Americold Realty Trust Inc. Q1 2023 Earnings Call
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Good afternoon, ladies and gentlemen, and welcome to the Americold Realty Trust first quarter 2023 earnings Conference call. At this time all lines are in a listen only mode. Following the presentation.
We will conduct a question and answer session. If at any time. During this call you require immediate assistance. Please press star zero for operator. This call is being recorded on Thursday may four 2023.
I would now like to turn the conference over to Scott Henderson, Senior Vice President capital markets and Investor Relations. Please go ahead.
Good afternoon. Thank you for joining us today for Americold Realty Trust first quarter 2023 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 Relations section on our website at Www Dot Americold Dot com.
This afternoon's conference call is hosted by <unk>, Chief Executive Officer, George L. <unk>.
<unk> commercial officer, Rob Chambers.
Chief Financial Officer, Mark Smith.
Management will make some prepared comments after which we will open up the call to your questions.
On today's call management's prepared remarks may contain forward looking statements.
We're looking statements address matters that are subject to risks and uncertainties.
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.
Speak only as of the date they are made.
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.
Oh.
The full definitions of these non-GAAP financial measures reconciliations.
The comparable GAAP financial measures.
Attained in the supplemental information package available on the company's website.
Now I will turn the call over to George.
Thank you Scott and thank you all for joining our first quarter 2023 earnings conference call. The.
This afternoon I will provide the latest information around our recent cyber security event.
I will then comment on some key operational metrics.
Results for our first quarter and our outlook for the remainder of the year.
Rob will provide an update on our recent customer initiatives.
And Mark will provide a detailed walk through of our guidance for the remainder of the year.
As we shared earlier this week.
Systems were recently impacted by our cyber security event.
Our cyber security protocols limited the impact of the intrusion to approximately 30% of our facilities.
As of today, the impact has been reduced to approximately 15% and we.
I expect to see continued progress over the short term.
It is important to note that none of our safety procedures or structural capabilities within the impacted facilities, such as power and utilities refrigeration systems and blast freeze processes were compromised.
Although inventory was being preserved within these impacted facilities throughput was temporary halt and is currently scaling back up quickly.
During this event, we will continue to work incredibly hard to accomplish two goals.
First communicated proactively and transparently with our customers on both food manufacturing and retail sides of the business.
Second implement manual processes and procedures to reduce overall disruption to the business as much as possible.
Mandy.
Strategic partners since late 2020 at a recognized global cyber security expert.
Conjunction with our in house Cyber security team is leading the restoration of our systems. So that when they come back online our systems have a clean bill of health. We have also engaged the appropriate law enforcement authorities and the investigation.
Since late 2020, we have invested an incremental $20 million in cyber security, which included a combination of personnel enhancements.
And software upgrades and third party specialty expert fees.
In fact during the time of this incident management was performing routine cyber security advisory services and reacting quickly to reduce the disruption.
We are all faced with an evolving cyber threat landscape in which the cyber adversaries are persistent.
Continually evolving their tactics techniques and procedures.
As we recover from the impact of this incident, we remain committed to continued strengthening of our policies practices and technology to further protect against future attacks.
At this point, let me comment on our core business priorities, which remain fully intact. Despite this recent event.
First as we discussed on previous calls.
Service is a key priority for America.
For the first quarter, our same store economic occupancy increased to 84, 6%.
Record setting first quarter level as food manufacturing customers continue to ramp production and.
In the first quarter. We also derived 46, 1% of rent and storage revenue from fixed commitment storage contract, which is also a record setting level.
During the first quarter, we consistently delivered a high level of customer service at record setting economic occupancy levels.
Turning to our priorities around labor management.
During the first quarter, we achieved a perm to temp hours ratio of $75 25.
This is nine points higher than our first quarter 2022 level and on a sequential basis, we improved by three points over the fourth quarter 2022 levels.
Normalizing for the exit of a large retail customer and the corresponding associates and our third party managed segment. We ended March of 2023, then annualized turnover trends.
Roughly equivalent to that of March of 2022.
Compared to 2019, our pre Covid year, we ended March at approximately 18 percentage points higher.
On a sequential basis, we improved our turnover rate from the end of December which was approximately 22 percentage points higher than 2019 levels.
As the data points show, we are making continued improvements on our perm to temp ratios and turnover rates.
Lastly, during the first quarter, we completed our customer dedicated automated facility in Lancaster, Pennsylvania.
Began inbound product into the facility and ramping towards stabilization. This.
