Pure Cycle Corporation

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

In Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), “we,” “us,” “our” and "Pure Cycle" refer to Pure Cycle Corporation and all entities owned or controlled by Pure Cycle Corporation. You should read the following discussion in conjunction with our consolidated financial statements and accompanying notes, related MD&A and discussion of our business included in our Annual Report on Form 10-K for the year ended August 31, 2025 (the “2025 Annual Report”) filed with the United States (U.S.) Securities and Exchange Commission (the “SEC”) and the unaudited consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q. The results of operations reported and summarized below are not necessarily indicative of future operating results, and future results could differ materially from those anticipated in forward-looking statements (refer to “Forward-Looking Statements” in this report and Part I, Item 1A. “Risk Factors” in our 2025 Annual Report for further discussion).

We are a diversified water and wastewater service provider, land developer, and home rental company. We provide wholesale water and wastewater services in the Denver, Colorado area, develop land we own into master planned communities, and develop single-family homes for rent. Each of our businesses, providing water and wastewater services, land development and single-family home rentals, generates attractive recurring monthly income.

Recent Developments and Economic Conditions

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The housing market stabilized in 2024 as the Federal Reserve shifted from aggressively increasing interest rates in 2023 to a balanced approach that maintained relatively consistent interest rates through the first half of 2025. In the second half of 2025, the Federal Reserve pivoted from primarily combating inflation to supporting labor market stability and economic activity, implementing a series of interest rate reductions that continued through December 2025. Since December 2025, the Federal Reserve has paused its easing cycle and held rates steady at its January, March, April and June 2026 meetings, leaving the target range for the federal funds rate at 3.50% to 3.75%, as policymakers navigate inflation that has reaccelerated to its highest level since 2023 and remains above the Federal Reserve's target, a labor market that has shown signs of softening, heightened geopolitical uncertainty arising from the military conflict between the United States and Iran, and weak consumer confidence. Although mortgage interest rates remain below their 2024 peaks, they have risen from their early 2026 lows as the energy price shock has pushed inflation higher, and the 30-year fixed rate averaged approximately 6.52% as of mid-June 2026. The housing market continues to face significant headwinds. Consumer demand remains constrained by cumulative affordability challenges, elevated energy costs and heightened economic uncertainty. Furthermore, volatility in the broader macroeconomic environment, driven in part by the military conflict between the United States and Iran, federal trade policies affecting the cost of imported construction materials, and fluctuating consumer confidence, continues to impact builder sentiment and the pace of new home sales. Builder sentiment, as measured by the NAHB/Wells Fargo Housing Market Index, stood at 35 in June 2026, remaining below the breakeven level of 50 for the 26th consecutive month, with approximately 62% of builders continuing to offer sales incentives to attract buyers.

As higher mortgage interest rates, volatile macroeconomic conditions and geopolitical instability have adversely affected the residential real estate market, homebuilders' strategic use of interest rate buydowns and other sales incentives have continued to play a crucial role in driving sales. Despite current interest rates, elevated energy costs, increases in the cost of construction materials and economic uncertainty stemming from actual and anticipated U.S. governmental policy changes, we maintain a positive long-term outlook on land development and the housing market based on fundamental factors remaining positive. These include favorable demographics, the lot and housing supply vs demand imbalance resulting from a decade of underproduction of new homes in relation to population growth, and low resale home inventory. While we remain confident in the long-term growth prospects for the industry given these factors, the current demand for new homes is subject to continued uncertainty due to many factors. The combination of higher mortgage interest rates since early 2022, several years of rising housing prices, renewed inflation, and various other macroeconomic and geopolitical concerns have been moderating housing demand. The Denver metro housing market has reflected these national trends. After home sales fell to their lowest levels since the 2008 financial crisis in early 2026, the spring selling season showed signs of stabilization, with median home prices remaining approximately flat to modestly higher on a sequential basis and sales activity improving from earlier in the year, even as new listings declined and the supply of homes available for sale tightened. Although the Federal Reserve's participants had projected one rate reduction for 2026 as recently as March, the Summary of Economic Projections released following the June 2026 meeting removed that projected reduction, and nine of the eighteen participants who submitted projections instead projected at least one increase in the federal funds rate before the end of 2026, with six projecting two 25 basis point increases. Those participants also raised their median projection for year end 2026 inflation, as measured by the personal consumption expenditures price index, to 3.6% from 2.7% in March, while lowering their projection for real GDP growth.

