Pure Cycle Corp Q4 FY2022 Earnings Call

Good morning, everyone, and welcome to the Pure Cycle Corporation Earnings Call for the year ended 2022. I would now like to introduce your host, Mark Harding. The floor is yours, Mark.

Thank you and good morning, everyone. I appreciate you joining us for our year-end earnings call. To start, you can access our presentation deck by visiting our website at purecyclewater.com. There’s a link to the Investor page where you can find a tab to join the call. Once you click that button, I’ll be able to advance the slides during the presentation, and the presentation will also be available as a PDF on the website for further reference if you’d like to dive deeper into it later. Joining me today is Kevin McNeill, who is participating in listen-only mode due to feeling a bit under the weather, and Dirk Lashnits, who oversees all of our land development activities. In addition to hearing from me, Dirk will share insights on our land activities and successes in that area. Let's begin the presentation with our safe harbor statement, which notes that any historical facts not included or referenced in this presentation may include forward-looking statements. I trust you are all familiar with the safe harbor statement, so we can move forward. I'll cover a brief overview of the company. Most of you likely have some familiarity with our operations, but if you’re new, there’s extensive information available on our website that details what we do. Essentially, we operate through three complementary segments. At our core, we are a water and wastewater resource company with a significant portfolio of water in a prime area of the country, where water ownership is valuable. We offer comprehensive water services to our customers, and we are developing a master-planned community in the Denver metropolitan area. Additionally, we retain some developed lots for our homebuilder customers and to pursue opportunities in the single-family rental market, providing ongoing cash flow from appreciating assets. Now, to briefly touch on each segment: in water and wastewater, we manage the development of wells, diversions, and all water supply, treating that water and distributing it to customers. We charge connection fees, commonly referred to as tap fees in Colorado, which are approximately $28,000 for water and around $5,000 for sewer connections. We are equipped to provide services to about 60,000 connections and generate monthly revenues from these services, averaging about $1,500 per connection per year. We recover and treat wastewater for reuse, creating a sustainable water balance system for our customers. Over the past five years, we have nearly doubled our investments in water infrastructure, including wells, transmission lines, storage, treatment facilities, and distribution systems. Our growth not only encompasses new residential connections in our Sky Ranch community but also commercial customers in both Sky Ranch and our Wild Pointe service area, as well as existing industrial clients. Currently, we have about 1,000 connections to our systems. An important aspect of our operations includes working with industrial customers, especially in a prolific oil and gas field located above our water supplies. We have multiple operators actively developing this field, allowing us to sell a substantial volume of water, which led to a record year for water sales in the oil and gas segment, driven by favorable oil prices and a stabilizing regulatory environment in Colorado. Geographically, we are positioned within the Denver metropolitan area, constrained by the mountains to the west, shaping our growth potential into a 180-degree semi-circle. The map illustrates our location relative to major infrastructure, such as Interstate-70 and the 470 belt loop, with our Sky Ranch project located just four miles south of Denver International Airport. The map also showcases potential development opportunities in the Lowry service area alongside our Master Planned Community. Now, I’ll hand the call over to Dirk for an update on our land development segment and the exciting activities taking place there. Dirk, it’s all yours.

