Q2 2020 Americold Realty Trust Earnings Call
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As a reminder, this conference is being recorded.
It's now my pleasure to introduce your host Scott Anderson <unk> Senior Vice President of capital markets. Thank you you may begin.
Good afternoon, we would like to thank you for joining us today for American 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 to any investor section on our website at www Dot Americold Dot com.
On today's call management's prepared remarks any 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 discuss 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 can speak only as of the date, there 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 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 at today's prepared remarks have been rounded to the nearest million.
But the exceptional per share amounts.
This afternoons conference call is hosted by Miracles, Chief Executive Officer bread bowler.
And executive Vice President and Chief Financial Officer, Mark Smirnoff.
Management will make some prepared comments.
After which we will open up the coal to your questions.
Now I will turn the call over to Brett.
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 come up on the continuing affects of Carbonite team on our business.
Mark will then review our quarterly results in more detail and discuss our balance sheet and updates to our guidance for 2020.
After our prepared remarks, well 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.
Well not workup temperature control infrastructure and the services, we provide our mission critical part of the food supply chain.
We are committed to supporting our frontline associates, who protect the integrity of the supply chain. They our greatest asset and I've worked tirelessly since the outbreak of cope with 19 to help ensure grocery stores are stopped.
So the started this pandemic, we've invested in extra sanitation and P. P social distancing protocols and other measures designed to promote health and safety.
In addition, this quarter the thank our frontline associates for their hard work and dedication we paid an appreciation bonus up $4.3 million.
As anticipated our second quarter results show some level of normalization after the first quarters unprecedented search and retail activity due to the covert 19 pandemic.
In the second quarter Art Global warehouse same store pool generated total revenue growth and I know why 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 baldness 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 declined after the consumer stockpiling search late in the first quarter.
The stabilized late in the second quarter, but remains above pre cobot.
Levels.
Additionally, now we have begun to see individual states reopen we've seen some modest pick up in foodservice, particularly in quick service restaurants.
That said overall food service activities still remains well below historic norms.
As we previously stated there remains uncertainty around the progress of individual states reopening and the impact the near term and long term consumer behavior.
With respect to protein manufacturers, we saw some production plants temporarily closed during the second quarter, but all a sense reopened.
In certain cases, they are not running at full capacity.
Outside 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 work to help our customers execute their business plans.
In May we announced a new 325 million dollar fully automated build to suit development project for Ahold Delhaize.
The second largest gross around the world and the fourth largest grocer in the United States.
We are building and will operate two stated the art temperature control retail distribution centers, one in Connecticut, and one in Pennsylvania that will support the local brands about whole Delhaize, you out say 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've discussed previously grocery retail is a key growth sector for americold as evidenced by this project without we're 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 first quarter of 2021.
At the three expansion projects that we purchased from cloverleaf, we're fully operational and nearly all Powell 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 power 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 cobot 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 pellet 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 up our Boston, Massachusetts facility for a sale price of $27 million to a local developer who will be repurchasing the property.
We recorded a gain on the sale of $19.4 million and expect to redeploy the proceeds into a 10 31 exchange.
We intend to move the customers from that facility to other facilities that we have in the region.
Additionally, post quarter end, we acquire two facilities, which we previously leased in Auckland, New Zealand for 12.3 million dollar New Zealand dollars.
We also sold a non core Corey 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 and Mansfield taxes, and least additional facility in Grand Prairie taxes.
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, a major market capacity by approximately 30% and expand our protein capabilities, including our wallet share with one of the leading global protein producers.
We expect to complete the SEC acquisition subject to customary closing conditions in early September.
The cope with 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 here.
Well the greater economy may be in for a bumpy recovery our business is naturally stable on an annual basis and design for resiliency.
First demand remains consistent what people eat and where they 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 ships and consumption behavior and specific commodity disruptions.
Second we may continue to see ships and the endpoint of consumption as individual states are in various stages of reopening.
Recall that typical consumption has historically been serve drone even balance of foodservice and retail.
Americold infrastructure service, both parts of the food supply chain, while the mix continues to be tilted toward grocery we're well positioned as we move forward to support any mix.
Finally, we would remind you that growth in E commerce, which many of us so seeing in our own households in real time does not meaningfully impact americold.
