Pure Cycle (NASDAQ:PCYO) held its third-quarter earnings conference call on Thursday. Below is the complete transcript from the call.

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Summary

Pure Cycle Corporation reported strong Q3 results with $8.2 million in revenue and $4.3 million in gross profits, achieving a 52% profit margin.

The company accelerated the development of phase 2D due to favorable weather, refreshing liquidity, and allowing early product delivery.

Pure Cycle's water revenues strengthened, driven by increased industrial water sales and tap fees, with expectations for continued growth.

The land development segment delivered approximately 430 lots in the last 18 months, and Phase 2E is underway with 159-160 lots.

Single-family rental segment adjusted its expansion plans due to regulatory considerations, scaling back to 70 units.

Management remains optimistic about fiscal year-end results, with potential to exceed guidance, and plans to continue share repurchases.

The company is diversifying revenue streams across water, land development, and rentals, ensuring stability across market conditions.

Pure Cycle is actively pursuing commercial opportunities and aims to start commercial development in late 2027 after receiving necessary permits.

Full Transcript

OPERATOR

Good morning everyone and welcome to Pure Cycle Corporation's third quarter 2026 earnings presentation. We've started the presentation with everybody on mute as our CEO Mark Harding goes through our financial results. At the end of the presentation we will open up the lines for Q and A and with that I'll turn the mic over to our CEO Mark Harding.

Mark Harding, President, CEO

Thank you, Mark. And I'll add my welcome as well. With me is Marc Spezialy, he's our CFO and he'll give you kind of the detail on some of the technology questions as we get into the Q&A portion of this. Also with me is our controller, Irina Finnegan. So if you guys have any drill-down questions on the accounting, I'll share the mic with her and have her walk through some of those. As Mark sort of announced, this is our Q3 presentation and we're delighted to be able to bring you some very solid results here.

As we start the presentation, we'll start with our forward-looking statement. I'm sure most of you are familiar with that, but statements that are not historical facts contained or incorporated by reference in this presentation are forward-looking statements. Continuing on, you know, it's my pleasure and really the company's benefit to continue to work with a great management team. You know, a ton of experience on this team and really bringing value to the shareholders on a day-to-day basis at the board.

Update on board composition. We have had a couple of resignations. Two board members are related to a 13B filer on the board that you've likely seen. There's no drama with these. They represented an FPV vehicle which holds about 13% of the stock and are working really in the best interest of the limited partnerships for the FPV and then combining with the restrictions that come on with the board. So I think we'd like to acknowledge their service and their contributions and thank them for their efforts and wish them the very best.

Taking a little bit on the overview, another great quarter and continued execution of our business. Most notable really was refreshing of our liquidity. After accelerating the development timeline of our phase 2D. We had kind of two phases that we're kind of developing at the same time. And because of the mild winter, we really did continue to reinvest on that, accelerate that, deliver those lots a little bit early, allow a couple of our new builders to get a head start on what we were looking at on delivery of that product towards this summer.

So that really has seen a refresh on that and you'll continue to see that through year-end. But you know, we still have almost a little more than seven consecutive years of profitable quarter over quarter and really execution of monetizing our highly appreciated assets with on the balance sheet and carrying that through to the income statement. Let me dive right in on the Q3 results. Taking a look at revenue. 8.2 million in revenue, 4.3 million in gross profits.

That takes a look at about a 52% margin on revenue to gross profit. So you know, we do have a real highly appreciated asset base that really continues to drive shareholder value, net income and earnings per share reflective of our percent complete revenue recognition and advance of phase two ahead of a typical seasonal schedule. So you do see very strong Q3 results that really are carrying that momentum from Q2. And so this kind of is a bit more indicative of sort of an even flow revenue and earnings cycle, which is not all that typical for us just because of the seasonality of the construction schedules here in Colorado.

