Pure Cycle Corporation (PCYO) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Pure Cycle Corporation's Third Quarter 2026 Earnings Presentation. We've started the presentation with everybody on mute as our CEO, Mark Harding, goes through our financial results. At the end of the presentation, we will open up the lines for Q&A. And with that, I'll turn the mic over to our CEO, Mark Harding.

Thank you, Marc, and I'll add my welcome as well. With me is Marc Spezialy, who's our CFO, and he'll give you kind of the detail on some of the technology questions as we get into the Q&A portion of this. Also with me is our Controller, Cyrena Finnegan. So if you guys have any drill-down questions on the accounting, I'll share the mic with her and have her walked through some of those. As Marc sort of announced, this is our Q3 presentation, and we're delighted to be able to bring you some very solid results here. As we start the presentation, we'll start with our forward-looking statement. I'm sure most of you are familiar with that, but statements that are not historical facts contained or incorporated by reference in this presentation are forward-looking statements. continuing on. It's my pleasure. And really, the company's benefit to continue to work with a great management team, a ton of experience on this team and really bringing value to the shareholders on a day-to-day basis. At the Board update on board composition, we had a couple of resignations of 2 Board members that are regulated to a 13D filer on the Board that you've likely seen, there's no drama with these. They represented an SPV vehicle, which holds about 13% of the stock and are working really in the best interest of the limited partnerships for the SPV and then combining with the restrictions that come on with the Board. So I think we'd like to acknowledge their service and their contributions and thank them for their efforts and wish them the very best. Taking a little bit on the overview. Another great quarter and continued execution of our business. Most notable really was refreshing of our liquidity after accelerating the development time line of our Phase II, we had kind of 2 phases that we're kind of developing at the same time. And because of the mild winter, we really did continue to reinvest on that, accelerate that, deliver those lots a little bit early, allow a couple of our new builders to get a head start on what we were looking at on delivery of that product towards this summer. So that really has seen a refresh on that, and you'll continue to see that through year-end. But we still have almost a little more than 7 consecutive years of profitable quarter-over-quarter and really execution of monetizing our highly appreciated assets with on the balance sheet and carrying that through to the income statement. Let me dive right in on the Q3 results, taking a look at revenue, $8.2 million in revenue, $4.3 million in gross profits. That takes a look at about a 52% margin on revenue to gross profit. So we do have a real highly appreciated asset base that really continues to drive shareholder value. Net income and earnings per share are reflective of our percent complete revenue recognition in advance of Phase 2 ahead of a typical seasonal schedule. So you do see very strong Q3 results that really are carrying that momentum from Q2. And so there's kind of -- is a bit more indicative of sort of an even flow revenue and earnings cycle, which is not all that typical for us just because of the seasonality of the construction schedules here in Colorado. Moving over to total revenue and total gross profit for year-end. And as that relates to our yearly guidance, we're a little ahead of our schedule on guidance as we would typically do, and that's really, again, to that seasonality issue, but we really are optimistic and looking forward to a very strong year-end as well. So this gives you kind of a feel for where we're at year-to-date. Taking a look similarly with net income and earnings per share for our yearly guidance, also favorable for the Q3 typical guidance and then also looking to finish the year strong and be able to deliver within forecast or maybe a wee bit more than what we were looking at on the forecast side. With those as detailed on the quarters and certainly willing to drill down on those with some Q&A on that, I do want to just give you a quick update for those of you that are new to the company and talk a little bit about why we think this is such a great company and why we think what it is that we're doing is very unique in the marketplace. Certainly, the water side, we're able to capitalize on owning water rights, and that's very specific to most of the Western United States, very specifically in Colorado. Colorado is probably the tip of the sword on defining ownership interest in water. And how do we do that? We really provide water, domestic water, which is your our potable water supply to retail customers, that's homeowners, businesses, industrial complexes. We also provide raw water for industrial uses. That's primarily in oil and gas, and we do have a very active oil and gas field right on top of where our water supplies originated. So that's a very efficient framework for both us on the profit side as well as the operators because very lower -- much, much lower costs and then being able to transport that from source to pad sites. And then we continue to add customers to our systems, and those connections are very sticky customers because in 100 years, you're still going to be doing the same thing with water that you're doing today. Taking a specific look on total water revenues were strengthened by better-than-expected industrial water sales compared to last year specifically and look to finish the year strong in that. And really, that was a function last year when the fact that most of our main operators in our particular area of the field were really accumulating a number of permits, well permits. And so they do have all those through the Oil and Gas Commission here in Colorado and then really have been executing that. I think