Pure Cycle - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 delivered revenue of $5.75M, net income of $3.94M, and diluted EPS of $0.16, driven by a sharp increase in oil & gas royalty income and higher tap fee activity; gross profit was $3.67M with ~64% GM.
• Year-over-year, revenue rose 6.8% ($5.75M vs $5.39M), EPS increased 78% ($0.16 vs $0.09), and net income grew 91% ($3.94M vs $2.07M), aided by royalty income from six new wells completed in 2024.
• Management reiterated FY2025 guidance around ~$31M revenue, ~$23.7M gross profit, and ~$0.52 EPS; Q1 represents 18.6% of revenue and 15.4% of gross profit targets, with timing effects in Land Development expected to normalize in subsequent quarters.
• Consensus estimates via S&P Global were unavailable at the time of analysis; no beat/miss determination vs Street can be made. Result and estimates comparison includes N/A placeholders (Wall Street consensus unavailable via S&P Global during this session).

What Went Well and What Went Wrong

What Went Well

• Strong profitability and margin quality: net income of $3.94M; EBITDA of $5.84M; gross profit of $3.67M with ~64% GM. “We had an outstanding quarter in terms of royalty income… earned about $2.6M in oil and gas royalties”.
• Tap fee momentum and customer growth: 38 taps sold for $1.5M vs 15 taps/$0.6M YoY; management highlights entry-level positioning and efficient delivery of finished lots to builders.
• Clear confidence in 2025 outlook: “Our Q1 results are in line with our expectations… we expect to see another record year for revenues and earnings”. CFO added Sky Ranch phases are progressing with 949 finished lots delivered and additional phases under development.

What Went Wrong

• Water deliveries fell to 301 acre-feet vs 623 YoY, reflecting lower sales to oil & gas operations; management emphasizes this is variable and not core residential revenue.
• Land Development revenues are timing-dependent; Q1 lot sale revenue increased YoY but management noted overall YTD revenue pacing below budget due to development timing, expected to catch up next quarter.
• Operating expenses rose: G&A $1.79M vs $1.44M YoY, reflecting growth investments and concurrent multi-phase development.

Transcript

Mark W. Harding (CEO)

Good morning. I'd like to welcome you all to Pure Cycle Corporation's earnings presentation for the three months ended November 30, 2024. We're doing a little bit different format for this particular call through our Teams meeting, and what we wanted to do is allow us to go ahead and have all of you participate, and then, as we go through the presentation, there's a slide deck for this. For those of you who have dialed in and are not on the call through our Teams through the website, you can see this presentation deck if you log into purecyclewater.com and you go to the opening page there. There will be a link that will allow you to join this and see both the slide deck for this.

And then we will have a camera that we'll turn on after the presentation, and then we'll handle that through a visual format through a Q&A session. So it'll allow us to have a little bit more interactive presentation with you for this earnings call. With me today is our controller, Sarita Finnegan, who makes sure that all these numbers get presented accurately and fairly. And also with me is Marc Spezialy, who's our CFO. And then joining us will be also Dan Kozlowski, who is a director and one of our shareholders. And as we did with our annual presentation for our year-end presentation, we had kind of more of an interactive format for that, and we'd like to carry that forward.

Got a lot of good feedback from shareholders about that format, so we'd like to carry that forward and be a little bit more interactive in the presentation with that. So with that, I'll go ahead and start the presentation. We do have our forward-looking statement that incorporates statements by reference that are forward-looking statements within the meaning of the Securities and Exchange Act. You're all familiar with forward-looking statements on that, so I'll move forward and get the lawyers out of the room. I want to continue to acknowledge our leadership team. It's my pleasure to get to work with an outstanding team of professionals that really are executing our business model with great success. It's really a privilege to work with these professionals who have industry experience that are decades long, and they bring that experience to the work environment every day.

So the true success of the company is really by the employees and the people that make it happen each day. Also want to acknowledge our board of directors. We continue to punch above our weight on an outstanding board who provide just terrific leadership for the company. And each of them have industry experience where they've spent their careers doing the key elements of what it is that we're doing, whether it's in land development, whether it's in water rights, whether it's in corporate governance, and just SEC experience. So pleasure to work with a great team of professionals. So I want to dive right into the financials on this. We'll talk about the quarterly performance. And again, we're continuing the momentum that we had with fiscal year-end 2024 and doing just a terrific execution of our business model. So we had record revenues again for our first quarter.

Revenues about $5.7 million. Gross profit, looking at an outstanding gross margin on these assets. We've got sort of these legacy assets that we've purchased and really have seen a tremendous increase in value on that, and they're really driving revenue from a number of operating business segments, so we're really having a great execution on all this stuff and seeing these great gross margins, so about $3.67 million, 64% gross margin. We had an outstanding quarter in terms of royalty income, and so what that is, I'll give a particular call out here on these numbers because we earned about $2.6 million in oil and gas royalties, so we do have mineral interests that were associated with some of the land interests that we acquired. Our mineral interests for the oil play that we have at Sky Ranch.

And so we had an additional six wells drilled in that formation that were pooled with some other mineral interests in that. So those are starting to produce revenue royalties there. And that really is aiding in our gross margins and then also our quarterly income on that. And then great net income for the quarter, almost $4 million or $0.16 per share. Excuse me. Continuing on with kind of the revenue picture, really comparing this quarter-over-quarter, our revenues are up almost 7%, $5.7 million. Gross profits up almost 10% from quarter-over-quarter from 2024. Our momentum continues to carry that forward in all metrics. So we're really pleased with how that's executing quarter-over-quarter and year-over-year. Drilling down into some of the other metrics here, taking a look at net income, sorry.