Moving over to total revenue and total gross profit for year-end. And as that relates to our yearly guidance, we're a little ahead of our schedule on guidance as we would typically do. And that's really again to that seasonality issue. But we really are optimistic and looking forward to a very strong year-end as well. So this gives you kind of a feel for where we're at year to date. Taking a look similarly with net income and earnings per share for yearly guidance, also favorable for the Q3 typical guidance and then also looking to finish the year strong and be able to deliver within forecast or maybe a wee bit more than what we were looking at on the forecast side with those as detailed on the quarters and certainly willing to drill down on those with some Q&A on that. I do want to just give you a quick update for those of you that are newer to the company and talk a little bit about why we think this is such a great company and why we think what it is that we're doing is very unique in the marketplace. Certainly the water side, you know, we're able to capitalize on water rights and that's very specific to most of the western United States.

Very specifically in Colorado. Colorado's probably tip of the sword on defining ownership interest in water and how we do that. We really provide water, domestic water, which is your potable water supply to retail customers. You know, that's homeowners, businesses, industrial complexes. We also provide raw water for industrial uses. That's primarily in oil and gas. And we do have a very active oil and gas field right on top of where our water supplies originate.

So that the very efficient framework for both us on the profit side as well as the operators, because very lower, much, much lower cost on them being able to transport that from source to pad sites. And then, you know, we continue to add customers to our systems and those connections are very sticky customers because in 100 years, you're still going to be doing the same thing with water that you're doing today. Taking a specific look on total water revenues were strengthened by better than expected industrial water sales compared to last year specifically.

And look to finish the year strong in that. And really that was a function last year of the fact that most of our main operators in our particular area of the field were really accumulating a number of permits, well permits. And so they do have all those through the oil and gas commission here in Colorado and really have been executing that. I think it timed out very well for them with the price of oil. So I think a lot of that activity is looking to be strong, not only this year, but also over the next several years.

Cat fees also are strong, a little bit stronger than they were previous years, year to date as well as year to finish. And that's mostly because we have several phases that came online and were delivered in 2026. So you're likely to see continued strength in the tap fees not only through this fiscal year, but also next year. Taking a look at the industrial water sales, that gives you a little bit of picture. We had a strong year, probably not as strong as what we saw in 2024, and that was just a record year for us in that, but we will see a pretty good year, real strong year for us as we complete this year.

And still, again, as I said, really look to see continued strength in that over the next several years as they drill out the remaining wells that they've already permitted. And then they'll continue to take a look at other well pad sites within this field just because of the size of the field. It's a very large field and we have a very broad ability to supply water to most of this area. Next slide really shows that we continue to invest in our business segments on the water side, making sure that we have capacity for our industrial customers as market conditions for oil and gas continue to dial up.

And as most of you know, the oil and gas industry likes them to be at their beck and call. Sometimes they fall, sometimes they don't, but they do pay a premium for that availability. And so, you know, we continue to make sure that we're investing in that production capacity, we still have a little bit of pedal left in that. And so as they continue to dial up that drilling program and the opportunity to capitalize on price of oil, we certainly are ready to meet that demand and look forward to that demand because that's a very high margin business for us.

Let me move on to our land development segment. As most of you know, we also, in addition to being a water utility, we bring that water to land interest. And that land interest really is really increasing the value of land through water availability here in the Denver area. And so water can be worth as much as three times the value of the land. And what we are able to do is acquire land interests and develop those land interests and also develop the water utility for those customers that we're developing the lots for.

This year was a very good year for us on developing lots. We delivered approximately 430 lots in the last 18 months. So that was kind of a dial-up that you heard us talk about probably in 2024 time frame when the market was much stronger. I wouldn't say it's not still doing well, but it's not as strong as it was in 2024. But we were moving into our next phase, 2e, which is a bit smaller than our usual phases. We typically are looking at around 230 to 250 lots per phase.