This project has a 20 year fixed commitment in place from a leading global grocer and we are generating a 100% of the underwritten rent and storage revenue from this project, we look forward to servicing our customer in this facility.
Turning to our first quarter results, we delivered <unk> per share up 29.
An increase of 12% compared to prior year.
This performance was primarily driven by our global warehouse same store pool, which generated revenue growth of 12, 3% and NOI growth of 26, 1% versus prior year, both on a constant currency basis.
Our strong same store pool results were driven by meaningful economic occupancy growth and pricing initiatives, partially offset by reduced throughput volumes for.
For the first quarter, our same store economic occupancy increased 748 basis points over the first quarter 2022 to 84, 6%.
Record setting first quarter level Renton.
Rent and storage revenue per economic occupied pallet and our same store.
On a constant currency basis increased 10, 3% versus the prior year service revenue per throughput pallet increased eight 6%.
The large increase in economic occupancy is attributable to two factors as previously mentioned.
First our fixed commitment contracts structures smooth out the seasonality in our business and increase overall economic occupancy while also providing certainty for our customers.
This quarter, we derived 46, 1% of rent and storage revenue from fixed commitment storage contracts.
Which is approximately a 420 basis point improvement over fourth quarter 'twenty two.
And approximately 80 630 basis point improvement over the first quarter 2022.
As we said earlier 46, 1% fixed commit percentage as a record setting level for a miracle.
Our food manufacturers continue to ramp production levels in order to provide higher service levels to their primary customers retailers grocers and foodservice companies.
As a result of the progress we made around economic occupancy and our same store pool, we are increasing our full year 2023, <unk> per share guidance to the range of $1 16 to $1 26.
This guidance increase reflects both the strong first quarter and some relative uncertainty going forward around the recent cyber security of that Mark will provide more commentary around the individual components.
Lastly, let me comment on our ESG initiatives in April we posted our fourth annual ESG report on our website.
<unk> highlights from this report include exceeding our internal goals around associate safety, which outpaced the cold storage industry average by over 100%.
And establishing our internal global diversity inclusion and belonging Culture Committee, whose mission is to build and foster a culture, where all associates can be their true selves at work achieved their full potential and thrive is being valued for their unique contributions with that I will turn it over to Rob.
Thank you George as George mentioned, our company achieved some very significant milestones during the first quarter.
Including record setting first quarter economic occupancy levels at 84, 6% for the same store pool and record setting fixed commitment percentage levels for our total warehouse segment.
At quarter end within our global warehouse segment rent and storage revenue from fixed commitment contracts increased on an absolute dollar basis to $480 million compared to $367 million at the end of the first quarter of 2022.
On a combined pro forma basis, we derived 46, 1% of rent and storage revenue from fixed commitment storage contracts, which has an approximately 630 basis point improvement over the first quarter of 2022.
We're very pleased with this progress.
Given these operating metrics, we are continuing to accelerate the underwriting process and evaluating development opportunity, which includes a mix of expansion and greenfield projects customer dedicated in major market distribution centers and conventional and automation facilities.
Combined this macro backdrop, along with our strengthened development platform positions us well to capitalize on these potential opportunities.
Within our global warehouse segment, we had no material changes to the composition of our top 25 customers, who account for only 48% of our global warehouse revenue on a pro forma basis.
Additionally, our churn rate remained low at approximately three 1% of total warehouse revenues consistent with historical churn rates.
Going forward, we are confident that we will recover a stronger from this recent cyber security event.
As part of our key priorities around providing best in class customer service, we plan on spending significant time with many constituents in the food supply chain.
Current and potential customers suppliers partners to name a few sharing our experience and educating them on our lessons learned we.
We will seek to work with our industry constituents on how to broadly reduced the level of impact from these types of cyber security events.
Once again, we would like to thank our customers for their understanding and support and we'd like to thank our associates for their hard work and dedication.
At this point.
Let me comment on our recent investment in RSA cold chain in Dubai through a joint venture, where we now own 49% of RSA.
At the moment RSA as a single location major market distribution center located in Dubai.
Is it $2 6 million cubic foot conventional facility that has approximately 9800 pallet positions Rs.
RSA leases the land from the Dubai Aviation Citicorp duration and a ground lease has over 40 years of remaining term inclusive of options.
RSA is largest customers are food importers and it serves the local market with a diverse product mix coming from food producers in the Middle East North Africa and India.
<unk>, 49% ownership investment imply that total enterprise value of approximately 11 million U S dollars and also implies a net entry NOI yield of approximately 9% on the in place business and.
