Pure Cycle Corporation (PCYO) Earnings Call Transcript & Summary

Okay. For those of you that are joining us online, I'd like to welcome you all. We're just wrapping up a short tour of Sky Ranch. We did a bit of a tour of the Lowry Range and kind of the proximity of growth and development along the Lowry Range. Got a few folks that actually joined us in person, actually wait for them to kind of take a little bathroom, biological break, and we'll get started here in about 2 minutes. [indiscernible] and she actually leads our Single-Family Rental segment, but she also takes care of us in the office. So I guess what I'll do for all the folks that are online. Really, we just had our recent earnings call, as you guys were able to see if you -- as you see the financial notes as well as probably most of you have listened to the earnings call, but I guess the real punchline here is how the company is really continuing to monetize its assets. We've seen a strong growth, a strong acceleration to the land development activities here. We've seen our water segment correspondingly grow because as we're adding new lots, we add new customers to our water segment that provides a new connection fees, new tap fees. And then we've had a strong growth of oil and gas here. And some of the questions that the folks that joined in person as we were going out in the tour, they had a good question about, how should we think about oil and gas? How should we think about the continuing development? You have a couple of operators here, and you can see a number of pad sites here. And I think the oil and gas story is -- it's relatively derisked. You see a pretty steady approach to the field development, a pretty disciplined development of wells, well pad sites, getting permits through the process. And so I'd like to think about that segment as it has grown significantly since we started. This will be a record year for us on that. But it will continue to be pretty steady and continuing to generate significant opportunity for the company. If you just take that one segment all by itself. If you take a look at the land development segment, as we had in our presentation, you saw kind of the picture of us having the second phase of the company, and we have 4 sub-phases there. And the first sub-phase is totally built out. We were able to kind of drive by some of our rental homes and how we've configured those homes. We've got multiple product classifications in our Rental Home segment so that we can serve a bunch of different types of customers that are looking, whether it's going to be a couple, whether it's going to be a starter family, whether it's going to be a retired couple, whether it's going to be a single mom and single dad. Those are all product categories that I think we have varying price points for those. But our Single-Family Rental side of the company is going very well. We're looking at maybe another 17 units in Phase 2B and then really ramping it up. I think we've got 40 units in 2C and then another 26, 28 units in 2D. And so the real interesting, and you guys saw this necessarily when you get a stronger appreciation, boots on the ground to see delivery of Phase 2C, and we'll get our final payment on 2B by the end of our fiscal year. So we're just working out the closing characteristics for those lots. And then you can see all the activity going on in 2C. We've had the first closing of 2C, which our -- closing of the lots, which is our first payment for our lot development structure. We've got the utility crew out there. They're actively putting in the water, sewer, the storm system out there. That should be done in September, October time frame. So we'll have our second closing of that. And then we're pressing our contractors heavy so that we can open up some of those lots because I've got other new builders in 2C that aren't in 2B and they want those lots so that they can overlap the development of 2C and 2B. And then we'll be going to the county later this summer, likely in August, to get approval for 2D. So our fourth sub-phase on that. And I've got new builders in that phase as well. And so we'll start grading that phase. And the interesting thing about it is, if you take a look at what we've done since we started Sky Ranch, we've built about 700 homes. And we're looking at delivering another 700 lots in the next 12 months. And so pretty exciting for us to have that level of demand out there, pretty exciting on all 3 fronts. What we're looking for is doubling the number of homes that we have. That will add another 700 customers to our water portfolio. That will add another, almost up to 90 single-family rentals in the Single-Family Rental portfolio. So when you look at it, each aspect of the company is really well positioned. And we have been very studious about developing this infrastructure so that we have the ability to deliver these lots as the demand increases. And we've seen a strong appetite. We've diversified our builders to bring on -- not 3 builders, but 6, 7 builders that are building in multiple phases so that they'll have unique product categories without inventorying too many lots so that, that relationship of us partnering with our builders in each of these phases is really starting to bear fruit for us. I really didn't have any prepared presentation on this. Being so recent on our earnings calls, you've seen the numbers. We put up great numbers, at great margins. I really wanted to use this as an opportunity to engage with you all. And so yes, the format for this Q&A would be that you could raise your hand and we'll click on you. We'll make you live. All you are currently muted and make you live, you can kind of throw your -- lob your question out there, and I'll see if I can do my best to kind of color the presentation or anything like that. So with that, if you have a question, go ahead and hit your raise hand button on teams for those of you that are familiar with teams. That would be the way to do it. I do want to introduce Dan Kozlowski, he's with us today. He's one of our Board members. He also happens to be our largest shareholder. So we thank you for your confidence in your invested capital. But chime in, if you all have a question.

