Q3 2021 Pure Cycle Corp Earnings Call
Greetings and welcome to the pure cycle Corporation third quarter 'twenty 'twenty 1 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
Note. This conference is being recorded I will now turn the conference over to your host Mark Harding, President and CEO of pure cycle. Thank you you may begin.
Thank you Hillary.
Welcome you all to our third quarter earnings call.
For those of you that have excess you can jump onto our website and on the landing page you can join the conference to our lives.
Slide deck that I have that will accompany this presentation. So if you can.
Pure cycle water dot com and on the landing page just click that join conference.
Conference in progress and then that'll allow you to kind of.
Flow along with the presentation.
As usual.
First slide will be our safe Harbor statement, which states that statements that are not historical facts contained or incorporated by reference in this presentation are forward looking statements I'm sure you're all familiar with the forward looking statements.
What I'll do is I'll kind of provide a brief overview I'll try and be cursory about that I know many of you are familiar with the company, but also for those of you who are new to the company.
You kind of overview of what it is that we're doing and where we generate our revenues from.
We have 3 unique business segments that are all kind of underpinned on our utilities and so at a DNA level, we're a water and wastewater resource development company, we own a portfolio of water rights here in the Denver Metropolitan area of Colorado.
We're only water is unique assets you can own waters with separable property REIT assets.
If you take a look at our portfolio. We can serve about 60000 connections and we referenced our connections based on a single family equivalency connection.
In addition to our water and wastewater activities. We also have land development, where we are a master plan developer and we have about 1000 acres on the I 70 corridor.
1 of the most attractive development quarters in the Denver Metropolitan area and are developing a full master plan residential product as well as commercial and retail in line industrial spaces talked a little bit more about that.
And then more recently.
To the single family rental segment, where we're actually contracting with others to build the homes that we will actually maintain an inventory and be able to leverage some of the equity value that we've developed not only in the water arena, but also in the land side and so we'll talk a little bit more about that as well.
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I wanted to kind of highlight our new website. It has a tremendous amount of information.
If you're new to the web site.
Certainly come back and visit us and drill down on all the different layers of it because it contains a tremendous amount of information and very multimedia formatted where we're able to kind of give you.
The benefit of some of our current activity we update some video links of some of our development activity has some podcasts on there. So it's a wealth of information.
Not only for those that are new to the company, but also those that are.
Familiar with the company to get updates on a more and more.
More real time basis, so we're thrilled to be able to present that to you all.
Let's talk a little bit about are a water utility segment as I mentioned, we have a portfolio of water and we really go cradle to grave with that we own the water rights, we develop the wells and surface water diversion facilities, we treat that water. It goes into our distribution system to deliver that to our.
Customers, who use that and then they return.
Return that water to us as a wastewater we collect that wastewater we run that through our water reclamation facility and we have complete reuse of that water supplies. So we're using and reusing water supply through its extinction, we're reusing that the water supply for outdoor irrigation demands as well as our industrial customer.
So we have the opportunity to kind of reuse that very precious resource we collect 2 fee instruments for this well.
Onetime connection fee, which are what we something we've referred to as our tap fees are those have grown over the years. We're currently at about $32000 per connection and this will give you a little bit of the math on it if you take a look at the 60000 connections that's about $2 billion worth of top line revenue and really it's about a 50% margin business.
We use half of that money to build all the brick and mortar that delivers all of the infrastructure to our customers and then.
Have your customer.
That delivers water and wastewater on a monthly basis, and so that generates about $1500 per connection per year at build out of the 60000 connections that's about a $90 million year over year business for us and Thats about another 50% margin business, we do operate and maintain that and make sure that we're continuing to deliver.
Quality.
To our customers a little bit of information about some of the metrics that we have on our utility assets.
Wells and then the water rights themselves in pipe.
Our water reclamation facilities if I.
Take a look at kind of the customer growth in our customers. We're serving close to about 1000 connections. So we continue to grow our customers each month organically from what we have at Sky Ranch as well as the other surface area down at Wild Pointe and this really just kind of shows the growth of what we have in the Sky Ranch community itself.
Our 5000 connections and then as I mentioned earlier, we have capacity of up to 60000 connections.
Taking a look at kind of some of the the bulk assets that we have we continue to grow our assets.
If you take a look at.
Q3, we're up at about $55.1 million in net water assets and then just kind of a revenue growth each through the years and organically growing those from our Sky Ranch and while point projects.
Moving on to our land development segment, we have about 930 acres that can accommodate 3400 residential lots and that'll be a mix of lots and it'll be a full range of single family detached as well as.
Paired product, where you have duplexes some higher density multifamily product.
As well as some townhome product for us so we have a.
Cadre of price points for customers out of Sky Ranch, and we're very proud of Sky Ranch. It sits.
