the things that we did this year that we wanted to concentrate a little bit different on, just because there's a lot to see, is taking a look at our service area, taking a look at where our water originate, what's going on on the borders of the property, what's going on on the property. What we were able to see today is a pretty sizable amount of oil and gas activity. We saw a pad site that had 10 or so wells that had just finished fracking. We see them rigging up on another pad site because they're going to be fracking that probably starting next week. We see a pad site being developed, a pad site being graded out where they're going to bring a rig too. We saw a pad site where the rig was.

They're drilling that, and that one will start to frack probably, these fracks last around two months. I think there'll be a little bit of overlap between, because they're two different operators. We got one operator, SM, which is fracking the one starting next week, then we got GMT, which is drilling, and they're doing the other pad site. We've got really two operators on Lowry. SM has the dominant position out there, so GMT's back-filling in with their position. It gives you a perspective of the oil and gas industrial side of it, which is fairly robust, and it's been a while since I've talked about it being robust.

I always temper my remarks because as soon as I say that, then they end up saying, "Oh, yeah, we finished that pad site, but we're going to move on to another one before we do this one." They're not always as predictable as both we would like, and I'm sure you would like to give you guys some certainty as to how the cash flows are going to come in. Take a look at some of the development that is pressuring this particular area. You've heard me talk in the past how Denver lives on an ocean where we can't grow west, and we just can't. The focus of the metropolitan area has been to grow east.

Even growing east, one of the things that shows as you drive it is, boy, there's a lot more barriers to where growth can occur than you might think. When you take a look at the south side of our service area, a lot of land, but it's all chunked up, right? There's five-acre lots and there's thousands of five-acre lots that make it absolutely impractical for any real substantive growth to occur on the south side of Lowry. When you take a look at some of the north side of Lowry and what's going on with some landfills and open space areas, there's a real gap there. It really shows you positioning of the metropolitan area and how much growth has occurred in the metropolitan area over the last 30 years.

We take that tour of Sky Ranch, show you the various phases as how they come online, how builders actually stage their production. How they're going to take down lots, how they're going to build their inventory, how they sell their inventory, and how we phase that. Giving them various components of that inventory cycle so that they're building what they have for the next year. We're building what they're going to want in the next year. We're planning what they're going to want in the third year. A lot of our activities aren't as much about what's going on today. Somebody often wants to know, "Well, how's business today?" I'm not the right guy to ask that. My filter isn't how business is today. Mark's the right guy. Our CFO, Mark Beasley is the right person to ask on how business goes today.

100% of my focus is how's business going to be in 18 months? How's business going to be in 36 months? What do I need to be doing such that we're going from what our team is doing today to what our customers are going to want in 18 months, to where I need to be preparing for the next phase in that 36-month cycle. It shows like that, right? When you go out and see it, you say, "Oh, that makes sense now." I wouldn't have otherwise appreciated that that is what you're working on, not for today. Those lots are going to be available summer next year. You see, "Oh, I see that. That's what you're going to work to do for 2028," and then some of that other stuff.

What are some of those variables that we look to try and either do to develop, to acquire, to partner with on other land opportunities, and how do those position themselves in the metropolitan area, and where is growth in those areas? That was what the tour was today, I think we focused probably 60% on non-Sky Ranch stuff and maybe a little bit, whatever that little bit was pretty quick on what's actually occurring on Sky Ranch that gives us the world of how cash flows are going to be as we roll into year-end, how cash flows are going to be in fiscal 2027. We saw a bunch of that. We really don't have a strong agenda item here today.

I'm going to put our two guests here who were able. We had a couple of folks that canceled on us on a last-minute basis. Dan Aronson out of Minneapolis, he's a long-term holder. He's been on the tour several times. JB, kind of new, first-time tourer. Knows the story pretty well. Maybe give them a couple sentences about what you saw, what you didn't like, and what you liked.

Thanks, Mark. A couple of comments on. For those of you who have taken a tour in the past, I was originally out here when the first phase was being developed, you see a water treatment facility and there's a lot of open land around. Sky Ranch, over the years, it's really starting to develop and become a substantial community. The opening of the high school, seeing that, what was open land a year or two ago with a full, not just the high school, but fields behind it, where you've got phase 2E- Right The grading work being done adjacent to that, you can see where the commercial takes place and how it's all filling in.

As you mentioned, to be able to go out and see where development stops, where the development is right on the edge of the Pure Cycle service territory, it's the natural extension. I'll just echo you. I've been out here before, you see, okay, well, there's one rig here. There's some pads that might be drilled. It's pretty extensive, the amount of industrial development and the oil and gas industry, and how that's being phased in.

Yeah. What stood out to me the most was certainly seeing how as Denver expands outward, that you are the very next stop for further development over by Lowry.

Yeah, previously I'd sort of underwritten it as nice to have the upside optionality and we'll see if it ever happens, certainly felt like a much more concrete opportunity. That was the most useful. Also the commercial area over at Sky Ranch, the compelling location of that.

Yeah. Both for the surrounding areas as well as how it fits so nicely for the broader community there, was the second takeaway.

Let me ride on that a little bit because I know I've always foreshadowed that commercial and upgrading that interchange is important for a lot of that big users that are going to look like that. The interesting thing is we kind of have a lock on that for a while. When we build that interchange, there's not a lot of competing land that's going to benefit from that. When you build something at the highway, both north and south components benefit from that. In our particular case, that's not going to be true because there's the railroad, which in terms of entities that are challenging to deal with, it starts out as railroads, federal government, and then local government.

Somebody else has to build that infrastructure over that before those lands come into play, the commercial off the interstate sort of stuff is going to be ours for a while. That does give us a nice value proposition. The people that we did engage, both a commercial and a retail broker, commercial, industrial, and retail brokers, to really get out there and represent us in that's not something that It's a different business, right? It's not something that we can do in-house. Those folks just don't deal with the land own. They deal with the institutional people, and they look at it on a national scale, and these guys are competing multi-state for particular projects.

