Americold Realty Trust, Inc.

Greetings and welcome to the AmeriCold Realty Trust second quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the form of presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Scott Henderson, Senior Vice President of Capital Market. Thank you. You may begin.

Good afternoon. We would like to thank you for joining us today for AmeriCold Realty Trust's second quarter 2020 earnings conference call. In addition to the press release distributed this afternoon, we have filed a supplemental package with additional detail on our results, which is available in the investor section on our website at www.americold.com. On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements. Forward-looking statements address matters that are subject to risk and uncertainties that may cause actual results to differ from those discussed today. A number of factors could cause actual results to differ materially from those anticipated. Forward-looking statements are based on current expectations, assumptions, and beliefs, as well as information available to us at this time and speak only as of the date they are made, and management undertakes no obligation to update publicly any of them in light of new information or future events. During this call, we will discuss certain non-GAAP financial measures. More information about these non-GAAP financial measures and reconciliations to the comparable GAAP financial measures is contained in the supplemental information package available on the company's website. We also would like to note that numbers presented in today's prepared remarks have been rounded to the nearest million, with the exception of per share amounts. This afternoon's conference call is hosted by AmeriCold's Chief Executive Officer, Fred Bowler, and Executive Vice President and Chief Financial Officer Mark Smirnoff. Management will make some prepared comments, after which we will open up the call to your questions. Now, I will turn the call over to Fred.

Thank you, and welcome to our second quarter 2020 earnings conference call. We hope everyone on this call and their families are well. This afternoon, I will discuss our second quarter 2020 results and activity. I will also comment on the continuing effects of COVID-19 on our business. Mark will then review our quarterly results in more detail and discuss our balance sheet in updates to our guidance for 2020. After our prepared remarks, we will open the call for your questions. Let me begin by stating that our business remains consistent and resilient, despite volatility in the economy and the world around us. Our global network of temperature control infrastructure and the services we provide are a mission-critical part of the food supply chain. We are committed to supporting our frontline associates who protect the integrity of this supply chain. They are our greatest asset and have worked tirelessly since the outbreak of COVID-19 to help ensure grocery stores are stocked. Since the start of this pandemic, we have invested in extra sanitation and PPE, social distancing protocols, and other measures designed to promote health and safety. In addition, this quarter, to thank our frontline associates for their hard work and dedication, we paid an appreciation bonus of $4.3 million. As anticipated, our second quarter results show some level of normalization after the first quarter's unprecedented surge in retail activity due to the COVID-19 pandemic. In the second quarter, our global warehouse same-store pool generated total revenue growth in the NAOI growth of 3% and 0.7%, respectively, on a constant currency basis. Please note that our second quarter results reflect the full impact of the frontline appreciation bonus I just mentioned. Excluding this appreciation bonus, of which $3.1 million impacted our same-store pool, our global warehouse same-store NOI growth would have been 4% on a constant currency basis. Consistent with our comments last quarter, We saw grocery retail activity sequentially decline after the consumer stockpiling surge late in the first quarter. It then stabilized late in the second quarter, but remains above pre-COVID levels. Additionally, now we have begun to see individual states reopen. We have seen some modest pickup in food service, particularly in quick service restaurants. That said, overall food service activity still remains well below historic norms. As we have previously stated, there remains uncertainty around the progress of individual states reopening and impact in near-term and long-term consumer behavior. With respect to protein manufacturers, we saw some production plants temporarily close during the second quarter, but all have since reopened. In certain cases, they are not running at full capacity. As such, while our economic occupancy increased this quarter, our physical occupancy was impacted. This is partially attributed to protein inventory being pulled through the supply chain and headed toward grocery store shelves at a faster pace. We also continued to grow externally during the second quarter, as we worked to help our customers execute their business plans. In May, we announced a new $325 million fully automated build-to-suit development project for Ajo Del Haze, the second largest grocer in the world and the fourth largest grocer in the United States. We are building and will operate two state-of-the-art temperature control retail distribution centers, one in Connecticut and one in Pennsylvania, that will support the local brands of Ajo Del Haze USA in the Northeast and Mid-Atlantic regions. We broke ground in both locations in the second quarter, and we plan to deliver these facilities in 2022. As we have discussed previously, grocery