Pure Cycle Corp (PCYO) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2008 financial release in 2008 annual stockholders meeting conference call. My name is Jahida, and I am be your coordinator for today. At this time, all participants are in listen-only mode. We will facilitating a question and answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes. I will now like to turn the presentation over to your host for today's call, Mr. Mark Harding, President. Please proceed.

Thank you. Good afternoon, everyone. I would like to welcome you to Pure Cycle Corporation's 2008 annual stockholder meeting and first quarter ended November 30th, 2007, earnings release. My name is Mark Harding. I am the President of Pure Cycle, and I will act as Chairman for this meeting. I would like to welcome the other members of the Board of Directors. I would like to -- if you could just raise your hand, I would like to welcome our Chairman, Mr. Harry Augur, Mr. Mark Campbell, Mr. Bart Epker, Mr. Dick Guido, Mr. Peter Howell and Mr. George Middlemas. I would also like to introduce the representative from our independent auditors, is Mike Pakowski here? As soon as he gets here I I will reintroduce Mr. Pakowski.

In order to conduct this meeting in an orderly fashion we adopted the order of business as noted in the agenda provided to everyone attending the meeting and on the presentation which you can access through our website at purecyclewater.com on page three. It will be page three of the slide show. We ask in all fairness to the stockholders and investors joining us, everyone please adhere to this agenda. Mr. Scott Lehman, the Secretary of the company, will act as Secretary of the meeting. I hereby appoint Mr. Patrick [Hayes] of Computer Share Trust Company, our transfer agent, as the Inspector of Elections for the meeting, and I ask that he subscribe his oath of office and file it with the Secretary if he has not already done so. Thank you.

As I mentioned we'll have a brief presentation which will outline our first quarter financial results. You can tag along with the presentation through slide shows. You will have to advance the slides yourself as you access that through our website. I will try to note the transition of the slides as we move through the presentation. The Board of Directors has fixed December 6th, 2007, as the record date for determination of stockholders entitled to notice of and to vote at this annual meeting or any postponement or adjournment thereof. Mr. Lehman, Secretary of the meeting, please report in the notice of this meeting the presence of a quorum and the affidavit of mailing.

Mr. Chairman, I present to the meeting the following: a certified list of holders of common stock of the company as of the close of business on December 6th, 2007, our record date for determining stockholders entitled to notice of and to vote at this meeting. This list has been prepared by Computer Share Trust Company, the Company's transfer agent, and it has been on file with the Company's office and open to inspection by any stockholder for 10 days prior to this meeting. The list is available and subject to inspection by any stockholder during the meeting. According to such list, on December 6th, 2007, there were outstanding and entitled to vote at this meeting 20,206,568 shares of the company's common stock, each entitled to one vote. Stockholders who hold a total of over 17,469,059 shares are present in person or represented by proxy. This represents approximately 86.45% of the outstanding shares entitled to vote at this meeting.

On the basis of that report and the provisions of the company's bylaw and certificates of Corporation which states a quorum shall consist of the majority of the shares entitled to vote, I declare that a quorum is present. I also present an affidavit of [Daniel O'Connell], a Customer Service representative for Bound Marketing Business Communications, as to the mailing on or about December 18th, 2007, of: one, the notice of this meeting, two, the proxy statement dated December 14th, 2007, and, three, a proxy card for all holders of record of common stock of the company, for which we had a current address as of the close of business on December 6th, 2007. Copies of these materials are attached as exhibits to the affidavit.

Thank you, Mr. Secretary. Please file these materials with the minutes of this meeting. Having a quorum, we will proceed with the business of the meeting and the first quarter earnings release. A press release has been distributed, and the Company's Form 10Q has been filed with the Securities & Exchange Commission, on January 9th, 2008. The press release as well as the Form 10Q is available at the company's website. As we turn to the first slide, the first slide is a Safe Harbor Statement that says that investors are cautioned that statements are not historically facts are forward-leaning statements that involve risks and uncertainties that could cause actual results to differ materially from projected results. That said, I think most of you are familiar with forward leaning statements.

