Federal Realty Investment Trust. (FRT) — Q2 2023 Transcript

Good afternoon. Thank you for joining us today for Federal Realty's second quarter 2023 earnings conference call. Joining me on the call are Don Wood, Federal's Chief Executive Officer; Jeff Berkes, President and Chief Operating Officer; Dan G., Executive Vice President, Chief Financial Officer and Treasurer; Jan Sweetnam, Executive Vice President, Chief Investment Officer; Wendy Seher, Executive Vice President, Eastern Region President; and Dawn Becker, Executive Vice President, General Counsel and Secretary, as well as other members of our executive team that are available to take your questions at the conclusion of our prepared remarks. A reminder that certain matters discussed on this call may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include any annualized or projected information as well as statements referring to expected or anticipated events or results, including guidance. Although Federal Realty believes the expectations reflected in such forward-looking statements are based on reasonable assumptions, Federal Realty's future operations and its actual performance may differ materially from the information in our forward-looking statements, and we can give no assurance that these expectations can be attained. The earnings release and the supplemental reporting package that we issued yesterday, our annual report filed on Form 10-K, and our other financial disclosure documents provide a more in-depth discussion of risk factors that may affect our financial condition and results of operation. Given the number of participants on the call, we kindly ask you to limit yourself to one question during the Q&A portion of our call. If you have additional questions, please requeue. And with that, I will turn the call over to Don Wood to begin our discussion of our second quarter results.

Thanks Leah and good afternoon everybody. And special thanks to David Simon for finishing his call more or less on time this afternoon. All-time record-setting quarter for Federal Realty this time with $1.67 second quarter FFO per share result ahead of consensus, ahead of internal expectations, and ahead of last year's second quarter. By the way, last year's second quarter was helped by a large termination fee from Amazon as they exited their brick-and-mortar bookstores. Ex-termination fees, this quarter's bottom line FFO per share growth grew 5% despite significantly higher interest expense. That's a really strong quarter for us. Leasing velocity continues to be the highlight. We signed 107 comparable leases of 576,000 square feet at $35.34 a foot, 7% higher than the cash basis rent the previous tenant was paying in the final year of their lease, 19% on a straight-line basis. Demand was exceptional. When you include non-comparable leases, which, by the way, for us largely relates to newly built-out space on our redevelopment and development projects, along with our office leasing, we executed 135 leases in the second quarter for a very robust 652,000 square feet, representing $23 million of newly contracted annual rent. These are production numbers that lie well outside the averages over our very long history and will go a long way towards offsetting the loss at Bed Bath & Beyond and Christmas Tree Shop income stream in 2024, until they're re-leased and rent paying. In terms of Bed Bath, we lost 1 of our remaining nine Bed Bath leases during the quarter. That lease, a 25,000 square foot box at Mount Vernon Plaza in Northern Virginia, has been re-leased to Burlington at a 57% rent increase. Three more Bed Bath leases were rejected effective June 30 and July rent was received on the remaining five. Two of the remaining five were Buy Buy Baby locations that were assumed by online baby retailer Dream on Me, and we therefore expect to continue to receive rents in the future. The remaining three leases were rejected in the third quarter, and accordingly, we'll have a hit to occupancy of about 1% and lost rent of $2.5 million or so for the balance of 2023, all of which has been considered in our guidance. Deals are in the works for all of our Bed Bath locations and replacement rent will start to ramp up in late 2024. Both leased and physical occupancy continued to improve compared with the previous quarter and the previous year. 94.3% leased, a 92.8% physical occupancy at quarter end are up 10 and 20 basis points, respectively, compared with the first quarter and 20 and 80 basis points, respectively, year-over-year. Small shop occupancy gains, in particular, continued their trend during the quarter and increased 20 basis points on a lease basis and 40% on an occupied basis. That's a total increase in small shop occupancy of 310 basis points since Q1 2022. The quality of our small shop tenants and the discerning way that we choose them at our properties is where we create a ton of value. All small shop vacancy or tenancy rather is not created equal. I've noted in the past couple of quarters that leasing productivity and the rate that have occurred at the properties we've acquired over the past several years have significantly exceeded our underwriting and that has continued. Similarly, leasing productivity at properties that have recently undergone redevelopment and/or property improvement plans have outperformed our expectations, and we expect that to continue, meaning that maybe we can be a bit too conservative at times. The roughly 3,100 apartments that make up an important part of the revenue stream at our mixed-use and other properties remain a real differentiating bright spot for our portfolio and continue to add to both cash flow and to value. In the aggregate, our residential portfolio was 98% leased at June 30, and provided 11% more property operating income this quarter than compared with last year's second quarter. Resi is a super important component of our mixed-use neighborhoods as is the office component, which is also 98% leased outside Santana West and the Choice headquarters building, which is under construction. We did, by the way, deliver the newly built-out office space to Choice Hotels this quarter and expect them to finish their work and occupy the building by year-end. Sodexo in the same building will follow right behind. I reported last quarter that inquiries and property tours have seen renewed life at Santana West, and that has certainly continued. Even the Northern California press is noting layoffs and dramatic new investments in hiring in areas like AI, electric vehicles, and related technologies. It feels like Silicon Valley is stabilizing. So I look back and I think about what it is that we're doing, and I kind of tell you that some of the country's most productive and well-known mixed-use communities sitting just outside San Jose, Boston, Washington, D.C., and Miami seem to us to be right on the mark of the product that is and will remain in high demand as resilient consumers continue to prove that to be so. Let me turn it over to Dan before opening it up to your questions.