retail is a key growth sector for AmeriCold. As evidenced by this project with AHOLD, we are well positioned to partner with leading retailers. Also during the second quarter, at our Chicago facility, we have sold nearly all available pallet positions, and we continue to onboard customers. we remain on track to stabilize this facility in the first quarter of 2021. At the three expansion projects that we purchased from Cloverleaf, we are fully operational and nearly all pallet positions are sold. We have received our final certificate of occupancy at our newly delivered facility in Savannah, Georgia, and we continue to onboard customers commensurate with our underwriting. In Atlanta, at our major market expansion, We have sold nearly all pallet positions in advance of completion. We remain on track with construction to be completed in mid-2021. Finally, we have restarted construction at our New Zealand project after a pause due to local COVID-19 restrictions. As disclosed previously, this expansion will be anchored by our top retail customer. In addition to this customer, we have sold significant amount of pallet positions to other customers, and at this point we have sold a majority of the pallet positions in advance of completion. We also continue to optimize our portfolio through acquisitions and dispositions. During the quarter, we closed on an opportunistic sale of our Boston, Massachusetts facility for a sale price of $27 million to a local developer who will be repurposing the property. We recorded a gain on the sale of $19.4 million and expect to redeploy the proceeds into a 1031 exchange. We intend to move the customers from that facility to other facilities that we have in the region. Additionally, post quarter end, we acquired two facilities which we previously leased in Auckland, New Zealand for $12.3 million New Zealand dollars. We also sold a non-core quarry asset in Carthage, Missouri for $9 million. Mark will discuss both of these transactions in more detail momentarily. Finally, in August, we signed a definitive purchase agreement to acquire AMC Warehouses located in the Dallas-Fort Worth market for $85 million. AMC owned one distribution center, which was recently expanded in Mansfield, Texas, and leased an additional facility in Grand Prairie, Texas. We will purchase the Mansfield facility and assume the Grand Prairie lease. The Mansfield facility was constructed in 2018, has 8.6 million cubic feet, and an additional 18 acres that can accommodate further expansion. This acquisition grows our DFW major market capacity by approximately 30%. and expands our protein capabilities, including our wallet share with one of the leading global protein producers. We expect to complete this acquisition subject to customary closing conditions in early September. The COVID-19 pandemic has certainly put a spotlight on the integrity and flexibility of the food supply chain through periods of dislocation. As a leader in the temperature-controlled storage, We have no shortage of growth opportunities with current and potential customers and their efforts to improve their supply chain initiatives. Now, let me discuss our view of the road ahead as we begin the back half of what has been an unprecedented year. While the greater economy may be in for a bumpy recovery, our business is naturally stable on an annual basis and designed for resiliency. First, demand remains consistent. What people eat and where they eat may change, but people are still going to continue to eat. Our portfolio is diversified by geography, customer, commodity type, facility type, and note in the supply chain. This helps us to reduce volatility from the shifts in consumption behavior and specific commodity disruptions. Second, we may continue to see shifts in the endpoint of consumption as individual states are in various stages of reopening. Recall that typical consumption has historically been served through an even balance of food service and retail. AmeriCold's infrastructure serves both parts of the food supply chain. While the mix continues to be tilted toward grocery, we are well positioned as we move forward to support any mix. Finally, we would remind you that growth in e-commerce, which many of us are seeing in our own households in real time, does not meaningfully impact AmeriCold. Whether purchased online or in person, groceries still move through the traditional supply chain infrastructure. Grocery stores, due to their location with targeted populations, remain by far the best place for grocers to service last-mile logistics. As food travels from food manufacturer all the way to the grocery store, AmeriCold is a key player at each stage of the supply chain along the way. At the same time, barriers to entry in our business remain high. Over decades, we have built a fully integrated global network of temperature control infrastructure with deep customer relationships as well as proprietary technology and processes. We have also spent many years professionalizing and commercializing our business, including our fixed commitment model, which helps to stabilize our revenue streams and ensure customers have space when they need it. The pandemic has proven just how mission critical our infrastructure and services are to the food supply chain. We have also proven that our large diversified portfolio, combined with our business model, is extremely resilient. We will continue to partner with our customers and ensure the food supply chain is protected and efficient. Before I turn the call over to Mark, I want to reiterate our commitment to all of our valued stakeholders. This includes our customers, our shareholders, and importantly, our associates. Now I'll turn the call over to Mark.