And 2e, just because of its size, is right around 159, 160 lots compared to our average lot size. But we continue to really pace our finish lot work where we're investing in that land to pace that with the housing absorption. So I think that that's going to time itself very well with kind of the headwinds that are in the housing market. And really it's just a good housing market. Really good segmentation for us at the entry-level product. But you know, there is a consumer confidence issue within most of the home buyers in the market today.

Also showing strength through Q3 on lot deliveries. Almost 70% better than last year. And that was really moderated by a very mild winter. But I think that that will even out as we get into our year-end and realize the percent complete for what we had under contracts. But we do look to deliver strong results through our fiscal year-end. Breaking this up a little bit. Taking a look at the phases as we have been talking about this. Each of these phases we have portfolio of builders.

And really our business model here is to really try and match deliveries to our home builder customers for an annual inventory. We want to make sure that we don't over-invest into what is a very expensive lot delivery mechanism that ends up creating high inventory for our home builders. And then we also want to make sure that we can match the demand for lots and houses together with the supply of delivering those finished lots. Because there's a long lead cycle on delivering these finished lots.

And so we took great care to make sure that we're pacing that deliveries together with the home builder customers. This sort of shows you kind of completion of each of these two phases. And it really shows you that pacing of about 230 lots per year. You take a look at kind of the acceleration through phases 2C, D and E, which is now in progress. That kind of gives you a feel for a little bit of that increase in revenues and gross profits for that.

And it really was very attractive. Home deliveries in Phase 2C, you can see we've got very strong development of those. So I'd say maybe a third of all those lots are vertical right now. And we're seeing probably 25% of all of the inventory that our home builder partners have are sold homes that are occupied. So very strong sales at that entry-level price point. That phase 2D, you know that that really delivered ahead of schedule and allowed some of our new builders to get vertical.

We have two new builders to the portfolio, Pulte and Oakwood Homes. And then they're getting their model homes up and into the market. And then phase 2e, which is right across the street from our school, which really is our next phase that'll be delivering for summer 2027. But it shows you the grading activity on that. This kind of illustrates how we phase our development schedules. And the way we like to deliver this with our homebuilder customers is that we have what we call a slow fun type contract where we are delivering a plat.

So home builders get the title to a plat, so they pay a third of that lot cost. And then that allows us to fund the grading work activity in the wet utilities. And then the second payment after wet utilities allows us to finish the lot. And then we really wait to take our margins on the finished lot delivery, but we still look to do that. Phase 2e is a little bit unique in that we got started on that one just to make sure that we're capitalizing on the cyclical seasonal weather out here.

But really seeing how we can continue to match our customers. Cash flows to the product delivery cash flows. Very proud to work with our charter development partners National Heritage Academy on our school campus. And this just is a terrific asset for the community. We've got a K12 campus, just finishing the high school for opening this August. And we're thrilled that all of the residents here can have a local school that is acceptable, it's walkable, and really provides a terrific opportunity.

And we continue to get feedback from the community that this is the reason, one of the primary reasons that they are relocating to the community. And so this is just a terrific asset for us. Why don't I talk and give everybody a little bit of update. This is what we try to do to kind of give you some focus about where the metropolitan area is and where the company operates. Our sandbox really is right on the path of development in the Denver metro area.

As many of you know, we sort of live on a notion where we can't move to the west, given the terrain on that side. And really all development activity is growing to the east. And it shows you where Sky Ranch is positioned right along Interstate 70 there. That's the blue parcel in there. We're just terrific location on that. That's primarily why we continue to see strength in what we would otherwise have as a more challenging housing market. And then also our service area at Lowry.

State of Colorado owns a Lowry parcel. But, you know, it's probably their single most valuable parcel. And there's just a tremendous amount of development activity going on all around the borders of that, on three borders of that property. And so it kind of gives you an appreciation for, you know, the magnitude of our service area, which is 24,000 acres and where our service area together with our development projects are on the growth of the metropolitan area.

