Greetings, and welcome to the Americold Realty Trust Third Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr.
Scott Henderson, Senior Vice President, Investor Relations and Capital Markets. Please proceed.
Good afternoon. We would like to thank you for joining us today for Americold Realty Trust's 3rd quarter 2019 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 Investors section of 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 the company's website. We also would like to note that numbers presented in today's prepared remarks have been rounded to the nearest million with the exception of per share amounts.
This afternoon's conference call is hosted by Americold's Chief Executive Officer, Fred Boehler and Executive Vice President and Chief Financial Officer, Mark Smerinoff. Management will make some prepared comments, after which we will open up the call to your questions. Now, I will turn the call over to Fred. Thank you and welcome to our Q3 2019 earnings conference call. This afternoon, I will provide highlights for the quarter, discuss macro trends driving our business and update you on our growth activity.
Mark will follow with a review of the Q3 results and then discuss our balance sheet and outlook. After our prepared remarks, we will open the call for your questions. The Q3 was a strong quarter for Americold. We reported total company revenue growth of 16%, total company NOI growth of 18.9 percent and core EBITDA growth of 21.6%. This was driven primarily by 3 factors: 1st, the contribution from our 2nd quarter acquisition 2nd, as our platform and scale grow, we continue to benefit from improved operating efficiencies and integration synergies.
As a result, total company NOI margin increased 65 basis points to 25.9 percent and core EBITDA margin increased 92 basis points to 20% compared to the Q3 last year. And third, our core portfolio continues to perform well. On a constant currency basis, same store Global Warehouse segment revenue grew by 3.3% and NOI grew by 2.3%. Year to date, same store Global Warehouse segment revenue grew by 3.2% and NOI grew by 3.4%, also on a constant currency basis. Outperformance is supported by favorable macro trends.
We continue to expect that demand will rise steadily with population and consumption growth. In addition, consumer preferences continue to shift towards healthy, perishable food. Manufacturers are supporting this demand through the introduction of new products and reformulations of old. This increases the need for temperature controlled storage. Across our portfolio, we see no signs that these trends will change, and we believe we are uniquely positioned to capture outsized market share utilizing our fully integrated infrastructure.
On the supply side, significant barriers to new development remain in place. Our systems and processes are backed by many years of research and 1,000,000 of dollars of technology investment. Further, our customers trust us to maintain their brand integrity, and we take this responsibility seriously. We believe this customer centric focus, combined with our portfolio that has the right assets in the right location, serve us well as we seek to achieve consistent and profitable growth over the long term. In other news, during the quarter, we were extremely pleased to receive an investment grade rating of Baa3 with a stable outlook from Moody's.
This rating combined with our BBB ratings from Fitch and DBRS Morningstar significantly reduces our cost of capital. As our growth activity remains robust, this magnifies the benefits of the bottom line for our shareholders. Across our active development pipeline, we have 5 projects currently underway, totaling 42,000,000 cubic feet and representing $261,000,000 of total investment. These projects remain on track to be completed at dates ranging between the end of Q4 2019 to mid-twenty 21. At our recently completed 15,700,000 Cubit Foot State of the Art Automated Expansion Project in Chicago, we continue to ramp up systems and onboard customers.
However, due to the weather related delays in completing construction, customer requirements to utilize the space for the upcoming holiday season and our prioritization on meeting our customer service requirements, full stabilization of this facility may take 12 to 18 months. Our goal is always to get our operations right for our customers, and our stabilized return expectations remain unchanged for this project. With regard to the acquisitions we announced earlier this year, we continue to integrate the operations onto our platform and implement our Americold operating system and commercial business practices to capture expected efficiency gains. As noted previously, we transitioned core SG and A functions to our headquarters, including HR, finance, IT, and Engineering. I am excited about the progress to date, and we are on track to achieve our synergy goals.
Also, as we mentioned last quarter, our percentage of fixed commitment storage contracts in our Global Warehouse segment decreased as a result of the acquisitions, which had fewer fixed commitments. I'm pleased to say that in the 3rd quarter, we increased our percentage of fixed commitment storage contracts by 170 basis points sequentially, and we are now back to 40%. Also, as previously discussed, we sold our minority JV interest in China during the Q3. This sale generated approximately $15,000,000 in cash proceeds. Finally, I'm pleased to welcome Cara Julian as our new Executive Vice President and Chief Human Resources Officer.
Kara brings a wealth of experience in human resources and will play a valuable role in developing our associates to support the company's growth. We are excited to have Cara on our team. I will now turn the call over to Mark, who will provide more details on our quarterly results, balance sheet and outlook. Thank you, Fred, and good afternoon, everyone. Today, we will provide updates on our actual performance as well as certain metrics on a constant currency basis.
