Americold Realty Trust - Q2 2023

Transcript

Operator (participant)

Ladies and gentlemen, greetings, and welcome to the Americold Realty Trust second quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star and zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Scott Henderson, chief investment officer. Please go ahead, sir.

Scott Henderson (Executive VP and Chief Investment Officer)

Good afternoon. Thank you for joining us today for Americold Realty Trust second quarter 2023 earnings conference call. In addition to the press release distributed this afternoon, we have filed a supplemental package with additional details on our results, which is available in the investor relations section on our website at www.americold.com. This afternoon's conference call is hosted by Americold's Chief Executive Officer, George Chappelle, Chief Commercial Officer, Rob Chambers, and Chief Financial Officer, Marc Smernoff. 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. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results 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, including Core EBITDA and AFFO. Full definitions of these non-GAAP financial measures and reconciliations to the comparable GAAP financial measures are contained in the supplemental package available on the company's website. Now, I will turn the call over to George.

George Chappelle (CEO)

Thank you, Scott, and thank you all for joining our second quarter 2023 earnings conference call. This afternoon, I will discuss some key operational metrics and financial results for the second quarter and then comment on our outlook for the remainder of the year. Rob will provide an update on our recent customer initiatives and an update on our growth activity. Marc will also provide some additional commentary on our second quarter results and a detailed walkthrough of our guidance for the remainder of the year. Before I begin, let me quickly comment on last quarter's cybersecurity event. I am pleased to report that this event is behind us from an operational standpoint. We are confident that the impact of the cybersecurity event on our AFFO per share is largely contained to the second quarter, and that our guidance going forward takes any additional impacts into account.

Marc will provide a detailed bridge on how it impacted us during the second quarter and how we are taking this into account in our guidance for the remainder of the year. As a note, we have characterized direct cybersecurity costs below AFFO to provide a clean view of our operating performance. Turning to our core business priorities, which we have made progress on since our last call. First, customer service continues to be a key priority for Americold. For the second quarter, our same-store economic occupancy increased to 84.8%, a very strong record-setting second quarter level. We also derived 48.5% of rent and storage revenue from fixed commitment storage contracts in the second quarter, which is 240 basis points higher than the first quarter's level and sets another record for this metric at Americold.

Lastly, our churn rate continued to remain low at approximately 3.2% of total warehouse revenues, consistent with historical churn rates. These key operational metrics illustrate that despite the cybersecurity event, we were able to perform at high levels for our customers. Let me provide one example of recognition from a customer for strong customer service. Last month, we received an award from Yum! Brands for the successful launch of a new contract with Kentucky Fried Chicken in a handful of our Australian sites. The KFC Link Award is given to KFC partners who provide strong links to the company's supply chain. Acknowledgments like this demonstrate our strong commitment to customer service. Second, turning to our priorities around labor management. During the second quarter, we achieved a perm to temp hours ratio of 76/24.

This is six percentage points higher than our 2Q 2022 levels, and on a sequential basis, we improved by one percentage point over the 1Q 2023 levels. Additionally, we ended June 2023 at an annualized turnover trend, approximately nine percentage points lower compared to prior year. Compared to the end of 2019, a pre-COVID year, we ended June at approximately 11 percentage points higher. On a sequential basis, we improved our turnover rate from the end of March, which was approximately 18 percentage points higher than pre-COVID levels. As these data points show, we are making continued improvements on our perm to temp ratios and turnover rates. Third, we continue to make progress in our development projects. We recently completed our customer-dedicated automated project in Russellville, Arkansas...

This facility went live, we are now in the process of inbounding product as we begin ramping up the stabilization. We also recently completed phase 2 of our automated facility in Atlanta, Georgia, a few strategic food manufacturing customers have already committed to taking the space. Additionally, today, we are announcing plans to launch an expansion project with RSA, our JV partner in Dubai. Also, during the quarter, we announced an agreement with Canadian Pacific Kansas City, or CPKC, one of North America's largest railroad companies. CPKC owns the first and only single-line transnational railroad linking Canada, the United States, and Mexico. Our agreement with CPKC is a strategic collaboration in which Americold will build, own, and operate cold storage facilities on the land located on CPKC's railroad network.