Thank you, Fred, and good afternoon, everyone. Today we'll provide updates on our actual performance as well as certain metrics on a constant currency basis. We'll also highlight areas of our business that were impacted by the ongoing COVID-19 pandemic. As Fred mentioned, we paid a frontline appreciation bonus of $4.3 million in the quarter. Except where noted, all of our results include the impact of this bonus. For the second quarter, we reported total company revenue of $483 million and total company NOI of $128 million, which reflects a 10% increase and a 6% increase year-over-year respectively. Excluding the frontline appreciation bonus, Total company NOI would have been $133 million, a 9.5% increase year over year. Core EBITDA was $101 million for the second quarter of 2020, an increase of 7.4% year over year. This was driven by our 2019 and 2020 acquisitions and solid growth within our core portfolio, partially offset by higher COVID-19-related costs and the frontline appreciation bonus. Excluding this bonus, core EBITDA would have been $105 million, an increase of 12% year-over-year. Our core EBITDA margin decreased by 52 basis points to 20.8%. Excluding the frontline appreciation bonus, our core EBITDA margin would have increased by 37 basis points to 21.7%. For the second quarter 2020, we reported net income of $33 million compared to net income of $5 million for the same quarter of the prior year. Our second quarter core FFO was $55 million or $0.27 per diluted share. Our second quarter AFFO was $61 million or $0.30 per diluted share. Excluding the frontline appreciation bonus, core FFO per diluted share would have been $0.29 and our AFFO per diluted share would have been 32 cents. As a reminder, the full definition and reconciliation of core EBITDA, core FFO, and AFFO to reported net income can be found in our supplemental. For the second quarter of 2020, global warehouse segment revenue was $372 million, which reflects growth of 10.1% year-over-year. Global warehouse segment NOI was $120 million, which reflects growth of 5.5%. Excluding the frontline appreciation bonus, global warehouse segment NOI would have been 124 million, which reflects growth of 9.3%. Global warehouse segment NOI margin was 32.3% for the second quarter, a 139 basis point decrease compared to the same quarter the prior year. Excluding the frontline appreciation bonus, our global warehouse segment NOI margin would have been 33.4%, a 24 basis point decrease. The NOI growth was primarily driven by improvements in our core business, accretive acquisitions, same-store economic occupancy growth, and the benefit of the AmeriCold operating system. These results were partially offset by the strength of the U.S. dollar, an increase in property insurance and taxes, and the frontline appreciation bonus, and the incremental expense we incurred to address COVID-19. The incremental COVID-19 expenses include higher sanitation and PPE costs and higher labor costs. They also have added certain inefficiencies due to social distancing, staggered schedules, and other changes to processes. Let me note that while these COVID-19-related supply costs and inefficiencies are new this year, we fully expect them to be incorporated into our cost structure going forward. As such, we have factored them into our underwriting. Over time, we expect to offset these costs as we sign new business and renewals for existing business. In the second quarter, we incurred $1.3 million of new sanitation costs and we incurred $0.4 million of new PPE costs. Please note the new sanitation costs are recognized in the other facilities cost line item and the new PPE costs are recognized in the other service cost line item in the warehouse segment results. At quarter end, 270 million of our annualized rent and storage revenue was derived from customers with fixed commitment storage contracts. As compared to 259 million for the first quarter of 2020, and $232 million for the second quarter of 2019. As a reminder, our recent acquisitions have a lower percentage of fixed commitment contracts as a percent of rent and storage revenue. We view this as an opportunity as we bring these acquisitions to AmeriCold's commercialization standards. For the second quarter of 2020, 41.4% of rent and storage revenue was generated from fixed commitment storage contracts on a combined pro forma basis, which is a 130 basis point increase over the sequential quarter. Our customers on fixed commitments saw significantly less disruption due to COVID-19, and we continue to work with current and potential customers to put the structure in place. As of June 30, 2020, our global portfolio consisted of 183 facilities. Our total facility count includes 172 facilities in our global warehouse segment portfolio and 11 facilities in our third-party managed segment. This total facility count reflects the addition of our newly completed Savannah asset and the sale of our Boston asset completed during the second quarter. Now I will turn to our same store results in our global warehouse segment, which reflects 135 facilities As a reminder, a facility is counted as same store if it meets our definition at the beginning of the year. For the second quarter of 2020, our same store global warehouse segment revenue was $286 million, which reflects growth of 1.5% year over year and 3% on a constant currency basis. Same store global warehouse NOI was $93 million, which reflects a decrease of 0.5% year over year but an increase of 0.7% on a constant currency basis. Excluding the frontline appreciation bonus, of which 3.1 million impacted the same store pool, our global warehouse same store NOI growth would have been 4% on a constant currency basis. Same store global warehouse NOI margin decreased 68 basis points to 32.7%. Excluding the frontline appreciation bonus, our NOI margin would have increased by 40 basis points to 33.8%. This shows the continued benefit of the AmeriCold operating system. For the second quarter, same-store global rent and storage revenue grew by 4.7% year over year. This was driven by increased economic occupancy and contractual rate escalation. This was partially offset by the impact of the strength of the U.S. dollar. on a constant currency basis, our growth would have been 6%. Our same-store economic occupancy was 78.9%, which reflects an increase of 270 basis points from the prior year. Our same-store global rent and storage NOI grew by 3.3% year-over-year, or 4.5% on a constant currency basis. The NOI growth was a result of the revenue metrics cited above. Additionally, this NOI growth was driven by continued portfolio management, efforts to grow our fixed commitment storage contract, disciplined cost controls through the AmeriCold operating system, and the impact of currency translation on costs in international segments. Same Store global rent and storage NOI margin decreased 92 basis points to 65.9%. The margin compression was driven by higher property insurance, higher property taxes, and increased sanitation costs from COVID-19. Same-store global warehouse services revenue for the second quarter decreased by 0.8% year-over-year or increased by 0.8% on a constant currency basis. This