Thanks, Mark. Good morning, everyone. Land development is the Sky Ranch project, our Master Planned Community. This information is probably a bit familiar, but it will remain consistent throughout the project. We see the upward trend of the iteration curve for the next several years. Sky Ranch spans 930 acres, which can accommodate up to 3,200 residential lots and about 2 million square feet of commercial development. Moving to the next phase, our first phase officially began in 2018 and provides a solid frame of reference for the entire project. This phase includes 509 lots and is currently wrapping up. In the top right-hand corner of the graphic, you can see the last homes under construction at this time. We have sold all our taps, all homes have begun construction, and the final residents are moving in. We have transferred all infrastructure to the relevant jurisdictions and collected $36.7 million from lot sales and $14 million from taps. In 2019, we also issued a bond for this phase amounting to about $30 million, with some reimbursable costs accruing for future phases. Now, onto our second phase, which is the latest phase located directly across the street to the east. In the graphic, the lots are in the bottom right corner, while the upper right corner features school land. The main shift in this phase is our revamped land plan. The layout between Phase 1 and Phase 2 shows significant changes. We introduced additional product lines; while the first phase offered two product types, the new phase will feature six. In Phase 1, we utilized the inherited product mix from the project, but in Phase 2, we carefully considered how we wanted to approach the planning. Our focus was increasing density; while Phase 1 had about three homes per acre, we aim to achieve five to six homes per acre in the upcoming stages to meet the target number of lots. This increase in density is advantageous for bonding as well as water use. We also added a fourth builder for this neighborhood, balancing the number of builders to four, which we believe is the optimal setup for good yield. Each builder has at least one unique product segment, allowing for some overlap and competition on specific product types. We plan to maintain this strategy through the second phase's build-out. In terms of financials, we are looking at approximately $70 million in revenue here, a 15% increase from our first phase on a per lot basis, along with another bond issuance in 2022 worth $29 million for the 850 lots in Phase 2. We observed a healthy appreciation from Phase 1 to Phase 2. The next slide illustrates the four quadrants mentioned earlier, with color-coded pie charts indicating the six product types and builder segmentation, showcasing good parity and distribution. Currently, Phase 2A is nearly complete, and we've received most of our lot revenue except for some minor outstanding items. Regarding the school, we see construction progressing well, with a charter elementary school beginning to lay its foundation and set to open in the fall. Now, let’s quickly review the market conditions. Currently, we find ourselves in a contracting market, with some labeling it a housing recession. New home sales have declined 17% year-over-year and mortgage applications are down 40%. Builder confidence has dropped for ten consecutive months. Interest rates spiked sharply in 2022, jumping from about 3% to 7%. While this is historically high, it's not unprecedented; average rates were around 7.76% since the 1970s, even peaking at 18% in the 1980s. Material and labor costs have typically risen a few percentage points each year, but recently, material costs surged by 20% year-over-year and have increased by 40% since the pandemic began. This escalation affects our builders and their ability to sell homes. Consequently, our production costs rise while customers’ buying power decreases, which is concerning. On a brighter note, demand for new home sales remains strong. In the peak of 2005-2006, we produced around 1.4 million new homes annually, whereas by 2021, that number dropped to about 600,000, indicating that there’s still capacity in the market. The time homes spend on the market is also declining, typically trending downwards into winter, and we are currently observing a 30-60 day average on the market. We're still witnessing positive home appreciation, albeit at a slower pace, which many consider more sustainable. Creative short-term mortgage options are emerging as lenders look for ways to ease purchasing costs. Moreover, unemployment rates remain low, especially in Colorado. We believe a correction is necessary, and we hope to avoid a collapse as the market recalibrates. At Sky Ranch, we are reassessing the timeline for the next phases in line with builders’ sales velocities. The following slide presents further visual data concerning market statistics, including housing supply and lending standards. It highlights significant differences compared to the 2008 financial crisis, indicating a lack of foreclosures which is a positive sign considering the current unemployment context. Now I’ll turn it back over to Mark.

Thank you, Dirk. I'd like to discuss our latest business segment, single-family rentals. We recently entered this market by retaining lots in our Master Planned Community to develop them into single-family rentals, capitalizing on the appreciation we are driving in that community. This is creating significant value, providing us with a great investment opportunity and ongoing cash flow. We see it as a strong complement to our water and land development efforts, and we anticipate increased activity in this area. Consumer trends are shifting towards home rentals instead of apartments, with many seeking more space rather than just a prime location. Affordability plays a significant role here. We have broadened our product offerings, including paired homes and townhomes, all at entry-level price points that cater to both consumers and renters. We provide a range of options, from larger four-bedroom homes to more compact two-bedroom townhomes, making our offerings flexible for a diverse customer base and strengthening the home rental market. Regarding financial performance, each average rental home generates about $33,000 annually. Our operating costs include taxes, dues, interest, and depreciation, but when adding back cash flows, we see high margins in this segment. We are able to carry forward the equity value of land and water to generate free cash flows. We have currently four rentals available, up from three last year, with another ten under construction. In terms of our land development activities, we have successfully completed 100% of Phase 1 and are about 76% through Phase 2A. We are generating impressive gross margins from our lot sales and public improvement reimbursements, leading to strong liquidity. Our business model enables us to develop infrastructure efficiently, minimizing exposure for ourselves and our homebuilder customers. This year, we've experienced significant growth with total revenues around $23 million, including $8 million from Water and Wastewater and $15 million primarily from Land Development. Our net income has also risen, demonstrating our successful execution since we began this venture in 2018. We are continuing to invest in assets and have ended the year with about $35 million in cash and cash equivalents. I also want to highlight our commitment to ESG initiatives. We have engaged an ESG specialist to develop our documentation and we will be releasing our first annual ESG report later this month, which will be available on our website. We aim to provide transparency in energy management, water usage, employee satisfaction, and board diversity among other concerns. Our balance sheet is strong with significant cash and low debt at favorable interest rates. We are excited about implementing a share repurchase program, which we believe can enhance our shareholder value given our capital structure and market position. Looking ahead, important dates include our proxy statements being mailed on December 2 and the annual shareholder meeting on January 11. We are pleased with our leadership’s direction and the intellectual capital within our Board of Directors. In summary, we had a robust year, meeting project timelines and maintaining liquidity through efficient credit practices. We are thoughtfully positioned in the current market, particularly for entry-level homebuilders. Given the strong demand for housing in Denver, we continue to see significant opportunities for growth. I'll now hand it back to Ali for any questions you may have.