In addition, we recently announced our DP World partnership with Americold seeking to design build own and operate on DP world Port locations and various strategic geographies around the world.
Our RSA investment is complementary with the DP World partnership and it is important to note that <unk> has been looking at very select middle lease locations that are in need of temperature controlled logistics real estate and value added services.
He identified RSA as a best in class local market owner and operator.
For us to partner with in order to enter these new markets, we expect to grow the RSA footprint over time in select locations throughout the region now I will turn it over to Mark.
Thank you Rob.
Today, I'll discuss our capital position and liquidity and then I'll turn to full year guidance.
At quarter end total debt outstanding was $3 5 billion.
<unk> had total liquidity of $566 million, consisting of cash on hand and revolver availability.
Our net debt to pro forma core EBITDA was approximately six five times.
At this point, we have invested approximately $304 million on development projects in process and have approximately $67 million remaining to invest throughout the year on these projects as detailed on page 33 of the IR supplemental as.
As we've discussed on our last call, we expect to organically Delever as our same store portfolio continues to improve and our recently completed and in process developments ramped to stabilization.
Now, let me discuss our outlook for the remainder of 2023.
As Jordan mentioned, we are increasing our guidance for the full year 2023, <unk> per share to be in the range of $1 16 to $1 26, which incorporates our strong first quarter results and reflects the impact of the cyber security event as we understand it today.
Please see page 36 of the IR supplemental for key components underpinning this guidance.
At this point I will comment on the primary building blocks to get to <unk> <unk> per share and provide a bridge for each as it relates to the full year.
We are now expecting constant currency revenue growth in the same store pool for the full year to be in the range of four five to eight 5%.
For the first quarter it was 12, 3%.
This implies growth for the remainder of the year to be in the range of $1 nine to seven 3%.
So let me provide more detail around the key drivers of this growth.
Our occupancy in throughput volumes.
For the full year, we expect economic occupancy to increase by approximately 275 to 375 basis points.
For the first quarter economic occupancy increased by 748 basis points.
This implies economic occupancy increases throughout the remainder of the year to be approximately 120 to 250 basis points.
We expect to continue benefiting from recent commercialization efforts translating to higher fixed commitments and new business wins combined with softer throughput volumes.
For the full year, we now expect a decline in throughput volumes of 1% to 3%.
For the first quarter throughput decreased by one 6%.
This implies throughput volume decreases.
Throughout the remainder of the year by approximately 0.8 to three 5%.
As end consumer demand continues to slow and basket sizes shrink due to the current economic environment.
Additionally, we're taking into account an expected lower amount of product moving through our overall portfolio, while certain facilities were impacted by the cyber security event.
For pricing.
For the full year, we expect constant currency rent and storage revenue per economic occupied pallet growth to be in the range of five 5% to seven 5%.
For the first quarter increased by 10, 3%.
This implies growth for the remainder of the year to be approximately four 1% to six 7%, primarily reflecting the impact of the wrap of pricing previously put into place.
Also for the full year, we expect constant currency service revenue per throughput pallet growth to be in the range of 5% to 7% for the first quarter increased eight 6%.
This implies growth for the remainder of the year to be approximately $3 nine to six 5%.
For the full year, we are now expecting same store constant currency NOI growth to be in the range of 12% to 17%, which is 750 to 850 basis points higher than the corresponding revenue growth.
For the first quarter same store constant currency NOI increased by 26, 1%.
This implies growth for the remainder of the year to be seven 5% to 14%.
Please note we are expecting the primary driver of NOI growth to come from economic occupancy.
As a result of the impact of the cyber security event, we assume lower throughput volumes, coupled with higher labor costs and operational inefficiencies during the period and we expect our full year services NOI margin to be approximately 3% to 4%.
Please note. The following guidance metrics are provided on an actual dollar basis not on a constant currency basis.
Turning to the non same store pool for.
For the full year, we expect the non same store pool to generate approximately zero to $5 million of NOI.
For the first quarter it generated a loss of approximately $7 million in NOI. This implies the remainder of the year to be in the range of approximately 7% to $12 million and NOI.
Please note due to the continued startup costs for the recently completed and in process development projects, we expect the second quarter to continue to be negative.
Before generating positive NOI in the second half of 2023.
This also reflects the impact of the cyber security event on the non same store portfolio.
Turning to our managed and transportation segment NOI.
For the full year, we expect these segments combined to generate approximately 43% to $50 million of NOI for the first quarter. These segments generated approximately $13 million of NOI. This implies the remainder of the year to be in the range of approximately $30 million to $37 million. Please note our updated guidance range assumed.