If we move on, we have kind of gone over the agenda, so I would like to highlight some of the significant events for the first quarter. Really, two areas stand out in terms of highlights, the most active one will be the repurchase of an additional $4.7 million of CAA interest in October of 2007, company issued 211,000 shares of restricted stock to the owners of those interests. From an accounting journal entry standpoint to further advance the second, no good deed goes unpunished. It did result in the Company taking a loss of $273,000, and that's a function of how we account for what the balance was booked for, what we retired that out for from the value of the stock that was given in consideration. As of November 30th, 2007, the remaining positions held by third parties to the TAA agreement resulted in approximately $3.5 million. So that interest started out around $36 million, and we widdled that down to about $3.5 million. So I think that is a favorable aspect for the Company, for the shareholders, and for those that converted their interest into an alternate form of interest.

The other notable feature for first quarter this year was that we, pursuant to the recording methodology that we have under the acquisition of the Arkansas River asset, take a look at the contingent portion of that which is the cap participation fee available, and as a result of the company's reevaluation of that cap participation fee, we will have a change of an increase in the total estimated future payments of that from approximately $104 million to $108 million. Those are what the total future potential payments might be. Due to the use of the effective interest method, the imputed interest expense will decrease by approximately $183,000 to $1. million for the three months ended December 30th, 2007, annualizing that out to an annualized decrease that will result in about a decrease of about $700,000 in interest expense to that particular component. And what the Company does in that particular element is, we recess that each year to determine how the likelihood of the timing and payment of those are, and that's a function of the anticipation of payment of future tap fees, what the tap fees will be, discount rate, present valuing some of those payments over a period of time, so that will be an instrument that will constantly be reassessed by management and our auditors as we move forward and attain additional information.

We transition to the next slide. What I would like to do is give you a brief asset activity update. I know all of you probably listen to our annual call for fiscal year 2007 just less than 60 days ago, and not a lot has transpired since that time. If I can just take a look at highlighting the areas of emphasis the Company is working on, this slide will represent that. What this illustrates is where the Company's service area is in proximity to the Denver metropolitan area. This really drills down specifically into southeast Arapahoe County. If you take a look at the yellow area, that's the Company's service area that we have in our existing relationship with Power State Land Board.

Taking a look at the land board proposal dating back to December of 2005 when they selected various criterias for a conservation proposal as well as a development proposal, those areas are highlighted, and the green is the land board, RFP development proposal which they have entered into a development and management services agreement with the Company, an Australian-based company, called Lend Lease Community. The gray shaded area is where they entered into negotiations with a conservation team. They have yet to conclude a definitive agreement on the conservation parcel. And then the red area is the area that they've identified to set aside for water resource development. So they have a three-phase vision for the Lowry Range which encompasses all three elements: development, conservation and water resource development.

Taking a look at the pink area or the light red colored area is the I-70 corridor development area, a number of landowners that own property in that area that have looked at opportunities for development of that property, and the Company's targeting that service area as an opportunity for it to extend services to. This also referenced the location of the Sky Ranch project. As many of you know and we announced previously, the developer for the Sky Ranch project is -- has filed for Chapter 11 bankruptcy protection, and the particular entity that is held within this is a component of that bankruptcy, so we are awaiting repositioning of that asset in some form. Then there is some Arapahoe County fairgrounds where we're extending services to some of the infrastructure requirements that extend service to the areas. As this illustrates, the Company has the opportunity to provide water and wastewater services pursuant to our existing agreement with the state land board to the textured box, the stone-colored texture box. That's two of the six sections included in the development parcel area, and we're working with the parties including the state land board, Lend Lease, neighboring city of Aurora, and the conservation team on opportunities relative to each of the three components: conservation proposal, the development proposal and water resources development proposals, and we'll keep of apprised of those conversations as they unfold.

We transition to the next slide. Again, this is a graphic we try to articulate to the market to give everybody a sense of the value of tap fees. Tap fees in the Colorado area are going to be probably be our closest indicator of the value of water resources to serve development areas. This has not changed since our last report. We were noticing that the exchange of tap fees over the last five years has had double-digit tap increases. It is probably not safe to assume that will continue on indefinitely, but we will wait and see. Typically our rate-based stricts which we peg our rates and charge to say assess their rates and charges at the end of the year, we take a look at those in the first part of the year announce and typically March of what our rates are going to be, and those rates are effective every July. Our rate cycles are about six-month lag to our rate-based district.