Quarter over quarter on net income, Q1 for 2025 over 2024, we almost doubled those performance numbers, taking a look at that, so gangbuster increase in net income as well as earnings per share. We had about 78% increase in earnings per share when you take a look at that on a period over period basis, and then really taking a look at this on a 12-month rolling average basis, we're really, again, hitting some key drivers here where we're putting up record revenue year-over-year, 12-month rolling average over 12-month rolling average. Taking a look at sort of how we gave guidance in this, rolling that forward, so our 2024 results compared to our guidance for 2025, we are on pace to continue to perform on that guidance. What you're going to see is our positive performance on that and really continue to roll that forward.

We gave guidance right around $31 million in total revenue. So we got about $5.8 million in that for the first quarter. Gross profit right around $20 million or $23 million. So we'll continue to demonstrate that and keep you guys appraised on a quarterly basis as to how we want to meet those metrics for our fiscal year-end. Those performance metrics for net income and earnings per share. Again, we had a record year, $0.48 per share last year. We forecast out $0.52 per share and $0.16 in the first quarter. Gets us off a great start on that for continuing to execute and deliver that for our fiscal year-end. So it gives you a perspective of how that compares to previous year as well as how that compares to our guidance.

Want to break it down a little bit in terms of each of the individual segments. So this is an analysis of our water utility segment. And we've got a little bit weaker here, but I think our guidance for the water segments will still be very strong on that. That's primarily attributable to a trade-off between monetizing tap fees, which are the continued growth of Sky Ranch, and adding new connections to that. So as we've talked about, we've got three phases at Sky Ranch under development. And then the oil and gas revenues. And so when you take a look at the oil and gas revenues, we're a little bit weaker on that, which is what we anticipated. We did forecast that a little bit weaker this year.

That's primarily because our oil and gas operators are really expanding their coverage, and they've been working on the next set of permits. And they've got a tremendous number of permits. They got about 180 wells permitted on the Lowry Ranch, which they're expanding their infrastructure to, getting pad sites structured over there. And so you're going to see a little bit more of that activity in late 2025 and into 2026 through 2030. So that was kind of a forecasted area. We did see a significant uptick in the number of new connections, and that's because of the Sky Ranch. So our tap fees are up about 150% in that area. And then continuing growth in our recurring customer base with about a 12% increase in customer revenues on that. Just a little bit of highlight on the oil and gas.

We did anticipate that to be a bit weaker, but the outlook for 2026 through 2030 continued to look very strong because they've got a tremendous amount of pedal that they're looking to continue to develop this, a very proven field. So they have a very optimistic runway for continued drilling and continued fracking right within our service area where we're very efficient on delivering those water supplies for that well field enhancement. A little bit more on sector performance. This is Carry forward from our year-end presentation, and one of the things we wanted to do is kind of give you guys a perspective of how we are executing on each of these business models compared to our peers in this, and so when you take a look at this, this really describes how each of our segments perform compared to what can be considered best-in-class performers on that.

We're very competitive to our much larger peers in each of these business segments. This shows you our deliveries of gross margins and return on assets in our water segment. You can see we're really in that category of delivering good margins with the assets that we have. We continue to do that. The biggest call out in the water utility sector is really just the utilization. We're just still getting started. We're really only utilizing about 5% of our assets. We've got tremendous opportunity to continue to grow this segment, not only serving land areas that we're developing, but other land areas in and around our area as well as our service area. We're really excited about that opportunity.

Taking a look at our land development, if you want to take a look at callouts there, as we mentioned, we've got three phases currently under development. We've got phase two, which is about a total of 890 units. That really is in four sub-phases. The first phase, 2A, is fully completed, and we've got homes constructed, and they're all sold and occupied. Phase 2B, we delivered end of last summer. What you will be able to see is kind of vertical construction on that. We've probably got about 35 homes vertical in phase 2B. Phase 2C is what we're most active on. We finished the grading on phase 2C. We're about 70% complete on the utilities.

And then we'll move from utilities to the pavement, curb and gutter on that, and then be able to deliver those homes for building permits on phase 2C. That's another 200 lots where we've got about 190 of those lots that are going to be for sale and about a real strengthening of our single-family rental segment in there where we've got 40 units that we've reserved for us to go vertical on that phase. And then phase 2D, which we are currently grading. So we're about halfway through the grading of that segment as well. This is a comparison of taking a look at how we stack up to some of the peer performers in land development. And so again, tremendous execution really just is a testament to the high equity value that we have in the land.

So just because of the strategic acquisition and execution of our horizontal construction, we're very efficient and pleased that we're delivering these lots at that entry-level price point, which is really our most competitive advantage in the master plan community here in the Denver area, which is no different than most other major metropolitan areas. It does challenge itself through affordability. And we're probably one of the most affordable master plan communities in the Denver metropolitan area where we're actually delivering lots, and you can buy a home sub-$500,000. And then in some cases on the duplexes and the paired product and townhomes, some of those products you can deliver sub-$400,000. So very advantageous for us in this market segment. And then also taking a look at continued growth in our single-family rental segment, we continue to improve those. We've got rental incomes up about 14%.

And so that's a combination of strengthening in the rents as well as bringing on new units. And then this segment's also very attractive for us because not only does it provide that recurring revenue for us, it also has asset growth from the portfolio. So we have a strong equity position in there because we're keeping the equity value of the land that we have as well as the horizontal development of the community. And so those are rolling forward on the appreciation of each individual home as well as the ability to continue to rent those out. And so we've got higher than a 90% renewal rate of our lessees on that. So we have a great customer experience for the single-family rental.

Again, this is a carry forward from our year-end presentation, which compares us on this particular segment to kind of the larger operating groups that are in this space. And so as you can see, we have very favorable comparisons to some of those that are best in class. So that kind of gives you a great summary of really how the quarter went. And again, another record quarter for us, a great experience for our delivery of these asset values. Maybe what I want to do is for those of you that are just learning about the company or just getting familiar with this, really take this up a few feet and give you kind of an overview of really the company's strategic positioning here. We operate in three different business segments.

