Business Overview and History
Pure Cycle Corporation (NASDAQ:PCYO) is a diversified water resource and land development company that has been meticulously assembling a portfolio of valuable water rights and land interests in Colorado for over three decades. The company’s strategic focus on sustainable water management and strategic land development positions it for substantial growth in the coming years.
Pure Cycle was founded over 30 years ago and has since established itself as a prominent player in the water and land development industry in Colorado. The company’s core operations are divided into three complementary business segments: water and wastewater resource development, land development, and single-family rental homes.
Water and Wastewater Resource Development: Pure Cycle owns and controls a substantial portfolio of over 30,000 acre-feet of water rights, including groundwater, designated basin groundwater, and surface water supplies. The company has built an extensive network of wholesale water production, storage, treatment, and distribution systems, as well as wastewater collection and treatment systems. These systems serve domestic, commercial, and industrial customers in the eastern Denver metropolitan region. Pure Cycle’s water assets include treatment facilities, storage, and distribution infrastructure, positioning it as a key provider in a water-constrained market.
Land Development: The company’s primary land asset is the Sky Ranch Master Planned Community, located along the rapidly developing I-70 corridor in the Denver metropolitan area. Pure Cycle began developing Sky Ranch in 2017, entering into contracts with several national homebuilders to sell residential lots. The company completed Phase 1 of the Sky Ranch development, consisting of 505 single-family, detached residential lots. During fiscal 2021, Pure Cycle commenced construction on the second development phase at Sky Ranch, entering into separate contracts with additional national homebuilders to sell 781 single-family attached and detached residential lots. This second phase is being completed in four sub-phases.
Single-Family Rental Homes: In fiscal 2021, Pure Cycle launched a single-family rental business, leveraging its land development expertise and water infrastructure to create a vertically integrated real estate platform. The company retains ownership of certain residential lots and rents out the homes constructed on those lots.
Throughout its history, Pure Cycle has faced various challenges as it built out its water utility and land development businesses. The company had to establish itself as a new player in the land development space and work to partner with national homebuilder customers. It also had to navigate the ebb and flow of the housing market, including the COVID-19 pandemic and rising interest rates in 2023, which impacted the pace of lot sales and home construction activity. Despite these challenges, Pure Cycle has continued to execute on its business model and has achieved consistent profitability.
Financial Performance and Liquidity
For the fiscal year ended August 31, 2024, Pure Cycle reported record financial results, including:
Pure Cycle’s financial position remains strong, with $22.11 million in cash and cash equivalents as of August 31, 2024, and a debt-to-equity ratio of just 0.0546. The company’s robust liquidity and conservative capital structure provide ample flexibility to fund future growth initiatives. Additionally, Pure Cycle has a $5 million revolving credit facility that was undrawn as of the most recent quarter, further enhancing its financial flexibility.
The company’s current ratio of 4.05 and quick ratio of 3.66 demonstrate its strong short-term liquidity position and ability to meet its near-term obligations.
For the fourth quarter of fiscal year 2024, Pure Cycle reported:
The record Q4 results were primarily driven by the delivery of 197 lots in Phase 2D of the Sky Ranch development.
Segment Performance
Pure Cycle operates in two primary business segments: Water and Wastewater Resource Development, and Land Development.
Water and Wastewater Resource Development Segment: For the nine months ended May 31, 2024, this segment generated $7.56 million in revenue, a 28% increase compared to the prior year period. This growth was driven by a 94% increase in commercial water usage revenue to $5.04 million, primarily due to increased water sales to oil and gas operators. Municipal water usage revenue also increased 31% to $458,000, and wastewater treatment fees were up 19% to $258,000. However, water and wastewater tap fees declined 52% to $1.16 million. Segment operating income for the nine-month period was $3.88 million.
Land Development Segment: For the nine months ended May 31, 2024, the Land Development segment generated $8.27 million in revenue, an increase of 58% compared to the prior year period. Lot sales revenue increased 56% to $7.91 million, and project management revenue grew 109% to $362,000. Segment operating income for the nine-month period was $5.91 million.
Single-Family Rental Business: For the nine months ended May 31, 2024, this segment generated $357,000 in rental revenue.
Growth Catalysts and Outlook
Pure Cycle’s multi-faceted business model presents significant growth opportunities in the coming years. The company’s water and wastewater resource development segment is poised to benefit from the increasing demand for water in the water-constrained Denver metropolitan region. With only 5% of its water asset capacity currently in use, Pure Cycle has ample room for expansion to serve both residential and commercial customers.
In the land development segment, Pure Cycle has delivered over 1,200 lots at Sky Ranch to date, with approximately 700 residents currently living in the community. The company is actively developing the remaining phases of Sky Ranch, with plans to deliver an additional 700 lots over the next several years. Notably, only 18% of the total land at Sky Ranch has been developed so far, providing significant runway for future growth.
The company’s single-family rental business is still in its early stages, with 14 units currently occupied as of August 31, 2024. However, Pure Cycle plans to rapidly expand this segment, with plans to grow the portfolio to over 200 units within the next 18-24 months. The recurring revenue and high margins associated with this business line are expected to contribute significantly to the company’s overall financial performance.
Pure Cycle has provided positive forward guidance for fiscal year 2025 and beyond. The company expects revenues to continue increasing modestly year-over-year, with margins forecasted to improve further. Net income is expected to grow as Pure Cycle continues to benefit from its land development and water utility segments.
Industry Trends and Market Position
Pure Cycle is well-positioned to capitalize on several favorable industry trends. The company has reported a 21% CAGR in utility customer growth over the past several years, reflecting the strong demand for water services in the Denver metropolitan area. Additionally, tap fees, which are a key revenue driver for Pure Cycle, have been increasing in the region, rising from around $30,000 per tap to an average of $40,000 currently.
The company’s strategic focus on the Denver metropolitan area has allowed it to establish a strong market position in a region experiencing significant population growth and development. Pure Cycle’s integrated business model, combining water resource management with land development, provides a unique competitive advantage and allows the company to capture value across multiple stages of the development process.
Risks and Challenges
While Pure Cycle’s growth prospects are compelling, the company is not without its risks and challenges. The water industry is highly regulated, and changes in governmental policies or environmental regulations could impact the company’s operations. Additionally, the land development business is subject to economic cycles and fluctuations in the housing market, which could affect Pure Cycle’s revenue and profitability.
The company’s single-family rental business also faces competition from larger, more established players in the market, as well as potential changes in tenant relief laws and regulations that could impact the company’s ability to increase rental rates.
Conclusion
Pure Cycle Corporation is a unique and well-positioned company in the water and land development industry. With its extensive water rights, strategically located land assets, and a vertically integrated business model, the company is poised for substantial growth in the coming years. The company’s strong financial performance, positive forward guidance, and significant untapped potential in both its water utility and land development segments make it an attractive investment opportunity.
While the company faces some industry-specific risks, its strong financial position, experienced management team, and innovative approach to water management and land development position it well for long-term success. As Pure Cycle continues to execute on its growth strategy and capitalize on the favorable trends in the Denver metropolitan area, it offers investors exposure to the essential water resource sector combined with the growth potential of strategic land development.
Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.