Whether purchased online or in person grocers still move through the traditional supply chain infrastructure.
Grocery stores due to their location with targeted populations remains 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 and our business remain high over decades, we have built a fully integrated global that work of temperature control infrastructure with deep customer relationships as well as proprietary technology and processes.
We have also spent many years professionalizing in commercializing our business, including our fixed commitment model, which helps to stabilize our revenue streams and ensure customers have space when they need it.
A 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 will provide updates on our actual performance as well as certain metrics on a constant currency basis.
I'll also highlight areas of our business that were impacted by the ongoing cobot 19 endemic.
As Fred mentioned, we paid a frontline appreciation bonus of 4.3 million in the quarter, except where noted all of our result include the impact of this bonus.
For the second quarter, we reported total company revenue of 483 million and total company and Hawaii, a 128 million, which reflects the 10% increase and a 6% increase year over year respectively.
Excluding the frontline appreciation bonus total company and all I would have been 133 million and 9.5% increase year over year.
For 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 obit 19 related costs and the frontline appreciation bonus.
Excluding this bonus core EBITDA would've been 105 billion, 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 the prior year.
Our second quarter core FFO was 55 million or 27 cents per diluted share.
Our second quarter, AFFO was 61 million or 30 cents per diluted share excluding the frontline appreciation bonus core FFO per diluted share would've been 29 cents and our AFFO per diluted share would've 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 2020, Global warehouse segment revenue was 372 million, which reflects growth of 10.1% year over year.
Global warehouse segment, and Allied was 120 million, which reflects growth of 5.5%.
Excluding the frontline appreciation bonus.
Global warehouse segment, an NOI would have been 124 million, which reflects growth of 9.3%.
Global warehouse segment and a wide 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, and a wide margin would've been 33.4% at 24 basis point decrease.
Oh I growth was primarily driven by improvements in our core business accretive acquisitions same store economic occupancy growth and the benefited the Americas 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 bona and the incremental expense we incurred to address over 19.
The incremental Kobin 19 expenses include higher temptation, MPP costs and higher labor costs.
They also have added certain inefficiencies due to social distancing staggered schedule and other changes to processes.
Let me note that while these cobot 19 related supply cost inefficiencies are new this year, we fully expect and to be incorporated into our cost structure going forward.
As such we had factored them into our underwriting.
Overtime, we expect to offset these costs as we signed new business and renewals for existing business.
In the second quarter, we incurred 1.3 million of new sanitation cough, and we incurred point 4 million of new pp call.
Please note the new sanitation cost are recognized in the other facilities cost line item and the new pp costs are recognized need other service cost line item in the warehouse segment results.
At quarter end 270 million of our annualized written storage revenue was derived from customers effect commitments storage contracts as compared to 259 million for the first quarter 2020, and 232 million for the second quarter 2019.
As a reminder, our recent acquisitions have a lower percentage of fixed commitment contract as a percent of written storage revenue.
We view this as an opportunity as we bring these acquisitions to Americold commercialization standards.
For the second quarter 2020, 41.4% of written storage revenue was generated from fixed commitment storage contract on a combined pro forma basis, which is a 130 basis point increase over the sequential quarter.
Our customers on fixed commitments soft significantly less disruption due to covert 19, and we continue to work with current and potential customers to put the structure in place.
As of June Thirtyth 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 boffin asset completed during the second quarter.
Now turning to our same store results in our global warehouse segment, which reflects 135 facilities.
As a reminder of facility accounted at same store if it meets our definition at the beginning of the year.
For the second quarter 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 and ROI 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 and align margin decreased 68 basis points to 32.7%, excluding the frontline appreciation bonus our annualized 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 written 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 written storage and ally grew by 3.3% year over year or 4.5% on a constant currency basis.
The NOI growth was result of the revenue metric cited above.
Additionally, the satellite growth was driven by continued portfolio management.
Efforts to grow our fixed commitments storage contract disciplined cost control through the Americold operating system and the impact of currency translation on costs from the international segments.
Same store global rent and storage and why margin decreased 92 basis points to 65.9%. The margin compression was driven by higher property insurance higher property taxes and increased temptation cost Cobiz 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 in foodservice 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, and Allied 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 covert 19 and pp costs.
