Americold Realty Trust (COLD) Q3 Earnings Conference Call Transcript

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Americold Realty Trust (NYSE:COLD)
Q3 2018 Earnings Conference Call
Nov. 8, 2018, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to Americold Realty Trust Third Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press “*0” on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Steve Swett. Please go ahead.

Steve SwettIntegrated Corporate Relations, Inc.

Good afternoon. We would like to thank you for joining us today for Americold Realty Trust’s Third Quarter 2018 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.americold.com.

On today’s call, management’s prepared remarks and answers to your questions may contain forward-looking statements. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ from those discussed today. A number of factors could cause actual results to differ materially from those anticipated. Forward-looking statements are based on current expectations, assumptions, and beliefs, as well as information available to us at this time and speak only as of the date they are made and management undertakes no obligation to update publicly any of them in light of new information or future events.

During this call, we will discuss certain non-GAAP financial measures. More information about these non-GAAP financial measures and reconciliations to the comparable GAAP financial measures is contained in the supplemental information package available on our website.

This afternoon’s conference call is hosted by Americold’s Chief Executive Officer, Fred Boehler, and Executive Vice President and Chief Financial Officer, Marc Smernoff. Management will make some prepared comments, after which we will open up the call to your questions. Now, I will turn the call over to Fred.

Fred BoehlerPresident and Chief Executive Officer

Thank you and welcome to our Third Quarter 2018 Earnings Conference Call. This afternoon, I will discuss progress against our strategy, key additions to our senior management team, and recent financing activities. I will then review industry fundamentals and certain key operating metrics. Marc will follow with a summary of our quarterly results and then review our balance sheet and capital markets activities. After our prepared remarks, we will open the call for your questions.

Americold is the world’s largest owner and operator of temperature-controlled warehouses and is the only publicly traded REIT focused solely on this business. Our size and scale, combined with our focus on operational excellence, create a meaningful differentiation over our peers and a competitive advantage for our customers.

As of September 30th, our portfolio consisted of 156 mission-critical facilities which serve approximately 2,400 customers globally. Our 25 largest customers, including leading food producers, distributors, and retailers, account for approximately 62% of our global warehouse revenue. They each utilize multiple facilities across our network and have been with us, on average, for over 30 years.

The third quarter of 2018 was extremely productive here at Americold. We continued to execute on our core strategy while taking key steps to enhance our management team and strengthen our balance sheet. We enhanced our senior leadership team with several key additions.

Carlos Rodriguez has joined us in the role of Chief Operating Officer. In his role, Carlos will lead our global operations to maximize our platform efficiencies and drive growth. Carlos was most recently with Big Lots and has over 30 years of experience in supply chain management.

Additionally, Jay Harron has joined us as Chief Investment Officer, responsible for acquisitions and strategic partnerships. Jay brings 20 years of experience in real estate, private equity, and investment banking. We look forward to leveraging his relationship and focus.

And as many of you know, Scott Henderson has joined us in the role of SVP, Capital Markets, Treasury, and Investor Relations. Scott was previously with Citizens Banka and DDR Corporation and brings significant experience to our team.

We continue to work to attract talented members to our organization and we are very pleased to have Carlos, Jay, and Scott on board to help drive our key strategies.

Also, we are very active in the capital markets front. We raised $232 million in a well-received follow-on offering inclusive of a forward equity component and provided liquidity for our legacy financial sponsors. We received inaugural investment grade ratings from Fitch and Morningstar and entered into agreements to recast and upsize our credit facility to nearly $1.3 billion while moving it to an unsecured structure. We also priced a $600 million unsecured debt private placement. Marc will provide more details, but these financings have meaningfully enhanced our access to capital at lower rates.

Now, I’d like to update you on industry fundamentals and our quarterly results. Demand, driven by consumption growth and favorable industry trends, remains steady. On top of this, high barriers to entry limit new supply so we are well-positioned to continue to grow based on the demand fundamentals. And in this environment, we know that if we help improve our customers’ supply chain efficiency, effectiveness, and profitability, we will continue to find opportunities to expand our relationships.

On the operation front, today we reported revenue growth in our global warehouse segment of 2.3% and our NOI grew by 8.8%. These results were primarily driven by the favorable customer mix, net new business, improvements in our commercial terms, and contractual rate escalations. We also continued to benefit from further operating efficiency gains, driven by labor productivity and the leveraging of fixed expenses. As a result of these initiatives, which are collectively focused on driving profitable growth, our global warehouse segment contribution margin expanded 190 basis points to 31.5%. We continue to operate at a high level of occupancy and utilization across our global network and we expect to see normal inventory build for the holiday season.

In order to help our customers manage their supply chains more efficiently, we continue to transition our customers to fixed commitment rent and storage contracts. At quarter-end, 41.8% of our rent and storage revenue was earned from customers with fixed commitment contracts, an increase from 39.7% in the second quarter of this year.