We've got a lot of feedback from them in the few months that they've been engaged about the competitiveness of our particular property, the interchange access to it, the interstate frontage of it, and where there's just not a lot of competing opportunities for the same types of uses that we would have on our particular site. Just a quick update on some of that interchange type activity. We continue to work on that permitting process. We're the applicant with CDOT, with the county, which is our jurisdiction. We should be in a position of getting that CDOT's approval on all of those agreements by the end of the year. That's our pathway on that.

We go from a 30% design up to the full design, which will take us maybe four or five months because it's not anything new other than the hard part is the first 30%. Now that the 80% is the bid docs as to what type of concrete you use and how much rebar you're using, all those sorts of things. Important things, but I think that's a fairly streamlined process so that we can get to a design where we can send that out to bid. We go to bid with that, same time we're going to go look to the bond market and hope to be in a position of issuing those bonds for the construction of that sometime in the fall of next year. Let that construction. I always think it should go faster than it does. I think it should take six months.

They'll probably tell me it takes a year. It's in that range. The nice thing about that is then that really does open up a lot of those commercial users because it's going to take them a little bit. They're going to want to plant the flag, they want to get the land. We have it zoned, but they need specific use, building permits, those sorts of things. That might take them that six months, six to nine-month time window. In a perfect world, everything should time itself out correctly by the time it's opened and you got a bunch of people that are breaking ground on that commercial component. The value for us in that is, and I've described this as you'll see Sky Ranch continue to build out, and we've got, call it 1,000 homes occupied.

We probably got up to 1,500 homes that are sold or under contract with home builders. Those will continue to build out, and we continue to produce that out somewhere between 250 and 350 units a year. Maybe we dial it down to 200 in a slow year. We dial it up to 350 in a robust year to kind of work on being a just-in-time lot delivery customer for our home builders. That'll generate that $20 million-$30 million a year in revenue to the company. That'll continue to go for the next seven years. The stack here is once that commercial comes online, that's going to be a similar absorption where we've got a roughly 1,600, 1,800 lot tap equivalencies in the commercial component that will be additive to it.

I'd love to say that this linearly would grow on that scale, but it likely is a step growth, right? We'll see a function where that commercial will be layering on top of the residential, and it'll have its own little bell curve, where it'll start out with a few transactions, and then it'll grow up to a bunch of transactions, and then it'll tail off at maturity. You'll see a lot of that type of activity on a stacking basis. Whether it's that we provide water to another surrounding development, whether we have an acquisition on some of the surrounding vacant land out there, whether some of the stuff starts to break free on the State Land Board properties, all that becomes additive to then those two stacks.

That's how this scales over time, is that you have those step function scales that don't wait it for us to tell everybody, "Oh, you know what? We're going to absorb the next 3,000 units in three years, not six years or not nine years." It's going to absorb, and we're going to go as fast as the market will take it. What we do have is kind of a layering of monetization of the various components of what we have. That kind of really is some of the interesting things that we would facilitate that. What we can do is we'll unmute everybody. At the same time, if you've got something in background on yours, you can mute your own mics on that, but we'll just open it up and see if anybody. This is kind of a fireside chat.

If you have any questions, just go ahead and holler out. If you had any follow-up from our earnings call last week, happy to color into some of that stuff as well. Just turn it over to the team here.

We're waiting for somebody. Mark, can you comment on, for Sky Ranch specifically, on your customers, our customers, the home builders, the competitiveness of the product at Sky Ranch versus other developments that they're working on within the Denver metropolitan area? I ask that in the sense that my impression is that the consumer, the home buyer, can buy a similar or the same product at Sky Ranch for less than they can at another development. I'm just curious as to if you have a thought as to, or observation as to how the developers, the builders look at Sky Ranch versus their other developments in the area.

Good question. I would say that that is true. Home builders, each builder will segment themselves into a particular phase of the market. Their product is almost the same across multiple price ranges. The location might vary one way or another. Lot sizes might vary one way or another. One of the big advantages that I think we have at Sky Ranch in the county that we really haven't talked about, that the builders love, is setback requirements. In a lot of jurisdictions, the setback requirements are 10 feet from property, such that you get a 20-foot setback between homes, which means you've got to have a bigger lot. In Arapahoe County, we have a 5-foot setback requirement. We have the ability to be closer to lot line development in Arapahoe County.

What that means is it's a smaller lot, which means it's a smaller cost for the real estate for the home builder on that basis. It used to be an impediment to be closer to your neighbors. I think that's kind of blurred the way through the marketplace, because what they're looking for is to max out the square feet. What they want is: Can I get that same house on a smaller lot at a lower price? Because if they're four walls, if they get 2,800 square feet and they have 10 feet of yard versus 5 feet of yard, they don't really look at the yard, they're looking at the 2,800 square feet, and that's what their buying mentality looks for. That's one of the big advantages that we have being in the jurisdiction that we have.

The setback requirements are shorter and smaller. Even then, we can get even variances beyond the 5-foot setback as long as we get fire-rated walls. It'd be like you'd be a paired product that has a fire-rated, whatever, the hour rated that the fire, the building material is between that. There's ways for us to be even closer on that, where some of the home builders are looking at saying, "Geez, I'd really like to try this product." It's very innovative, because what they're doing is they're getting an active side, which is going to be the open part. They might have a patio, a front door, and a passive side, which would be nothing but wall.

The two passive sides are going to be closer together, but the two active sides, so you can imagine almost like a duplex that's got just a small area in between it, but they're detached houses. Again, it's a price point stop, it's affordability stop. It's our ability to work with them on that product innovation. We can deliver much more flexibility than any of the other jurisdictions or other jurisdictions, primarily City of Aurora. They just don't allow that. It gives us a bit of perspective on bigger house, same size house, smaller lot, much, much cheaper. That's a big deal for them. A good question. We never really get to talk about the innovation of the actual home product that we are able to do.