Similar to our recent DP World announcement, our agreement with CPKC illustrates Americold's unique ability to create value by collaborating with global leaders in the supply chain. Given our strong operating metrics and the significant customer demand for cold storage, coupled with a best-in-class operating platform, we are turning to growth, and we expect to be in a position to announce additional high-quality expansions throughout the remainder of the year. Lastly, we continue to effectively reprice our warehouse business to offset inflationary pressures in our cost structure, to protect margin dollars, and to continue to move back towards historical warehouse margin percentages. For the second quarter, rent and storage revenue per economic occupied pallet, our same-store on a constant currency basis, increased by 4.8% versus the prior year. Service revenue per throughput pallet increased by 7%.

During the second quarter, we broadly saw inflationary pressures in our business begin to moderate sequentially, and we reduced power surcharges in certain markets. Moving through the third quarter, we will continue to take a surgical approach to our pricing initiatives to continue to drive margin dollars and increase margin %. Please note, as the high inflation cycle is showing signs of moderating, we also expect our pricing growth will begin to moderate as we lap last year's decades-high inflationary period, and power surcharges continue to be reduced in certain markets. Turning to our second quarter results, we delivered AFFO per share of $0.28. This performance was primarily driven by our global warehouse same-store pool, which generated revenue growth of 3.9% and NOI growth of 13.8% versus prior year, both on a constant currency basis.

Our strong same-store pool results were, were driven by meaningful economic occupancy growth and pricing initiatives, partially offset by reduced throughput volumes driven by the cybersecurity event and reduced pantry stocking by the end consumer, which recently has been mentioned by several large food manufacturers and retailers. For the second quarter, our same-store economic occupancy increased 687 basis points over second quarter 2022 to 84.8%. As we have discussed, we expected second quarter economic occupancy to decline roughly 100-200 basis points sequentially versus first quarter, and instead, economic occupancy slightly increased. However, we now expect the bulk of this decrease to occur during the third quarter.

The key drivers for this strong economic occupancy increase year-over-year are as follows: First, our fixed commitment contract structures smooth out the seasonality in our business and increase overall economic occupancy, while also providing certainty for our customers. Second, our food manufacturing customers continue to support inventory levels, ensuring better service levels for their customers. Third, our continued focus on customer service, in combination with our strategically located mission-critical infrastructure, is enabling us to continue to win new business. As a result of the progress we have made around economic occupancy and pricing in our same-store pool, we are increasing our full year 2023 AFFO per share guidance to the range of $1.20-$1.30.

This guidance incorporates the progress we have made year to date, and that we expect this progress to continue, coupled with some near-term headwinds that Marc Smernoff will discuss later in the call. Next, let me comment on some strategic decisions that we have made after very careful consideration. First, during the second quarter, we exited our ownership position in our LatAm JV, which was formed to develop and acquire assets in Latin American countries other than Brazil. Our recently announced agreements with DP World and CPKC provide better opportunities and lower-risk approaches to invest in the region. Second, regarding our Comfrio JV in Brazil, we received regulatory approval and were required to close on the transaction with our JV partner, who had previously exercised their put option, requiring us to purchase all of their ownership interest in the Comfrio JV.

This JV came to Americold through the acquisition of Agro Merchants in 2020. Since year-end, we have been in the process of exploring strategic alternatives for Comfrio, which is not aligned with our core business model as the business lacks significant real estate ownership. Finally, let me comment on an ESG initiative. Recently, Americold, in partnership with Feed the Children and the Atlanta's Mayor's Office of International and Immigrant Affairs, completed a four-month initiative where we worked together to provide nearly 80,000 pounds of food and essentials to families across Atlanta, as well as Atlanta Public Schools. The goal of these efforts was to help reduce the stress of food insecurity that families face daily. We are very proud of the work that Americold and our associates do in the communities in which we live and operate. With that, I will turn it over to Rob.

Rob Chambers (Chief Commercial Officer)

Thank you, George. As George mentioned, our company delivered strong results during the second quarter, including a record-setting second quarter economic occupancy level at 84.8% for the same-store pool, and another quarter of record-setting fixed commitment % 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 $521 million, compared to $379 million at the end of the second quarter of 2022. On a combined pro forma basis, we derived 48.5% of rent and storage revenue from fixed commitment storage contracts, which is an approximately 800 basis point improvement over the second quarter of 2022.

