Author Topic: PCYO - Pure Cycle Corporation  (Read 13466 times)

nspo

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Re: PCYO - Pure Cycle Corporation
« Reply #20 on: October 21, 2020, 07:15:17 AM »
I saw this writeup on TPL by Black Bear Value

"TPL is a royalty company with 100% of its acreage located in the Texas Permian Basin. In a nutshell, it makes money when drilling activity occurs, but DO NOT have the capital needs as it simply provides access to land. Think of it as a franchisor of fast-food energy and the drillers and/or midstream as the actual restaurants. If you drill oil on its royalty-land, you pay a portion to TPL. Need a road to drive to the site? You pay a fee/easement. Need water? Need a pipeline? Need electricity transmission lines? I think you get the picture. If you want access to the assets underneath the ground or to travel on top (oil/natural gas/water), you must pay TPL."

While there are some obvious differences, do any of you think TPL can be used to model PCYO's business and likely outcome?



Gregmal

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Re: PCYO - Pure Cycle Corporation
« Reply #21 on: October 21, 2020, 08:17:49 AM »
I dont know if you can use it and a model, but there are similarities. TPL was basically a land bank that happened to be located in oil territory. Being able to bleed the land while collecting royalties is an incredible combination. You also didnt need employees, which is great. Pure Cycle does not really have material royalty/subsurface assets, at least that we know of. They do periodically make some money in that area but I dont think it will ever become a significant value driver. Its more or less a free call. The growth driver for Pure Cycle and eventual profit engine will be the tap fees/lot sales which then convert to recurring revenue, and then also probably a significant CRE asset that I am hoping is monetized through ground leases and triple net leases. The water rights will be monetized gradually as the buildout takes off. So its in more need of direction and execution than TPL, which kind of just ran itself. I started losing interest in TPL as the company(and others) started getting greedy and trying to convert it to a business.

nspo

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Re: PCYO - Pure Cycle Corporation
« Reply #22 on: October 21, 2020, 12:55:38 PM »
Thanks for the insight!

DW1234

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Re: PCYO - Pure Cycle Corporation
« Reply #23 on: October 22, 2020, 06:45:30 AM »
Nice idea, I have a couple Q and I'm curious about your thoughts:

* How many SFEs can their current water facility serve? There's a lot of cost involved in building these things, so ideally you'd want them to be able to serve the entirety of Sky Ranch with their current facilities.

* What do you estimate net margins on recurring water revenues to be? Numbers look a bit disappointing right now, given there's relatively high operating costs, SG&A, D&A and taxes. $1500/household sounds good but I do wonder how much of it will go to FCF.

* They're talking about 2500-3000 SFEs for Phase 2. Does this equal potential lot sales, or will certain lots have multiple SFEs? Probably doesn't matter in the grand scheme of things since they'll get $31K/SFE.

* The economics of lot sales almost sound too good to be true. Buy land for $7M --> incur ~$30M in costs developing lots --> meanwhile get reimbursement for this because these are public utilities --> Sell these for ~$70K/lot.

It looks like there's a bunch of demand and they can keep repeating this, what am I missing?

Gregmal

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Re: PCYO - Pure Cycle Corporation
« Reply #24 on: October 22, 2020, 06:57:51 AM »
Nice idea, I have a couple Q and I'm curious about your thoughts:

* How many SFEs can their current water facility serve? There's a lot of cost involved in building these things, so ideally you'd want them to be able to serve the entirety of Sky Ranch with their current facilities.

* What do you estimate net margins on recurring water revenues to be? Numbers look a bit disappointing right now, given there's relatively high operating costs, SG&A, D&A and taxes. $1500/household sounds good but I do wonder how much of it will go to FCF.

* They're talking about 2500-3000 SFEs for Phase 2. Does this equal potential lot sales, or will certain lots have multiple SFEs? Probably doesn't matter in the grand scheme of things since they'll get $31K/SFE.

* The economics of lot sales almost sound too good to be true. Buy land for $7M --> incur ~$30M in costs developing lots --> meanwhile get reimbursement for this because these are public utilities --> Sell these for ~$70K/lot.

It looks like there's a bunch of demand and they can keep repeating this, what am I missing?

Ill do my best here.

They have water rights that would cover about 60,000 SFE so they are easily covering the entire Sky Ranch, as well as capable of tapping nearby developments which is something they hope to do.

My understanding on the margins is that they will improve in time as much of the major infrastructure and buildout occurs up front. Much of the infrastructure costs for Sky Ranch have already been incurred. The number suggested a few times on the $1500 yearly fees was about 70% margin.

The lot sales would more or less be equivalent to the 2500-3000 SFE number. They have yet to announce, but its been said that the economics of this phase will be greater, for obvious reasons.