it timed out very well for them with the price of oil. So I think a lot of that activity is looking to be strong not only this year, but also over the next several years. Tap fees also are strong, a little bit stronger than they were previous years, year-to-date as well as the year to finish. And that's mostly because we have several phases that came online and were delivered in 2026. So you're likely to see continued strength in the tap fees, not only through this fiscal year but also next year. Taking a look at the industrial water sales, that gives you a little bit of picture. We have strong year, probably not as strong as what we saw in 2024, and that was just a record year for us in that. But we will see a pretty good year, real strong year for us as we complete this year. And still, again, as I said, really look to see continued strength in that over the next several years as drill out the remaining wells that they've already permitted. And then they'll continue to take a look at other well pad sites within this field just because of the size of the field. It's a very large field, and we have a very broad ability to supply water to most of this area. Next slide really shows that we continue to invest in our business segment on the water side, making sure that we have capacity for our industrial customers as market conditions for oil and gas continue to dial up. And as most of you know, the oil and gas industry likes them to be at their beck in call. Sometimes they call, sometimes they don't, but they do pay a premium for that availability. And so we continue to make sure that we're investing in that production capacity. We still have a little bit of peddle left in that. And so as they continue to dial up that drilling program and the opportunity to capitalize on the price of oil, we certainly are ready to meet that demand and look forward to that demand because that's a very high-margin business for us. Let me move on to our Land Development segment. As most of you know, we also, in addition to being a water utility, we bring that water to land interest. And that land interest really is really increasing the value of land through water availability here in the Denver area. And so water can be worth as much as 3x the value of the land. And what we are able to do is acquire land interests and also develop the water utility for those customers that we're developing a lot for. This year was a very good year for us in developing lots. We delivered approximately 430 lots in the last 18 months. So that was kind of a dial up that you heard us talk about probably in 2024 time frame when the market was much stronger. I wouldn't say it's not still doing well, but it's not as strong as it was in 2024. But we were moving into our next Phase II E, which is a bit smaller and than our usual phases, we typically are looking at around 230 to 250 lots per phase and 2E, just because of its size is right around 159, 160 lots compared to our average lot size. But we continue to really pace our finished lot work where we're investing in that land to pace that with the housing absorption. So I think that, that's going to time itself very well with kind of the headwinds that are in the housing market. And really, it's just a good housing market, really good segmentation for us at the entry-level product. But there is a consumer confidence issue within most of the homebuyers in the market today. Also showing strength through Q3 unlock deliveries, almost 70% better than last year, and that was really moderated by a very mild winter. But I think that, that will even out as we get into our year-end and realize the percent complete for what we had under contract. But we do look to deliver strong results through our fiscal year-end. Breaking this up a little bit, taking a look at the phases as we have been talking about this, each of these phases, we have a portfolio of builders. And really, our business model here is to really try and match deliveries to our homebuilder customers for an annual inventory. We want to make sure that we don't over invest into what is a very expensive lot delivery mechanism that ends up creating a high inventory for our home builders. And then we also want to make sure that we can match the demand for lots and houses together with the supply of delivering those finished lots because there's a long lead cycle on delivering these finished lots. And so we took great care to make sure that we're pacing that deliveries together with the homebuilder customers. This sort of shows you kind of completion of each of these 2 phases. And it really shows you that pacing of about 230 lots per year. If you take a look at kind of the acceleration through Phases to CD and E, which is now in progress. That kind of gives you a feel for a little bit of that increase in revenues and gross profits for that. And it really was very attractive home deliveries in Phase II. You can see we've got very strong development of those. So I'd say maybe 1/3 of all those lots are vertical right now. And we're seeing probably 25% of all of the inventory that our homebuilder partners have are sold homes that are occupied. So very strong sales at that entry level price point. That Phase 2b that really delivered ahead of schedule and allowed some of our new builders to get vertical. We have 2 new builders to the portfolio, Pulte and Oakwood Homes. And then they're getting their model homes up and into the market. And then Phase 2, which is right across the street from our school, which really is our next phase. That will be delivering for summer 2027, but it shows you the grading activity on that. This kind of illustrates how we phase our development schedules. And the way we like to deliver this with our homebuilder customers is that we have what we call a flow fund type contract where we are delivering a plate. So homebuilders get the title to a plant where they pay 1/3 of that lot cost and then that allows us to fund the grading work activity in the wet utilities and then the second payment after wet utilities allows us to finish the lots and