Thank you, Don, and hello everyone. It is very satisfying to report a company record FFO per share of $1.67, especially considering the interest rate challenges we faced, which speaks to the ongoing strength of our business model. To emphasize Don's earlier point, we surpassed last year's quarter's FFO record by 5% when accounting for the unusually high term fees last year and also achieved 5% sequential growth compared to the first quarter, reinforcing the health of our underlying business. Regarding this record performance, which exceeded our expectations, we can identify several key factors: higher property-level POI than expected, due to strong performance in rents, parking, specialty leasing, and percentage rent, along with lower operating expenses resulting from our ongoing focus on cost controls at the corporate level, leading to reduced G&A, although this was countered by the previously mentioned higher interest expenses. Overall, it was a very strong quarter. In terms of our comparable metric, POI grew by 4.6% when excluding the impact of term fees from the previous period. On a cash basis, comparable POI growth, excluding term fees and prior period rent, was even stronger at 4.7%. The term fees in the comparable pool this quarter were significantly lower at $1.6 million compared to $5.5 million in the second quarter last year, while prior period rent this quarter was $1.2 million versus $2.2 million in the second quarter of 2022. All these figures are detailed in our supplemental 8-K on Pages 10 and 11. Year-over-year, our occupancy metrics showed continued improvement, with the overall occupied rate increasing by 80 basis points from 92% to 92.8%, and our lease percentage rising by 20 basis points from 94.1% to 94.3%. Our small shop momentum continued to strengthen, achieving a 90.2% rate, up 90 basis points from the previous year, with a target lease rate for small shops of 92%. Our signed but not occupied percentage is about 3% or $34 million, consisting of approximately $17 million of incremental rent in our existing portfolio and another $17 million in our non-comparable pool, where leases are signed but space is yet to be delivered. This non-comparable signed but not occupied pool is a crucial aspect of Federal's business strategy that is often overlooked. We set a federal record for total comparable leasing volume this quarter at 576,000 square feet, marking the second-highest volume ever on a comparable basis. The rollover was 7% on a cash basis and 19% on a straight-line basis, reflecting growth driven by sector-leading contractual rent increases, averaging roughly 2.25% blended across both anchor and small shop spaces. Now, turning to our balance sheet. As of June 30, we had $1.3 billion of total available liquidity, consisting of $1.2 billion under our revolver and $100 million in cash. During the quarter, we successfully accessed the unsecured market at favorable rates with a $350 million green bond at 5 3/8%, marking our second green bond and underscoring our commitment to sustainability and our overall ESG strategy. Don't forget to view our annual corporate responsibility report on our website released in early June. Concerning leverage, our net debt-to-EBITDA ratio continues to improve each quarter, and we expect to return to our target level in the mid-five times range by 2024. Our $750 million pipeline of active redevelopments and expansions has $220 million remaining against our $1.3 billion of available liquidity, with a significant portion of that being leasing capital, which is promising when utilized. Moving to guidance, we are raising our FFO per share forecast for 2023 by $0.04 at the midpoint to $6.52, adjusting our range from $6.38 to $6.58 per share to a new range of $6.46 to $6.58 per share. The guidance now indicates 2023 FFO growth over 2022 of about 2% to 4%, or 3.2% at the midpoint. We have navigated through bankruptcies in the retail sector very well, collecting more rent from Bed Bath than we initially anticipated and having minimal exposure to other retail closures. As the Bed Bath bankruptcy concludes, we project it will result in a 31 basis point impact for the year compared to our initial credit reserve of 25 to 60 basis points. Regarding the balance of our tenants, we are setting that reserve at 50 to 75 basis points. Next quarter, we anticipate a decline in occupancy as the effects of the lost Bed Bath locations and one Christmas Tree Shop become apparent, but we expect to finish the year in the low to mid-92% range. Please consider this impact when evaluating the cadence of FFO per share for the remainder of the year, with the third quarter anticipated at $1.61 and the fourth quarter at $1.65 at midpoint. From a comparable growth outlook, given a solid first half of the year, we are affirming the 2% to 4% range for comparable POI growth and the 3% to 5% range on a cash basis while adjusting for prior period rents and term fees. Due to our cost control efforts, we have reduced our G&A forecast from $54 million to $52 million, reflecting $52.5 million at the midpoint, and we raised our forecast for contributions from redevelopments and expansions to a range of $16 million to $19 million, up from the previous $15 million to $18 million range. An updated summary of these key assumptions regarding our guidance is available on Page 27 of our 8-K. Before I conclude my prepared remarks, I want to highlight that for the 56th consecutive year, Federal's Board of Directors has increased our dividend, which is a record in the REIT industry. As the only dividend king in the real estate sector, we are extremely pleased to have navigated yet another challenging economic cycle while consistently providing our shareholders with a reliable and growing cash flow stream. The compounded annual growth rate over these 56 years stands at 7%. Now, I will finish my prepared remarks and turn it back to Don Wood for his concluding remarks.