The home builders, this is a double-edged sword, because when they start to hear it, they're like, "Oh my God, we want to do this, and we want to do that." I'm like, "Oh my God, I can give you some of that. If you want all of that, then it becomes your product specific." Now I'm like, "Okay, I need you before I go out there and get all that. I need you to be there," making sure that they're there if we're getting that type of product. Yes, it can be crossing over to other builders if we got that setback variance, and we know we can do that. When we start to go at the design stage, they get very interested.

Yeah Just like every pretty girl that tell you that they're going to be there.

I want to go out to dinner. Anybody out on the call? We've got a good attendance here, you know.

Mark, this is, I don't know if you can hear me.

Yes, we can. Okay, great.

Thanks. This is Vishal from Bard Associates. If you look back like last 10 years, I'm sure a few things did not go per your expectations and few things sort of went ahead. If you can talk about that, the highlights and the lowlights. Do you think where the development and everything is where you thought you would be here, or is it a bit slower because of the setbacks, or it's faster because of the things which happened?

Great. Good question. What's the last Since we started, say we've been in Sky Ranch for six years, and you say, "Okay, what went well? What were the tailwinds? What were the headwinds?" The tailwinds were, we were a breakout, right? We were the next part of the Denver Metro area. You don't know. You don't know how that's going to go, right?

Yeah. When we first broke ground- then we had three national home builders.

We had Richmond, we had KB, and we had Taylor Morrison. We were starting out with 500 lots, and they all said, "Okay, I want 30 lots." You sort of say, "Okay, I'm breaking ground here, and I've got a lot of offsite infrastructure, and you all want to commit to 100 lots, and I've got 500 lots here, and I got to build the infrastructure for 500 lots." That took a little bit of, you're pulling your pants on something like that, getting started on that. We do it, we get it going, and they open up, and they said, "Okay, not 100 lots. I want all 500 lots and I want it tomorrow." That was a big surprise for us, right?

That was entirely driven by the price segmentation. Right? They drop in, they knew what the footprints were. They knew what they could price their models out at, they didn't know if people were going to come to the next level of development, right? It was the next step out in the metropolitan area. What they found was, holy crap, everybody wants price. That's how it started. All of a sudden, COVID hits, right? Nobody knew what to do for COVID. We fortunately had their full commitments on that. There was this giant hush that went through the marketplace on the sale side because nobody could get out of the house to buy a house. It sort of settled down after about three, four months, and it was just another Gold Rush.

Everybody's like, "Okay, not only am I looking for price, but I'm now getting out of town. I don't want to be in an urbanized area." Everybody that might have been in a higher density development now wanted, "I can't get on the elevator. I'm never going to get on another elevator again." They were actually, you had this flight to the suburban model. Because technology started to really ratchet into it, people didn't need to live downtown. They didn't need to live where they were going to commute every day to an office. That then you had an unusual cycle and then a little bit of an acceleration, right? There was a bunch of stuff that people were wanting to do. I would say that took us from, say, 2022 to 2024, as fast as you can build, more, more, more.

I was just like, "Well, I hear you, but I'm willing to do that, but here's the dollars, and here's the time." They're like, "Well, no, just more. We'll get there." I'm like, "No, we're going to get there before we do that." You try and take it on a disciplined approach. I could have delivered more if I speculated more in 2023, right? Then 2024 still looked great, so we dialed it up a little bit in 2024. Everybody was there. They said, "Yes. Yes. Yes. We want more lot. We want more lots." Then 2025 started to come in, and then the new administration came in, and things got a little wonky, and they're like, "Well, about that next phase.

I'm not so sure." I'm like, "Well, we're already under contract." "Well, yeah, but my inventory's not rolling as fast." What we were able to do on that side of it that, again, taking lemons and making lemonade out of it is when some people started to slow down, we had some bridesmaids sitting on the sidelines saying, "Hey, if anybody isn't interested in moving forward, your price point works. That's what we want." Instead of having four builders, now we have seven builders. We're still not trying to deliver more than what they want in their annual inventories, right? Everybody would prefer to say, "I'm going to buy the lot when I sell the house." Then you say, "Well, I'll let you do that if you can make me young." Right? That's just a real hard timing.

What we're doing for our customers is as close to that as anyone can do. Right? We don't chunk off more than they want to take down, and we're creating this rolling inventory on a master plan. What's happened over the last, say, five or six years are a few headwinds, a few unpredictables, but what we've really done is establish the market in it. Growth in the Denver area has come to us. In some areas, it's gone past us. We're not what I would still call infill, but we're also not the breakout community. We went by a couple breakout communities.

Yeah on the tour. You sort of look at it and say, "Okay.

They're grading a lot of lots, hoping that the market's going to be there." Personally, I think they're over their skis on what they've got. That's okay. They'll have a little bit of inventory. Some builders will come in there and do that. What we try to do is not be over our skis, and we try and not trying to have to catch up on that demand. There's a delicate balance there. What's it going to look like on the next three, four years? We're going to be disciplined enough to do it on the same scale as our builders.

Now with all the infrastructure in, we got all the backbone roads in and the major offsite infrastructure in such that if somebody comes in and says, "Okay, for those 2028 deliveries, I don't want 30 lots. I want 90 lots." That's something we can dial up and dial down into now having the backbone infrastructure.

Yeah A little chunky on the front end.

When we had the backbone that would've supported it at 500 units and they only wanted 100 units, and it worked out well for us, I'd say that's luck rather than skill. Now it's going to be just be in that just in time basis. If the demand picks up, maybe our pricing picks up in a way that helps support that. I think they'd be comfortable paying that price. The home builders themselves have tried to get as close as they can to not close on those lots, and to the extent that they are, they're closing with land banking it, which that's the creation of the affordability challenge because then you've got double-digit interest costs on a land bank and they've got $2 billion on the balance sheet that they're earning 3.5% on.

That's just a weird dynamic of the home building company. That's the preference on their IRR versus gross margin. I don't know if that gave you enough color on that.