Certain levels of transportation declined in the face of broader economic headwinds and the impact of the cyber security event on both segments.
Turning to our SG&A expense.
For the full year, we expect total SG&A to be in the range of $228 million to $239 million inclusive of $22 million to $24 million of stock compensation expense for.
For the first quarter, it was $63 million inclusive of $7 million of stock compensation expense.
As a reminder, we exclude stock comp expense from our total SG&A expense to arrive at what we call core SG&A expense.
Which is what truly impacts <unk>.
For the full year, we expect core SG&A to be in the range of $206 million to $215 million.
For the first quarter it was $56 million.
Turning to our interest expense for the full year, we now expect interest expense to be approximately 151 to 158 million the increase throughout the remainder of the year is being driven by higher debt balances increasing base rates a weaker U S. Dollar on conversion of non U S. Dollar.
Our debt and less capitalized interest as we deliver in process development throughout the year.
For the first quarter interest expense was $34 million.
Onto our cash tax expense, which is the number that impacts <unk> for the full year. We expect this expense to be approximately $7 million to $9 million for the first quarter It was $2 million.
Turning to our maintenance capital expenditures for the full year.
We expect this investment to be approximately $80 million to $90 million for the first quarter. It was $16 million as a reminder, our first quarter tends to be the lowest quarter of maintenance capital expenditures spend.
Throughout the year.
We expect to announce development starts aggregating between 100 200 million.
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.
Finally, please refer to our IR supplement for detail on additional assumptions embedded in this guidance as a reminder, the cyber security event is currently ongoing in this revised guidance reflects our outlook based upon the information we have available to us at this point in time now.
Now, let me turn the call back to George for some closing remarks.
Thanks, Mark as the operational and financial results of the first quarter highlight our core business continues to grow and performed above expectations.
While we recognize the cyber security event as a disruption we will not allow it to impact the progress we have made for the long term trajectory of our business, we would like to thank our associates for their hard work and dedication during this time. Thank.
Thank you again for joining us today, and we will now open the call for your questions operator.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by the one on your Touchtone phone you will hear a suite on comps acknowledging your request questions will be taken in the order received should you wish to cancel your request.
Please press the star followed by the tail.
Using a speaker phone please lift the handset before pressing any Keith.
Participants may only ask one question and one follow up question.
Your first question is from Samir Khanal from Evercore ISI. Please ask your question.
Hello, everybody.
First of all Scott congratulations on the promotion certainly well deserved.
George on occupancy I just wanted to ask you maybe you can provide a bit more color.
It sounds like occupancy will continue to increase throughout the year I mean, you hit record setting levels in <unk>.
I know, it's a little bit early but how do you think about occupancy.
Sort of.
To the end of this year and even 24 at this point based on kind of what Youre seeing I guess, what's the new normal or the new peak.
You can hit in 'twenty four.
Well I think the first quarter occupancy Samir is primarily driven by two things. One is food manufacturers are ramping up production as they are able to staff appropriately as where are we in the first quarter.
And also the record setting fixed commit sales I mean.
Commercial group really commercialized.
Ton of fixed commit to give you an idea of its over $100 million above year over year and revenue now in fixed commit so those two things are really driving first quarter occupancy.
We did raise guidance for the full year. So we expect most of that to flow through the entire year.
It'll early to comment on 2024, but I think what this reflects is manufacturers being able to produce.
Getting their inventory correct is probably the next.
The remainder of the year I wouldn't say that.
Inventory is optimal at the item level, but it certainly is optimal at the total level from volume standpoint. So.
Hopefully that gives you a little more color on where we are.
But just in terms of modeling perspective, I mean is it fair to assume that even in 'twenty four it would be higher than 2003 at this point or would it kind of hit a level in 'twenty three and then it sort of flat lines you think.
It all depends where our customers are in the cycle of building back their customer service levels and there the renovation plans and all the things that still have to normalize to get back to a normal supply chain.
We know we can service higher inventory, we know we can get into the low 90 percents.
Our buildings in service it very very well so it's not that we've maxed out.
Sales at the 85% level, let's say.
But I.
I don't know where it will go I suspect, we're close to a high watermark.
Got it and just.
Once again that is star one should you wish to ask a question and participant may only ask one question and one follow up question. The next one is from Mike Mueller from Jpmorgan. Please ask your question.
Yes, hi.
Curious in terms of.
Occupancy so far the second quarter are you starting to see the normalization that you were talking about that you laid out when you were talking about guidance for the back half of the year or is that still basically the assumption at this point.