We have the water and wastewater utility segment, which allows us to own water rights in a water short area and really be able to participate not only in the appreciation value of water, but also what water does. That water allows us to be able to bring service to land that could not otherwise develop and be able to change the composition of that land. And so we look at participating on a vertical scale on all elements of that. And so that led to our entry into the land development segment. We've been in this segment for probably five years. I think we've done a very good job really entering the marketplace. We're in the right sub-market of the segmentation of that as an affordable product out here where we're developing land. We're delivering that to our homebuilder partners at very competitive rates.

Our homebuilder partners are able to execute and really compress their timeline from when their money comes in to when they're able to go vertical on a house. And so that's very important for them. And really, this partnership is really on delivering things just in time where we're not overburdening them on inventory of some of that horizontal infrastructure. We're able to carry forward the strategic acquisition costs of our land opportunities and be able to carry that into the model where they can be competitive and have a lot of absorption and some velocity of sales. That's one of the key metrics for them. And then the most recent segment is our single-family rental segment where we're holding back some of those lots, and we're partnering with our homebuilder partners to go vertical on those and be able to deliver those lots.

Again, when we're doing that, we're seeing each individual home that we're bringing to market, we're carrying forward as much as $150,000 of equity value in each of those homes. We're able to rent those out at fair market value, brand new homes where renters are coming in. These are, we see, a very strong qualifying marketplace for those. The folks that are applying for rent on this are choosing to rent for various reasons, so we've got a very strong portfolio of that, and we're continuing to grow that. If you want to take a look at each of these in some of the real specifics, if you take a look at our water segment here, these are just some of the metrics on that. We've got tremendous value in our water segment.

You take a look at the asset value here and what we're generating in revenues, and there seems to be a disconnect, right? You can imagine, you say, how does a company that has $65 million of total water assets start to generate 10, 12, $15 million a year, year-over-year revenue from this water segment? And it's really because of the low basis that we have in that. We've acquired these assets some 30 years ago. These assets have appreciated significantly in the market. We can serve about 60,000 connections here. And we get two revenues from that. We get a tat fee from that, which is a system development charge, and that's about $40,000 combined water-sewer. And so when you connect that over to 60,000 connections, that's a very large top-line revenue. That's almost $2.5 billion worth of revenue, and it's about a 50% margin business for us.

And then we have the continuing water revenues on that, right? We have a perpetual customer there where we're delivering monthly water and wastewater service fees. Those fees are around $1,500 per connections. And that's about a 50% margin business on the water utility side. So very attractive business segment for us. And it's really driven by the early recognition of the value of water a number of years ago. A particular note in this particular segment is also % utilization. So we're still very early on in that. As you can see, our capacity that we're delivering, we have about, I'd say, another 50% capacity. This shows that the acre-foot of production for the year-end.

This shows that we use about 25% for the first quarter, but we do have excess capacity in here, which we continue to deliver to our oil and gas customers on that excess capacity. It's a good partnering relationship where their utilization of water does not come at the expense of our other customer base. Then when they're done using that water, we have existing capacity to reallocate to our permanent customers. There's a very good relationship for us to continue to expand and invest in our system for our current customer and then have the utility value of that investment in perpetuity, delivering that system capacity to our residential customers as those come online at Sky Ranch and other places. This really highlights our land development segment.

So historically, this is really an opportunity where the company saw a strategic opportunity back in the real depths of the recession. We were able to act and strategically purchase a particular piece of property which we could deliver water service to. Our basis in the land is very, very low. We have a land basis that is less than $1,000 a lot. And then we're able to carry that forward with bringing utilities to it and then getting into executing on the land development, the horizontal infrastructure where we're delivering a finished lot. And that's very rare. What you're seeing in the marketplace is that it's because of the complexity of land development and the investment in both water utilities here locally in the Denver area, as well as just all the other phases of that, that it's very difficult to manage all of those investments.

Who carries that inventory? And so the relationship that we have with our homebuilder partners is outstanding, mostly because we're one of the few that actually do do that work in this market segment. So we've seen almost $80 million in lot sales to date. We've got great gross margins in there. So we're executing on all aspects of how we're delivering that, both on a real-time basis so that homebuilders don't carry too much inventory, and then we don't have to carry that inventory as well. So both of those are working very well for us. This is a little bit of how we're executing. So we typically are looking at about 250 lots per phase. And so this will really show you that annual delivery capacity. And what we've seen is a strengthening of the entry-level market.

The opportunity on the entry-level market is really because of our land basis and because we're controlling the investment in the utilities on a real-time basis. So we're able to do that together with our homebuilder partners. And so this will give you a progress of that. We've got that phase 2A, which we talked about, is fully built out and occupied, phase 2B, some of the vertical going on there. And we've had a fairly mild winter so far. So the builders are out there continuing to pour foundations and go vertical on phase 2B. We're finishing up the utility side of that phase 2C and then the grading of phase 2D. So it really does give a good inventory of both existing opportunities as well as continuing to sell through all of those phases for our homebuilders.

This will kind of give you a little bit of sort of the capacity of that. When you take a look at Sky Ranch, a fairly big project. It was started out as 1,000 acres originally and a total of about 5,000 single-family units. It'll be about 3,200 residential units and then some commercial. We're privileged to be able to have the land located in really the most active sub-market of the Denver metropolitan area, which is along the I-70 corridor. We have an interchange right at our property. We're improving that interchange. And so we'll have about 1,800-2,000 really lots and water utility connections attributable to that commercial, which is yet to start. We're about 22% done with the residential side. And when you add that over to the total, 18% done with the project as a whole.

And so we've still got four-fifths of this to go and really looking at a very favorable climate because we've got most of the hard off-site infrastructure built. So expanding that is a lot easier than coming out of the ground. Lastly, if we really drill down a little bit on the single-family rentals, this really is an opportunity for us to maximize our land development opportunities where we're carrying forward all the hard work to build a great community, bring good schools out there. We've got a great school partner with National Heritage Academies on a charter school out at Sky Ranch and carrying forward the parks, the open space, and then ultimately the commercial so that we're bringing that retail commercial opportunity to not only the residents that live at Sky Ranch, but also in the regional area.

