Q1 2021 Pure Cycle Corp Earnings Call

Aside from all participants are in a listen only mode and question and answer session will follow the formal presentation. If anyone should require operator, Sis and shrink the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded I would now like to turn the conference over to your host Mark sorry.

[music].

Oh, Thank you I'd like to welcome you all to our first quarter call for our fiscal year 2021 for those of you that have been following the company.

Yeah, we typically do fewer calls we've been typically on a platform, where we do a couple of calls a year, but I think what we'd like to do is hard given the level of interest and the new folks that have been expressing interest in the company and then really just the quarter over quarter improvement and and really.

Changes to not changes, but execution to our business plan and we want to kind of be a little bit more descriptive and a little more timely and these calls so we're going to get to that traditional four calls a year format 40 also a welcome and this will be our first call Oh and why we did this I think last years.

So we're going to continue that context on that.

What I want to do is for those that are on the call itself that haven't already done. This if you can go to our website on the front page of our website will be a link on the front page that you can click to run a new platform here. We're very excited about that will allow me to be able to actually control the deck.

For our call ourselves so that we can walk them through and that allow me to be able to be descriptive about what our results are so on a new platform here and I think it's gonna and it's going to improve that calls I think it's going to prove a flow of the information for you all so.

If you haven't done it go ahead and do that jump on that a pure cycle water dot com and on the home page, you'll see that link up there.

So with that I'm going to go out and get started on our first slide that's always is our safe Harbor statement. So we'll get the attorneys out of the room and say that these statements are non historical facts and they're all forward looking statements and and I think you're all familiar with forward looking statements on that but.

Diving in to.

Okay.

Being told.

Told Oh increased my volume ever and get a little closer to the microphone.

Little bit about pure cycle for those who are new to the company. We on a portfolio of valuable water rights and the water short a Denver, Colorado area. Some of you may have seen a recent article and the New York times about the value of water and value of Colorado water and it's an opportunity to create value.

And we're delighted that I'm more recognition and being given to this resource and the value that this resource had we have been long on water from more than 30 years.

And and also long on how to monetize that water and.

Taking a look at not just the utility segment, but won't water can do for land development four properties for industrial customers and so while I think there's a there's a very compelling case to be made for the value of water and water short areas. It's also a an elegant way.

And being able to monetize that value through vertical integration and so we do have not only utility segment, but also a land development signal that we'll talk a little bit about as well.

Moving to our next slide this a brief description of kind of the location of our water on waters and southeast Denver Metropolitan area on towards the top and that you see the Sky Ranch project that our land interest a write up along the Interstate that Interstate 70, right to the top and that graph there and there's a little.

And the depiction about some of the transmission infrastructure and wells and some of the storage assets that we have.

What's interesting is you know.

New York Times really did have a great discussion about the value of water, but didn't really have much about how to monetize that you know there's really several ways that if you. If you look at the broad scheme of how you can monetize water certainly there are those folks that buy low and sell high I mean, that's just a on a an arbitrage where.

You're going and buying the value of an asset waiting for the value that asset to increase and then selling that asset that's certainly a wait and monetize it or you can buy a the asset you can add some infrastructure to it and then sell it as a monetization so your value, adding in that cycle and doing that in addition to.

You, allowing time to appreciate the value of and I said, it's another way to monetize it certainly EUC and by the assets add value and then provide service, which is on monetization and so that's kind of the vertically integrated utility portion of the model and that's historically a component of what we.

And operating under as our utility segment and then.

Lastly, you can buy and ask that you can add value. A you can provide that service model and then you can also leverage that and by that leverage what we'd look to do is find opportunities where water increases the value of another asset and then and our particular market segment, where we happen to on water and water short region that opportunity is.

Created through land development, and that's really where the company has focused on its energies and most recent years and so we like that model, we have been executing that model for the last three years and what I'd like to do is tell ya on whether or not we're doing okay on that and so.

As we move through a really kinda description of the Q.

Oh and development segment, we picked up a personal property probably you know it at the right time, we bought it right and the depth of the real estate recession back in 2010, it's a 930 acre parcel of property that was zone that they fully entitled Master plan community at the mixed use Master plan.

On the that had.

Wide range of a residential product types of commercial retail industrial zone, and so it's a full masterplan community can accommodate about 32 to 3400 residential lots about 2 million square feet of commercial because we do have an interchange write off the interstate and that equates out to about another 16 and.

Good equivalent connections for us and and we typically look at the world and what it relates to has a lot and let it relates to as a service connection both in terms of a lot for our land development segment and and that's that the service connection for our utility segment and the right location.

