Pure Cycle Corp (PCYO) 2010 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Pure Cycle fiscal 2010 year-end, August 31, financial results conference call.

At this time all participants are in a listen-only mode. Later we will conduct a question and answer session, and instructions will be given at that time. (Operator Instructions) As a reminder, today's call is being recorded.

At this time I would now like to turn the conference over to your host, President and CEO, Mr. Mark Harding.

Thank you very much Joe. I would like to welcome you all to our fiscal year end results.

What I would like to do is we have a slide presentation that will allow you to follow along with this presentation on our website. You can click on that. It will direct you directly to the presentation, and then you will advance the slides yourself. So I will try and note the transition of the slides as we progress through the presentation.

Our first slide really is the Safe Harbor statement that states that this presentation does contain forward-looking statements. Actual results may differ materially from the projected results.

What I want to do first is really dive into our recent acquisition and talk with you a little bit about our Sky Ranch acquisition.

The primary motive for this acquisition was really probably four principle objectives.

One was to get the property broke free from the complex bankruptcy from Neumann Homes.

Another key objective of ours was that we did have a contract to buy the water beneath the property, so obtaining water in conjunction with the property acquisition was a key benefit for us in this transaction.

As well as control of the wastewater service. We had water service agreements with this property but also were looking to add wastewater service to that, so we were able to accomplish all of those tasks in this acquisition.

And then finally, really to position the property for development and make sure that this property is among the first opportunities as the housing market continues to recover.

So what I would like to do is really walk through some of the chronology of the events and how they unfolded in this acquisition and give you a little bit of color into what we were trying to accomplish.

At the end of June this year we were able to enter into an agreement with the Bank of America to purchase the loan, to purchase the note that Bank of America had on the property.

The purchase price on this property was -- or for the note itself was $7 million. We made a 10% down payment, an escrow -- a fully refundable escrow payment of $700,000 at that time, put the property under contract for a 60-day diligence period.

At the end of that period of time, which would have been September 30, Bank of America needed additional time to address some of the outstanding issues that they had on the property, so we extended that to October 18, which was the date on which we finally closed on this and paid the remaining balance of the $6.3 million to acquire the full note and deed of trust on that.

And then proceeded quickly, as we were moving this also through the bankruptcy court, to petition the bankruptcy court to enter an order granting us the ability to obtain title free and clear through the bankruptcy court, which allowed us to be able to move much more quickly than had we had to go through the process of foreclosing on the note and the collateral of the note, which was the deed of trust.

Finally on November 2, which was really very, very quick turnaround time, the bankruptcy court did enter an order for us, and we were able to get the property free and clear of all of the bankruptcy claims. So as of that date and currently today we do own free and clear deed of title to the property, so we're very excited about having this opportunity and now are really working to position the property for development and make sure that this property has great access to the development community and the homebuilder community.

If you move to the next slide, what this slide talks about is what we used, the instrument we used to finance the project.

The financing came together in September, late September of this year, and really ended up becoming two financial instruments. One was where the company sold approximately $5.5 million worth of common stock from the company's active shelf registration statement that we had. Also entered into a note with a shareholder for $5.2 million, which is convertible into common stock.

The reason for splitting the financing from the common stock issuance and the convertible note instrument was that we had a rule interpretation from NASDAQ that when an individual shareholder's shareholdings exceed 20% of the outstanding shares, NASDAQ takes a look at that and reviews that to determine if they themselves determine that to be a change of voter control of the company. This is a NASDAQ rule, not an SEC rule. And so NASDAQ came back very late in the transaction and gave us their rule interpretation that wanted the company to seek shareholder approval for a shareholder exceeding that 20% threshold. So that was the reason that we needed to split that out.

What you will see on our proxy materials, which will be coming to you shortly, is that the company and the Board will be recommending shareholders approve the increase of shareholder holdings for PAR Capital to be able to exceed that 20% threshold.

So that was the reason that we had the split from common shares to common shares and a note for the balance of that.

A lot of this stuff is also summarized on our website, which you can see at purecyclewater.com, as well as in our Annual Report, Form 10-K, which is on file.

Moving on to the next slide, slide five, will give you kind of an overview of some of the company's activities and our operations over the last year.

Prominently on there is the Sky Ranch property, which is really adjacent to the I-70 corridor area.

We provide water and wastewater service to the Lowry Range, currently serving customers that are located on the Lowry Range, as well as customers off the Lowry Range.

The state is seeking to modify their vision for the property from when our agreement was cast in 1996 and update that vision to what the state's three-part vision for that property is now.

And what their current vision is, that there's development that will occur on the six sections that are North of Quincy and that they will take a look at a conservation parcel, which is outlined, and then a water resource parcel, which is outlined.

And in the water resource parcel the company has got an active engagement and an ongoing discussion with the neighboring city of Aurora on some interest that the neighboring City of Aurora has with one of the reservoir -- one or multiple reservoir sites that we have in that water resource parcel, so we're working actively with those interests together with the State Land Board.