Mark, I'll start. This is Dan Kozlowski. We've been invested in Pure Cycle for many years. I first sat down with Mark and he explained to me the land you bought off I-70, which is now Sky Ranch today. And then the portfolio of water rights that were purchased 25 or 30 years ago. And being a Denver resident and just seeing the development and development pushing east over time, it just seemed like an extraordinary asset base. So this was probably over 10 years ago, and we've got to know each other. And Mark, I guess what I would ask you and to frame up for us is, [indiscernible] can say, 2018 or so, you had plans for Sky Ranch, and it was a little further east than some of the other developments. But it was right in our sweet spot, obviously, what we owned and our ability to develop water and deliver that water. And over the last 4 years, from my perspective, watching it on the ground, Sky Ranch has been absolutely successful. It went from concept to negotiating with the builders for the first 500 lots, and those are completely done. And the whole development has been proven out. Now we're in Phase 2A, 2B, 2C, 2D, referenced. And there's a school on the property and the whole Denver metropolitan area has developed as we really thought it would, continues to push east. So that's been very successful. And will -- these different phases to work through. There'll be a Phase 3 eventually. There'll be other opportunities such as commercial, which again, are all tracking. We all want it faster, but it is tracking. And again, according to everyone in the Denver market, this has been a real super success compared to what other people's expectations might have been 4 years ago, and I think that's a testament to your operating ability. So the second piece of the investment is, are the water rights, the ability to tap 60,000, 70,000, maybe with conservation efforts, it could be more than that over time. Can you talk a little bit about, as we work through Sky Ranch, what are the other opportunities to find places for those taps and kind of how you're thinking about it, game planning, as we look at the next 5 years? Now during that period of time, the cash flows and these projects are always back-end loaded. So commercial, things of that nature will be coming through. So it's going to be pretty well lined up 3 or 4 years. But after that, Mark, where does this go next?

So thanks. It is a testament to our team, and we really have built a great team here of folks that are very competent in the land development side. We have a team and construction equipment to allow us to self-perform on some of the in between things. The biggest challenge I've learned in this land development business is, it constantly surprises you. There's things that you just come off against that wasn't in your bid when you went out to bid for this. And so a lot of times when something like that comes up, we fix it ourselves as opposed to the contractors when they come into this game, they give you a very attractive bid knowing that they're going to get change orders and their change orders are going to be a whole lot less attractive than their unit costs under their initial bid. And so they help us a lot on managing our costs and managing our margins on that. And we had to establish ourselves in the market, right? We were a new play. We were unknown, untapped, both in terms of building and operating a lot of utility as well as being developed. Can you execute? It's not an easy thing. And I'm flattered by the market's reactions and the comments that we get back. Because the biggest comment I get from our homebuilder customers is, "Oh my God, get more land. Do this in other markets. You guys are really good at this." And I do think we are good at it. But I think the overall experience of delivering utilities together with the land development is so much more friendly for the homebuilders, right? They're not dealing with the utility department, which they call in for an inspection and 3 days later, somebody comes out and takes a look at it and says, "Yes, you did it wrong, do this." And they're down for that amount of time. We're on site. When we get there to a point of a utility inspection, our guys are there. They're there the same day, and they don't have any downtime. There are contractors that -- their framers, all that stuff -- when they get all this stuff going, the water inspections on this are so much smoother. And so having that combined within the same entity has been very helpful, and we are interested in doing this at other places. I mean we are out there, we drove by a lot of landholders and I know who the landowners are. I meet with them. I would love for them to be a little bit more decisive on selling their land, joint venturing their land, developing their land and that's doing water utilities and in all of the above. And so the most attractive thing, and this is something that I think we focused on this year, is the tour of the delineation between the Denver metropolitan areas growth to the Lowry Range, our service area. And you all can see on our website, we've got lots of maps and illustrations of our service area, one is right behind me. You probably can't see it. But our service area is 24,000 acres of contiguous property at the Lowry Range, which is part of [indiscernible] an incorporate Apple County. And you guys can give me your impression of where development sits compared to what is really a 5-mile line of development bounded by that property. And this is a unique piece of property. The State of Colorado owns it. It's owned in trust for generating income for K-12 public education here. So State of Colorado and all Western states, frankly, when at statehood formed these land trust entities. And the federal government gave these states land to manage for funding public education. And in Colorado, they got every Section 16 and every section 36 and every township range throughout the state of Colorado. So it's this gigantic, checkerboard at the original statehood. And over the last 150 years, they've traded, they've sold, they've acquired and consolidated a lot of these holdings. They currently have about 2.5 million acres of surface land throughout the state. Lowry is a large portfolio. It's not their largest, but it is their most valuable. I mean the 27,000 acres that they have out there, is their single most valuable asset in their portfolio. And so they look at that as to say, how are we going to develop this? This is a special piece of property, and it can be a lot of things, right? It doesn't have to be 100,000 homes. It can have opportunities for recreation. It can have opportunities for education. It can have opportunities for affordable housing. As you guys saw, it can have opportunities for beautiful [indiscernible]. I mean, there's million-dollar homes right bordering the State Land Boards Lowry Range. And so you look at it and it has a spectrum of opportunities. That's the good news, "Oh my god, look at all these opportunities that we can do here." Bad news is, "Oh my god, look at all these opportunities. What the heck do I do? " And so they're thoughtful. They're looking at it. They've looked at it. In the last 35 years I've been here, I participated to half a dozen design charrettes. Bringing in experts that are either from like the CU Real Estate School or Urban Land Institute, any of the big, heavy thinkers in real estate as to how do you look at a big piece of property like this? And so maybe some of those efforts were early because the metro area was farther away from Lowry, but it's not today. I mean, as you guys saw, it's not at all. It's right there. And so that's a key opportunity for us. It's a question of when.