Thanks, Dan. As I listen to Dan's conversation and comments there, I thought of one more point that I really wanted to make. There's so much conversation about the supermarket part of our business and part of the industry and how good that is, but I want you to know about our mixed-use communities. I spoke about the overall outsized performance of the big four mixed-use communities last quarter, but it bears repeating as its strength continued and helped drive the results in the second quarter. Taken together, Assembly Row, Bethesda Row, Pike & Rose, and Santana Row are a real company differentiator for Federal, as you know, and more in demand than ever before, with retail leased occupancy at 98% and tenant sales well above 2019 levels. These properties are humming with estimated foot traffic in excess of 30 million shoppers in the trailing 12 months. That's a big number. And it comes from the database of place for AI, which we think is well understated. In our estimation, this is the product in the market that consumers in a post-COVID world want the most. So despite the well-publicized bankruptcies of companies like Bed Bath and Christmas Tree Shops and the effects of higher interest rates on our business, I'm feeling pretty good about the way this year is playing out, and that's been the basis for which we could increase guidance by as much as we did this quarter. Let's now turn it over and open it up to your questions.

Hey, good afternoon and thank you, Don, for moving the call to avoid the overlap. So appreciate it.

You’re welcome, Alex.

So, I have a question regarding the mixed-use aspect. There was a recent article about Federal Plaza West, which is close to Pike & Rose, where you received approval for a residential addition. Could you provide some more details on this? I understand you may not be planning another large-scale redevelopment like Pike & Rose, but what are your thoughts on the apartments being developed there? Additionally, do you feel more optimistic about adding more apartments across your shopping center portfolio, or do you think you’ll only take on a few projects at a time due to the current capital costs?

Thank you, Alex. I'm really impressed that you're keeping up with the Montgomery County press releases and paying attention to what's happening at Federal. It’s great to see. We have received full entitlements for apartments at Federal Plaza. I've mentioned before that we aim to use this downtime to keep our development team engaged with obtaining entitlements that we can utilize as the economy shifts. Residential development is crucial for us, not only at mixed-use properties but across the board. Currently, we have the entitlements for Federal Plaza, and there are 500 units ready for construction that we can start on immediately. We are closely examining our capital allocation and the financials to determine precisely what we need to accomplish at Santana Row and Bala Cynwyd, Pennsylvania. Additionally, there are around a dozen other properties with about 3,000 units for which we are actively pursuing entitlements at our shopping centers. These include locations like Friendship Heights, the Avenue in Baltimore, Hoboken in New Jersey, and the Panam shopping center. We've been successfully managing these projects for 20 years, as evidenced by our past work at Congressional Plaza, Housing, Chelsea Shopping Center, and Bala. We strive to use our own capital when it makes sense financially, ensuring we achieve above-average returns to benefit Federal. This experience is a key differentiator for us as we look ahead over the next five to six years. While some of these projects might not be feasible right now, that’s expected. Our strategy is to obtain the entitlements to enhance the land's value, so we’re prepared to invest when the time is right. This approach is essential for our growth.