It really allows us to leverage some of that market demand on those. So good return on investment through single-family rental segments. If you take a look at the numbers on that, we've got about $5 million worth of homes that are constructed. And that's what it cost us to build those homes. And then when you look at the equity value on that, we really have about another 50% margin in there in the equity. So that fair market value, we're seeing a $7.6 million continue to rise just because of the value that we're creating within the community itself and then what it's generating to us on monthly recurring revenues on that. So very good segment for us and continued execution on that. This will kind of give you a foreshadow of really how we look at phasing this thing out.

We started out with phase one on a proof of concept, which is four units, and then when phase two rolls in, we're going to add nearly another 95 units to that, so that model has proven out very well, and we've been able to partner with our homebuilder partners to execute on that so that we're not competing with them, and we're actually giving them a sold product before they even start, so as they go into each of these phases, they're able to demonstrate to the market that they've got sold units contracted with us to be able to deliver these rental units. Lastly, what I want to do is continue to highlight the stewardship of the company. We've got a great balance sheet, very strong liquidity that allows us to really execute on some of these business models.

And what we're really doing with some of that liquidity, really on a two-phase, well, all phase fronts, is we're continuing to grow the business through acquisitions. We're continuing to accelerate the development of Sky Ranch and have the ability to do what others cannot, which is we can deliver the finished lot to our homebuilders. And then we're able to continue to transfer shareholder value by repurchasing shares and using some of that liquidity to help really optimize what the market may not be fully appreciating yet. So we continue to add to that balance sheet and be good stewards of that invested capital that you've allowed us to have. A little bit on some of the outlook.

Again, this will be a little bit of the carry forward, how we look at kind of the business model over the short term, and then really where does this look like through Sky Ranch build-out. We have customer growth, about 2,500 accounts into that short-term period where we'll continue to add accounts at Sky Ranch, Wild Pointe, and in other areas. Our tap fee increases are very modest. We have those built in on a yearly basis, so those are increasing at 3%. And then you take a look at the long-term build-out of that Sky Ranch. There's 5,000 total connections between the residential and the commercial, and we're seeing continued growth in the value of that, not only on the residential lots, but also the continuing value of what we look to see and monetize through the commercial opportunities.

Mark Burkhalter (Chairman and CEO)

Taking a look at the land development, we'll see steady lot sales over the next five years with the completion of Sky Ranch. We don't expect build-out. Build-out might be in that five- to seven-year range, but it's certainly within a foreseeable future. So when you look at what's already baked into the balance sheet, we've got Sky Ranch generating tremendous revenue for us. There's more than probably twice what our market cap is. They're looking at maybe $600 million worth of revenue potential at Sky Ranch alone through build-out. We want to really keep our focus on that opportunity and continue to deliver shareholder value there. Then the single-family rentals, we look to get to somewhere between two and 300 homes for that. Again, that's going to be somewhere around $100 million-$125 million of asset value.

And then again, that recurring revenue on that where we're generating somewhere close to $30,000 a year in excess of that per unit. And so that's, again, a tremendous driver for recurring revenue for the company. This will kind of translate it into kind of a more tangible picture of how that growth looks like, not only on what we're doing for our fiscal 2025 compared to 2024. So this shows kind of it'll give you a three-year comparison from the growth potential in 2023 through 2025, and then also that short-term projection, growing that up into where we think we're going to be in 2028 timeframe. So that'll give you a continued acceleration of that, moving from very modest revenues in 2023 up to strong performance of over $60 million in the short term.

And then how that translates into recurring revenue, both in terms of the short term and then ultimate build-out of Sky Ranch. So this kind of gives you a flavor for the built-in value that we have within our project and really what's within our own control here. So looking at that asset growth, we're looking at almost two and a half times our current market cap just from what the company's currently got in its portfolio. Again, we continue to be in the market, continuing to purchase shares. So you're going to see us continue to be in there on the disconnect between what we believe the company's value is and then also the opportunity to continue to deliver shareholder value by reducing the denominator in our share count.

Okay. So with that, what we'd like to do is kind of open it up into a Q&A and then really kind of show that more collaborative format with maybe some observations from our director and a shareholder to give you perspective. He's got a great career as an equity analyst with a number of institutions, most recently Janus, where he retired from Janus and is really managing an independent portfolio. But we'll open it up for questions. And let me stop sharing this and see if we can get it converted over to our team's presentation where you can see our smiling faces in the conference room. Great. That worked out. So with that, if you want to describe this will now begin the Q&A of our presentation. So as you know, we're using Teams this quarter to kind of have a more interactive experience with the investor base.

So if you do have a question, we've opened up our camera and our mic. And if you want to raise your hand by selecting the raise hand button icon at the top of your screen, we can call on you and open up your line. DJ? Your mic might be muted, DJ. There you go.

David Jarvis (SVP)

Hey, can you hear me? Yeah. Great. Good morning. Morning. Welcome. Question on one of those, the latter slides. I think it was slide 27 where you showed the projected asset value. I guess I was curious a little more detail on how do you arrive and sort of what does that represent? So yeah, we'll say 26. And we show that. Or actually, it might have been 37. Oh, okay. Yeah. I was going to say that might have been just the land development.

Mark Burkhalter (Chairman and CEO)

But yeah, when you take a look at 37, and that's an asset growth. What that shows is from each of the segments, whether that was going to be the land development opportunities on selling lots and the number of lots that we have still remaining in inventory. And we're making between what we make from our homebuilders, which is fairly modest on actually the sale of the lot to the homebuilders, and then the reimbursables. As you see in our balance sheet, we have a continued growth of the reimbursables on the balance sheet. And that's really we get paid back for all the public improvements that we do with that. And we get paid back from the tax receipts on that. And so periodically, we'll go forward and we'll bond the continued growth of homes.

