Pure Cycle Corporation (PCYO) Q3 2021 Earnings Call Transcript | The Motley Fool

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Pure Cycle Corporation (NASDAQ:PCYO)
Q3 2021 Earnings Call
Jul 6, 2021, 4:30 p.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Greetings, welcome to the Pure Cycle Corporation Third Quarter 2021 Earnings Call. [Operator Instructions]

I will now turn the conference over to your host Mark Harding, President and CEO of Pure Cycle. Thank you. You may begin.

Mark W. HardingPresident and Director (Principal Executive Officer)

Thank you, Hilary. I’d like to welcome you all to our third quarter earnings call. For those of you that have access, you can jump on to our website and on the landing page you can join the conference through a live deck — slide deck that I have that will accompany this presentation. So if you go to and on the landing page just click that join conference in progress and then that will allow you to kind of flow along with the presentation.

As usual first slide will be our Safe Harbor statement, which states that statements that are not historical facts contained or incorporated are referenced in this presentation are forward-looking statements. I’m sure you’re all familiar with the forward-looking statements.

What I’ll do is, I’ll kind of provide a brief overview, I’ll try and be cursory about that, I know many of you are familiar with the company, but also for those of you who are new to the company, to give you a kind of overview of what it is that we’re doing and where we generate our revenues from. We have three unique business segments that are all kind of underpinned on our utilities and so at a DNA level we’re a water and wastewater resource development company. We own a portfolio of water rights here in the Denver metropolitan area of Colorado where only water is a unique asset. You can own water, assist severable property right assets.

If you take a look at our portfolio, we can serve about 60,000 connections and we referenced our connections based on a single-family equivalency connection. In addition to our water and wastewater activities, we also have land development, where we are a master plan developer and we have about a 1,000 acres on the I-70 Corridor in one of the most attractive development corridors in the Denver metropolitan area, and are developing a full Master Plan of residential product as well as commercial and retail and light industrial spaces. I’ll talk a little bit more about that. And then more recently into the single-family rental segment, where we’re actually contracting with others to build homes that we will actually maintain and inventory and be able to leverage some of the equity value that we’ve developed not only in the water arena, but also in the land side. And so we’ll talk a little bit more about that as well.

I want to kind of highlight our new website. It has a tremendous amount of information. If you’re new to the website, certainly come back and visit us and drill down on all the different layers of it, because it contains a tremendous amount of information and very multimedia formatted where we’re able to kind of give you the benefit of some of our current activity, we update some video links of some of our development activity, have some podcasts on there, so it’s a wealth of information, not only for those that are new to the company, but also those that are familiar with the company to get updates on a more real-time basis. So we’re thrilled to be able to present that to you all.

Let’s talk a little bit about our water utility segment. As I mentioned, we have a portfolio of water and we really go cradle to grave with that. We own the water rights. We develop the wells and then surface water diversion facilities. We treat that water. It goes into our distribution system to deliver that to our customers who use that and then they return that water to us as wastewater. We collect that wastewater. We run that through our water reclamation facility and we have complete reuse of that water supply. So we’re using and reusing that water supply through its extinction where we’re using that to water supply for outdoor irrigation demands as well as our industrial customers. So we have the opportunity to kind of reuse that very precious resource.

We collect two fee instruments for this. One-time connection fee, which are — which we — something we’ve referred to as our tap fees, those have grown over the years. We’re currently at about $32,000 per connection. And just to give you a little bit of the math on it. If you take a look at the 60,000 connections, that’s about $2 billion with the top line revenue and really it’s about a 50% margin business. We use half of that money to build all the brick and mortar that delivers all of the infrastructure to our customers and then have your customer that delivers water and wastewater on monthly basis. And so that generates about $1,500 per connection per year. At build-out of the 60,000 connections, that’s about a $90 million year-over-year business for us and that’s about another 50% margin business. We do operate and maintain that and make sure that we’re continuing to deliver high quality water to our customers.

A little bit of information about some of the metrics that we have on our utility assets, wells and then the water rights themselves and pipe and water reclamation facilities. If I take a look at kind of the customer growth in our customers, we’re serving close to about 1,000 connections. So we continue to grow our customers each month organically from what we have at Sky Ranch as well as other service area down at Wild Point and this really just kind of shows the growth of what we have in the Sky Ranch Community itself of our 5,000 connections and then as I mentioned earlier, we have capacity of up to 60,000 connections.

Taking a look at kind of some of the bulk assets that we have, we continue to grow our assets. If you take a look at Q3, we’re up at about 55.1 million in net water assets and then just kind of our revenue growth each through the years and organically growing those from our Sky Ranch and Wild Point projects.

