Americold Realty Trust, Inc.

Greetings, ladies and gentlemen, and welcome to AmeriCold Realty Trust's first quarter earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentations. Should anyone require operator assistance, please press star zero on the telephone keypad. It is now my pleasure to introduce your host, Mr. Scott Henderson. Thank you. You may begin.

Good afternoon. We would like to thank you for joining us today for AmeriCold Realty Trust's first quarter 2021 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.americal.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 risks 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 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, including Core EBITDA, Core FFO, and AFFO. The full definitions of 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 AmeriCorps' 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 first quarter 2021 earnings conference call. We hope everyone on this call is well. This afternoon, I will summarize our first quarter 2021 results, our current view of market conditions, and our external growth activity. Mark will then review our quarterly results in more detail, as well as our recent capital markets activity and guidance for 2021. After our prepared remarks, we'll open the call for your questions. For the first quarter of 2021, global warehouse segment revenue was $485 million, which reflects growth of 27% year-over-year. Global warehouse segment NOI was $146 million, which reflects growth of 15%. For the first quarter 2021, our global warehouse same-store revenue decreased by 3.8% on a constant currency basis. Our global warehouse same-store NOI decreased by 6.9% on a constant currency basis. I'll note that if we normalize for the acquisitions that were added into our same store pool this quarter and the COVID surge from the first quarter of last year, our same store results would have been essentially flat on revenue and slightly positive on NOI. As discussed on the last earnings call, we fully anticipated continued supply chain disruption. As such, quarterly comps will be less relevant over the course of the year. We factored in supply chain variability, food service levels well below historic norms, elevated retail activity, food production at less than full capacity, and continued sanitation PPE costs. We are reaffirming our annual guidance for the year. Let me provide a bit more perspective. Entering into first quarter 2021, existing inventory and cold storage was below prior year's levels. While demand continues to remain steady, manufacturers have not yet gotten back up to full pre-COVID production levels. As such, their safety stock, which is represented by our physical inventory, is literally being eaten into. As the quarter progressed, conversations with our food manufacturing customers have indicated that production volumes are expected to increase and many of them are seeking to improve their inventory positions to better support their customers for the retailers and food service companies. We continue to be optimistic about global demand for all types of food production in our diverse portfolio, and we are confident that food manufacturers will return to pre-COVID inventory levels as end consumer demand remains firmly intact. Our commercial business processes, including our fixed commitment contracts, mitigate some but not all of this impact. While we continue to make progress, we would remind you that nearly all of our recent acquisitions over the past few years did not initially have a meaningful number of fixed commitment structures. Further, while almost all categories of food manufacturers' production lines have been impacted by COVID, certain subsets, such as protein, have been impacted more. As a reminder, Portfresh, Cloverleaf, Lanier, MHW, Novacold, and Newport are all part of our same store pool, but we're not in Q1 2020. These acquisitions are indexed greater towards protein. That said, we are actively working with our customers to bring these acquisitions onto our commercial standards. This is how we continue to enhance value for customers and shareholders. Finally, we are comparing to the first quarter 2020, where we saw buildup of inventory for export activity and, more importantly, the historic COVID-related surge. As a reminder, the first half of the year is typically lighter than the second half. However, we all remember the hurricane effect we experienced in the food supply chain when the global stay-at-home orders went into effect at the end of the first quarter 2020. This makes the year-over-year comparisons far less meaningful. The quarterly cadence of our results in 2020 was very unique, and as previously discussed, we expect it will continue to be so in 2021. Starting late in the first quarter of 2021, we have seen food manufacture activity start to ramp up, and our recent conversations with our customers have been very positive. As the vaccine continues to roll out and reopenings expand, We expect this will continue to help manufacturers with their staffing and processes, which should enable them to continue to ramp up production to more normalized levels in inventory positions. Further, individual states, regions, and countries are continuing to progress through the various stages of reopening, though we would note this has been very uneven. We expect this return to the norm to happen very gradually over 2021 and into 2022. Through it all, we continue to benefit from our portfolio's diversity and scale, the effectiveness of the AmeriCold operating system, and our commercial processes. Barriers to entry remain high in our business, and our integrated global platform, which now spans four continents, would be difficult, if not impossible, to replicate. Finally, we expect that food consumption will remain stable and in line with historical trends. For these reasons, we feel confident that our business will remain steady on an annual basis, which is reflected in our full year 2021 guidance targets. Now, let me turn to our external growth activity. We continue to execute on strategic development and acquisitions that will help us better serve our customers and their supply chain needs on a global scale. In specific, we completed two transactions since the start of the year, totaling $118 million and we have entered into a purchase agreement for an additional acquisition for $102 million expected to close this month. As we have said previously, strategic tuck-in acquisitions meaningfully enhance our existing network. Just as important, all of these transactions bring opportunity to drive NOI growth as we commercialize existing business and implement the AmeriCold operating system. On March 1st, we closed on the acquisition of Liberty Freezers in Canada for $46 million. Liberty consists of four assets totaling 10 million cubic feet, two owned facilities in Montreal and London, and two leased facilities in Toronto. This acquisition grows our exposure with several of our top 100 customers, as well as adds some new customers. And as a mix of protein, consumer packaged goods, bakery, and dairy, The Greater Toronto Area is one of Canada's most important distribution markets, and this transaction increases our existing footprint in Toronto by nearly 40%. Finally, this transaction includes approximately 20 buildable acres of land across the three cities to support additional development. On May 5th, we closed on the acquisition of KMT Burr in southern New Jersey for $71 million. KMT consists of two owned facilities totaling 13 million cubic feet, supporting the ports of Philadelphia and Wilmington. KMT also has a transportation business that provides less than truckload services to support its customers in the two warehouses. This acquisition increases our exposure to both new and current customers and is a mix of produce, protein, seafood, and bakery. This transaction grows our New Jersey footprint by 15% and complements our current portfolio in the region, which grew significantly through the agro and halls acquisitions. As we stated when we acquired agro, we continue to find opportunities to build our network in Europe. Subsequent to quarter end, we entered into a purchase agreement to acquire Bowman Stores, which operates a single campus located in Spalding, England, for $102 million. The campus aggregates 10 million cubic feet, along with four buildable acres of land to support additional development. Nearly all of the customers in this facility are new to AmeriCold, and the commodity mix is distributed between protein, prepared foods, and produce. The facility is also one of the few businesses in the UK with a protein export license to China. The asset is located approximately 100 miles north of London and complements our existing Whitchurch site. Please see pages 34 and 35 of our IR supplement for more detail on these three acquisitions. Finally, we continue to be very active on the ESG front. We recently posted our 2020 sustainability report to our corporate website. We encourage everyone listening to review it and learn about the progress on this important effort. As we noted in our report, we implemented 55 sustainability projects in 2020. In 2021, we look forward to pursuing additional sustainability projects, as well as increase our GCCA Energy Excellence Certifications. I'm very proud of the accomplishments across our organization with respect to ESG. In closing, it has been another busy quarter here at Ed Miracle. We continue to work to support our customers and their global supply chains through COVID-related disruptions as we look to return to normal. We thank our associates for their continued hard work and dedication. I'll now turn the call over to Mark, who will provide more details on our results, balance sheet, and outlook for 2021.