Each phase gets a new set of homes, and then that adds to the assessed value, which is the value of the home times the tax base on that. And then that's how we get that money back together with the water tap fees and then the single-family homes. That's really just a core mathematical computation of Sky Ranch and only Sky Ranch. It does not take into account all of the 60,000 connections that we have in inventory available to serve other land interests or serve development within our service area at the Lowry Ranch or any other of those opportunities. This is just what's on the balance sheet on things that we own.

Mark W. Harding (CEO)

Got it. Okay. Thank you. Yep. All right. We'll take our next question is from a caller with area code 201. So your line is open. And you're muted. Yeah.

If you had your hand up ending in 7586, you're muted, but you're allowed to talk if you still have a question. And if there's anybody else who has a question, please raise your hand.

Mark Burkhalter (Chairman and CEO)

Okay. While we're still sort of queuing up some of the questions on that, maybe what we can do is turn it over and open it up to Dan and have you give maybe a little bit of perspective, both in terms of a board perspective as well as kind of someone on the outside looking at valuations as to not only what you've seen since your participation on the board, but kind of how you see this thing maturing quarter-over-quarter, year-over-year.

Daniel Gregg (Director)

Yeah. Thanks, Mark. Good to be on the call again today. We got pretty good feedback from the call last, kind of the year-end call.

So we decided to do it again. It was not something a lot of people had seen, but both Mark and I and Mark received phone calls saying it was interesting to hear from a board member working collaboratively with the management team as well as a large shareholder. So as you all know, I'm fully vested in this. We own over 10% of the company, and we've been pretty active. And so I want to say that was a pretty good quarter again. It followed up with more earnings power in a typical sleepy Q1, but the resource base allowed us to stack some more EPS on the books. So as I look at it, I think coming into today, based on year-end numbers, we had done $0.48. Now the rolling 12-month or rolling past four quarters is a $0.55 earnings run rate.

That's an all-time record if we look back historically accurately. I think a couple of years ago, there was a one-time accounting true-up for the reimbursables. I think spiked an EPS number in one particular quarter, but that was kind of a catch-up. Really, if you look at it on a sort of like-for-like, apples-to-apples comparison, this is we continue to progress to new, at least for now, record earnings rolling forward. And futures, Mark has sort of softly guided, just given direction for next year, continues to point up and to the right. So Mark, any comment on that, just how you feel about hitting the higher run rates of earnings and the sustainability over the next 18, 24 months?

Mark W. Harding (CEO)

Yeah. And I think it's really the proof in the pudding here is that we're able to get all these segments producing at the same time.

We made strategic investments in each of them individually. And so the water assets that we've acquired, we've grown these water assets. We've made investments in that. And you see that how we not only make the investments year-over-year basis, but then where we're getting that money to invest from. We're taking some of that oil and gas, fracking revenue money, and investing that into the system. That's excess capacity within our system. And then you see that being able to transfer over into the land development segment because as we add new connections to the accounts, that investment's already amortized. And so it improves the margins in the land development segment. And then we continue and invest in the land development segment, the parks, the schools, the open space, which we get that revenue back, right?

That's an investment in that public infrastructure, which adds to the community value, and it increases the land value, but we're seeing that monetize itself into the single-family rental segments where that equity is continuing to appreciate. We get that recurring revenue from the rentals coming in from the individual homes that we've gotten, and then finally, one of the biggest surprises this quarter was we knew that we had new wells that were coming online, and that royalty income is another key surprise. We were strategic in acquiring Sky Ranch when we did and have made that back just on oil revenues, just the royalty revenue from the oils, let alone what we're doing on monetizing it from the water utilities, the land utilities, the single-family revenue. So all these assets really are driving into the company all at once, and it's thrilling.

It's great that we're able to do that. It's great that we're able to do that on an experiential basis so that we're partnering with national homebuilders who want us to expand beyond Sky Ranch, right? They're like, "Look, do this in this market, in that market," and we love that enthusiasm. We're looking at expanding that net to continue to reinvest in that. Let's try a couple of questions. Let me pause you for a second and get this interaction with Tucker Anderson. Your line is open if you want to unmute your computer. I can see you here right now. I can hear you and I can see you. Welcome.

Tucker Andersen (Private Investor)

Good. Fantastic. Once I learn how to do this and get up to speed, well, you know I've been with you for a long time, Mark, so I told you I was a long-term investor.

I have a couple of questions. First, on the oil and gas, what is the outlook going forward? Are there potential for more wells and more fracking to be done? Are we now on a gradual decline curve on the wells? Obviously, royalties are partially dependent on the price of oil and gas, but excluding that, how do we look for continuing royalties?

Mark W. Harding (CEO)

That's a good question. And really kind of two different avenues there. Let me speak to the royalty first. So we have six new wells that were drilled in Sky Ranch. And typically, you get those royalties coming in upfront, right? The shale oil play delivers very, very high returns very early on. And they have pretty steep decline curves. So what I would say is you're likely to see a continued high performance through this fiscal year and then a little bit of a decline.

We still get about $50,000 a month and have been getting that for years, for four or five years as the initial development of wells went in, and now we're looking and that was really an initial two wells, and so that is probably a good tail for, say, a longer-term trend, but when you get these wells coming online, they do have a big pop on those first year. When you take a look at the frack revenue and the opportunity for us to continue to support our oil and gas partners in new wells that they're bringing online that we don't have the mineral interest in, that trend looks very favorable for the next five years. They've got hundreds, hundreds of wells that they have been permitting and working on in and around our service area that will allow them continuing developing the field.

So that still looks like that can be from years 26 through 30 and beyond, that can be significant revenue to us. We had a record year last year. It's somewhere around close to $6 million of revenue from oil and gas, water sales. And I think that can even grow from there in that period of time and for a period of time, five to 10 years in that segment. So those outlooks look very favorable.

