Pure Cycle Corp Q1 FY2026 Earnings Call

Good morning, everyone, and welcome to Pure Cycle Corporation's First Quarter 2026 Earnings Call. We have had a great start to the year, and we're excited to share with you our results for the first quarter. A couple of housekeeping notes. The earnings presentation is on our website. So if you're listening on a phone or on replay, you can download the slides from our website. I will now turn the call over to our President and CEO, Mark Harding.

Thank you, Mark, and I would like to extend a warm welcome. As Mark hinted earlier, we experienced a very strong first quarter. Usually, this quarter presents some challenges due to weather conditions, but this year we had favorable weather, which positively impacted our ski reservations and allowed us to push forward with many construction projects at Sky Ranch. Now, let's move on to the presentation. Our initial slide is our forward-looking statement, emphasizing that these statements are not historical facts, but rather projections. I also want to acknowledge our management team, including Marc Spezialy and Cyrena Finnegan, our Controller, who are here to assist with any specific questions. Our dedicated team continues to provide exceptional leadership across all company segments, supported by an engaged and capable Board of Directors. As many of you are aware, we are maintaining a streak of profitable quarters, which is encouraging for our profitability and shareholder value. We’re operating in three business segments: land development, water utilities, and single-family rentals, all performing well. We have strong visibility in our land development efforts and are focused on growing our recurring revenue base. Additionally, we are strengthening our balance sheet and investing in our business to enhance shareholder value through a diversified approach. Now, turning to the quarterly results, we achieved noteworthy revenue figures, and this quarter could be considered a record-setting one due to favorable seasonal conditions. We welcomed two new homebuilders to our portfolio actively working on Phase 2D, and we completed Phase 2C at the end of last fiscal year. Thanks to the weather, we made significant progress with curbs and asphalt in November and December, which is quite rare for this time of year. As of now, we are approximately 80% done with the roads in Phase 2D, which is several months ahead of schedule. On the profitability front, we recorded substantial increases in net income and earnings per share, thanks to advancements in Phase 2D. Overall, we are delighted to maintain a steady flow of earnings and revenue, even as we navigate seasonal variations. Throughout the first quarter, we achieved about one-third of our fiscal year forecast, exceeding our guidance with over $9 million in revenue and around $6.2 million in gross profit, showcasing excellent performance by our management team and field personnel. This year-to-date, we are ahead of expectations with net income and earnings per share, achieving approximately 37% of our annual guidance. As we continue to advance our land development efforts, we are poised to produce more lots for our homebuilder customers in Phase 2E. I will break down the results further across our three segments, starting with the water utility sector. We have two classes of customers: domestic residential clients and industrial clients primarily in the oil and gas sector, mainly servicing Roble County. Our water and wastewater revenues consist of recurring monthly charges on a metered basis and one-time capital connection fees from homebuilders. Despite the record quarter overall, our water segment saw some softness attributed to delays in permits and fluctuations in the oil and gas segment. We anticipate an increase in activity as operators ramp up drilling activity. Our oil and gas clients are focusing on acquiring well permits, indicating upcoming opportunities for growth. Regarding our land development segment, we are pleased to report progress as Phase 2C is completed, and we are more than halfway through Phase 2D. Our timeline for lot deliveries illustrates a structured approach to revenue recognition throughout the phases of our project. We are experiencing significant demand for homebuilding and have increased our collaboration with multiple national builders, expanding our presence in this sector. Our efforts in the single-family rental segment remain strong, with 19 homes now occupied and an additional 40 units under contract, allowing us to meet growing housing demands while addressing affordability challenges. We are committed to continuing our investment in each segment, whether it be through enhancing our land assets, expanding our water service infrastructure, or increasing our single-family rental inventory. We aim to drive shareholder value and improve asset growth through strategic capital allocation and ongoing support for our business lines. In summary, we are navigating a prosperous quarter, setting ourselves up for future success, and we look forward to answering any questions you may have.

Mark? Very interesting to see you put the estimates of earnings out there. There was one pretty obvious blank, and that was for fiscal '27. What should we be thinking about in terms of estimated earnings range for fiscal '27?

Good question. '27 is going to be a large component of Phase 2E and then looking at how we roll into some of the interstate construction and some of the other segments. So I think it's going to look a lot like the last couple of years. It's not going to be a real breakout year in 2027, but we really think that breakout year is going to be more once we get the interchange complete and get that commercial online and into development. There are opportunities to do non-high-traffic commercial users out there that we're marketing to. But as we continue to grow traffic, we have that obligation to build that infrastructure.

