Pure Cycle's Q4 2025 Earnings Call: Contradictions Emerge on Profitability, Water Rights, and Oil Royalties Outlook

Date of Call: November 13, 2025

Financials Results

• Revenue: Q4 described as the company's highest quarter but 'slightly down' vs. 2024 as some percent-complete land-development revenue was deferred into Q1 2026 due to housing headwinds.
• EPS: Net income and EPS 'exceeded expectations' versus company forecast; management noted a forecasted net income of ~ $12.5M and attributed EPS upside to stronger-than-expected oil & gas royalty income from completion of 6–7 wells.
• Gross Margin: Gross profit was up year-over-year but 'slightly off' from 2024; management cited slightly higher costs of revenue (tariffs, inflation) partly offset by lower G&A.

Guidance:

• Expect continued recurring revenue growth from water and accelerating single-family rental income.
• Anticipate increased oil & gas deliveries in 2026 (Lowry Ranch drilling) but remain cautious on commodity price visibility.
• Short-term single-family rental target ~100 units; longer-term rental portfolio target 250–300 homes.
• 2026 gross revenue sensitivity range ~26%–30% with EPS tied to lot deliveries and industrial water sales.
• Major commercial revenue ramp expected after Phase 3/interchange financing and construction (monetization acceleration in 2028).

Business Commentary:

• Continuous Profitability and Revenue Growth:
• Pure Cycle Corporation reported 25 straight quarters of profitability, with notable growth in revenue, especially in recurring revenue streams.

• The growth was supported by strong performance in water and wastewater, land development, and rental income from single-family homes.

• Resiliency and Flexibility of Business Model:

• The company demonstrated flexibility in its business model, enabling it to turn volume up or down to match customer needs, particularly in land development.

• This resiliency is attributed to the company's ability to risk on or risk off and adjust development cycles based on market conditions.

• Strength in Oil and Gas Royalties:

• Oil and gas royalty income significantly exceeded expectations, contributing to increased earnings per share.

• This was driven by the completion and operation of multiple wells on the company's royalty estate, which increased oil production.

• Land Development and Single-Family Rental Growth:

• Despite headwinds in the housing market, Pure Cycle's land development segment delivered 228 lots as planned in 2025, with expectations for growth in single-family rentals in 2026.
• Growth is supported by a solid backlog of homebuilder permits and ongoing regulatory resolutions that will accelerate rental units.

Sentiment Analysis:

Overall Tone: Positive

• Management emphasized '25 straight quarters of profitability,' stated net income and EPS 'exceeded expectations' driven by oil & gas royalties, highlighted 'continued strong stewardship of shareholder capital,' and described optimism on recurring revenue growth, rental acceleration and a commercial ramp tied to the Phase 3 interchange.

Q&A:

• Question from Greg Vennett (Shareholder): Has housing sales in your areas slowed down due to affordability or are builders still building?
  Response: Denver is affordability-challenged but Sky Ranch targets an entry-level segment that makes it more resilient; builders remain active and the company can pace lot deliveries incrementally to match demand.

• Question from Unknown Analyst (Investor): Any progress on land acquisitions this quarter and any materialized commercial players for the 2028 hockey-stick commercial ramp?
  Response: Management is actively pursuing targeted acquisitions, preserving liquidity and preferring parcels where Pure Cycle can add water value; commercial interest exists from end users but meaningful monetization is expected to ramp with the Phase 3/interchange timing (2026–2028).

• Question from Matt Reiner (Aranda): On Slide 34, revenues for 2026 look up slightly but earnings forecast down—what explains the difference?
  Response: 2025 EPS was unusually strong due to very high‑margin oil & gas royalties; 2026 revenue increases are concentrated in lower‑margin water and land segments so EPS won't necessarily match the 2025 peak.

Contradiction Point 1

Profitability Trends and Revenue Margins

It involves discrepancies in the explanation of profitability trends and revenue margins, which are crucial for investors to understand the company's financial performance and outlook.