I'm interested in how you're planning to fund your expansion and explore new opportunities. Would you consider forming a joint venture with any of the major properties to set yourselves apart, and what are your thoughts on balancing growth and funding?

Juan, that's an excellent question. Let's discuss how we fund the company and our future direction. A significant advantage for us is the substantial equity we have invested in the big four properties. I've mentioned this before, and while today isn't the right time to bring in a joint venture partner on Assembly or Santana, those markets will eventually open up, and we want to be prepared for that. When considering Federal's long-term plan, it's important to leverage the great work we've accomplished. Right now, I am at Assembly Row, where we held our Board meeting today, and I can see the tremendous value we've created. Over the medium term, this will be a crucial source of funding, and I believe it will be valued at a much lower rate compared to historical common stock, as I don't think we're receiving proper compensation for the value generated here. That's a vital aspect. Additionally, Dan will address our nearer-term funding strategy, which is that the capital markets remain accessible to us even during challenging times. You should anticipate us utilizing all of our resources over the next year, as that's our usual approach. In the long run, this company has special lower capital costs that will significantly aid our growth in the medium term.

Good afternoon, good evening. Thanks a lot for taking my questions. Questions on Santana Row and more specifically, Santana West. What's the latest and greatest in the leasing conversations that you're having there? And as you talk to tenants, are they thinking through the return to office and how return to office looks at a mixed-use center versus a traditional office setting? And is that part of the conversations there? And is that driving momentum? How the kind of return to office continues to amplify? Thanks.

Yes, Michael, that’s a great question. Let me provide some insights, and then Jeff or Jan can elaborate if needed. It's important to note that I believe we are seeing some stabilization occurring in the Valley. If you’ve been following the news from that area, you might sense that we are entering a period where positive developments could start to emerge. We are currently engaged in serious negotiations with potential tenants who are interested in our space, particularly because of its prime location at Santana Row and the fact that it is a brand-new, fully amenitized product. I’ve experienced setbacks in the past, so I’m being cautious, but I am quite optimistic that we will see some leasing success in the near future. I hope that sentiment is accurate. If it turns out not to be the case, I’m open to being proven wrong. However, the atmosphere in the Valley feels significantly more promising compared to the last year or two. From a product perspective, we are attracting attention because of the nature of our offering and the fully amenitized mixed-use environment. This is where the opportunity lies.

I think the only thing I would add is that we're seeing more than our fair share of interest in the marketplace, which is precisely what Don mentioned. Everyone we’re communicating with wants to provide incentives to bring their employees back to the office, which is where they prefer to work. These are the kinds of tenants we’re currently engaging with, and it's been very positive.

Hey good evening. Just hoping you could touch on what you're seeing in terms of acquisition opportunities within the market today, whether you're starting to see a narrowing of bid/ask spreads and where there's properties out there of the quality that you're looking to acquire?

Hey Greg, it's Jeff. Yes, the market is starting to pick up a little bit. There's been a handful of trades or maybe slightly less than a handful of trades in our West Coast markets at cap rates to start with a five. There's probably another couple of handfuls of deals in the marketing process on both the East and West Coast where we would look to buy and the expectations there are sub-six. So we're starting to see more stuff come to the market and the bid/ask spreads start to narrow. As you know, we have a very active team. We're always in the market. We're always trying to force stuff before it gets into an auction process, and we're looking at a lot of stuff, but we're selective too and don't really have anything to talk about at this point. But definitely, we're out there looking and starting to see more activity. So hopefully, we'll have something good to report in coming quarters in that regard.

Thanks, Jeff. And if I could just follow up on Santana West on a more modeling-based question. But when you have to stop capitalizing interest on that property, is there going to be any sort of disconnect between when a tenant is moving in and the interest that's being capitalized there?

We fully expect to take advantage of our build-out plan on a floor-by-floor basis throughout 2024. We anticipate generating income as we reduce the capitalized interest. Therefore, we don't foresee any disconnect at this time, but we will have more clarity as we finalize leases and continue our build-out, assessing the success of our multi-tenant strategy in the building.

