Earnings Call Transcript - PCYO Q2 2026

Operator, Operator

Good morning, everyone, and welcome to Pure Cycle Corporation's Second Quarter 2026 Earnings Call. As in prior quarters, we'll start the call with a presentation from our CEO, Mark Harding, and then we'll provide time for questions and answers afterwards. Operator Instructions So we'll start the earnings call with a presentation followed by questions and answers. Without further ado, I'd like to introduce Mark Harding, our CEO.

Mark Harding, CEO

Thank you. Good morning, everyone. Joining me today is Marc Spezialy, our CFO, and our Controller, Serena Fingan. If you have any questions, we have a solid team here to provide detailed answers. For those interested, we have a presentation deck available on our website's landing page to go through the details. I'll begin with our forward-looking statements. The presentation includes forward-looking statements as defined by the Securities and Exchange Act, which I know many of you are familiar with. I want to acknowledge our exceptional management team, whose daily efforts greatly contribute to driving value for the corporation. Additionally, I'm pleased to welcome our newest Board member, Dan Rohler, and I'm excited to work with him and the team. Looking at our investment snapshot, we continue to deliver shareholder returns and returns on our assets through consistent, profitable results, marking our 27th consecutive profitable quarter. We're experiencing growth in our revenues and recurring revenues across all three business segments. Our growing asset base is due to successfully delivering lots to our national homebuilder customers on a just-in-time basis to meet market demands, despite the cyclical nature of the housing market. While the water segment is more stable, we remain focused on monetizing our assets to build shareholder value, supported by our strong balance sheet and liquidity. Moving on to results, we've had an excellent order performance this year, which has been more balanced in terms of revenue and cash flows, partly due to a mild winter impacting ski season. This allowed us to complete significant concrete and asphalt work that would typically be done in winter. Over the past six months, our quarterly revenue reached approximately $5.1 million, with around $2.8 million in gross profit, driven by timely lot deliveries to our customers, some of which are up to six months ahead of schedule. Our builders are excited as this enables them to set up model homes for the spring season. Regarding net income and earnings per share, we exceeded our typical guidance due to progress on our projects. Net income surpassed $1 million, with earnings per share around $0.05, reflecting a 36% increase, driven mostly by our land segment, with contributions from water and single-family rentals. We are currently tracking around 50% of our full-year guidance halfway through the year, which is somewhat unusual for us, as winter quarters are typically weaker due to weather seasonality. We've achieved about $14.3 million in total revenue towards our nearly $30 million forecast, and we're on track for about $9 million in profit against our approximately $19 million guidance. As we look at specific segment performance, our oil and gas sales within the industrial segment have significantly increased this year due to a more active drilling environment, following a year primarily focused on permit acquisition by our largest operator. This uptick is encouraging, and the outlook remains positive as we have a dedicated rig in our service area expected to meet the drilling demands for permits secured last year. In our water segment, customer growth continues, with revenues benefiting from connection fees, and our oil and gas revenues are up considerably compared to last year. Monthly water and wastewater sales are also increasing, thanks to rising rates and a growing customer base. I also want to highlight our land development ventures, including the construction of the Sky Ranch K-12 campus, which is bolstering community interest in purchasing homes. We're making great progress in delivering lots, with Phase II about 95% complete and Phase IId nearly 80% complete. Our homebuilder partners, including major developers, are offering a variety of homes to the Denver market. We're excited to share that we've expanded our lot inventory in Sky Ranch, growing from 780 to over 1,000 lots as a result of product alignment and diversification. This increase will enhance our assessed value and support additional capacity for bonding within the district. As we normalize our land development efforts throughout the year, we focus on completing Phase II and preparing for Phase IIE, which will facilitate the delivery of additional lots. In terms of our single-family rental segment, we've decided to adjust our growth strategy in response to market conditions and feedback on corporate homeownership's impact on affordability. We're now planning for a more measured growth, aiming for approximately 60 units, down from 90, to maximize performance in our Land Development segment. Finally, we believe our assets have substantial value beyond their recorded scale representing only a fraction of our developed segment. With continued strong balance sheet performance, we are optimistic about our revenue growth trajectory and the support we anticipate for our shareholders moving forward. Now, I'd like to open the floor for questions from the audience. Please feel free to unmute and ask away.