No I think if you look at our year in occupancy Q1, and Q2 are by far our lowest occupancy points of the year historically.
Obviously Q1 this year at a record high as a little counter counter seasonal driven by probably the fixed commit as I mentioned over $100 million year over year.
And obviously manufacturers ramping up because they have labor it wouldn't surprise me if sequentially occupancy declined a bit as manufacturers refine the inventory content as I just mentioned.
But for the full year, we are saying guiding it up because we expect Q3 and Q4 to be very strong. So it could again sequentially see a small dip as manufacturers right size, but our guide reflects an overall increase in.
Occupancy through Q3 and Q4.
Thank you. The next question is from Vince Taiwan from Green Street. Please ask your question.
Hi, good afternoon.
It sounded like in Mark's comments around some of the guidance changes that the cyber security event impacted multiple line items just kind of to.
To help sum it up.
But to kind of provide an estimate of how much the event.
Dragging on guidance, if you will.
Aggregate.
Yes, if you think through it.
Widened out our guide around throughput volumes being down.
Roughly increase that at the upper end of or the wider end by 100 basis points. So you can pull that through its roughly about 380000 pallets.
And you can look at our our current occupancy there.
He also commented around impact on margin.
Particularly obviously I commented that we're going to be less efficient.
In particular in this quarter as we were working through.
The cyber security event, so we will have higher labor costs higher operational efficiencies and I think the last area too as we think about cyber security and cyber security defense spend you can see that we did include incremental costs in our SG&A. Our core SG&A guide. So if you think through it those tends to be the.
The primary numbers that will impact our <unk> guide for the year as it relates to that.
So I guess in total what does that amount to.
The $5 million drag to this.
Like if you can just help kind of simplify some of the math and get US all on the same page.
Is there a dollar amount you'd be willing to share on the impact.
Okay, I think we factored in given that this is an ongoing event right now.
Based on the best of our knowledge, we factored it into those guidance parameters. So I think that that we'll leave it at that.
Yes.
But it is impacting us.
Go ahead Sir.
No it's impacting those three main line items that I described.
Okay.
Thank you. Our next question is from Josh Levin from Bank of America. Please ask your question.
Hello, This is Dan.
Josh Congrats on the economic occupancy I was just kind of curious does that occupancy build imply that you guys are capturing market share.
I think as we've said pretty consistently from a customer service standpoint, we're doing it we were doing really really well through the first quarter and that it's clear that part of that was manufacturing increases.
Increases.
Part of that obviously, the big fixed commit increase but for sure part of that was market share gains as well. There's no question about that we don't have really good tools to break it down, but we know to be at this level of occupancy we had to have had market share gains to get there.
So it's a combination of all three I would say by far the most.
Impactful component as food manufacturers hiring.
People as we were successfully able to hire people in our operation and ramping up production that would be the biggest piece combined with the fixed commit which is essentially reserving space for that production.
Great really appreciate the color.
Thank you and the next one is from Michael Carroll RBC capital markets. Please ask your question.
Yes. Thanks, I know we've been talking a lot about this economic occupancy, but I have another question I know George you said it was due to higher fixed commitments and just overall better production.
Is there any more details just seems like it's a fairly sizable uptick versus the historical trend I mean is there any specific large customer agreement that you won.
Did you just have several other customers that came on board that just that that just kind of started I mean is this just the building over the past few quarters or is this kind of just a surprise to you.
Well I'll turn it over to Rob in a second because youll probably have more color. Then then I can add but we.
We always said look we have a blue chip manufacturing customer base in <unk>.
And given that it is a blue chip base when they can turn on production. It comes in it comes fast and it comes in big numbers.
We have we've said when that day comes we're going to see occupancy increase pretty quickly.
And that's exactly what happened.
This is not a time of year, we typically hit a seasonal high obviously, it's one of our lowest parts of the season to have a record breaking occupancy quarter in Q1 is very unusual.
It reflects the fact that labor is becoming available retention is getting better it is in our business as well by the way and at that point manufacturers when they produce given the blue chip manufacturing base, we have it happens quickly and in big numbers.
Rob I don't know if you want to comment on the customer content I. Just think you have a lot of the food manufacturers all all getting back to normalized production at the same time and as everybody was able to make progress kind of consistently and again remember our book of business is more heavily skewed towards those big food manufacturers, who are able to make.
That progress faster.
With everybody kind of coming back at the same time that not only are we seeing any increase in physical occupancy, but youre also having.
Our customer base recognize the need to reserve that capacity and so our economic occupancy.