then we really wait to take our margins on the finished lot delivery. But we still look to do that. Phase 2 is a little bit unique in that. We got started on that one just to make sure that we're capitalizing on the cyclical seasonal weather out here, but really seeing how we can continue to match our customers' cash flows to the product delivery cash flows. Very proud to work with our charter development partners, National Harrods Academy, on our school campus. And this just is a terrific asset for the community. We've got a K-12 campus just finishing the high school for opening this August, and we're thrilled that all of the residents here can have a local school that is accessible, it's walkable and really provides a terrific opportunity. And we continue to get feedback from the community that this is the reason, one of the primary reasons that they are relocating to the community. And so this is just a terrific asset for us. I want to talk and give everybody a little bit of update. This is what we try to do to kind of give you some focus about where the metropolitan area is and where the company operates. Our sandbox really is right on the path of development in the Denver Metro area. As many of you know, we sort of live on a notion where we can't move to the West, given the terrain on that side. And really, all development activity is growing to the east, and it shows you where Sky Ranch is positioned right along Interstate 70 there. That's the blue parcel in there. We're just a terrific location on that. That's primarily why we continue to see strength in what we would otherwise have as a more challenging housing market. And then also our service area at [indiscernible] parcel, but it's one of -- it's probably their single most valuable parcel and there's just a tremendous amount of development activity going on all around the quarter itself down 3/4 of that property. And so it kind of gives you an appreciation for the magnitude of our service area, which is 24,000 acres and where our service area together with our development projects are on the growth of the Metropolitan area. Taking a look at our single-family rental aspect. We did have a bit of a as we foreshadowed in Q2, pivot on some of that as Washington was looking to, I guess, update institutional ownership of homes what we were taking a look at was building this segment up to about 100 homes through Phase II and really did do a bit of a pivot on that. We revised our segment so that we can moderate that expansion we're able to push back some of the loss that we have for reserve to some of our homebuilder customers and then really, we're concentrating on building the homes out that we had contracted for. So instead of looking at bringing 100 -- up to 100 units online, we're backing that off into in the high 60s, low 70 unit time frame. And that's -- there are several reasons for that. One, we wanted to make sure that we understood what that regulatory climate was going to look at. And then secondly, we also wanted to make sure that we really could define the return on investment for that. And so we'll be able to get a better feel as a mature segment causing this at this level, take a look at maybe monetizing homes, a few of these volumes to check and mark-to-market, what our assumptions are on the rate of return on that and then make an assessment on how the portfolio stands to carry forward. Taking a look at how that's scaling, we're delivering. We have 30 -- almost 40 homes completed now. We've got another 30-ish homes under contract that will deliver through probably calendar year 2026 that will bring us right around that 70 home unit. The strong advantages of this, we're seeing tremendous demand on the rental side. In fact, we've got most -- I think almost every one of these homes are leased as they deliver. And in some cases, we've got homes leased that won't deliver until October, November time frame. So our real marketing program for this and the acceptance of people understanding that we do have a portfolio here that is an institutionally owned portfolio where we have our team that can continue to rent these and maintain these really does provide a stable income stream for us on a recurring revenue basis. So those are the positive aspects of it. The negative aspects would have been how the government is going to regulate this. I think that's settled down a little bit, so it gives us a little bit of comfort, but we still want to get a good measure on what that rate of return is. It's a little bit of a metric on continued growth in that segment. So you can see that, that continues to appreciate with the home deliveries. And we have a tax advantage of the appreciation of the asset compared to the fair market value and the book value of those assets. So those do give us some really attractive tax-advantaged ways to hold the portfolio so it will be just kind of how we were looking at growing that and really see that scaled back from where we were taking as much as 30% off of that from where we were near to get. I want to talk a little bit about shareholder value, capital allocation. We continue to really reinvest within the company. And so you see strong appreciation on the balance sheet, good growth in the asset portfolio. The big story, and I know you hear me talk about this often, but the big story on the asset side is really the legacy assets and the cost basis that we have on both the water and the land assets. And we acquired the water very many, many, many years ago at a very, very low basis on that, and it has just a tremendous opportunity to continue to drive shareholder value and similarly with Sky Ranch and the land assets. Those are very small cost allocations on the balance sheet, but they drive a tremendous amount of revenue on the income statement. And then as I mentioned on the first part of that, the liquidity continues to strengthen. And that will continue through year-end and also may give us the opportunity to strengthen our shareholder buyback program. What we really like to highlight here is our continued diversification of