Lineage, Inc.

Ladies and gentlemen, thank you for standing by. My name is Desiree and I will be your conference operator today. At this time, I would like to welcome everyone to the Lineage Third Quarter 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again, press the star one. I would now like to turn the conference over to Kee Bin Kim, Head of Investor Relations. You may begin.

Thank you, Operator. Welcome to Lineage's discussion of its third quarter 2025 financial results. Joining me today are Greg Lemko, Lineage's President and Chief Executive Officer, and Rob Cresci, Lineage's Chief Financial Officer. Our earnings presentation, which includes supplemental financial information, can be found on our investor relations website at ir.londonage.com. Following Amanda's prepared remarks, we'll be happy to take your questions. Turning to slide two, before we begin, I would like to remind everybody that our comments today will include forward-looking statements under federal securities law. These statements are subject to numerous risks and uncertainties as described in our filings with the SEC. These risks could cause our actual results to differ materially from those expressed in or implied by our comments. Forward-looking statements in the earnings release that we issued today, along with the comments on this call, are made only as of today and will not be updated as actual events unfold. In addition, reference will be made to certain non-GAAP financial measures Information regarding our use of these measures and a reconciliation of non-GAAP to GAAP measures can be found in the press release that was issued this morning. Unless otherwise noted, reported figures are rounded, and comparisons of the third quarter of 2025 are to those of third quarter 2024.

Now, I'd like to turn the call over to Greg. Good morning, everyone. Thank you, Keevan, and welcome to the lineage family. We're thrilled to have you. As many of you know, Keevan joined us from a distinctive career at Truist bringing 20 years of experience in the real estate industry, most recently as a leading sell-side analyst. He's now two weeks into his new role, and we are already feeling his positive impact. Let me start by walking you through our agenda for this morning. First, I'll recap our third quarter performance, which came in slightly ahead of our expectations. Then we'll review occupancy and price, followed by our latest view of supply and demand for our industry. We know this is an important topic that many of you are interested. Following my remarks, I will turn it over to Rob Cresci, who will walk through the details of segment performance, capital structure, and our updated guidance. I'll then return to share closing comments before we open up the line for your questions. Turning to our quarterly performance on slide 4, total revenue increased by 3% and adjusted EBITDA increased 2% to $341 million, which is the quarterly record for the company. Total AFFO grew 6% year-over-year, and we which declined 6% year over year. As a reminder, our IPO occurred in the third quarter of last year, which impacts the comparability of these periods. Looking at our business segments, global warehousing performed in line with expectations consistent with the outlook we shared on last quarter's call. Same store physical occupancy improved sequentially by 50 basis points to 75%, and we anticipate further occupancy gains in the fourth quarter, consistent with the muted seasonal pattern we discussed last quarter Same store NOI increased sequentially to $351 million from $340 million, although it declined 3.6% year-over-year. Same warehouse storage revenue per physical occupied pallet remained stable, as expected, growing at 1%. Our global integrated solutions business saw year-over-year NOI growth of 16%, led by our U.S. transportation and direct-to-consumer business. In the quarter, we invested $127 million of growth capital, primarily in our development projects. We're pleased with the continued progress on these projects. As a reminder, we have 25 facilities that are in process or ramping. We expect these assets to deliver $167 million of incremental EBITDA once stabilized. In Q3, we delivered in-line same-store NOI and exceeded our adjusted EBITDA and ASFO per share guidance. and are therefore moving to the lower end of our full year guidance range for both EBITDA and AFFO per share. This is largely driven by a $20 million decline in our outlook for same warehouse NOI due to two primary factors. First, tariff uncertainty is impacting import X for container volumes, leading to softer year end services revenue. Second, while our total occupancy outlook for the fourth quarter is unchanged versus our previous guidance, US occupancy is slightly lower new business hitting in the quarter this is being offset by higher occupancy outside the united states where we are in lower margins despite these near-term headwinds we remain focused on providing world-class service to our valued customers by leveraging our industry-leading network and cutting-edge technologies i'm confident that we are well positioned to grow as the food industry normalizes new capacity is absorbed and our linus labor management and energy efficiency initiatives accelerate Moving to slide five, as I mentioned, Q3 and Q4 total occupancy are in line with our prior forecast and pricing remains stable as expected. Note that we typically see a sequential decline in storage revenue per pallet