Tucker Andersen (Private Investor)

Thanks. The second question is, most homebuilders that I listen to their calls because I'm invested in several of them, at this level of interest rates to continue to get the sales or having to do mortgage buy-downs, could you talk specifically about the Denver area and what's happening there and what sort of incentives your builders may be having to give to continue to get the sales level?

Mark Burkhalter (Chairman and CEO)

Interesting you ask this because I had this very conversation with one of our builders more recently. And they really like Sky Ranch because the buy-downs at Sky Ranch are significantly less than they have to do in other price points. So if you compare it, our entry-level price point here is the high 400s, right? So anything less than $500,000 is what they'll consider a starter home market in Colorado, which is extraordinary. I mean, it just boggles the mind that that's considered entry-level here in this market. But we do have, as many major metropolitan markets are seeing, an affordability problem. And they're saying what we like about your price point and what it is that you're doing is they may be having an average incentive in the marketplace of $120,000 of buy-down incentives. And they may have $15,000 at Sky Ranch.

And so when you compare it on a relative basis, if your price point is a $700,000, $800,000 home, that incentive is gone, right? They've liquefied their margins in that price point where they can hold their margins at that entry-level price point. So they're sort of looking at that opportunity of Sky Ranch saying, "That's where the bulk of the buyer demand is." It's very difficult for the move-up buyer right now because it's hard to walk away from a 2.8% mortgage rate that they locked in two years ago. And so you're going to see really the strength continue to be at that entry level and the incentives for the homebuilders being the smallest at that entry level. So that's how that conversation led us to understand the importance of continuing to deliver these lots in that price point in this interest rate market.

Tucker Andersen (Private Investor)

Thanks. That's very helpful. The last question is sort of a philosophical question that you and your other team members may want to comment on, and first, I'd like to congratulate you on the attempt to really lay out more of how your value creation works in the last few quarters and give us the extra charts and stuff like that, but as you think about balancing what I would call value creation versus reported earnings, which may not always coincide, as you pointed out, the appreciation you're getting on your rental homes and things like that. How does the team think about that, and how important is just the ability to show continued progress in reported earnings, which may not equate to value creation?

Mark W. Harding (CEO)

That's a great question and one we struggle with because we see that, you're right, we see that not only in the rental segments and carrying forward the equity value there. We see that in what we've done on the land development segment, and we see that in the water assets, right? So each of these assets have this tremendous equity value in it that's just not on the balance sheet. And what we're hoping that we can continue to demonstrate to the market is how that translates into earnings per share, the margins, the gross margins that we're going to be delivering year-over-year such that we can then take that gross margin and equate that out to the balance of the inventory.

Mark Burkhalter (Chairman and CEO)

And that's really what PJ's question was earlier is, how do you get to that $700 million asset value when your asset right now is only $100 million? And it's really that equity value. And you're going to see that, and you're going to see us start to just crush these year-over-year returns through that equity value. I don't know, Dan, you've seen that a lot in your career. You've seen how companies kind of express that and then really how they demonstrate that. And that's one we talk about a lot at the board level.

Daniel Gregg (Director)

Yeah. I mean, these assets were put on we talked about this last call a little bit. Mark, what year was the water was the bulk of the water rights purchased?

Mark Burkhalter (Chairman and CEO)

You're going to go back almost 30. This is my 35th year.

So I think I bought it two years in, so more than 30 years.

Daniel Gregg (Director)

So more than 30 years. And we talk about water out here in Colorado and other places. I mean, there's been people who've come to the market. They get excited. They try to buy some water. They try to flip it to a municipality. And there's stories of that not working out perfectly, many stories. And so buying marketed water and trying to do something cute with it and flipping it is not an easy thing. This is a very different situation. This is 30 years of embedded appreciation, effectively, of the water rights that were purchased. And so one way I think about it, and you're just trying to triangulate valuation. We never know exactly what something's worth. But what was the price paid for the bulk of the water? Do you recall, Mark?

Mark Burkhalter (Chairman and CEO)

The more recent acquisitions. I know the one a long time ago. Our capital basis in that is about $15 million.

Daniel Gregg (Director)

So $15 million. So in some ways, this is another take on it. You have 30 years of appreciation on $15 million. And pick your discount rate. And if you use something smaller, 7%, 8%, 9%, I mean, think about the compounding of that using the rule of 72 or breaking out your spreadsheet. So it's not to say that that's exactly what it's worth today, but that'd be a reasonable starting point to talk about it. And the State Land Board sold that effectively to, at the end of the day, to Pure Cycle. And so in some ways, they got a really good deal, right?

Mark Burkhalter (Chairman and CEO)

And continuing.

Daniel Gregg (Director)

Yeah, with the time value of money. So it kind of worked out. But Pure Cycle didn't monetize that for 30 years.

So here we are. And Mark points out, it's on the balance sheet at these historical levels. That's why the returns in today's dollars should be pretty good and increasing into the future could be quite an asset. Again, we're not going to say that's what it's worth today, but that'd be a reasonable assumption that water in the West has compounded or has grown in value, appreciated probably better than inflation over 30 years. And its starting point was over $13 million 30 years ago. So that number's kind of a bigger number than you think. So that's one way I've thought about this. And there's five or six different ways to think about it, but that's one. In terms of the part of the question, Tucker, I think you asked was the tug-of-war sometimes between posting earnings and creating value long-term.

And I think that Mark did a great job creating value at Pure Cycle over the last five years. And you could see looking back last three years ago, two years ago, we'd have quarters where we didn't put a lot of EPS on the board, but we were adding a lot of value to the portfolio or to the asset base, and it didn't necessarily show up. I think what we've gotten to now is the point where we're continuing to do all those things for the future, but the earnings power, it can no longer it's no longer suppressed by those investments. I mean, we're looking at opportunities to build a water portfolio. We're looking for opportunities to build the land portfolio, the single-family rentals. So we're doing all those things.