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The timing and likelihood of any future rate reductions have accordingly become less certain, and we expect moderate demand to continue throughout 2026 given the compounding headwinds of elevated energy prices, persistent inflation, and ongoing trade policy and geopolitical uncertainty. Given current conditions, we continue to monitor market dynamics and surrounding community performance and will adjust the timing of additional construction expenditures at Sky Ranch as warranted. We believe our segment pricing (entry level) lots and the low inventory of entry level housing in the Denver market will help Sky Ranch navigate a cyclical market better than other surrounding and significantly higher priced communities.

Our future performance and the strategies we implement (and adjust or refine as necessary or appropriate) will depend significantly on the prevailing economic environment, the state of the homebuilding industry, capital, credit and financial market conditions and political and regulatory factors (particularly regarding housing and mortgage loan financing policies and trade policies impacting the cost of construction and building materials). The Federal Reserve's decision to pause its rate cutting cycle, the reacceleration of inflation to its highest level since 2023, the leadership transition at the Federal Reserve, and elevated uncertainty regarding the duration and economic impact of the military conflict between the United States and Iran are expected to be ongoing headwinds for the housing market. Although energy prices have retreated from their heights surrounding the United States and Iran conflict, they remain elevated relative to pre-conflict levels, and the durability of the agreement to end the conflict and the timing and extent of any normalization in global energy markets remain uncertain. Prolonged supply chain disruptions, labor shortages, increased costs as a result of tariffs (including tariffs of up to 50% on steel, aluminum and copper and additional duties on softwood lumber, gypsum and other building products) or other factors and other production related challenges could extend or delay our construction cycle times and intensify construction-related cost pressures beyond those we experienced in 2025 and 2026. Consumer confidence weakened materially during the period, with the University of Michigan Index of Consumer Sentiment falling to a record low in May 2026 before recovering modestly in June, as households reacted to the military conflict and higher gasoline prices. Higher energy costs disproportionately impact lower income households, which represents a significant portion of the entry level buyer demographic we serve. In addition, consumer demand for our homes and our ability to grow and scale revenue and returns in fiscal 2026 could be materially and negatively affected by the above described monetary policy impacts, the economic consequences of the military conflict between the United States and Iran, rising energy costs, or other factors that curtail mortgage loan availability, employment or income growth or consumer confidence in the U.S. and in the Colorado markets.

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Our Business Strategy

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For more than 30 years, we have accumulated and continue to accumulate a portfolio of valuable water rights, land interests and single-family rental homes along the Front Range of Colorado. We have added an extensive network of wholesale water production, storage, treatment and distribution systems and wastewater collection and treatment systems that we operate and maintain to serve domestic, commercial, and industrial customers in the eastern Denver metropolitan region. Our primary land asset, known as Sky Ranch, is in one of the most active Master Planned Communities in the Denver metropolitan region along the rapidly developing I-70 corridor, where we are developing lots for residential, commercial, retail, and light industrial uses. Sky Ranch is zoned to include up to 3,200 single-family and multifamily homes, parks, open spaces, trails, recreational centers, schools, and over two million square feet of retail, commercial and light industrial space, all of which will be serviced by our water and wastewater services segment. Additionally, we have retained lots in our Sky Ranch development for our single-family rental business where we contract with national homebuilders to build the single-family homes we rent, typically under annual lease agreements. With 39 homes currently owned, we continue to evaluate this new line of business, which will include up to 71 rental homes at Sky Ranch by the end of 2026.

Although we report our results of operations through our water and wastewater resource development segment, our land development segment, and our single-family rental segment, we operate these segments as a cohesive business designed to provide a cost effective, sustainable, and value-added business enterprise.

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Water and Wastewater

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Water resources throughout the western U.S., and particularly in Colorado, are a scarce and valuable resource. Our owned and/or controlled portfolio of more than 30,000 acre-feet of water is comprised of groundwater, designated basin groundwater, and surface water supplies. Our other significant water assets include 26,000 acre-feet of adjudicated reservoir sites, two wastewater reclamation facilities, 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 primarily located 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.