Taking a look at our single-family rental aspect, we did have a bit of, as we foreshadowed in Q2, pivot on some of that. As Washington was looking to, I guess, update institutional ownership of homes, what we were taking a look at was building this segment up to about 100 homes through Phase 2e and really did do a bit of a pivot on that. We revised our segment so that we can moderate that expansion. We're able to push back some of the lots that we held for reserve to some of our homebuilder customers.

And then, you know, really we're concentrating on building homes out that we had contracted for. So instead of looking at bringing up to 100 units online, we're backing that off into, you know, the high 60s, low 70 unit time frame. And that's. There's several reasons for that. One, you know, we wanted to make sure that we understood what that regulatory climate was going to look at. And then secondly, we also wanted to make sure that we really could define the return on investment for that.

And so, you know, we'll be able to get a better feel as a mature segment. Pausing this at this level. Take a look at maybe monetizing homes, a few of these homes to check mark to market, you know, what our assumptions are on the rate of return on that and then make an assessment on how the portfolio stands to carry forward. Taking a look at how that's scaling. We're delivering, we have 30, almost 40 homes completed now. We've got another 30ish homes under contract that'll deliver through probably calendar year 2026.

That'll bring us right around that 70 home unit. You know, the strong advantages of this are we're seeing tremendous demand on the rental side. In fact, you know, we've got most, I think almost every one of these homes are leased as they deliver. And in some cases we've got homes leased that won't deliver until October, November timeframe. So our real marketing program for this and the acceptance of people understanding that we do have a portfolio here that is an institutionally owned portfolio where we have our team that can continue to rent these and maintain these really does provide a stable income stream for us on a return revenue basis.

So those are the, those are the positive aspects of it, you know, the negative aspects within, you know, how the, how the government was going to regulate this. I think that settled down a little bit. So it gives us a little bit of comfort. But we still want to get a good measure on what that rate of return is. This is a little bit of a metric on continued growth in that segment. So you can see that that continues to appreciate with the home deliveries.

And you know, we have a tax advantage of the appreciation of the asset compared to the fair market value and the book value of those assets. So those do give us some really attractive tax advantaged ways to hold the portfolio. Slide will be just kind of how we were looking at growing that and really see that scale back from where we were taking as much as 30% off of that, from where we were geared to go. Wanna talk a little bit about shareholder value, capital allocation.

We continue to really reinvest within the company and so you see strong appreciation on the balance sheet, good growth in the asset portfolio. You know the big story, and I know you hear me talk about this often, but the big story on the asset side is really the legacy assets and the cost basis that we have on both the Water and the land assets and we acquired the water very many, many, many years ago. You know, very, very low basis on that. And it has just a tremendous opportunity to continue to drive shareholder value.

And similarly with Sky Ranch and the land assets, you know, those are very small cost allocations on the balance sheet, but they drive a tremendous amount of revenue on the income statement. And then, you know, as I mentioned on the first part of that, the liquidity continues to strengthen and that will continue through year-end and you know, also may give us the opportunity to strengthen our shareholder buyback program. What we really like to highlight here is our continued diversification of revenues and revenue mix for stability and resiliency under any market conditions.

We have great revenues from Waterside, from the land development side and then from the single-family rental side. And all of those have different industry segments that don't. While they're related, they don't quite overlap. And so if you have strength in one and weakness in another really allows us to have a very stable balance sheet and income statement. So we very much like the diversification that we have on our asset base. Moving over to shareholder values, building recurring revenues, continuing to add shareholder value through asset growth.

So you'll see those continue to grow year over year. And we have got just a nice growth curve on that for us over the last several years. Profitability. This is kind of what we were looking to do on guidance for you and a lot of you have seen this through each presentation, but we look very, very strong to meet our expectations, maybe exceed those on our fiscal year guidance, but we'll see how the fourth quarter comes in. Valuation sensitivities is kind of where our guidance was.