But the reality is, at the same time, those prior investments, Sky Ranch, namely, investments in oil and gas, commercial water sales, those are just earning through now. And so we think we're doing both, and we have the resources to do both. It's just the earnings power is flowing through, and we continue to do what we do for the future. Anything to add there?

Mark Burkhalter (Chairman and CEO)

No, I think that's great. I mean.

Tucker Andersen (Private Investor)

Yeah. Well, as Mark knows, I don't go back quite as far as he does, but I go back a long way before Sky Ranch and those sort of things.

I would just make the comment that as a long-term shareholder, I am much happier for you to continue to build value and do things that make economic sense, including buying stock back, which clearly you're getting an excellent return on, and sort of let the earnings fall where they may within a reasonable area. Sort of that way, your stockholder base will be aligned with people who are interested in making very long-term commitments to this company. I say that even though I'm a lot older than I used to be when I was involved. Just keep up the good work, Mark.

Mark Burkhalter (Chairman and CEO)

Thank you. Thank you, Tucker.

We'll take number three, which is area code 919, ends in 1214. Your line is open.

If you're on a computer and a phone, you'll have to unmute your phone because this is coming through on the phone number. But if your phone number ends in 1214, your line is open.

Jeff Scott (Shareholder)

Mark, can you hear me?

Mark Burkhalter (Chairman and CEO)

I can.

Jeff Scott (Shareholder)

Mark, this is Jeff Scott. How are you?

Mark Burkhalter (Chairman and CEO)

I'm great. Nice to hear from you, Jeff. Are you in Dallas?

Jeff Scott (Shareholder)

No, I'm in Telluride right now, but.

Mark Burkhalter (Chairman and CEO)

That's what I meant.

Jeff Scott (Shareholder)

I drove through about 10 days ago, and I continue to be amazed at the progress out there. First question. When we started this, the combined tap and waste fees were kind of in the low 20s. And I think you said on the call that they're now 40. Are you starting to get any competitive or political pushback? And if you're not yet, kind of at what level would you expect to get some pushback?

Mark Burkhalter (Chairman and CEO)

Great question. And I didn't have that slide in this deck, but I do have it in the year-end deck. And what we try to do is keep consistent with where the market is for these tap fees. And so when you look at that, we're right in the meat of the market. We take a look at our most regional competitor, which is going to be the neighbor, which is City of Aurora. And our tap fees are just slightly less than City of Aurora tap fees. But when you look at the overall tap fees, there are water providers whose tap fees are reaching $60,000 a connection.

And so it really is a play between what it costs you to develop that system, what's your cost of capital in carrying those assets forward, together with the market appreciation and the cost of the next incremental amount of water that needs to get developed in the system. And so I would say we've been very good about keeping up with the bulk of the market and having that opportunity to continue to drive the investments that we're doing in oil and gas to be able to monetize that going forward.

Jeff Scott (Shareholder)

So what I'm hearing is you're not seeing any pushback yet.

Mark Burkhalter (Chairman and CEO)

No, no. And intentionally, right? We want to stay in the meat of that market.

Jeff Scott (Shareholder)

Okay. On the commercial side, what are we looking at in terms of timing for kind of initial development?

Mark Burkhalter (Chairman and CEO)

Great question.

We continue to have those conversations with some of those end users, right? We've got a lot of demand for our commercial for sort of the people that develop commercial, right? There's a lot of folks that want to come in, and they want to buy that commercial land. And then they want to either flip it to the end user, or they want to participate in some of that development with the end user. And I think our philosophy there is much like we've done with our residential is to vertically integrate ourselves. And we're really looking not for a commercial developer, but for commercial users, right? I'm looking for the Kroger. I'm looking for a Walmart, a Home Depot. I'm looking for the folks that we can actually facilitate that role on delivering a pad site and then have them carry that forward.

What they're looking for is probably around 1,500 homes. We have about 800 now, and we have 700 under construction. As we carry forward through 2025, we're going to deliver another, say, 200-300 homes at our fiscal year-end, and then probably another 400 homes by our calendar year-end. That really puts us very close to that threshold of their number of rooftops where they like to see that economic opportunity. The upgrades to the interchange that we're working on, we have been working with the county, with CDOT for the last three years on that. That looks to be a project where we'll start that construction in 2026 using some of the mill levies that we've reserved for that to be able to bond that particular project. All those things are coming together here in, say, the next 18-24 months.

And then you'll start to see a lot of that commercial activity.

Jeff Scott (Shareholder)

So we're looking end of calendar 2026 or 2027, something like that?

Mark Burkhalter (Chairman and CEO)

I think that's a good time frame. We'll really start to get some transactions codified in that 2026 time frame, and then a lot of that real monetization in the 2027 time frame. Which is what you kind of see a little bit in our forecast. When I show a little bit of that forecast in that 2028 time frame, it's really just the entrance, just the start of the commercial in that.

Jeff Scott (Shareholder)

Okay. Completely different question. Of your home builders, do you track the metric of how many days on the market each house is?

Mark Burkhalter (Chairman and CEO)

I don't, but I know they do.

Jeff Scott (Shareholder)

I know they do. Has it gone up at all?

Mark Burkhalter (Chairman and CEO)

That's a good question.

What we've seen at Sky Ranch is they pretty much they're not like it was when interest rates were at 2%, right? They were taking pre-orders. And they didn't start a house until they sold it. And so what they like to do is they have a model home, and they usually have three or four homes built so that they can be in a real-time basis. If somebody walks in and says, "I want a home today," here's your home today. And then they have them at various stages of completion where they say, "I don't need a home today. I need a home in three weeks," or, "I need a home in three months." And they have various phases of development.