Yeah. No, that's great. Thank you. I'll jump in. This is Darren with Klipbok. You mentioned volume output you expect to remain around 200 to 250 lots per year, also the number of builders have grown from three at the start to seven now. That implies less lots per builder. If you could provide some color on that. Is that macro related, Denver specific, Sky Ranch specific? Why do you expect less lots per builder moving forward?

Builders will be very predictable. They're going to want less lots when the market's slow and more lots when the market's hot. They just only want to pay for the lots when the market's slow. They want us to build lots for when the market picks up. That's where we temper that out, is to say, "Okay, fine. We'll inventory maybe some of the grading costs on that." Before we move, because we like to flow fund our land development deals, where we really get down a third, a third, a third, where the first third, they get the plat, they get the physical title to the land, and they pay me one third of the total lot cost in that payment. I take that third and I use that to do offsites grading and wet utilities.

They pay me the next third so that I can use that money to do the paving, roads, curbs, and gutters, then I eat last. When things are good, they're happy to pay that second third and the first third, just to make sure that that's there. When things are bad, they're like, "Okay, can you take that first third, then I'll pay you that second third after you got the lots graded." We don't want to get over extended on that. I can dial that up from when we started this, they were at 30 lots per builder per year. In 2023, 2024, they were moving up to 60, 70 lots per builder per year.

They dialed back down in 2025 to say, "I'd rather be at 30." I still have that 250 lots, if they all want 30, that's seven as opposed to four. That's that flex in and out. What happens is, if I'm only developing 250 lots at a time and they move back up from 30, 40 to 70, 80, those that come in first get the lots that are going to be finished. It may be that you see it dial back down to four builders, if the market gets hot, then we'll dial back up. For the four builders, the seven builders will come in, the market will swing back down.

It's in that, if you see a cycle there, you want to draw that linear line right through the middle of that cycle and have us have a little bit of inventory, have them have a little bit of inventory. It's that right balance. Awesome.

Thanks. Can I ask a follow-up question on the actual composition of those?

Because you guys have got critical mass now in Sky Ranch. You've got a number of SFRs you're going to build up. The next few months will be upwards to close to what? 70?

Yeah. I know you've commented on the previous calls, change regulations, be a little bit of a pause here, and cut back from the initial about 100 that you were looking at doing.

Aside from Sky Ranch, do we know those who are buying, what is the owner occupy percentage within Sky Ranch versus those who rent out units? Obviously, the company rents, but are there private owners that are renting out units as well?

Yeah, that's a great question. I'm going to punch that over to Deb. Does Deb say she runs the SFR segment for us?

The last time we looked at that, it's about four weeks old, the data I'm spitting out at you. There were 62 rentals in Sky Ranch that was as ours were being built. There were 30 above our numbers.

Okay. Which went down. There were 50 when we looked about a year ago.

Was it a year ago? The last board meeting. Annual board meeting. Yeah. Right. Yeah. those are going to be mom and pop- Right a dentist buying a rental unit, and it's sort of ones and twos.

Somebody that got relocated, or they had a family change and needed a bigger house, smaller house. Either way, they keep the house, those types of- It's a minority.

Almost everything that's being sold is owner occupied.

Yeah. Predominantly. It helps with the understanding a little bit of the characteristics, not being part of the community, understanding part of the characteristics of the community.

Yeah. Deb, you might comment. I know a lot of the folks that are We have a couple of value propositions on it. When we were first getting going on it, you had somebody coming in that got relocated over to Buckley Space Force Base, right? Deb comes in and says, "Hey, I got this guy, and he's asking about a military discount." I'm like, "Okay, sure. We'll give him a military discount." The guy must have put up a card and said, "Hey, anybody that wants it, Sky Ranch is your place." Unbelievable amount of military relocates come and live in Sky Ranch. I doubt it's because we gave him a military discount. Maybe. It was just thank you for your service discount. Oh my gosh, we're 10 minutes away from Buckley, we get a lot of folks.

That's a transient, high caliber renter. They're always probably going to rent as opposed to buy, just because they're mobile, we get a lot of people that come here that are coming here for the school specifically. Either they were out of district commuting into it and renting out of district, parents are like, "Oh my God, why am I renting this house 30 minutes from the school when I could rent a house and be two minutes from the school?" We get a lot of that action as people are really the value of the school. The value, I can't tell you, the opportunity of having a K12 campus right on walkable distance for all your kiddos is super valuable in the community.

The school brings in grandparents as well, a large number on the for sale side as well as just from being at the school. The other big draw is DIA. We have a lot of DIA staff members. Same thing happened with an airline pilot, posted it on their company chat, we get calls. Mark is right. The first military guy actually stuck our information on a bulletin board, as it progressed, the wives got us on the Facebook page and all of that. We do have a That's probably the largest population- Yeah of tenants that we have.

The SFR segment as a whole, we've had a lot of discussion at the board level and really looking to make sure that we understand that segment. We need to know what the rate of return is on that particular segment. We stood it up. I think we did a good job standing it up. We operate it in-house. Deb does a fabulous job of making sure they're leased. We're delivering units months ahead, and she's got them rented before. This is a weird dynamic. Great for people that look ahead of that, but when I was renting a house, it was, "Okay, we need to move on the weekend. Go find a place to live." That's what, it was just in time sort of deal, and that doesn't seem to be the case.

We get these things leased far ahead of them being completed and have just a solid occupancy record here. The basis of it really is tax advantage because we're holding a lot of that equity between the lot, the tap, and what's going on in that, which doesn't show on the balance sheet. When you start to look at the optics of it, is that a great segment or not? We think it is. We also need to make sure it is. We need to report back to the shareholders to say, "Here's what we now know this segment to return." If it's not, then we'll take a look at, okay, maybe that's not the right segment. Before there was a good reason to pause it, certainly because of the administration said we were the problem on housing affordability, which we're not.