was primarily driven by lower protein and food service volumes. This was partially offset by a favorable business mix and the benefit of contractual rate escalation in our services. Our same-store global warehouse services NOI declined by 22.6% year-over-year or 21.1% on a constant currency basis. This was primarily driven by the frontline appreciation bonus. Higher labor costs caused by the inefficiencies due to COVID-19 and PPE costs. We also saw lower overall throughput volume following the first quarter surge. Excluding the frontline appreciation bonus, our same-store global warehouse services NOI growth would have been 1.1% on a constant currency basis. Same-store warehouse services NOI margin was 6.7% for the quarter, which resulted in margin compression of 189 basis points driven by the same factors. Excluding the frontline appreciation bonus, our same-store warehouse services NOI margin would have been 8.7%, a four basis point increase. Within our global warehouse segment, we had no material changes to the composition of our top 25 customers who, on a pro forma basis, account for approximately 58% of our global warehouse revenue and who have been with us on average for over 30 years. Our recent acquisition activity has both enhanced our wallet share of our key customers while providing further overall diversification. Additionally, our churn rate was approximately 3.5% of total warehouse revenue. Corporate SG&A totaled $32 million for the second quarter of 2020 as compared to $33 million for the comparable prior year quarter. primarily driven by the reduction of travel expense due to COVID-19 and net synergies realized relative to overhead acquired through acquisitions. Now let me update you on our development and acquisition activity. We spent $85 million in the second quarter on expansion and development capital, mostly related to spending at our off-hold Build-to-Sue projects in Connecticut and Pennsylvania. As Fred discussed, we are making progress on all previously announced developments. As a reminder, our supplemental has additional disclosure on expected yields and target stabilization dates for these projects, which remain unchanged. Turning now to transaction activity, we completed the sale of our Boston, Massachusetts facility during the quarter to a local developer seeking an alternate use for the site. The facility sold for $27 million, which translates to a 4.8% cap rate. We believe these economics represent meaningful shareholder value creation as we reinvest the proceeds. Subsequent to quarter end, we entered into a definitive purchase agreement and completed two transactions. First, as Fred discussed, we agreed to acquire AMC Warehouses for $85 million and we expect to close in early September. The owned Mansfield facility is 8.6 million cubic feet with approximately 27,000 pallet positions, and the leased Grand Prairie facility is 5.2 million cubic feet with approximately 18,000 pallet positions. The lease on the Grand Prairie facility expires in 2023 and has a four-year extension option. The price reflects a 7.4% net entry NOI yield. Please see page 38 of our Q2 2020 supplemental for more information on this acquisition. Second, in July, we acquired two facilities in Auckland, New Zealand that we previously leased. For $12 million New Zealand dollars, we purchased two facilities, one consisting of the building and underlying land, and one just the improvements subject to a long-term ground lease. The implied cap rate on this acquisition was approximately 11.2%. Third, we sold a non-core asset in July, a limestone quarry that was adjacent to our facility located in Carthage, Missouri, for $9 million. Please note that the sale resulted in a $3.7 million impairment charge taken in the second quarter. Additionally, the quarry was classified in its own business segment, which contributed approximately $500,000 in NOI for the 12-month period ended June 30, 2020. Now turning to our balance sheet. We believe that maintaining prudent leverage, access to multiple sources of capital, and ample liquidity is important at any part in the cycle, but especially in the current environment. We are committed to maintaining a strong, flexible balance sheet as we finance our growth plan. During the second quarter, we strategically issued approximately 3.6 million shares of common stock under our 500 million ATM program, at a weighted average price of $35.77 per share, aggregating approximately 128 million of gross proceeds. Of this 3.6 million shares issued, approximately 473,000 were issued under a forward sale agreement at a weighted average price of $36.35 per share, totaling approximately 17 million of gross proceeds. The shares under the forward agreement can be settled at any time up until July 1, 2021. We intend to use these proceeds to fund a portion of our recently announced acquisition activity. As of June 30, 2020, total debt outstanding was $2 billion, of which 77% was in an unsecured structure and 86% was at a fixed rate. Our real estate debt is a weighted average remaining term of 6.3 years, and carries a weighted average contractual interest rate of 3.6%. At quarter end, we had total liquidity of approximately $1.2 billion consisting of cash on hand, revolver availability, and $151 million of outstanding equity forwards. Our net debt to proform a quarter EBITDA was approximately 4.1 times. Finally, during these uncertain times, we have maintained our day sales outstanding, or DSO, as our customer cash collections remain strong. Our DSO has been consistent from year end to the end of Q1 and now in Q2. Now, I'd like to take a moment to discuss our outlook for the second half of 2020. As a reminder, we look at our business on an annual basis. As we have seen for many years, food consumption remains fairly constant on an annual basis. Further, The scale and diversity of our portfolio, combined with our strong market share, provides stability in our business. That said, thus far in 2020, we have benefited from elevated consumer activity in response to COVID-19, with certain related costs partially offsetting that growth. Additionally, we continue to see lower throughput volumes associated with product ultimately destined for food service channels, with quick service restaurants being the exception. As Fred stated, the broader economy may be in for an uneven recovery and there's still uncertainty related to the timing of state reopening plans and the resulting consumer behavior. That said, our business is naturally stable on an annual basis and designed for resiliency. For that reason, we are raising our AFFO per share guidance at the low end from our previous range of $1.22 to $1.30 to now $1.24 to $1.30. Please refer to our supplemental for updates to deferred income tax benefit, non-real estate amortization and depreciation expense, total maintenance capital expenditures, development starts, and currency translation rates embedded in this guidance. Please keep in mind that our guidance does not include the impact of acquisitions, dispositions, or capital markets activity beyond which has been previously announced. Now let me turn the call back to Fred for some closing remarks.