The land cost is exaggerated as it was an opportunistic purchase. They bought the plot in a bankruptcy auction in 2012 or so, from the original Australian based development company. This would be equivalent to about a $40M or so purchase now. But yes, otherwise its an attractive proposition and a low risk strategy as they are not actually developing or building but rather subbing out to national builders with the only real company responsibility being the infrastructure and grading.

wisowis

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Re: PCYO - Pure Cycle Corporation
« Reply #25 on: October 29, 2020, 08:49:25 PM »
Maran Capital declared this as a top 5 position in their Q3 2020 letter, here is how they summarized it. Not as good as Greg's posts of course, but still thought I'd share because I find it nice to read what others shareholders think of the company:

Quote
As  a  Colorado  native,  I’m  certainly  biased  about  the  virtues  of  my  home  state.  But  the  data  seem  to  indicate that my bias is not completely misplaced. US News and World Report’s list of top places to live in the US in 2020-213 begins with:
1.Boulder, CO
2.Denver, CO
3.Austin, TX
4.Colorado Springs, CO
5.Fort Collins, CO

According to the Denver Metro Association of Realtors, September was the “toughest month to buy a house in Denver Metro’s history,” with just 5,301 total active listings, and 3,041 detached single family listings (almost half of the previous low). The median house stayed on the MLS for just six days. Inventory – especially at the entry level – is scarce, mortgage rates are low, and Denver’s population is growing.

Given  this  incredibly  bullish  backdrop,  could  any  stock  exposed  to  this  theme  still  have  a  reasonable  valuation?  Could  a  pure-play  Denver  real  estate  and  water  company  be  trading  at  an  extreme  low valuation below where it closed on March 23rd,  the day the S&P 500 reached its Covid-panic lows, and down over 30% year-to-date? Incredibly, the answer is yes.

Pure Cycle is a Denver area land developer and water utility. The company owns a nearly 5,000-single-family-lot-equivalent-development 25 minutes from downtown Denver that is delivering lots to a number of  national  homebuilders,  as  well  as  ~30k  acre  feet  of  water  supplies  and  significant  additional  water  infrastructure in the area. Its balance sheet is pristine, with a large net cash position and de minimis total liabilities. I  believe  PCYO  is  a  “fifty  cent  dollar,”  with  approximately  $10/sh  of  value  in  land  and  lots,  and  approximately  $10/sh of  value  in  water  rights  and  infrastructure,  against  the  current  sub-$9/sh  stock  price. Importantly, the value of the “dollar” is growing as the company is commencing phase 2 of its real estate development and as more people move to the Denver area, proving out the scarcity value of entry-level homes and water rights in the region.

There is an element of special situation here. A former 25%-owner of PCYO has been exiting its position for the last year, which I believe has been weighing on shares. Once this seller is cleaned up, I believe the stock has 50% upside in the near term, and 100%+ upside over the next few years. We have owned a number of real estate-related companies over the years (see our Q1 2016 letter, for example).

What has tended to work for us are situations with the following attributes:
1)a large discount to liquidation value (preferably a “fifty cent dollar”);
2)fair value (the “dollar”) is growing; and 
3)a catalyst to unlock value.

I believe Purce [sic] Cycle has all of these attributes.


Gregmal

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Re: PCYO - Pure Cycle Corporation
« Reply #26 on: October 30, 2020, 06:35:56 AM »
Thanks for sharing that. Been a busy week for me, so I didnt catch that. All I'd add, is again that its interesting how many local guys are invested in Pure Cycle. A big part of that is likely seeing firsthand whats taking place there and how the Front Range is really the last developable location in that region.

Castanza

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Re: PCYO - Pure Cycle Corporation
« Reply #27 on: October 30, 2020, 06:47:09 AM »
100% upside really isn’t much beyond what the price was in January, so I guess my concern is at this point what should we expect as shareholders? I hope a distribution would begin being paid out. Otherwise there isn’t much reason to stick around. But once you have that recurring revenue stream at scale I don’t see a reason why a divy wouldn’t be established.
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Gregmal

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Re: PCYO - Pure Cycle Corporation
« Reply #28 on: October 30, 2020, 07:00:37 AM »
I think it really depends on your interpretation and timelines. Harding has mentioned before the preference towards installing a dividend. You are going to have a good chunk of cash coming in, continuously, which bridges the gap to sustained recurring revenue. This Q alone we should see payments reflecting the final 115 lots delivered. You've also got, IIRC, maybe $15-20M more in reimbursables accruing 6-7% from the municipality. The tax base, despite covid, has nearly doubled this year. In 2018 Dan Kozlowski pitch this at one of the conferences and the internal research conducted(again, another Denver guy) indicated an undiscounted NAV of about $2B. So on the lower, short term end, yea there's maybe 50-100% upside which if I had to guess, is probably largely just taking a loose stab at what completion of phase 1 gets you. But at the same time, I see the company earning $1 per share or so(give a take a little for various reasons) from here on out...so depending upon what they do with that there could be more upside(or downside). From here, or even the low teens...to me this is a classic swing big setup, one of my favorites...as long term downside from these prices is pretty limited and upside is pretty significant.

valueventures

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Re: PCYO - Pure Cycle Corporation
« Reply #29 on: November 01, 2020, 09:01:24 AM »
Very interesting and thanks for your detailed research here! How would you justify the 25% owner mentioned in Maran's letter and various funds liquidating their stakes? Seems like a bit of a red flag given that we're still quite early in monetization/realization mode here.