At the end of the day, we also want to be fiduciary with shareholder capital here and make sure that this works.

What is the hurdle rate, Mark, with that rate of return discussion you said with the board? Is there a cap rate hurdle or IRR hurdle for single-family rentals?

I think we got into it on a forecast basis to say we think it's going to be in that 10% return on investment, and we want to see if that's the case. I think, when you take a look at our return on equity, we're making much, much higher margins on sort of the land assets and the water assets. If I take a look at what we're doing, we might make 70% margin on the land assets. We might make 60% margin on the water assets. We're only using 2% of that asset. When you take a look at that on return on equity, the overall return on equity is around 9%. Our minimum would be we've got to do better than that return on equity. We'd like our return on investment to be in the mid to high teens.

If we're in the low teens, but we have a great tax advantage way of keeping that asset that might juice that up a little bit, that would be worth considering. I don't know that we've got a hard, fast threshold other than it's got to do better than our return on equity.

Okay, thanks. If there's nothing else in the SFR, I was going to kick it back over to Lowry real quick, if that's all right.

We spoke a moment ago about going out there, and you see how the residential development has now directly abuts that property. At least to the layman's eye, it looks like the next logical step or progression is for development there. Yet the regulatory approval processes, the red tape that needs to be broken through in order to enable that to happen is different than the processes that enabled the residential development that goes all the way up to the border of that.

Yep. Could you speak a bit about maybe even if in Cliff Notes bullet point format, what is the process step by step that needs to occur for that to materialize?

How does that differ from the process that enabled all the adjacent development? Accordingly, where do you maybe see some risks or some key uncertainties?

Okay. The regulatory process, that property is in unincorporated Arapahoe County, the neighboring jurisdiction, City of Aurora. City of Aurora controlled everything that comes up to the property. Once you get onto that property, it's Arapahoe County. I would say we know that process very well. That's exactly the same process we deal with at Sky Ranch. That's our entitlement jurisdiction. We know with those zoning. In fact, when I was talking about some of the setbacks and things like that, we think that Arapahoe County is actually more advantageous than the City of Aurora. Is Arapahoe County easier or harder to work with than the City of Aurora? Well, yeah. Arapahoe County was by far considered the best jurisdiction to work with, say five, seven years ago. Then everybody at Arapahoe County retired.

Every department had retired at Arapahoe County, they're actually backfilling into that staffing issue. What does that translate into? It's a little bumpier than it was a few years ago, but our relationship with them and their experience with us doing exactly what we say we're going to do, exceeding expectations, solving problems. We solved the problem of schools. We brought our own schools. We solved the problem of the interchange. We didn't wait for somebody else, the county or anybody else to say, "Oh, somebody else will build that." Well, growth has to pay its own way. We do that, they do that. When you take a look at the actual zoning and entitlements just through Arapahoe County, the biggest complication or the big thing that's different on Lowry than it is in any other private property is the owner.

It's owned by the State of Colorado. It's owned by the State Land Board. It's a trust for K-12 education beneficiaries. They have different metrics than anybody else, right? They're fiduciary for school funding in perpetuity. They say this, but this is their single most valuable asset in their portfolio of three and a half million acres of land all over the state. It's a very diverse piece of property, right? It has any number of opportunities for use and revenue. When the Land Board looks at that, they're looking at all uses. What education uses do we have there? What mineral uses do we have there? You saw that they were very active about monetizing their minerals out there. They've got the oil and gas leased out there, and it's being drilling.

They're looking at it, okay, what are the setback requirements for oil and gas development and urban development? There's a setback where oil and gas encroaches to residential, which is very big. That might be a 3,000-foot setback. On a reverse setback, if the oil and gas facilities are there and residential encroaches to that might be 300 feet. There's an entirely different filter for them to analyze on which lands they want to look at for multi-uses and how they want to do those, and the timing of those. That all layer into that. Sometimes when you have an infinite number of possibilities, it's hard to take that first step. If you only have two possibilities, it's binary. If you have 100 different opportunities, it's problematic. They've been looking at it pretty hard for a few years now.

Do I know what they're looking at? No. That's pretty close to the vest on their side. We're their partner on the water. They generate a lot of money. We're likely to become their largest revenue lessee in the next five years. On what they make from water utility alone. Because a lot of our water, not all of our water, a lot of our water originates on that property. They get a royalty on that. We continue to be that steward of those systems and continue to invest on it. I'd say we know the process a lot. Process can be political, right? We're going to have change of leadership in the State of Colorado this year. We got a new governor coming, new sheriff coming into town. It'll be a Democrat, I assure you. Those are some of the interesting dynamics.

The jurisdictional issues are in our favor. The ownership, complicated. Great. Thank you.

Having a single for 40 square miles is a lot different than having multiple landowners. As that ball gets rolling, you're likely to see it roll for a long time. If anything would impress you about the tour, that's a 50-year inventory of land. When you look at 40 square miles, boy, that's a lot of land. They're not going to develop every square inch of it. They're not going to conserve every square inch of it. Somewhere between those two poles is unanswered. I think the last five years, growth was continuing to get out there, but there was an inventory of land, and I think that's whittled itself away. I don't think that changes their timeline because their motives are different than a private ownership model. Good question. Back to the callers. Anybody else have any color that they'd like an observation on?

Mark, in your annual letter, you have recurring revenue sort of a step up from 2026 to 2028. I assume that you make the assumption that the I-70 interchange will be completed by then.

Yeah. I just want to make sure, has it delayed a little bit, or you think still?

No, you're right. That is exactly right. When I think about writing that letter, when it gets published, and when you get to read it. That was a 2024, 2025 view, and I thought, "Oh, we'll be done with that by 2028." Given where we were with the actual design, because we were up to our eyeballs on the design and CDOT review and, "Oh, the ramp's got to be this, and it's got to do that, and it's got to have this," and "The deck has got to look like this." I'm looking at all of these decisions being made about the actual interchange, thinking, "Okay, great. That'll allow me to get to this, to get to this, to get to this." It's probably a year delayed.