We reported total company revenue of 466,000,000 dollars and total company NOI of $121,000,000 which reflects a 16% increase and an 18.9% increase year over year, respectively. Core EBITDA was $93,000,000 for the Q3 of 2019, an increase of 21.6 percent year over year, primarily driven by our 2019 acquisitions, solid growth within our core portfolio and continued improvement in operating efficiency. Our core EBITDA margin grew by 92 basis points to 20%. Please note, our strong core EBITDA growth and margin improvement were impacted by factors including higher healthcare expenses related to an increase in high dollar claims, the J curve associated with implementing and aligning our recent acquisition to the Americold operating structure and practices, start up costs related to our Chicago development project, and the currency translation impact of the strengthening of the U. S.
Dollar. It is important to note that higher healthcare costs were not related to workers' comp, but rather made up of certain high dollar claims from associates and their dependents utilizing their healthcare benefits. As we have noted in the past, our quarterly results can be lumpy due to the timing of certain factors such as healthcare expenses, which is why we recommend continuing to focus on an annual rather than quarterly result. For the Q3 2019, we reported net income of $27,000,000 compared to net income of $25,000,000 for the same quarter of the prior year. Our 3rd quarter core FFO was 59,000,000 dollars or $0.30 per diluted share.
Our 3rd quarter AFFO was $52,000,000 or $0.27 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 Q3 of 2019, Global Warehouse segment revenue was 366,000,000 dollars which reflects growth of 23% year over year. Global Warehouse segment NOI was 113,000,000 which reflects growth of 21.1 percent. Global Warehouse segment margin was 31% for the 3rd quarter, a 48 basis point decline compared to the same quarter of the prior year.
The decrease in margin was primarily due to the factors impacting core EBITDA previously discussed. At quarter end, $244,000,000 of our rent and storage revenue was derived from customers with fixed commitment storage contracts as compared to $232,000,000 in the Q2 of 2019 and $215,000,000 in the Q3 of 2018. For the Q3 of 2019, 40% of rent and storage revenue was generated from fixed commitment storage contracts, a sequential increase of 170 basis points from the Q2 2019 on a combined pro form a basis. As of September 30, 2019, our global portfolio consisted of 176 facilities, 2 less than what we reported at the end of the Q2 of 2019. We ended the Q3 of 2019 with 165 facilities in our Global Warehouse segment portfolio and 11 facilities in our 3rd party managed segment portfolio.
During the Q3, we exited a lease facility in Hebron, Idaho, which was classified as non same store. In connection with the exit of this lease, we relocated the majority of customer product within this facility to other owned facilities within our network. Additionally, we exited the operation of 1 of our 3rd party managed facilities in Crete, Nebraska, and there was no material contribution to NOI in the Q3 from this facility. Now I will turn 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 Q3 2019, 138 of our 165 warehouses were included within our same store pool. The remaining 27 non same store warehouse facilities include the 24 facilities that were acquired in 2019 and 3 legacy facilities that are in various stages of operational stabilization. For the Q3 of 2019, our same store Global Warehouse segment revenue was $298,000,000 which reflects growth of 2% year over year and 3.3% on a constant currency basis. Same store global warehouse NOI was $93,000,000 which reflects growth of 1% year over year and 2.3% on a constant currency basis. Same store global warehouse NOI margin decreased 31 basis points on a constant currency basis to 31.1%.
This comparison was impacted by approximately $3,000,000 of healthcare expenses related to higher claims reported in the Q3 than I previously mentioned. I will now discuss our same store results in a little more detail. For the Q3, same store global rent and storage revenue grew by 1.4% year over year or 2.6% on a constant currency basis. Our same store economic occupancy was 79.2%. This reflects a decline of 108 basis points from the prior year, while partially offsetting the 196 basis point decline in physical occupancy.
Our same store global rent and storage NOI grew by 2.3% year over year or 3.4% on a constant currency basis. Same store global rent and storage NOI margin increased 54 basis points on a constant currency basis to 64.1%. The NOI growth and margin expansion was a result of continued portfolio management combined with our efforts to grow our fixed commitment storage contracts and disciplined cost control through the Americold operating system of our power and facility related costs. Same store global warehouse services revenue for the Q3 increased 2.4% year over year or 3.9% on a constant currency basis. These results included the benefit of 1 extra business day in the Q3 2019 and excluding this, same store warehouse services revenue would have increased 2.4% quarter over quarter on a constant currency basis.