You know just east of downtown four miles south of the de <unk>. So good location.

With access along the Interstate.

You know there are just simply not enough water to serve the land in in the west and particularly in the Denver area and while.

Water without land continues to hold valu land without water does not and so what we like is this combination of the land and the water utility segment with more land and water and you know we've been bringing our water supplies to land that adds value to the land and and participating in.

The increase in the value that that water I, just do the land and then as well adds value to our utility segment. So we'll add customers and will add connections by virtue of the land development segment. So we kind of have the best of both growth of bringing a valuable assets to a valuable assets and.

And the scheme on how you're adding the land and the water assets together.

Take a look at our Sky Ranch and development all quickly moving through some of these slides because some of those are going to be a recap, but our first phase included a free.

506 lots. So if you look at that first day, we had 506 lots three national homebuilders put those lots under contract a sort of a mid year 2018 have sold and delivered all those lots. So all 506 lots have been completed and delivered to our homebuilders.

The pace of absorption for a development out there has exceeded all expectations, both our expectation as well as the build the forecast we have about 232 residents out there and about 115 homes under construction. So we're adding about 27 homes about nine eight and nine homes per builder per month. So the.

George and his terrific out there and so we're very proud of the first phase the successes that we've had on to the first phase and really looking to move to our second phase. Our second phase is about twice the size of our first filing we'll have about 900 total platted lots.

We've contracted for about a 790 789 of those lots. So we kept a few lots in reserve. This time, because we were looking for some options for those the other lots. So we'll continue to evaluate the options on what we want to do with those and really update you as a as our plans continue to evolve and.

Those but we wanted to make sure that we're looking at all our options on how we're adding value to the community and giving us the ability to continue to add to the curb appeal of the community and participate and the benefit of depreciation of those lots and some strategy. So we'll continue to update you on how we progressed with those other lots, but really if you.

Look at the second phase it will look a it'll be all 900 lots, it's just keeping some options up and as to how we can track for the other hundred lots on that.

Second phase will be a little more diversified and its product class a and our first aid and we had really just two options. We had a 45 foot lot and a 50 foot lots so yet door number one and door number two and in the next phase we have six different product classification, so you're going to see the same continuation.

On a 35 or 45 and 50 foot lots, but then we'll have a lot of other types of pair duplex town homes.

A lot higher density in the second phase to give us.

Higher assess value higher opportunities for monetizing the reimbursables that we have from the bond proceeds so we'll talk a little bit about how those reimbursables play and our business model and the opportunities for us on that.

On the second phase will be breaking ground. This month on that were actually in the in the field installing all of our improvements for the Roche and control sentiments and things like that so on the big the big equipment looking to be on site. Later this month and really moving a lot of the grading on that but before we get that and that we've got to put some of the b.

M P's force storm water detention in there and and all that stuff is currently underway. So we we are underway on net second phase, we've got contracts with us for a home builders on the next day, so will be as we finish out the first filing that you know finish out the last components of the 506 slots.

As we ramp up with the other 900 lots. So we're likely to have for a period of time six builders out there and then we run out of inventory and the first phase and maintained on inventory and the second phase.

Taking a look and kind of the score card for each of these filing one we invested about $35.8 million received to date to 47.2 million and a lot revenues as well as about $10.5 million and Reimbursable. So we did have one monetization of the Reimbursables and let me.

Talk a little bit about what these reimbursables are so what we do is we are installing the public improvements and those public improvements range from roads curves and gutters to drainage facilities stormwater facilities storm water detention facilities parks open spaces, a whole portfolio of improvements and the cash.

Immunities, Colorado, much like a mini state sort of growth pays its own way. So each each new project will have its own municipalities that have mill levies that they used to finance all those public improvements and so as the community matures, you get that assess value, which aggregates the total.

Value of all the homes and businesses that live in the community and on the tax revenues. The property tax revenues from that are available for bond proceeds to go to reimburse the developer in this first phase we have a relatively high amount of that upfront. If you look at those two reimbursable amounts were at about 31.6 million down.

Balance of Reimbursables from that first day, and so we still have $21 million of Reimbursables that we will get from that first day.

We're working on how we account for that currently you know you can see that on our financial statements in the notes because we do have a note with the municipality that carries with a time value and money component on that that continues to grow on interest and allow us.

To be current on what the value of that is as we make those investments and as the as the community matures there will be future bond offerings that will allow us to recover that 21 million and so that will be another component of our first stage, where we're already in the black on that first days with recovery of about almost 30.