Moving on to our land development segment, we have about 930 acres that can accommodate 3,400 residential lots and that will be a mix of lots, it will be a full range of single-family detached as well as paired product where you have duplexes, some higher density multifamily product as well as some townhome product for us. So we have a cadre of price points for customers out at Sky Ranch and we’re very proud of Sky Ranch. It’s become one of the fastest growing affordable, one of the most affordable master plan community in the Denver market. So we’re happy to continue that theme and really working with our homebuilder customers to deliver a high quality affordable housing product. We also have an ideal location along the interstate so that accommodates some commercial development for that. So we have 2 million square feet of retail, commercial, industrial space up there, and if you kind of convert that out on a typical basis that’s about another 1,600 connections. And then just kind of where we’re located, just directly south of the airport.

Just some bullet points on progress of our first phase is kind of gives you an aerial. We’ve got about 300, little more than 330 residents out there. We kind of metrics that out on — we’ve delivered 446 connection fees and typically those are delivered at the building permit phase. So it’s almost nearly sold out. We probably got about another 40 homes left or 40 lots that are yet to be sold out there. It’s really exceeded expectations, both from the company’s standpoint as well as each of our individual homebuilders out there. So they are about two years ahead of schedule on delivering all those finished lots.

In addition to the revenue that we receive, we received about $36.7 million from our lot fee revenues and we still have a bit more to collect on that. We — in addition to the lot revenues, we get revenues from the public improvements that we create out there and so those are reimbursed to us by the local municipality that’s out there. We had about $30 million, $31 million of reimbursables. We’ve gotten about $10.5 million of that back, but have been able to record other $20 million, due to the acceleration of the development of Phase 1, a little bit higher assessed value to the community and then also additional mills that we have from future filings. So all of that we’re executing very well and really enjoy working with our homebuilder partners.

Taking a look at our Phase II, we broke ground on that in February of this year and we’ll deliver that additional 900 lots in kind of four subsequent phases. If you kind of look at these they kind of quadrant themselves out very nicely in terms of the main thoroughfare streets there, but we’re delivering sort of this first quadrant of about 229 lots, finished up to the grading of that. So all of our dirt work’s done. We have the utility crews in there working on the water sewer and storm water systems associated with that and then hope to be delivering some lots to each of our homebuilders later this year, so that they can kind of continue that construction through the winter and get their model homes up for the selling season of next year. If you take a look at all 900 lots in here, that is estimated to generate about $72.6 million of that and then of that $72.6 million, we’ll get about another $48 million of that in reimbursables and then again the utility fees is about $21.5 million in the water tap fees.

Let’s drill down a little bit more specifically on kind of the gross numbers for Sky Ranch and we really kind of carve it up in terms of here our net experiences on filing one and that kind of shows you where we’re at. We invested about $35.8 million and between the lot sales and the reimbursables that we are getting we’ll — we’re currently showing about just the $10.5 million of those reimbursables in that $47.4 million, which also includes the tap fee revenues. So we still have about $21 million net to receive on that and then you take a look at the filing two metrics on that again, we show that net of the reimbursables in there and so the timing of those reimbursables will be dependent on kind of a financing metric of the local municipality, but it also cast it out on the buildup and the remaining 3,600 lots and how we forecast the remaining balance of the project. So tremendous opportunity for us. We have very good success with delivery of this infrastructure and ultimately the finished lots for our homebuilder customers.

Talking a little bit about this new segment that we have, the single-family rental segment, where we are actually going to hold inventory certain lots and kind of an understanding of why we think that’s a good business, if you take a look at the housing market in general, there is a tremendous appreciation of houses. So these are some metrics that come out of Colorado, but we’ve had nearly a 26% increase in average single-family home prices, kind of over the period of time, which we’ve got started on the Sky Ranch project moving from what was really around $350,000 per home to probably close to $480,000, $500,000 per home. So significant growth rates, we’re seeing about 6% annual growth rate there and then just kind of the competitiveness of the market. It’s very competitive to get these homes, the supply does not come close to meeting the demand and you can kind of see weeks on inventory from even just year-over-year May from ’20 to May ’21, we’re moving from nine weeks of inventory to two weeks of inventory.

So the housing market is still very robust, particularly in our market segment, in the starter home market segment. And so one of the things that we like about that is that, we find Denver to be a very good place to be able to deliver single-family rental market where families can come in and if they’re not situated to buy just yet, they can certainly find a very nice community where they can rent a home until they are interested to buy. So these are some of the metrics about kind of where we position ourselves with other master plan communities in the metro area and so we think that with our ideal location, access to transportation, the ability to deliver the amenities we have a new charter school that was approved this year. So that will be under construction later this year for delivery in school year — next year. So we’ll have neighborhood schools, parks, open space and a whole network of trails that run throughout the community.