Thank you, Fred, and good afternoon, everyone. For the first quarter, we reported total company revenue of $635 million and total company NOI of $157 million, which reflects a 31.1% increase and a 16% increase year-over-year respectively. Core EBITDA was $118 million for the first quarter of 2021, an increase of 13.1% year-over-year. This was driven by our 2020 acquisitions and recent developments over the past year. This was partially offset by lower revenue due to volumes impacted by COVID, higher COVID-related costs, and incremental corporate SG&A related to our recent acquisitions. Our core EBITDA margin declined by 295 basis points to 18.6%. This margin decline was primarily driven by the increase in revenue and NOI from our transportation segment due to our acquisition activity and a reduction in our same-store global warehouse segment revenue. As you know, the transportation segment has lower NOI margins than our primary warehouse business. For the first quarter of 2021, we reported a net loss of $14 million compared to net income of $24 million for the same quarter of the prior year. The net loss was driven by an increase in acquisition and integration costs. As a reminder, these expenses are excluded from Core EBITDA, Core FFO, and AFFO. Our first quarter Core FFO was $63 million, or $0.24 per diluted share. Our first quarter AFFO was $76 million, or $0.30 per diluted share. For the first quarter of 2021, global warehouse segment revenue was $485 million, which reflects growth of 27% year-over-year. Global warehouse segment NOI was $146 million, which reflects growth of 15%. Global warehouse segment NOI margin was 30.1% for the first quarter, a 316 basis point decrease compared to the same quarter of the prior year. The NOI growth was primarily due to our acquisitions and developments that stabilized over the past year, as well as contractual rate escalation. This was partially offset by softness in our same store pool, including reduced throughput due to lower food production and food service volume driven by continued COVID impacts. We are also impacted by lower holdings as compared to the inventory held for export during the first quarter of 2020 and ongoing COVID related expenses. At quarter end, Rent and storage revenue from fixed commitment storage contracts increased on an absolute dollar basis to $307 million from the sequential quarter. On a combined pro forma basis, we derived 36.5% of rent and storage revenue from fixed commitment storage contracts, which is a 420 basis point decrease from the sequential quarter, primarily driven by our acquisition activity. As a reminder, our acquisitions have had a very limited percentage of fixed commitment contracts. The opportunity to commercialize business is part of the value we create through our platform, but this value is realized over time. For example, we are pleased to announce that we recently converted another top five customer to a fixed commitment contract, the impact of which will be seen starting in the second quarter. At quarter end, Our global portfolio consisted of 242 facilities, including the four we acquired from Liberty Freezers. Our total facility count includes 233 facilities in our global warehouse segment portfolio and nine facilities in our third-party managed segment. Now I'll turn to our same-store results in our global warehouse segment. We count a facility as same store if it meets our definition at the beginning of the year, and same store for 2021 consists of 162 facilities. Our same store pool in 2021 now includes the facilities acquired from the Port Crush, Cloverleaf, Lanier, MHW, Novacold, and Newport acquisitions. In the aggregate, these facilities have a meaningful protein component and comparatively low levels of fixed commitment contracts. This is seen in our same-store results. Additionally, our comparables this quarter include the impact in the first quarter of 2020 of both a buildup in protein inventory related to increased export activity, as well as the historic retail surge. We are actively working to commercialize our acquisitions as our fixed commitment structure provides enhanced stability in our results. For the first quarter of 2021, our same-star global warehouse segment revenue was $355 million, which reflects a decrease of 1.8% year-over-year and a decrease of 3.8% on a constant currency basis. Same-star global warehouse NOI was $118 million, which reflects a decrease of 5.2% year-over-year and a decrease of 6.9% on a constant currency basis. Our revenue was impacted by lower rent and storage revenue and services revenue, primarily due to the ongoing impact of reduced food production volume and food service activity, partially offset by elevated retail activity. As a reminder, first quarter 2020 benefited from approximately 6 million of incremental NOI due to elevated inventory and the historic surge related to COVID. same-store global warehouse NOI margin decreased 120 basis points to 33.3% due to the reduced economic occupancy and throughput volumes. For the first quarter, same-store global rent and storage revenue decreased 2.4% year-over-year and by 3.5% on a constant currency basis. This was driven primarily by a decline in economic occupancy. Our same-store economic occupancy was 76.7%, which reflects a decrease of 597 basis points from last year's strong first-quarter economic occupancy, as we were impacted by reduced food production levels, yet stable consumer demand. Our same-store global rent and storage, NOI, decreased by 5.9% year-over-year and decreased by 7% on a constant currency basis. This was due to lower occupancy, as well as increased costs year over year, including increased property insurance expense, higher property