Pure Cycle Corporation

Good morning.

I'd like to welcome you all to our second quarter fiscal year 2025 earnings call. For those of you that are listening on the phone, I think most of you have connected through this through our website, but we do have a deck for this that is on our landing page of the website. So if you go to purecyclewater.com, you can click on that link and that'll take you directly to the presentation and I can walk you through the presentation as we move through our slides. With me today is our CFO, Mark Bezali, as well as our controller, Serena Finnegan. So I'd like to thank them for joining us early morning and really want to welcome you all to the call. I'll get started. Well, first thing we'll do is, that's a slide here. Talk a little bit about our forward-looking statements, statements that are not historical facts contained or incorporated by reference in this presentation are forward-looking statements. I think you're all familiar with the forward-looking statements. With that said, Certainly want to highlight our leadership team. The success is driven by, you know, the people that we get to work with, both in terms of our management as well as our board of directors. We have a great board of directors, which bring a tremendous amount of experience and guide and leadership to the company. And it certainly helps to be at the center. the helm in calm waters and rough seas. And I'm not exactly sure where we are with this market, but it is comforting to have a great leadership team as well as a great board of directors to help steward the company through managing these assets. I want to jump right into the financials here and see if we can't highlight our second quarter. We had a terrific quarter. So we really want to highlight our financial performance Again, just continuing to execute on monetizing our assets, both our water assets as well as our land assets and then our single-family rental assets. So taking a look at it, Q2 quarter, about $4 million in revenue, about $1.5 million, about a 38% gross margin, a large portion of that. Margin is really going to be from the royalty income. We continue to see a very strong performance out of our mineral royalties that we have when we acquired the Skye Ranch property, really flowing down to the bottom line with continued net income and earnings per share. So both our three months and our six months here today, we're about $10 million, $9.7 million in revenue, gross profit, again, a very solid gross margin around 50 plus percent, and then continuing growth in our earnings per share. Taking a look at that, it's queue over queue. And so this kind of gives you a performance, as most of you know, who follow the company, our second quarter is usually our most, our softest quarter. And it really is a seasonal issue. You know, we are in the construction business where we construct and deliver lots for our home builder customers. And that's a little bit more challenging in Colorado in the winter months. But again, we see, you know, solid performance, on this quarter over our trending quarters for the last three years. The profit in that's probably going to be a seasonally adjusted issue, and that's kind of a timing of how we're recognizing some of this revenue on a percent complete basis, but nothing really of concern on the Q over Q on the gross profit, just really continuing to develop these lots. We've got three phases under construction simultaneously, and so really investing in that segment for us so that we can continue to drive revenue. Taking a look at net income again, that's really going to be a solid performer, really indicative of both having three phases under construction at the same time, as well as some of that royalty income that's coming in from oil and gas just because that's a high you know it's almost 100 profit margin for us on that so we get to roll that right down to the bottom line on that and then continued growth on earnings per share so that's a quarter over quarter performance on earnings per share This will really drive into year to date and really kind of showing you year to date, both in terms of prior fiscal year as well as our guidance. We had guidance for fiscal 25 at around 30, close to $31 million. We're about $10 million into that. And that's about where we are. You know, we're on track to meet that goal, knowing that Q2 is that seasonally adjusted and Q3 and Q4 usually are high growth areas just because of how we sequence our lot deliveries on each of these phases. Taking a look at gross profit also, you know, we're on track for that in terms of our guidance as well. Year to date net income. Again, you know, really solid continuing performance in all segments of the business, whether that's land development, water utilities, as well as single family rentals and then earnings per share. So we had about 20 cents earnings per share, a little bit shy of about 50 percent of our guidance, but really looking to meet that guidance through our fiscal year end. So if we want to break this down by each individual segment, taking a look at our water utility segment, very good quarter for us on that. That's largely driven by the receipt of TAP fees. As we open up each new phase of our development, that's when we start to recognize a lot of those capital fees that we have for the water business. And so we get those TAP fees in. Those are paid by our home builder customers. at the time of building permit applications. And so we have probably about half of the TAP fees receded from filing five, which we delivered sort of end of last fiscal year, last summer. And I'd say we've got close to maybe 75 vertical homes in there. So the builders are very aggressive. They're getting out there. building a number of spec homes, as well as homes that are sold. They have model homes up in both the filing four, which is our phase 2A, as well as some of those in 2B, which is the more active one. What you'll note in this segment for water utilities is Oil and gas deliveries are a little bit weak. That's what we did forecast. We knew that that was going to be a little bit weaker than we had last year. And that was predominantly because most of our operators really working on a large block of well permits. And I think there's more than 200 well permits under production, both for the Lowry Ranch and the surrounding areas of the Lowry Range. So we've got a lot of that activity that is going to occur in fiscal 2025, which will start drilling probably late 25, early 26 to see a bit more of that activity in fiscal year 2026. But again, the water utility setting is