Okay. So probably $0.75 a share is too high for fiscal '27 is what I think you’re saying.

Yes. I wouldn’t say that that would be a good clear guidance. But when we take a look at commercial and bringing on that in the 2028 timeframe, you really do supercharge because we’re going to see the delivery of lots on the residential side, and then we think we double up on that revenue stream from delivery of lots on the commercial side.

Okay. Refresh my mind. I can't remember whether on taps sold, the pretax margin is 50% or 60%, which is it?

That's a great question. When we look at the aggregate, if you look at the build-out of what will be 60,000 units of it, we believe that margin is around 50% because we have to continue to build that system. In the more short term, I think we're seeing a lot more margin on those because we've kept ahead on developing capacity on that. When we look at year-over-year in the last couple of years and the next couple of years, those margins might be a little higher than that 50%.

Okay. In the past, when you mentioned the need to spend $1 billion, is that amount factored into the costs when determining if the 50% pretax margin includes the amortization of that $1 billion?

That's included.

Yes.

Mark, Tucker Andersen, can you hear me?

I can, Tucker. Nice to hear from you.

First, I'd like to take a minute as long as you guys were nice enough to provide it to shout out hello to my old friend, Elliot Knight. Anyway, a couple of questions. First, what do you see as the opportunities for water acquisition at this point? As you've talked about in the past, you're always on the lookout for adding to your water acquisition and opportunities for utilizing that water. Could you talk about that broadly?

You bet. I'd say we've got a very strong water portfolio right now. When we take a look at water acquisitions because we always do and one of the ones that folks are constantly knocking on doors with projects, I think we're content with where our portfolio is today. Our acquisitions are really going to be strategic where they are adjacent to our existing portfolio, right? They provide the most economies of adding to it and the synergies around where we've got our investments today. Our appetite for water acquisitions is likely more cautious than I think we would otherwise be in maybe some of the other areas like land. We’d be more aggressive on land acquisitions than water acquisitions right now just because we want more portfolio on vertically integrating that value. We have water that we can serve, we have infrastructure that we can serve, and then building into the land portfolio and then single-family rental portfolio. That drives all three segments where a water acquisition would be nice. It will be valuable because we do not make water anymore. The existing water rights continue to illustrate value. But it’s a bit—we already have a deep portfolio there. So Tucker, I would say they have to be the right water right in the right location.

You've just transitioned into my next question, which pertains to land acquisitions. Given the slowdown in homebuilding, how are you approaching this in a rapidly growing area where your expansion options are limited? Do you feel more optimistic, less optimistic, or about the same regarding your potential for land acquisitions?

I'm more optimistic. I'd say conversations that we've had with the landowners through the years and where they were previously and where they are today are much more interesting and much more active. So I would say I'm more optimistic about where that sits for us to expand our portfolio and really show a stronger runway beyond the $600 million, $700 million that we think we're going to monetize out of Sky Ranch.

I look forward to that, although you know my baseline comparison is always going to be the attractiveness of Sky Ranch, and I'm not expecting you to buy anything quite that attractive at this point.

Well, you’re right about that. I'd hate to see the economy that leads us to what it would look like when I did acquire Sky Ranch, but...

I found the data center comment interesting. In your area, where are potential locations for data centers, and how does that align with your service area?

Great question. We spent a bit of time working on these data center opportunities. There's a lot of money sitting, waiting for ready-to-go sites. There are three metrics for data centers: property location, availability of power, and availability of water. I'd say we have the advantage of the water side. A lot of these cities and municipalities really don't want that type of user just because it doesn't grow their assessed values fast. They may end up having to commit 700 homes worth of water to one user, and that user is not going to have the same tax base as that 700 homes would. We have the ability to provide that water to them. We're long. It's a good allocation for us. The siting of it is less important; they can move around. They do need to be close to water and power. Because of Sky Ranch's location, it really checks all those boxes. We have had conversations with specific users. We've been engaged with Cushman, one of the largest brokers managing sites for data centers, so we're optimistic that this might lead to a great opportunity for us.

And last, my question is, in your market, what's happening to price appreciation in general in the Denver market on existing homes? And two, has your first phase or maybe your first two phases been in existence long enough so that you're starting to see resales and how those resales compare to the owner's original cost?