This revenue increase resulted from a favorable mix, which generated 4.1% growth in our same store warehouse service revenue for throughput pallet on a constant currency basis. Our same store global warehouse services NOI declined by 8.3% year over year or 5.9% on a constant currency basis as a result of the increased health care costs previously discussed. Despite these higher costs, same store warehouse services NOI margin was 6% on a constant currency basis in the quarter, a decline of only 63 basis points. Using the same store pool for the 1st 9 months of the year, which represents 137 facilities, our same store global warehouse revenue growth was 3.2% and NOI growth was 3.4% on a constant currency basis. Please note that the 9 month period this year contained the same number of business days as last year.
Year to date same store revenue and NOI growth were impacted by the same factors that drove the quarter over quarter performance. Adjusting for the $2,000,000 non recurring workers' comp benefit realized in the first half of 2018 that we previously discussed, our NOI growth would have been 4.2% on a constant currency basis. Within our Global Warehouse segment, we had no material changes to the composition of our top 25 customers who, on a pro form a basis, account for approximately 60% of our global warehouse revenue and who have been with us on average for over 30 years. Additionally, our churn rate was approximately 3% of total warehouse revenue, a 30 basis point reduction from the same period last year. We believe our strong focus on customer service and active portfolio management contribute to our ability to retain customers.
Corporate SG and A totaled $32,000,000 for the Q3 of 2019 as compared to $27,000,000 for the comparable prior year quarter. This increase is primarily a result of the SG and A absorbed from our recent acquisitions net of synergies, higher stock compliance costs, increased stock compensation expense and additional investment made to support our expanded development pipeline. Additionally, we incurred total cost of $4,000,000 for the Q3 as shown in the acquisitions, litigation and other line item within our statement of operations, which primarily reflect M and A related integration, retention and severance costs. Of the $10,000,000 in total cost savings that we expect to realize from the Cloverleaf integration, we have already eliminated approximately $6,000,000 on an annualized basis, and we have taken action to eliminate $4,000,000 more of cost on an annualized basis. As we stated, we expect to capture the full benefit of the synergies by the end of the 1st 12 months after closing.
Now, let me update you on our development spending. In aggregate, we have spent $155,000,000 year to date on expansion development capital, including $50,000,000 in the Q3. As Fred mentioned, in Chicago, we have completed construction, are commissioning our system and are currently on boarding and serving our customers. Our active expansion and development projects are on track and are expected to achieve our targeted return. It is important to note, during the period after completion until stabilization, we will incur start up costs such as making key facility hires, training employees, bringing down the temperature in the facility, fine tuning automation systems and ramping up and onboarding new business.
As we work towards stabilization during this time, which normally takes approximately 12 months, there may be instances where the revenue generated for the period may not cover these startup costs. Now turning to our balance sheet. As of September 30, 2019, total debt outstanding was $1,900,000,000 of which 76% was in an unsecured structure and then 92% was at a fixed rate. Our real estate debt has a weighted average remaining term of 6.5 years and carries a weighted average contractual interest rate of 4.29%. At quarter end, we had total liquidity of approximately $1,500,000,000 This includes $372,000,000 of net proceeds from our previously announced equity forward.
Our net debt to pro form a core EBITDA was approximately 4.1x. Additionally, during the Q3, we filed a $500,000,000 at the market program as an additional capital source to support our growth strategy. At this time, we have not utilized our ATM. Finally, we received an investment grade rating of Baa3 with a stable outlook from Moody's. This rating, combined with our BBB rating from Fitch, reduced our annual spread on our $475,000,000 term loan from 145 basis points to 100 basis points, resulting in a $2,100,000 in annual interest savings.
Additionally, our annual spread on our $800,000,000 revolver, which at the end of the quarter was not drawn, is reduced from 145 basis points to 90 basis points, resulting in significant interest savings when the revolver is being utilized. Also, as a result of this rating, we moved to a flat 20 basis point facility fee on our revolver. Assuming an undrawn revolver, this results in 1,200,000 dollars in annual interest savings. Before I turn the call back to Fred, I would like to update our outlook for the remainder of 2019. For the full year 2019, we expect the following: we are reiterating our Global Warehouse segment same store revenue growth range of between 2% 4%.
Given the higher than expected healthcare costs experienced year to date, we now expect same store NOI growth for this year to be at the bottom half of our stated range of 100 to 200 basis points higher than the associated revenue growth. Both of these growth rates are expressed on a constant currency basis. Selling, general and administrative expense as a percentage of total revenue is expected to range between 7% and 7.2%. Recurring maintenance and IT capital expenditures are now expected in the range of $50,000,000 to $60,000,000 Growth and expansion capital expenditures are expected to be 205,000,000 to $215,000,000 This includes spending related to the company's announced development projects. Anticipated AFFO payout ratio of 65% to 68%, reflecting a full year weighted average diluted share count of 180,000,000 to 184,000,000 shares.