We currently provide service or control service to two of the six sections of that development parcel, and obviously our interests are to expand our service to include all of the development parcel.

And then additionally we have a water service agreement with the Arapahoe County and the Arapahoe County Fairgrounds, which is in close proximity to Quincy and the Lowry Range property in the aggregate.

So with that, we will transition to the next slide. We will talk a little bit about the results of operations for fiscal 2010.

Of note on this slide is that fiscal revenues for 2010 were in line with revenues and water deliveries from prior years.

Water deliveries were slightly less, maybe 2% less. Revenues were slightly up, and those were due to rate increase and timing of deliveries and timing of usages of water.

Of note also is the general and administrative expenses. Those decreased, mainly as a result of some 123R calculations on share-based compensation expense that we have from some of those shares and options shares decreasing over prior periods, as well as continued cost cutting due to continued management of our O&M costs in there. So somewhat lower G&A expenses in there.

Moving to the next slide, continuing on the results of operations, let me speak a little bit about the Tap Participation Fee liability. For those that are acquainted with the company, I'll update you, and for those that are new to this, the Tap Participation Fee is an imputed obligation based on the payments that we are to make to High Plains A&M, which is the entity that we purchased the Arkansas River land and water interest from.

So what this does is it takes a look at estimating the fair value of what that Tap Participation Fee liability is. And whenever events or circumstances change that might change that fair value, the company assesses that on a quarterly basis and takes a look at whether or not any changes are needed to that particular forecast.

And what that fair value seeks to do is it estimates the future water tap sales based on forecasts and housing market data, which as you might imagine, is a little bit difficult for us to give a trend analysis on that. And then we take a look at the difference between the recorded value and the estimated net realizable fair value of that and impute the interest component to that.

And so when you see our bottom-line G&A expenses or our bottom-line NOL expenses on this, they show that very large component of the Tap Participation Fee liability, which is a non-cash component of that.

Additionally some of the other expenses in there are the share-based compensation expense, and some of that that I detailed earlier that the 2010 decrease is attributable to, fewer options being granted in prior years.

And then also the depreciation and other non-cash charges are an additional component to that.

So if we move on to slide nine, we will take a look at the balance sheet.

Of note on the balance sheet specifically is our cash position. Our cash position showed a current cash and cash equivalents and marketable securities of about $1.5 million, and that was net of the $700,000 that we made as a cash payment at the end of June for the Sky Ranch purchase.

So if you include that, the actual cash position -- because that was a refundable payment. If it shows that we did not pursue the acquisition of the property, we would have gotten that back. Our cash position at year-end was approximately about $2.5 million.

Subsequent to year-end we have about $5.9 million of cash and cash equivalents, which accounted for the raise that we had of about $10.7 million, less the $7 million that we used for purchase of the Sky Ranch property.

If you move on to slide number of 11, talk a little bit about the significant asset accounts.

Two primary asset accounts, our water asset account, which is comprised of our Arkansas River water rights together with our Front Range water rights and our west flow Paradise water rights.

The long-term note receivables -- we have two note receivables.

One is from Arapaho County Fairgrounds. Arapaho County, through development of the fairgrounds, the company was able to advance some of those development costs that were responsible for the County, and we're getting payments on a regular monthly basis associated with those.

And then some note receivables from the Rangeview Metropolitan District, which is a district that we run in conjunction with our Denver-based portfolio.

Moving on to slide 11, taking a look at our significant liabilities.

The company really has no debt. The liabilities that are reported on the balance sheet, the two primary components of that, the largest of which is going to be the Tap Participation Fee liability, is recorded at its estimated fair value, which we talked about earlier. And then there is also a very similar component that the company had outstanding. We have really a very small amount outstanding on that, called the CAA, and that is very similar to the Tap Participation Fee liability. That's a payable on a percentage basis, a 10 percentage basis.

As the company sells taps, we have an obligation to pay holders of that Tap Participation Fee and the Comprehensive Amendment Agreement. More like it royalty payment rather than a direct liability, but because of the fair value accounting rules, those are recorded as that liability section.

And total equity at about $42.5 million. So it's in line with what prior years were, with the reduction in the net operating losses.

If you move to slide 13, we will take a look at the statement of cash flows.

Again of note in the statement of cash flows is going to be cash used in operations increased approximately 7%, and that is really due -- mostly due to timing of receipts and payments.

I would like to think more of that was attributable to the decrease in interest income associated with our investments, but that is probably not true because we're not -- the market is not yielding very much in terms of cash investments at this time.

The unusual presentation in the investing activity is really attributable to the marketable securities. We are investing our residual cash in a portfolio of insured certificates of deposit, so it depends on the maturity of those and how we hold those in marketable securities and the timing of rolling those over from marketable securities to cash. And because we had significant transactions in that fourth quarter resulting in the purchase of Sky Ranch, there was a lot of movement in the investing activities, which looks awkward in its presentation, but it was nothing unusual.