From 1 of the fastest growing affordable the 1 of the most affordable.
Master planned communities in the Denver market. So we're happy to continue that theme and really working with our homebuilder customers to deliver a high quality affordable housing product. We also have an ideal location along the interstate so that accommodate some commercial.
Commercial development for that so we have about 2 million square feet of retail commercial and industrial space up there and if you kind of convert that out on a typical basis thats about another 1600 connections.
And then just kind of where we're located just directly south of the airport.
Just some bullet points on the progress of our first phase is kind of gives you an aerial we've got about 300, a little more than 330 residents out there we kind of metrics that out on we've delivered 446 connection fees and typically those are.
<unk> delivered at the building permit base. So it's almost nearly sold out and we probably got about another 40 homes left or 40 lots that are yet to be sold out there it's really exceeded.
Patients both from the company's standpoint, as well as each of our individual homebuilders out there. So there are about 2 years ahead of schedule on delivering all those finished lots.
In addition to the revenue that we received we received about $36.7 million from our lot fee revenues and we still have a bit more to collect on that we are in addition to the lot revenues, we get revenues from the public improvements that we create out there and so those are reimbursed to us by the <unk>.
Local municipality that's out there we.
Had about 30 months $30.31 million of Reimbursable as we've gotten about $10.5 million net back but have been able to record the other $20 million due to the acceleration of the development of phase 1 a little bit higher a assess value to the community and then also additional mills that we have from fuel.
<unk> filing so all of that.
We're executing very well and really enjoy working with our homebuilder partners.
Taking a look at our phase II, we broke ground on that in February of this year and we will deliver that additional 900 lots can kind of force subsequent phases. If you kind of look at these day kind of quadrant themselves out very nicely in terms of the main.
Main thoroughfare streets, there, but we're delivering sort of this first quadrant of about 229 lots.
<unk> finished up the grading of that so all of our dirt works done we have the utility crews and theyre working on the water sewer and storm water systems associated with that and then hope to be delivering some lots to each of our homebuilders. Later this year. So that they can kind of continue that.
Construction through the winter and get their model homes up for the selling season of next year. If you take a look at all 900 lots in here.
Estimated to generate about $72.6 million of that and then of that $72.6 was to get about another $48 million of that in Reimbursable and then again the utility fees of about 21 and a half.
In the.
And the water tap fees.
That's I'll drill down a little bit more specifically on kind of the gross numbers for Sky Ranch, and we really kind of carve it up in terms of here are net experiences on filing 1.
And that kind of shows you where we're at we invest.
Invested.
$35.8 million and between the lots sales and the Reimbursable that we're getting you know will share. We're currently showing about just the $10.5 million of those reimbursable is in that 47.
$4 million, which also includes the tap fee revenue. So we still have about $21 million net to receive on that and then you take a look at the filing 2 metrics on that again, we show that net of.
The Reimbursable is in there and so the timing of those Reimbursable is will be dependent on kind of a financing metric of the local municipality, but it also cash sit out on the build out and the remaining 3600 lots in how we how.
How we forecast the remaining balance of the project so.
Tremendous opportunity for us we have a.
Very good success with delivery of this infrastructure and ultimately the finished lots for our homebuilder customers.
I'll talk a little bit about this new segment that we had the single family rental segment, where we're actually going to hold our inventory certain lots and kind of an understanding of why we think that's a good business.
If you take a look at.
Housing market in general you know Theres a tremendous appreciation of houses. So these are some metrics that come out of Colorado, but we've had a nearly a 26% increase in average single family home prices are kind of over the period of time, which we've got started on the Sky Ranch project moving from you know what was.
Really around $350000 per home.
Probably close to $480.500000 per home so significant growth rates, we're seeing at about 6% annual growth rate there.
And then just kind of the competitiveness of the market is very competitive to get these homes the supply does not.
Come close to meeting the demand and you can kind of see weeks on inventory.
From even just a year over year may from 'twenty to 'twenty, 1 we're moving from 9 weeks of inventory of the 2 weeks of inventories so.
The housing market is still very robust, particularly in our market segment and the starter home market segment and so 1 of the things that we like about that is that you know.
We find Denver to be a very good place to be able to deliver a single family rental market where families can come in and if theyre not situated to buy just yet they can certainly find a very nice.
Community, where they can rent a home until they are.
Interested to buy so these are some of the metrics about kind of where we position ourselves with other masterplan communities in the Metro area and so we think that you know.
With our ideal location.
Excess to transportation.
The ability to deliver the amenities, we have a new charter school that was approved this year. So that will be under construction later this year for delivery in the school year next year. So we'll have neighborhood schools parks open space.
And a whole network of trails that run throughout the community.
