Earnings Labs

Pure Cycle Corporation (PCYO)

Q3 2023 Earnings Call· Thu, Jul 13, 2023

$11.52

+0.22%

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Transcript

Operator

Operator

Greetings. Welcome to the Pure Cycle Corporation Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Mark Harding. You may begin.

Mark Harding

Analyst

Thank you, Holly. I'd like to welcome you all to our third quarter earnings call. We do have a slide deck for this. So for those that want to follow along with the slide deck, you can go to our website at purecyclewater.com. On the landing page there you will find the ability to join the slide deck as well. So with that, I also have Kevin McNeill, our CFO, joining me today; Dirk Lashnits, who is our Vice President of Land Development is on family vacation. So I will pinch hit into his land development segment. So with that, let me get started. Our first slide will be our Safe Harbor statement that highlights the fact that statements here are that are not historical facts contained or incorporated by reference from this presentation are forward-looking statements with the meaning of the Private Securities Litigation Reform Act of 1995, I think you're all familiar with the Safe Harbor statement. Let me put a little overview of the company for those that are new or listening into the call for the first time.. We operate in three multiple complementary business segments. We operate a water, wastewater resource development segment, which is kind of the utility segment. The key investment themes in this segment is we own large amount of water in a water-short area. We've owned those assets for quite some time. So we have a very low cost basis in that. And those assets continue to rise in value we develop those assets, cradle to grave from developing the water resources, all the way through collection and processing wastewater. In our land development segment, we own about 900 volume - we're developing a 930-acre master plan community. The key investment theme here is again owning the land with a very…

Kevin McNeill

Analyst

Thank you, Mark. Yes, the first slide we're on here really reiterates what Mark said, highlights our three segments and just shows the growth in each one. Obviously, we're starting with the water and wastewater. Continue to add customers through Sky Ranch, had a great year, especially the last quarter for water sales to oil and gas operators, almost 263 million gallons of water. Land development, as Mark noted, we have two of our development - two of our sub phases in Phase 2 going at the same time. It was a pretty tough winter. A lot of snow stayed on the ground, a lot of rain. So hopefully we'll get Phase 2 going - Phase 2B going even faster in the summer months. That's - obviously in Colorado typical development time is out in the summer when it's sunny and not raining. And then the single-family rental market, as Mark pointed out, continued growth in that. We've got another 19 units in the next phase that we're going to start, which will - once Phase 2 is all done, between the two phases, we'll have 69 rental homes in total. The next one from a standpoint of the financial results, which we'll - we sent out a press release last night with financial results, and then we'll be issuing our Form 10-Q tomorrow. You can see the three - the nine months ended revenue on the left pretty consistent the last three years. So we're pretty happy with - 2021 through 2023 are showing pretty consistent results, which is really indicative of the Sky Ranch community continuing to grow at a typical standard pace, what we feel pretty sustainable pace. It hasn't taken off, it hasn't dropped despite the market challenges through the year. 2020 revenue was a little…

Mark Harding

Analyst

Great. So again a great quarter. We're thrilled that all these - each segment is continuing to grow, continuing to demonstrate terrific margins, capitalizing on the legacy value of the assets and we look forward to continuing to deliver results. So with that, I'll turn it back to Holly and she can open it up for Q&A.

Operator

Operator

[Operator Instructions] Your first question for today is coming from Greg Roeder at Adirondack Funds.

Greg Roeder

Analyst

Hi, Mark, can you hear me?

Mark Harding

Analyst

I can. Good morning, Greg.

Greg Roeder

Analyst

Good morning. How are you? I've got a question for you on. Once you complete Sky Ranch and fully complete it. How much book-value of your water rights will you have partnered West as a result of that project.

Mark Harding

Analyst

Yes, we really wouldn't have parted with them. What I would say is that we put about 12% into service. So when you take a look at it, we'll have about 5,000 of 60,000 connections in service. We will have collected the tap fee. And the interesting thing about that segment is the recurring revenues related to it, right? We're going to continue to get water and sewer revenue. It's hard to say perpetual. But it is one of those asset classes that in a 100 years they're going to be doing the exact same thing with it, right? I mean, we will have that revenue stream and our systems are built and maintained for those very, very multigenerational aspects of delivery of. So we're not in the business of buying and selling water rights. We want to provide that as a perpetual service. And what I can tell you is we'll have customers for 12% of the total portfolio. That's the way to think about it.

Greg Roeder

Analyst

Right. So technically, you will own the rights subject to a service agreement. Is that kind of how it works?

Mark Harding

Analyst

Yes, that's right.

Greg Roeder

Analyst

Okay. So if you ever to want to sell that to a utility, you could - those type of transactions are common.

Mark Harding

Analyst

Yes, they are. I mean private water utilities, it would be a peer of ours, publicly traded private water utility to come in and they say, I want to buy the customer base and the portfolio that goes with it, whether they buy the existing customers, that water would stay with the account or they buy the whole portfolio, where they want the unallocated together with the allocated, I mean there's any number of combinations. But typically, if you're - once we sell a tap, infrastructure that goes with it, there's customers that go with it, there's operation and maintenance responsibilities that go with it.

Greg Roeder

Analyst

Got you. And one last question, on the 69 rentals that you plan to own, what - how should we look at that by product type?