$48 million and then another $21 million to come.

And then the second component of that and the coupling of land and water development.

On the water utility component, where we get the connection piece, we get about <unk> about $15 million and connection fees to date, we received about 10 million of that so there's about another 5 million from the remaining lots that are still yet to be built and the filing one and then kind of the cost component of that 35.8 that I mentioned earlier.

If you take a look at that and contrast that to the other 900 Lothian and 95 lots you know, we we will see a little bit of increase and lot costs, but not much we might see about a three 3.5% increase and lot cost. So you know we will take a look at the next slots is about $72.6 million or we're estimating.

And this is an estimate the reimbursables here won't be as high as a percentage as they were in the first phase just because we had some offsite improvements and the first phase, but you know taking a look at that 48.1 million well received those revenues as well and then the tap fees were projecting you know and we'll have a variety.

Yes, happy because not all of the tax would be a whole tap because they'll be kind of higher density multifamily product out there and contrasting that against the 65 million and cost. So the lot sales, we had really about a 30% increase and the lot revenue. So the cost of our lots we were able because of the six.

Assets of our first filing we were able to hold a price increase on that and then we'll still maintain our margins on the reimbursables and the tap fees.

That's a bit about how the second phase its kind of roll forward.

Oh this is kind of a contrasting the the remaining portion of the project. So if you take a look at this.

Filing one represented about 10% of the aggregate opportunity of the project about 506 lots out of a total of 5000 lots, we have plenty of pedal left and Sky Ranch and when we look at the cumulative component of this you know between a lot revenues and Reimbursable revenues and the tap fee revenues. This is over 500 million dollar project.

The company. So we are excited about continuing to grow this opportunity to continue into value and prove this through how we're making the community the value that we're putting into the infrastructure and then how that's going to translate both in terms of water connections as well as a lot revenue.

Turning our attention on a little bit too or water utility segment. What makes this whole thing work is water. Our utility segment continues to grow by adding assets that were adding assets that we capitalize and depreciate off our balance sheet and it was a high value assets for the company that then we put into service.

And provide that customer service on on ongoing basis, and you know these customers are probably the the the sticky and stuff customers right. These are going to be perpetual customers. You I know a lot of companies like to talk about how sticky there customers are what they are recurring revenues are going to be that these customers really do last and purposes.

What do you have to have water for any value to and asset of this nature for a house or home.

Taking a look at kind of how that asset growth has occurred and we've had a 60% growth and our asset value. So that's the system that we continue to build and capitalize and that's what we used to provide both water and waste water service to our customers out at Sky Ranch.

What we're looking at is really adding.

Most of the infrastructure for filing two is in place and all of the wastewater assets and place with existing capacity, we might add a modest amount of water capacities to allow operators to sleep at night to have a little bit of redundant facilities. So, we'll probably spend about $3 million to make sure that we have a a second well that will be a backup.

Well in the event that our first well goes down and we have storage and and a number of duplicity to our system to make sure that we can sustain our sales for several days without any with with an outage or anything like that so we have a little bit of duplicity and that but the interesting thing about our second phase will be kind of the margins and how.

Scully, our tap fee revenues accelerate and show that that growth and our net income just because we've got the assets in place from the first phase.

Looking to add another EUR 5 million and tap fees from filing one which will balance out the water and wastewater tap. These from filing one and then again moving into 2021 2022 would that be starting for the second phase of this so you'll see that continuing.

On you know we get two sources of revenue for that we get the upfront fee, which are the tap. These and then this ongoing customer. So this kind of shows you what our growth for our.

Customer bases are and so.

We were up to about 650 connections today and that continues to grow this shows up through about 35, interconnections and we'd probably look a little bit stronger than that I would project, given where our absorptions are today, but certainly sky ranch by itself will be about 5000 connections so depending on a 10 year. So.

Cycle that could go between 650 up to 5000 connection and build out and so if we continue to maintain this pace you know we're going to see about those continuing customer connections and that ongoing revenue cycle for the company.

Oh Q1 accomplishments you know these are going to be sort of the statistics.

We continue to build our balance sheet add on total assets continue to add to the cash pill position of the company and we were very clean balance sheet. We have no debt you know were strong cash balance as we roll into our second filing and and I know you know I know the last couple of calls I know there was a bunch of questions about.

What are we going to do with those cash positions and and at what point does the company look for other options, we need on whether their strategic options on continuing to grow the business by acquisitions, which we do have our net out for acquisitions on those so we want to keep a little powder dry for some of those acquisitions and as well as being able to use.

Net cash to generate.