Our first question is coming from Bill Miller, who is an Investor.

I congratulate you on a great quarter, and I'm just curious about a couple of things. One is your acquisitions that you alluded to, and where are you on any big further land acquisitions along I-70 or anywhere else? And secondly, the home rental market is obviously a home run for you. Are you going to expand beyond the 100 a year or whatever number you have because that's certainly your highest return investment opportunity. Will you reallocate resources there? And finally, are you going to stop at 200,000? Or are you going to go beyond that? How aggressively do you plan to pursue that at this price?

Yes. Let me address them in the order they were presented, if I can recall. Regarding land acquisitions, we have a strong interest in that area. As mentioned previously, we are well established in the market segment. We have access to water, which is a significant advantage that surrounding land interests typically lack. The ability to acquire land along with our water resources adds considerable value. Although we haven’t finalized any acquisitions yet, we are seeing substantial interest and movement in this area, which we are eager to explore further. We remain active in pursuing opportunities and have ample liquidity to do so. We appreciate having that flexibility. As you can see, we are continuing to make strategic small acquisitions in the water sector. Our preference leans toward acquiring both land and water, but when water resources near our existing supplies become available, we will pursue those as well. Looking at the single-family rental market, it presents another great opportunity for us. Our builder partners have performed well, particularly in the entry-level home market segment. Each builder excelled in Phase 1, and we are moving forward from there. If we identify any builder who is overexposed in that segment, it could open up an opportunity for us to acquire some of those lots and invest further in the single-family market. We are keen on this approach. Currently, all our lots are under contract, but this remains an opportunity for us. You may see us investing more in this area during Phases 2B, C, and D. Regarding the share buyback, the Board is cautious and ensures we maintain flexibility to invest across all areas of the company: water, land, and our own currency. If the market remains misaligned, the decision to buy back 200,000 shares was made because it serves as an anti-dilutive measure, and we will assess it as we move forward. As you know, and Bill, you have extensive experience with us, we approach governance and stewardship with a disciplined mindset. We examine these matters incrementally, evaluate their effectiveness, and continue to reinvest in successful areas. This share buyback was a well-considered decision made over several quarters and presents an opportunity for us to continue investing in our growth. I can't provide specifics beyond noting our past performance and our history of making thoughtful and careful decisions before scaling our efforts based on success.

Mark, how big a portion of your company do you want the rental business to be?

It's a good question. If you take a look at the 3,200 single-family lots out there, a good growth target would be somewhere around that 12% to 15% of that market can be in our portfolio.

That's going to be a big business for you.

That will be a strong business for us, aligning with your observations. The asset is continually gaining value, and our customer is reducing the vertical costs through mortgage rentals. This also generates cash flow for us. It’s definitely a beneficial segment that we have a legitimate reason to be involved in. Considering our approach to this business, it presents a solid opportunity as a significant amount of investment is flowing into that area. We can leverage the equity we hold in both the land and water, making it a highly tax-efficient way for us to invest. We are carrying this forward as it appreciates. If we identify a promising acquisition with a few hundred homes available, that could allow us to monetize it for other land acquisition opportunities that might exceed our usual range while enabling further growth. There is considerable flexibility for us within this business segment.