What's causing the discrepancy between revenue growth and earnings decline? - Unknown Analyst

2025Q4: The profitability of oil and gas royalties in 2025 contributed significantly to earnings. Although revenues increase in 2026, the margins are not expected to match the high profitability of 2025 due to oil and gas royalties. The diversity of revenue streams is emphasized, and share buybacks do not affect share count significantly. - Mark Harding(CEO)

Can you clarify the revenue, cost, and profitability lines on the next slide? - Unknown Analyst

2025Q3: The main driver is our oil and gas royalties are $1.5 million lower in the quarter. Cost of sales increased 26% to $42.4 million compared to the prior year, primarily due to higher oil and gas royalties and higher royalty revenue. - Marc Spezialy(CFO)

Contradiction Point 2

Water Rights and Development Strategies

It pertains to the company's strategy regarding water rights and development, which is crucial for the company's growth and sustainability.

Are you considering acquisitions of land without water access, or land with existing water access? - Greg Vennett(Shareholder)

2025Q4: Pure Cycle is interested in acquisitions where it can bring added value through water, such as providing water access. The company's expertise and vertical integration offer advantages in land development, and acquisitions without water access are also considered. - Mark Harding(CEO)

What is the new parcel being developed, and where will the water be obtained from? - Elliot Knight(Unidentified Company)

2025Q3: The new parcel being developed in the lower left-hand corner is within the city of Aurora's utility service area and has been annexed to the city for over 20 years. The water for this development will be provided by the city of Aurora. This development surrounds the Lowry property and is not an entry-level housing project. - Mark Harding(CEO)

Contradiction Point 3

Affordability and Market Conditions

It involves differing perspectives on the affordability of housing and its impact on Pure Cycle's business, which is crucial for understanding the company's market positioning and resilience.

Have housing sales in your regions slowed due to affordability issues, or are builders continuing construction? - Greg Vennett (Shareholder)

2025Q4: Denver is in the top 10 cities for housing affordability, which presents a challenge. However, Pure Cycle's affordable price point helps mitigate this. The company's business model allows for incremental deliveries, managing headwinds better. - Mark Harding(CEO)

What is the current demand in Denver's real estate market and its impact on single-family rentals? Is the price advantage still effective? - Unidentified Analyst (Nigel)

2025Q2: Demand in the Denver market is driven by affordability concerns, with favorable consumer sentiment due to stabilized interest rates. - Mark Harding(CEO)

Contradiction Point 4

Commercial Development Strategy

It highlights differing strategies regarding commercial development, which is essential for understanding Pure Cycle's approach to diversifying its revenue streams and increasing the value of its properties.

Can you discuss acquisitions, land purchases, and progress in commercial development projects? - Unknown Analyst

2025Q4: Pure Cycle is in the market and seeing interest from commercial brokers. The strategy is to work directly with end-users. - Mark Harding(CEO)

What is the company's outlook on commercial development in Sky Ranch for retail and industrial warehousing? - Dan Kozlowski (Board Member)

2025Q2: Expertise is being leveraged to diversify offerings, including grocery stores, apartment complexes, and light industrial facilities. Strategic partnerships allow for the development of these spaces, with a focus on high-value land usage. - Mark Harding(CEO)

Contradiction Point 5

Oil and Gas Royalties Outlook

It involves changes in the outlook for oil and gas royalties, which are a significant component of Pure Cycle's revenue and profitability.

What is causing the earnings decline despite revenue growth? - Unknown Analyst

2025Q4: The profitability of oil and gas royalties in 2025 contributed significantly to earnings. Although revenues increase in 2026, the margins are not expected to match the high profitability of 2025 due to oil and gas royalties. - Mark Harding(CEO)

What is the outlook for oil and gas royalties? - Unknown Analyst

2025Q1: We have 6 new wells drilled in Sky Ranch. The royalties show a high performance and steep decline curve. The outlook for strong fracking revenue is favorable for the next 5 years and could see significant growth. - Mark Harding(CEO)