Thanks, Mark. To summarize our call today, AmeriCold continues to demonstrate that it is mission critical part of the temperature controlled food supply chain. As expected, our second quarter showed a reduction in throughput after our first quarter's unprecedented surge. Please remember that we look at our business on an annual basis and it has been stable and consistent over many years. We continue to drive internal same-store growth through our commercialization efforts in the AmeriCold operating system and drive external growth through disciplined acquisitions and development in order to support our customers. This growth is supported by our strong, low-levered balance sheet. Finally, we again want to thank all of our frontline associates and the entire AmeriCold team for their hard work and dedication. We also thank our customers for putting their trust in us to manage the critical component of their supply chain. Thanks again for joining us today, and we will now open the call for your questions. Operator.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. Confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for your questions. Our first questions come from the line of Kevin Kim with Truist. Please proceed with your questions.

Thanks. Good afternoon, guys. Maybe we can start off higher level. What would you say is the biggest challenge to your business today?

Well, thanks, Keven. You know, I think part of it is just predictability in terms of flow, right? You know, the state reopening plans, you know, are kind of all over the place. And as you know, every state's in a different position. And You know, how restaurants open and how consumers, you know, react to that, you know, is difficult to judge. So that exact precise predictability in terms of week to week, month to month, and even quarter to quarter flows can be, you know, somewhat of a challenge. We don't control the volume. You know, as you recall, Mark and I have said a number of times that You know, it's our customers' customers that are actually influencing the way volume flows through our facilities. So, you know, that poses a bit of a challenge. That said, you know, I just reiterate that on an annual basis, we know that that all works out. You know, and if you recall back in the first quarter, you know, I kind of compared what had occurred at the end of the first quarter to a hurricane, you know, where there's a massive surge of if you will, overnight unannounced that kind of swept the retailers and created a demand surge, if you will. You know, those things are tough challenges to predict, but at the end of the day, you know, it's all about pulling volume forward because, again, on an annual basis, You know, an individual's individual consumption remains pretty much in check and pretty stable. So, you know, over the course of the year, it all tends to work out.

Okay. And sticking with that topic, your annual guidance for same-store revenue is 2% to 4%. It hasn't changed for a couple quarters here. That implies that your same-store revenue decelerates to about 1% growth. Any particular reason why that would be the case?

You know, we're sitting, Keevan, if you look year-to-date, we're roughly at 4.9% constant currency growth, about 3.3% growth. So we're in line. Please remember that the back half of the year, as you look, is typically includes the volume associated with both Thanksgiving and the Christmas holidays, so it tends to be significantly greater volume. You know, I think, you know, that's one of the areas where we're, as we look forward into, you know, are waiting to see how that will play out. You know, will people gather together? Will there be as big things, or will people eat remotely? You know, so those are things we're looking at. They kind of line up exactly with what Fred is saying is You know, states reopen as people are able to get together, as consumer preferences move and change. You know, those are things that will impact our view on the back half of the year. But as you see overall, you know, in the quarter, you know, strong growth, you know, year-to-date strong growth. Obviously, some of that is obviously helped by that volume we saw in Q1 from COVID. But overall, the business is performing well and not dissimilar to what we'd expect it to in this environment.

Just a follow-up on that. If the current pace of reopenings and local guidelines stay in place for the rest of the year, and let's say Thanksgiving and Christmas become less of a family gathering situation, have you guys thought through what does that mean for your business?

Yeah. Look, I think even... Even with Thanksgiving and Christmas, I mean, again, it's very difficult to predict exactly how the flow will occur. But I can assure you one thing. People will eat on Thanksgiving and people will eat on Christmas. You know, the question is how do all of the food manufacturers flow their goods in and around that time? And are they going to flow those goods differently? And I don't think you can get an answer out of a ConAgra or Kraft Heinz or Lamb West or the McCain's. as to exactly how that flow of goods is going to occur. To your point, if mixed stays the same, that's a big if and something that I don't think that we want to necessarily speculate on, but if the same balance between food service and retail remains where it is, clearly we get a little bit more of a benefit by larger retail volumes on the services side, not necessarily on the storage side. But more throughput through our retail distribution centers does equate to more revenue, albeit a lower margin revenue, but still more cash flow, more NOI. But again, trying to predict that. is not something that I think we're in the best position to be able to do other than to reinforce that over that long period of this 12-month period, we're pretty confident that that consumption will come in as planned.

Okay. Thank you.

Sure. Thanks, Keegan.

Thank you. Our next questions come from the line of Dave Rogers with Baird. Please proceed with your questions.

Yeah, Mark, Fred, good evening. Thanks for all the information on the call. I wanted to kind of go through volume a little bit more. Fred, at the end of your comments, you had said, as expected, you know, volume was down and not sure the market anticipated volume to be down. And so I guess I wanted to, you know, dive a little further deeper into the 3% decline here if you're in pallet volume and throughput volume. Can you give us a sense for – Obviously, March was strong, but I think if you look at retail sales, April and May also seemed to be strong. So can you give us a sense sequentially where that was? How much was protein and how much was maybe COVID-related inefficiencies on the revenue side for volume?

Yeah, a couple things. If you recall, the analogy I gave, you know, first quarter, you know, was I talked about that hurricane effect, right? And I talked about this huge surge. I mean, people swarmed the grocery markets and cleared out 30 days of inventory. Nobody needed 30 days of inventory immediately, right? And so, like a hurricane, as I explained in my example last quarter, when that happens, there's usually a lull that follows it. And then it kind of comes back into stabilization, you know, a couple weeks later. And what I said is it was going to be hard to predict and understand exactly how quick that would stabilize because, you know, I don't know how much refrigerator and freezer capacity individuals have, you know, at their home and who actually did that hoarding, right? So very difficult to predict. But we knew that there would be a lull in volume and that it would kind of come back and gradually come back to more of a stabilized manner. And that's indeed what it did on the retail side towards the back half of the quarter, you know, is retail kind of stabilized, albeit, you know, much higher than pre-COVID levels, but it's kind of it's kind of leveled out as to what I'll call the new norm, if you will, as food service continues to be down. So, you know, that coupled with the fact that, yes, on a protein standpoint, you know, you'll recall me talking a lot about the plant shutdowns and the effect that it has on us overall. I think what we proved this quarter is indeed the power of economic occupancy in our fixed commitment process you know, that, you know, from a storage standpoint, we're protected and we're protecting our customers on the volume or the space that they need during critical times. But, you know, because of those plant shutdowns, you know, you had reduced throughput. And so it's that throughput, you know, reduction in protein coupled with the throughput reduction at the beginning of the quarter due to, you know, the end of the first quarter purge that really standpoint.

