Mark Harding is the CEO of Pure Cycle Corp (PCYO), a growing water utility in Denver, CO. Mark rejoins The Stock Podcast to talk about the progress his company has made on the first two phases of Sky Ranch, a master plan community his company has been developing over the past decade. Mark also provides his perspectives on the oil and gas industry in the state of Colorado, his thoughts on the valuation of PCYO stock, what he’s been hearing from investors, and some insight into how he’s currently thinking about shareholder returns.
Mark first appeared on the program in June of 2018, Episode 10 of the stock podcast. In that episode, Mark provided an in-depth overview of Pure Cycle’s operations, but he also talked about some really interesting subjects including Colorado’s role as the sole water exporter in the lower 48, some of the history and dynamics around water rights, real estate development, and some of the benefits his company is seeing from oil and gas development hear in the state of Colorado.
If you’re interested in learning more about Pure Cycle’s asset portfolio of water rights, the Sky Ranch master planned community, or anything else about the Pure Cycle investment story, check out their investor relations page.
Interview Transcript
Participants
Mark Harding, CEO at Pure Cycle Corporation (PCYO)
Nate Abercrombie, The Stock Podcast
Interview Transcript
Nate: Mark Harding, thank you so very much for doing the first follow-up interview. It’s a pleasure being back here in front of you and seeing you again.
Mark: Well, thank you. It’s a pleasure to be with you again this morning.
Nate: How have things been?
Mark: Things have been very good. We have had a lot of activity in the last 18 months or so since we first met and really excited about the progress that the company has seen over that period of time. So I’m happy to be able to share that with you.
Nate: I’m excited to talk about it and especially since I also get to see it firsthand driving down I-70 and seeing all the construction out there. So, it’s very impressive.
Mark: You know and we’re one of those companies that it does have an impact when you get a chance to visit it. You know what I mean? The visual impact of seeing a development, seeing where we are positioned in the metro area, the access that we have to transportation, how our facilities come together, the proximity of oil and gas development and the push that that industry has as it tries to coexist with an emerging and expanding residential area. And then where we’re developing our water resources all have a very good feel once you have a chance to see it. So, I’m glad that you had a chance to drive by.
Nate: Yeah. You have your investor days out there, right?
Mark: We do. We do.
Nate: When is the next one?
Mark: So, we do those every summer to give everybody an opportunity to come out and see the progress that we’re making not only in the development side of what it is that we’re doing with Sky Ranch, but also how our water utility is expanding some of the reservoirs and giving everybody that view of what it’s going to be like if you’re somebody looking for a home out here. What it’s going to be like delivering water or waste water services to customers that we have in the area. So, we did this one in July. I think that’s been a good month to do that. I think it fits with most folk’s schedule. It’s been very well received for the past two years so we’ll keep that probably going every July. Patterns itself well within what it is that we’re doing on how we report our earnings. We’re on odd fiscal year end, we have an 831 fiscal year end which is off cycle to most public companies. And then that puts this right in squarely towards the end of our fiscal year.
Mark: We typically do earnings calls twice a year rather than three times a year just because of it doesn’t change all that much and so kind of laws to being in a position of updating investors with the same information. So I think couple times a year presents itself well. So we do one in November to report on our fiscal year end results and then we do one at half year, which is typically around April. So then that July cycles itself very well and in between those two. So, it does give everybody a very good perspective not only in what’s happening on the season of the building activity but also cycling between our reporting periods.
Nate: Yeah. No, I really appreciate the fact that you do twice a year reporting because I think four times a year really is far too much, very short sighted.
Mark: Right. I agree.
Nate: So, if you wouldn’t mind just providing just a brief overview of your business. I mean, I know people can go back to the previous interview and listen to a more in-depth overview of your business and how everything has evolved for pure cycle over the past, well, since 1980s, right? When you first bought this water rights. But a brief overview just for people who don’t want to go back and look right now that would be really helpful.
Mark: Yeah, sure. So, I mean, at a DNA level we’re a water utility. And we do what you would normally think of when you think of getting water and wastewater service from a provider. Typically, that provider is usually a city or a municipality, so they’re government owned. If you look at water utilities throughout the United States, roughly 85% of all water wastewater activities are handled by governmental enterprises. So, only about 15% of those activities are handled by private companies like Pure Cycle. Our operating model happens to be in the state of Colorado in the Denver metropolitan area. And really the principle theory is owning water as a resource and we are in one of those unique areas where you can own water as a real property interest. And it’s an area where there isn’t a lot of water and so we have a fixed supply of water, Colorado only gets about, I’d say, 13 inches of rainfall precipitation in a given year. And most of it’s all through the winter. And so, what we have is a semi-arid climate. We have a growing population base and so if you have a fixed supply of a commodity and a growing demand for that commodity that’s what you want to own, right?
Mark: I mean, your macroeconomic class tries to tell you if you have a fixed supply, growing demand, price will adjust to that. And so we have been long on water owning water for a number of years and we continue to be in the market for expanding and strengthening that portfolio. We also look at how that component can add value in other areas. And so we find ourselves in a position where we picked up a land interest a number of years ago as a result of the fact that we had a water service commitment to that property and in the real estate downturn that property ended up going into bankruptcy. Our water commitment was tied to that land and bankruptcy and no one was really paying any attention to a water interest on that because adding water to a particular piece of property here in Colorado significantly enhances the value of it. And so, because nobody wanted to own real estate in 2010, we had an opportunistic buy where we bought about a thousand acres. It was ideally located, it was right along the interstate, it had an interchange right at the property itself, and it presented an opportunity for us to vertically integrate not only being the utility provider but also then to be taking a look at the development side of it.
Mark: Yeah and it was something that we weren’t exactly sure we wanted to develop the property. We were probably more inclined to partner with somebody to develop that property, but that opportunity never really presented itself for us. And so, incrementally owning the property was a significant component of it, being able to develop the utilities was a significant component of it. And so, delivering a finish lot for home builders seemed to be that third legged a stool that if you had the first two, the third one was probably not as challenging as the first. And so, we decided to go down that path, really broke down about 18 months ago when we first met and really have had a tremendous amount of success delivering those lots. So, really taking a look at what the company does, we’re a water utility, we provide domestic water and wastewater service in addition to the domestic site. Sometimes there’s an opportunity to preside raw water for opportunities that’s been another growing business of ours here due to being able to get oil out of oil shell. And so we got a number of major oil and gas operators that are in this field that are developing it. We probably had, I guess, water serviced about a hundred and thirty wells in this area and they use a tremendous amount of water for that activity as well. And so, between developing the water utility, using that water utility for the oil and gas space through industrial water and then also the domestic side with a little bit of real estate development on the side really it all underpins to that water opportunity.
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