Release Date: April 11, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Pure Cycle Corp (PCYO, Financial) reported a strong quarter with $8.5 million in revenue, indicating a return to growth trends seen in 2021 and 2022.
- The company's gross margins remain impressive, exceeding 50% across all three business segments: water utilities, land development, and single-family rentals.
- Pure Cycle Corp (PCYO) has a robust balance sheet with high liquidity, including over $50 million worth of liquidity between cash and notes receivable, and very modest debt.
- The company's single-family rental segment is showing success with 100% occupancy in Q2 and a high renewal rate, indicating strong demand for the units.
- Pure Cycle Corp (PCYO) has significant untapped capacity, with the ability to provide water and wastewater service to approximately 60,000 single-family connections, of which only 1,300 are currently connected.
Negative Points
- There was a 90-day pause in starting Phase 2b of land development due to aggressive interest rate increases towards the end of 2022, which could indicate sensitivity to market conditions.
- The tap fees segment was lighter in Q2, which is attributed to seasonality, but it also shows reliance on certain times of the year for higher revenue generation.
- Despite the company's strong performance, the market valuation does not seem to reflect the company's growth and asset value, as discussed by investors during the Q&A session.
- The company's water and wastewater segment revenues are heavily dependent on the oil and gas industry, which could pose risks if the industry faces downturns.
- There is a perception of slow progress in land development and water asset utilization, with only a small percentage of the company's capacity being used, which may raise concerns about the pace of growth and capital allocation.
Q & A Highlights
Q: Mark, good morning, you've often mentioned acquisitions. I didn't hear it in this call, but maybe I missed it. Secondly, what do you think now are the highest return on investment that you have that you can control? And thirdly, when do you think you will get into the large-scale commercial development along I-70?
A: Good morning, Bill. The highest margin business we have is utilizing our portfolio of water for oil and gas. Our land development revenues generate high margins because we bought the land correctly. As for acquisitions, we have targeted acquisitions in areas where we can provide water utility from existing infrastructure. The timing of these acquisitions is not something we can control, but there is more activity than since our last call. Regarding commercial development, it is probably a year plus out and is a function of the rooftops. We need more rooftops to attract large-scale commercial opportunities.
Q: Mark, you left out the rental area.
A: Single-family rentals have tremendous demand. We see people choosing to rent, and our renewal rate is high. We focus on delivering homes at a cost-effective basis and will continue to grow this segment.
Q: Since we're all pretty sensitive to inflation, what kind of price increases are you able to put in place and have you been consistently doing it or withholding that knife for a while?
A: On the rental rates, we're at the 90 percentile, but we're not at the 100 percentile. We prefer to retain a tenant, so renewals see modest price increases of 1% or 2%. For new turnovers, we mark up closer to market rates. For oil and gas, we have multi-year contracts with fixed pricing that inflate every year. Our tap fees and water usage fees are increasing, and our lot fees are priced to maintain margins despite increased costs of delivering infrastructure.
Q: Where are you seeing the most inflationary impact on your business?
A: We have not seen strong inflationary pressures. In fact, building materials costs have come down, and supply chains are relieving. If there's any cost rising, it would be on the labor side.
Q: I was just wondering if you could give any color on the timeline for the next bond issuance?
A: The last bond issuance was in '22, and we tend to bond out at the start of each phase. The next bond issue will likely start in earnest at the beginning of next year. We may see a refinancing opportunity of our first phase of bonds towards the end of this year or early next year, and then rolling into late '25, '26 for our Phase 3 bond issue.
Q: Is there a point where we look at our market valuation and see this is a perpetual issue? What can we do differently to fix that since the market isn't translating to value for our stockholders?
A: We share your frustration and are at a loss. We continue to produce results and execute our business model, hoping the market will take care of itself, which it has not. We are looking to expand our approach and have sponsorship. We are also looking to reach more ears, more eyes, more opportunities, and we're open to ideas from investors.
Q: Maybe look at seeing what we're missing here or what we can do differently to go about fixing that?
A: We could benefit from hiring an adviser and conducting a strategic review. We could also have a more significant share repurchase program. We could clarify our capital allocation and state that our focus is solely on maximizing what we have and returning capital to shareholders. We are open to suggestions and proactive measures.