And to tie those comments out, moving into the third quarter, if retail is kind of back slightly above, protein should no longer, I guess, be short as plants are coming back to full capacity and food service seems to be recovering. I guess, would you agree with that last statement? You know, the second half of the year would seem to be much more of a comparable year for you guys without the risks that maybe we saw in the first or the second quarter.

I think it will definitely be more stable. You know, I was asked by someone about what if there's a second surge. You know, I don't think there'll be a second surge. At least it won't happen like the light switch that happened, you know, at the beginning of the year. So I think it will be more slow and steady as food service ramps up. You know, obviously that will start to consume and overtake some of the retail volume, and that will come back down and all bring it back to normalcy. The question is, how long is that going to take, and where is it going to stabilize? You know, if it was 50-50, you know, food service retail pre-COVID, where is it going to settle when this is all said and done? That is still a question that I don't think anybody has the direct answer to.

Last, just for me, on the cost side of the equation, the performance bonus and then the added cost that you experienced – The performance bonus, was that something you paid early in the quarter or later in the quarter as a reward or more of a pre-incentive? And are you seeing any changes in the workers' comp or healthcare line items of note through the first half or through August?

Let me answer the first part, and I'll let Mark answer the second part. You know, in terms of the incentive itself, it was paid out very late in the quarter. You know, this is a fluid thing. I mean, this event, it's literally daily. We're watching and seeing what's happening in the marketplace, understanding where we need to be competitively to attract the workforce to our work, watching what our food manufacturers and retailers were doing with their incentive pay. Now, theirs was more hazard pay driven. We don't believe that we have an environment that's hazardous just because of the nature of our business. We do appreciate the fact that our folks came and came in with pride to be able to service our local communities. We just felt it was incumbent upon us to recognize them for that effort, and we did it in the form of a one-time bonus. Again, those decisions don't get made lightly. They take a lot of thought, a lot of evaluation. We have to understand what's going on in the market around us, and it took us some time to kind of go through that, and we came up with the decision at the back end. So, Mark, do you want to talk about health care?

Yes. You know, when you overall look at health care, overall health care is consistent with our expectation for the year. If you look at the underlying data around the cases, obviously a little more cost associated to COVID or COVID-related type claims, but less cost associated with elective surgeries and those types of things that you would see. So overall, health care, we're not seeing a major move in health care. You know, I think the team has done a very good job in terms of making sure they're operating in a very disciplined manner, even where people have had to work extra overtime and other things that, you know, work through this difficult environment. And so they've done a very good job of managing our workers' comp costs as well. So we're very pleased with that. We're not seeing major moves in those costs on items.

Thank you both for all the added comments.

Yep, no problem. Thanks.

Thank you. Our next question has come from the line of Eric Frankel with Green Street Advisors. Please proceed with your question.

Thank you very much. Just to get a little more color on the production advantage facilities and what you described as some short shutdowns of some production plants for some of your customers, how did that specifically impact your warehouse services revenue? I understand you have fixed contracts on the rent and storage side, but could you understand how that shut down or slowed down for some facilities impacted, you know, overall results?

Yeah, actually, it didn't just impact the production advantage facilities. It actually ripples through the supply chain, right? So when the plant is shut down, you know, it's less receiving of new pallets coming into the building. And on the services side, we get paid as that volume enters our facility and moves between the various nodes of the supply chain. So Less volume equates to less services overall. Again, that's the lower margin part of our business and the service that we provide that helps to create the stickiness of keeping people within our infrastructure. But that's what happens. Anytime there's a plant shutdown or a catastrophic event like what we saw at the end of the first quarter, it impacts volume all the way through the supply chain.

Well, any chance you could just provide a little bit of math of how much it might have impacted overall results in terms of both production advantage and retail facilities?

You know, I'll let Mark try to do it. All I would say is it's multivariable and volume tends to offset another, and that's one of the things that we pride ourselves in is because of our diversified portfolio, usually when one part of the supply chain is down, You know, like if pork is lower due to shutdowns, other proteins tend to pick up. So while those plants were down, other plants were up. While food service was down, retail was up. So the benefit of our diversified portfolio is it all kind of balances itself out in this multivariable supply chain. But, Mark, I don't know if you want to add more color to that.