<unk> significantly it's a combination of all those things no no specific.
Large new business win or anything that out that I would highlight.
I guess I'm, Rob is there any specific assets like the production advantage assets do they gain where occupancy was at the distribution throughout the chain has that changed at all.
It has I mean, what we're fortunate is that we're seeing it across all of the nodes in the supply chain. Our production advantaged facilities are up we're also seeing in our four distribution centers and even our retail fulfillment centers.
They have high occupancy at the moment, which I think reflects just the general labor availability situation getting better and the overall supply chain, putting more product in the system.
Thank you. Our next question is from Anthony Powell from Barclays. Please ask your question.
Hi, good afternoon.
Now the cybersecurity incident, usually I think of these as Dr customer data, but it seems like more some different could you maybe describe exactly what's going on here is this.
Operational sabotage more detail will be super helpful.
Yeah. Unfortunately at this time, Anthony we cannot provide more detail when when we say this is active we mean it really is active investigation is not complete as to.
Exactly some of the questions you just asked so im sure at some point in the future we can comment more directly but unfortunately, we can't at this point alright got it. So for my follow up just a question on throughput and then I know its down a bit due to the economic situation and at what point is the throughput decline become.
I guess looking forward when you need to see throughput improve for you to be comfortable that you can think you can continue to drive.
Higher occupancy.
I'm not sure.
So I'll ask Rob to comment in a second but I don't I'm not sure throughput in occupancy correlate one for one right could throughput is a combination of inbound and outbound.
Average together.
So you can have inbounds, increasing occupancy outbound.
Outbound as being down overall throughput being down but occupancy going up for instance.
And you could you could have the reverse of outbound succeed inbound so I don't know that theres, a real correlation to overall throughput given its an average between inbound and outbound.
But our business is better when throughput is up right I mean, our handling revenue goes up our handling NOI goes up so we want through put in the system, but I consider it more for economic reasons and for servicing our customers those reasons.
But I look at throughput.
It's a tough correlations occupancy it is I mean at the moment, obviously, we've had our economic occupancy benefited a little bit.
From the standpoint of the inbounds exceeding.
What we're seeing on an hour about level in an ideal scenario as George has described.
We're seeing product turn through the facilities.
Quickly so that we're getting incremental storage revenue in hand, and we're getting there.
The throughput or the handling services.
Revenue as well at the moment, where we have our inbounds.
Feeding our outbound, which is which is helping occupancy so.
It would have to go the other way, where it would be a drag on occupancy but.
For now we're seeing the opposite.
Thank you. Your next question is from Craig Mailman from Citi. Please ask your question.
Hey, guys.
Maybe a follow up right, we've been talking a lot about the <unk>.
Jump in occupancy, helping same store here, but as you think about the dynamics that are pushing it production is getting back up that end user demand is slowing right.
Conceivably could be a little bit of a limit here, but youre getting the pop this year as we think about next year and I know, you're not giving <unk> guidance, but the comps are going to get really tough because you're getting all of this economic occupancy now from that production input plus just transitioning to fixed price contracts.
This be the kind of the peaking growth year, just given those those dynamics as we think about <unk> and same store kind of in 'twenty four.
I would say no and maybe coming at this a little differently. Greg remember, we had a huge upside if we can get handling correct right in terms of efficiency and productivity. We have said that while we've been able to attract people to the business and we're doing much better at attracting people to the business 75, Chris.
<unk> of our where our content was done by permanent employees. We've always said this three months to get those people productive we haven't achieved that yet and we said there was significant upside to margins when we get to the levels of productivity that are no more than pre COVID-19. They weren't aspirational, we just had to get back to pre COVID-19.
So even if occupancy.
Thomas become tough next year as you just mentioned, which I think is likely I mean 84, 5% in the first quarter record setting obviously there are limits, but the handling margins are still out there for us to get we're still focused on getting them and that was a substantial number as we pointed to.
Last time, we met so that's really still the opportunity and we're really focused on optimizing Max rate. So that we can we can drive occupancy even higher so we'll use the backdrop to make sure that we're focused on optimizing mix on the facility.
That allows us to keep driving occupancy.
And then lastly, I know.
Your question was about the same store, but just remember next year as we move forward. We will have the benefit of a number of development projects ramping to stabilization.
Okay.
And then just the follow up to an earlier question on.
Putting a number around the cyber piece I guess, if I'm looking at the.
Differential in core SG&A, that's 10 million if im looking at some of the revenue on the transportation side, that's like $7 million. So around call. It 17% to 20 million that seems about eight to 10 cents is that kind of the right way to think about what this impact.