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We provide wholesale water and wastewater service to local governments for both residential and commercial customers. The local governments we serve include the Rangeview Metropolitan District (“Rangeview District”), Arapahoe County, the Sky Ranch Community Authority Board and related metropolitan districts (“Sky Ranch CAB”), and the Elbert and Highway 86 Commercial Metropolitan District (“Elbert 86 District”). Our mission is to provide sustainable, reliable, high-quality water to our customers and collect, treat, and reuse wastewater using advanced 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, which dramatically reduces the environmental impact of our water resource operations. 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 exclusively 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.

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Revenues for our water operations are dependent on us growing the number of customers we serve. If we are unable to add customers to our systems and sell taps to builders, our revenues could be negatively impacted. We are currently the developer of the Sky Ranch Master Planned Community, which is the main driver of our tap sales. Prolonged periods of hot and dry weather generally cause increased water usage for watering lawns, washing cars, and irrigating parks. Conversely, prolonged periods of dry weather could lead to drought restrictions and limited water availability. Despite our substantial water supply, customers may be required to conserve water usage under such drought restrictions, which would negatively impact metered usage revenues. The Rangeview District and Elbert 86 District have addressed some of this vulnerability by instituting minimum customer charges, which are intended to cover fixed costs of operations under all likely weather conditions. Neither district anticipates the need to implement any mandatory watering restrictions in fiscal 2026.

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Land Development

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Our Land Development segment is primarily focused on developing the Sky Ranch Master Planned Community located along the booming I-70 corridor. We develop and sell residential, commercial, retail, and light industrial lots. Sky Ranch is zoned to include up to 3,200 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 approximately 1,800 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 homebuilders 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 homebuilder customers under specific agreements for the delivery of finished lots. Additionally, pursuant to certain agreements with the Sky Ranch CAB and its related metropolitan districts, on their behalf we construct public infrastructure such as roads, curbs, storm water, drainage, sidewalks, parks, open space, trails, and other amenities, the costs of which are reimbursed to us by the Sky Ranch CAB through funds generated from property taxes, fees or the issuance of municipal bonds.

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Our land development activities provide a strategic complement to our water and wastewater activities because a significant component of any master planned community is providing high quality domestic water, irrigation water, and wastewater services to the community. Having control over the 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 homebuilder customers without significant excess capacity in any of these investments.

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We have been developing the Sky Ranch community in phases since 2017. We believe it will take approximately eight to ten more years to fully develop Sky Ranch. In 2017, we began the initial development phase of Sky Ranch by entering into contracts with several national homebuilders, to deliver finished building permit ready lots. Pursuant to these agreements, we were obligated to construct infrastructure and other public improvements as well as wholesale infrastructure improvements (i.e., a wastewater reclamation facility and wholesale water facilities). Since then, multiple phases of the Sky Ranch development have been completed and revenue and costs have been recognized.

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During our fiscal 2021, we began construction on the second development phase at Sky Ranch, which has grown to include approximately 1,000 lots developed in five sub-phases (referred to as Phases 2A, 2B, 2C, 2D and 2E). Due to our strong performance in the first phase of the Sky Ranch project, we were able to realize an approximate 53% increase in our average lot prices in Phase 2. For example, we increased our sales price for a 45 foot lot from an average of $75,000 to $115,000. The timing of cash flows includes certain milestone deliveries such as the completion of governmental approvals for final plats, installation of wet utilities, and final completion of lot deliveries.

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As of May 31, 2026, Phase 2A of the Sky Ranch development is 100% complete, and we have received all $18.4 million of payments related to the sale of the 219 lots in Phase 2A. Phase 2B of the Sky Ranch development is approximately 99% complete, and we have received all $17.3 million of payments related to the sale of the 211 lots in Phase 2B. Phase 2C of the Sky Ranch development is approximately 95% complete. We have received all $17.3 million in payments related to the sale of the original 228 lots in Phase 2C, and we expect an additional $0.5 million from selling an additional five lots that were previously held for our single-family rental segment.

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As of May 31, 2026, Phase 2D of the Sky Ranch development is approximately 84% complete. As of that date, we have received $11.1 million, representing all three milestone payments due from our two builders with milestone payment contracts. We expect to receive an additional $9.7 million over the next nine months, consisting of all finished-lot payments for Phase 2D and proceeds from the sale of additional lots previously held for our single-family rental segment.