revenues and revenue mix for stability and resiliency in under any market conditions. We have great revenues from water side, from the land development side and then from the single-family rental side. And all of those have different industry segments that don't while they're related, they don't quite overlap. And so if you have strength in one and weakness in another, it really allows us to have a very stable balance sheet and income statement. So we very much like the diversification that we have on our asset base. Moving over to shareholder value, building recurring revenues, continuing to add shareholder value through asset growth. So you'll see those continue to grow year-over-year, and we have just a nice growth curve on that for us over the last several years. Profitability, this is kind of what we were looking to do on guidance for you and a lot of you have seen this through each presentation, but we look very, very strong to meet our expectations, maybe exceed those on our fiscal year guidance, but we'll see how the fourth quarter comes in. Valuation sensitivity is kind of where our guidance was, gross revenues between $20 million and $32 million, earnings per share in that $0.50 range, plus or minus, upside timing acceleration really some of the things that I think everyone is looking forward to is kind of the commercial. We do have some local commercial opportunities that really aren't right next to the interchange that we're in the market for. We do have some strong representation by Cushman and Wakefield on both the commercial, retail and then Cushman team on the industrial side. Look to have continued improvement in oil and gas on our industrial water sales and then just continuing to execute on the land development and a utility set, continue to reinvest in our sales through share repurchases. And while our priority continues to be invested in our business segments, and that does take a tremendous amount of liquidity, which you saw and that given liquidity in Q2 really wasn't anything other than our acceleration ahead of our typical flow fund agreement, but it does allow us to continue our balance sheet and our liquidity give us those options to capitalize on that when that occurs. And so we do that, but we also continue to take a look at share repurchases, and we will see how the liquidity continues to build. And as that builds, we'll continue to be more aggressive with those share repurchases to continue to return value to the shareholders. A bit of an update on the interchange. We continue to work with our governmental partners with the county, Repo County on getting that permit. This is a county project together with Taro Department of Transportation, on the design side and getting the permitting process on that. We look to have that. We've submitted each of the phases of the permit to CDOT on that for their comments and modifications. So we look to get that into them sometime towards the end of the summer and then hopefully be in a position of getting that permit issued sometime early next year with the opportunity to start construction of that interchange in late 2027, which really will give us a tremendous opportunity to open up the commercial and really stack into the revenue side. We've got a very good growth story on delivering residential lots. And so you take a look at that, and we're at that $25 million a year stack on being able to do that and continue to work that through on the build-out side, but which might be another years or so. But then when you can layer in that similar amount of revenues from commercial that almost has that doubling effect of our revenues. And so that will continue to supercharge what it is that we're doing. Also wanted to just give you all a quick video tour here, and this is just a continued visual representation of what is that we're doing, where it is that we're at along the metro area if it doesn't be who are new to the story, but just a gardens community. We're able to -- that gives you a feel for where we're at on the metropolitan area, how we're looking at delivering our original Phase I, Phase II A, B, C and D are represented here as we're approaching, that's what we have a space to see if you a feel for that's kind of depressed market demand, right? So you see each of our builders that are taking a look at their product. They've got inventory, they're building that inventory. They're selling that. That gives you a view of some of the 2D homes there with Pulte and then Oakwood is get started this summer as well with some of their lots. There in the background, you'll see our storage reservoir for irrigation water supply 100% of the wastewater that goes into all these houses is process and then we use that water supply to provide that to the parks in the open space. And then that gives you a deal comment into where we are with Phase 2E. That's our 2027 deliveries. So you'll see that activity is the grading activity on what we're doing and then also kind of our opening of the high school and that full campus there. So just terrific opportunities gives you a good visual for that. We do have -- just to remind you all, we do have an Investor Day next week, next Wednesday, and a number of you have RSVP. We look forward to seeing you. But this is an opportunity for us to really kind of give you guys a 2 or what it is that we're doing, have you come kick the tires. This year is going to be a little bit different. We're going to start here at our offices and then we're going to take a tour of the Lowry property. And then from that, you get a very good perspective of some of the oil and gas development that's going on, on the Lowry property as well as where that service area positions itself in the growth of the metropolitan market and trying to get a better flavor for the importance and the value of our service area. So with that, we'll open up the lines and see if we can drill them on any other color for the presentation. So I'll turn it back over to Marc and can give you kind of the instructions on how to do that. And see if we can answer your questions.

