PURE CYCLE CORP Q1 FY2025 earnings call

Management Statement and Operational Highlights:

• Acknowledged leadership team, board of directors, and strong team execution.
• Record revenues, gross profits, and royalty income. Q1 had $2.6 million in oil and gas royalties, ~$3.67 million gross profit (64% margin), net income ~$4 million.
• Momentum continued with revenues up ~7% QoQ, gross profits up ~10% QoQ. Net income almost doubled QoQ from 2024, earnings per share up 78% period over period.
• Water utility segment: ~5% asset utilization, significant opportunity for growth. Land development: Three phases under development, Phase 2a fully built out, Phase 2b and 2c in progress. Single-family rental segment: ~$5 million in constructed homes, ~$7.6 million equity value, 90% renewal rate.
• Strategic positioning: Water, land development, and single-family rental segments integrated to create value through asset appreciation and recurring revenue.

Segment Performance:

• Water Utility: Tap fees up 150% due to new connections at Sky Ranch, recurring customer revenues up 12%. Oil and gas royalties were $2.6 million from mineral interests at Sky Ranch.
• Land Development: $78 million in lot sales to date, with Phase 2a fully completed and occupied, Phase 2b with 35 homes vertical, Phase 2c 70% complete on utilities, Phase 2d grading underway.
• Overall: Revenues were $5.7 million (up ~7% QoQ), gross profit ~$3.67 million (64% margin), net income almost $4 million or $0.16 per share. Gross profits up ~10% QoQ, net income nearly doubled QoQ from 2024, earnings per share up 78% period over period.

Guidance:

• Total revenue guidance ~$31 million, Q1 had $5.7 million. Gross profit guidance ~$23 million.
• Fiscal year-end forecasted $0.52 per share, Q1 had $0.16 per share.
• Oil and gas revenue expected to be weaker in 2025 but strong from 2026-2030 due to numerous permits and continued drilling in the area.
• Water utility segment guidance strong despite weaker oil and gas revenue in 2025.

Risks:

• Potential pushback on tap fees as they approach higher market levels.
• Uncertainties in the timing of development and monetization of Lowry Ranch, including potential delays in commercial activity and infrastructure projects.

Question and Answer: Q: Hi, can you hear me?

A: Yeah.

Q: Question on one of those -- the latter slides, I think it was Slide 27 where you showed the projected asset value. I guess, I was curious a little more detail on how do you arrive and sort of what are the -- what does that represent?

A: Mark Harding: So yeah, we'll say 26 and we show that... when you take a look at 37 and that's an asset growth, what that shows is from each of the segments, whether that was going to be the land development opportunities on selling lots and the number of lots that we have still remaining in inventory and we're making between what we're -- what we make from our homebuilders, which is fairly modest, on actually the sale of the lot to the homebuilders and then the reimbursables. As you see in our balance sheet, we have a continued growth of the reimbursables on the balance sheet. And that's really -- we get paid back for all the public improvements that we do with that. And we get paid back from the tax receipts on that. And so periodically, we'll go forward and we'll bond the continued growth of homes. And so each phase gets a new set of homes and then that adds to the assessed value, which is the value of the home times the tax base on that. And then that's how we get that money back together with the water tap fees and then the single-family homes. So that's really just a core mathematic computation of Sky Ranch and only Sky Ranch. It does not take into account all of the 60,000 connections that we have in inventory available to serve other land interests or serve development within our service area at the Lowry Ranch or any other of those opportunities. This is just what's on the balance sheet on things that we own.

Q: Hi, can you hear me?

A: Yeah.

Q: Great. Good morning.

A: Good morning.

Q: Question on one of those -- the latter slides, I think it was Slide 27 where you showed the projected asset value. I guess, I was curious a little more detail on how do you arrive and sort of what are the -- what does that represent?