So they say, "Okay, three months, that'll be this address," or, "You can pick from these three addresses at this particular unit." If it's, "Oh, I need it in six months," okay, great. Here's these addresses that'll be delivering in the six months. So they're managing that inventory as close to real-time as the people that are walking in. But I don't know what that number of days is.

Jeff Scott (Shareholder)

Okay. But there hasn't been any appreciable change over the last 12 months or so? No. No, I think that's their model. At least that's how they've tried to phase it for us. Now, that depends on builders too. Some builders, the bigger builders, are just going to say, "Look, we just want full inventory.

We're going to start our 40 homes, and we'll be under construction with all 40 at once." And some of them are saying, "Okay, I'm going to start each week. I'm going to start three, four homes so that they're phasing that completion over a sales cycle."

Okay. Another completely different topic. The development of Lowry Ranch, that requires a lot of moving parts to come together. Where do you see that in kind of a time scale?

Mark Burkhalter (Chairman and CEO)

That's a good question. Certainly, the metropolitan area has grown out to it. And the state is evaluating a number of different options on it. So they're looking at what partners can they bring in it for development, what partners can they bring in it from a lesser land use standpoint, what partners can they bring in it from a conservation standpoint.

Sometimes when you look at all the options that you have, there's too many options that you have, and it makes it complicated in making some of those things come to fruition. Certainly, the road ahead is a lot shorter than what we've seen over the last 30 years since we've been involved. Just because of the growth and the maturation of the metropolitan area, as many times as I've tried to give guidance as to what I think a third party is going to do, I have an absolute perfect record of being wrong every time.

Jeff Scott (Shareholder)

We all have that. Are we talking about a decade or more or less, or?

Mark Burkhalter (Chairman and CEO)

No, I put that in the two- to five-year time frame. Pretty close to the commercial.

Jeff Scott (Shareholder)

You're actually seeing some momentum in terms of willingness to make decisions?

Mark Burkhalter (Chairman and CEO)

That's a different question. I would say the market would love for them to be in the two-year time frame, and the landlord might be in the five-year time frame.

They still have a mandate for the school system, don't they?

Yeah. Yeah. No, they are. And they're very cognizant of that, right? This is their single most valuable asset. And the number of opportunities that they have to do great things with it for generating revenue to the school trust, for generating education opportunities on the ranch, for generating recurring revenue from lessees on the ranch, all of those are opportunities for them. And it really is all for the benefit of K-12 public education.

Jeff Scott (Shareholder)

Okay, Mark, that's all I have. Good luck to you.

Mark Burkhalter (Chairman and CEO)

Great. Good to hear from you. Thank you.

Daniel Gregg (Director)

All right. We'll go back to the first caller. Area code 201 ends in 7586.

If you're able to unmute, your line is open. While we're waiting, I'll leave your line open. You might click unmute on your computer or on your phone, depending on how you're connected. But while we're waiting for that, Mark, there was a question in the chat. If you have any update on recurring revenue as a dividend, do we have any? The common question every quarter.

Mark Burkhalter (Chairman and CEO)

Yep. Nope. That's good. We continue to monitor that, both at the corporate level as well as at the board level. We want our recurring revenue, so that's growth in terms of the rental units as well as growth in our water accounts to really meet that nut of our annual overhead, and I see that happening sort of in this 2025 time frame where we're delivering another, say, 20 single-family rental homes and then adding another 300 connections to that.

So that window continues to close. That conversation is more active at the board level at each board meeting. And we continue to put up our metrics for the board to understand that. And so it's very it is at the forefront. I know some of you that are really pressing that pedal are a bit like to see it sooner rather than later. And it's likely to be sooner rather than later.

Jeff Scott (Shareholder)

Great. There's no more questions right now, so.

Mark W. Harding (CEO)

Okay. Well, if any of you that were listening to this that didn't quite want to weigh in on the Q&A session, or if you're listening to this on a rebroadcast and something comes up, don't hesitate to give us a call. We're very accessible and happy to give you color on how this thing goes. Dan, do you have any closing remarks?

Daniel Gregg (Director)

No.

I think we're just looking from a stock perspective. We're looking for the equity to follow the earnings progress that we've put up. That's always the goal, and the shares reacted well after the year-end results, and we've continued to follow through here into Q1. I think Mark took a big step in sort of, again, providing direction for the rest of the year and into next year, and so we think we continue to take the steps to really what we're trying to do is coordinate the put up the numbers, and then hopefully that's somewhat tied to the share price progress as well, so we know a lot of shareholders have been in the equity, some for 20 years.

And you deserve to be rewarded and should be rewarded with these operating earnings that the team, the management team, has generated and has signaled that the future is very, very bright. So everything's highly functional, and nice job, Mark and Mark. Really great quarter, and it should be a great year. So thank you. And also, what I will kind of foreshadow is we're going to try and do a little more IR on this campaign and get out to various markets, get out to the New York market, much like we did in the last year where we were able to coordinate a lunch at Nasdaq and then maybe do some one-on-one meetings either in-office or traveling through various markets. So we'll be reaching out.

Mark Burkhalter (Chairman and CEO)

We'll be sending out some notifications of some time periods that we're going to be in New York, in Chicago, in the West Coast as well. And so that'll be an opportunity for y'all to kind of see us in your various hometown areas as well as opportunities for you to say, "Hey, if you haven't heard of these guys, they're going to be in Dodge, and you might want to carve out an hour and get to know what they're doing because it's pretty exciting." So be on the lookout for that. And with that, I guess I'll wish you all a great Happy New Year. I meant to lead with this, but I do want to acknowledge our day of recognition for President Carter and his contributions not only to the country but to humanity as a whole.

So we didn't want to have to structure these earnings calls over a period of time. It was scheduled for that. We didn't want the sequencing to go as such, but we do want to acknowledge and respect his contributions to all of us. So we're better off for his presence. So with that, I'll close. Thank you all, and happy New Year.