This is Ravi Vaidya on the line for Haendel St. Juste. Hope you guys are doing well. Just one question here. Can you comment on your watch list? What would you estimate it to be on an ABR basis? And what would you estimate the embedded mark-to-market would be on that subset?

Look, we've done very well with regards to the watch list so far. I mean I think that with the exception of Bed Bath, we've had very little exposure to the failing retailers that we've had to date. I think that just generally those that are on our people's radar, whether they be Joanne or At Home or other names like that, we have very limited exposure there. I think, Wendy, I don't know if there's other comments.

Yeah. I mean, we're constantly reevaluating the list, and it's not just the watch list, but it's who's going up in size, who's going down in size and how are we managing what that means to us in the long term. If you look at what bankruptcies, I'm feeling pretty good about what I see on our watch list. If you look at the bankruptcies we've had, David's Bridal. Both of our leases were assumed. Party City, we have short-term leases with them, and we have one lease out for signature to backfill. The one location and the second location has two letters of intent on it. And Tuesday Morning, we had three locations with them. Two of them already signed leases and one is in lease documentation we executed this quarter. So, feeling pretty strong.

Hey, Dan, regarding the watch list, I know you've established a general reserve, which you mentioned is around 50 to 75 basis points. Given that it's August, are you being a bit conservative, or do you anticipate some issues in the second half of the year? I want to make sure I'm not overlooking anything. Can you share any insights or comments about next year? Where do you think that general reserve will land? Do you expect it to be higher, lower, or about the same as this year? Thanks.

Yes. In the first half of the year, excluding Bed Bath & Beyond, we experienced an impact of about 50 basis points on our credit reserve. I expect the full-year impact from Bed Bath & Beyond to be around 31 basis points. Regarding the second half of the year, the range of 50 to 75 basis points might reflect some conservatism. Initially, we projected 100 to 130 basis points at the beginning of the year, but it's likely to be closer to 80 to 100 basis points now. We have made significant progress, and I hope we will perform better than the 50 to 75 basis points range.

Dan, I’d like to discuss the $0.06 sequential decline, which is around $4.9 million from 2Q FFO to 3Q FFO. I know you've mentioned the $2.5 million loss from the three Bed Bath rejections. Can you explain the remaining factors contributing to the sequential decrease?

Yes. A big hit there is going to be the interest expense. We refinanced a bond in the second quarter, repaid them effectively on June 1, so we're going to see the full quarter there. Plus, the Fed continues to raise rates, and so we do have a little bit of exposure on the floating rate side. And that's probably the lion's share in addition to the Bed Bath impact in 3Q.

Hi, everyone. Thanks for having me on. So you did comment on leasing productivity, and that's continued to outperform expectations. Can you talk about the spreads achieved on the leases executed this quarter? It just looks like that moderated, particularly on renewals. Just want to get some more color on what tenants are still willing to take and kind of comment on the outlook for the trend on spreads going forward?

I understand your point, Liz. I still strongly believe that a 7% spread on re-leasing, given the inherent bumps in our leases, is effectively comparable to a 16% spread for a company with bumps that are 100 basis points lower than ours. This is a crucial aspect we've been discussing over the past few quarters. When you see a 7% spread, and compare it to another company without contractual bumps of 11 or 12, our economics are still superior. I think this is not widely acknowledged. It's not a slowdown; it's just a reflection of the mix for that particular quarter, so I don't think trend lines should be drawn based on that. Honestly, I believe that about three out of four of our leases have bumps of 3% or more, which includes anchors, and that's a significant figure. I doubt many others can claim the same, as that information isn't typically disclosed. However, when considering those 7% bumps, the economics are considerably better due to those bumps.

Thanks. Good evening. Your equity issuance guidance is lowered. I was just curious how much impact that made to your overall FFO guidance. And from a realistic standpoint, is issuing $100 million very realistic just given where your stock price is? And when you talked about some of the acquisition opportunities at sub-6 potentially, I guess, how is that more attractive than maybe buying back your stock, which is trading at mid to higher 6s? And I realize that's only one spec you want to know how you make decisions, but just curious overall.

That's a great question. Regarding the equity, it's just an assumption we include for our guidance and doesn't significantly impact the previous $200 million estimate. I wouldn't read too much into that. It's simply a figure for reaching the midpoint of 652 and fits within our range. As for stock buybacks, I don't find it to be the best use of our capital right now. We're aiming to keep our resources available for better opportunities and will prioritize acquisitions and redevelopments based on our current trading situation.