doing great, continue to add new customers. to the segment. So we continue to build that recurring revenue segment for that. This is kind of a little bit of a comparison of the oil and gas, which we did forecast that was going to be a bit softer. And so, you know, you see that by comparison over year over year activities. Oil and gas, as you know, very, very, it's a very, very, no, it's a variable segment. And a lot of times it really is a, both a global price comparison to how the price of oil is, to how quickly these operators dial this up. The field itself continues to just perform great for all of the operators. And I think that it's de-risked. They have a very high degree of certainty as to how each of these wells perform. We can see that in terms of our royalties off of the wells that were drilled on Sky Ranch in 2021. And so, you know, you see a lot of that continuing activity where they will continue to invest in that based on their permits and kind of their internal processes to how they want to deploy their capital. But very good segment for us, very high margins for us. And it continues to allow us to monetize and pull forward some of that infrastructure that we continue to invest in our water utility segment. Moving on to land development. This kind of highlights each of the phases. We have four phases that force, actually we expanded. So we added another fifth phase. So you'll see a 2E coming up in the presentation in our second round of investments into infrastructure for Sky Ranch. But this really illustrates where we're at in terms of three phases concurrently going on. We have phase 2B, which is we delivered those lots last summer, and we have a bit of a punch-out items on some landscaping issues and things like that that we'll round out the rest of this year as we roll into the spring. But that's where most of the builders are currently going vertical. They've got, you know, a number of homes that are up available for sale or at various levels. components of that. And it seems like once they finish those homes that, you know, there's a ready and robust market for those. And I think that's attributable mostly to price point that we find ourselves in that entry home segment. And I think that's the most attractive segment in the market, not only in the Denver area, but nationally. But this also highlights where we're at with the other phases of this 2C, 2D. really highlights both the lots for sale as well as our single-family rental lots. And so as you see those accumulating on each individual phase, we have 17 units that we've got under contract that are at various phases of permitting and starting of construction in Phase 2B. And then we're rolling into phase two C where we delivered the, the, the overlap grading. We finished the utility side and really now down to the curving gutter and the paving side of that. And so that should deliver by fiscal year end. So that will that we're currently about 48% complete there. That'll, that'll round up to the, mid 90s by fiscal year end. And then, you know, we finished the grading on phase 2D and have started our utility work on that. So we're midway through our lot delivery contract structure where we get payments from our home builders on increments of phases of delivery. So about 1,300 lots on the for-sales side and about 100 lots on the single-family rental side. So it gives you kind of a very strong picture of how we're accelerating the development of these land assets and delivery of lots. And then the single-family rental, highlighting that Q over Q performance, really not a lot of – change there. We still have the same 14 homes that have been completed. Our rentals are still very strong. So we continue to have a high occupancy rate there. And then again, very great margins on how we do that. And I think we've talked about this a lot in the past on why this is so attractive. And it really is a formulation of being able to roll in the equity value that we have on the land side, as well as the water utility side, being able to deliver these lots where our home builders who are our partners on buying the lots are also our partners on helping us build these homes. And so they have a great delivery device on building the homes. And then, you know, we have the advantage of keeping that equity within the lot themselves and renting them out at the full fair market value of those assets. So the book value of those assets are about 80 percent of the fair market value of those assets. So we very much continue to enjoy a great segment on the single family rentals. Just want to quickly review, kind of, you know, take this up a few after the financial performance and really highlight kind of how the company is structured, how we look at each of these individual segments and how they interrelate to each other and At a DNA level, most of you know we're a water utility company. We have a portfolio of water rights that we have acquired many, many years ago, some more than 30 years ago. Then we take those water, we bring that to properties, both properties that we own as well as properties that are in our service area and properties that others own, that we can be delivering that as a water utility service, both water and wastewater service. And then in some cases where we have the land, we actually are developing that land. So right now that's confined to the Sky Ranch community. It's about 5,000 single family connections. We're about 20% built out there. But that allows us to be able to vertically integrate ourselves and do the horizontal infrastructure. That's a very valuable component in the marketplace because there are very few people that are doing that. Home builders really prefer having, you know, a fixed fee where they have someone that will deliver that lot for them. And so we partner with them to deliver those lots. They sell those, they build the home, sell those, that generates a water customer for us. And then in a portion of that portfolio, they also build that home for us. And then we rent that out as a single family business. So each of these segments, interrelate to each other. They're really building on each other, and they're complementing each other. So one does really feed into the next, and I think it has a great business value-added proposition for both us and our shareholders. Let me drill down to each of these very specifically. I'll try and go through these quickly because I know many of you know this. Our water segment, if you just look at the balance sheet side of our water segment, that has about $65 million in total assets kind of breaks itself out in