We are very pleased with this continued progress, in particular, the meaningful progress that has been made this year in re-commercializing our European platform as we transition more of that business to our fixed commitment structure. Within our global warehouse segment, we had no material changes to the composition of our top 25 customers, who account for approximately 48% of our global warehouse revenue on a pro forma basis. Our churn rate continued to be low at approximately 3.2% of total warehouse revenues, consistent with historical churn rates. Given our strong operating metrics, we are continuing to accelerate the underwriting process in evaluating development opportunities, which include a mix of expansion and greenfield projects, customer-dedicated and major market distribution centers, and conventional and automated facilities. Combined, this macro backdrop, along with our strengthened development platform, positions us well to capitalize on these potential opportunities.

We are excited about announcing our plans to build a conventional multi-customer expansion project on our Dubai site in our RSA JV, which will be approximately 11,000 pallet positions and over 2 million cu ft. We estimate this total investment to be approximately $11 million, of which Americold's pro rata share is approximately $5.4 million. A reminder, we announced the formation and investment into this JV on last quarter's call, and we are a 49% owner of the RSA JV. We expect to break ground on this expansion in the second half of 2023. For our current in-process developments, we recently completed our customer-dedicated automated project in Russellville and phase two of our automated facility in Atlanta. We began inbounding product into these facilities and ramping towards stabilization.

For Russellville, we're excited to continue growing with this national food manufacturing customer. For Atlanta, both phase one and phase two of this automated facility, we are pleased to report that we have entered into multiyear agreements with a handful of very large strategic food manufacturing customers for both phases of the facility. At this point, let me comment on our recent announcement with CPKC, one of North America's largest railroad companies. Similar to Americold's recent DP World announcement, this announcement illustrates Americold's unique ability to create value by collaborating with global leaders in the supply chain, such as best-in-class railroad and port owner and operators. Anchored by railroad service, the goal of the CPKC agreement is to bring together cold storage and value-added services with intermodal railroad solutions connecting key North American markets.

Specifically, the one-of-a-kind Americold and CPKC solution will enable the preclearance of frozen product traveling by rail between the U.S., Mexico, and Canada, which will result in our customers having meaningfully lower supply chain costs and a more efficient, environmentally friendly mode of transportation. In short, CPKC and Americold will jointly serve our mutual customers for both cold storage and railway transportation. On a case-by-case basis, Americold gets the exclusive right to build, own, and operate cold storage facilities on CPKC's strategic nodes within its railway network. In current with building a facility, we anticipate entering into a long-term ground lease with the company. CPKC gets the benefit of increased rail usage by our mutual customers, utilizing both its railroad and Americold's cold storage facilities.

This agreement provides both CPKC and Americold exclusive access to these collaboration opportunities, while each deal will be at the discretion of each respective company and will be decided on a case-by-case basis. We are very excited about this announcement and look forward to working with CPKC on these opportunities. Next, during the quarter, we completed the purchase of one multi-customer facility in Green Bay, Wisconsin, that we previously leased for approximately $20 million. This acquisition represented an attractive entry point, significantly below replacement cost of an asset we currently operate, as we prefer to own versus lease our infrastructure. Lastly, subsequent to quarter end, we completed the acquisition of one distribution facility in Brisbane, Australia, for a total investment of approximately AUD 36 million.

We acquired the facility vacant, and we expect to stabilize this property at a range of 9%-10% over the next three years. Americold already owns multiple facilities in the area, and we have seen significant demand in excess of the capacity of our existing portfolio. Now I'll turn it over to Marc.

Marc Smernoff (CFO)

Thank you, Rob. Today, I will discuss the capital funding and accounting of our net investment activities, our capital position, and liquidity. I will then discuss the impact of the cyber event with regard to our second quarter results, followed by an update on our full year guidance. As Rob mentioned, we completed the purchase of two facilities, the facility in Green Bay during the quarter and the facility in Brisbane subsequent to quarter end. We funded these investments through a combination of available cash and our multicurrency revolver. On the disposition front, during the quarter, we sold a small 1.1 million cubic foot facility in Montreal, Canada, for CAD 10 million. Let me discuss the financial impact during the quarter related to transactions involving two of our joint ventures, the LatAm JV and Comfrio.

As a result of our strategic exit from the LatAm JV, we received proceeds of approximately $37 million, which reflected our initial basis in the investment in this JV. Pertaining to our Brazilian joint venture, Comfrio, we are required to complete the purchase of this company, subject to our JV partner's put option. We are in the process of exploring strategic alternatives for Comfrio, we have classified Comfrio as assets held for sale. We have excluded Comfrio's results from Americold's AFFO per share in the second quarter and will do so going forward. Moving to our balance sheet. At quarter end, total debt outstanding was $3.6 billion. We have total liquidity of $455 million, consisting of cash on hand and revolver availability.