It is being layered in these different line items.
Look I think those are some of the components, but they don't represent all the components from cyber so as we said.
In transportation.
Mentioned originally when we gave guidance for this year in my prepared remarks, there is an overall slowdown in overall economic activity, which is impacting transportation it isn't all cyber.
As we've been guiding for this year throughput has been down although we did call out that part of the the higher decrease in slowdown in throughput is related to the cyber event. So as I said that the event is ongoing it's still pressure, we're working through it but as best we know it's those line items.
That I called out that have the impact of where we're seeing.
The cyber event.
Thank you. The next question is from Nick Coleman from Baird. Please ask your question.
Hey, good morning, good afternoon guys.
I guess, maybe touching a little bit.
Fixed commitment structures is there an optimal level you can get to on a fixed commitment for just this rent and storage piece combined with the services and have you had any negotiations on maybe layering in some fixed commitment component to this.
Service part of the industry.
Yes.
Our next milestone I think for fixed commitments is to get over 50%, which we are really focused on I think over.
Longer period, we can get that number into the sixties.
That would be a great milestone for us to get to.
I think it is important to still have a component of the business.
That's transactional because it gives you some flexibility to operate and so it will never be 100, but I think if we get over the 50 over the 50% range and into the long term, we we cracked the 60% range, we would be ecstatic.
On the services side there is.
From time to time, the volume commitments and those types of things, but really what what we do is we have what we call profile protection and on and on.
On the variable side of the business, which is the assumptions around throughput and the percentages of the business theyre going to be full pallet in full pallet out or potentially.
<unk>. So that we can we can understand our work content and generally speaking if there is significant variability from what we underwrote in the contract. There is an ability for re pricing that side of the business.
Yes les around.
Volume type commitments, some true ups more around our ability to adjust the rates. They have to work content is different on the services side.
And then maybe last question for me maybe for Scott looking at the.
The financial.
Financial conditions are kind of tightening here and there is a decent amount of spec construction in this space are you seeing any opportunities for some take out here.
Just looking across the board.
Yes.
I would say right now.
When we're looking at.
Deals from from sellers or potential sellers, which we have a we continue to have discussions with with different market participants.
The bid ask spread is still.
Still remains somewhat wide meaning.
Folks are looking at multiples based on levels before interest rates rose as well as.
Still wanting to underwrite fully recovered EBITDA levels.
In terms of spec construction.
<unk> I think we've seen on the development side, a little bit of that but we're not seeing a ton across the entire network.
As a reminder, this asset class.
You not only have to build it you have to operate it and it's expensive to build and you have to have a platform to operate it so that really limits spec across the across the platform or excuse me across the.
He has a different geographies. So we just haven't haven't seen a ton of that at this time.
Thank you Ravi. Your next question is from Bill Crow from Raymond James Please ask your question.
Thank you good evening guys.
Cyber incident, a two parter here first of all how similar is this incident the prior incident.
That occurred in the second of all.
Maybe a different point of view, but.
How has the customer reaction to this you've been pushing and pushing rents successfully.
There were service issues last year as your labor.
Labor Force struggles.
And now a cyber event disrupted.
Their activity.
Just curious whether there's any sort of.
Potential threat to tenant retention.
Anything else that goes along with us.
Yes, Bill I'll answer the first part of your question and then I'll hand, it Rob to talk about customer impact but.
As Mark has said this is still ongoing so we don't have an investigation to compare per se.
So the last incident, but what we know is that every incident is almost unique I mean, whether whether it's cros and industry or across a group of industries or even.
One event to the next as Youre, describing so I would expect that the similarities.
At every level our few because the environment is so fluid when it comes to this kind of thing as I'm learning.
So when we have the investigation complete we can answer that question, but I would expect the answer to be very few similarities because we shut that door back.
Back in the first incident pretty hard and hardened R. R. R Iot environment pretty significantly with the $20 million spend as I said in my prepared.
Paired remarks over just a few years so.
That's all I can say with respect to the first question second one Rob if you want to comment when it comes to customer reaction.
George George hit it very well in his prepared remarks, I mean, the first thing that's important to our customers is that we're communicating proactively and transparently with which we have through this scenario.
And the second thing is that we demonstrate a willingness very quickly to stand up manual processes to keep the business moving even if not as efficiently as possible, while we fully recover and we've done that as well so.
I think that certainly helps we definitely recognize that theres going to be a need coming out of this the spend.