Mark Harding

Analyst

Really, it's all single family. And so the various categories of the single family are going to range from probably a higher concentration of detached single-family, but they'll be attached. There'll be duplex attached paired product, as they call it. They'll be townhome product, where we may own a few of the units or we may own the entire - these get developed in maybe five or six pack building segments of that. We'll take a look as to we do have multifamily as part of this development as well. That will be a transition between the commercial area and the residential area. And we'll take a look at what opportunities exist for us to play in that field as well. There's very good players in that area where we may partner with some of those folks on how we develop some of that. But right now, I think our concentration is going to be on the single family right now and not the multifamily. We'll see the multifamily together with the commercial over the next, say, two or three years.

Greg Roeder

Analyst

And is there a big spread in rents between detached and townhome?

Mark Harding

Analyst

Not so much. I mean we do have price segmentation on it. But our spreads right now are somewhere between 2,800 and 3,100. So a big four-bedroom, three-bedroom half or three bath house might be at the high end of that, where you might have, say, a two-bedroom, two-bath duplex townhome that might be on the low end of that.

Greg Roeder

Analyst

Okay. Okay. That's all. Thanks.

Mark Harding

Analyst

You bet.

Operator

Operator

[Operator Instructions] Your next question for today is coming from Elliot Knight at Knight Advisors.

Elliot Knight

Analyst

Good morning, Mark.

Mark Harding

Analyst

Good morning, Elliot.

Elliot Knight

Analyst

Two pleasant surprise that I've heard this morning. One is I noticed cap fees are now up to $38,000. It wasn't that long ago that they were much closer to 30. So that's just an observation. Second surprise is that apparently, the Denver market is a lot stronger, particularly for first-time owners than I had thought. In an earlier call, you speculated that Pure Cycle might take back some lots from builders. Has the market been strong enough so that the builders don't want to sell lots back to you

Mark Harding

Analyst

Good question. It's not so much that they don't want to sell the lot back to us because they haven't actually paid for it at that time. What became an opportunity for both them and us was particularly when interest rates were rising fast, and we moved into the winter months and everybody got all dark and cold and concerned about what the market was or wasn't going to do. It was - I made a little hay out of that. And I said, instead of you worrying about it on the start time of our next phase, why don't we do this? Why don't I take back a few of these lots that you're yet to have paid for and I'll enter into an agreement with you so that you've actually got a customer for a percentage of the next phase. You presold these. And it was an interesting exercise for both them and their management team on, okay, we do. We don't have to buy the lot. We can still do what we're going to do on the building side, and it gives us confidence that if they had picked the number, they had 50 lots in there that they had maybe one of the builders would have had five or six lots that we would have taken and entered into a contract for them to build on those lots. And so it was a great opportunity for both of us. So that's kind of how it worked in terms of - it wasn't that they were being iced out of the opportunity. It was actually that they were getting presales in the opportunity. So very good relationship for both them and us. Very astute and your observations on the tap fees. One of the advantages, and I think we highlight that in our investment thing, but we've had these water rights for a very long time, and they've appreciated significantly in the value. And where we see that value is in tap fees. And our tap fees really are competitive to the local markets, right? Customers can either choose to develop in our area or not. And so that tap fee - that tap fee from a market-based reaction of the availability of water resources, and we've seen a big pressure on those staff fees. You've been with the company and tracking the company not to see tap fees go from 30 to 38, but you've seen them go from 15 to 38. So it has had tremendous growth, and there will be continued growth in that area as resources become more constrained.

Elliot Knight

Analyst

Actually, I don't know where tap fees were in 1993, but that's when I started with the company.

Mark Harding

Analyst

They were slightly less.

Elliot Knight

Analyst

But it's so interesting, the first questioner made the very salient observation that 88% of the company's water reserves are still going to be available. It's the largest undedicated water supply in the Denver area. Multiply that by $38,000 and you get a big number. But what you're doing is you're taking that water and making it far more valuable through build to rent and that sort of thing. It's fascinating exercise that you're going through and you're doing it well. Thanks Mark.

Mark Harding

Analyst

Thank you. That's on the back like that keep me going.

Operator

Operator

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

Mark Harding

Analyst

For those of you that either had a technology issue and getting in for a question or that you're listening in on a replay of this and if a question pops up, don't hesitate to give me a call. We look forward to seeing those of you who are going to come out and kick the tires next week. It shows much better than in-person than it does on the slide deck. It's very - the tremendous velocity that we've got on the land side, the development side and what we continue to do to enhance the community through assets as the investment that we make in trails and open space and parks and then ultimately charter schools, rec centers, commercial development, everything we're doing continues to add value to the community to each individual homeowner, and we're looking, as Elliot highlighted, we're looking to participate on vertically integrating all sides of that. So that we're doing what we're doing, we're also doing a for own account. And so that helps motivate all these investment decisions, and we continue to expand the water utility segment, the land development segment. As I've said before, we like that land development and pairing land development with water utilities. So our nets are out for additional opportunities on land development and bringing our water and increasing the value of the opportunity by adding water resources, horizontal expertise and then maybe even some of our vertical expertise. So again, I want to thank you all for your continued support and confidence in the company and look forward to seeing those of you that can make it next week. So I'll sign off.

Operator

Operator

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.

Mark Harding

Analyst

Thank you, Holly.