Let me now update you on our development activity. First, we restabilized occupancy levels in our Clearfield, Utah facility. Second, as mentioned earlier, we delivered our new Production Advantage facility in Middleborough, Massachusetts. This facility was delivered on time and on budget and was fully occupied in time for this fall harvest. Finally, we remain on plan to our state-of-the-art expansion project in Chicago and continue to expect to launch the facility in the first quarter of 2019.

Beyond our current pipeline and recently signed LOI with a major customer, we continue to source and pursue external growth opportunity. We have long-standing industry relationships and believe that our balance sheet and access to capital provides us with a key advantage over our peers. Given the size of the investment required for temperature-controlled assets, we have a detailed underwriting process to ensure that we are creating both customer and shareholder value. The addition of Jay shows our commitment to our external growth initiatives but as we previously have mentioned, transaction timing is difficult to predict.

In summary, we continue to focus on executing our internal and external growth strategy and we believe we have a long runway for growth ahead of us. I’ll now turn the call over to Marc.

Marc SmernoffExecutive Vice President and Chief Financial Officer

Thank you, Fred, and good afternoon, everyone. For the third quarter of 2018, we reported total revenue of $402 million and total contribution, or NOI, of $101.5 million, which reflects a 3.2% increase and a 9.3% increase, respectively. Core EBITDA was $76.8 million for the third quarter of 2018, an increase of 7.6% year-over-year, driven by increased revenue, a more favorable customer mix, continued operating efficiency gains, as well as the contribution from our recently delivered facilities in Utah and Massachusetts. Our core EBITDA margin expanded by 30 basis points to 18.7% despite incurring the incremental SG&A related to being a public company.

We reported net income of $24.5 million, compared to a net loss of $4.6 million for the same quarter of the prior year. Net income for the current quarter included a $3.7 million benefit related to refundable alternative minimum tax credits that are no longer subject to limitation under the Tax Cut and Jobs Act. We expect these credits to be non-recurring so we have excluded the benefit of them from our core FFO and AFFO results.

Our third quarter core FFO was $43.9 million, or $0.30 per diluted share. Our third quarter AFFO was $41.4 million, or $0.28 per diluted share. 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 third quarter 2018, global warehouse segment revenues grew by 2.3% year-over-year to $297.2 million. Segment NOI grew 8.8% to $93.6 million. Global warehouse margin was 31.5% for the third quarter compared to 29.6% for the same quarter of the prior year. This represents a 190 basis point improvement, driven by the same factors discussed earlier.

Now, turning to our same-store results in our global warehouse segment. We define same-store as facilities that have at least 24 months of normalized operation. For the third quarter 2018, 137 of our 144 warehouses were included within our same-store pool. For the third quarter 2018, our same-store global warehouse segment revenues grew by 2.5% year-over-year to $290.2 million. This revenue growth was driven by the same factors that benefited our total portfolio and more than offset the year-over-year declines in physical occupancy of 70 basis points and throughput pallet of 3.4%.

As Fred discussed earlier, our network optimization initiatives and our improved commercialization efforts resulted in a positive change in customer mix, allowing us to drive profitable growth.

Global same-store rent and storage revenues grew by 2.1% year-over-year and we continue to transition more of our customers to fixed commitment storage contracts. At quarter-end, 41.8% of our rent and storage revenue were derived from customers with fixed commitment storage contracts, an increase of 210 basis points from the second quarter of 2018 and 340 basis points over the third quarter of 2017.

We would remind you that our third quarter same-store average physical occupancy of 77% is relative to the 85% occupancy that we would consider to be our optimal physical occupancy. As we continue to transition to a higher mix of fixed commitment storage contracts, at times there are a number of unoccupied pallet positions that continue to generate monthly revenue.

Global same-store warehouse services revenue for the third quarter increased 2.8% from last year. Our favorable mix resulted in growth of 6.5% in our same-store warehouse services revenue for throughput pallet, which overcame the lower volume associated with this mix. Our same-store warehouse services contribution was $10.9 million, an increase of $4.7 million or 75.1%. Warehouse services contribution margin improved 280 basis points to 6.7% in the quarter.

In total, our third quarter 2018 global same-store NOI was $91.7 million, up 7.2% over the prior year results, driven by the same factors previously discussed. On a constant currency basis, same-store global warehouse revenue for the third quarter increased 4.35 and same-store NOI grew 8.5%.

Now, let me comment on our long-term growth prospects. We want to reiterate the long-term targets that we provided at the time of our IPO, which remain consistent today. We expect that on an annual basis, over time, we will grow same-store revenue in the range of 2% to 4% on a constant currency basis. We expect to drive NOI growth, which is 100-200 basis points higher than the associated revenue growth. While there will be variability quarter to quarter and year to year, we believe that these are helpful achievement guideposts.