terms of the water rights, the bricks and mortar of the pumps and the wells and the pipes and the water treatment facilities that deliver that potable water. Our portfolio allows us to provide service to about 60,000 connections. So we're very early stage in monetizing this portfolio and getting our share value out of that. But we continue to add connections each year. Take a look at the system capacity. You know, we have more capacity. We are fortunate to be able to stay ahead of that capacity where we're developing water, wet water deliveries greater than the portable demand for those services are. And what we use that excess capacity for is typically providing that service to industrial applications such as oil and gas. And then taking a look at our Portfolio capacity in terms of the capital fee, how many taps that 60,000 taps can generate. You know, we're very, very early on in that. You know, we have capacity capacities that can generate about two, a little more than two point three billion dollars worth of that. And that's about a 50 percent margin business on the capital side, as well as on the operating side. So gives you guys a pedal amount of what that water segment can do for us. Taking a look at our land segment, land segment, you know, we have constructed about $77 million of lot sale revenue since we started the project. And we're about 20% built on that. So we still have a ton of pedal left in the land development segment. And again, that's a very good gross margin segment. The reason I think that's gross margins as good as it is, is probably because of the bond. We acquired Sky Ranch at a good price, at a fair price at the time when a lot of people weren't interested in buying it. We bought it in 2010 during the great recession and really take a look at monetizing that asset being opportunistic about our capital allocation and how we look for additional opportunities. And so with a very uncertain market out there, you know, that sometimes presents great opportunities for those that are well positioned. And we think that we are well positioned for that. So we hope to see if we can continue to add to this portfolio and continue to expand in the land development segment. This is just a little bit of a highlight of each of the phases that are subcomponents of that. We completed Phase 2A. All those homes are fully occupied. Phase 2B, as you can see there, there's about 70 homes that are up and constructed. Phase 2C, you can see some of the alleyways being poured. many of the streets that are graded out. And so a lot of the utility package there has been complete and we'll really have that strong push to deliver those finish lots before fiscal year end together with the weather. So we time that out such that we can be in that season where we can do the concrete and asphalt where we're not competing with Mother Nature on that. And then phase 2D, that's fully graded. And equally, we're going to get the utilities in there and look to see if we can't get those lots finished by the end of the calendar year. Sometimes we have to race against Mother Nature. It depends on whether or not we get an early season winter in October versus a late season winter after November time frame. So we'll continue to press on 2D. And then we will have another phase of this. We have a sub phase of that, which is about another 150 plus or minus units that are phase 2E, which we are planning right now. And then we'll extend those opportunities to our existing portfolio of builders. This kind of highlights the overall capacity of our land assets. And as I mentioned, we're about 22% developed. If you take a look at the residential side, so we've delivered about 1,300 single family residential lots through phase two. Our commercial lots, we have about 800 single family equivalent commercials. We're just converting those to a commercial. Those are done a little bit differently. Those are usually priced per square foot as opposed to per lot, but this allows us to do some forecasting to give you guys a comparison as to how the overall opportunity relates in the land development segment. And so combined, You know, we look at that being a very strong performance, the overall combined performance about that 18% right there around close to 20% of the build out of Sky Ranch when you combine both the residential and the commercial. Single-family rentals, we've highlighted some of the opportunities there and really the attractive nature of it, and it's maximizing the land development as we continue to provide value to the community for what it is that we do on the parks, the open space. partnering with our national charter, National Heritage Academy for schools. It generates continued recurring revenue. So each unit provides close to a little more than $30,000 a year in recurring revenue on the rental side. And it really does leverage the market demand and produces great returns for the company. So we will continue to invest in this segment. You'll see a little bit more acceleration on that through the latter phases of this as we continue to build out the phase two. Some of the metrics on our existing portfolio. You know, this really highlights the difference between fair market value and really the balance sheet impact. So we have about 5.3 million of capital costs on that and a fair market value, about $2 million on that. So we still have a lot of appreciated assets on there that are not able to discern through the balance sheet. This is kind of a highlight of where we're headed with that single family portfolio. So, you know, you're going to see phase two grow substantially here in 2C, B, C, and D. So we're going to move from about 1,400 homes close to 100 homes on that. And really, this is some of the metrics that will drive to that. And the fortunate thing for us on this one is because of the equity value that we have, in the land and the water utility, this is a great one where we can leverage that portfolio. We have relationships with three different banks that are very excited to help with this portfolio and really give us a lot of that capital and a little bit of leverage to be able to capitalize on using that above our balance sheet capacity. So we're very excited about that. One of the great things about the company is our balance sheet and our liquidity position. So you take a look at where we're at. Between the cash that we have, we have more than $20 million of liquidity. We have cash and investments right at $17 million. The restricted cash that we have and how that's used is we secure lines of credit, letter of credits for the county on our