taxes, and COVID-related sanitation expenses, partially offset by lower power expenses and embedded rate escalation. Same-store rent and storage NOI margin decreased 247 basis points to 65.9% due to the same factors. Same-store global warehouse services revenue for the first quarter decreased by 1.3% year-over-year and decreased by 4.1% on a constant currency basis. Our same-star global warehouse services NOI decreased by 1.5% year-over-year or 6% on a constant currency basis. This decrease in NOI was driven by fewer throughput pallets and incremental COVID PPE costs and inefficiencies. Sandstore Warehouse Services NOI margin was 9.7% for the quarter, which was roughly flat with prior year. The disciplined cost control embedded in the AmeriCold operating system helped to maintain our margin, given we were able to reduce labor and other service expenses. We continue to work to enhance the diversity of our customer base while growing our wallet share with our key customers. Within our global warehouse segment, our top 25 customers account for approximately 48% of our global warehouse revenue on a pro forma basis. While this is down approximately 959 basis points from first quarter 2020, our actual wallet share with these customers continues to rise. Our acquisition strategy continues to benefit the portfolio with increased diversity. Additionally, our churn rate was approximately 3.5% of total warehouse revenue. Corporate selling general and administrative expense totaled $45 million for the first quarter of 2021 as compared to $37 million for the comparable prior year quarter. The increase was driven by SG&A absorbed net of synergies through our recent acquisitions to support our global platform. We remain on track to deliver the synergies from the halls and agroacquisitions. Now let me update you on our external growth activity. With respect to our development, we invested approximately $70 million on expansion development capital during the first quarter. We are making progress on all in-process developments. We remain on track to complete Atlanta and Auckland, New Zealand on time and on budget. Regarding our acquisition activity, as Fred mentioned, we completed two transactions since the start of the year, and we entered into a purchase agreement for another acquisition, which is expected to close this month. All of these were or will be funded using our multi-currency revolver. In March, we acquired Liberty Freezers in Canada for a total investment of 58 million Canadian dollars, or approximately 46 million U.S. dollars. This transaction translates into a net entry NOI yield of 7%, which assumes the consolidation of the two Toronto facilities at least expiration of the smaller facility in September. Subsequent to the quarter end, in May, we acquired KMT-BUR for a total investment of $71 million. This translates into a net entry NOI yield of 9%. The warehouse business generates 60% of the NOI, and the transportation business generates the balance. Additionally, as part of this acquisition, we are assuming approximately $1.8 million in SG&A, which implies an in-place EBITDA yield of approximately 6.5%. Of this $1.8 million in SG&A, we believe that we can eliminate approximately half over the next 12 months. In addition, we entered into a purchase agreement to acquire Bowman Stores in the U.K. for a total investment of 74 million pounds. This translates to 102 million U.S. dollars and is expected to close this month. This translates into a net entry NOI yield of 6.8%. We continue to execute on our strategic growth plan in Europe. Please see pages 34 and 35 of our IR supplement for more detail on these acquisitions. For a format for these acquisitions, our portfolio consists of 245 facilities. Now, turning to our balance sheet and capital markets activity. We continue to believe maintaining a low-levered, flexible balance sheet provides a competitive advantage as we seek to drive internal and external growth over the long term. In January, we completed an amendment to our credit facility and increased the capacity on our revolver from $800 million to $1 billion. We concurrently paid down the balance on our U.S. dollar term loan A from $325 million to $125 million using the cash on the balance sheet. We did not utilize our ATM program during the first quarter. As of March 31st, we had 252.5 million shares outstanding. At quarter end, total debt outstanding was $2.8 billion. Our real estate debt had a weighted average remaining term of 7.5 years and carries a weighted average contractual interest rate of 3.1%. We had total liquidity of approximately $1.5 billion, consisting of cash on hand, revolver availability, and $388 million of outstanding equity forwards. Our net debt to pro forma core EBITDA was approximately 4.8 times. Now let me discuss our outlook for 2021. We are maintaining our guidance for AFFO per share in the range of $1.36 to $1.46. As a reminder, we look at our business on an annual, not the quarterly basis. We continue to expect that the quarterly cadence of this year will be unique, and we were impacted by a very difficult comp in the first quarter. We have also factored in uncertainty around reopening trends and consumer behavior. At the same time, we know that food consumption remains relatively consistent, and we benefit from the scale and diversity of our portfolio, as well as our strong market share. Please refer to our supplemental for detail on the assumptions embedded in this guidance. Please keep in mind that our guidance does not include the impact of acquisitions, dispositions, or capital markets activity beyond that which has been previously announced. Now let me turn the call back to Fred for some closing remarks.