We also saw lower overall throughput volumes following the first quarter surge.
Excluding the frontline appreciation bonus our same store global warehouse services and the like growth would have been 1.1% on a constant currency basis.
Same store warehouse services and a wide 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 and Hawaiian 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 base to account for approximately 58% of our global warehouse revenue and who I've been with us on average for over 30 years.
Our recent after the snow 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 SGN eight totaled 32 million for the second quarter 2020, as compared to 33 million for the comparable prior year quarter, primarily driven by the reduction of travel expense due to covert 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 I'll hold built to suit project in Connecticut in Pennsylvania.
As spreads discussed, we're making progress on all previously announced developments.
As a reminder, our supplemental has additional disclosure unexpected 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 developers 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 that closed in early September the own Mansfield facility is 8.6 million cubic feet of approach.
Probably 27000 power positions and the least Grand Prairie facility is 5.2 million cubic feet off approximately 18000 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 and ROI yield. Please see page 38 of our Q2 2020 supplemental for more information on this acquisition.
Second.
In July we acquired two facilities and often New Zealand that we previously leased.
Our 12 million New Zealand dollars, we purchased two facilities, one consisting of the building an underlying land and one just the improvement subject to a long term ground lease.
Implied cap rate on this acquisition was approximately 11.2%.
Third we solve noncore asset in July Alliance, some Corey that was adjacent to our facility located 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 core it was classified in its own business segment, which contributed approximately 500000 and ROI for the 12 month period ended June Thirtyth 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 financed 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.
This 3.6 million shares issued approximately 473000 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 several that anytime up until July Onest 2021.
We intend to use these proceeds to fund a portion of our recently announced acquisition activity.
As of June Thirtyth 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 as 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 about standing equity forwards.
Our net debt to pro forma core EBITDA was approximately 4.1 times.
Finally during these uncertain time, we have maintained our days sales outstanding or DS. So 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've looked at our business on an annual basis.
As we've seen for many years food consumption remains fairly confident 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 covert 19 with certain related cost partially offsetting that growth.
Additionally, we continue to see lower throughput volume associated with product ultimately destined for foodservice 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 states reopening plans and the resulting consumer behavior.
That said our business is naturally stable on an annual basis and design for resiliency.
That reason, we're raising our AFFO per share guidance at the low end from our previous range of $1.22 to $1.30.
To now a $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 translations 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 is prudent previously announced now let me turn the call back the credit for some closing remarks.
Thanks Mark.
Summarize our call today Americold continues to demonstrate that it is mission critical part of the temperature control food supply chain.
As expected our second quarter showed a reduction in throughput after our first quarters unprecedented surge.
Please remember that we look at our business on an annual basis and has been stable and consistent over many years.
We continue to drive internal same store growth through our commercialization efforts and 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 think 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.
Okay.
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One moment, please while we Paul for your question.
[music].
Our first questions come from the line of Kevin Kim with Truest. Please proceed with your question.
Thanks.
Good afternoon guys.
Maybe we can start off higher level, what what would you say is the biggest challenge to your business today.
Well.
Thanks Ki bin.
I think part of it is just predictability in terms of flow right.
Yes, the state reopening plans.
Our kind of all over the place and as you know every states in a different position.
How restaurants opened at how consumers.
After that.
You know is difficult to judge.
So that exact precise predictability in terms of week to week month to month that even quarter to quarter flows can be.
Somewhat of a somewhat of a challenge we don't control the volume as you recall, Mark and I have said a number of times that.
It's our customers customers that are actually influencing the way volume flows through.
Our facilities, so that that that poses a bit of a challenge that said I'd just reiterate that on an annual basis, we know that that all works out in a few if you recall back in the first quarter.
Kind of compared what has occurred at the end of the first quarter two a hurricane.
Where there's a massive surge if you will overnight on announced that kind of swept the the retailers and and created a demand surge if you will.
Those those things are tough challenges to predict but at the end of the day, it's all about pulling pulley volume forward because.
Again on an annual basis.
Ill.
Individuals individual consumption remains pretty much in check and pretty stable. So over the course of the year at all tends to.
To work out.