Transition to the next slide. I talked a little bit about housing. Housing is a direct correlation to some of the activity we serve. We're looking to provide water and wastewater service to growth areas in the Denver area, housing and housing activity in the areas is an important matrix for us in our business model. The specifics really reiterate some of the conversations we had last November, late last November. Colorado housing market continues to contract similarly to the national trends. The sluggish housing starts here. If you annualize these, taking a look at what we know through the end of third quarter, we do not have year-end results because we're just 15 days into the new year, but we don't do not have calendar year end results, but the Front Range starts look to be a decrease of about 31%, the specific submarket, the Denver metropolitan market, is about a 30% decrease, and then Arapahoe County is about a 28%. So we're seeing across the board about a 30% decrease over prior year levels of housing starts. Housing prices have fallen somewhat here in the Denver market, about a 2% fall on average throughout the Denver market.

Foreclosures still impacting resale and new development markets. The highest percentage of foreclosures continues to be the entry level market, and again much like the same in the national market we have these adjustable rate mortgages which are causing the principle concern, where rates have been adjusting to price entry level home buyers out of their ability to meet their mortgage payments. Some of the interesting things that are continuing to mature in the Denver market are the vacancy rates for rental properties are at 6.5% year low. There is continuing as these people are transitioning out to -- out of either foreclosed properties or not entering into new purchase properties, they're staying a little bit longer in the rental market, and capacity in the rental market is really tight right now, so those typically are going to be an indication of where your next buyers are going to come from as they continue to mature through the market.

The transition to the next slide. Job growth and employment rates here, again, we start -- are showing a stronger picture than what we see on a national basis. The Colorado market added around 43,000 jobs year-over-year from November '06 to November '07. The metro area added 21,000 of those jobs. Denver metro unemployment rates tracking at around 3.9% compared to national unemployment rates of somewhere around 4.7% to 5%.

If I can then move now to the financial results, I will give you kind of a score book account of the first quarter performance, so if we want to roll to the first slide. The product deliveries water deliveries for the first quarter, 10.6 million gallons which is in line with prior year levels for first quarter deliveries, so we don't see a real variation in the seasonality year-over-year between '06 and '07. Taking a look at total water usage fees, we're up slightly in water usage fees, primarily due to increase in rates and charges that we see taking account in mid-year range.

Going to the next slide, total revenue. Again, total revenues are up very slightly, again due to slight increases in the usage rates which we see occurring each mid-year. Moving over to G&A expenses, one of the more driving and important components for the Company, G&A expenses increased significantly in 2008 over 2007, primarily related to increased fees, legal fees, consulting fees, relative to the Lowry Range. We have a number of additional resources we debt indicated towards working with the various groups, whether that is going to be Lend Lease, the State Land Board, or neighboring city of Aurora and negotiations that we have on multiple levels and multiple playing fields for that. So we have about $150,000 of the $200,000 increases really relating directly to discussions that we have with ongoing service opportunities in the Lowry Range opportunity, a little bit of an increase in fee in assessments from the Arkansas asset, the Fort Lyon Canal company, those increased about $15,000 and public entity cost another $32,000, a slight increase in the public entity cost. So those $200,000, the bulk of that is relative to discussion that is we have out at the Lowry Range. Net loss for the year, again, taking a look at that, we have got about a 200 -- a $300,000 increase in net loss year-over-year from 2008 to 2007, if we project that out, increases in that are attributable mostly to the nearly $300,000 imputed loss necessarily to the buyout of the CAA interest, noncash depreciation charges relative to some of the nonwater-related assets from the Arkansas River.

Current assets. Seven -- about approximately $7 million cash, cash equivalents, that's about $300,000 down from fiscal year end 2007, so on line with our budgeted forecast for the year expenditures. Investments in water and wastewater systems. In line with where where we were previously, $103 million. Total assets again in line with close of fiscal year 2007. Total equity also in line with closed fiscal year 2007. That will really conclude the brief update that we were going to provide on the earnings call as well as the summary of the current activities. This is the last slide really is some of the statistics how to get in touch with us, where you can get additional information. So what I would like to do is briefly open it up to any questions and answers to anybody listening in on the conference call, if you have any questions, please go ahead and star through your procedure and ask any questions.

(OPERATOR INSTRUCTIONS) Questions will be taken in the order they are received. (OPERATOR INSTRUCTIONS) Please stand by for your questions. (OPERATOR INSTRUCTIONS)

If there's no questions and you think of something later, please feel free to give me a call, and I would be more than happy to answer any questions, or if you're listening to this on a rebroadcast and you have a question, please don't hesitate to give me a call at the office. I would be more than happy to address any questions you might have. If there are questions, you can chime in, otherwise we'll move on to the proxy items.

Do we have any from the public? Great. I am sorry.