Taking a look some of the numbers of this single family rental we are forecasting rental income on average of about $2800. A month per unit and then you know if you take a look at how this would.
Our crew to us, we're able to get access to very inexpensive money mortgage type money, it's not a mortgage companies can't have a mortgage but it's it's mortgage type money at about $3.75 from our lending institution and so not only do we have the renters covering our cost of debt service on that but we also generated.
Margin on that so it becomes accretive to both the balance sheet as well as the income statement and then it really does accelerate kind of our recur BOLE income so instead of us just generating that $500 per connection per home.
This really does add maybe another $15000 in free cash flow of $30000.33000 in total cash flow. So it's a great opportunity for us to really carry forward some of that equity value from collecting that land at the height of the great rich.
Session and being able to capitalize on the appreciation of the community that we're creating.
A little bit more metrics on that what we're looking at is we will finance the vertical cost of that debt. So you know this is kind of a typical assumption of how that's going to look for us where we will have a finance gossip about $317000 of a $450000 market cap or market value of the home.
And so each year you know we.
We're estimating maybe 4 to even 6% appreciation on that $450000 of assets and then we're financing at 317000 of that at $3.75. So we've got a natural arbitrage on the market appreciation in the value of the asset together with the added incremental cost of going vertical on it.
No.
This is kind of give you a view of our 3 units that we've got under construction for phase..1 we did have 3 available lots. So we're we're well on our way to completing these units and hope to have those completed by September and they'll have the renters in there in September October timeframe. So.
We've got a few loss reserved in our second phase that we will hold out for more BTR units that'll be interspersed within.
The community and our homebuilder partner products, where we're looking to engage with them as they are on that block. They can build those typical homes that they are building next door to us and they can build those homes for our inventory accounts and then.
You may have a block of about 60 homes that are contiguous that we'll look to continue this model and add to the portfolio.
Little bit of a little bit a touch on the oil and gas certainly $70 oil helps a lot more than $40 oil. So we do have operators that are drilling in the field. So we've got a 1 rig that's drilling contiguous continuously and then a second operator will bring in a rig.
For some wells that'll be a little bit south of our surface area, which will be kind of a new portion of the field that are there'll be exploring.
You know this is an area, where you know we deliver an awful lot of water to these operators in a very short timeframe. So we are seeing kind of an annual creep.
Creep in terms of the amount of water that they're using just because of the technology and enhancements to the fracking technology currently we generate about $250000 per well for water and we're seeing kind of a progression of the field. So as opposed to it being 1 or 2 wells per pad site. This year, we're seeing 4 and 6 wells per.
Pad site in next year that May increased anywhere from 10 to 12 wells per pad site. So that continues to be an opportunity for us.
Its a very incremental in terms of our ability to maintain service for their so we enjoy that when they're there, but don't have a lot of fixed costs when net weekends and so continue to watch that and see how that progresses over the years as the oil market continues to strengthen.
So for our 9 months and it will just be very summary in kind of our our financial presentation here we had.
I had hoped ahead of a more traditional.
Presentation on each of our individual metrics, but we did find in the air in 1 of our spreadsheets just at the 11th hour on how our Reimbursable as were going until we had to redo those numbers and so youll see those numbers coming out later this week sometime.
Towards the end of the weekend then what I'll do is I'll update this slide presentation. So you can see those.
The traditional metrics that we have but in general.
We've got about $12 million in revenue from the 9 months ended our gross margins are about $7 million and net income up to about $18 million. So 1 of the key areas of that was that we were able to recognize the revenue the reimbursement.
The opportunity from the phase 1 and so we had that add in our Q2.
We have about a if you take a look at some of these metrics.
Metrics in here about $36.7 million you know a lot revenues from phase 1.
We're almost through the choppy. So we've got a few more chassis left that'll get us up to about $14.5 million and were currently at $13.3 and then.
Reimbursable the $29 million in Reimbursable. So we've got about 10 and a half of those already delivered to US and then we get a project management fee on top of the reimbursement from the public improvement so.
It kind of a.
A summary overview of that but then look for the actual filing of the Q. Later. This later this week.
And then just wanted to talk a little bit about our leadership you know very a very strong board of directors that have very.
Very relevant disciplines that they bring to the board so and to the company. So we've got a strong expertise in land development.
Our financial management commercial development water water law, you now and then and just Investor shareholder relations in general So we continue to rely on their stewardship.
A little bit more about the continued stock metrics because.
We're continuing to get the word out I think people are continuing to see our results that we posted quarter over quarter year over year. So that is helping significantly not only in terms of price, but also in our volume. So we are we like.
To continue to provide liquidity to the marketplace.
So with that those are my prepared remarks, let me turn it over to our moderator and see if we have some questions that I can drill down and provide a little color.