Our revolver balance was elevated by approximately $54 million as a result of the cyber incident delaying our billings and cash collections. We have recovered this working capital in July. Our net debt to pro forma Core EBITDA was approximately 6.6x. At this point, we have invested $277 million on development projects in process and have approximately $53 million remaining to invest throughout the year on the projects as detailed on page 38 of the IR supplemental. We expect to organically delever as our same-store portfolio continues to grow and our recently completed and in-process developments ramp to stabilization.

Before I turn to our outlook and updated guidance components, I would like to comment briefly on how we accounted for the cybersecurity event in the second quarter results and provide a bridge to where we estimate the second quarter would have landed if the event would not have occurred. Through the end of the second quarter, we incurred $19 million of costs directly related to the cyber incident, inclusive of third-party fees and expenses, remediation costs, incremental direct labor and inefficiencies, and customer claims, all of which were reported in the acquisition, cyber incident, and other net line. We excluded these cyber-related costs from our reported Core EBITDA and AFFO. We intend to recognize future insurance recoveries of these costs through the same line item. Additionally, the cyber incident impacted certain facilities by reducing the normal throughput we would have processed.

We estimate the impact from lost volume during the cyber incident as follows, and point out that these estimates have not been incorporated into our revenue, NOI, Core EBITDA, and AFFO. Within our warehouse segment, we estimate approximately half of the 933 basis point decrease in same-store throughput volume was driven by the impact of the cybersecurity event. We estimate that this translates to approximately $15 million of lost services revenue. We estimate the variable contribution margin against this lost service revenue as approximately 60%, which translates to $9 million in estimated lost NOI, equating to approximately $0.03 per share in AFFO. This $0.03 has not been adjusted into our reported second quarter AFFO per share.

To summarize, we reported $0.28 per share in AFFO for the second quarter of 2023, which does not include the impact of the lost services revenue and NOI within the same store pool. Thus, while our reported second quarter AFFO per share is $0.28, we estimate that it would have been $0.31 if the cyber event would not have occurred. Now let me discuss our outlook for the remainder of 2023. As George mentioned, we are increasing our guidance for the full year of 2023 AFFO per share to be in the range of $1.20-$1.30. Please see page 40 of the IR supplemental for the key components underpinning this guidance.

For the avoidance of doubt, this revised range excludes the previously provided estimate of impact to AFFO from lost services revenue and NOI of approximately $0.03 per share. We estimate our revised full year 2023 AFFO per share range would have been $1.23-$1.33 if the cybersecurity event would not have occurred. At this point, I will comment on the primary building blocks to get to AFFO per share and provide a bridge for each as it relates to the full year. Please note the comparisons described represent comparisons to the corresponding prior year results. We are now expecting constant currency revenue growth in the same-store pool for the full year to be in the range of 5%-8%. Year to date, it was 8.1%.

This implies growth for the remainder of the year to be in the range of 2.5%-8%. Let me provide more detail around the key drivers of this growth. For occupancy and throughput volumes. For the full year, we expect economic occupancy to increase by approximately 400-500 basis points. Year to date, economic occupancy increased by 722 basis points. This implies economic occupancy increases throughout the remainder of the year by approximately 80-280 basis points. We expect to continue benefiting from recent commercialization efforts, translating into 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 3%-4%. Year to date, throughput volumes decreased by 5.5%.

This implies throughput volumes decreases throughout the remainder of the year by approximately 0.5%-2.5%, as end consumer demand continues to slow and basket sizes shrink due to the current economic environment and as a result of the amount of product moving through our overall portfolio, while certain facilities were impacted by the cybersecurity event. For pricing, for the full year, we expect constant currency, rent, and storage revenue for economic occupied pallet growth to be in the range of 6%-7%. Year to date, it increased by 7.5%. This implies growth for the remainder of the year to be approximately 4.5%-6.5%, primarily reflecting the impact of the ramp 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 5.5%-7.5%. Year to date, it increased 7.8%. This implies growth for the remainder of the year to be approximately 3-7% due to the strong performance in the second half of 2022. For the full year, we are now expecting same-store constant currency NOI growth to be in the range of 15%-20%, which is approximately 1,000-1,200 basis points higher than the corresponding revenue growth. Year to date, same-store constant currency NOI increased by 19.9%. This implies growth for the remainder of the year to be approximately 10.5%-20%.