Elliot Knight, Analyst

Mark, I've got several questions for you. Most important, on your last call, you made it clear that the completion of the new interchange is very important. You sound encouraged; could you give us a detailed update?

Mark Harding, CEO

Yes, diving into that, we have been working on the interchange, which involves the 1601 permit process in Colorado. This is done in collaboration with the Colorado Department of Transportation and is a thorough effort. We are examining every aspect of the interchange design, including load capacities, traffic movements, signal distance setbacks, and environmental factors. Currently, we are around 30% complete with the design of the interchange, so we have a good understanding of cost estimates and how to fund the project. The Sky Ranch will be responsible for obtaining the private permit, and we will collaborate with Arapahoe County for its administration, as it falls under their jurisdiction. We plan to submit the 1601 permit and will provide every component for their review and approval as we progress. Our goal is to have that ready by June, followed by moving to the final design, which will likely take until the end of the year. We have designated specific funds within the community to support the bonding for this project. Subsequently, we aim to begin construction in 2027 and complete it by 2028. That outlines our timeline.

Elliot Knight, Analyst

Okay. That slipped a little bit from completion in 2028 because on the last call I think you were thinking in late 2027?

Mark Harding, CEO

Yes, that has likely slipped a bit, but we are still on track to deliver each phase as planned. We will maintain our schedule for lot deliveries. We are also focusing on some commercial opportunities and want to ensure we can integrate those as we build the interchange.

Elliot Knight, Analyst

Okay. In your last call, you mentioned data center. Can you please provide an update on that?

Mark Harding, CEO

Yes, we are still pursuing opportunities in Colorado, but the state may not be as appealing for larger hyperscale or data center projects. There are two main reasons for this. First, many of these projects are seeking tax incentives, and currently, Colorado is dealing with two competing bills: one that seeks to provide incentives and another that aims to impose disincentives. This has created a lack of consistent policy in the state. Additionally, Colorado has high water usage, which we can address, but it also has significant power demands, and the state is facing challenges in expanding its power supply, especially for gas turbine-based energy. These are concerns that potential data center clients have shared with us. Nonetheless, we still see potential in this market, as data centers are still being developed in the area. We will continue to compete for these projects. Beyond data centers, we are also focusing on water and bottling opportunities, which require significant water resources, and we are exploring overall distribution centers for our commercial industrial projects.

Elliot Knight, Analyst

Okay. Last question. I was delighted to see that you've added another 1,600-plus acre-feet of water. You acquired little bits and pieces of water, I think in the last few years. The company continues to say it has 30,000 acre-feet of water. It must have more than that. How much does it have?

Mark Harding, CEO

We have indeed increased our water portfolio by about 10%, bringing us closer to 3,000 acre-feet of water. This gives us the capacity to serve over 60,000 connections, which are significant metrics for us. While these figures take time to develop, we've evaluated the opportunity and anticipate a connection charge of around $40,000 to $60,000, totaling approximately $2.5 billion, potentially approaching $3 billion. As we approach 25,000 connections within the company, we will have a clearer understanding of our service capacity. Key growth areas for us include the Denver region, particularly around Sky Ranch and Lowry Ranch, which are crucial for expanding our portfolio and customer base.

Unknown Analyst, Analyst

Quick question. As I recall, you were going to wait for the commercial development until the interchange was actually finished. Did I understand that you're currently actively marketing the commercial opportunities?

Mark Harding, CEO

We are. Yes.

Unknown Analyst, Analyst

Is that an acceleration of what you had wanted to do?