Thanks, Mark. Yes, we should -- we've opened up the lines now. [Operator Instructions]

Mark, it's Elliot. You made a comment at the beginning of the presentation, you said why we think this is such a great company. In my opinion, what makes it such a great company is that it will have so much unallocated in the way of water reserves once Sky Ranch is fully developed. So let me probe just a little bit on that. In earlier presentations, in the charts that were presented, there was a chart that said at full build-out, the assets -- pure cycles assets would total approximately $65 to $675 million. I had to estimate that from the chart and that -- most of that was going to be cash. Is that no comparable figures are shown and just series of charts, is that $650 -- $75 million still a reasonable estimate?

Yes. Let me tell you how to think about that. And so what you -- what we look to try and illustrate and this has always been one of the challenges for the company is -- when you take a look at our land and our water balance sheet assets, they're relatively modest, right? Our water rights we have valued on the balance sheet at around $30 million. And when we collect $40,000 per cap, and we can collect -- we show we can serve 60,000 connections from that portfolio. And we're probably a little conservative with that. But let's just say it's 60,000 connections. That shows about $2.5 billion worth of water revenue. And then we get that $1,500, $1,700 per connection per year, and that's about $100 million year-over-year revenue. So that gives you the gross potential on that. On to your question about the $650 million that we've shown on previous slides and how we've given that guidance, that -- how we come to some of that guidance on that just -- let's take a look at Sky Ranch. We know we have 5,000 connections at Sky Ranch. So that's our sounding. And that splits out as to 3,400 residential units, and then we -- at the 2 million square feet of the commercial space, we have portion that to 1,600 call it, lots and connect. So that's how you get to the 5,000 units at Sky Ranch. And if you take a look at 5,000 times $40,000. That gives you the math on how we're going to get to the tap fee revenue. That's $200 million worth of tap fee revenue. And then on average, we're making $100,000 per lot. So if you take a look at 5,000 lots and you take a look at 200 or $100,000, that's $500 million. So that's kind of where that math comes wrong. That's what we make on Sky Ranch. And Sky Ranch as an asset is $5 million on our balance sheet. So that shows you the magnitude of the earning power of these legacy assets. So that's -- you're correct, and that's kind of how we portion out those numbers.