Thanks, Mark. America remains a mission-critical part of the global temperature-controlled food supply chain. Our global network has produced stable and consistent growth over many years, and we expect it will continue to do so. We also recently took opportunities to complete several acquisitions, and would like to welcome the Liberty, KMT, and Bowman Associates to the AmeriCold family. Finally, we again want to thank all of our associates, especially our frontline associates, for their hard work and dedication. Thanks again for joining us today, and we will now open the call for your questions. Operator?

Thank you, Fred. Before we take questions, you may have noticed we posted our earnings release today at approximately 3.30 p.m. Eastern time due to a technical issue with a third-party website provider. All of our materials are now posted and have been filed as appropriate.

Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star one on your telephone keypad. The confirmation form will indicate your line is in question queue. You may press star two if you'd like to remove your question from the queue. Without just confusing speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment, please. We'll recall for questions. Our first question comes from the line of Dave Rogers with Robert W. Baers. Please proceed with your question.

Good afternoon, everyone. Fred, I wanted to start with you on the protein impact to the same store pool and your overall kind of guidance. Starting with the protein, I think when we talked last year, you had made it, I thought, fairly clear that there was kind of a rolling impact, but it wasn't that severe, and it just kind of happens from time to time. I think your comments today suggest that it has not normalized and won't be normal for most of 2021. So I guess I'm wondering... you know, what changed in that kind of view that you guys had shared last year, if anything? And then I guess the second question is maybe for Mark, is can you give us a sense of what the core legacy cold same-store portfolio delivered versus the contribution? Because you only grew the portfolio by about 20% on the same-store side, and it seems like it might have had an outsized impact. Yeah.

So first of all, on the protein piece, you know, we've There's many products. You know, I think we talk about protein as kind of being the lead indicator. From what we've seen, given the disproportionate amount of protein that came with the acquisition, really all manufacturers have been impacted by a slowdown in manufacturing. So we talked about that the last couple quarters. You know, everybody's affected, anybody that runs a manufacturing operation. is impacted by having to mitigate their line speeds and such. And so as a result, that's eaten into, you know, kind of a physical inventory, which is their safety stock. So think about it. Demand, you know, for the consumers remains steady. As I say, you know, we're always going to eat, right? So that demand has remained steady. The problem is the manufacturers have been unable to keep up with that demand, hence the reduction in our physical inventory. So we use protein as an example because it's been the most public, you know, out there in the marketplace in terms of what's been going on through some of their manufacturing operations and supported by the USDA report. So, you know, it's one industry that does a pretty good job of putting public information out there and talks about the declines and kind of the pressure on that particular part of of the food supply chain. So that's why we were using it as just kind of a barometer to give a sense. As it pertains to the same store pool, again, we did over-index, if you will, on the acquisitions that we made, particularly Cloverleaf, and that's now part of our same store pool. So the impact on that particular segment has been a little bit more than others. Yeah, I will remind folks that, you know, if you kind of go back, you know, we talk about protein, we talk about substitutability and such. This is unique that, you know, COVID is impacting all manufacturers regardless of what they're processing. You know, usually when one protein's down, the other one's up. And it kind of stabilizes through our network. But this is a bit different and unprecedented because it has more to do with just manufacturing overall. Mark?

Yeah. And, you know, I think Fred said it best. If you look at our same-store results and you pull out the acquisitions, the protein-heavy piece, which Fred just discussed, and you pull out what we called out last year as the historic surge, overall, our overall portfolio revenue on the same-store would have been slightly down and then – or flat, sorry – And then NOI would have been slightly positive, you know, in the one percentage range.

Okay, that's helpful. With reiterating the guidance overall, I guess two questions. One is can you give us a peek into April and May in terms of are you seeing kind of continued improvement off of what was maybe a low point in the first quarter? And then, Mark, I guess to get to that midpoint of your guidance for the year, you're looking at about 14% year-over-year growth for the remaining three quarters of the year against a pretty tough comp. big picture, big pieces that contribute to that that you have a lot of confidence in, color there would be helpful. Thank you.

Yeah, I think I'll give a little prelude and then let Mark pick up on it. But, you know, as we've talked about in our prepared remarks, you know, we are seeing, you know, a little bit of an uptick. We're seeing manufacturers start to come back as, you know, the vaccinations are rolling out and restrictions are starting to free up a little bit. So manufacturers are gearing back up. You know, at some point, and this is just the way the food industry works, that inventory is going to get built back up. You know, so nobody's happy with their inventory levels. They're struggling to keep up with retailer and distributor demands. you know, for fill. So, yeah, they're going to rebuild those inventories. So as those manufacturing lines start to get more and more productive, we expect to see that build in inventory. And as we've talked about, you know, the build in inventory and storage is, you know, the more profitable part of our business. And we expect that to, you know, gradually increase as we go throughout the year. Whereas it was down quite a bit last year, it gradually declined over the course of last year.

Yes, and as it relates to the full year and the outlook, I think Fred really said it best in his prepared remarks and his just recent remarks. We're seeing kind of renewed activity from our manufacturing clients, which gives us encouragement that, that we're going to see improved activity as you move throughout the balance of this year. I would remind people we looked at our business on a full-year basis. You know, we knew going into this year that, you know, given all the activity in Q1 last year and the strength, that that was a tough comp. But when we look for the balance of the year, you know, with this renewed activity, you know, we're very confident that we'll be able to deliver within our guidance range.

Fred, Mark, thank you. All right, thanks, Dave.