in the fourth quarter due to normal seasonal mix changes. Additionally, we saw a sequential 180 BIPs increase in our minimum storage guarantees to 46.7 as our customers continue to want to secure space across our network. Turning to slide six, we understand that our industry is a specialized part of the real estate landscape with limited publicly available data. Accordingly, we continue to collaborate with CVRE to provide insights into new supply growth for the cold storage industry. At this point, our analysis is focused on the US where we have the most successful data and in certain markets are seeing the most acute supply, demand and balance. Let me quickly walk through this slide. The upper left-hand chart labeled A shows from 2021 through 2025, public refrigerated warehouse supply grew at approximately 14.5% on a square foot basis, which is weighing on occupancy and pricing in certain markets. Importantly, CVRE's outlook for new capacity in 2026 is down substantially for recent levels to 1.5%. The upper right-hand chart, labeled B, is based on Nielsen and Circana data fresh and frozen food volumes in both the retail and food service channels. The data shows demand for the food categories stored in our network grew cumulatively by 5% during the 2021 through 2000 time period. To be clear, in spite of continued pressure from tariffs, consumer price inflation, and other headwinds, end consumer demand for the products that flow through our network has been and continues to grow. On the bottom left hand of the slide, we bring these two concepts together to calculate estimated excess capacity of approximately 9.5% for the U.S. market over the last four years. Despite this nearly 10% imbalance, our 2025 total estimated average fiscal occupancy is 75%, down only three points from 78% in 2021. We are using our network size and the strength of our operations to perform relatively well in a very challenging environment. Looking forward, CBRE is expecting less new supply, which we believe is logical as further speculative development is not supported by current industry dynamics. Before handing it over to our CFO, Rob Cresci, most of you are aware that he announced his retirement in June and will be handing over the reins to our new CFO on Monday. I just want to take this opportunity to sincerely thank Rob for his numerous contributions to Lineage over the last few years, helping to lead us through the IPO process with a lot of passion and building an excellent finance team here at Lineage. It's been a pleasure getting to know you both personally and professionally. Also, cannot thank you enough for all your help in making this a smooth transition. I look forward to getting together in Sarasota and wish you the very best in retirement. Rob Lemaster is our incoming CFO. capacity over the last few weeks, shadowing our earnings process. He has an exceptional background with two decades of finance and buy side investing experience, including a very successful run as a public company CFO and BWX Technologies. He has a lot of great experience managing complex financial operations at asset intensive businesses. Rob's already been out to visit a bunch of our sites, and I know he's very excited to officially get started next week. Welcome, Rob. We're excited to work with you and expect great things. With that, I'll turn it over to Rob Cresci. Thanks, Greg, and good morning, everyone. I greatly appreciate the kind words. My colleagues at Lineage have also become great friends, which is a testament to the culture you, Kevin, Adam, and the team have built here. Rob Lemasters is a great fit for Lineage, and I've really enjoyed getting to know him. The finance organization is an excellent hand. I'm here to help as needed in my advisory role, but I doubt Rob will need much. I'd also like to add we are incredibly excited to add Keith into the team. It's been great having you as part of our process the last couple of weeks. Turning to our global warehousing segment, total revenue grew 4% and total NOI grew slightly to $384 million in line with our expectations. Same warehouse NOI declined 3.6%. We continue to focus on operating efficiency And to that end, we saw our same warehouse cost of operations decline 1%. We will dive deeper into this on the next slide. Looking to the fourth quarter, we now expect the same warehouse NOI decline of 3% to 6%, a reduction of approximately $20 million at the midpoint versus our prior implied Q4 outlook. Greg already outlined the main drivers behind this reduction, including the impact of tariffs on import and export activities. We've been monitoring the tariff situation closely and are cautiously optimistic about some of the recently announced trade agreements, which should benefit both our customers and lineage. We continue to fight through the competitive environment, as Greg discussed earlier. We feel good about the positive trend in occupancy and the return to more normal seasonality this year, albeit at somewhat muted levels. Turning to slide A, diving deeper into warehouse efficiency, As we all know, the current inflationary environment has driven labor cost increases. As a reminder, labor is by far our largest controllable cost at $1.5 billion per year. On a same warehouse basis, we've been able to hold labor costs flat over the last couple of years. This year, throughput has declined low single digits, making the progress our operations team has made on labor per throughput pallet even