I will now turn the call back to Fred. Thanks, Mark. We are very pleased with our performance so far in 2019. We continue to generate strong results from our same store portfolio as well as grow our business through strategic developments and acquisitions, which are fully funded with long term capital. As we look towards the end of 2019 and into next year, we believe Americold is uniquely positioned to continue to drive long term growth and create shareholder value through best in class operational expertise and accretive portfolio growth.
I'd like to thank all of our associates for their continued hard work and outstanding contributions as we continue to grow our company and serve our global customers. Thanks again for joining us today and we will now open the call for your questions. Operator?
Thank you. Your first question comes from the line of Ki Bin Kim with SunTrust Robinson Humphrey. Please proceed with your question.
Thanks. Good afternoon, everyone. Hi, Ki Bin. Can we first hi. Can we first start off on the expenses side?
So if I just try to remember correctly, I thought the expense comps still negative, it still will be tough in the second half, but I thought it was supposed to get better because I think you had a $2,000,000 negative comp variance last quarter year over year and it was supposed to be like $1,000,000 in the second half. It was supposed to just get better, but it looks like it got worse. So can you help me understand that better?
Yes. So, clearly, as we spoke about in our prepared remarks, the Q3, we had a higher number of high dollar health insurance claims, approximately $3,000,000 in our same store portfolio. So if you look at that, that contributed roughly to a 3 30 basis points reduction in what we would have seen in our normalized NOI growth rate for the warehouse segment or for the same store warehouse segment. So it's really isolated around that number. We will say over time, look, we have roughly several thousand of our employees on our healthcare programs and we are self insured and we will see over time some variation in that number.
I would say that we don't believe this is a trend. But over time, over a long time, given that population, you may have quarters where you have higher healthcare costs that's happened to be one of them.
Okay. And that $3,000,000 I am just trying to get a better sense of when that starts
to how that dissipates over time? It was fully
incurred this quarter. Yes. So is it 1 year from now that will be gone? Or will it kind of ratchet down pro rata somehow over the next 4 quarters?
Oh. Ki Bin, these are like costs for medical procedures that happened during the quarter. So they are fully approved.
I see. Now, maybe bigger picture, is there a way are there ways that you are thinking about to maybe take the edge off these kind of volatile expenses? I'm not sure if reinsurance is even a possibility, but are you looking into anything like that?
Yes. We do retain reinsurance for extreme high dollar claims. The increase that we saw this year, when we talk high dollar claims, we're talking about claims in excess of $250,000 for an individual claim. We had a significant number in this quarter. We don't believe, again, that it's a trend and we do retain reinsurance above that level.
But it's just as you know, just like with regular car insurance, you don't have a 0 deductible. It's prohibitively cost expensive. We believe over the long term, we retain the appropriate level of reinsurance to manage the risk of the business.
Thanks. And just last
And, Kibei, just a follow-up on that. Again, looking at it on an annual basis, this is one of those items that we have called out before that can fluctuate on a quarterly basis. But over the span of the year, it tends to work itself out through the expenses. So again, that's another reason why we kind of focus on the full year.
Okay. And in terms of like the revenue side of the business, the business trends, can you just give us a little more clarity on some operating stats like the lease spreads year to date in 2019 and maybe the rent growth that you've seen? And I know customer retention is probably a tricky stat given that 60% of your revenue is on month to month or non fixed rate commitments. But maybe just provide us a little more color just so that we get a better business sense of what's going on?
Yes. As I mentioned in the individual categories and breaking them apart, you probably best see this in our same store portfolio. We're actually seeing decent revenue growth and we continue to hold our guidance for the full year. Specifically in the quarter on a constant currency basis, we saw rent and storage revenue growth of roughly 2.6% and we saw services, warehouse services growth of 3.9%. On average, for the whole segment, roughly 3.3%, which is just above the midpoint of our guidance range.
Yes. I guess I was asking about what line items contributed to that 2.6% growth. So, for example, I think when I look at your lease expiration schedule, you obviously ran 8 more into the expirations for this year. So just kind of what kind of rental rate trends are you seeing when you are resigning leases?
Yes. So if you come back to look at and this is in our supplement, so our same store rent in storage for occupied pallet is roughly going up about 4.4% year over year on average and on a constant currency basis, closer to 5.5%. So, we are seeing strong growth and as we mentioned, roughly 4% growth on revenue per throughput pallet. So, we continue to see strong revenue growth in the business. I think, remember, on the leases and the renewals and such, our churn rate is very, very low, right?
I mean, I think we are talking about 3% to 4% churn rate, So very little rotation. So our customers are with us long term and we renew their contracts as we go.