Thank you. Our next question comes from the line of Manny Coachman with Citi. Please proceed with your question.

Hey, guys. Fred, you sort of just touched on this in response to Dave's question, but maybe I'll ask it a different way. Is there the risk that the manufacturers are actually going to take advantage of this situation, say maybe we were paying too much for the storage of our product before, we've learned to become leaner, meaner, we've got better systems in place, we found spots that maybe we don't need as much product or space or however you want to look at it. And there's a new normal, if you will, between sort of old inventory levels and the new ones.

Yeah, thanks, Manny. Fair question. But the answer is no. Like I said, we talked to all of the food manufacturers. I was just with a couple big ones earlier this week. you know, they are scrambling like crazy to rebuild inventory. So they are failing to meet the needs of the retailers today. Their line fills, so, you know, a customer orders 10, you know, they're only able to fill eight. So their line fills are horrible. They're getting penalized by retailers as a result of not being able to service it. The retailers are upset because they never want a customer to walk into their store and have a stock out. And so that's why the safety stock exists and has existed for decades. So I fully expect it to get back. Nobody's happy with where those levels are. This is not the type of industry that can be run just in time.

Right. And then just in terms of competition in this space, whether that be for acquisitions or for customer agreements, have you seen any changes over the last few months or quarters?

No, it's really been pretty steady. Obviously, on the acquisition front, we run into the usual suspects. I haven't really seen any new entrance into that. In terms of customer contracts, we reported our churn rate again at being at a low 3.5%, and it's pretty steady there. That just goes to show you that we're not losing any of our big deals. you know, to competition. So, as a matter of fact, it's quite opposite most of the time.

And maybe one last quick one for me. It looks like one of these fields came with more transportation services. Is that a business that you'd maintain, grow, shrink otherwise?

You know, I'd say that we're evaluating it. It's kind of a gift with purchase, if you will. So lots of companies aren't pure play warehouse companies. They do have some ancillary aspects of their business. This particular business is focused on consolidation, which is what we believe is the real strength of transportation. And so that's where we're able to pull lots of smaller customers together and create full truckloads going to the retailers and the food service guys. That's the most efficient. It's the most ESG-friendly. That's the good transportation engine that we continue to drive. As for other ancillary, we'll get in there, we'll assess the profitability, and we'll determine how we move forward with it. But by no means do we have a desire to become a transportation company. That is not our core. We are more brokers of consolidation.

Thanks, everyone.

Thank you. Our next question comes from the line of Nate Crossett with Theronburg. Please give me the questions.

Hey, good evening, guys. Maybe just to follow up on the previous questions in form of clarification. So when are you guys kind of underwriting that you expect to see pre-COVID inventory levels? Is it at any point later this year or is it still a 2022 event. I mean, I know it's incredibly difficult, but what is your guidance and underwriting kind of assume right now?

Yeah. You know, as we look at it and, you know, based on the conversation we're having for our customers, we really see, you know, getting close to the COVID level coming into the back half of the year, you know, really going into the seasonal build. Um, And so, you know, we're encouraged, as we said, we're encouraged by the conversations. We're having with our clients. We're encouraged by, you know, what we see and hear them doing in terms of adding additional production lines and really doing their best to try to ramp up production. Because as Fred mentioned earlier, you know, they're struggling to meet their customers' needs. So, you know, we think that was going well for us. And as we said, you know, this isn't an industry that runs just in time and needs. you know, sufficient safety stock through the different nodes to run efficiently.

Yeah, and Nate, I think if you think about our guidance, right, that we're reaffirming here, it's fairly wide, if you will. And when we built that guidance, we did so without being able to pinpoint exactly when we reached pre-COVID levels. We knew supply chains were going to be disrupted over the course of the year. So the way I would look at things is if manufacturers ramp up faster, remember we have 5,000 customers, so all of them are in a different location, different restriction, different type of situation. But, you know, if they all ramp up and it happens faster than we think, that will obviously push us towards the top end. If it lags a little bit and takes a little bit longer to get up to those levels, you know, we believe we'll be at the low end. So, you know, so we think we have that kind of flexibility, and really there's just no lens that we can see other than what we've seen happen in the recent weeks in terms of an uptick that, you know, makes us feel comfortable that we're going to be able to hit the ranks. Hope that helps.

Okay. Yeah, I mean, is there any large disparity between what you're seeing in the U.S. versus Europe customers? Just having to do the vaccines rolling out quicker in the U.S. I didn't know if that's kind of translating to customer behavior for you guys.

Yeah, it's very, very similar. It's shocking how similar it is really around the entire world. So we're seeing the same type of phenomena.

Okay, and then just one quick one on inflation. What are you guys seeing in terms of input costs just for development? And is this going to have any impact on maybe the yields that you can execute on? And then also, if you do have higher build costs, does that kind of impact how customers think about maybe outsourcing more development to you guys?

Yeah, no, good question, Nate. In terms of – I'll take the inflation in two pieces just so we cover them both. The inflation to our base business is pretty nonexistent, really. I mean, if you think about it, we're all labor and utilities, so we don't really have raw materials and those types of goods that you'll undoubtedly see inflation. As we've talked about in the past, you know, labor rates haven't increased yet. I would expect that we'll see some pressure on that, but we do have protections and the ability to be able to pass that on through. So we feel pretty comfortable both on the labor and on the utilities front. As for development, you know, the biggest impact, it's not impacting any of our existing current development projects. However, we do see it impacting some of the new projects that we're working on, and it is definitely having an impact on the cost of that construction. In terms of the returns that we get on that, look, you know, we build all that into our models and we pass it through to try to protect the margin that we want. So, in other words, we will price that into our pricing with our customers and to be able to protect that return on that investment. So we feel very comfortable that we're capable of doing that. As for insource versus outsource, look, all of our customers are going to experience the exact same cost. So it really doesn't change the equation because it's neutral. It's affecting everybody.