Okay. Now based on the 3,000 -- approximately 3,000 acre feet of water that you have bought since you began using the 30,000 acre feet, Sky Ranch is fully developed. Is it reasonable to say and think that the company with Sky Ranch fully developed still has about 30,000 acre feet of undeveloped water. Is that reasonable?

Yes, that's reasonable. I mean, we do take a look at continuing to diversify the portfolio. And so I guess we have added to that. We've added to that by buying some farms up in Weld County that bring some very valuable renewable water supplies. You've added to that by virtue of our water court decree that we just got finalized, and you heard us talk a little bit about really, that's at Lowry, very local, very convenient for us to develop that out. And so yes, while we talk in terms of how many units we can serve that 60,000 units. And we really haven't updated that with our acquisitions, but we kind of want to balance out the portfolio with renewable supplies and groundwater supplies and reuse supplies to make sure that all of that is sustainable. But we do think we have 30 -- a strong 30,000 acre feet and a strong, very conservative number on 60,000 connections. So it gives us a great opportunity to continue to expand that portfolio, which we look to either at Lowry or at other areas around Sky Ranch. And that's where the majority of the growth in the Denver Metro area is coming and is on top of it. There's just not a way that Denver just doesn't grow on top of Sky Ranch and Lowry and all the surrounding properties in and around or Apple County because there's no other place to grow.

And that's illustrated by the fact that the borders of Denver have moved 6 miles closer to lower and are now adjacent to it. from the time I began following the company in the late 1990s. But what I am suggesting is that the same kind of math that you spoke of in coming up with the $65 million, $75 million figure, also needs to be applied to the 30,000 acre feet, call it, 60,000 taps and that's where the value lies because we're dealing with a company that only has 24 million shares.

Yes.

I'm not arguing with you. I'm just trying to explain how I look at it and why I think it's such a great company.

Well, I do appreciate that color. And I agree with you. I mean, we do have tremendous value in these assets and the water is the water segment alone continues to really drive a lot of that value, both in terms of what we're doing at Sky Ranch, and we vertically integrated ourselves there. as well as the next opportunities, whether that's properties neighboring to styrene, whether we acquire those properties, whether we utility provider for those properties, whether Lowry brings some of that land and inventory for the state of Colorado. All those are continuing opportunities. And the nice thing about it is it's something that we have control, right? We have the exclusivity on our service area. Water is continuingly valuable and increasing in value as tap fees continue to go up. We've talked often about the fact 30 years ago, tapes were $6,000, and they're most that map and continuing to rise because the incremental cost of water continues to go up. because we have to reach farther and farther routes in the next supply. So all those metrics and all those dynamics are really weighing into the fact that this is a tremendous opportunity. And I can be fair to the market and saying, yes, that's all true, and it's been true for the last 5 years, but the stock has been flat for the last 5 years. That's a bit of a mystery. Are we mispriced? Certainly, we think so. Maybe you would agree and others would agree. But at the end of the day, the market does what the market does, and if we continue to generate value on that and we create liquidity, we're going to continue to reinvest in ourselves and we're going to continue the share buyback. So you're going to see a little bit more of that activity. And to the extent that the market doesn't see the same things that we see, we'll be more aggressive about it. And that's a great opportunity, right? When you have that kind of margin potential on your assets and the opportunity to continue to generate those and we will continue to lower that dynamic. So you'll look to see a bit more of that through this year and into next year. And then as we continue to really accelerate this with the commercial development and other water supply contracts that we look to bring online and the possibility of Lowry is going to get very exciting for us.

One question about Lowry and the size of Lowry. I've heard 24,000 acres, I've heard 26, 000 and I've heard 27,000. Which is it?