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We recognize revenue earned under contracts with milestone payments over time using the percentage-of-completion method, which aligns revenue recognition with the progress made on construction activities. During the three months ended May 31, 2026 and 2025, due to construction progress in Phases 2B through 2D, we recognized $3.0 million and $2.5 million, respectively, of lot sales revenue related to construction at Sky Ranch. During the nine months ended May 31, 2026 and 2025, due to construction progress in Phases 2B through 2D, we recognized $10.7 million and $6.0 million, respectively, of lot sales revenue related to construction at Sky Ranch. As of May 31, 2026, we have recognized cumulative lot sales revenue of $18.4 million for Phase 2A, $17.0 million for Phase 2B, $16.5 million for Phase 2C, and $9.3 million for Phase 2D. We expect to recognize the remaining $0.8 million of revenue for Phase 2C over the next three months and the remaining $11.7 million of revenue for Phase 2D before the end of fiscal 2026, except for revenue from the sale of additional lots previously held for our single-family rental segment, which may take additional time to recognize as our builders work through their current inventories.

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We began construction activities in Phase 2E in fiscal 2026 and expect to complete approximately 159 lots in fiscal 2027, although we plan to pace construction to match builder absorption. As of May 31, 2026, we have not recognized any revenue related to Phase 2E and will begin recognizing revenue under the percentage-of-completion method once our first customer contract is executed.

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In addition to the lot sales described above, from the start of development at Sky Ranch through May 31, 2026, we have received $37.6 million of water and wastewater tap fees from the homebuilders, which is for all 509 taps sold in Phase 1 (with four being allocated to our single-family rentals), all 229 taps sold in Phase 2A (with 10 being allocated to our single-family rentals), 199 of 211 taps sold in Phase 2B (with 17 allocated to our single-family rentals), 170 of 228 taps sold in Phase 2C (with 29 allocated to our single-family rentals) and 24 of 204 taps sold in Phase 2D ( with two allocated to our single-family rentals). The timing of tap sales is dependent on when homebuilders request building permits. Fees charged per water tap are dependent on lot sizes and average water usage across a broad range of housing product types, including duplexes and townhomes. For Phase 2, we estimate that the additional water and wastewater tap fees will exceed $19.0 million.

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Single-Family Rentals

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During our fiscal 2021, we launched a new line of business we refer to as our single-family rental business. During Phase 1 of Sky Ranch, we retained ownership of four residential lots for use in this business. As of May 31, 2026, we have completed 39 single-family homes on lots, 38 of which we own, maintain, and have rented under one-year lease terms. We expect to expand our single-family rentals in our second development phase of Sky Ranch by building homes on lots we did not sell to our homebuilder partners, which we intend to rent out once completed. As of May 31, 2026, we reserved approximately 71 lots in Phase 1 and 2. This includes 38 homes that are completed and rented and 33 lots in Phase 2C and 2D that are reserved for rental home, the majority of which are anticipated to be available for rent in calendar 2026. In addition, we own one house listed for sale as of May 31, 2026.

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We capitalize the costs of the homes and, when applicable, depreciate the costs over periods not exceeding 30 years. Lease income is recorded monthly as earned, and renters are typically under a one-year lease. We began recognizing monthly lease income for the first three rental units on November 1, 2021.

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Results of Operations

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Executive Summary

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For the three months ended May 31, 2026 and 2025, we generated net income of $2.9 million and $2.3 million, respectively. The increase in net income was due to an increase in water sales to oil and gas operators for drilling purposes in 2026. Despite increased challenges in the housing market, our land development activities continue to perform well, and we continued construction on Phases 2C and 2D at Sky Ranch during the quarter.

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For the nine months ended May 31, 2026 and 2025, we generated net income of $8.6 million and $7.0 million, respectively. The increase was primarily due to an increase in land development revenue and an increase in water sales to oil and gas operators for drilling purposes in 2026. Lot sales revenue is recognized using the percentage-of-completion method, which is based on progress of construction. During the period, a mild winter in the Denver area allowed us to capitalize on favorable conditions and advance our lot development schedule at Sky Ranch, which accelerated revenue recognition on a percentage-of-completion basis during the period.

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The tables below present our consolidated results of operations for the three and nine months ended May 31, 2026 and 2025.

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