Okay, thank you.

Sure.

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

Yeah, thanks. So talking a little bit about the manufacturing side, can you kind of quantify how much has activity improved? I think in the press release it said that activity improved in the back half of 1Q and into 2Q. I mean, how big of an improvement was that?

Well, we really try to stay away from monthly information. I will just say that we're seeing an uptick. Again, we guide on a full annual basis, not on a quarterly basis. And we believe that that uptick is giving us the confidence to be able to deliver within that full year. So volume is picking up. We are seeing it. All signs are pointing to recovery. both from our customers and externally if you look at the macroeconomic climate right now, especially here in the U.S.

Okay. And then I guess will this cause your same store trend to kind of trend towards the lower end of that long-term range? I mean, I guess while manufacturing will pick up, that will help your throughput. I mean, you'll probably regain that throughout the year, but you're probably going to lose the storage revenue, right, from the lower inventories in the first quarter. I mean, how big of a deal will that have on the full year results?

No, I think what we're saying is while the manufacturers pick up, yes, that will help with throughput. But throughput's kind of – I mean, it's not lacking as much as storage, if you will, because, again, the throughput is coming out of storage instead of literally going through the building and not hitting inventory. So we expect inventory to start building back up as the manufacturers come up. We think that they're going to produce pretty aggressively to refill those stocks.

So the lost inventory revenue, though, that you had is one Q from lower – the lost storage revenue is from the lower inventory, one Q. I mean, that's the bigger margin, right? So that's something you're not going to be able to regain, but the throughput you'll be able to regain on the full year result, at least.

We'll be able to regain on the storage as well, if all things go as what we're seeing, because if you recall, last year it was a steady decline of physical inventory over the course of the year. So, you know, we'll see an opposite trend this year as that recovers.

Okay. And then can you remind us about the J curve for acquisitions? I mean, I know that you're talking about the acquisitions were heavily protein-related, so I guess those trends are going to be lower probably in the second year after acquiring them. But how should we typically think about that? So Portfresh, for example, had a net entry NOI of 6.7, but a stabilized NOI between 9% and 12%. I mean, how long or, I guess, what does that yield look like in year two and three before you get to that stabilized yield in year three?

Yeah, I think if you look at our supplement and the guidance, you know, our acquisitions really don't have a J curve, right? So the J implies that you're going to go negative or below that yield. The way that we guide on acquisitions is that, you know, typically there's kind of a three-year run, right? So the first year is relatively neutral-ish. So we are investing in the business as well as taking costs out of the business. And then in years two, three, we start ramping up 100 to 200 basis points on top of that yield. So that's our typical guidance and typical trajectory that we see with all of our acquisitions. That said, I will call out that we did give a little bit different guidance on the agro deal where we made it a five-year. So we said two years kind of even on the inbound yields. and then ramp up that 100 to 200 basis points over the course of those following three years. And the reason why that was different is just, number one, the size and the number of entities contained within AGRA, as well as, you know, at the time that we did that acquisition, we were starting to hear things, and sure enough, it happened with COVID. And then, I'm not starting to hear things, we were in the middle of COVID. So we weren't sure exactly when we were going to be able to get over there and how aggressive we would be able to get after it. So that's why we gave ourselves five years on that integration effort. Okay, great, thanks. Sure.

Thank you. Our next question comes from the line of Kimbin Kim with Truist. Please proceed with your question.

Thanks. Good afternoon, everyone. I was wondering if you can go back to the comments about manufacturing output being lower for your top tenants. Just help us understand what that really means.

Yeah.

So not for your super volume, but, like, what are we talking about here in terms of, like, how much lower and how much has that actually improved to your tenants in April? Yeah.

Yeah, so if you think about it, I don't have exact numbers here, but I would point you and tell you to take a look at some of the USDA information that's out there, which talks about pork stocks and beef stocks and poultry stocks and et cetera. And I think if you look at something like pork, I don't have it right in front of me, but I want to say their stock, their inventory levels are like 30% down. So that is a function of the manufacturers not being able to produce to meet the demand. So what is happening is they're, again, I'll keep using the phrase, eaten into the safety stock. So their inventory levels that are in our storage are meant to do two things. Number one, to be able to make sure that they're able to deliver to customers as they need it and have that inventory ready to go. within a moment's notice. And number two, to be able to weather storms, literally like hurricanes and disruptions in the marketplace, plant shutdowns and that type of thing. So that's why they have inventory in the first place. And so, you know, what they're being impacted by is an elongated plant disruption, if you think about it. Let's talk about that hurricane effect, right? So it's elongated. Instead of just being a month, it's a year. So if consumer demand is the same, let's say the demand pool is 100 units, and they have 30 units in inventory, and the manufacturers are only able to produce that 90 units, you know, they're 10 units shy of the 100 in demand, and so that 10 units comes out of the physical inventory, which is our safety stock, or their safety stock, our physical inventory. So that's what's happening. So due to the lower production, not only do I see lower throughput coming through from the manufacturers, but the bigger impact is I'm losing inventory space. Now, that gets mitigated a little bit with those customers that we have fixed commitments with. So we're protecting their space and locking in their space. But as we've discussed, that's not holistic around all 5,000 of our customers and all 100% of our physical inventory or economic inventory. So that's kind of the dynamics at play here at QPEN.