We are expecting the primary driver of NOI growth to come from economic occupancy. 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 the full year, we expect the non-same store pool to generate approximately $0-$5 million in NOI. Year to date, the non-same store pool generated a loss of approximately $5.2 million in NOI. This implies the remainder of the year to be in the range of approximately $5-$10 million in NOI. Turning to our managed and transportation segment NOI. For the full year, we expect these segments combined to generate $43-$50 million of NOI. Year to date, these segments generated approximately $24 million of NOI. This implies the remainder of the year to be in the range of approximately $19-$26 million.

Turning to our SG&A expense. For the full year, we expect total SG&A to be in the range of $231 million-$241 million, inclusive of $22 million-$24 million of stock compensation expense. Year to date, SG&A expense was $117 million, inclusive of $12 million of stock compensation expense. As a reminder, we exclude stock compensation expense from our total SG&A expense to arrive at what we call core SG&A expense, which is what truly impacts AFFO. For the full year, we expect core SG&A to be in the range of $209 million-$217 million. Year to date, core SG&A was $105 million. Our SG&A run rate reflects the in-year impact of spend related to additional cybersecurity measures. Turning to our interest expense.

For the full year, we expect interest expense to be approximately $151 million-$158 million, consistent with our previous guide. On to our cash tax expense, which is the number that impacts AFFO. For the full year, we expect this expense to be approximately $7 million-$10 million. Year to date, it was $4 million. Turning to our maintenance capital expenditures. For the full year, we expect this investment to be approximately $80 million-$90 million. Year to date, it was $39 million. We expect to announce development starts aggregating between $100 million-$200 million. Please keep in mind that our guidance does not include the impact of acquisitions, dispositions, or capital markets activity beyond that which has been previously announced. Finally, please refer to our IR supplemental for detail on the additional assumptions embedded in this guidance.

Now let me turn the call back to George for some closing remarks.

George Chappelle (CEO)

Thanks, Marc. As the operational and financial results of the second quarter highlight, our core business continues to grow and perform above expectations. Exceptional customer service, driving record occupancy and fixed commit contracts, hiring and retention continuing to improve sequentially, developments continuing to launch on time, and expanding our strategic alliances to include Canadian Pacific Kansas City Railroad, reflect the strong operational performance of today and our capabilities for achieving growth in the future. In closing, I'd like to thank the 15,000 Americold associates around the world for their hard work and dedication in servicing our customers every day. It is their efforts that provide the foundation for our future. Thank you again for joining us today, and we will now open the call for your questions. Operator?

Operator (participant)

Thank you. Ladies and gentlemen, we will be conducting a question and answer session. If you would like to ask a question, please press star and one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your headset before pressing the star keys. Ladies and gentlemen, a reminder, we request you to restrict to one question and one follow-up question per participant. One moment, please, while we poll for questions. Our first question comes from the line of Samir Khanal with Evercore ISI. Please go ahead.

Samir Khanal (Fundamental Research Analyst)

Hey, George, with, with occupancy out for the year, I mean, I, I guess, how are you thinking about occupancy? Not, I mean, for the balance of the year, you gave an idea, but really over the next, let's call it 18 months, I mean, do you think you can even push economic occupancy even higher in 2024? I guess, what's the sort of the new high watermark we should consider that, you know, knowing that you're already back to sort of 2018 and 2019 levels at this point?

George Chappelle (CEO)

Yeah, Samir, we said we know we can get into the low 90% on economic occupancy because we have facilities at that level now. We know that, based on similar facilities executing at that level, we can get there. I think the opportunities are really economic oc- occupancy in Europe as we commercialize that business, that's starting to contribute now in a much higher fashion. You know, our goal remains to get above 50%, our short-term goal, and longer term, Rob, I think we said 60% over time.

Marc Smernoff (CFO)

Yep, well into the sixties.

George Chappelle (CEO)

We think there's plenty of opportunity over the next 18 months.

Samir Khanal (Fundamental Research Analyst)

Okay, got it. I, I guess, just in terms of follow-up, maybe provide a bit more color on expenses? I know that, that sort of helped your NOI growth in the quarter as well. Maybe a little bit of color on that would be great, and then how you think about expenses over the next, let's call it, the next six months and into next year? Thanks.