Within our global warehouse segment, we had no material changes to the composition of our Top 25 customers. Additionally, year-to-date churn rate was approximately 3.4%, a 160 basis point improvement from the prior year-end.

Turning to our balance sheet, we believe that our strategy to maintain a strong balance sheet with ample liquidity, capacity, and access to multiple capital sources will enable us to execute our business plan and take advantage of growth opportunities as we identify them. Over the past several weeks, we took important steps to improve our liquidity and lower our cost of capital.

In September, in connection with funding our growth initiatives, the company raised $92 million of net proceeds through the issuance of 4 million shares in a follow-on offering and entered into a forward contract for 6 million shares to be settled within one year. The shares were issued at $24.50 per share.

At September 30, 2018, we had total liquidity of $644 million, including cash and available capacity on our revolving credit facility. Our total debt outstanding was $1.55 billion, with a weighted average effective interest rate of 5.53% and a weighted average term of 3.9 years. 63% of our debt, including capital leases, was at a fixed rate.

At the quarter end, on a trailing 12-month basis, our net debt to core EBITDA was approximately 4.4 times. Subsequent to quarter-end, we priced 600 million of senior unsecured notes in an institutional private placement offering with a weighted average interest rate of 4.8% and a weighted average duration of nine years. The transaction consists of $400 million of 10-year, 4.86% notes and $200 million of seven-year, 4.68% notes. We expect to close this transaction in early December, subject to customary closing conditions. The company expects to use net proceeds with cash on the balance sheet to retire approximately $624 million of indebtedness, including the CMBS debt due in 2021 as well as the Australia-New Zealand term loan, both due in 2020.

In connection with this transaction, the company expects to incur approximately $21 million of one-time defeasance and swap breakage costs in the fourth quarter. Additionally, the company will benefit from a cash flow standpoint by the elimination of approximately $18 million of annual principal amortization after the repayment of the CMBS loan.

Also, we entered into an agreement with our bank group to recast and upsize our $925 million secured credit facility to a $1.275 billion unsecured credit facility by increasing our revolver by $350 million. We expect to use the excess capacity to fund our recently announced growth initiative through stabilization.

The new facility provides us with a 60 basis point savings, with potential future savings from a transition to an investment grade pricing grid. The facility provides additional flexibility through the ability to draw proceeds in multiple currencies. Closing is subject to the completion of the private placement offering.

As we continue to transition our balance sheet, we are pleased to announce that we have achieved investment grade ratings from Fitch and Morningstar. Both institutions have assigned us a BBB rating with a stable outlook. The ratings are contingent of the debt private placement and the upsized credit facility.

Pro forma for the financing activities, our total debt outstanding will be $1.53 billion with a weighted average effective interest rate of 5.12%, saving us approximately $6.1 million in interest per year. We expect to have total liquidity of $959 million. Further, our debt will have a significantly longer weighted average term of 6.8 years, including all extension options. And 69% of our debt will be at a fixed rate. Additionally, we have migrated from 100% of our debt being secured to approximately 30% being secured as a result of these financings. The remaining secured debt consists of $292 million of CMBS debt maturing in 2023, as well as sale leaseback financing and capitalized lease financing obligations. As a result of these transactions, our pro forma net leverage is unchanged.

We believe these efforts have resulted in a meaningful strengthened balance sheet, lower cost of capital, and increased financial flexibility, which will position us for long-term value creation. I will now turn the call back to Fred.

Fred BoehlerPresident and Chief Executive Officer

Thanks, Marc. We are very pleased with our third quarter results, as we continue to execute on our business plan. Fundamentals for our industry remain positive and supportive of our strategy. We continue to leverage our scale, operating expertise, the Americold operating system, and the dedication and commitment of our team members to create value for our customers. Further, having delivered a dedicated build this quarter, progressed on our external growth, expanded our management team, and made significant enhancements to our balance sheet, we believe that we have laid the groundwork for further long-term growth and shareholder value creation. I’d like to thank our entire team for their continued hard work and achievements. Operator, this completes our prepared remarks. Please open the call for questions.

Questions and Answers:

Operator

Thank you. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press “*1” on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press “*2” if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing “*”. One moment, please, while we poll for questions.

Ladies and gentlemen, we have reached the end of the question-and-answer session and I would like to turn the call back to management for closing remarks.

Fred BoehlerPresident and Chief Executive Officer

Thank you. We really appreciate everybody’s attendance today. I know it was difficult timing butting up against Mary so I apologize for that. But we look forward to speaking to all of you here shortly and, certainly, next quarter. Thank you.

Operator

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.

Duration: 22 minutes

Call participants:

Steve SwettIntegrated Corporate Relations, Inc.

Fred BoehlerPresident and Chief Executive Officer

Marc SmernoffExecutive Vice President and Chief Financial Officer

More COLD analysis

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company’s SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

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