Just a follow-up on that or just a comment. So it seems over time in the lease, Pure Cycle pays a royalty on water that we develop to the State Land Board. Is that a good way to think of it? And how has that changed over time just in the last 24 months or 3 years, is that royalty growing?

Strong acceleration.

State Land Board happy with [indiscernible].

They're finally seeing the benefits of this. We've spent millions. We've probably invested $50 million, $60 million into water and wastewater and distribution in wells and reservoirs out there, and they're starting to see significant revenue. Within the next 3, 4 years, we'll become the largest non-oil and gas lessee royalty earner for them.

And that seems like it's evolving into a good partnership. And you put yourself out as a valuable resource for them to work with them and [indiscernible] I assume.

And so it's just -- it is owned by a governmental entity, and sometimes they don't move exactly the pace that private enterprise would move, but they're also pretty steady heady as they start that. Once that ball gets rolling, it stays rolling. I'd just like to give you a little nudge every now and then, and I know Adam spent a lot of time well to think about this and there is no day to make -- in case you were all wondering, there's no day I wake up, I don't think about it. There's no day in my head hits the pillow that I don't think about it. So that certainly is top of mind. It is a terrific opportunity. Whether we're the developer or not, I think we can add value as the developer, but we don't have to be. I'm just happy to be having that 24,000 acres as our service area. That's a place that will develop a lot of our water assets. And that was the intent, right, so that they could generate royalties and that they could benefit from the increased land value of water and wastewater [indiscernible] on the line. And we see that all the time. I see opportunities. I bought Sky Ranch, cheap, we add water and wastewater, and it becomes very valuable. There's lots of raw land that I'm trying to buy at $18,000, $20,000 an acre. And when I put my water on it, it could be worth $60,000, $70,000 an acre, just by that. So they have that enhanced value of having water available to it. But then further, the $50 million, $60 million that we put into facilities there increases the attractiveness of that opportunity because it's already there, ready to go.

And while the State Land Board hasn't developed yet, it seems like a great opportunity for Governor Polis who has done a nice job as Governor of State to sort of potentially pursue some of his goals for lower-income housing, entry-level housing. It just seems like such a perfect way for a public-private partnership. So well, thank you for that explanation.

Yes. Sometimes I wonder, I'm a water geek, and I find myself in the school board or I find myself into politics and but those are -- they are super interesting. It's fascinating to see some of those drivers and how we can help achieve very broad thinking perspectives on the value that we're bringing to the community.

So do you think in 3 years, 5 years, 10 years? Like if you are.

Yes. [indiscernible].

A little closer in talking about infrastructure Mark. It's really impressive to see the development and the acceleration of the development in Sky Ranch. To that end, there still is no commercial services and retail in the area, that likely will be coming next. But I think you've mentioned in the past, a key piece to that development is going to be the rebuilding of the interchange off of I-70. Can you just remind us what that takes, maybe a potential time line that would really help accelerate and then continue the growth that we're seeing now?

