Pure Cycle Corporation

Greetings. Welcome to the Pure Cycle Corporation Q3 2024 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Mark Harding, President and CEO. You may begin.

Thank you, Holly. And I'd like to welcome you all to our Q3 for 2024 period ending May 31st. For those of you that are listening online, we also have a deck for this presentation. If you want to go to our website at purecyclewater.com, there'll be a banner on the landing page. You can click on that and you can kind of follow through with the slide deck on that. We will also post a presentation on our website for you to be able to take a look and drill down a little bit deeper as you desire. So I will note the transition of the slides as we move through the presentation. Our first or second slide actually is our forward-looking statements, which I think you all are familiar with, statements that are not historical facts and contained or incorporated by reference in this presentation are forward-looking statements as defined by the Securities and Exchange Act. What I'd like to do in regard to the presentation, I'll briefly go through quickly a bit of our strategies, really spend some time on our performance and the results of our Q3, talk a little bit about our assets and some of their trajectories and the strength and the asset potential left in those, and then give you a brief update on some of those. So we'll move to slide four. I'm very proud of our strong leadership and board. We have a very heavy board that provides a tremendous amount of guidance. And then together with our managers, with me here is Mark Pizali, who's our CFO. And you've got a picture of our leadership team. You know, they've been... with our team and our group for quite some time, all strong leaders within their individual industries, and bring a tremendous amount of experience and wealth of knowledge to the company. We operate in three primary business segments. Our water segment, where we have a strong portfolio of water rights in a water short area, and those water rights are very valuable, not only in and of how we monetize those water rights, but also in how they position themselves in working with land development interests, which is our second segment where we are a master plan developer in the Denver metropolitan area. We build master plan communities. We have one active master plan communities, fairly large master plan community, which will have about 3,200 residential units and over 2 million square feet of commercial space. And then as we're also developing our single family lots for sale to our home builders, we keep some of those lots and we work with our home builders to be able to have them build homes on those for our own portfolio. And what we like to do is keep that portfolio for those recurring revenue streams and be able to bring in additional income and also additional value from the appreciation of those assets as we continue to build value in the community it continues to add value to each of those homes so that's a very emerging and very successful segment for us as well if you move to page seven uh here's uh how each segment's positioned on the balance sheet um we have excellent liquidity as most of you know we have in excess of 24 million dollars of cash and then a very strong liquidity value with our note receivable which is a uh receivable that we get as we continue to build out our infrastructure, our horizontal infrastructure, and our land development segment. So we have a little over $33.5 million of note receivable that continues to work hard for us, earning interest on that note receivable. And that gets repaid periodically through bond offerings that the municipality does as they continue to build their assessed value. And then You see a little bit of collateral instruments from restricted cast, which is what we use for letters of credit that we use as security instruments as we work through our land development segment and how we partner with the local government jurisdictions. We also continue to grow the Sky Ranch cab liquidity. And as that continues to grow, you should see one of the another one of those bond offerings later this year. And we'll talk a little bit more about that later in the presentation. Moving on to slide eight, talk a little bit about our financial performance, how we do the performance metrics and what our takeaways are from that. So moving to slide nine, We continue to see significant growth this year through overall revenues, up approximately 45% over the same period last year. Taking a look at our gross profit, up over 60% from the same period of last year. So this year really is demonstrating the continued value that we have within the assets and also really the performance that the company has with these highly appreciated assets. Taking a look at the P&L statement, corresponding increases in net income and earnings per share are up over 30% from that same period last year as well. So we continue to really have a great asset trajectory, not only for value, but also performance quarter over quarter and then year over year. Moving to slide 11, I want to break down our performance by segment. We continue to realize attractive margins from each of these segments, which are reflected of the appreciation of these assets in each business segment. And, you know, really taking a look at how this is divided up between our water segment where we're delivering domestic water as well as industrial water for oil and gas, our land development segment, continuing to add liquidity to the company, monetizing our Sky Ranch assets, and then also our single family rental. So continue to have great performance in each of those segments. Moving to slide 12, really drill down a little bit in our water and wastewater segment. 2024 has had significant strength in water sales, continued growth, adding new customers each year. And then, you know, we've had a record year in water deliveries in oil and gas. Moving to the next slide. Really taking a look at that industrial segment, we've got record deliveries. We've sold a tremendous amount of water through the first three quarters and really looking to finish the year out strong. So we've continued to invest in our water system, making sure that we have that capacity that's available for our oil and gas customers. Colorado is a very aggressive state on the regulatory climate, and so we've had A lot of investment that the oil and gas operators have had to make to solidify how they do business in the state of Colorado. And I think that they've got a comfort level for how that is being done. We're probably one of the strictest markets in the nation on environmental controls over oil and gas and just the continued strength in the oil price continues to allow them to operate and perform in our market segment. We have a very