OVERVIEW
The discussion and analysis below includes certain forward-looking statements
that are subject to risks, uncertainties and other factors, as described in
"Risk Factors" in the 2020 Annual Report, that could cause our actual growth,
results of operations, performance, financial position and business prospects
and opportunities for this fiscal year and periods that follow to differ
materially from those expressed in or implied by those forward-looking
statements. Readers are cautioned that forward-looking statements contained in
this Quarterly Report on Form 10-Q should be read in conjunction with our
disclosure under the heading "Disclosure Regarding Forward-Looking Statements"
below.
The following Management's Discussion and Analysis ("MD&A") is intended to help
the reader understand our results of operations and financial condition and
should be read in conjunction with the accompanying condensed consolidated
financial statements and the notes thereto and the financial statements and the
notes thereto contained in the 2020 Annual Report.
Our Business
We are a diversified water resource and land development company. At our core,
we are an innovative and vertically integrated wholesale water and wastewater
service provider which also develops land we own into master planned
communities, to which we will continue to provide water and wastewater services
as well as operate long-term build-to-rent properties. We have accumulated
valuable water and land interests over the past 30 years and have developed an
extensive network of wholesale water production, storage, treatment and
distribution systems, and wastewater collection and treatment systems that we
use to serve domestic, commercial and industrial customers in the Denver
metropolitan region. Our primary land asset, Sky Ranch, is located in one of the
most active development areas in the Denver metropolitan region along the
quickly developing I-70 corridor, and we are developing lots at Sky Ranch for
residential, commercial, retail, and light industrial uses.
Although we currently report our results of operations in two segments, our
water and wastewater resource development segment and our land development
segment, we operate these segments as a cohesive business designed to provide a
cost effective, sustainable and value-added business enterprise. We will
separately present the Build-to-Rent segment once material.
Water and Wastewater
Water resources throughout the western United States and more prominently in
Colorado are a scarce and valuable resource. Our portfolio of 29,500 acre-feet
is comprised of groundwater and surface water supplies. Our other significant
water assets include 26,000 acre-feet of adjudicated reservoir sites, two
wastewater reclamation facilities, multiple water treatment facilities, potable
and raw water storage facilities, wells and water production facilities, and
roughly 50 miles of water distribution and wastewater collection lines. Our
water supplies and wholesale facilities are in southeast Denver, an area which
is limited in both water availability and infrastructure to produce, treat,
store, and distribute water and wastewater. We believe this provides us with a
unique competitive advantage in offering these services.
We provide wholesale water and wastewater service to local governments,
including the Rangeview Metropolitan District (the "Rangeview District"),
Arapahoe County, the Sky Ranch Community Authority Board (the "Sky Ranch CAB"),
and the Elbert and Highway 86 Commercial Metropolitan District (the "Elbert 86
District"). Our mission is to provide sustainable, reliable, high quality water
to our customers and collect, treat, and reuse wastewater using advance water
treatment systems, which produce high quality reclaimed water we can reuse for
outdoor irrigation and industrial demands. By using and reusing our water
supplies, we proactively manage our valuable water rights in the water-scarce
Denver, Colorado region. We design, permit, construct, operate and maintain
wholesale water and wastewater systems that we own or operate on behalf of
governmental entities. We also design, permit, construct, operate and maintain
retail distribution and collection systems that we own or operate on behalf of
our governmental customers. Additionally, we handle administrative functions,
including meter reading, billing and collection of monthly water and wastewater
revenues, regulatory water quality monitoring, sampling, testing, and reporting
requirements to the Colorado Department of Public Health and Environment.
22
Table of Contents
Land DevelopmentOur Land Development segment is primarily focused on actively developing the Sky
Ranch Master Planned Community located along the booming I-70 corridor to
provide residential, commercial, retail, and light industrial lots. Sky Ranch is
zoned to include up to 3,400 single-family and multifamily homes, parks, open
spaces, trails, recreational centers, and schools. Additionally, Sky Ranch is
zoned to include over two million square feet of retail, commercial and light
industrial space, which is the equivalent of 1,600 residential units, meaning
the Sky Ranch community at build-out will include a total of roughly 5,000
residential and equivalent units. Our land development activities include the
design, permitting, and construction of all the horizontal infrastructure,
including, storm water, drainage, roads, curbs, sidewalks, parks, open space,
trails, and other infrastructure to deliver "ready to build" finished lots to
home builders and commercial customers. Our land development activities generate
revenue from the sale of finished lots as well as construction revenues from
activities where we construct infrastructure on behalf of others. Land
development revenues come from our home builder customers under specific
agreements for the delivery of finished lots. Additionally, pursuant to certain
agreements with the Sky Ranch metropolitan districts, on their behalf we
construct public infrastructure such as roads, curbs, storm water, drainage,
sidewalks, parks, open space, trails etc., which costs are reimbursed to us by
the Sky Ranch CAB, through funds generated by the Sky Ranch districts through
taxes, fees or the issuance of municipal bonds.
Our land development activities provide a strategic complement to our water and
wastewater services because a significant component of any master planned
community is providing high quality domestic water, irrigation water, and
wastewater to the community. Having control over land and the water and
wastewater services enables us to build infrastructure for potable water and
irrigation distribution, wastewater and storm water collection, roads, parks,
open spaces, and other investments efficiently, and to manage delivery of these
investments to match take-down commitments from our home builder customers
without significant excess capacity in any of these investments.