Our next question is coming from Geoffrey Scott with Scott Asset Management.

Two questions. You didn't mention much about the commercial side. Can you talk about the development and potential timing of that?

We're still focusing on expanding our residential side. The commercial segment is still a bit further down the road. We're looking at approximately 1,000 rooftops in and around the area for this development. There are neighboring projects that enhance our density considerations. Our aim is to attract higher-value commercial spaces; we prefer larger grocery stores and significant retail centers with high traffic. We're also exploring partnerships where we can contribute utilities and land, similar to our approach in the single-family rental segment, adding equity value. While we won't be vertical in commercial development as we are in residential, we see opportunities with good margins. We're still somewhat distant from this goal, and I believe our patience will pay off in securing substantial commercial projects rather than small retail ventures, which typically get initiated too early and require redevelopment later. We aim to be strategic and methodical in pursuing substantial commercial opportunities, especially given our advantageous location near the interstate and close to Denver International Airport. I acknowledge our ongoing patience and commitment to exploring market opportunities, though I do not have a specific start date at this moment.

If I understood correctly, the big box kind of folks want a lot more houses built, right? So they wouldn't be in a community of multiple thousands. So, we're talking about development kind of four or five years away from now.

Yes, that's a hard one for me to say; it's that far out. I'd say it might be a couple of years out, but not four, five years out.

Okay. Next question on page 26. You mentioned that you delivered 404.9 million gallons. If I calculated correctly, that's approximately 1,200 to 1,300 acre-feet, and you have 30,000. So you're selling about 3% to 4% of the acre-feet you currently possess; why pursue additional water acquisitions?

Once water is purchased by a city municipality, it becomes unavailable. Our focus is not on expanding our portfolio indiscriminately but rather on acquiring assets adjacent to our existing investments. This presents an opportunity to enhance our portfolio. We recognize that we have a substantial water supply and want to avoid over-investment in this area. However, we are open to considering strategic acquisitions. The decision comes down to price. Is it reasonable? Can we add value through our infrastructure and existing water rights for that specific asset, thereby enhancing its worth beyond the purchase price?

If I hear you correctly, it's really a defensive move to keep it out of governmental control?

Not necessarily out of governmental control. Other water providers; it's very competitive. We have 70 different water providers who are all out scouring opportunities for water supplies. So, you have diminishing acquisition opportunities and an increasing number of folks looking for those acquisition opportunities.

Okay. Anything happening then on the reservoir?

No. We still look to partner with other regional interests on the reservoir assets that we have and whether that's with our neighbors or with our partners that we have in Wise with the South Metro Group, all of those studies, evaluations, and consultations continue to take place, but nothing really exciting to update you on.

Our next question is coming from Greg Malachowski with Benchmark.

I have one general question regarding the single-family rental business. Has your approach to financing changed at all with the current mortgage rates, which I believe are in the high 3s or low 4s? How is the company planning to fund future projects considering the rise in mortgage rates? How are you evaluating that?

That's a good question. We have secured about $4 million at some very favorable rates, and we intend to keep those options available. With mortgage rates rising to 7%, given our strong equity value, we might consider financing a lower percentage, perhaps 50% instead of 80%. We will still utilize that financing strategy. While it was better when rates were 3% or 4%, 7% isn't terrible and reflects the nature of financing activities. I believe millennials will look into purchasing homes for reasons beyond mere investment or utility value. A 7% mortgage is more traditional and fits long-term projections. We are open to financing at rates of 4% or 4.5%, as this may yield better returns for our cash flow when we have the opportunity. However, we won't overextend ourselves in this area. We aim to grow that segment, as our Board recognizes its potential. We have to balance the vertical cost with our equity value. Seven percent is still a very competitive rate for what we consider to be relatively inexpensive debt.

Okay. And how do you see the overall rental market right now and maybe projecting going forward? What is the strength or weakness associated with that versus kind of what you guys loosely would underwrite when you're looking at picking up a home?