Taking a look at some of the numbers of this single-family rental. We are forecasting rental income on average of about $2,800 a month per unit. And then if you take a look at how this would accrue to us, we’re able to get access to a very inexpensive money, mortgage type money, it’s not a mortgage, companies can have a mortgage, but it’s mortgage type money at about 3.75 from our lending institution and so not only do we have the renters covering our cost of debt service on that but we also generate a margin on that, so it becomes accretive to both the balance sheet as well as the income statement and then it really does accelerate kind of our recurrable income. So instead of us just generating that $1,500 per connection per home per year, this really does add maybe another $15,000 in free cash flow and $30,000 — $33,000 in total cash flow. So it’s a great opportunity for us to really carry forward some of that equity value from collecting that land at the height of the great recession and being able to capitalize on the appreciation of the community that we’re creating.

A little bit more metrics on that, what we’re looking at is we’ll finance the vertical cost of that. So this is kind of a typical assumption of how that’s going to look for us where we will have a finance cost of about $317,000 of $450,000 market cap or market value of the home, and so each year we are estimating maybe 4% to even 6% appreciation on that $450,000 asset and then we’re financing that $317,000 of that at 3.75%. So we’ve got a natural arbitrage on the market appreciation of the value of the asset together with the added incremental cost of going vertical on it.

Just kind of give you a view of our three units that we’ve got under construction for Phase 1. We did have three available lots. So we’re well on our way to completing these units and hope to have those completed by September. We have rentals in there in September-October timeframe. So we’ve got a few lots reserved in our second phase that we will hold out for more BTR units that will be interspersed within the community and our homebuilder partner products, where we’re looking to engage with them as there on that block they can build those typical homes that they’re building next door to us and they can build those homes for our inventory account and then we have a block of about 60 homes that are contiguous that we’ll look to continue this model and add to the portfolio.

A little bit of touch on the oil and gas. Certainly $70 oil helps a lot more than $40 oil. So we do have operators that are drilling in the field. So we’ve got one rig that’s drilling contiguous — continuously and then a second operator will bring in a rig for some wells that will be a little bit south of our service area, which will be kind of a new portion of the field that they will be exploring. This is an area where we deliver on awful lot of water to these operators in a very short timeframe. So we are seeing kind of an annual creep in terms of the amount of water that they’re using, just because the technology enhancements do the fracking technology.

Currently we generate about $250,000 per well for water and we’re seeing kind of a progression of the field, so it’s opposed to it being one or two wells per pad site. This year we’re seeing four and six wells per pad site and next year that may increase anywhere from 10 to 12 wells per pad site. So that continues to be an opportunity for us. It’s very incremental in terms of our ability to maintain service for this. So we enjoy that when they’re there, but don’t have a lot of fixed costs when that weakens, and so continue to watch that and see how that progresses over the years as the oil market continues to strengthen.

So for our nine months ended, I will just be very summary in kind of our financial presentation here. We had hoped ahead of a more traditional presentation on each of our individual metrics, but we did find an error in one of our spreadsheets just at the 11th hour on how our reimbursables we’re going. So we had to review those numbers and so you’ll see those numbers coming out later this week some time toward the end of the week. And then, what I’ll do is I’ll update this slide presentation, so you can see those traditional metrics that we have.

But in general, we’ve got about $12 million in revenue for the nine months ended. Our gross margins are about $7 million and net income up to about $18 million. So one of the key areas of that was that we were able to recognize the revenue, the reimbursement opportunity from the Phase 1 and so we had that add in our Q2. We have about — if you take a look at some of these metrics in here about $36.7 million in lot revenues from Phase 1. We’re almost through the tap fees. So we’ve got a few more tap fees left that will get us up to about $14.5 million and we’re currently at $13.3 million and then of the reimbursables of the $29 million in reimbursables, we’ve got about $10.5 million of those already delivered to us and then we get a project management fee on top of the reimbursables for the public improvements. So that gives you kind of a summary overview on that. But then, look for the actual filing of the Q later this week.

I then just want to talk a little bit about our leadership, very, very strong Board of Directors that have very, very relevant disciplines that they bring to the Board so — and to the company. So we’ve got strong expertise in land development, financial management, commercial development, water law and just investor shareholder relations in general. So we continue to rely on their stewardship. And then a little bit more about the continued stock metrics, because we’re continuing to get the word out. I think people are continuing to see our results that we post quarter-over-quarter, year-over-year. So that’s helping significantly, not only in terms of price, but also in volume. So we like to continue to provide liquidity to the marketplace.

So with that, those are my prepared remarks. Let me turn it over to our moderator and see if we have some questions that I can drill down and provide a little color.