On the rental rates, can you talk about the six-and-a-half year low? Do those have to come up in order for the housing market to improve or is the housing market the price of the homes, have they come down to where they're competitive even though the rental rates are the six-and-a-half?

That's a very good question. The question was, what we're noticing on our statistics here is the Denver market is at a six-and-a-half year low in terms of vacancy on rental rates. Are rental rates going up to a point it makes them attractive to the people now renting to buy a house or does the price of a house have to drop to a point where somebody that's looking at buying a house that's renting would otherwise come into that market? I think it may be those are two matrices that are going to be in there.

I think it is also a function of interest rates and making sure that if -- as interest rates are more attractive to the entry level market. The entry level market is going to be more sensitive to the interest rate and the ultimate payment. So as interest rates have come down and they have a stabilized ability to lock in a 30-year fixed loan rather than -- I think what happened in this push in maybe the last five years was a lot of credit agencies took a look at mortgages and put them into a very low interest rate where their mortgage payment would qualify, assuming that those interest rates would stay low for a period of time, and that they would maintain that low payment as those interest rates went up. Then those ratchet payments came up above the threshold where the people would have traditionally qualified. So it was really an assumption based on whether the people would continue to qualify at a lower rate. As the rates are falling and incentives are being either provided by the fed or by home builders themselves to be able to lock in the interest rates on a specific area, they're more stable on qualifying buyers to come into that area. Now with rental rates continuing to rise, then it becomes an area where somebody would say, why would I continue to rent and pay the same amount that I could otherwise qualify for on a mortgage. And they'll compare and contrast that.

Especially if like you say the rental market is tight right now, then wouldn't you expect --

Yes. Prices -- yes, that's two ways. You add capacity, you increase price, and capacity takes time to bring on line. So opportunistic as income properties are, they will continue to bump those up, and those people that are in there would more attractively look to pay the same amount for ownership rather than rent it. Great question. Any other questions? Thank you. Yes?

How do you foresee the G&A stabilizing or growth (inaudible).

Good question. The question is G&A expenses likely to stabilize or are we likely to see an increase in G&A expenses attributable to the continued growth? We will see marginally an increase in G&A expenses this year, because we have direct activity ongoing with specific issues that weren't addressed. So is it going to be normalized to what we saw in the first quarter? I think that would be a reasonable expectation to see a normalization of that, maybe another -- I wouldn't say that if we had $150,000 in the first quarter that we're looking at $500,000 year end, probably not a fair assessment, but I would probably take a look at another $250,000 in G&A normalized over prior year levels. Good question. Any other questions?

Okay. Let me proceed with the business items to the proxy item. On our agenda for this meeting is consideration of three proposals as recommended to the Company's stockholders by the Board of Directors. The polls are now open for voting and will be open for voting during our consideration of the proposals. I will declare the polls closed for voting subsequent to our discussion of the proposals. I now call Mr. Scott Lehman, Secretary of the company, and Secretary to this meeting, to identify these proposals.

Mr. Chairman, I present to the meeting the first proposal, which is described in the Company's proxy statement dated December 14th, 2007, and is presented at this meeting by the Board of Directors. Proposal number one is for the election of the following nominees to serve on the Board of Directors of the company until the 2009 annual meeting of stockholders: Mark W. Harding, Harrison H. Auger, Mark D. Campbell, Arthur Epker III, Richard L. Guido, Peter C. Howell, and George M. Middlemas.

The Board will call for a motion of the nominees so named as directors of the company. Is there a second?

Second.

The motion has been made and there is a second. No other nominations have been received pursuant to the procedures set forth in the Company's bylaws. Mr. Secretary, please identify the next proposal.

Mr. Chairman, I present to the meeting the second proposal, which is described in the Company's proxy statement dated December 14, 2007, and is presented at this meeting at the recommendation of the Board of Directors. Proposal number two is to approve a proposal to change the state of incorporation of Pure Cycle Corporation from the state of Delaware to the state of Colorado. .

The Board will call for a motion of the adoption of the proposal to change the state of incorporation from the state of Delaware to the state of Colorado. Do I hear a motion? Motion has been made and seconded.

Mr. Chairman, I present to the meeting the third proposal which is described in the Company's proxy statement dated December 14th, 2007, and is presented at this meeting at the recommendation of the Board of Directors. The proposal number three is to ratify the audit committee selection of GHP Horwath, P.C., as the Company's independent auditors for the current fiscal year ending August 31st, 2007.