The the next phase of this community. So we take the next 900 lots, we'll probably break that down into several sup days and so that we don't put all that at risk at once we want to make sure that you know we maintain some parity with our homebuilders and how they are purchasing those lots and on.

On builders are paying us concurrently as we develop that so that we minimize our risk and we also minimize their inventory. So there is a good partnership relationship.

With our builders and how we monetize and how we fund.

Fund the public improvement investment from them.

Taking a look at our balance sheet and you know that you guys sort of take a look at the balance sheet and the income statement. So that you can you can kind of see the results of what it is that we're doing on both of those but tremendous results. You know if you take a look at year over year quarter over quarter results. We continue to post on some really good numbers. So.

Keep keep an eye on how we continue to develop those assets and.

Want to talk a little bit about kind of a leadership within the company. So the company has grown fairly substantially over the last couple of years and we've added a you know some key talent to some very key positions within the company. We've added Kevin Macneil, Who's a vice president and CFO pure operations and so he'd come back to the company was our controller.

Several years ago, but you.

You know sort of it and it's just career and really fine tune his skills that CFO with a couple of other companies were welcome and Bakken and certainly appreciate the contributions that he is making to help us grow the business as well as kind of adding additional board members. So we've had to retiring board members. This year two of our longest serving board members.

Harry Auger and Dick Idaho are both retiring this year after more than 25 years of service and while we will miss them greatly we won't totally let them go we'll kind of always kind of maintain that contact with them just a and continue with the institutional knowledge, but we're also bringing in some other key position strength in here. So we've added.

Three board positions over the last year, and Jeff sheets, who has a significant amount of commercial real estate experience here and the Denver area. We've added a rip and Dell who has retired who was our water attorney.

And and retired after a more than 35 years of being a water attorney here and the state of Colorado. So we're able to leverage his his expertise not only with the company's assets, but also his expertise in general to help us continuing to navigate how we own water how much water, we own and what type of water.

Are we on where we own it as well as Dan got Lucky, whose and institutional investor and that really brings.

And on the new a fresh perspective on how institutional investors look at companies you know what their metrics are how we communicate with them. How we continue to build that investor relation program. So very excited about the transition and kind of the the growth of our our leadership.

Yep, and our real brain trust within the company.

Couple of other metrics you know these are going to be when you net charts that you're all accustomed to seeing both revenue and gross margin net income EBITDA. These are very you know just terrific growth charts, when you see year over year from.

2016 up to current 2020, so I'll, let you study and and analyze those but we're really really excited about kind of the continued monetization of both our land interest and as well as our water interest.

I think on slide final slides can be stock price.

No.

Stock price isn't driving and so we did see.

Some weakness and the stock through the 2020 and we're all glad to 2020 is behind us.

And I think that you know if we're looking at 2021 and a fresh start the last couple of days have been a great start for us. So we'll hope to keep that momentum and and really start to be able to demonstrate not only to you our longstanding shareholders, but also people moving the company or really the value of these assets and how they've grown and how the company.

He has really built around monetizing these assets.

We'd like to do is continue to get the word out and now I'm going to try and leverage some of our existing shareholder so to the extent that you have referrals or somebody who might be interested and a company that has high value that that the rich that sun inflation protection, and that's high margin business and debt free and.

And undervalued company send them our way, it's something I think we can give them a story and I think a impressed them about what it is that we put together and and how we might want to monetize this so.

With that I might turn it back over to the moderator and see if you all have any questions that I might be able to provide a little bit of additional color on so with that I'll take it back to you on Mark Alright, perfect and at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad a confirmation total indicate your line is.

And the question in queue, you May press star two if you'd like to remove your question from the Q and from participants using speaker equipment and may be necessary to pick up your handset before pressing star keys.

So one moment, please while we poll for questions.

Yeah.

And our first question comes from John Rosenberg with low and water partners you May State your question John.

Yes, hi, good afternoon, I hope to sign two well and thank you for taking my question.

You bet anyway, Mark I asked you. This before I, just kind of I'm, just trying to better understand.

You, you're you're obviously expensing a lot of the build out of your system. You mentioned in your remarks about some greater contribution margin coming through as you go into phase two as a lot of your system has been built out could you provide some more color on that as to what we might expect in terms of actual.

Our gross profits from the water utility and and wastewater utility operations.

Sure. So when we took a look at that first segment 506 lots. We had if you took a look at the tap fees and that tap. These you know one single family equivalent tap is really roughly translates to about 0.4 acre feet of water a year and and that's.

