Business Overview
At the core of Pure Cycle's operations is its water and wastewater resource development segment. The company owns and controls a substantial portfolio of water rights, including groundwater, designated basin groundwater, and surface water supplies, totaling over 30,000 acre-feet. This valuable water asset provides the company with a competitive advantage as it serves domestic, commercial, and industrial customers in the water-scarce Denver region. Pure Cycle designs, permits, constructs, operates, and maintains wholesale water and wastewater systems, as well as retail distribution and collection systems, on behalf of governmental entities.The company's land development segment is primarily focused on the Sky Ranch Master Planned Community, located along the booming I-70 corridor. Sky Ranch is zoned for up to 3,200 single-family and multi-family homes, as well as over 2 million square feet of retail, commercial, and light industrial space. Pure Cycle's land development activities include the design, permitting, and construction of all horizontal infrastructure, such as storm water, drainage, roads, and utilities, to deliver "ready to build" finished lots to homebuilders and commercial customers.
In addition to its core business segments, Pure Cycle has also launched a single-family rental business, where it retains ownership of certain lots within Sky Ranch and constructs and leases homes to qualified renters under one-year lease agreements. This new line of business is expected to become a more significant contributor to the company's operations in the coming years.
Financial Performance
For the fiscal year ended August 31, 2023, Pure Cycle reported annual revenue of $14.6 million and net income of $4.7 million. The company's water and wastewater resource development segment generated $9.8 million in revenue, while the land development segment contributed $4.8 million. The single-family rental business, which was launched in fiscal 2021, contributed $0.1 million in revenue.In the latest quarter ended May 31, 2023, Pure Cycle reported quarterly revenue of $7.6 million and net income of $2.8 million. The water and wastewater resource development segment generated $2.5 million in revenue, the land development segment contributed $5.0 million, and the single-family rental business contributed $0.1 million.
The company's operating cash flow for the fiscal year ended August 31, 2023, was negative $2.3 million, while its free cash flow was negative $10.2 million. This reflects the significant investments Pure Cycle has made in developing its Sky Ranch community and expanding its water and wastewater infrastructure.
Liquidity and Capital Resources
As of May 31, 2023, Pure Cycle had $20.4 million in cash and cash equivalents, as well as $33.5 million in notes receivable from the Sky Ranch Community Authority Board (Sky Ranch CAB) for reimbursable public improvements and project management fees. The company also maintains $2.9 million in restricted cash for letters of credit related to its construction projects.Pure Cycle's balance sheet remains strong, with a current ratio of 3.17 and a quick ratio of 2.59 as of May 31, 2023. The company's total debt stood at $6.9 million, with a debt-to-equity ratio of 0.06, indicating a conservative capital structure.
Guidance and Outlook
Pure Cycle has not provided specific financial guidance for the upcoming fiscal year. However, the company has highlighted several positive trends that are expected to drive its future performance:1. Continued growth in water and wastewater customers, driven by the development of the Sky Ranch community and increased demand from commercial and industrial users, including the oil and gas industry.
2. Accelerated lot sales and infrastructure development at Sky Ranch, with multiple phases of the master-planned community currently under construction.
3. Expansion of the company's single-family rental business, with plans to grow the portfolio to over 200 units in the coming years.
4. Potential for additional land and water asset acquisitions to further expand the company's footprint in the Denver metropolitan area.
Risks and Challenges
While Pure Cycle's outlook appears promising, the company faces several risks and challenges that investors should be aware of:1. Dependence on the housing market: A significant portion of the company's revenue is tied to the performance of the residential real estate market in the Denver area. A prolonged downturn in the housing market could adversely impact Pure Cycle's land development and single-family rental segments.
2. Regulatory environment: The company's water and wastewater operations are subject to various environmental regulations and permitting requirements, which could change over time and impact the company's costs and operations.
3. Competition for water resources: Pure Cycle operates in a water-scarce region, and it may face increasing competition for water rights and supplies from other municipalities and users.
4. Execution risk: The successful development and monetization of the Sky Ranch community is critical to Pure Cycle's future growth, and any delays or cost overruns could negatively impact the company's financial performance.