Okay. Thank you.
Thanks, Ki Bin.
Your next question comes from the line of Michael Carroll with RBC Capital Markets. Please proceed with your question.
Yes, thanks. Fred, I wanted to touch
on Rochelle developments. I believe I heard you correctly saying that you don't expect it to be stabilized in 12 months. Now you expect it to be stabilized in 18 months. Can you kind of walk through why it's taking a little bit longer and what's your expectations there?
Yes. I think we said in the release that we expect it to be between 12 and 18. It's all about ramping up and commissioning the automation. If you recall, a quarter ago, we talked about the fact that we experienced some extreme weather delays in getting that building built, about 140 days above and beyond our original expectations. The building is 140 feet high, wind gusts, ice, snow, rain, any weather condition you can think of affected our ability in being able to erect that, the racking and then the siding that goes that's attached to the racking.
What that does is that prevents us from being able to fully test and commission all of the automation that's within that building until you get the building wrapped. So as a result, that testing and kind of fine tuning the automation didn't occur until late in the year when we were opening and we're expecting to onboard some business for a particular customer who is kind of in a pinch running up against an expiration with their current provider. So we onboarded that product in at same time that we are commissioning. So we are burning in, if you will, the automation and getting it fine tuned. And we have made some decisions as we are kind of getting late in the year to be a little cautious about overburdening that during the holiday season, the most critical time of the year.
So we have onboarded. We have got a couple different customers in there. The system is working. It's just we're right up against the holiday schedule, which was unplanned due to the 140 days in delay. So, we're just giving ourselves a little cushion there to say that coming out of the holidays, we will start ramping more business into there and that stabilization could be somewhere between 12 18 months.
So what happened in the Q3 related to the financial impact? I guess, how much money did Rochelle add? And then I guess, I am assuming Q4 is going to be fairly stable and then we start seeing a ramp up as you go into 2020. Is that correct?
Yes. As we mentioned in our prepared remarks, typically with a launch of a facility, there will be a J curve. I think we have called out certain of the types of expenses that you would expect to see at the launch of a facility. Obviously, we are bringing on the labor. We are bringing down the temperature.
Before the business is ramping in, we are dialing in the automation. So it's not uncommon and this is why we talk about typical standard year to stabilization being the 1st 6 months roughly being breakeven, just because you have much higher cost as you are onboarding, learning the business, making sure you are servicing the business and then it really ramps from there. And we expect to exit, just as we have always said, that first year on our stabilized run rate. So was there a contribution in the 3rd quarter? Because I
guess it was completed between the 1st and second quarter. And then if you are not bringing on new customers in the 4th quarter, should we expect a J curve ramp there? Or is it going to be kind of similar to what it was this quarter?
Yes. As I said, that J curve typically could take upwards of the 1st 6 months. So you think about really a beginning of Q3 launch of the facility. So we expect to have those costs through the balance of the year.
Okay. Great. And then last question, Mark.
That's reflected in our full year guidance.
Okay. And then last question, Mark. I think you said in the guidance that you still expect NOI growth to be about 100 basis points higher than your revenue growth. Through the 1st 9 months, it seems like it's only 20 basis points higher. So what's going to happen in the Q4?
Is it just that you typically see higher margins in the Q4 given the seasonality and that's what's taking it up so significantly?
Yes, Michael. This is the busiest time of the year. So this is when you typically convert a little bit more. Again, this is why we look at the full year.
Okay, great. Thank you.
Your next question comes from the line of Dave Rodgers with Baird. Please proceed with your question.
Hey, good afternoon guys. Just wanted to follow-up on Mike's question. So it sounds like you're at a full expense run rate for Rochelle in the Q4, if not before, is that right?
That's correct.
Okay. And then I guess on the second question was the margin enhancement. Can you kind of walk through what's going to get you to the 200 to 400 basis points of margin expansion in the Q4 to kind of get you on pace for the year? I mean, it's almost upwards of 400 you'd need and that would be a great performance in the Q4 and obviously you guys have confidence in that. But just on top of the occupancy and the throughput, we just haven't seen that yet.
And so just kind of curious if you could walk through some of the mechanics of kind of getting up to that number.
Yes. No, look, I think the warehouse segment performance actually is very strong. As I said in my prepared remarks, we have a significant dollar amount, roughly $3,000,000 within our same store of health care costs that burdened our same store services margin and that item alone was 3.30 basis points that impacted our same store revenue growth. So we are talking about going from a 2.3% revenue growth up to a 5.6%. So that's what I was saying.
The business continues to perform. We don't expect to see the heavy healthcare that we saw this quarter. While the item is lumpy, it tends not to be sustained over long periods of time. And so we look at that. The core business performs and you can also take a look at our year ago margins too to see the impact of the volume that the 4th quarter has in the overall business.