more impressive. You can see this on the right-hand chart. We remain hyper-focused on lowering costs and increasing warehouse efficiency. This benefits us both in the short term and will drive strong operating leverage on incremental growth. Next slide. Shifting to slide 9 and covering our global integrated solution segment. Revenue was flat and NOI grew 16% to $65 billion. Our NOI margin was up 250 basis points to 17.9%. We're continuing to see strong momentum in our U.S. transportation and direct-to-consumer businesses due to the value these integrated solutions provide to our customers. For the fourth quarter, we expect the strong momentum to continue with 10 to 15% growth. Notably, we benefited in the third quarter from approximately $4 million of NOI that was previously expected for the fourth quarter. We now see full-year NOI growth of 8 to 10% versus prior range of 8 to 12%. Slight reduction at the midpoint is due to less trade services, also associated with lower import-export activity. Really great year overall and solid execution by Greg Bryan and the Global GIS team. Turning to slide 10, we ended the quarter with total net debt of $7.55 billion. Total liquidity at the end of the quarter stood at $1.3 billion, including cash and revolving credit facility capacity. Our leverage ratio defined as net debt to adjusted EBITDA was 5.8 at the end of the quarter. We remain highly disciplined on future capital deployment. We continue to actively manage our interest rate exposure in light of our existing SOFR hedges that expire at year end. We have been opportunistically executing new hedges and working to further optimize our investment grade balance sheet. Given these year end expirations, we are providing a very early look for 2026 forecast interest expense to help with your modeling. At this time, we see approximately $340 to $360 million of total interest expense in 2026, which is approximately $80 million higher than this year. A little more than half of the increase is due to the expiring hedges, and the remainder is due to our recent capital deployment, which we anticipate will drive attractive risk-adjusted returns and further support for customer-driven growth. Turning to the guidance slide, we are initiating Q4 with EBITDA of 319 to 334 million and AFFO per share of 68 cents to 78 cents. For the full year, EBITDA is 1290 to 1305 and AFFO per share is 320 to 330. In short, we are going to the lower end of our previous ranges on adjusted EBITDA and AFFO per share. We see total and same warehouse NOI about $20 million lower than previous guidance for the reasons mentioned earlier. With that, I'll turn it back over to Greg to wrap up before opening up to your questions. Rob has walked you through our updated guidance, and I want to reaffirm that while we were operating in a challenging environment, we believe Lineage remains positioned to win. As outlined in detail in our prior earnings call, we're focused on driving competitive differentiation across three key areas. delivering customer success, leveraging our network effects, and enhancing warehouse productivity. Before summarizing and turning it over for your questions, I'd like to provide a quick update on Lido S, our proprietary warehouse execution system. As of today, we've deployed the platform in seven conventional sites, and the results have exceeded our expectations. We're seeing double-digit productivity improvements in key metrics like units per hour, translating to higher output and lower unit costs. We expect to complete 10 deployments by year-end, setting the stage for an accelerated rollout in 2026. We look forward to sharing more details at NAREIT, where we'll be hosting an in-person and webcasted investor forum on Monday afternoon, December 8th. The presentation will focus on operational excellence and our LendOS technology. Turning to slide 13 and in summary, it's obviously been a very bumpy road since our IPO last July. for our external investors and for our lineage team, who are also owners of our company. But when I take a step back and look at the company, I see the largest best position player in a mission-critical business where underlying consumer demand has been growing, even in the face of some of the worst food inflation in decades. This is a great company in a resilient long-term industry that is clearly facing short-term challenges due to excess supply and macro headwinds like tariffs. The cash flow generation of our company remains strong. Our trading valuation is currently about half of the replacement cost of our assets, and we believe we have an unmatched portfolio of buildings in critical markets for our customers. While Q4 will be challenged due to near-term headwinds, there are green shoots of optimism, including less new supply coming online, growing demand, and potential global trade policy resolution. We grew this business successfully for 15 years leading up to the IPO, and while we can't predict the moment of inflection, we believe in this industry's fundamentals and that stability is on the horizon. In the meantime, we will continue to focus on the areas of our business that are under our control, becoming a leaner, smarter company, investing in our people, processes, and technology. And when the industry does inflect, we will come out stronger than ever. Finally, I want to thank our global team members for their dedication and commitment to our customers. Operator, I'd like to open it up for questions now.