So well -- online won't be able to see this, but to give you a perspective, our existing interchange is right here. And we've got the full design of the new interchange. And so we went through a timing study with C-DOT and Arapahoe County 18 months ago that got us the full design of the interchange. What is it going to look like. And when we looked at all the options, was it going to be a redo of this interchange or a new interchange, just located a little bit over here. And ultimately, they wanted to move it over. So it lines up with the section you had commented on, "Hey, this is a major transportation boulevard." And it really is that way so that you've got through traffic all the way up to the airport. And so that's an important component of it. We're in a permanent process right now with the same entities, with C-DOT, with Arapahoe County. We should get that permit for the interchange in maybe January, February. It's called 1601 permit. And so we should get that. We do all the work on environmental, rights of play, time line for construction, funding for construction. That's an important component of that. And so we've been working with Arapahoe County. Arapahoe County is going to impose what they call an impact fee. So it will be a fee that you pay at your building permit that will provide a portion of the revenue on that and that we've set aside mills to help fund that. So that we've got all the funding mechanisms so that it's not us funding that, right. We will bond that interchange from the bondings that we do that get us our reimbursable stack. But we're the entity that helps control that fund. C-DOT, they don't build the interchanges because growth creates that interchange and so they want growth to help do that and then the mechanism for doing that is a fee on the building permits and they go through -- the consultants go through this calculation of what's the geographic area around the interchange that is going to benefit from that. And those are the fees that come in to pay for the interchange. So it does several things for us. I mean, one, it's a very attractive infrastructure to the community. But then secondly, it also opens up a lot of the current restrictions that some of the big commercial wants, right? Because you've got to have those big trucks and the big trucks can get on and off here, but it's just not as convenient. It's easy to get on, it's harder to get off. And so they want that. That's a big advantage for them. And so that will open up a lot of that. We're looking at a time frame of finishing. If we get that permit in 2025, maybe we go to a bond on that late 2025. We'll get the contractors lined up. So by the end of maybe '26, early '27, we had that interchange. So it's a couple of years out, but it's still a component of that process. And then concurrently with that. Once we've got that permit, a lot of these guys, it takes them that much time to get out of here, get it built. Whether it's a big box store, whether it's a big grocer, whether it's -- we've got some flex space. We've got a big space that we can set aside for, as you were referring to earlier, you've got a lot of distribution centers, light industrial. That's a big user out here, provides a lot of AV. You hear me talk a lot about assess value and why that's important to us because that is the translation that gives us a quicker time line to get our reimbursables back. And so all that stuff is looking to time itself out in the next 2 years, which is also corresponding to the number of rooftops that these guys want to see, right? We have 700 rooftops now, we're doubling that. As you've heard us talk about 3 phases of Sky Ranch, the next 3 phases, each of them having about 230 lots coming online in the next 12 months. And so that puts us at about 1,500 units, which is kind of that number. And then around Sky Ranch, like you were saying, boy, not only does that Sky Ranch not have it, neither does anything else around Sky Ranch. And so all of those kind of traffic into that same area and it becomes an important opportunity for grocer, for fuel, for big box. I'd love to see Home Depot. I got to Home Depot even when [indiscernible]. Of course, I grew up with a family -- house of women. Home Depot was a good option for me some days.

So Harmony has how many homes roughly? What's there?

So that's a big development. And I'd say that's a little bit bigger than we are. If you take a look at -- they don't have the commercial for Harmony. So the advantage that commercial does is it allows us that we make 4x the tax revenue from commercial than you do from the residential. And so if Harmony doesn't have that commercial, then what they have to do is they have to recover that through their lot prices. And so their lot prices are a lot higher than ours. And the homebuilder are building exact same product. They're building the exact same home on Harmony, and they're going to charge them 600 and something for it, where they are going to charge our guys 400 and something for it.

And their roof counts will help our commercial there because they are right next doors.

By then, we should get some of the interconnecting road work. You can see here, so this road -- our responsibility was to bring a road here, which we have. And then Harmony builds it the rest of the way here. And so that is a little bit later in the phases, but they're looking at this segment of the project as well. And that's just a through fit, right? All those guys are going to come right through us to go to the interstate [indiscernible] any pass way by the commercial.

How many homes are left in Harmony?

They've got a lot. I would say they're probably -- if we have 3,200 homes, 5,000 when you add to the commercial SOPs, they've probably got 4,500 so another 1,000 homes [indiscernible].

What's the overlap issue with builders. The same builders in Harmony [indiscernible].

Different price point.

So I'll just remind everybody on the call. [Operator Instructions]. Seems like one person, Mark Mandel, typed in a question. Wanted to know about our strategy for buying back shares or if we have any plans to increase that or use of the cash flow [indiscernible].

Fair question. We buy shares every week, every month. So we're in the market buying shares on a continuous basis. When the stock was weakening, we accelerated that. Maybe some people would like us to accelerate it more. Some people would say get out of the market because I don't want you competing with me buying shares at that price. And so we will continue to deploy what we believe and what we are comfortable with on a go-forward strategy, acquiring shares on a monthly basis. We're not going to set a market price on it. We're not going to sweep the market on it, but we are going to keep buying in the marketplace and make sure that not only are we non-dilutive, but we're actually reducing that denominator.

Mark, in the years past, we've taken a tour of the water treatment facility. Early years, rather challenging to run it with so little flow in there.

Feedstock.