Okay, and thinking with that topic. Your annual guidance for same store revenue is 2% to 4% Hasnt changed for a couple of quarters here.
That implies that your cancer revenue accelerates to about 1% growth.
Any particular reason line that is that would be the case.
Okay.
We're sitting keep and if you look year to date were roughly at 4.9% constant currency growth about 3.3% growth so were in line.
Please remember that the back half of the areas you. As you look is typically include that the volume associated with both Thanksgiving and Christmas holiday for the tends to be significantly greater volume I think that's one of the areas, where where as we look forward into.
Our waiting to see how that will play out well people gather together will be as big things are all people eat remotely.
So those are things were looking at as they kind of lineup exactly with what Fred saying is states reopened as people are able to get together as consumer preferences move and change those are things that will impact our our view on the back half of the year, but as you see overall in the.
Quarter.
Strong growth year to date strong growth obviously some of that is obviously helped by that volume. We saw on Q1 from co bit, but overall the business is performing well and not dissimilar to what we'd expected to in this environment.
Just a follow up on that.
Yes.
Current pace of reopening.
And local guidelines stay in place for rest of the year and let's say.
Thanksgiving and correct Mark become less of a family gatherings situation.
Have you thought through what what does that mean for your business.
Yes.
Look I think.
Even with Thanksgiving and Christmas and 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 Chris.
The question is how to all of the food manufacturers flow their goods and it around that time and are they are they going to flow those goods differently and I don't think you can give that answer out of a conagra Kraft Heinz Alam was southern Mccain.
As to exactly how that flow of goods is going to to occur.
Yes to your point if it makes stays the same thats, a big enough and something that I don't think that we want to necessarily speculate on but if if the same balance between foodservice and retail remains where it is.
So clearly we get a little bit more of a benefits.
Bye bye larger retail volumes on the services side, not not necessarily on the storage side.
But more throughput through our retail distribution centers does does equate to more revenue, albeit a lower margin revenue, but still more more cash flow more and ROI.
But again trying to predict that.
Is not something that I think we're the best positioned to be able to do other than the reinforce that over that long period of best 12 month period.
We're pretty confident that that consumption will will come in as planned.
Okay. Thank you.
Sure. Thanks, Kevin.
Thank you. Our next question is coming from the line of Dave Rodgers with Baird. Please proceed with your questions.
Yes, Mark Fred Good evening, Thanks for all the information on the call I wanted to kind of go through volume a little bit more credit the into your comment you had said as expected volume was down and not sure the market anticipated volume to be down and so I guess I wanted to dive a little further deeper into the 3% decline year over year in pallet volume throughput volume can you give us.
And for.
Obviously March was strong, but I think if you look at Reed April and May also seem to be strong. So can you give us a sense sequentially, where that was how much was protein and how much was maybe colvin related inefficiencies on the revenue side for volume.
Yes, a couple couple of things if you recall the the analogy I gave first quarter.
As I talked about that hurricane effect, right and I talked about this this huge surge I mean people swarm the grocery markets in cleared out 30 days of inventory.
Nobody need to 30 days of inventory immediately right.
And so like a hurricane as I explained that my example.
Last quarter when when that happens, there's usually a law that follows it and that and they kind of comes back at the stabilization.
Couple of weeks later, and what I said as it was going to be hard to predict and understand exactly how quick that would stabilize because I don't know how much bridge writer and freezer capacity individuals have at their home and who actually did that hoarding right. So very difficult to predict but we knew that there would be a low volume.
And that it would come to 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.
As retail kind of stabilized, albeit much higher than pre cope at 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 as foodservice continues to be down so.
That coupled with the fact that yes on the protein standpoint.
Yes, Youre, you'll recall me talking a lot about the plant shutdowns in the fact that it has on US overall I think what we've proved this quarter is indeed, the power of economic occupancy in our fixed commitment process, you know that from a storage standpoint, we're protected and we're protecting our customers on the.
On the volume or the space that they need during critical times, but because of those plant shutdowns you had reduced throughput and so if that is that throughput.
Induction and protein coupled with the throughput reduction at the beginning of the quarter due to the end of the first quarter purchase that really that's the bulk of what impacted us from a total throughput standpoint.
