Earnings Labs

Pure Cycle Corporation (PCYO)

Q1 2020 Earnings Call· Tue, Jan 7, 2020

$11.52

+0.22%

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Transcript

Operator

Operator

Good day, ladies and gentlemen, and welcome to the Pure Cycle Corporation 2020 First Quarter Financial Result Conference Call. All lines have been placed in a listen-only mode, and the floor will be opened for your questions and comments following the presentation. [Operator Instructions] At this time, it is my pleasure to turn the floor to your host for today, Mr. Mark Harding. Sir, the floor is yours.

Mark Harding

Analyst

Thanks Jess and I'd like to welcome you all to our first quarter earnings call. It's a bid out of cycle for us as we typically usually do two calls a year but because of the results that we have and kind of the uniqueness of some of these results that I thought it might be important to share some of the color of all of these things. And kind of give you an update on what we are doing and where we are headed. So with that we do have a slide deck for this. If you move over to, if you can get over to our website, get over to purecyclewater.com and in the Investor tab you will find that there is this slide deck for this presentation. And what I'll try to do is I'll try and note the transition of the slide as we work through the presentation. So our first slide, second slide actually is our safe harbor statement where those statements are not historical facts and incorporated in reference presentation are forward looking statements. And I think you are all familiar with our safe harbor statement. I am going to kind of run through the kind of the company story because I'm certain that most of you are fairly familiar with the company and the assets. They're in here. We are a water utility company and with the segments that also develops land and we've been developing or Sky Ranch project. We broke ground on that this year and I'm going to give you kind of a lot of color on how that's gone this year, as well as providing water for industrial sales and some oil and gas royalties. Slide 4 is just a summary of our water utility assets and kind of…

Operator

Operator

[Operator Instructions] We have a question from Geoffrey Scott at Scott Asset Management.

GeoffreyScott

Analyst

Mark, how are you? Very well, thank you. A couple questions. Can you size the infrastructure expenditures for Phase 2 for us?

MarkHarding

Analyst

Can I size the infrastructure, so -- not just yet? If you take a look at -- let me set aside that I'll bifurcate that out between what the commercial deliveries going to look like versus the rest of the residential delivery. And so what I would see in the rest of the residential delivery, we're probably a little more than 2x the size of the first phase. So if you take a look at the lot delivery and so if we took out some of the heavy public improvements like the drainage channel and things like that. We're probably delivery of the 506 lots would be around call it $30 million. And so maybe we're looking at a little bit of economies of scale and maybe twice that investment for the delivery of the next increment of that. And what we would try to do is really similar to Phase 1; phase that so there's going to be opportunities where we can grade out say the whole area for residential to capitalize on economies of scale. And then incrementally deliver sub phases within that phase. So we did that even in Phase 1. We delivered Phase 1, 506 lots but we were technically set up to deliver in three phases, but we ultimately because of the success ended up delivering it in two phases just because of the acceleration. But we will similarly bifurcate that out where we have commitments from builders. We're going to try and look at the same contractual format where we're going to have a lot development agreement where we'll get paid a third type transaction. So that we can continue to have the builders optimize their cash flow so that they're not paying for all of that infrastructure upfront, neither am I. So we're partnering and delivering that on a real-time basis. And I think we have adequate capital. If I ultimately run through the analysis I think we believe we have an adequate capital to run all of Phase 2 on the same platform that we did with Phase 1.

GeoffreyScott

Analyst

Okay, sounds good. You talked about 40 residents. Is that 40 human beings or is that forty houses?

MarkHarding

Analyst

40 houses, so 40 families out there. I don't have a census count out there. It's predominantly family. So we're seeing lots of young kids that are loving the updated play structures that we've got at our parks.

GeoffreyScott

Analyst

Yes. But it's 40 houses that are inhabited now.

MarkHarding

Analyst

Correct.

GeoffreyScott

Analyst

Yes. I've driven through and I've been surprised at the amount of activity. It's really going very well from outsider's perspective.