Yes. So again, normalized healthcare as well as the ramp up in business. When you talk about occupancy at this type of the year, remember, we've got such a diversified portfolio and assets that service a lot of different parts of the food supply chain. But this time of the year, this is where it's your key logistics centers, your key logistics markets, our distribution centers that really ramp up. And every single one of those markets are operating at 85% or higher.
So they're very, very full, but not too full, which means that we're going to be able to operate it highly efficiently by not overfilling the facilities and being at 100% like we used to be in the past. So this is a high efficiency quarter for us and that's why the NOI is outsized.
Got you. I appreciate the added color. On the G and A, maybe for Mark, you did talk about the synergies that you were getting post the Cloverleaf transaction. But I wanted to ask is the G and A was up sequentially even if you kind of back out I think some of the one time items in the quarter. Is that still a good run rate kind of going forward?
Or do
you expect to be able
to take some of the synergies out of that line? Or are we seeing them come from somewhere else?
No. As I said, roughly we've identified in action an additional $4,000,000 on an annualized basis of synergy that we should continue to see benefit overall spend on the go forward basis.
And was the $6,000,000 annualized fully reflected in the 3rd quarter?
Well, the $6,000,000 on an annualized basis, so it wouldn't be all $6,000,000 in that quarter, it would be the annualized impact of that kind of midway through the quarter, if you think about
More midway. So there's some benefit of
the Q4. Okay, that's helpful.
And then last, maybe just, Fred, can you talk about kind of the outlook or appetite? Obviously, the appetite, but the pipeline for acquisitions, the opportunity that you're seeing out there given your liquidity today?
Yes. No, the same opportunities that we have seen. We have got, as I say, on the acquisition front, we capped out a very wide net. We are going to remain disciplined and make sure that we are buying things that make sense and fit within our portfolio in a way that we can fully integrate our enterprise. So again, our approach is full on integration, and that's important to us.
And so look, we're looking at a number of things. If something happens, we'll action it. If not, remember the other part of our growth pipeline is the development pipeline and that continues to be very robust. Still have a pipeline in excess of $1,000,000,000 So you'll see us continue to execute on that in addition to the buyback process we have got going right now. Thank you.
Sure. Thanks, Ed.
Your next question comes from the line of Manny Korchman with Citigroup. Please proceed with your question.
Thanks. Fred, maybe to follow-up
a little bit on Dave's question. In your press release, you talked about a wealth of potential opportunities. Is there something special you're looking at now that you would include that line in the release? And with that line, were you talking about acquisitions and development? Or are you talking about sort of lease up opportunities, more specifically?
I think we were speaking more about acquisitions and development. We were talking about growth.
And is there something going on at the moment that you chose to sort of leave with that in your prepared quote in the release? Or is it just more of the same and you chose to just highlight it?
Yes. No, I think we highlighted in every press release because it's a fundamental part of our growth strategy. We don't give guidance on acquisitions. We say that that will be lumpy because of the fact that we are kind of hunting and packing to find the right acquisitions. But the development pipeline continues to be really strong.
So this development pipeline has been this size ever since we went public. We've executed on a tremendous amount of it and we plan on continuing to do so. So we're just calling out that that growth continues to be strong and as fuel for us. Yes. I mean, our long term model, I think, as you've heard us talk about, is our goal is to start roughly between 75 $1,000,000 of new development projects in a given calendar year and we believe our pipeline is robust and continues to support that level of development growth.
Okay. If we can
hop back to the discussion on the healthcare costs,
just to help frame sort
of what's going on, what is sort of your annual outside of just the premium spend? So those costs that you highlighted in the quarter, what's your total sort of annual spend on those? And then what were they in, I guess, in total in the quarter that would have been higher than what you expected, if that makes sense?
Yes. No, exactly. As we said, on an annual basis, our total healthcare spending in our same store could be close to, in aggregate dollars, around $40,000,000 So So this gives you a sense of that $3,000,000 move is about roughly a 10% move on an annual basis and obviously a much larger percent move on if you think about the quarterly impact of that.
So instead of $10,000,000 you spent $13,000,000 in the quarter? Correct. And so we should think about it being sort of at that $10,000,000 mark, there
is no Visa Fee thing that will be higher going forward? Yes. Look, when we look back at our healthcare expenses over time, not dissimilar, we have seen roughly about 5% growth over the long term in overall healthcare spending. We factor that into our cost model and our escalation. What I would say, the thing I think we look at, while we will as a business going forward in the future, we may see this level of lumpiness going to last quarters, Overall, what I would say is this is the least controllable of all the expenses that we manage, the core business expenses, the operations, the efficiencies, the workers' comp, those are performing.