And to tighten as comment that moving into the third quarter of retail is going to back slightly above protein should no longer I guess be short is plants are coming back to full capacity in foodservice seems to be recovering I guess would you agree with that last statement.
The second half of the would seem to be much more of a comparable year for you guys with without the risks that may be we saw in the first through the second quarter.
I think it will definitely be more stable.
I was asked by someone about what if Theres a second Serge I don't I don't think don't be a second surge at least.
Well it won't happen like the light switch that happened at the beginning of the year. So I think it will be more slow and steady as foodservice ramps up.
Obviously that will start to consume and overtake some of the retail volume and that will come back down into all bring it back of normality. The question is how long.
Is that going to take and where's it going to stabilize if it was 50 50.
Foodservice retail pre tow bid, whereas that going to settle when this is all said and done that that is still a question that I don't think anybody has the direct answer to.
Last from me on the cost side of the equation the performance bonus and then the added costs 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 health care line items that.
Of note through the first half way through August well, let me, let me answer the first part and I'll, let mark answer the second part.
In terms of the incentive itself. It was it was paid out very late in the quarter.
Yes. This is a fluid thing I mean us this event is literally daily.
We're watching and seeing what's happening in the marketplace understanding where we need to be competitively to attract.
With the workforce to our our work watching what our food manufacturers and retailers, we're doing with their incentive pay now there's was more hazard pay driven.
We don't believe that we have an environment that that's hazardous just because of the nature of our business but.
We do appreciate the fact that our folks came and came in with pride.
To be able to service our local communities and yes, we just filed it was a covenant upon us to recognize them for that effort and we did it in the form of other onetime bonus some again those those things do those decisions don't get made lightly.
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 came with the decision at the backend. So mark you want to talk about healthcare yes.
Overall look at health care overall healthcare is consistent with our expectation for the year. If you look at the the underlying data around the case is obviously a little more cost associated to covert are covered 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 healthcare.
I think the team has done a very good job in terms of making sure they're operating in the in a very disciplined manner, even more people have had to work extra overtime and other things that work through this difficult environment and so they've done a very good job managing our workers comp costs as well. So we're very pleased with that we're not seeing major moves.
And those costs on items.
Thank you built for all the added code.
Yes, so prototype.
Thank you. Our next question is come from the line of Eric Frankel Green Street Advisors. Please proceed with your question.
Thank you very much.
Just to get a little more color on that production advantage facilities than what you described that some some short shutdown to some production plans for some of your customers. How did that typically impact your warehouse services revenue I understand you have to contract underwritten storage side, we could be under good to understand how that shutdown or slowdown.
Yes, it's still in APAC and overall results.
Yes, actually actually it didnt just impact the production advantage facilities that actually ripples through the supply chain right. So when the plant is shut down.
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 moves between the various nodes of the supply chain. So less volume equates to equates to less services overall again thats the lower margin.
Part of our business on the service that we provide that helps to create the stickiness of keeping people within our infrastructure.
But that's that's what happens is any 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, we sensed any chance you can just provide a little bit of math of how much I might have and capital resolved overall results in terms of production advantage and retail.
Yeah facilities.
I'll, let mark try to try to all I would say is multi variable and volume has offset in other and that's one of the thing that we pride ourselves and is because of our diversified portfolio usually when one one part of the supply chain is down.
Like if if pork is lower due to the shutdowns other proteins tend to pick up so while those plants were down other plants were up while foodservice was down retail was up so the benefit of our diversified portfolio is it all kind of balance itself out in this multi variable.
Supply chain, but mark I don't want to add more color and then yes, I think Fred you really hit its multi variable.
Finally, I think you know shouldn't be any surprising the production shutdowns for all over the news we talked about last quarter. We knew we set we would see lower inbound volume, we're really pleased though with how well.
Our our clients really got back there from operations back to work and I know many of them are ramping and working toward going back to their full production. So hopefully I look at it this way from the consumer perspective, hopefully people on the call are seeing at the scene that theres, an improved availability of product throughout the supply chain that tells me the supply.
Chains functioning and healthy.
That's what we're seeing but on the on the overall volume is definitely it's consistent with exactly what we thought we'd see this quarter given the background work.
Okay. Thanks, not just.