Yeah, I think, you know, Fred, you really hit it. It's multivariable. You know, definitely I think, you know, it shouldn't be any surprise. I think the production shutdowns were all over the news. We talked about it last quarter. You know, we knew we would see, you know, lower inbound volume. You know, we're really pleased, though, with how well, you know, our clients really got back their operations back to work. And I know many of them are ramping and working towards getting back to their full production. So, you know, hopefully I look at it this way from the consumer perspective. Hopefully people on the call are seeing it, seeing that there's an improved availability of product throughout the supply chain. That tells me the supply chain is functioning and healthy. You know, that's what we're seeing. But on the overall volume, it's definitely consistent with exactly what we thought we'd see this quarter, given the background we're in.

Okay, thanks. I'll do one more quick question. I'll jump back in the queue. Just on the Boston facility, obviously it sounds like a good deal. It looks like you're selling the site for an alternative use that's not cold storage. But is there any thought to the value of keeping those types of facilities that are closer to urban centers just because food supply chains might evolve over time and maybe those facilities might prove especially valuable?

You know, kind of mixed answer. I would say that, you know, for the most part, again, we continue to accentuate that that last mile delivery is best facilitated through your local grocery store. And that's where we see the predominance of that type of activity. But there are those niche opportunities, right, of inner city or infill types of opportunities. I don't think it's a predominant. aspect of the food supply chain, but it is certainly relevant. That said, this facility in particular would not be a facility that I would put a lot of high volume, high traffic type of activity in. It's more of an old style warehouse where it's multi-level type of situation. So great for cold storage, great for storing slower moving, slower turn type of product. Not exactly what you would picking or each picking.

Very helpful caller. Thank you.

Yeah, sure. Thanks.

Thank you. Our next question has come from the line of Michael Carroll with RBC Capital Markets. Please proceed with your questions.

Yeah, thanks. Frank, can we talk a little bit about the AMC warehouse acquisition, I guess particularly to start with the Mansfield property? I believe AMC had a few other additional expansions that they were pursuing, one that's supposed to be completed this year and one next year, I guess. Are those projects, have they been completed or are they currently under construction or is that something that you plan on doing in the future?

Yeah, they completed one of the expansions, as we noted, and, you know, they have 18 acres for us to build on. You know, now we'll take it over. We'll reevaluate the demand flow. You know, I think part of their strategy was to consolidate the lease facility into that as a part of their expansion and consolidate into one facility. We may or may not choose to do that, right, as our business development team kind of dives in and works with our broader customer base. Obviously, they're a small operator, small customer base. The number of options were minimal, and they have a strategy around that minimal offering. Now they're part of a much larger enterprise. We have many more customers to bring to light, and we'll evaluate that the second we take over that operation when we close here in early September.

Okay, great. And then I guess the leased asset, I believe that they had two assets, right, right near the Mansell property. Were those two leased assets? And I guess what happened with that other property, or did the other property exist?

We're not aware of another leased property. We just have the one leased property.

Okay. And then can you kind of, just a quick model question, the Rochelle development, I guess what type of NOI did they contribute in the second quarter, or is it still a drag right now?

The Rochelle property, you know, is positively contributing cash flow and growing, and it's you know, working towards our stabilized ramp. You know, as Fred mentioned, in his prepared remarks, you know, we expect the asset to be, you know, operating on a fully stabilized basis in Q1.

Okay. And then can you give us the cap rate for the New Zealand properties that you buy? What did you buy that real estate at?

Yeah. So the cap rate on our in-place rents, because remember, we were operating those facilities, so it was roughly an 11.2% cap rate.

Okay, great. Thanks.

Thank you. Our next question has come from the line of Manny Korchman with Citi. Please proceed with your questions.

Hey, everyone. Good evening. Maybe if we go back to the PPE comments. I think you mentioned in your press release and then on the call that you thought that you could sort of recover those inefficiencies as you sign contracts with new customers. Is that to say that there's a separate expense line and they're going to just reimburse you for the increased expenses? And if not, I guess, how much does that just cut into rental rate growth that you would have received but now you might receive less because they're thinking about that as just higher revenue and you're thinking about it as covering expenses?

Yeah, I think we detailed this in the actual earnings release. But the best way to think about it is these costs, you know, as we build our underwriting model, what we do is we build up our detailed costs and then we margin up that business. So those costs are now reflected in our model, which is now being margined up. So going forward, obviously, we're going to, you know, be able to recover, you know, those costs over time. In terms of the impact, they don't impact top line. revenue growth so much today, I think those costs would more impact our NOI growth. And you see that a little bit in the call-out of the different margins that we reported for the second quarter. You know, roughly on an absolute dollar basis, I think we had about $1.3 million of additional sanitation costs, which would impact the infrastructure side of our warehouse business and the cash flow and the margin reported there. and we had roughly about 400,000 of PPE costs that was flowing through the services side of the business. So hopefully that gives you a little bit of color.

Yeah. And then maybe flipping to future development, I mean, our whole deal was obviously a big one, but it sounds like that was ongoing for quite a bit of time. If you think about the rest of your customer base, are they still focused on things like new developments and building out their supply chains, or are they just in the trenches trying to deal with what they've got coming at them right now? And so we might see a little bit of a lull in future development or transaction activity.