When you take a look at all of what I thought was going to happen in 2028, I think that's probably a 2029. What I think will happen, and we were talking about this on the tour, is every commercial retail, residential, all of those businesses need a certain critical mass of density that are within X geography. They put a pin in, and they draw a circle around it, and they say, "I've got to have this type of demographic around that circle." That usually is around that 1,500 homes or more. That'll coincide. We might have been a year ahead of that curve with some of that density development. I think our commercial users are going to like for us to be that one more year mature before they put their flag down.

They're going to be putting their flag down knowing that that's going to be the case in 2028, 2029, and it takes them that amount of time to get their approvals and through the process. I still think you're going to see a little bit of feathering between the residential aspects of what we're doing, and then the commercial aspects layering onto that. Those bell curves, what I'd like to do is have those bell curves, the meat part of those two bell curves lining up. That's not always going to be the case.

Yeah. Great. Thanks. Just to clarify that, are you saying that you think you'll have the first cash inflows from commercial development by the beginning of 2029?

I'm going to be out there a little bit and qualify it by this is a forward-looking statement, but I think we're going to have those in before that, before 2029, just because they're going to want to buy that. They're not going to go through all the entitlement work on the plot plan and the building code and all that other stuff, on an option. I loathe options, so I'm much more inclined to say either buy it or wait. I think we'll see some of those transactions. I wouldn't be shocked if we get some in late 2027 once we green light- The interchange.

Yeah. Once I contract for somebody to put that interchange in. It might take them, I think it takes them six months. They're going to tell me it's going to take them 12 months, but once they see that award of contract, they're going to be going hard. I'm not saying that. My commercial guys are saying that, too.

Great I like your 2029 date, and I'll say that and give you a surprise on the upside.

Can you share a little bit of thought or update on the board's thought on returning capital at some point to investors, priorities. As investors, at some point we'd like to get paid.

Yeah. To always have growth, but we have a company here that is profitable, that has a very solid balance sheet, and is probably next year too, going to become very liquid, absent a significant investment in future growth.

What's that look like? Yeah.

That's a softball. Thanks. Yeah, no, great question. Trust me, there's nobody more frustrated about the share price than this side of the table and the board and the company. If we look at our capital stack, what we've done is continue to invest into the assets, right? We invest into our water system because we make a pot full of money selling water to oil and gas, and I sell almost five times the amount physical wet water to oil and gas than I do to my domestic guys. They pay- Premium a premium, right?

They pay four times what my residential customers pay. That's great money and it's great margin, and we want to continue to invest into that system. It does two things for us. It generates cash flows on that, and secondly, it allows us to flip that switch and our margins on our tap fees become very high because I don't need the facilities to do that on the water side. Oil and gas has already paid for that. You see, are we building shareholder capital? Yes, we are. We keep expanding that system. Goddammit, it doesn't translate into share price, and that's frustrating.

Our legacy basis in the assets are awesome, they also don't translate well into an index or into somebody saying, "Oh, I get it, these assets just Here's how many, and here's how many you're going to do it over this period of time." Second stack is, if we're water, and I'll put that first stack being both water and land, right?

Yeah. We want to put some land money out there, this is a very capital-intensive business, right?

Every phase that we do is around $20 million. $20 million is a lot, you like to flow fund that, when your customer's out there saying, "Yes, I want to buy those lots, but you need to hold them until they're finished." I'm like, "But if you don't buy them when I finish them, I'm sad." We try and work that relationship out, so we're not too far over our skis, they want us to be over our skis. It's, "Trust me." I'm like, "Well, yeah, but no." That's a bit of a feathering. You saw that this year, right?

This year was a classic example where we actually got ahead, that was weather related, we got ahead of the flow funding. You saw our liquidity go down to $5 million when our liquidity's usually at $14 million-$15 million. Having that flexibility produces tremendous dividends, you got to have that cushion in there. Could we use debt to do that? We probably could. There's an opportunity for us to use a little bit more leverage and a little difference on your balance sheet, I was also here when that wasn't the case. Sometimes the mule remembers the last down cycle more than it remembers the opportunistic side of it. We're a bit conservative on that side, and I'll admit that.

Now with a big assessed value, and you guys saw that today, you see not 500 homes, you see 1,100 homes and you start to see a bunch of stuff going on. That contributes to the value of the community, the tax base of that community. That tax base then allows us to be paid back that $60 million that the taxpayers owes on that, and you're going to see that accelerate. That's an opportunity for us to do that. We think that's going to happen this year. We think that's going to happen next year, specifically because we get these five-year increments, and I think we'll refinance a 2022 bond that we did in 2027, which will create a chunk of change. I think there's $10 million, $15 million worth of payback there. We'll still have a solid balance sheet.

You're going to start to see us be a lot more aggressive in the next 12 to 18 months on buybacks, because that would be my next step. We're a water utility. Water utilities, our peers, when we benchmark peers, somebody types us in, they say, "Oh, it's a water utility company. Why the hell don't they pay a dividend?" I'm like, "We are a water utility company, but we're not a regulated dividend cost to capital predictable side." I think dividends are part of the equation. I don't think it's this year, but I think it's soon that that becomes a component of the equation. I like buyback more than I like dividends as a consumer. I'm a shareholder, and I'd rather not double tax that income on it. Those are what I think the capital stack going to look like.

I did talk a bit about that on our call last week, is that I do think that we're going to be more aggressive. We don't want to compete with you guys because we think things are going to go fantastic over the next 18 months, and you're going to want to pick up some of that public float. We're going to be in there a little bit more. Good question. Thank you Thanks for putting me on the spot.

Could you expand on that a touch? In that you mentioned it at the start of the call, you've said it, I think several times over the last year or so, about potential acquisitions and how land acquisitions for development maybe fits into that capital allocation decision.