A: Mark Harding: So yeah, we'll say 26 and we show that... when you take a look at 37 and that's an asset growth, what that shows is from each of the segments, whether that was going to be the land development opportunities on selling lots and the number of lots that we have still remaining in inventory and we're making between what we're -- what we make from our homebuilders, which is fairly modest, on actually the sale of the lot to the homebuilders and then the reimbursables. As you see in our balance sheet, we have a continued growth of the reimbursables on the balance sheet. And that's really -- we get paid back for all the public improvements that we do with that. And we get paid back from the tax receipts on that. And so periodically, we'll go forward and we'll bond the continued growth of homes. And so each phase gets a new set of homes and then that adds to the assessed value, which is the value of the home times the tax base on that. And then that's how we get that money back together with the water tap fees and then the single-family homes. So that's really just a core mathematic computation of Sky Ranch and only Sky Ranch. It does not take into account all of the 60,000 connections that we have in inventory available to serve other land interests or serve development within our service area at the Lowry Ranch or any other of those opportunities. This is just what's on the balance sheet on things that we own.

Q: Hi, can you hear me?

A: Yeah.

Q: Great. Good morning.

A: Good morning.

Q: Question on one of those -- the latter slides, I think it was Slide 27 where you showed the projected asset value. I guess, I was curious a little more detail on how do you arrive and sort of what are the -- what does that represent?

A: Mark Harding: So yeah, we'll say 26 and we show that... when you take a look at 37 and that's an asset growth, what that shows is from each of the segments, whether that was going to be the land development opportunities on selling lots and the number of lots that we have still remaining in inventory and we're making between what we're -- what we make from our homebuilders, which is fairly modest, on actually the sale of the lot to the homebuilders and then the reimbursables. As you see in our balance sheet, we have a continued growth of the reimbursables on the balance sheet. And that's really -- we get paid back for all the public improvements that we do with that. And we get paid back from the tax receipts on that. And so periodically, we'll go forward and we'll bond the continued growth of homes. And so each phase gets a new set of homes and then that adds to the assessed value, which is the value of the home times the tax base on that. And then that's how we get that money back together with the water tap fees and then the single-family homes. So that's really just a core mathematic computation of Sky Ranch and only Sky Ranch. It does not take into account all of the 60,000 connections that we have in inventory available to serve other land interests or serve development within our service area at the Lowry Ranch or any other of those opportunities. This is just what's on the balance sheet on things that we own.

Q: Hi, Jeff Scott here. How are you?

A: I'm great. Nice to hear from you, Jeff.

Q: First question, when we started this, the combined tap and waste fees were kind of in the low 20s. And I think you said on the call that they're now 40. Are you starting to get any competitive or political pushback? And if you're not yet, kind of at what level would you expect to get some pushback?

A: Great question. And I didn't have that slide in this deck, but I do have it in the year-end deck. And what we try to do is keep consistent with where the market is for these tap fees. And so when you look at that, we're right in the meat of the market. We take a look at our most regionally competitor, which is going to be the neighbor, which is city of Aurora and our tap fees are just slightly less than city of Aurora tap fees. But when you look at the overall tap fees, there are water providers whose tap fees are reaching $60,000 a connection. And so it really is a play between what it costs you to develop that system, what's your cost of capital and carrying those assets forward, together with the market appreciation and the cost of the next incremental amount of water that needs to get developed in the system. And so I would say we've been very good about keeping up with the bulk of the market and having that opportunity to continue to drive the investments that we're doing in oil and gas to be able to monetize that going forward.

Q: Mark, this is Jeff Scott. Another completely different topic. The development of Lowry Ranch, that requires a lot of moving parts to come together. Where do you see that in kind of a time scale?

A: That's a good question. Certainly, the metropolitan area has grown out to it. And the state is evaluating a number of different options on it. So, they're looking at what partners can they bring in it for development, what partners can they bring in it from a lessor land use standpoint, what partners can they bring in it from a conservation standpoint. And sometimes when you look at all the options that you have, there's too many options that you have and it makes it complicated in making some of those things come to fruition. But certainly, the road ahead is a lot shorter than what we've seen over the last 30 years since we've been involved, just because of the growth and the maturation of the metropolitan area. I can, as many times as I've tried to give guidance as to what I think a third party is going to do, I have an absolute perfect record of being wrong every time.

Q: They still have a mandate for the school system, don't they?

A: Yeah. No, they are -- and they're very cognizant of that, right? This is their single most valuable asset. And the number of opportunities that they have to do great things with it, for generating revenue to the school trust or generating education opportunities on the ranch for generating recurring revenue from lessees on the ranch, all of those are opportunities for them, and it really is for the benefit of K-12 public education.