Ki Bin, just one more thing. Many companies talk about stock buybacks and how beneficial they are. However, if the buybacks aren’t substantial enough to truly impact the company’s capitalization, they won’t have a significant effect. The buyback only makes sense if the stock is heavily discounted and remains so for a long time. Considering the opportunities we see, using our resources for stock buybacks to increase leverage doesn’t seem viable for us long-term, even if it might provide a short-term boost.

And to the extent we don't like where our stock is trading, we've got a pool of assets that we'll opportunistically look to sell in the market and try and obtain more attractive pricing than where our stock is trading. So we've got multiple arrows in the quiver to fund the business going forward.

Thanks. Good evening. What refinancing options are you considering for your 2024 maturities? And then where is that pricing today?

With regards to the $600 million that we have coming due in January, look, we're in the market assessing it. It's not particularly opportunistic today. We raised $350 million back in April. I think we feel pretty good about that at 5 3/8% coupon for $350 million. Look, we've got access to the market. I think today, it would be in the upper 5s if we were to access the market today. We don't particularly find that attractive, but we've got time. And so we've got multiple arrows in the quiver there as well in options, and we'll look to be opportunistic. So who knows where we'll be over the next several months, but we'll get it done.

Yeah, hi. Just a quick follow-up on the ramp-up discussion. What's the average portfolio escalator for the overall portfolio? And then if you look at the first half of the year leasing, how did the bump on those leases compared to the overall portfolio?

Yes. Blended, it's in and around roughly 2.25 across the entire portfolio, anchors and small shop. And this quarter was in line with that, maybe a little bit shy. And that's retail only. Obviously, to the extent that we have other commercial leases, they tend to be higher and they tend to have annual bumps that drive that blended spread up.

And by the way, Mike, congratulations to those Oreos cap. They look fantastic.

Thanks. I recently saw Mike at one of your competitor centers, and he was proudly wearing his Oreos cap, showing off his success this year. I believe you are one of two shopping center companies that have raised your guidance with a midpoint above consensus, which is a positive sign. However, financing could be a challenge due to higher rates. I was encouraged by the green bonds and would like to get more details on this, particularly regarding the rate differential between green bonds and regular bonds, what is required to qualify for them, and what kind of returns we can expect in terms of energy efficiency and water usage across the overall portfolio.

Regarding pricing, we don't focus on incremental pricing. There might be some incremental demand, but quantifying its impact on pricing in today's market is challenging. We emphasize this because, when we develop our mixed-use communities, we aim for LEED Gold certification or higher. For example, Pike & Rose has a LEED Gold-certified neighborhood designation, making it one of only a few in the country. Environmental, social, and governance factors are crucial for us. I believe Don Becker can provide further details on this matter. We pursue green bonds not only to showcase our achievements but also to broaden the range of potential investors interested in these bonds. If it results in better pricing, that's beneficial, but the most important aspect is the increased opportunities for execution.

Hi. The comparable signed but not occupied pipeline of, I think, $34 million and the noncomp of $17 million, what's that cadence of the about $50 million coming online?

Well, it's not $50 million. It's $34 million. I mean the total is $34 million, and there's $17 million in the existing portfolio. And there's $17 million in the non-comparable portfolio, space to be delivered. That will come online about 45% or $15 million is scheduled to commence the balance of this year. And then the remainder of $19 million, the lion's share of that, almost all of it will come on in 2024. And it's a little bit more weighted in the fourth quarter than it is in the third quarter this year.

Hello. I'm looking at your disclosure on capital expenditures, and we see moving topics is relative to last year and also other prior years. Can you provide some background on what is driving that lower rate than CapEx?

The lower CapEx that you're seeing this quarter?

Yes, Paulina. We are having a hard time hearing you. I don't know whether it's the connection or not. We're going to try to answer this, I guess, on the capital. If we're not giving you what you want, please give us a call directly. Call Dan or Melissa after this, and we'll get you specifically what you want. But we're going to take a shot, I guess where we're going.

I'm not quite sure about the numbers you're mentioning. We will follow up with you after the call regarding this. It's important to note that capital is down for the quarter, and we feel positive about that. However, we cannot answer your specific question at this moment. We will reach out this evening.

Thanks for joining us tonight. I hope you have a great rest of the summer. I look forward to seeing you soon.