So using that particular example, if a pork manufacturer's output is down 30%, I guess it makes sense that to your business the impact is probably greater than 30% because of the inventory drawdown. Am I thinking about that correctly?

Probably a little bit less. It kind of goes the opposite way because they're actually able to produce some, you know, product, but they're taking down the inventory, right? Net-net. Net-net. Yeah, net-net is down.

And you see that in a macro basis in what the USDA is reporting, so. So us as consumers, we continue to eat. You know, you hear Fred talk about his famous saying, you know, the consumer demand is stable. But, you know, what we have seen is the fact that the manufacturers haven't been able to keep up to support that steady demand, which is why we're seeing our safety stock, the fiscal inventory within our network, be drawn down in order to satisfy that stable demand.

And that's the beauty here. If you think about our models, You know, most companies, when they have down periods of time, it's because the demand is not there. The demand is here. So the demand is steady, and it always will be because we're talking about food and food consumption. So that's the beauty here. We're just artificially hampered right now because of the manufacturer's ability to be able to produce, given the COVID environment that we're in. Again, As we come out of COVID, as things start to loosen up, they'll start to get back up to production and the business snaps back. So that's the positive outlook that you're hearing from us.

And, Kevin, just also keep in mind, most of our acquisitions aren't going to have fixed commitments in place. Right. And so as we commercialize the business, like our legacy business, you'll see those fixed commitments come into place.

Okay. And the second part to that question, when you talk about, these type of tenants showing improvement, what kind of magnitude are we talking about? So I don't mean, you know, your guidance for two-foot pallets. I'm talking about from your tenant perspective.

Yeah, no, look, as Fred mentioned, they're struggling to meet their end customer demand, so they're trying to get their inventory production back where they can safely satisfy their customer demand and the fill rates required to meet theirs. contracts with their end customers.

And I don't know, you know, look, again, 5,000 customers. Some customers are going to be a little bit more skittish and they're going to over-index. I think you'll see them, you know, go with larger inventory pools as we head into the future. I would say as for the rest of the customers that don't over-index, at a minimum, they're going to get back to their norms. I don't see anybody, and I can't think of a single customer, that is happy with where their inventory positions are and feel that they could run a lower inventory at this point.

Okay. Thank you very much. Sure.

Thank you. Our next question comes from the line of Joshua Dennerle with Bank of America. Please proceed with your question.

Hey, guys. Hope you're all well. In the past, You've mentioned some inefficiencies from social distancing within your warehouses. Does your guidance assume that those inefficiencies hold throughout the year?

Yeah, we did embed those into our plans. You know, both the inefficiencies with labor as well as the extra PPE costs associated with sanitation and some of that aspect. As we've discussed in the past, we believe some of those practices that were actually put in place are best practices for us to carry forward. We think that it will help us in the future with absenteeism around things like the flu. So the more sanitized areas that we can have in safer work environments, we believe, will stem turnover and help ensure that we have our regular employees at work. And when our regular employees are at work, we're more productive. So, you know, so a lot of those are going to stay with us, and we will embed that whole cost structure and impact into our activity-based costing models, which we already have. And so we price all new business accordingly.

Then the other thing I would add is this was Q1 of 2021 was the last quarter where we were comping a period this year where we had COVID-related PPE and sanitation costs. more materially than last Q1 we did not. So going as we move into Q2 and beyond, those costs really, you know, we're sort of in our cost structure.

Okay. That's good to know. Are there any other kind of moving pieces that we should be aware of for same store for next quarter? Any, like, face effects, the holiday shifts?

The one big thing I would just call out in Q2 of last year is the quarter that we paid an appreciation bonus to our frontline workers. So that was just something I would just call out. I think it was an aggregate of about $5 million for the total company.

So really, outside of that, I mean, the business, you know, every other aspect of the business is really normal. It's simply a function of getting manufacturing capacity back up. Okay.

And then maybe on – you mentioned that if you normalized for, like, a pandemic and the change in the same store pool that, again, I would just be down a little bit, your revenues would be flat. Is there any way to quantify, like, how much of that – normalization would be driven by the pandemic versus, like, the change in same-store pool?

Yeah. So I think we actually tried to do that. And just to be clear, as Fred mentioned in his prepared remarks, adjusting for those two items, you know, stripping out the acquisitions and adjusting for kind of the COVID-related upside we saw last year, revenues would be flat and a lot would be slightly up. You know, as we said, the COVID surge impact, you know, we quantified that as roughly about, you know, half of our overall growth last year. If you think about the impact, it was about $6 million that we have called out related to Q1's results last year.

Yeah, so think about that. I mean, outside of the surge, the surge, if you will, You know, the first quarter last year was relatively normal course, a little bit of buildup in some inventory for export anticipation to China. But, you know, it was, for all intents and purposes, until the end of that quarter, a fairly normal quarter. And then we had the surge that kind of really, really boosted us up, right? So if you think about that, stripping that surge away and looking at like for like, same store, to that first quarter, the fact that we're up on NOI with so much less physical inventory is actually pretty good performance. So, you know, because, again, we're looking at a full quarter of COVID impact this quarter versus really no impact last year other than a positive. So the fact that that's why I stripped that out to say, hey, look, You know, we were actually positive on NOI with that much less physical inventory.