This is something that is one of those items that's probably a little more unique to our business than others. And so, we do our best to manage it. We have a lot of investment through HR around health and wellness programs. But look, I wish we all had a crystal ball to make sure we knew we were going to get sick to do something about it. And last one for me, the preferred income tax benefit in the quarter was much higher than we had expected.
Is that an item that's
going to continue sort of at
those levels? Or what would be a more normalized level to think about in the future? Yes. What that particularly related to was the fact that our legacy business had some NOLs in our TRS. And with the addition of the acquisition, we were able to take advantage of some of those NOLs which were previously reserved.
And so as we acquire businesses in the future and we continue to grow our earnings, we do think that there could be some level of benefits, but I think you'll see the bigger moves in connection with when we make acquisitions.
Thanks Mark.
Thanks Jamie.
Your next question comes from the line of Mike Mueller with JPMorgan. Please proceed with your question.
Yes. Hi. Two questions here. And first, I apologize for another Chicago one. But the startup cost in the Q3, should we expect a similar I know you touched on this, but I don't think it was answered explicitly this way.
Should the drag or the start up costs in 4Q be fairly similar to what we saw in 3Q or will they be notably different for some reason?
The cost base is more in there. But as Fred said, this Q4 is the busiest quarter of the year. Our focus as a business is really on making sure we are serving our customers and performing for them during this busy season. So I would expect not significantly greater cost, but I would also expect the ramp to really not be focused until the early part of next year.
Got it. Okay. And then, I guess, when we're thinking about development investment over the next 3 years, 5 years, what do you think the most in terms of annual development spend
we will see is in
a given year once you are ramped up?
Yes. Look, I think we gave guidance today of $75,000,000 to $200,000,000 Certainly, we are excited about the pipeline that we have out there. But you've got a mix of opportunities out there, some of which are customer dedicated build and some of which are more market build, like our Chicago or like our Atlanta project. Those market builds, we have a little bit more control of over the timing. The customer builds, as we have discussed in the past, can fluctuate because we are really kind of at the mercy of the customer and their timing.
So it's really hard to kind of pinpoint the exact number.
Got it. Okay. That's it. Thank you.
Your next question is a follow-up from Ki Bin Kim with SunTrust Robinson Humphrey. Please proceed with your question.
Thanks. Any new updates on the Woolworth development in Australia in terms of timing?
Sure. Speaking of customer driven timelines, that's a good one, Ki Bin. We continue to work with that customer. I don't anticipate any news coming up soon, just with a lot of things that are going on. They are working in their Q4, which is their busiest time of the year right now.
And they've got an automated dry facility of their own that they're working through. So, look, we continue to work with them and commercialize the deal as well as work through detailed design. And we'll know more as soon as the customer is ready to go. As you know, we took action and pushed out the forward because of our belief of matching funds with development projects. If we are not breaking ground at the beginning of the year, we are confident that something else will be.
So again, thanks to having a rich pipeline.
And what's the probability of that deal actually ever even canceling? Is there almost a zero probability of that happening?
Well, I will never say 0 Ki Bin. But it's a big project. It's a big customer. Will it look exactly like it was when we started working on this 2 years ago? Probably not.
But we expect to get the same returns out of whatever we do for them and we'll announce that as it comes about.
Okay. And just last question, do you see much different rent growth patterns when you look at your distribution facilities versus the production advantage facilities?
No. Really, across our entire portfolio, even our public warehouses, we tend to see the same types of rent increase and storage handling increases throughout all of our services and throughout all of our distribution types. Yes. The numbers I quoted earlier are kind of the weighted average across the broad portfolio. Yes.
But they are pretty consistent, not a whole lot of fluctuation between them.
Okay. And this is a hard concept for me and I think a lot of people to understand and that's like the market rent growth, right? So not the in place rents you're getting or higher revenue per pallet, but just the market overall. How would you describe the market rent growth in cold storage? And is there any kind of big trends between the different cities or geographies?
Look, I think the market, as Fred has
mentioned and we've talked about
for some time, remains tight. This is still a market where you do not see people building on spec. These are very expensive, purpose driven, mission critical assets. And I think the market remains very disciplined. I think the other thing to remind you of is, again, this is an industry, there's not rack rates.
There's nobody out there publishing per square foot rental rates and that type of thing. Our pricing is unique to every individual turns, the amount of handling, lots of different things that go into our pricing. So typically what happens, Ki Bin, is are giving increases on an annual basis of 2% to 4% a year and we are at the end of a 5 year contract and we are renewing a new 5 year contract, it pretty much carries on through into the new contract.