It's a great question, and it is strengthening. What you're seeing is to the extent that those former buyers may have lost the ability to qualify for the same house that they would have wanted at 4% compared to 7%, we're really getting a lot of referrals from our homebuilders to say, well, if you like the community, why don't you go talk to the developer who's got some units that are coming online for rental because it locks them into the market. There's that component of it. The second component that we're really excited about is truly bringing online our school. That's a community. That’s a sense of education being the initiative of every new subdivision, new community. So that’s a strong driver for new families, particularly because we’re opening up this K-7. It will be a full K-8 facility. We may not open all those grades all at once, but that’s what the capacity of that is. We find that to be some good traffic flow on the single-family rental business, which is putting a little bit of wind in our sails on why we may partner with some builders to claw back a few of those lots and sales.

Okay. So you're saying the financing is still favorable and the rental market is strong. If I can suggest something that I’m sure you’ve considered, when looking at capital allocation and land, some challenges arise. First, land isn’t cheap, and second, acquiring and developing it requires significant capital and time. Given what we currently have, land might not be the best use of our capital right now. Regarding water rights, as previous callers pointed out, they’re beneficial, but a public company doesn’t receive much recognition for those assets, which suggests it may not be the best use of capital either. One thing to consider is how you’re investing in your own currency. If the company is valued at $25 per share and you're capitalizing on an $8 price, you're generating immense value for the shareholders who choose to stay. I commend you for being aggressive at these prices. Then, looking at the single-family rental business, it resembles buying back stock, where you can create a $400,000 or $500,000 asset for a fraction of that cost. You acquire the land, maintain the developer margin, and have substantial flexibility with financing. If you can develop something for around $250,000 to $300,000, much of which can be financed with bank funding, you not only add value but also keep Sky Ranch progressing. In a climate like this, it's crucial to maintain efficiency and continue adding rooftops. Even if there’s a slowdown and builders aren’t selling as many homes, realistically, you could purchase 100 homes, assess the costs, and after factoring in financing, it wouldn’t be prohibitively expensive. You could expand the water business while still generating profits. I believe this is a significant opportunity for you to evaluate the rental business more closely because, as you mentioned, it’s a win-win. I’m interested in hearing your thoughts on what I said or any disagreements you might have.

Yes, I agree with everything you've said. What I do and what we are looking at is working with each of our builders to say, okay, let's take a look at this next takedown. We're ready to move forward on this next takedown, and you guys find yourselves to be a little bit long on your inventory for a period longer than you think you'd want. We can pull back, not on the start but pull back some of those lots. Instead of having ten in that next sub-section of that, maybe we have 50. Maybe we pull back some of those and we can develop those or we can have them build on them just like they would be building the next door and then just deliver that house to us. It's never been more relevant for them to have a guaranteed buyer. So that conversation is there, Greg, and we will take a look at something like that.

Our next question is from Bill Cunningham, an investor.

I actually have, for starters, just a very basic financial presentation question for you. You earned $0.40 a share in the most recent fiscal year. The first three quarters were $0.17 a share, which I think means you had an absolutely fantastic final quarter of $0.23 per share. But it doesn't appear that you actually layout anywhere the actual numbers specifically for the fourth quarter unless I'm missing something.

You're correct; we don't have that information readily available. I apologize, as it's always beneficial for us to analyze our quarter-over-quarter performance. In this instance, one significant factor that boosted our fourth quarter was our ability to secure the next bond offering from the CAB, along with the delivery of all those finished lots. This impacted our finished lot category. When reviewing our builder agreements, three out of the four are structured as lot delivery agreements, where payments are based on a split of one-third each. The fourth quarter will consistently appear strong due to this structure, especially since one of our builders specializes in finished lot deliveries and pays a premium for that service. This is why it influences our results in delivery quarters.

Okay. I'm also looking at your Sky Ranch Co website, which shows that two of the four builders in Phase 2 are simply coming soon, D.R. Horton and Lennar, so I'm wondering, is that actually updated that they're not selling homes there yet? Or what's the situation with those two?

Lennar currently has about ten townhomes and six to eight detached single-family homes under construction, but they haven't started selling them yet. They plan to sell out of a model home instead of using sales trailers, which should be open before the holidays. D.R. Horton has not started construction yet because they were delayed in getting their product approvals from the county. They are expected to begin within the next two or three weeks. Horton usually has a more aggressive build cycle and tends to construct more spec homes than most builders, but we will see how they perform in this market.

Okay. So with Lennar actually building homes, obviously, they've purchased tap fees from you, but they haven't sold the homes yet. I mean, how many tap fees have you sold in Phase 2, I'm wondering about?