MarkHarding

Analyst

Yes, coming out of the ground, it's exciting to see and it's not --where as I'm sure you saw at one of the Investor Days we had maybe a couple years ago you're like, wow, this is the middle of nowhere and all of a sudden now you've got 150 homes in the middle and it doesn't feel like that at all.

GeoffreyScott

Analyst

No. And I mean I drove through it kind of 10 days ago and I was surprised it just a change from when I drove through it at the end August. The next question is really kind of chicken-and-egg that the first houses go in there the lots are a little bit less valuable because there is no commercial. And then once commercial is --once residents in there there's more interest on the commercial side because you have this market that's grown up. And then once the commercial is in the next set of residential is even more valuable because there's commercial there. Where do you kind of stand on that spectrum? How are you thinking about the comparative values going forward? Does it make sense?

MarkHarding

Analyst

I think -- it does, it's sort of the cyclical value that you create with a Master Planned Community. And you're right, when you're leading with that, you've got a residential opportunity and it may have a value that would be discounted compared to when you're in an urbanized area and you've got all the convenience of commercial facilities. And so two things happen; one, the assessed value of your existing customer base goes up, so resale of homes certainly have a significant price appreciation, that has two -- that has -- it has two effects. One, it certainly has the advantage to the original homebuyer. But from our perspective, it also adds more tax revenue to help pay more of the reimbursable than we already financed in the first phase. And then on the other side which you are alluding to is your lots become more valuable because your home builders have the ability to build the same house and sell it at a higher price and so we want to participate in that. And so how we look to do that one, Geoff is we want to try and have a base price for our house and then also have participation with the builders on sort of any price appreciation over certain number. And then that way I'm not forecasting it at their expense and they're not benefiting the price appreciation at my expense. So we will partner with them on that to be able to incentivize us to provide a great curb appeal community and a community that continues to have price appreciation for even the same product that they're going to be building.

GeoffreyScott

Analyst

And you'll keep that agreement for phase II?

MarkHarding

Analyst

That's what we're looking at. Yes, that's how we're -- we're trying to structure this as the same lot delivery agreement, get a bump in the price and then also have a back-end true-up on home value sales.

GeoffreyScott

Analyst

Is the residential development to-date sufficient that commercial people have been coming to you or have you still been having to go out to them?

MarkHarding

Analyst

Kind of 50-50. I'd say there are some tire kickers that are just sort of looking to lock up on long options, which are really not of interest to us. We're really looking at users, builders on this thing rather than kind of sell it to somebody who is going to sell it to somebody. So we want to be a little bit more patient with that because we've got -- we really are monetizing the project very nicely, and I don't want to miss out on sort of undervaluing the commercial which then continues to grow in value because of what we're doing on the residential.

GeoffreyScott

Analyst

Yes, I mean that was my impression from my little advisory that once phase 2 starts to be very visible, commercial becomes extremely valuable.

MarkHarding

Analyst

Yes.

GeoffreyScott

Analyst

Of that 2.3 million square foot commercial, how much is going to be in phase 2 and then how much is going to remain?

MarkHarding

Analyst

So I would sort of segment that as to say that's commercial and that'll be through -- throughout the rest of the project. While we're -- while -- because we're planning that upfront that's going to be that 480 acres occurs. But I will say that a portion of that commercial we'll develop in phase 2 and a portion of that commercial we'll develop in phase 3.

Operator

Operator

And Mr. Harding, I have no other questions holding. I'll turn the conference back to you for any additional or closing comments.

MarkHarding

Analyst

Okay. Did we get one that wanted to jump in there at the end, Jess?

Operator

Operator

We just did. Absolutely, Robert [Sloce]. Your line is open. Please go ahead, sir.

UnidentifiedAnalyst

Analyst

Mark, fine job. I'm inquiring about subsequent quarters this year that possibly you won't have a CAB reimbursement so the earnings might be less than this quarter. Could you comment on that?