Yeah, I'd say you have a combination of customers. You know, our overall pipeline remains strong, and, again, My supply chain team continues to complain about the hours that they're working. We're quite busy with all of our customers. Even the Ahold deal, the final negotiations, all the detailed design was happening at the same time that Ahold is going crazy from a retail operations standpoint supporting its local constituents. The resources are still being applied to that. We're still working We do have a couple customers that kind of pressed the pause button and said, hey, let me kind of hone in here and focus on today and we'll come back to you. But, you know, usually even in that situation in the background, we're doing some type of analytics or some type of fine-tuning on the design aspects of those facilities. So, you know, pipeline remains healthy. We're well over what we guided to for the year. and we continue to have those opportunities come to us.

Yeah, just to put a little more color around it, Manny, I think year-to-date we've announced about $367 million of development, which was clearly outside of our original guidance of $75 to $200, and we revised guidance in this quarter roughly to $400 to $500 million of new starts this year. So I think that shows we still have a lot of attractive opportunities in the pipeline and some we hope to break ground on and announce this year.

And maybe a last one for me, you know, we spent a fair amount of time on this call to fix contracts and the benefits of the economic occupancy because of it. But if you look at your alignment with customers across different, you know, categories or verticals, do you feel like those fixed contracts are aligned with sort of the right customers versus the wrong customers? Like are the customers that, you know, I'm thinking maybe a restaurant customer or a food service customer, that has that fixed contract that they don't need that excess space versus the grocery customer that doesn't have the fixed contract and so they're looking for that excess space. How does the alignment on the fixed contract line up with your customer base?

Yeah, I think it lines up for both parties really, really well. I mean, if you think about food service, they actually do need the fixed contracts. They don't want their product kicked out of the warehouse. or moved around their supply chain because we're holding it and preserving that product on their behalf until that pipeline starts to open up. So they actually need that space more than ever. And then on the retail side or the food distribution going to retail, they still require the same space. You know, look, you know, people are playing the market on a month-to-month basis. This is the long game when you're talking about food supply chain. They know the third and fourth quarters are coming. You know, they're anticipating still needing their space. And, you know, they're not going to give that up, certainly, in these crazy times where it's difficult to predict exact volume patterns. So... You know, I think that the fixed commitment, while it does a lot good for us in terms of providing stability and predictability, it also provides a tremendous benefit for our customers in being able to stabilize their supply chains and, again, the most expensive part of their supply chain, transportation. So, you know, meaning that we have the space in the right places that they needed at the right time so that they're not forced to have to go outside of market to find space.

Thanks, Fred.

Yep, no problem.

Thank you. Our next questions come from the line of Keevan Kim of Truist. Please proceed with your questions.

Thanks, Don. Just a couple quick ones. The additional PPE costs and the cleaning costs related to COVID, should we just expect that to be recurring? And even post-vaccine, if there is one, should that just be recurring in a new standard of business?

Yeah, I think so, Keevan. You know, that's the way we've kind of talked about it. You know, as we said, it will now be a part of our cost base, and we will offset that in our pricing based on the fact that we use activity-based costing. So it's now part of our cost base. Our margin goes on top, as Mark explained, and it gets built into our pricing. We do believe even post-COVID, certainly a good chunk of that will remain in place. We think that there's actually best practices that came out of this. and we believe that by creating a healthier work environment for the long term, who knows, maybe we won't lose as many people to the ordinary flu going forward. We'll have better attendance, and better attendance for us means greater efficiency because we're able to use our own employees instead of temporary employees. So we think there's some good that came out of it. That will be added to our cost base. That's That's good for our customers as well. So good for our customers, good for our employees.

Okay. Thank you again.

Sure.

Thank you. Our next question has come from the line of Eric Frankel with Green Street Advisors. Please proceed with your question.

Thank you. A quick clarification on development projects. You know, it certainly sounds like you're having success in releasing most of your developments. but I noticed that the timing of the stabilizations haven't changed. Is there anything to interpret with that?

No, I think they're proceeding consistent with our underwriting and our plan. I think that's the key takeaway.

Okay, thank you. Then just final question to accounting housekeeping. Just non-real estate depreciation, can you explain the increase in that and how, you know, whether that's just because of the AFO guidance increase?

Yeah, it's a function of acquisitions and the final purchase price allocations of those acquisitions. So we reflected the latest update as a result of that.

Okay, sounds good. Thank you. Thanks, Eric.

There are no further questions at this time. I'd like to turn the call back over to management for any closing remarks.

Great, thanks. And thanks again, everyone, for the call and for your support. Yeah, I'd just like to reiterate that, again, at a time of this instability that we're seeing in the marketplace, I'm really proud of the team and the resilient nature of our unique infrastructure and services that supports the food supply chain. And while there's a lot of uncertainty still around the world and timing as to when we'll get back to normal or what normal will look like, You know, I think our business model provides the stability that we talk about on an annual basis. And, you know, that's pretty important, I think, during these times. And so much so that, you know, we were able to confirm, you know, our guidance and even tighten our guidance range at a time of the craziness that's occurring out there. You know, again, we're excited about the organic improvements that we continue to make. The development pipeline remains as strong as ever. M&A opportunities continue to present themselves, and we'll continue to be very, very disciplined with our capital. So, again, thanks, everyone. Really proud of our associates around the world. Welcome to the new AMC associates to the AmeriCold family. And, again, we'll talk next quarter. Thanks, everyone. Be safe.

This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great evening.