I'll do one more quick quick question I'll jump back into queue, just on the Boston facility, obviously sounds like it's a good deal.
Look like or some type or not for for an alternative you said thats not cold storage, but is there any thoughts to the value of keeping the types of.
Facilities that are close into urban centers as because food food supply chains might evolve over time is named those facilities prove especially valuable.
Kind of kind of mixed.
Yes to answer I would say that for the most part again, we continue to access accentuate that last mile delivery as best facilitated through your local grocery store and.
Thats, where we see the predominance of that type of activity.
But there there are those niche opportunities right.
Of of inner city or infill types of opportunities I don't think at the predominant.
Aspect of the food supply chain, but it is it is certainly relevant that said this facility in particular would not be a facility that's.
I would put a lot of high volume high traffic type of activity in its more of an old style warehouse, where its multi level type of situation. So great for cold storage, great restoring slower moving slower turn type of product not exactly what you would.
Call in infill type of location for high speed cakes picking are each becky.
Very helpful color. Thank you.
Yes sure. Thanks.
Thank you. Our next question is coming from the line of Michael Carroll with RBC capital markets. Please proceed with your question.
Yes, Thanks, Frank can you talk little bit about the in the warehouse acquisition, I guess, particularly start with the demand steels property I.
I believe AMC had a few other additional expansions that they were pursuing one that's supposed to be completed this year in one next year I guess are those projects tend they have been completed or they currently under construction or is that something that you plan on doing in the future.
Yes, they completed one of the expansions as as we noted and.
They have 18 acres for us to build on.
Now, we'll take it over will re evaluate the demand flow I think part of their strategy was to consolidate believes 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 we as our business development team kind of dives into works with our broader customer base.
Obviously, there are small operator.
Small customer base, the number of options where were minimal and they have a strategy around that minimal offering now there are part of a much larger enterprise.
We have many more customers to bring a light and we'll evaluate that the second we.
Take over then operation will be close here in early September.
Okay great.
Then I guess the need the least asset I believe that they had two assets right and Graham.
And right near the man sell property.
For those two leased assets in May.
I guess, what happened with that other property or did the other property exists.
We're not aware another at least property, we just have the one lease property.
Okay.
And then how much can you comment just a quick modeling question Diever shale development.
I guess what type of then why did they contribute in the second quarter or.
This is still a drag right now.
That is the Rochelle property have is positively contributing cash flow and growing in its.
Working towards our stabilized ramp is as Fred mentioned this in his prepared remarks, we expect the assets to be 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 net.
Yes, so the cap rate on our in place rapid manner, we were operating those facilities. So it was roughly 11.2% cap rate.
Okay, great. Thanks.
Thank you. Our next question is coming from the line of Manny Korchman with Citi. Please proceed with your questions Hey, everyone. Good evening.
Maybe I'll go back to the PD comments I think you mentioned in your press release and then the on the call that you thought you could sort of a cover those inefficiencies as you sign contracts with new customers.
Is that to say this as a separate expense line and they're going to just reimburse you for an increase 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 over the next as this high revenue in your think about its covering expenses.
Yes, I think we detailed this in the actual earnings release, but that the best way to think about as these these costs as we build our under underwriting model, what we do as we build up our detailed off and then we margin up that business. So these those costs are now reflected in our model, which is now being margin.
So going forward, obviously, we're going to.
Be able to recover those costs over time.
On in terms of the impact they don't impact topline.
Revenue growth so much today I think those costs of more impact our NOI growth and you see that a little bit in.
The call out of of the different margins that we reported for the second quarter roughly on a on an absolute dollar basis I think we add about 1.3 million of additional sanitation costs, which would impact the infrastructure side of our warehouse business and the cash flow in the margin reported there and we have roughly about 400.
1000 of ERP cost that was flowing through the services side of the business. So.
Okay. Thank you Jon good color.
Yes, and then maybe flipping to.
It's a development I mean, the our whole deal was obviously, a big one but it sounds like that with ongoing for quite a bit a time.
You think about the rest of your customer base are they still focused on things like new developments and building out their supply chains are they just in the tranches trying to deal with but it's not coming out right now and so we might see a little bit of a low in future development or.
Okay.