Of the 230 lots, I think we've sold about 110 taps. That will give you an idea of the building permits that are in place.

Is there likely to be a lull then? It sounds like you're ahead of the game with many tap fees already sold for homes that haven’t been sold yet. I assume there might be a bit of a lull on tap fees in the next couple of quarters.

Yes. If you're looking at a quarter-over-quarter, I probably wouldn't disagree with that. I try and caution you, as well as the rest of the market that quarterly management of a company like ours is a little bit harder, but we still look at a great year, year-over-year.

Our next question is coming from John Rosenberg, who is with Lachlan Water.

Most of my questions have been addressed. Congratulations on your achievements, results, and strategy. One of the previous callers inquired about your ability to adapt more towards the rental segment depending on market conditions. I want to first applaud your efforts in that area and then ask if you have complete flexibility to make that shift. Is there any limit on how much you can do that in a given time period?

No, we really don't. The reason we like it so much is that we have an advantage to roll forward some of that cost. As Greg was mentioning, we're carrying forward the equity value of the land and the water on that. That's a tax-efficient strategy to be able to do that. We're delivering a home that might be a $550,000 home, if you take a look at the standard detached product base with a number of categories. The reason we really love concentrating a bit more into the rental market here in the second phase is we've got six different product classes. We're not constrained to just the same type of rental customer. It can be an individual looking for a townhouse or duplex. It can be a family with parents renting one side and the new family renting the other side. Great opportunities for shared spaces and things like that. That's why we like it; not only is it a great opportunity for us, but the diversity of the product mix gives us a ton of optionality in what we're offering to the marketplace. It's not a homogeneous customer for us.

No, that's great. I do appreciate that. I think it was a very thoughtful move in terms of expanding your product range in Phase 2A. Additionally, just kind of a little bit of housekeeping. Your receivables from the CAB, I presume that's going to be very lumpy over time as needed.

It is. It is. It's every couple of three-year cycles between the two as you start and build up AV. Each of these bonds has kind of five-year call restrictions on that. They're really three-year plus premium calls in years four and five. As you do them, what happens is the AV, so the value of each of these homes continue to grow, and you have the same number of mills, so you increase your bonding capacity. They are lumpy. I will say that our underwriters could not have been more complementary about our business model. They took a look at it, and we were in a tough market where not so much in terms of the interest rate market, but a lot of outflows from invested capital for municipal bonds. So when you have all that money coming out and you have deals trying to hit the market, we were oversold by 400% on our bond offering. It really is validation of how we do it, the care with which we do, how we're investing in this infrastructure. We're maturing that; we're not over our skis on any component of the infrastructure or delivery of lots, and we have great partners in our homebuilders.

That's great. Lastly, again, a bit more housekeeping, but I seem to recall from a prior conversation that when you do ultimately go to large commercial and perhaps I'm wrong, you'll be eligible for other types of infrastructure reimbursement perhaps from the state? Or am I incorrect in that?

You are correct. The interesting thing about that is Colorado is what we call a sales tax incentive state. What we do is we weight the burden, the tax burden to the commercial base. By a lot, I mean, by 4x. The same AV at the residential and commercial. If I take $1 million of AV at residential versus $1 million AV at commercial at the same mill rate, I get 4x the tax revenue on that. Yes, it supercharges your ability to get back your reimbursables. Even to the point where we would no longer have reimbursables; we would be able to have more bond capacity to fund public improvements.

And I take it then, if I'm hearing you correctly, that also means that would also imply to me that the cadence of reimbursement would be somewhat accelerated from where it is now, once you do start actual commercial development?

Yes.

Great. Okay. Well, thanks again. Congratulations and keep at it.

Thank you. First, at this time, there appear to be no further questions in queue. So I will hand it back to Mr. Harding for any closing comments you may have.

Terrific. Well, I'd like to again thank you all for your continued support. To the extent that you didn't get an opportunity to bring in on a technical challenge, please don't hesitate to give me a call. I'd be happy to drill down on any specifics and continue to stay tuned. We have some exciting things that we're working on, and we'll look forward to executing and bringing those to increasing the value for all of our shareholders. So with that, I'll sign off, and thank you all.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation.

Thanks, Ali.