Yes. There's two schools of thought, asset light, asset heavy. I'd love to say that we have the ability to choose between that, but we're a halo company, we're a heavy asset company, and we're cognizant of that. When we look at an acquisition, the opportunity for us to buy an asset and wait 10 years for it to develop is less interesting. If I can pay more for that and start developing it tomorrow, then I'd like that much better. Somewhere between those two goals, relates to our ability to buy or acquire property. Most of the types of acquisitions are the first part. We buy it, we wait 10 years. I think our discipline is to say, "I'd rather wait nine years before I buy that." The seller of that may not be as interested in that.

Where some of those opportunities have surfaced, we've passed because they're too far out, and we don't think that that prospect goes away. We certainly like venturing. We certainly like having somebody right next to us, and they can inventory the land. We do the development and the water and bring up the value that way. That's probably not our sandbox. These guys, they're generational owners of this land. They may have the same pickup truck they've had for 40 years, and they've rebuilt that engine three times. You know what? They're going to die in that truck because it's just if they don't have it, they don't want. It's all next generation type stuff. What happens typically on that is somebody needs to die, then the next generation says, "Okay, I want to sell it." That's happened a couple of times.

There's still generational owners all around us, and they call me up and say, "Hey, what is this pipeline I see you building near my property? Not through my property, but near my property." I'm fortunate to know a number of really good individuals who are driven by just value propositions. Those things, those will come up, but has anything broken free that has been the right time for them and us? No. Is it for lack of price? No, it's really not price. If I offer them an absurd amount of money, they'd step aside. At the same token, I'd have a lot of our capital tied up, and it wouldn't translate for too long, and I think you guys would beat me up for it. I know my board would beat me up for it. Mark would beat me up for it.

Let's not. My wife would prefer that that not happen.

We've debated this a bit in our office, right? You see how the Sky Ranch has done. It's done great, right? On the other hand, there's almost a case that the track record's a little bit thin because it's just been Sky Ranch and perhaps some nuances to that property, very importantly, including the timing in which you bought it, right? In a down market, may have contributed to the success of that, right? A risk that, all right, if we're going to try to repeat this going forward, how much confidence do we have in that, right? I know one of the narratives that I've heard is that, well, you pair the land development alongside the water assets- That provides an advantage.

On the other hand, I'm not sure how much money you're leaving on the table for the builders of maybe Johar, whatever. I guess what I'm trying to say is could you go into that? Why do you think that is an advantage? Why are you uniquely positioned to successfully develop this land? Especially at a time when there's probably going to be more competition for those parcels than there was at the outset of the Sky Ranch.

I think we provide value on that basis, but we don't have to be the developer, right? In addition to us looking at acquisitions for land and bringing our water to that land, we also look at just utilities, right?

Yeah. I'm okay. Yeah. They're big.

I've got a system that's built.

Yeah. If they come to me and say, "Hey, guess what?

I want your water, but I want to develop the land," hell, yes. There's great opportunities for that. If they say, "I want your water, and I'm going to bring my land to it and just give me your water so I can get my land zone and I'm going to sell it to a third party." I'm like, "Yeah, maybe not." That's not what I want to do. If they're ready to go and develop and they have the capability to developing it, and they say, I say, "Okay, I'm going to give you my water." If you're going to develop in the next 18 months, 2 years, that's worth doing.

If you say you're not going to develop for 10 years and I have to allocate my water to it, I'm going to look for another date who wants to go out and not just say, "When I have nothing else to do, I'll go.

Got it. Yep, perfect. Exactly what I was hoping to hear. Thank you. That's a feather, right?

Because I get asked that a lot.

Yeah. Give me a water service contract." "Oh, just that, huh?" "Well, you've got all this water." I'm like, "Yeah.

When are you going to develop?" "Well, we just want to get zoning." I'm like, "And then what?" "Well, we're going to sell it." I'm like, "Oh. I want to be you.

Yeah. Mark, in the boardroom and yourself, we have all these numbers floating around.

Which metric is the best sort of number, or maybe there are several, to sort of track the value created? Is it book value per share? Because I think, yeah, that's six, seven years it has doubled, that's kind of good. I'm just thinking internally, or which one is a good way to measure the value creation?

Yeah. I'd say book value's the worst.

Okay. We've owned these assets forever.

Look at Sky Ranch as an example, right? We bought that for our land basis, $4 million or $5 million. That's our land basis. We're going to make $500 million on that. When you look at the book value of that in the highly appreciated asset side that we have, it's the worst indicator. Is that what the market's valuing this as? There's not human beings. You're the only human beings left that look at companies, right? Now it's all quants and computers and AI that just looks at it from a book value transaction standpoint, they don't quite appreciate the fact that these assets have appreciated heavily. Our water assets, our total capital account in the water asset's $20 million. It's going to generate $2.5 billion, $3 billion. It's $20 million. I bought it 35 years ago, Enron solved that cost basis, there's no way to really mark that to market on the appreciation of the asset.

That's one of the challenges that we have, is to how to communicate that to the marketplace. When you show that you're making 70% margins on 2% of your asset, it just leads to the question of when's 2% go to 5%? When does 5% go to 20%? What's the scale and the timeline, there's a cost to that, making sure that that happens. Most of the way the company looks at is the sum of the parts, we take a look at what's Sky Ranch residential going to value to? What's Sky Ranch commercial going to value to? What's Sky Ranch water utility, the tap fees and the usage revenue?

Those are all very predictable to value, right. I've got 5,000 single family lots. We break that up into, say, there's 3,400 residential lots, 1,600 commercial lots. That's just to keep the math easy. I'm not exactly sure if it's going to go that way. We make $100,000 a lot on the residential side. We think we make one and a half, two times that on the commercial side. If you just value 5,000 lots at $100,000 a lot, that's $500 million on the land development side. We get $40,000 a tap. We've got 5,000 taps, that's $200 million. JB asked a great question on that.