Yes, I I'd say you have a combination of customers.
Our overall pipeline remains strong and.
My supply chain team continues to complain about the hours that they're working so.
There were quite busy with all of our customers I mean, even the our whole deal.
The final negotiations to all the detailed design what's happening at the same time that all hold is going crazy from a retail operation standpoint.
Supporting its local constituents. So the resources are still being applied to that we're still working we do have a couple of customers that kind of press the pause button that hey, let me, let me kind of hone in here and focus on today and we'll come back Tia.
But usually even in that situation in the background, we're doing some type of analytics or some type of some type of fine tuning by turning on the design aspects of those facilities. So pipeline remained remains healthy we are well over what we guided to for the year.
And we continue to to have those opportunities come to US, yes, just put a little more color on M&A I think year to date, we've announced about $367 million 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 Star.
This year, so I think that that shows we still have a lot of attractive opportunities in the pipeline and in some we hope to break ground on and announced this year.
And maybe last one from me we spent a fair amount of touched on this call fixed contracts.
And the benefits of economic occupancy because of it but if you look at your alignment with.
Customers across different.
Categories or verticals do you feel like those fixed contracts are aligned with sort of the right customers versus the wrong customers like our the customers that.
Yes, I'm thinking maybe a restaurant customer our foodservice customer that has FX contract that they don't need that excess space versus the grocery customer that doesn't have the fixed contract and so those they're looking for that space. How does the alignment on the fixed contracts line up with your customer base.
Yes, 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 move moved around their supply chain, because we're holding it in preserving that 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 on the retail side or the food distribution going to retail.
They still require the same space.
Look people are play in the market on a month to month basis. This is the long game when you're talking about food supply chain.
They know they know the third and fourth quarters are coming.
Yes, they're anticipating still needing their space.
They're not going to give that up certainly in these in these crazy times, where it's difficult to predict exactly volume pattern. So I think that the fixed commitment wallet does a lot fit for us in terms of providing stability and predictability. It also provides a tremendous benefit for our customers and being able to.
Stabilize their supply chains and again, the most expensive part of their supply chain.
Transportation, so yes, meaning that we have the space in the right places that they needed at the right time, so they're not forced to have to go outside of market defined space.
Thanks.
Yes, no problem.
Thank you. Our next question has come from the line of Ki bin Kim of Truest. Please proceed with your questions.
Thanks, Don just a couple of quick ones.
Additional pp costs and the clean cost related to co that.
Should we just expect that to be recurring and even post taxing. If there is one that just steam occurring and a new standard business.
Yes, I think so ki bin that's the way, we've kind of talked about it.
You know as 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 coughing. So it's now part of our cost base our margin goes on top as Mark explain.
And that gets built into our pricing, we do believe even post co bid.
Certainly a good chunk of that will remain in place, we think that theres actually best practices that came out of this.
Yes, and we believe that by creating a healthier work environments for a long term who knows maybe we'll lose as many people to the ordinary flu going forward, we'll have better attendant butter attendance for us means greater efficiency, because we're able to use our own employees and start the temporary employees.
So.
We think theres. 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 is coming from the line of Eric Frankel with Green Street Advisors. Please proceed with your question.
Well thank you.
Clarification on development projects.
It sounds like you are having success and leasing moster 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 thats the key takeaway.
Okay, and then just final question accounting housekeeping.
Non real estate depreciation can you explain the increase in that and how whether that's it because of the AFFO guidance increase.
Yes, it's a function of acquisitions and the final purchase price allocations of those acquisitions. So we reflected the latest update as a result.
Okay. Thank you.
Thanks.
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.
Yes, I just like to reiterate that again at a time of oil.
City that we're seeing in the marketplace I'm really proud of.
Team.
And the resilient nature of our unique infrastructure and services that supports the food supply chain.
And while there is lot of uncertainty still around the world.
You know and timing as to when we'll get back to normal or what normal will look like.
I think our business model provides the stability that that we talked about on annual basis soon.
That's that's pretty important I think during these times and so much so that we were able to confirm.
Our guidance and even tighten our guidance range at at a time of.
The craziness that's occurring out there.
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.
MC associates to the Americold family and again, we'll talk next quarter, thanks, everyone would 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.