Marc Smernoff (CFO)

Yes, Samir, this is Marc. As, as I mentioned in the guide, and when you look at the overall NOI growth, what you're seeing is, is stronger cost control, both with power starting to come down. I think you heard us mention that in the prepared remarks, and that's, we see that in our actual power results. We see improvement in labor as we've seen our labor metrics improve since the beginning of the year. I think overall, you see there's just much more disciplined cost control, some, you know, favorability for some, you know, power markets starting to come back from the very extreme highs that we saw late last year. I don't, I think those things overall, we're starting to see, you know, cost controls come under.

Operator (participant)

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

Michael Carroll (Managing Director and Head of US Real Estate Research)

Yeah, thanks. George, I wanted to circle back on your comments regarding occupancy. Is there a specific reason that the 100-200 basis point decline that we previously expected in 2Q didn't occur? I wanna make sure I got this correct. We now expect that 100-200 basis point decline will occur in 3Q?

George Chappelle (CEO)

That's correct. Yeah, as far as the region, that would have been North America, was input we had received from several large manufacturing partners and customers that were pulling forward maintenance and were telling us of downtime in the second quarter. As Scott said, it did begin to materialize late in the quarter, very late in June. So we do think it will occur, and we believe it'll happen in the third quarter at this point.

Michael Carroll (Managing Director and Head of US Real Estate Research)

Then when we're looking at the sequential trend, I mean, should we still expect that 100-200 basis point decline in 3Q compared to 2Q? I know that we always talked about the seasonal build, and 3Q should be higher. Should we expect a smaller decline going into 3Q because of that, that's gonna offset the deferred maintenance that some of these customers are gonna be performing?

George Chappelle (CEO)

You're thinking about it the right way, Mike. We should see a sequential increase in inventory through the third quarter. That happens every year, and we do believe it will happen this year. We should see the 100-200 basis points due to manufacturing downtime that we talked about. That will probably wash out to higher occupancy in the third quarter. If you look at our guide for the remainder of the year, we do guide up the second half of the year in occupancy. Part of it is in the third quarter. It could be the timing of this 100-200 basis points now gets washed out with the seasonal build of inventory that will occur, sequentially, second quarter to the third quarter.

Operator (participant)

Thank you. Our next question comes from the line of Craig Mailman with Citi. Please go ahead.

Craig Mailman (Director and Equity Research Analyst)

Thanks. I, I wanted to, George, hit on the Brazilian JV real quick. What is the kind of the cash, cash usage here in the near term? What's the, you know, kind of the process look like to monetize that? Are there buyers from for this type of asset right now, given the capital markets environment?

George Chappelle (CEO)

You know, our intention, Craig, is to sell. We're working hard to sell it. There are buyers interested. We have a process ongoing. Whether that makes it all the way to a sale or not is to be determined. As of now, we have interest, and we're working the process with the intention of selling it as soon as we can.

Craig Mailman (Director and Equity Research Analyst)

It sounds like you guys are kind of pulling this from AFFO. I just want to clarify something, because you kept saying that the cyber was excluded, but then Marc would say numbers would have been higher if the cyber hadn't happened. I just wanted to see if that's a terminology switch. As I think about that $0.04, how much of it is from Brazil possibly being excluded versus kind of better operations that you guys are seeing?

George Chappelle (CEO)

Yeah. So a few things. I think the core of the overall business that you saw in what we reported in our $0.28 of AFFO is being driven by occupancy that we're seeing and pricing that we're realizing principally in our same-store portfolio. As it relates to cyber, we had certain one-time remediation costs that were directly related to the event. Those were pro forma or excluded from that $0.28. They did not impact the $0.28 earnings. The piece from cyber that is not in the $0.28 is the fact that we missed revenue and the NOI from that revenue of approximately $0.03, which was the missing piece of revenue that actually would have taken our reported AFFO from the $0.28 up to $0.31. Per GAAP, we can't report that missing revenue or, or profit.

Operator (participant)

Thank you. Our next question comes from the line of Nick Thillman with Baird. Please go ahead.