MarkHarding

Analyst

So, good question. That's what we've tried to smooth out. So what you saw was we recognized 60% of those revenues on Q1 and then we'll have that 40%, the remaining 40% of those bond proceeds which will go over the rest of the year. So it will be less, but it still will have some of those bond proceeds that even out some of those EPS in subsequent quarters. And you're right, these bond events happen periodically. There is kind of an optimization of when these are -- the right time to do and some of that has to do with the fact that you want to be kind of right mid stage where you've had some construction that got started. You know what those homes are selling for so that they have a good forward indicator to bond buyers to give them guidance as to say, here's the AV, here's the sales, here is the mill levies, and here's the bonding capacity, so you get all of that right. And then there is a window where you're not going to improve on that because you've got a year lag. So even though you might have a few more homes, it's still not going to give you more bonding capacity because they already price that into it. And so, we'll see that same cycle in phase 2. It might be a little bit bigger because we might wait and see that we have instead of 500 homes, maybe we're looking at projecting out 900, to 1,000 homes, something like that and then see how that will look for the next phase of the bond reimbursable. So those are going to be lumpy, but then when they occur, you'll see how we record that in revenue for those percent -- in the same percentage, based on the percentage of the cost of the public improvements to-date compared to the percentage of the total public improvements that we're going to make in the project.

UnidentifiedAnalyst

Analyst

Okay. It's a hard thing to get my hands around, but I -- yes, I'm sure, you're right. Thank you.

MarkHarding

Analyst

I wish I could have an easier way to explain the GAAP process on that and it's something that -- that's about as simplistic. That's just how I understand it. I think there is probably, if I had our CPA explain it to you, we'd all be lost.

Operator

Operator

And we will return to Geoffrey Scott at Scott Asset Management.

GeoffreyScott

Analyst

Mark, just one quick follow-up. What is the real estate taxes on your -- just kind of your average house that there is $325,000?

MarkHarding

Analyst

Very -- well, I'd say very modest. For those that are in New Jersey, it's a downright steel. But I would say based on the mill levies and this will be kind of a total mill levies, not just our mill levies, but we have overlapping districts and jurisdictions in here, it will be around, say, $3,800 - $4,000 a year.

GeoffreyScott

Analyst

$4,000 on a $325,000 house?

MarkHarding

Analyst

Yes, I'd call it, say, maybe a $350,000 house.

MarkHarding

Analyst

Yes. Well -- so, we've got another -- Pat [Donahoe]. Okay. It's going to be disappointed if Pat didn't make -- have a question.

UnidentifiedAnalyst

Analyst

Thanks Mark. Thanks. Just -- I think it's kind of a follow-up on the previous one. But if you look at the number you have on the inventory that $4 million that isn't on the balance sheet, all right? So where -- I'm still kind of confused on so where is it.

MarkHarding

Analyst

I think it is in the inventory number.

UnidentifiedAnalyst

Analyst

No, it's not in the inventory.

MarkHarding

Analyst

[Multiple Speakers] That's right. That's right. So what happened is that $4 million will be recognized with inventory. So as we roll, it's a deferred revenue component and what happens is as we sell additional lots, we're going to pull that $20,000 per lot into the rev rec for each lot we sell from here forward. That's how our margins would go from 6% to 27%.

UnidentifiedAnalyst

Analyst

I'm sorry. I just don't -- I don't -- so to get this $4 million asset, if you're going to move it from sort of -- I am just thinking of it should be moved from the balance sheet to the income statement, but it's not on the balance sheet or is it on the balance sheet? Is it incorporated in the -- in one of these other numbers? It's not in the investment in water systems, it's not in land and mineral interests, not in other long-term assets or is it, maybe it's on other long-term assets, where is that inventory number?