Cost of that cap I think our current tap fees are right around 27000 in that 27, and some change and so when you take a look at 506 lots and our forecast for those that was going to generate about $15 million.

In total water wastewater tap fee revenue and the facilities that we spent on that we're right around I'm going to say around $13 million. So we spent about $10 million on our water reclamation, our waste water treatment plant, which really takes water all the way back to a reuse potential and then and.

The $3 million, yeah, and water system improvements and so what that will translate to into the second phase is we're going to look to receive about $23 million and water and waste water tap fee revenues with a 3 million dollar additional investments so you're looking at kind of that spread of how much.

How much cost do we have to in core and career to get that $22 million. Given the fact that we made that front end investment on the phase one and so that'll give you a bit of a margin on how the capex looks on our utility segment from phase one to phase, two and where those revenue differentials and what our investments are looking like on that.

Okay I see so I'm, just I'm, sorry, I'm, just not quite understanding like I I can see I understand that there will be improvements, but yes for example.

The operating income up let's say in a typical water utility some are like around 30% is that kind of what you guys are gunning for and on an operating basis.

Yeah, I would say that's true so when we get that $1500 per connection per year, that's what I would call that operating revenue margin I would say our operating margins are going to be right in that range, maybe a little bit better you know I think we have a.

You know pretty efficient shop, where we're going to continue to run most of our systems on an automated fashion and and technology does leverage yourself here. So you know what we think will have the supply that we have you know we have very clean water on the front and so we have a minimal amount of treatment that we have to do that water supply and the front end and.

And you know wastewater reclamation those those margins are a little bit thinner. So we'll have probably higher margins on the water side and and sort of lower margins on the wastewater side. When you take a look at combined water and wastewater margins on the operating side of it it's probably closer to 40% margins so slightly better.

And then what you'd see and utility industry as a whole loans.

Okay, great, but you don't but towards that and you don't expect to see like a huge step up for that segment and SGN, a or anything like that.

Yes, you are and you are not you are sort of your costing your revenue your costing your base right now we.

We all firms that are adequately side. That's right. We are adequate you don't need and okay, great alright.

Right well.

Happy New year and thank you very much for taking my question that really are anymore.

Yep.

I did get a question or just.

Text and over to us about oil and gas I neglected not to mention on deck and not neglect and not to mention I neglected to mention that we do sell water to the oil and gas industry.

That's been a very light component over the last year, mostly because of the demand for oil and gas and Q1 of this year, we did do a frac for our largest operator in the field.

And and really kind of a four well frac. So they had a pad site that was drilled previously and then they did frac one of those pad sites I think we did a about a million and 1 million two and water sales for that Frac during Q1.

No guidance for that oil and gas industry, you know, we sort of look at that as sort of an optionality ended the company we like it when it's there because it's a it's good business. It's high margin business and you know we can dial our systems up and we can dial or systems down so that we don't incur pent up demand or unrealized cost city.

Good day to both to that industry and and have the ability to kind of serve them. When it's there and then you know not when that demand softened so.

We'll wait to see and you know as we get further guidance, we'll update you from.

The oil and gas operators in the field you know, we may or may not see a rig out there. This year are there still some wells that might still need yet to be frac from operators, but we'll see how that guidance goes overtime.

Right and it appears we have no further questions by phone if you have any closing remarks mr. hurting.

You bet so what.

What would I do as you know we will continue to really improve our investor outreach. So one of the things we're going to try to do is I'll be.

Be a little bit more proactive you'll see some updates to our website, you'll see some updates to social media and making sure that we're getting our information out we're linking to you know what we're doing on a more timely basis. So that it's not just the quarter over quarter update certainly we will do the quarter on a court updates we want to make sure that you guys get that info.

From Asia, and you get it disseminated correctly. So that you have the opportunity to kind of understand how we're executing on these phases and then also you know what's going on in between those phases. So that you know what those important metrics are and how you can evaluate the acceleration and the growth potential for the company on to the Ics.

Net that you've got others that are interested and you know forward those contacts will certainly reach out to them forward them opportunities and information on our website. There's a ton of information there will continue to add more information there with these types of presentations as well as the other metrics on there where we can get more video presentations and and.

Have a walk through of how we're progressing with the development activity on a more progressive update rather than quarterly calls.

Yes, if your technology Didnt work and you wanted to ask a question, but didn't get an opportunity to do that don't hesitate to give me a call a I'd be happy to answer any questions you might have and why.

Thank you for your continued support and look forward to working with you on the future.

Perfect. This concludes todays conference you may disconnect and lots at this time. Thank you for your participation.