In June 2017, we entered into separate contracts with Richmond American Homes,
Taylor Morrison, and KB Home, pursuant to which we agreed to sell 506 total
single-family, detached residential lots at the Sky Ranch property. We are
obligated, pursuant to these contracts, to construct infrastructure and other
public improvements as well as wholesale infrastructure improvements (i.e., a
wastewater reclamation facility and wholesale water facilities).
As of May 31, 2021, we have incurred $35.3 million of the total estimated $35.8
million in costs related to the development of the first phase of Sky Ranch. We
anticipate the majority of the remaining $0.5 million, of which $0.4 million is
estimated to be reimbursable, will be incurred during our remaining fiscal 2021.
These amounts include estimated reimbursable costs of $32.2 million, for which
we received a partial reimbursement of $10.5 million through proceeds from
municipal bonds and an additional payment of $0.4 million of unencumbered funds
resulting from a budget surplus in 2020. We believe the outstanding $21.3
million of remaining reimbursables from the Sky Ranch CAB will be paid from
future fees, taxes, and municipal bonds as the project continues to grow its
assessed value and tax base. As homes at Sky Ranch have sold faster than
anticipated (as of May 31, 2021 there are approximately 330 homes sold and
occupied in the first development phase) and assessed values have exceeded early
estimates, the Sky Ranch CAB has developed an established tax basis and has the
intent and ability to issue municipal bonds. As such, the collectability of
these reimbursables is deemed probable. The Company recognized an increase of
$0.3 million to the Note receivable - related party with the offsetting entry
recorded to Project management revenue and other income during the three months
ended May 31, 2021, for a note receivable balance of $21.3 million. As of May
31, 2021, we have recognized $36.3 million of the sales price contracted for
with the home builders and the remaining $0.5 million is expected to be
recognized as revenue in our remaining fiscal 2021. In addition, from the start
of development at Sky Ranch through May 31, 2021, the Sky Ranch development
produced $13.3 million of water and wastewater tap fees, and we expect that an
additional $1.5 million of tap fees will be received during calendar 2021.
In November 2020 and February 2021, we entered into separate contracts with KB
Home, Lennar Colorado, Melody (a DR Horton Company) and Challenger Homes to sell
789 single-family attached and detached residential lots at the Sky Ranch
property. This next development phase of Sky Ranch will incorporate
approximately 250 acres and is planned to be completed in four sub-phases. Due
to our strong performance in the first phase of the Sky Ranch project, we were
able to realize an approximate 30% increase in our lot price from $75,000 for a
50' lot in phase one to $97,000 for the same 50' lot in the first subphase of
the second phase. The timing of cash flows will include certain milestone
deliveries, including, but not limited to, completion of governmental approvals
for final plats, installation of wet utility public improvements, and final
completion of lot deliveries. In February 2021, we began construction on the
second development phase at Sky Ranch, which is expected to include nearly 900
residential lots. We expect delivery of platted lots to begin in the fourth
quarter of fiscal 2021 and continue steadily over the next several years. The
100+ lots not currently under contract to home builders are being retained for
use as build-to-rent long-term rental properties, as described below.
23
Table of Contents
Build-to-Rent
As announced in March 2021, we launched a new line of business which will be
referred to as our Build-to-Rent ("BTR") line of business. During our initial
development phase of Sky Ranch, we retained ownership of three residential lots,
on which we have begun building three single family homes which we will own,
maintain and rent to qualified renters. We have contracted for the construction
of the homes with a reputable construction company and we expect these three
homes to be completed and ready for renters in the fall of 2021. Foundations and
framing of the homes are complete and construction is progressing, on schedule
and on budget.
After the successful completion of the three houses in the first phase, we
intend to expand this BTR line in our second development phase of Sky Ranch by
building and renting homes on the 100+ lots we did not sell to our home builder
partners. Grading on the second phase of Sky Ranch has begun, and once complete
we will look to partner with certain builders to construct our BTR units as the
second development phase of Sky Ranch is completed.
Recent Developments
As the coronavirus ("COVID-19") pandemic continues, we have continued to enforce
many safety measures enacted to protect the health and well-being of our
employees, customers, business partners, and their families. While state and
local mandates have been eased, we continue to encourage voluntary vaccinations
and healthy practices such as hand washing, disinfecting, social distancing, and
face coverings when necessary. We have been able to maintain our level of
efficiency with the use of video conferencing and electronic data sharing
platforms. We were informed that our builder customers also took precautionary
measures to ensure the safety of their employees, customers, business partners,
and their families. These measures varied by builder. As a result, some of our
builder customers reported material net housing order declines in 2020. However,
they are also reporting material increases in orders since the stay-at-home
orders have been reduced. We had been expecting to accelerate deliveries of the
remaining finished lots at Sky Ranch into fiscal 2020; however, because of the
COVID-19 precautionary measures and stay-at-home orders, we delivered the
remaining lots during the first quarter of fiscal 2021. These deliveries were
still ahead of the original delivery dates set forth in our contracts with the
home builders by nearly two years. The most dramatic impact on our operations
has been the delay in inspections, the permit process and other activities
requiring governmental agencies due to expansive work restrictions imposed on
their operations. We expect COVID-19 to continue to play a role in potential
delays related to the second filing at Sky Ranch due to rapidly changing
governmental orders, city and country shutdowns, and public health concerns.
Mainly, we have experienced delays in the permitting process through the county
which has delayed the revenue recognition of the Phase two of the Sky Ranch
development.
24
Table of Contents
Results of Operations
Executive Summary
The results of our operations for the three and nine months ended May 31, 2021
and 2020 are as follows:
© Edgar Online, source Glimpses
PURE CYCLE CORPORATION 