Gross revenue is between 20 and 32 million earnings per shares in that 50 cent range, plus or minus upside, timing, acceleration. Really some of the things that I think everyone's looking forward to is kind of the commercial. We do have some local commercial opportunities that really aren't right next to the interchange that we're in the market for. We do have some strong representation by Fishman and Wakefield on both the commercial retail and then a Fishman team on the industrial side.

Look to have continued improvement in oil and gas on our industrial water sales and then just continuing to execute on the land development and water utility set. Continue to reinvest in our sales through share repurchases. And while our priority continues to be invest in our business segments, and that does take a tremendous amount of liquidity which you saw. And that dip in liquidity in Q2 really wasn't anything other than our acceleration ahead of our typical flow fund agreement.

But it does allow us to continue our balance sheet and our liquidity. Give us those options to capitalize on that when that occurs. And so we do that. But we also continue to take a look at share repurchases and we will see how the liquidity continues to build. And as that builds, you know, we'll, we'll continue to be more aggressive with those share repurchases to continue to return value to the shareholders. A bit of an update on the interchange.

We continue to work with our governmental partners, with the county, Rappo county on getting that permit. This is a county project together with Cairo Department of Transportation, CDOT on the design side and getting the permitting process on that. We look to have that. You know, we've submitted each of the phases of the permit to CDOT on that for their comments and modifications. So we look to get that into them sometime towards the end of summer and then hopefully be in a position of getting that permit issued sometime early next year with the opportunity to start construction of that interchange in late 2027, which really will give us a tremendous opportunity to open up the commercial on and really stack into the revenue side. You know, we've got a very good growth story on delivering residential lots. And so you take a look at that. We're at that $25 million year stacked on being able to do that and continue to work that through on the build-out cycle, which might be another seven years or so. But then when you can layer in that similar amount of revenues from commercial, that almost has that doubling effect of our revenues.

And so that will continue to supercharge what it is that we're doing. Also wanted to just give you all a quick video tour here. And this is just a continued visual representation of what it is that we're doing, where it is that we're at along the metro area. For those of you who are new to the story, but you know, just a gorgeous community we're able to. That gives you a feel for where we at on the metropolitan area, how we're looking at delivering our original phase one.

Phase two A, B, C and D are represented here as we're approaching. That's what we have as Phase 2C gives you a feel for. That's kind of the pressed market demand. Right. So you see each of our builders that are taking a look at their product. They've got inventory, they're building that inventory, you know, they're selling that. That gives you a view of some of the 2D homes there with Pulte, and then Oakwood is looking to get started this summer as well, with some of their lots there.

In the background, you'll see our storage reservoir for irrigation water supply. 100% of the wastewater that goes into all these houses is processed. And then we reuse that water supply to provide that to the parks in the open space. And then that gives you a feel coming to where we are with phase 2E. That's our 2027 delivery. So you'll see, you know, that activity is the grading activity on what we're doing. And then also kind of our opening of the high school and that whole campus there.

So just terrific opportunities. Gives you a good visual for that. We do have, just to remind you all, we do have an investor day next week, next Wednesday, and a number of you have RSVP. We look forward to seeing you. But this is an opportunity for us to really kind of give you guys a tour of what it is that we're doing. Have you come pick the tires. This year is going to be a little bit different. We're going to start here at our offices, and then we're going to take a tour of the Lowry property.

And then from that, you get a very good perspective of some of the oil and gas development that's going on on the Lowry property, as well as, you know, where that service area positions itself in the growth of the metropolitan market and kind of get a better flavor for the importance and the value of our service area. So with that, we'll open up the lines and see if we can drill down on any of the color for the presentation. So I'll turn it back over to Mark.

He can give you kind of the instructions on how to do that and see if we can answer your questions. Thanks, Mark. Yeah, we should. We've opened up the lines now, so if you're on your computer, you should see a button by a microphone where you can unmute yourself. And if you're on a phone and dialed in, you'll have to hit Star six. But with that, we'll take our first question.

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.