performance of building out the infrastructure on delivery of the land segment. And the reason that the county likes to do that is that they are allowing us to get building permits, in some cases, in advance of Finishing some of the the back end side of the land development, you know, some of the most all of the all of the roads, curves and gutters and water sewer storm, all that stuff is completed. But some of the landscaping and things like that, that, you know, usually come in seasonally. as long as we assure the County through a letter of credit that we'll complete all that stuff, then they're releasing those building permits to us early. And that's really advantageous to our home builders because we can concurrently build those homes while we're doing that landscaping. And so, you know, there's really no, very, very little risk on that restricted cash. Really, we do count that as component of our balance sheet. And then again, we talk a lot about this note receivable from the reimbursable. So not only do we receive revenue from the sale of lots from our home builder partners, but a lot of the infrastructure that we complete We do get reimbursed for that. We get reimbursed from that from the local municipality as they issue bonds. And so we had a bond offering in 2024 that gave us, it was about a $25 million bond offering, paid that down. But that's a nice liquidity element for us. So when you take a look at the overall liquidity of the company. You know, we're in great position not only to navigate challenging markets, and I'm not sure if this is a challenging market, but it does give us not only a great asset base there, but also opportunities to continue to invest into land and water assets. I'll talk a little bit about outlook, and this is kind of a repeat of slides from our fiscal year end. So, you know, we take a look at our short-term outlook, and that's kind of a three- to five-year outlook. You know, customer growth, so development of Sky Ranch up to about 2,500 units, consistent tap sales through the remaining phases of that. And then as those customers come online, you know, it increases the overall return revenue. So we've got... annual tap fees that increase year over year. And so you've seen that as we continue to add new connections to the system. And then longer term, you know, with the build out of Sky Ranch, we've really kind of tried to highlight what we have in the book, what we have in our portfolio for full build out and monetization of these segments. And so they're very attractive returns for us on that. You know, that build out of Sky Ranch could be in that seven year range. So it depends on kind of how we build out that commercial segment and some of our participation in there. And so we like opportunities where we can joint venture some of that commercial opportunities. We are working on those commercial opportunities as well as developing a new interchange right there at the interstate where we've got some mill levies that are set aside for that so that can come off of independent bond financing, but that's a project that we're looking at in this short-term aspect that will increase the overall accessibility of the site, as well as the commercial opportunities. Land development, you know, steady lot sales through the next five years. We continue to increase our lot margins. And I think that's largely because most of the heavy lift is complete. You know, we've got most of the offsite infrastructure. I think the last remaining key element will be that interchange. And so we do have a bonding teed up and ready to go for that. That will cover that cost. And then, excuse me. We really still have the most valuable land yet to come, which is going to be the commercial development. And we want to continue to look at all of our opportunities on the commercial side. And single family rentals, we've talked significantly about that, but going from what we have today to maybe more than 200 homes and continuing to look at the strength of that. So 200 plus homes through the build out of Sky Ranch. And we would look to do each of these elements in a future acquisition. So, to the extent that we continue to expand our land portfolio, we look at all three of these segments being able to be contributors to what it is that we're looking for. a little bit of the guidance on what we had for 2025. So you take a look at the trailing three years and how we're continuing to accelerate and really grow our revenues year over year and really look at not only another good year in 2025, but then, you know, how we look at that short-term aspect where we're starting to bring in some of that commercial land development and the punch that that's going to have for the company revenue as well as earnings per share. So really continue to execute and highlight the value of these assets. Again, shareholder value kind of a little bit more – fiscal year guidance, short-term guidance, and then build-out guidance for Sky Ranch. And again, that build-out is sort of what we have in inventory. That's not something that we need to grow. It's really just to execute on continuing to build out Sky Ranch. We continue to be in the market, so in our share repurchases, I'd say that in Q3, as we're rolling into that, you know, this current market was a bit choppy and, you know, we continue to have a bid in there to buy those shares, but we're also continuing to look at, you know, opportunities for reinvesting into land and other opportunities. And oftentimes when you get turbulent times, you know, it does create some of those opportunities. And I will say that we've had, you know, an increase in the interest level on some of our So we want to make sure that we have both capital to invest in the three phases that we've got under construction right now. And then as these opportunities present themselves with an acquisition, really to be in a position to perform on that. And those are kind of how we look at our capital stack on that. So with that... What I'd like to do is open it up to questions. I think what we'll do is we'll make everybody's mic live. If we get some feedback or something like that, we may change that format. But if anybody's got a question, you can either raise your hand in the bar up there, and then we can identify you. You can call out. or just kind of sing out, and we'll see if we can't have an orderly Q&A here. So with that, we'll open up the mic, and if anybody's got a question, go ahead and sing out.

So you have the ability to unmute yourself. It's not disabled. Good to see everybody. Mark, Bill Miller. Good morning. Good morning, Bill.