Questions and Answers:


Thank you, Mark. At this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Bill Miller, Shareholder. Please state your question.

William MillerAnalyst

Mark, hi.

Mark W. HardingPresident and Director (Principal Executive Officer)

Hi, Bill.

William MillerAnalyst

Like to hear all the good news, but I’m wondering about three year view and wondering where you’re going to get your next land for your apartment rental or to your house rentals, because that seems to be by far the most profitable business you have. But I wonder how big a percentage you’re trying to make it and where you’re going to get the land for your next at?

Mark W. HardingPresident and Director (Principal Executive Officer)

That’s a great question. We do have — as I mentioned previously, we do have our nets out for additional land acquisitions and we have a tremendous amount of land that surrounds us that is available. It’s ideally positioned, because I think it’s kind of consolidated. You’re not dealing with 10-acre assemblages here. We have a lot of land that’s around us that would be a half section, a section or large assemblages even of that, and really that’s kind of where we’re looking for our opportunities. We are cognizant that it’s a red hot market and expectations are pretty darn high and we want to make sure that it works for us as well as them, not to be overly analytic in our acquisitions, what we want to try to do is I think we have the ability to pay a little bit more than say anybody else, because we’re bringing the water to the table, but in truth, a lot of these property owners also know that we’re bringing water to the table and they want a little bit more of the benefit of the water than they actually have. So we’re a little patient on some of that, but we do have some very specific targets in mind. And that’s where we’re focusing in on that kind of segment.

To your other question about the BTRs and kind of the opportunities that that does provide us and the leverage that we create on some equity value there, I will say that the true value of that for the company is really in doing both the land and the utilities right. There is a lot of companies that are going after this single-family rental market segments. I mean, very big companies. If you’re talking about the America Home for rents or BlackRock or any of them, the managed portfolios that are really going after this, they are not actually just buying it in the market and really don’t have any of that metric margins in there other than being able to capitalize on inexpensive mortgage money. And so in addition to us being able to do that, we have the equity value that we have on the land and the water. So that gives us a tremendous value. I don’t know that we would actually be out there doing it if we weren’t doing the land and the water, but boy that’s certainly gives us a compelling opportunity.

William MillerAnalyst

So will that be the biggest part of your business in five years, that recurring revenue?

Mark W. HardingPresident and Director (Principal Executive Officer)

We’ll wait to see. It certainly will have some of that, because it’s such a large component of the residual recurring revenue, that that certainly will be a component of it. I still think that the water utility and the land segment, give us some big compelling projects that have decades worth of growth potential. But I think you’re going to like, how the BTR model generates a lot of cash flows for us to flex into things like dividends, flex into — if the market doesn’t quite understand what the value of the stock is that we can redeploy some of that revenue that way as well.

William MillerAnalyst

Great. I look forward to it.

Mark W. HardingPresident and Director (Principal Executive Officer)

Thank you. Thanks for your continued support.


[Operator Instructions] Mark, it appears we have no more questions at this time. So, I will now turn the call back over to you for closing remarks.

Mark W. HardingPresident and Director (Principal Executive Officer)

You bet. You bet. So to the extent that you were not able from a technology standpoint to queue in to ask a question, I do apologize for the brevity of the financial presentation. We do have the metrics out there that kind of give you a quarter-over-quarter results and then with the details on each of the segments you’ll see some of that information later. So I’ll refresh the presentation and certainly if you have questions as it leads to some of that detail, don’t hesitate to give me a call. I do want to make sure that we have kind of that quarterly analytics that I know a lot of you’ve got your model set up for, so we can keep that information rolling for you, so that you can continue to trend us on that.

We do have an Investor Day coming up, so we have a very nice RSVP for the Investor Day. So I welcome all of — those of you that are going to be joining us next week to kind of come out and kick the tires and not only see kind of Phase 1 but kind of — it gives you real-time opportunity to see how some of this horizontal infrastructure sinks in and coordinates in and it really does give you a feel for the synergies. The synergies of the utilities, together with horizontals and then it gives me ability to highlight where some of these reimbursables come from and how that kind of factors into our overall unit pricing in terms of our lots and then an opportunity to tour our water reclamation facility that we’re very proud of, because we’re recycling and reusing 100% of our water supply, so in addition that us having a very valuable portfolio we use and reuse that portfolio. So we’ll welcome those of you and if you find yourself traveling through the area and it’s not an Investor Day certainly reach out and give me hour, I’d love to give you tour.

So with that I will close that out and look forward to speaking with you all again soon.


[Operator Closing Remarks]

Duration: 29 minutes

Call participants:

Mark W. HardingPresident and Director (Principal Executive Officer)

William MillerAnalyst

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