Thank you. August 31st, 2008. Thank you for the clarification. The Board will call for a motion of the adoption of the proposal to ratify the selection of auditors. Thank you. Motion has been made and seconded. Let's proceed with the voting of the election of directors, the ratification of the proposal to change the state of incorporation and the selection of auditors. Mr. Secretary, please identify the voting required to approve each of the proposals.

Mr. Chairman, for proposal item number one the election of each director requires the affirmative vote of a plurality of the votes cast by shares represented in person or by proxy and entitled to vote for the election of directors. The recorporation of the company in Colorado requires the affirmative vote of the majority of the shares of common stock issued and outstanding and entitled to vote at the meeting. The ratification of auditors requires an affirmative vote of the majority of the shares of common stock represented and entitled to vote at the meeting.

If you wish to vote and have not done so, now is the time to return your proxy card or ballot to the inspector. If you have previously returned the proxy card and do not wish to change your vote, you need -- you do not need to turn in a ballot at this meeting. If you have not yet turned in a proxy card or if you are a stockholder of record on December 6th, 2007, and you wish to vote your shares in a manner different than you have indicated in your proxy card, please raise your hand so you may be given a new ballot. If there are any questions regarding the voting procedure or any stockholder wishes to comment on or raise any questions regarding the proposals being voted on, please raise your hand now or push the pound button on your conference call. There being no further discussion on the proposals, we will now close the polls. Please return your proxies now if you have not already done so. I will declare the polls closed. Inspector, have you completed your tabulation of the voting?

Currently based on my tabulations the majority of the shares were represented in person or by proxy at the meeting have voted for election of the company -- meeting director of the company. Accordingly Harding, Auger, Campbell, Epker, Guido, Howell and Middlemas have all been elected as directors. Proposal number two state of incorporation of company in the state of Colorado has received the affirmative vote from the majority of shares of common stock are presented in person or by proxy and voting (inaudible - microphone inaccessible). Proposal number three, the ratification election of auditor has received the appropriate vote and majority of the shares of common stock represented in person or by proxy and voting (inaudible - microphone inaccessible).

Thank you. Based on these results I hereby declare that the nominees for directors have been dually elected. The proposal to reincorporate the Company in the state of Colorado has been dually ratified, and the appointment of GHP Horwath, P.C., to audit the financial statements of the company for fiscal year ending August 31st, 2008, have been dually ratified. I am aware of no other business that should be brought before this meeting. I would like to thank you all for coming to this annual meeting and for participating on the conference call and the webcast. I would also like to express my appreciation for all the stockholders who submitted proxies, but were unable to be here in person. The directors, the officers and the employees of the company appreciate your loyalty and confidence in our company. I hereby adjourn this meeting. Thank you all for your attendance on the conference call. Thank you all for your attendance here. We'll break for a bit, and if you have questions directly that you would like to ask.

Mark, has there been any recent transactions for water rights (inaudible) in Colorado that might be a proxy for valuation?

That's a good question. The question was has there been any recent transactions for water rights that would be a good proxy for the Company's portfolio of water rights. Water rights are much like real estate. It kind of depends on what water rights there are. There is lots of water rights that are constantly changing hands. They're moving from one interest to another, maybe moving from one speculator to another, from agricultural interests to where cities, municipals or other water providers are looking at buying those, and those will vary very significantly from a modest transaction of maybe a couple of thousand dollars an acre foot to as high as $40,000 an acre foot, depending on who it is that is buying, where the water rights are located, what type of water right it is, what seniority of the water right is, what the use of the water right is, and it really will -- it is kind of like in the chain of production process. Something may be valuable as raw material, something may be valuable as raw materials delivered to a user of that raw material, a raw material put together into a partial completion of a product, full completion of a product, shifting of the product.

We see that same value enhancement along the chain of title as you're looking at water transactions, and so I don't have a real good answer. The answer is yes, and the core responding is, what's the value. The value ranges very widely. As much as we would like to articulate this is a good comparison to go and take a look at the company's portfolio, to evaluate that, it is a very hard analogy for us to give you a direct tie to. I would like to have a better answer for you, but I -- and I get asked that a lot, but I don't have a better answer than that. Okay. Well, thank you all. We'll conclude this call. Moderator, thank you for your participation. We look forward to our next quarterly update in March.

Thank you for your participation into this conference. This concludes the presentation. You may now disconnect. Good day.