MarkHarding

Analyst

So what we have to do is reduce the cost of that infrastructure. So you lower that cost out of there and then that money, it's receded into the assets. So we have the cash for it, but then as we recognize it from the balance sheet. So where is that on the balance sheet, it's in cash, and then where it rolls into the income statement is going to be a higher margin in how we're delivering the lots.

UnidentifiedAnalyst

Analyst

Okay. Okay, it's in the cash. Okay.

MarkHarding

Analyst

Trust me, we struggled as there's not a lot of precedent for how this stuff happens. And so if I give you kind of the three different scenarios for this and maybe this will help too for all of you to understand. If we issued the bonds upfront before we incurred any of that cost, then that money would be in inventory, all through the process and so you take it ratably down. If we issued the bonds after we sold all of the lots, then all of that would go to cash and then run down into the balance sheet. When we issue it in the middle of it, some of it goes to cash, some of it goes to the income statement. And so it's that timing of -- if it was all upfront it'd be running through inventory on every lot. If it was all after, it'd be in cash and it would roll through the income statement in its entirety. And then in between, we do it on a percentage basis.

UnidentifiedAnalyst

Analyst

Yes, I'm just having trouble trying to figure out what -- I'm kind of trying to figure out holistic view of what the business is worth. And so much of this tap fees are one-time -- obviously one-time revenue and income statement -- income numbers. And I guess if I kind of looked at back to your other slide that you had on slide 11 -- was that slide 11 -- I'm sorry, slide 10, where you had water investments in cash, if you can go back to 2016, am I thinking about this right? If you go back go to 2016 it's sort of if you had the cash plus water investments, you're at what is that, $56 million-ish and if you kind of fast forward it today your water investments plus cash is sort of $73 million, so over the sort of four years, we've kind of gone up that $17 million, is that -- plus maybe, so is that sort of what we've -- because we really haven't spent too much. I mean I know there's some things in terms of the big water channel and stuff like that that we will get some benefit in the second phase and obviously, we'll get some income going forward. But that $4 million that we're going show up as income is already in the cash statement. So if we kind of like I guess I'm thinking out loud here, sorry. But, so if we are at $0.09 a share-ish before the sort of this event we will probably be, you can add that in the next three quarters. So it's like $0.36 on top of that. So at $17 million plus a little bit is where we're at after phase 1? Does that sound about right?

MarkHarding

Analyst

I'm tracking your numbers, but yes, I think that's right.

UnidentifiedAnalyst

Analyst

Okay. Okay. Yes. It's cool. Sounds good. Hey. So I got one more for you. Just I was thinking about flying out for your -- you got a year-end meeting next week, is that right?

MarkHarding

Analyst

Yes. You pre-empted my close.

UnidentifiedAnalyst

Analyst

Okay. I'm sorry. Go ahead.

MarkHarding

Analyst

Yes. We have our shareholder -- we do have our shareholder meeting coming up next week. So if you're all passing through town or are interested to come out and take a look, it's on the 15th. It will be at 2 o'clock at Downtown at our attorney's office at Davis Graham & Stubbs. So there'll be the address for that on our proxy materials, but I certainly invite you all to have an opportunity to come out, meet the Board, ask any other detailed questions to the extent that we can give you some more color of kind of how the first half of this has gone. And what we expect to see kind of on phase 2 and the build-out and sort what may be some of these implications of the repositioning of some of these oil and gas assets would be.

UnidentifiedAnalyst

Analyst

Thank you. End of Q&A

Mark Harding

Analyst

Okay. So with that, I think I will again thank you all for your continued support. We wouldn't be here without all of your support and we have a lot of long-term shareholders. So I do want to thank you for your trust and your commitment over the years and we hope to continue to deliver positive results through the rest of this year and moving forward. So if you have a question that you didn't quite be able to get on through the technology of the call, certainly don't hesitate to give me a call or if you're listening to this on a rebroadcast, don't hesitate to just give me a call directly. So with that, I thank you and I will close the call.

Operator

Operator

Ladies and gentlemen, we thank you for your participation. You may disconnect at this time. And have a great day.