That 2% to 4% increase trend you mean?
Correct. Correct.
I see. All right. And you said your turnover rate is 3% to 4%. I think that meant annually? I mean, that's pretty low.
Yes.
So how do you do the calculus of, are you pushing rent enough versus a turnover rate that's from an industry standpoint, whatever real estate sector you are looking at is pretty low?
No. Look, it is pretty low. There is a little art and science to pricing, right? You want to be careful not to push it up too high and push customers out. So, we keep our eye on the market.
Obviously, we do bid on business on a regular basis through RFPs and that helps us get some intelligence. We also have the thing to remember here is we do have customer profitability. We've got pricing by customer, by market. We have over 2,600 customers across 178 sites. That gives us a very, very large database to understand what the market will bear in terms of pricing.
So we leverage all of that data and all
of that intel along with participating
in request of proposal and pricing on new business that's coming in. So again, there's nowhere to really go for published guides on it. It's a little bit of art and science.
All right. Thanks guys.
Thanks, Ki Bin. Thanks, Ki Bin.
Your next question comes from Bill Crow with Raymond James. Please proceed with your question.
Hey, good evening, guys. Hey, Bill. Fred or Mark, just on the insurance thing, dollars 40,000,000 a year in costs or $43,000,000 maybe this year, is that net of whatever premiums you're getting from your employees or how does that work?
That's correct.
Yes. And what would be the cost to Americold if you went to traditional insurance?
It would be significantly greater. So, you see this with most large companies. Once you get look, 200 people is statistically significant. Once you get to portfolios where you have thousands of employees, you tend to find that it's much cheaper to self insure. We do do that and we do retain stop loss coverage.
But that isn't to say that people don't get sick at times with certain illnesses that are very expensive to treat. Sometimes it's not illnesses. It's just people having babies and such, right? So, I mean, it's any medical procedure that one of our 13,000 associates is having. And we have about, I think, just over 7,000 associates that are participating on our health care plan.
Do you
kind of budget that on a per employee? Or is that how do you think about the cost to reach out on an annual basis?
We do. We do. Yes. As I said, if you look back over time, on average, we have seen healthcare costs rising roughly about 5% a year. I don't think that's too dissimilar than what you have seen in the broader marketplace.
I think if you could, we are all trying to square the bottom line results with all the great fundamentals that you guys are talking about. So just can you make sure that we understand the non recurring items in the quarter that caused EBITDA to go down from 2Q to 3Q? And where would we be? I mean, I get the $3,000,000 in healthcare and 3% change to same store. What else is in that number that we need to know about that we can use to justify that the fundamentals remain strong?
Yes. Overall, I think the business is growing. Total EBITDA is growing. Overall EBITDA margin is growing. I think the one area where we were down slightly was the warehouse services in our same store portfolio.
The margin slipping. As we said, we reported overall growth in the same store of roughly 2.3% NOI and that's after these $3,000,000 of healthcare costs. So, you can do the math and add back those $3,000,000 If you pro form a that $3,000,000 back, we would have seen services growth of $5,600,000 in the quarter, which would have been pretty consistent with what we've seen from prior April. So, remember, again, we've got to look on a full year basis still because the problem is one of the things is in addition to healthcare not being controllable, we also have the volume that fluctuates from quarter to quarter from month to month that we don't have direct control of. That's our customers or our customers' customers that are pulling that.
And remember, keep in mind, the year to date number on NOI growth was 3.4% and that's with the burden of that healthcare cost on top of it. So without that, we are smack dab right in the middle of everything that we have guided to. For all the guidance. Yes. And please understand, our overall cost structure isn't steady by quarter.
As Fred mentioned, this is the back half of the year and especially going into the Q4. This is our busiest time of the year. So you will see us spending more on labor. There is greater activity working through the warehouse, but also create opportunity for us to get efficiency.
All right. We can continue this later on off this call. Thank you for your time.
Sure. Thanks Bill.
Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to Mr. Fred Bowler for closing remarks.
Thank you. And thank you everyone for joining the call and for the questions that were asked. We understand that we are 2 years young as a public company and people are still trying to get their heads around our business. But that's why I'll continue to guide to look at the annual aspect of this business. It's a very strong underlying business, continues to perform strong on a same store basis.
And if you really look at it from a full year standpoint, we've reconfirmed all of our full year guidance. I think we had a similar type of situation between Q1 and Q2, where I think people were expecting more out of Q1 and we kind of said give us the year and it will smooth out. And sure enough, after Q2 came through, it did. So, this is really a full year business and we hope that you can see that. And again, we reconfirm guidance for the full year.
So, thank you for all of your support and have a great evening.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.