We're observing significant appreciation in the resales at Sky Ranch. This can be attributed to our initial entry into the market with very appealing lot values, which enabled our homebuilders to offer attractive home prices. Some of the Phase 1 home prices have increased by as much as 30% to 40% since their construction, which is excellent for the community and the homeowners. Nationally, home appreciation averages around 4% to 5%, but Sky Ranch is performing a bit better due to the added amenities, schools, and a more developed community. There's also less inventory at this pricing level. If a home was purchased for $430,000, its appreciation stands out, especially since there are currently no homes available for under $500,000, presenting a great opportunity for appreciation for homes priced below that threshold.

So that makes Sky Ranch then— that's one of the real attractions for your existing builders in effect?

It is. I'd say that's why in a relatively weak market, you can see in some of the local press where many homebuilders are dropping a lot of projects in and around the metropolitan area, but we're getting new homebuilders in our existing project.

This is Joakim from Circulus Asset Management in Stockholm, Sweden. I have two questions. The first one is regarding the guidance range. It would be interesting to hear you elaborate a bit more on the two different and quite broad outcomes.

Say that again...

The guidance range that you provided here...

You know what that's going to be is really a flex into how much oil and gas we get in there. They pay us to be at their back and call, right? They pay us a high rate for delivering raw water, and they want a ton of water, but they go from 0 to 100 in days, right? Sometimes it depends on how the rig availability is. What I do know is they have all their permits lined up, and they’ve constructed their pad sites. It’s a matter of keeping that rig on-site. I know they drilled 10 wells on one pad site. They are currently drilling, I think, another dozen wells on another pad. We see foreseeability into 20 to 35 wells on that. That’s the range because it is a high-margin opportunity for us.

The other question was around water assets. If you have seen water prices starting to creep up, and I think that’s the general trend. What’s the pricing on water assets right now? What would be the kind of worth of the water if you marked it to market, so to say?

Yes. Great question. There are two benchmarks for that. We continue to see strength and appreciation in the tap fees. Our tap fees over the last 3 or 4 years have increased about 6% to 7% per year. So we're above $42,000 a year in our water and wastewater connections. When taking a look at just the straight cost per acre-foot, we bought some water in a strategic location. Our first farm that we bought in that location was about four or five years ago; we paid about $9,700 per acre-foot for that. Most recent transactions are north of $20,000 an acre-foot. That gives you two different benchmarks, actual acre-foot purchases as well as the strength of the service model that we have in providing service on those 60,000 connections.

Maybe I’ll take a second, too. I know you got— I don’t know if you were asking specifically about our guidance in fiscal 2028 and kind of where that's coming from; a lot of what we're projecting after the interchange in 2027 is the ability to sell some of that commercial along with Phase 3. When we add the capacity to Sky Ranch, our lot revenue will really be able to scale as long as the market holds it with some commercial lots as additional to some home lots. In 2025 and 2026, we’re just selling residential lots in subphases and 2 to kind of stay within our capacity limits of the interchange. We kind of see in 2028 and beyond is the ability to do residential as well as commercial. I don't know if that was specifically what your question was related to, but that's really the big change you see in our guidance for the future.

Yes, that's a good clarification.

In 2025 and 2026, we’ll focus on selling residential lots in smaller phases to stay within our capacity limits at the interchange. Looking ahead to 2028 and beyond, we foresee the opportunity to sell both residential and commercial lots. I'm not sure if that specifically answered your question, but it's a significant change in our future guidance.

In the meantime, if nobody has a question, would you talk a little bit, Mark, about what's going on at the Lowry Ranch? Your comments suggested again that building is right up to it. I know you don’t speak for the landlord nor do you want to, but do you have any sense at all as to whether they are giving thought to starting to develop that land commercially, given we have an exclusive there, and it's 20 times the size of Sky Ranch?