Mark Harding, CEO

Well, I think we had that timeline. And as Elliot kind of highlighted, we were looking at getting that 1601 permit kind of this summer, and I think we'll look to get that towards the end of the year. But we already set that up in motion, right? We want to be in front of these users. It's not something that you can just directly turn on and say, okay, get out there and start building your building or your retail use or whatever it is. We really want to make sure that it is a highly attractive site, and we want to be regionally specific. We want all of those folks that are looking at sites and interchanges to be appreciating what it is that we're putting into this opportunity and put it into their scope and planning. And we do have some capacity to get started on it. It's not 100% conditioned on the interchange being developed. We have an existing interchange; it does have service capacities, and we do have opportunities where we can add maybe it would be a non-traffic sensitive type user to the site, someone like a distribution center that would have the appreciation. Okay, we can use the existing interchange to get our building permitted and started. And then as that gets completed, really would have that truck traffic. So that's what we were trying to do, is parallel that process and make sure that this doesn't have that long lead time and really deliver just in time.

Unknown Analyst, Analyst

Mark, just quick. Do you have any expectation on the timing of the next receivables?

Mark Harding, CEO

Great question. We'll take a look at what that capacity is from the 2022 bonds. And so those typically have a five-year call provision, and so that's where they start to burn off in 2027. And taking a look at really the differential that we had in our first filing and our second filing, we think they're somewhere around $10 million to $12 million worth of additional reimbursables from refinancing just what we've already financed there. And then as we move into Phase II, we'll take a look at because that will be that 2027 timeframe as well as we complete that interchange and really start processing permits into Phase III; that could be as much as $20 million. And I think we got about $10 million of refinancing on one bond and then probably another in fresh financing moving into Phase III.

Unknown Analyst, Analyst

Awesome. And then can you talk about the builders' appetite for lots right now, delivered the current phase ahead of schedule, we know new home demand is kind of sluggish given interest rates. So I guess I'm just wondering, is there any risk of an air pocket between this phase and then starting the next phase if it takes a while for the builders to deliver the lots that you delivered ahead of schedule? Like how does that impact the timing of starting the next phase?

Mark Harding, CEO

That's a great question. What we observed from the recent market pullback is that consumer confidence plays a key role in home buying decisions. While interest rates do have an effect, in our segment, homebuilders can manage mortgage costs, especially for entry-level homes, which tends to be less expensive to buy down. The difference is significant when considering a $450,000 home versus an $800,000 home. Our main focus is on consumer confidence rather than interest rates. We've managed to bring in new homebuilders to our portfolio. Initially, we had four national homebuilders when we began Phase II. Now, three additional builders are preparing to join for Phase IIC, and they are looking at inventory for 2027 deliveries and sales. Although they are not technically part of Phase IIC, they fall into Phase IID. The original four builders are in both Phases IIC and IID. This creates a disparity in inventory levels, with some builders holding more inventory than needed while others are short. This situation allows us to progress further with Phase IIE, as those seeking 2027 deliveries are also working on their 2026 inventory. This situation gives us the chance to engage more builders, and we value having annual deliveries from a diverse group of builders. This ensures we aren't competing within the market but instead fostering a strong and varied builder portfolio.

Operator, Operator

Operator Instructions.

Mark Harding, CEO

Operator Instructions.

Unknown Analyst, Analyst

There was a question about a small decrease in recurring revenue from 2025 to 2026. I looked into this, and it appears that some of our commercial customers outside of the oil and gas sector, specifically government buildings at Sky Ranch, are contributing to this fluctuation, which can vary each year. However, we are not experiencing a decline in average sales for residential properties at Sky Ranch, nor do we anticipate any decline despite the upcoming water restrictions. This slight decrease seems to be an anomaly linked to certain off-site customers.

Mark Harding, CEO

Well, if there aren't any other questions, I want to thank you all for your continued engagement. We are actively developing our assets and look forward to the progress at Sky Ranch. We are eager to expand in land development, monetize our service area, and explore more water opportunities. We are excited about our potential and the market penetration we have achieved as a utility provider and land developer in the Denver area. This will continue to generate substantial returns for us and our shareholders. If you're listening to this on a rebroadcast and have questions, please don't hesitate to reach out. We will have our Annual Investor Day in July, likely during the third week on a Wednesday. We appreciate your continued investor confidence and look forward to the next steps. Thank you.