Nick Thillman (Senior Research Analyst)

Hey, good evening, guys. Just going off that on the cybersecurity. On the service side, it looks like NOI margin, the same-store pool, would have been 4%, so flat sequentially without that disruption. I guess, like, longer term, where are we trying to push those service margins? I know you've talked about maybe pushing it to 10%, but have you begun discussions on that, and, like, kind of what has been the customer feedback?

George Chappelle (CEO)

Yeah, the first, to get back to pre-COVID margins, which we said were high single digits, that's now within our control. We've, we've largely priced the inflation related to the services margin. We now have to get back to the productivity levels. I would say, pricing largely complete. Might, might be some minor pricing left, but largely complete. Productivity, so getting the associates to work at the same throughput, if you like, from that they used to be able to work back pre-COVID, is the real challenge, and that takes time. You know, you've got to assemble a workforce, you've got to train them, you've got to get them to work safely together, and we've said that's a three to six-month exercise. The hiring has gone well.

The retention is getting both sequentially better and better year-over-year. Those two key components are coming into line nicely, and now we just need to do the training and go through the time it takes for a person to get comfortable in our environment and comfortable to work safely and productively. We expect to see improvement in the second half of the year. Whether we can get all the way back to 9% or 10% by the second half of the year is probably doubtful, but we should make progress on the 4%.

Nick Thillman (Senior Research Analyst)

Maybe just on the throughput of the obviously, the smaller basket size makes sense. Are you seeing any of the throughput from, like, the upper end of the bucket? Are you seeing any slowing on that end as well, or is it just mostly on the consumer end?

George Chappelle (CEO)

Just mostly on the consumer end. I mean, manufacturers have continued to support high inventory levels, so they can provide excellent customer service to their customers. It's just the outbound, if you like, to retail customers that's slowing down due to consumer buying habits easing and less disposable income, et cetera. You know, pretty much the same story we've been telling now for two or three quarters.

Operator (participant)

Thank you. Our next question comes from the line of Mike Mueller with JP Morgan. Please go ahead.

Mike Mueller (Senior Equity Research Analyst)

Yeah. Hi, two, two quick ones. One, are you seeing any lingering impact in Q3 from the, from, from cyber? I'm talking more the, the $0.03 impact, not the, not the $0.07.

George Chappelle (CEO)

No, we're not, Mike. Our guidance reflects anything that is coming post Q2 with cyber. I would say the bulk, the large percentage, 90%+, has been incurred in the second quarter. We've factored it into our, our reported results, obviously, and we've factored anything beyond that, that we are aware of, into the guide for the remainder of the year.

Mike Mueller (Senior Equity Research Analyst)

Got it. Okay. Then, on the comment of expecting more expansion announcements in the back half of the year, was that a comment just tied to specific expansions, or should we be thinking of new development announcements as well as expansions?

Rob Chambers (Chief Commercial Officer)

Yeah, it could be a combination of both, to, to be honest with you. I mean, our, our pipeline, our development pipeline, which I would say right now is, is very robust, is, is a mix of both expansions and greenfield opportunities, across, you know, all, all of our geographies. There's a mix of automated and conventional facilities in our pipeline, so we're, we're excited about it, and, and, it, it, it'll be a combination of both.

Operator (participant)

Thank you. Our next question comes from the line of Vince Tibone with Green Street. Please go ahead.

Vince Tibone (Managing Director and Head of US Industrial and Mall Research)

Hi, good evening. When do you see the developments with Canadian Pacific and DP World commencing? Just, you know, how much capital could you see allocating to these type of projects, to these partnerships over the next several years?

Rob Chambers (Chief Commercial Officer)

We're actively underwriting developments with both partnerships. I think in the coming quarters, we'll have announcements associated with both. When we think about the amount of capital that could be deployed in those types of facilities, I think we've said before, you know, DP World has 80+ ports that they operate at. You know, if we had a development on 5%-10% of those ports, you know, we would consider that partnership a success. When we think about the Canadian Pacific network, they have, they have 30+ nodes in, in, in their network, and, and for us, kind of the same thing, 5%-10% of, of those nodes having an Americold cold storage facility built on them would be, would be a great success for us.

Vince Tibone (Managing Director and Head of US Industrial and Mall Research)

That's, that's helpful. Just, like, how different are the cold storage facilities in these, you know, kind of key supply chain nodes differ from the rest of your portfolio, whether it's production advantage or distribution? Like, I'm just trying to get a sense, like, is there a little bit of kind of learning with some of these developments where you maybe wanna, you know, complete one before you start the next one? Or is this, you know, pretty similar to the other facilities you own, just, you know, a higher barrier location?