Those are the correct stats. You are right. We continue to believe that's our most valuable asset, right? How do you monetize water? It’s nice to buy water rights, but it's hard to monetize them other than providing service. Our model of providing service requires us to invest in infrastructure. We have a franchise service area at the Lowry Ranch. This is one of the most unique properties in the country; there's no property like having 27,000 acres of continuous land next to a metropolitan area. When we got into this 30 years ago, I see my good friend, Dick Guido, on the call. It dates back to 1990. You remember, Elliot, as likely Tucker was closely after that, but it was so far away from the Denver area. You take a look at the migration of the Denver area over that period of time and surrounding Lowry and where the landlord was looking at monetizing and generating revenue for those assets back in 1990 and where that opportunity is 30 years later, it has tremendous value. It is really an asset for the public education, the K-12 public education system here. I can't help but be excited about all the activity surrounding it and the significant opportunities that the state has with it. But it is their asset. It is an asset that they look at holistically, saying we want to do everything we can and everything possible with that. Some of those lands are going to be conserved; some will be for multi-revenue use; some will be developed. The magnitude of the challenge for them is figuring out the best way to use it. It's hard to eat this elephant; one bite at a time. You can’t look at it holistically; 27,000 acres, you have to scale it back and look at what are the opportunities with some of the most in-demand parcels and how to continue to participate with that. One of the things we've done to expand our portfolio is increase the ability to help them develop it. Thirty years ago, we were looking at the water utility side. Our portfolio now includes the ability to help develop land, develop infrastructure, develop open space, develop recreational uses, and many other things that would check all of their boxes. Matching those with their needs, wishes, and timelines is key. We're active on that, but not trying to get ahead of them on any of that either. We want to be partners. We want to be a catalyst in it, and we also want to advocate for their wishes regarding the property.

Mark, can you hear me?

I can.

I was interested in that slide that had commercial development on it. I think it was the first time, wasn’t it?

Yes. Yes. I just wanted to give you two things because we talk about that interchange all the time and to give you a relative perspective of the importance of that relative to the overall project.

From a practical perspective, is the commercial development dependent on the new interchange?

It is, yes.

What’s the timing on the interchange, realistic timing?

I think we get that— we’ve been working on that permit for the last three years with the county and CDOT. We're fairly close to getting that submittal. The submittal will be about 2,000 pages including everything: engineering, rights of ways, designs, permitting, traffic control, and everything associated with it. Each stage of that over the last three years, they’ve reviewed, commented, and set the parameters on that. We’ll get that into them this spring. They’ll review it in its completeness. Then we move forward to final design concurrently with that and the bonding of that later in the year. We look to bid for the interchange sometime end of the year and be under contract for construction in 2027. It will likely take about 6 to 9 months to construct. As you saw, it’s not a hugely complex project; we can take advantage of existing on and off-ramps. We’re really constructing a new bridge — wider bridge, longer ramps to the new one.

If things went according to that plan, it would be completed construction beginning of 2028 calendar?

Yes, yes.

You didn’t mention public comments and opportunities for the public to delay or stop. Is that going to be an issue?

That's a good question. I'm not sure there is a comment period to that because it's just replacing an existing interchange. If it were a new interchange, it might be a different process, but because we’re just replacing the existing interchange with an upgrade.

Mark, yes, I just wanted to ask on the data center potential. A lot of people don’t like living near data centers. How are you thinking about where this location would be within Sky Ranch? Would you be able to monetize it at the same rate as like a single-family home; if the data center is 500 single-family homes, would you be able to charge them a similar rate for that?

Good questions, both. On the first one, location-wise, if we look at the site that we’re currently evaluating, it would be tucked into kind of the top corner of the commercial parcel. So nobody would be living right next to it. The next to it could be a relative term, but what is next to it? Is next to it a few hundred feet or 0.25 of a mile? That's the kind of separation we would see between that land use and our residential land use. We do think we've got good spacing and buffering opportunities. We're not just looking at that one site; we're exploring other sites that might be more remote where we could get water to them in a more remote basis, maybe where power is more accessible in a more remote location. These data centers are not site-specific; frankly, being next to the interstate isn't what they would otherwise need. We have that site zoned, permitted, and ready to go with all of the water upfront, which is super attractive for our opportunity. As for what that water supply might look like, that’s a little nuanced because they don’t need full potable water. They don't need the same level of service; they’re not going to be drinking that water supply. We've had conversations about water quality, raw water service that might have a price incentive for them where we don't have the same level of cost. We do want to capitalize on our water supply’s value, but we’re also aware that we’re very long on water supply and maybe we have a supply agreement with them for a period of time that would look one way while repurposing that water back in another way to give them some incentives, ensuring we’re not losing 60,000 units worth of capacity, while also using that water in the interim. There are all those opportunities with that type of customer. If there are no more thoughts on the quarter, don’t hesitate. If you listen to this on rebroadcast or your technology didn’t work, don’t hesitate to give me a hello. We’re continuing to really accelerate the company. We’re very excited about where we’re at, what we’re executing, and how things are looking for the coming quarters and years. Thank you all for your continued support, and we wish you the very best in the new year.

Thank you, Mark.

Thanks all.