attractive, very oil-rich formation that happens to be right above where our water resources are. So there's a great partnership with us and our oil and gas operators. Moving on, I want to talk a little bit about the land development segment. Land development continues to see strong results with 40% growth year-over-year periods. Key takeaway here is we are finishing up, really have two, almost three phases that are currently active within the Sky Ranch development. We're finishing up the first sub-phase of our second phase. We've really got to get a better naming norm and culture for how we're identifying these, but Our second phase was about 870 units. We are closing out the first component of that, which was about 220 lots. We just have a few landscaping items to punch out and most of the builders are completing their inventory of that. There's just a few lots that are under construction. We finished lots on Phase 2B, and they're all in the process of getting their building permits for Phase 2B. So, we have active activity on, you know, making sure that that's available for them. All the water, sewer, roads, curbs, and gutters are complete. So, they're actively working on getting their building permits and will be in the ground this summer on making sure they have foundations and really selling out of some of their model homes from 2A. And then we also started 2C, so our third sub-phase of that, where we have completed the dirt work. We've done all the grading on that, and we have our utility contractor out there right now working on the wet utilities, which are going to be the water and sewer. We hope to have those completed before the end of the year and then try and get a portion of the road work in there so that some of those builders can have some of those lots opened up by the end of the year and certainly by next spring into the selling season. So what you see is we're really looking at, instead of having a couple hundred lots in production, we're really looking at closer to 400 lots in production. And then the fourth component of that, 2D, which is another 180 lots. It's 184 sale lots. We have a very large component of each of these sub-phases that we're holding back for our single-family rental portfolio. So each of these phases really translate to about 220 lots. And we're looking to get phase 2D dirt work started by the end of the year. And that's one of those seasonal issues where it's very easy for them to be able to move that dirt during the winter months. So we're going to try and capitalize on that as well. So really, what you're seeing is an acceleration of the housing activities here in the Denver market. Just to give you a visual of that, if you take a look at the next slide, there's no substitute for seeing it. This gives you kind of an aerial imagery of it, taking a look at Phase 2A, which you can see is complete. Phase 2B, which you can see is complete and ready for foundations and building permits. 2C, you can see that dirt work being complete. And then really where we're going to expand into is 2D. So tremendous growth in there. I will attribute that mostly to our segments. We're in what we call the entry-level segment for the Denver market, delivering those lots. The home builders are still able to be very competitive on delivering lots that are less than a half a million dollars in this market. And I think that the interest rate has stabilized in the market segment such that buyers are not really looking to time an interest rate purchase, but they really are looking for a need for housing and then really want to be in that affordable market segment. Continuing on, take a look at the single family rentals. We continue to add to our portfolio rental units. which really are generating positive cash flow for us and also asset appreciation. Just because of the continued work that we're doing in the community, we're seeing 5%, 6% continued asset appreciation of the overall home values out there. So really good, strong growth here. You're going to see a lot of that continue to accelerate. We've got 14 units already. We've got If you take a look at the next slide, we've got another 17 units coming online with 2B, and we've got builders that are really drilling down with the model home or the style of home we're looking for each of our builders to help build that. We've got a diversity of the product classes where we own some detached single-family lots, some attached duplex lots, as well as some attached townhome lots, and that will give us an opportunity where we can have multiple price points. We have multiple appreciation of asset values in there. And then as you see, we're going to accelerate some of that in phases 2C and 2D, where we're adding an additional 40 homes in 2C and another 26 homes in 2D. So we're going to get really close to 100 homes in that portfolio within the next two years. And so we're very excited about the continued performance and growth of that business segment. This is, again, drilling down a little bit more to illustrate how that translates both in terms of the P&L on the income statement as well as asset growth from how the appreciation of the home values in our community continue to add value to the company. And so very good segment for us and really starting to become meaningful in terms of the company's P&L. Moving on, take a little bit about the portfolio utilization. We talk a little bit, and you've heard me from time to time refer to the fact that we've got very highly appreciated assets on the balance sheet, whether that's in terms of our water portfolio or our land portfolio and what the company has invested into to continue to increase that value. Wanted to provide a little bit of color on each of those, so if we can drill down You know, let me outline a little bit about the, as we work into that, about what we see in the Denver real estate market. There is a lot of press about how housing is doing nationally as well as how housing is doing here in Denver locally. And not all segments of the housing market are performing equally. What we continue to see are supply shortages at the entry level, It really almost doesn't matter what market you're in. You have affordability concerns, which are really pressuring most of your buyers to qualify for that entry level segment, whether they're going to be move up buyers, whether they're going to be, you know, a second, not a second home, but the second purchase of a home. All of those are really competing for that entry level product. And there's really just a supply shortage of that. So what you have is an inventory imbalance about those projects, particularly here in Denver, that are capable of delivering lots for entry level. And we find ourselves positioned very nicely in that segment. We see this translating into, you know, demand from each of our