Moving on to the next slide, slide 15, we're going to have a few slides that have a graphic illustration of our results of operations. And this one illustrates our G&A expenses, which continue to decrease, principally due to cost cutting measures.

Of that $1.8 million we have probably three -- between $300,000 and $350,000 of non-cash items in there, so our actual cash burn remains in that $1.3 million, $1.4 million range.

Next slide 16, total revenues in line with prior-year.

Slide 17. Again, water deliveries, in line with prior-year water deliveries and water usage revenues as well. So no significant changes in the delivery of the company product from prior years.

Typically that is a weather related issue, and most -- the bulk of our water deliveries are going to be in the summer irrigation months. We had a fairly typical summer irrigation season.

Slide 18, the net loss, the majority, as we talked earlier, continues to be the non-cash component of the imputed interest from the Tap Participation Fee liability.

And then finally on slide 19, taking a look at the current assets, of particular note here is going to be the cash position of the company, where we'll have about $5.9 million after -- on our subsequent to year end. We had about $2.4 million. This shows the $1.6 million, but that does not include the $700,000 that would have otherwise been available for the refundable deposit on the Sky Ranch. So we have currently about $5.9 million cash and cash equivalents.

The company continues to burn about $1.30 million, $1.35 million annual, so that will give you kind of an understanding of the cash and liquidity position for the company.

Slide 19 and 21 -- or I'm sorry -- 20, 21 -- investments in water systems in line with prior years, and then total equity -- decrease in total equity from prior year is obviously the NOL for the company.

So moving on to slide 22, let me wrap this up by really giving you a market update to the State of Colorado and the Denver market and how the economy is looking here as it relates to historical trend as well as the national average.

Colorado's economic future I think is still mixed. I think we're probably better positioned on average than the national economy.

Our unemployment rate is about 2 points lower than the national average at about 7.9%.

Housing shows signs of recovery, particularly at the entry level product. Entry-level in this market is going to be defined as those houses less than $300,000.

If you take a look at the housing start statistics, the two housing start statistics matrix that we continually track and report are the entire Front Range, which saw an increase of about 33% housing starts to about 6400 or 6500 starts forecast for year-over-year 2009, as well as the Denver metropolitan area. So it's the eight county Denver metropolitan area -- again, the similar increase. And I think those are going to be across the board, similar increases of that.

Of the housing starts in the Denver metropolitan area, more than half of those are going to be at the entry-level market, and it's forecast that will continue to be the strength of the market. So that may even inch up more significantly than that 50%, 53%. We're expecting that to exceed maybe 60% in the next fiscal year.

And the reason we think that is important is because that's really where our price point entry is for the Sky Ranch project. We've been able to secure that. That was and continues to be an entry-level product. We have good densities out there. We have densities of about five units to the acre on the property, so we have the ability to deliver very low-cost lots. The company was able to acquire that with some very low cost basis in our land and then are able to deliver that to builders and developers on an incremental basis.

And by an incremental basis, what we mean is that the company is looking to be able to deliver both the land as well as the utilities and work with a developer or a homebuilder so that they can invest into the infrastructure of the project -- those are going to be the roads, curbs and gutters -- and really bring those lots available to the market so that multiple builders can have the opportunity of picking up entry-level lots in that $50,000 to $60,000 range, when our nearest competitors are closer to a $70,000 to $80,000 range. So we think we have a very strong competitive advantage on this particular land.

The inventory of vacant lots, the month's supply, or the number of vacant lots is a bit skewed by the type of lots and the absorptions, but the type of lots, the bulk of the entry-level type lots, lots that can be delivered for a price that you can also put up a house in that less than $300,000 model, and even less than $200,000 model, is what we're looking at, somewhere in that low $200,000 model for the Sky Ranch project.

Most of those lots have been bought and are built on. So the inventory of lots are going to be at a different price point, so we don't view that to be as a direct competitor on that.

So with that, let me conclude the real nuts and bolts of the update to financial performance.

Some of the statistical information about the company, our website, how to contact us is on the last page.

But what I would like to do is just open it up to questions and answers. If you had any questions, I would be happy to drill down on any of the specifics on this or provide you some additional color if you had any.

So I will turn it back over to you, Joe.

(Operator Instructions) I'm showing no questions on the phones.

Okay. What I would like to do is if anybody has a question that they wanted to ask or think of after, as you take a look at the presentation or maybe re-review the tape on this, please do not hesitate to give me a call, and we can drill down on some of the specifics.

Just by way of announcement, I will be in New York on November 30 and December 1 and will be presenting at the NYSSA's 14th annual water conference, so we will be reaching out to a number of our shareholders and interested parties in the New York market, seeing if we can't meet with you and give you an update and a little bit of activity on what the company's operations and opportunities are.

So with that, I will conclude. And again, if you have any questions, don't hesitate to give us a call.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone have a great day.