Rob Chambers (Chief Commercial Officer)

I would say they're pretty similar. I mean, every facility has a certain nuance. These facilities may have a slightly higher component of value-added services associated with them that we would need to make sure that our facility design, you know, cared for. I would not say there's any substantial amount of learning or nuances to them, where we would want to build one, learn from that model before we build the next. We know how to build these facilities, and we could handle more than one at one time.

Operator (participant)

Thank you. Our next question comes from the line of Ki Bin Kim with Truist Securities. Please go ahead.

Ki Bin Kim (Managing Director of US REIT Equity Research)

Thanks. Hi. UPS just raised wages for full-time workers to $49 an hour. I was wondering if you had any thoughts on a possible impact to your employee base or your tenant's employee base, and if there could be a bullwhip effect on wage inflation.

Rob Chambers (Chief Commercial Officer)

No, for us, we've seen wage inflation moderate. As we said, all inflationary impacts seem to be moderating at the moment. Marc mentioned some power, primarily in Europe, coming off surcharging, et cetera. Coming back to wages, our hiring is going well, our retention is going well. We now have more permanent hours and corresponding permanent associates in the system than we ever had, at 76% of the workforce. You know, going back to pre-COVID, that was never higher than 70%. Hiring is going well, retention is getting much better, and that tells us that wages have normalized, at least for the time being, where we are. We don't see any impact from the UPS agreement, at least not yet, and we don't expect to see any.

Ki Bin Kim (Managing Director of US REIT Equity Research)

Okay. On Comfrio, you know, it looks like the basis for the entire joint venture was, like, $135 million. Can you just help me understand, like, did you have to pay the, for the remaining 80% you didn't own? Was that the write-off? And tied to that, I was wondering if there's a similar dynamic for SuperFrio.

Rob Chambers (Chief Commercial Officer)

Yeah, I'll hit that. We had basis of an existing 22% of that entity when we closed on the Agro acquisition. The put loss that you saw flow through the face of the p- the PNL was $57 million. That was incremental cost for the, the 78% that we didn't own. Then the balance was a, you know, working capital investment we made into that business, which was roughly another, say, $22 million, $25 million. That was the entire basis of our investment in Comfrio. SuperFrio, very different business, owns a significant amount of its real estate, and that arrangement does not have any put arrangement in it.

Operator (participant)

Thank you. Our next question comes from the line of Anthony Powell with Barclays. Please go ahead.

Anthony Powell (Equity Research Analyst)

Hi, good evening. I, I had a question about how the, the CPKC deal came to fruition. It seems like a great opportunity for you to develop over time. Was that a competitive process? Do you come to them? Did they come to you? Maybe some more background there would be super helpful.

Rob Chambers (Chief Commercial Officer)

Yeah, not, not a competitive process. It, it was one that, you know, was nurtured over, over the last year, year and a half. We stayed close to CPKC as, as they went through their merger and acquisition process. We were very intrigued by the solution that they created through the merger of their business. It was just a collaborative conversation when we talked about how the customer overlap that we, that we have today, you know, we could use to create, create value, create value for us and create value for our customers. This, this solution that we're gonna be able to offer, I think, is gonna be a great benefit to our mutual customers, and we're excited to get started, but nothing competitive.

It was just something that was developed, over the last year or so.

Anthony Powell (Equity Research Analyst)

Great. Thank you. We've got some questions from clients about newer competitors who are more automation-based, who are saying they're cheaper than you or some other legacy, I guess, competitors in the space and who are maybe serving some of the larger customers. Are you seeing any more competition from some of these newer, I guess, more automated operators? If so, how are you, you know, answering that competition?

George Chappelle (CEO)

One, one thing I would say is we also provide highly automated solutions, three of which have gone live just this year already. One more automated facility will go live this year. I don't think there is anybody out there that can build an automated facility more reliably than we can. Rob, you're probably closer to the competition, though.

Rob Chambers (Chief Commercial Officer)

Yeah, I would just point to our record economic occupancy, our record fixed commitments, and our continued low churn rate to demonstrate that from an Americold standpoint, we continue to gain share.

Operator (participant)

Thank you. Ladies and gentlemen, as there are no further questions, the conference of Americold Realty Trust has now concluded. Thank you for your participation. You may now disconnect your lines.