home builders. such that it gives us the confidence to start multiple phases. And so that's why you've seen us accelerate our phasing in the Sky Ranch development. Talk a little bit about our water segment. I want to summarize some of our investments, which continue to monetize the water segment itself. You know, we talk about the overall service capacity here. We have the ability, our portfolio can provide 60 service to 60,000 connections. We currently have a water system that can serve about 3,600 connections. Our current connection tap base is our domestic customers are right around 1,800. So we still have plenty of pedal left in our water system and our wastewater system. A little bit about our land development. We have total master plan zoning for 3,200 single family units, a couple million square feet of square footage. of commercial space, and that'll be a mix of retail. We're still a little bit early on the commercial. We continue to add to that customer base by our single family units out there, and accelerating that demand is certainly going to help accelerate the demand for the commercial aspects. And then a little bit about where we're planning to go into single family rentals. If you look at the water system, you know, record year and well positioned to continue that growth. So we're using about 50% of our capacity in what we've developed to deliver water to customers. And so what happens is we continue to invest in that for the oil and gas segment. And then as we continue to build the customers in the residential segment, we have that capacity available and reallocate that over to the residential side. So It's a terrific opportunity for us to get that system up and running, and it increases the margins that we're going to see as we add our new connections and our tap fees on that. So you're going to continue to see a very favorable development of our margins as we continue to add customers from our retail development. Tap fees, the overall portfolio, significant growth, adding new customers, multiple phases at Sky Ranch. And then you'll start to see, because we've got two phases going on at the same time, you're going to start to see a lot of those tap fees accelerate into the P&L. And those are really concurrent with building permits. As our developer partners apply for building permits, they have to purchase those taps so that they can demonstrate to the local jurisdiction that they have sufficient, they've secured all of their entitlements to be able to build that home. Taking a little bit about the land capacity, land inventory and active development, we're about 18% complete in our overall residential portfolio. And then we have about that equal amount under construction. So whether that's under construction or we're zoned and we're phased into starting that, you're going to see that accelerate. So we're very excited about seeing that. Again, that commercial capacity, we translate that commercial capacity both in terms of the amount of lots that are available, which is not a direct correlation, but it gives us the ability to talk about how we would look to monetize that on a evaluation basis compared to our residential units both in terms of water and the land value and that really translates into what that's going to look like for the overall project and so when you take a look at how how built we are you know we're only about 12 percent built uh we have about 15 percent of that pedal that's under under construction and under delivery So we're really, you know, we have a lot of capacity left in there and we're seeing tremendous demand for that. So we're going to jump into the market and continue to try and meet that. On our single family rental portfolio, as I mentioned, you know, we've been much more aggressive about continuing to add to that portfolio and working with our home builders to be able to get some of those lots under construction with their models and you know, they are tapping the market. They're much more attenuated to what the buyers are looking for out there, which is helpful for us because it fits on the lot. They've got all of the demand characteristics and the market studies that show them what these buyers are looking for. And it translates directly into what these renters are going to be looking for. So That's a great relationship with them and we'll continue to grow that portfolio to 200 and possibly even more than 200 at Sky Ranch. So that's kind of where our trajectory is looking for on the single family rentals. You know, just want to emphasize the punchline here. You know, the company is doing great with our margins as well as continued cash flow. So you look at Our 62% gross margins, our return on assets, and our asset growth are all continuing to do terrific performance. You know, if I take a look at anything, you know, there just seems to be a disconnect, and I know you all are equally as frustrated with the disconnect between our growth, our performance, our outlook, because our outlook looks continued terrific, just given where our asset appreciations have been and where We continue to invest, and it just seems to be a disconnect with our share price. So that's a bit disappointing and continues to lead into what we're doing with our stock repurchase program. So we continue to be in the market. We continue to buy stock each week. We have standing orders with our repurchase program and have accelerated that with the weakening of the share price to continue to take advantage of that. And we'll continue to do so. So you see, we've been, you know, in that 15 to 20,000 share quarter repurchases. We were a little bit more aggressive in the first couple of weeks or the first month of our fourth quarter here. And we're going to continue to be in the market as that continues to demonstrate its weakness. But, you know, we're very optimistic that, you know, what we focus on is continuing to build value within our assets and continue to perform well. through each of our business segments. I do want to welcome our newest director. We had a retiring audit chair board member, Peter Howell, and I welcome Sue Heitman to the board. She has tremendous experience as a retired partner from KPMG. really hit the ground running and is bringing tremendous value each and every time. She's a tremendous asset for the company, and we really look forward to her tenureship on the board as well. So with that, I guess I'll turn it back over to Holly, and if you guys have got some specific questions, I'd be more than happy to drill down and provide a little bit more color if there was something I covered too quickly or something that I just didn't identify enough, so I'll turn it back over to you, Holly.

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Your first question for today is from John Rosenberg with Laughlin Water Partners.