Quite a bit of time with our customers walking them through the the investments that we have made and that will continue to make and talk more broadly about what we can do to minimize the impact of this and share lessons learned because because these are the things that can also happen to our customers or any of our competitor.
So we're going to we're going to need to spend that time, having those conversations but I think if we continue to do that.
We are not concerned about a significant risk associated with with churn as a result.
Great. Thank you.
Yes.
Yes.
Thank you. The next one is from Keybanc, Ken from Travis. Please ask your question.
Good evening everyone.
So first question.
Anything unusual about the first quarter that might have contributed to the higher occupancy did any development projects like stabilized in the first quarter, maybe earlier than expected just to understand any kind of unusual items.
No because I mean, the occupancy where credit was the same store so.
Any of the developments.
Are really kind of outside of that number, albeit we.
As we mentioned we did have one development project.
Were excited to complete and we are.
We are at a point on that development project in Lancaster, where where we are recognizing rent and storage out of that project, but.
Like we said it really is the culmination of manufacturers ramping back up.
A lot of them.
At the same time, the fact that our book of business is skewed towards those blue collar manufacturers and the fact that we had.
The fixed commitment contracts come through.
Yes, I asked that because our same store facility count changes changes quarter to quarter here and there so.
So the second question.
If I understand it correctly the fixed commitments.
Generally doesn't increase of total basket of revenue right.
And maybe smooth it out at least that was my understanding from previously.
So is that what's contributing to the remainder of the guidance.
Whether that be occupancy our same store revenue.
Decelerating, a little bit from here on out or how much conservatism that is driving that.
Deceleration.
Yes, as Rob mentioned around fixed commitments, they clearly stay.
Stabilize out the revenue throughout the quarter. So you have a little less seasonal impact of the revenue and then obviously as there are the underlying.
Physical build of the actual physical inventory that may just reduce the gap between.
Physical holdings, and economic holdings, but from an overall, how we report revenue more fixed commitments tend to actually smoothed out revenue through the year I think when we've looked at it over time, we have found that overall fixed.
Fixed commitments drive incremental revenue, but they also tend to drive significant savings to our customers in terms of knowing that they have the space that they need when they need it which allows them, particularly you've heard us talk about this in the past to procure transportation as an example, more efficiently and drive savings because warehousing is a much smaller piece of the <unk>.
Are all logistics spend when you factor in transportation.
Okay.
Thank you. The next one is from Nick <unk> from BNP Carnival. Please ask your question.
Hey, good evening.
Maybe you could just give an update on Europe . The portfolio over there is there anything unique you're seeing in terms of trends.
And then my second question is just on the balance sheet and funding development. This year, how should we think about sources and uses.
And.
Where could you raise that money today. Thank you.
Nate I'll take the first one and I'll hand, it to Mark for the second half of your question, but Europe , we is going reasonably well I mean occupancy there remains high.
Customer.
Activity remains high.
Yes.
The outlook for the remainder of the year looks very good we expect a good year out of the out of Europe and as of the moment.
Things are on plan and going really well, whether it's pricing to recover inflation, whether it's us continued surcharges to recover increased power.
Or whether it's a couple of.
New developments that have recently come online in Dublin in Barcelona. So we're very pleased with the progress in Europe , We've always said theres more commercialization work to do there and there is part of the fixed commit does reflect us.
Moving fixed commit for the first time into Europe , what I should say, maybe the first time at scale into Europe lots more opportunity to do that they're in.
Europe is going very well at the moment, so as it relates to the balance sheet and funding, we're very focused on making sure we have the maximum opportunities and flexibility to pursue.
All forms of capital to support customer driven growth, which is something that we've commented in the past, especially for developments as these opportunities come up they are very long dated commitments for significant capital spend so we're focused on making sure. We have all the tools in the toolkit to do that as you think about the balance sheet today.
And you began to see even from year end through first quarter clearly we're focused on organically delevering as the earnings return back into the platform you see that in the overall.
Organic earnings growth as well as the fact that we just have a number of core deliveries of development projects. This year and as those development projects are delivered and ramp up we believe that we can continue to organically delever the balance sheet down and some of that was even seen.
Beginning in the in this first quarter.
No I think your last question really related to where could we raise 10 year money today is triple B credit.
It would probably be somewhere in the low two hundreds above treasuries.
Okay. Thank you.
Thank you once again, please press star one should you wish to ask a question.
There are no further questions at this time please continue.
Okay.
Okay.
Well. Thank you all for joining the call and we look forward to speaking with you again soon thank you.
Thank you ladies and gentlemen, the conference has now ended thank you all for joining you may all disconnect.