When you go through the numbers and you're sort of saying, "Okay, when I look at the number of taps you sell and the revenue you generate off the taps, you're not actually getting $40,000 a tap." He's right, because we're not selling a full tap. A lot of these smaller, like when you get a townhome, the townhome might get 0.4 tap. What that does is it gets me that customer. Then I still have more water to sell another tap to. You look at some of our residential homes in there had to buy one and a half taps because the lot size was bigger. We apportion taps by the every individual lot. Some of them are more, some of them are less. On average, you look at that being 5,000 tap connections, that's easy to value.

We usually use a metric of about $1,500 per connection per year. That's probably closer to $1,700 per connection per year now. You look at 5,000 connections on that's going to be about $8 million year-over-year revenue. Those are three segments of value in the company. Very predictable, all within our control, no blue sky. All that stuff is very predictable. You can come up and say, "Okay, that's $800 million, present value of that over some sensitivity analysis." It sure as hell a lot more than $250 million market cap. That's where it's frustrating from our perspective. It's so obvious on what's in our book that we're undervalued. Everybody's like, "Well, if you're that undervalued, buy your own shares." We do.

We also look to try and make sure that that $800 million comes in. We use that capital that we're not going to use our denominator for any portion of that. If you take any comfort from us, last time I did shares was in 2010. We're not an issue. We're grateful that you guys are there to take a look at what we're doing and agree with us. We wish there were more of you.

Right. Go ahead. Yeah. Just on the defense of book value, it's like the past, what has the cash earnings being added to the depressed book value?

It's a backward-looking metric. It's a decent performance, by the way. I don't think, even on that backward-looking metric. I hear what your thoughts are, which is 800 versus 250, and that'll produce a huge IRR in any timeframe.

Yeah. You're not wrong. Everybody that looks at what we're making per year and the times earnings, we're trading where we should be trading.

Right. Great. Thank you. Right.

That's a good point. I hate that that's true.

It is. I also know what I just described to you is also true. Somewhere between those two, when you start to see, and to your point, your question earlier, what's the last five years and what's the next five years, and how do we look at those two differently? The last five years got us to where we are organically, slowly, incrementally. The next five years are going to be a higher degree of step functions because much more comes online in that period of time. To the point, I'm not in field yet, but I'm also not new growth.

Yeah. That's what shows well.

You see it. We do the drones, and you can kind of get a feel for it. There's nothing quite like pulling off to the side of the road and taking a perspective on it all.

If I could follow up on the water rights a little more. You mentioned the 60,000 taps at $40,000 a tap being a $2.4 billion opportunity, there's obviously kind of a IRR play there. I'd be curious to hear first, how you guys think about comparable prices on acre feet of water today, and then also just how liquid are those assets, right? There's a lot of infrastructure. It's going to take the right buyer for those. What would the opportunity be like there to actually unlock that value potentially?

Good question. When we first got into this, I'll portion that to a couple of different areas. 35 years ago, water rights were selling $4,000 or $5,000 an acre foot. Tap fees, which really try and portion the cost of developing that water utility, were $7,000, $8,000. We show this in some of our slides. I can't remember if it's earnings slides. I have two different decks out there. When I talk to people who are not familiar with the story, I don't focus so much on the quarterly earnings. There's a slide out there, I think in maybe one of the investor things, that starts to take a look at tap fees, and it compares our tap fees to tap fees elsewhere of surrounding water providers.

Our tap fees are at $40,000, but there are many providers that are north of $60,000 a tap. Where is that cycle going to go? It's going to go up, right? All the low-hanging fruit, which means all the close-in water's developed, every incremental water project is a billion-dollar water project. The tap fees, when you take a look at the time value of money and the discount back for all of those absorption of those tap fees, I often make the argument, and I'll make the argument again, that the increase in the value of the tap fees will compensate the discount factor on. It doesn't always work that way because you got to get a tangible value today. Is somebody willing to pay that for that today?

When you take a look at our water assets, to your point, can we bifurcate out and sell our water assets? That's a very hard thing to do. Really, it's because Colorado is very adverse to that, right? We have these very strict anti-speculation doctrine about private capital, Wall Street coming in and cornering the public water asset market. I say the road out of town is littered with billionaire carcasses trying to do that. It's very, very difficult for you to speculate in water. Yes, it's an asset class, lots of people buy farms, but when you're buying and selling water on an open, competitive market, it's very hard. What we've built here is the franchise of a water utility.

As much as we'd like to say, "Oh, let's just carve off and sell a bunch of acre feet, the water that we're not going to sell for 30 years, let's monetize that and sell that today," it's very hard to do that because if you do that, then it really compromises who, how, and where you're going to be able to use that water. The buyer of that won't have that certainty, when they dig into it's going to be very hard for them to do that. It's going to be very hard for them to replace us as the water utility. They're not going to be able to get a franchise water utility like we have. They won't have a service area.

They won't be able to transfer it to another parcel of land because they won't have the service plans, the approved service areas to do that. The stack on being able to do that, its value is in the actual utility itself. Is that to say I can't sell water? No, I can, but it's harder to do than to do the service model. The value of what we offer is all of those together, not just the asset that underpins the value of it. Then I sort of described the fact that my most recent water acquisitions, because while I wouldn't say we're active in buying it, we are very, very picky and are buying it very selectively. My last acquisition, which has been a couple of years, but it was right around that $20,000 an acre-foot price.

If I think it's worth $20,000 a long ways from where we're at, what's it worth for somebody with a franchise utility and a service area and customers? That's the chain that values this. I don't know if I answered your question. I went off on a different tangent.

No, that's great. Thank you.

If there's no other questions, maybe what I'll do is just wrap it up. We'll post it on our website and certainly, if as you think about it and say, "Gosh, I wish I would've asked this," don't hesitate, give me a holler. We'll continue to do this and if your plans so entail, pop by. It doesn't have to be on Investor Day. Pop by, kick the tires, take a look at it, look under the hood. I think you'll like what you see. Thank you, all. Thank you.