Thank you Mark at this time, we will be conducting a question and answer session. If you'd like to ask a question. Please press star 1 on your telephone keypad, a confirmation tone will indicate your line is no question you May press star 2 if he would like to remove your question from the queue.
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1 moment please poll for questions.
Okay.
Okay. Our first question is from Bill Miller shareholder. Please state your question.
Mark Hi.
Hi, Bill.
Right.
Good News Corp.
I'm wondering about the 3 year view, and wondering where youre going to get your net.
For your.
Apartment rentals through your house revenue.
Okay.
Moving by far the most profitable growth.
But I wonder how bigger percentage.
Trying to make it.
Where youre going to get the ramp for your next act.
That's a great question.
We do have.
As I've mentioned previously we do have our nets out for additional land acquisitions, and we have a tremendous amount of land that surrounds us that is available.
It is ideally positioned because I think it's.
Kind of consolidated Youre not dealing with 10 acre assemblage is here, we have a lot of land that's around us that would be a half section a section or larger assemblages even of that and really that's kind of where we're looking for opportunities. We are cognizant that it's a red hot market and XP.
Patients are pretty darn high and we want to make sure that it works for us as well as them not to be overly analytic in our acquisitions you know what we want to try to do is we I think we have the ability to pay a little bit more than say anybody else because we're bringing the water to the table.
But in truth a lot of these a lot of these property owners also know that we're bringing water to the table and they want a little bit more of the benefit of the water then they actually have.
So we're a little patient on some of that but we do have we.
We do have some very specific targets in mind, and that's where we're we're focusing in on that kind of segment.
To your other question about <unk>.
The <unk> and kind of the opportunities that that does provide us and the leverage that we create on some equity value there.
I will say that the.
The true value of that for the company is really in doing both the land and the utilities right. There's a lot of companies that are going after this single family rental market segments, I mean, very big companies, if you're if you're talking about the America home for rents are or a blackrock or any of the managed.
Portfolios that are really going after this they're actually just buying it.
In the in the market and really don't have any of that metric margins in there other than being able to capitalize on inexpensive mortgage money and so.
In addition to us being able to do that we have the equity value that we have on the land and the water. So that gives us a tremendous value I don't know that we would actually be out there doing it if we werent doing the land and the water, but boy, that's certainly gives us a compelling opportunity.
So that day, the biggest part of your business from 5 years.
Average revenue.
We'll wait to see it certainly will have some of that because it's such a large component of the residual recurring revenue that that certainly will be a component of it I still think that the water utility in the land segment give us some big compelling projects that have decades worth of growth.
But I think youre going to like how the.
Have the BTR model generates a lot of cash flows for us to flex into things like dividends flex into.
The market doesn't quite understand what the value of the stock is that we can redeploy some of that revenue that way as well.
Great I look forward to it.
Thank you. Thanks for your continued support.
Right.
Once again, we'd like to ask a question. Please press star 1 on your telephone keypad, a confirmation tone will indicate your line is in the question. Kim You May Press Star 2 if you would like to remove your question from accounts.
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1 moment, please let me call for additional questions.
Mark It appears we have no more questions at this time.
I'll now turn the call back over to you for closing remarks.
You bet.
So to the extent that you were not able from a technology standpoint to queue in.
To ask a question I do apologize for.
For the gravity of the financial presentation, we do have the metrics out there that kind of give you a quarter over quarter results and then you know with the details on each of the segments Youll see some of that information later, so I'll refresh the presentation and certainly if you have questions as it leads to some of that detail don't hesitate to give me a call.
I do want to make sure that.
We have kind of that quarterly.
Analytics that I know a lot of you've got your model set up for us. So we can keep that that information rolling for you. So that you can continue to trend us on that.
We do have an investor day coming up so we have.
Very nice.
Rsvp's for for the Investor Day, So I welcome all of those of you that are going to be joining us next week to kind of come out and kick the tires and not only see kind of the phase 1 but kind of it gives you real time.
Opportunity to see how some of this interest horizontal infrastructure sinks in and coordinates in and it really does give you a feel for the synergies the synergies of the utilities together with all the Horizontals and then it gives me ability to highlight where some of these <unk>.
Reimbursable has come from and how that kind of.
Factors into our overall unit pricing in terms of our lots and then an opportunity to tour our water reclamation facility that we're very proud of because we are recycling and reusing a 100% of our water supply. So in addition, net us having a very valuable portfolio, we use and reuse that portfolio. So.
We welcome those of you in a few if you find yourself traveling through the area and it's not an investor day, certainly reach out and give me a holler I'd love to give you a tour so with that I will close that out and look forward to speaking with you all again soon.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a great day.
Mhm.
Yes.
Yeah.