Okay, awesome. And then maybe one just final one. I think the Toronto acquisition, if I read the press release correctly, it sounded like it came with warehouse operations. Was that like actual warehouse, like regular dry industrial boxes or something else?

No, no, they're all temperature controlled.

Yeah. Oh, okay. Okay. All right. Thanks, guys. Appreciate the time.

Thank you. Our next question comes from the line of Vince Cabone with Green Street Advisors. Please proceed with your question.

Hi. Good afternoon. How do you think cold storage cap rates have changed over the past six months? If you were buying the Hall's portfolio today, for example, how different do you think that cap rate would be?

Over the last six months, I've Well, pretty, yeah, I would say pretty flat to maybe at best 25 base points tighter. As you can see, there's a lot of interest in our category and our space, and I think you've seen that. You can see some of it as you look in our M&A results and you go through the different deals and you see the overall yields. supply range.

And just to clarify, 25 basis points lower or higher? Sorry, I wasn't clear on your comment.

Lower.

Got it. And then one more. Can you just provide an overview of the supply landscape today? Are you seeing an acceleration of supply nationally, and are there any markets where overbuilding is a concern?

Yeah, no. I mean, look, the industry as a whole still remains very, very disciplined. There's There's some noise out there from a couple developers here and there, but very few shovels in the ground. There's a lot of conversations going on, but like I said, the barriers into this industry are very, very difficult. So nobody's starting up new cold storage companies unless they're legacy cold storage individuals. And the reason for that is, again, You know, we talk about food safety being so critical and so fundamental. We talk about brand recognition being so global. You know, food manufacturers aren't going to entrust a newbie into this industry and put all of that at risk and stake. So you don't see that happening. The developers that are talking about developing, remember, the difficulty here is our business is not just about the assets. It's about the full business. It's about the services and the infrastructure. And they go hand in hand. So developers building infrastructure doesn't really do a whole lot and isn't worth a whole lot unless somebody's running it. And the two largest players really aren't interested in leasing space. We're more interested, obviously, in owning our infrastructure. And we're not really interested in buying from developers, quite frankly. because we have our own builders to build, and we don't have to pay a middleman. So I just don't see – I see a lot of talk about it, as Mark said. There's a lot of interest in our space, and I get it. It's just more complex than building by industrial builders.

Thank you. That's a really helpful color. Maybe if you could just provide a ballpark estimate because supply data for the sector – you know, tough to come by. Like, where do you think construction is as a percentage of, you know, existing stock?

One-ish, one and a half percent maybe with all the development going on. And remember, we're probably, we're the majority of that development right now. I mean, we are, I think, developing more than anybody else right now in terms of active projects. You know, there's a fair amount of construction going on. But if you If you look at the GCCA, they're probably the best reference point in terms of talking about what that existing landscape looks like and the growth year over year. They can probably give you the best input.

Great. Thank you.

Sure. Thanks, Ben.

Thank you. Our next question comes from the line of Mike Mueller with J.P. Borgen. Please proceed with your question.

Yeah, hi. I think you mentioned in the comments that you picked up a top five customer and moved them to fixed commitment. I'm just curious, out of the top 10 or so, how many aren't on fixed commitments?

Two. You know, if you look at our top 25, it's probably five. So, yeah.

Got it.

And some of that is – yeah, go ahead. Sorry.

Oh, no, sorry.

Go ahead. 88%, Mike, if you look at our most recent deck, utilize fixed commits.

There you go.

Of our top 25.

And when you're thinking about, I guess, Europe and just how that's going, can you talk about the receptivity there?

Yeah, I mean, so far, so good. I mean, I would say that most of our work has been done remotely. A lot of it is getting alignment internally. And I would say that we're very focused, you know, kind of inwardly focused right now on SOX compliance and kind of getting all of that rolled together, getting our structure in place organizationally. And that's going really well. So we are definitely making progress there. We're starting to have those conversations and get those introductions to the customers. I think I mentioned on the last call that we're very excited. We've got two individuals that know the AmeriCold playbook by the back of their hand, one from the operations side and one from the business development side. Those two individuals will be going into leadership roles in Europe to help lead that effort. I think by having that expertise is going to help us make progress a bit faster than if we were to try to, you know, manage that from the states and educate and train the European team on how to do that. So having somebody on the ground full-time every single day, 24-7, I think is going to help move us a bit faster.

Got it. Okay, that was it. Thank you. Yeah, thanks.

Thank you. Ladies and gentlemen, there are no further questions. I would like to turn the conference back to Fred Bowler for closing comments.

Thanks, everyone, for participating this evening. I apologize for the minor snafu earlier today with the press release getting out there. Hopefully that doesn't cause any issues. So, look, the business fundamentals remain intact. And I think that's the key message that we want to get through today. Our business, it's imperative that you look at it on a full-year basis. Last year was a perfect example as to why that is so critically important. This hit us out of nowhere last year. After the first quarter, we repeatedly confirmed guidance and delivered that guidance. So we obviously felt some pressure this quarter as compared to the first quarter because the first quarter last year was a non-COVID environment until the last couple weeks. And this quarter was a full COVID environment. That said, we are bullish and optimistic as to the way that the business is seeming to pick up, the way manufacturers are starting to get back to normal, the way the You know, criteria, the stay-at-home orders and all of those things are starting to loosen up around the United States. It gives us great confidence that we'll be able to deliver again in the year. So, again, on the strength of steady, stable consumer demand. So thank you again this evening. Have a great night.

Thank you. Ladies and gentlemen this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.