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Edited Transcript of COLD earnings conference call or presentation 7-Nov-19 10:00pm GMT

Q3 2019 Americold Realty Trust Earnings Call

ATLANTA Nov 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Americold Realty Trust earnings conference call or presentation Thursday, November 7, 2019 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Fred W. Boehler

Americold Realty Trust - CEO, President & Trustee

* Marc Jason Smernoff

Americold Realty Trust - CFO & Executive VP

* Scott Henderson

Americold Realty Trust - Senior VP of Capital Markets, Treasury & IR

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Conference Call Participants

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* David Bryan Rodgers

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Emmanuel Korchman

Citigroup Inc, Research Division - VP and Senior Analyst

* Ki Bin Kim

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Michael Albert Carroll

RBC Capital Markets, Research Division - Analyst

* Michael William Mueller

JP Morgan Chase & Co, Research Division - Senior Analyst

* William Andrew Crow

Raymond James & Associates, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the Americold Realty Trust Third Quarter 2019 Earnings Conference Call. (Operator Instructions) 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

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Scott Henderson, Americold Realty Trust - Senior VP of Capital Markets, Treasury & IR [2]

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Good afternoon. We would like to thank you for joining us today for Americold Realty Trust Third 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, Marc Smernoff. Management will make some prepared comments, after which we will open up the call to your questions.

Now I will turn the call over to Fred.

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Fred W. Boehler, Americold Realty Trust - CEO, President & Trustee [3]

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Thank you, and welcome to our third quarter 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. Marc will follow with review of the third quarter results and then discuss our balance sheet and outlook. After our prepared remarks, we will open the call for your questions.

The third quarter was a strong quarter for Americold. We reported total company revenue growth of 16%, total company NOI growth of 18.9% and core EBITDA growth of 21.6%. This was driven primarily by 3 factors: First, the contribution from our second quarter acquisition. Second, 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%, and core EBITDA margin increased 92 basis points to 20% compared to the third quarter 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.

Our performance 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 millions 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 benefit to the bottom line for our shareholders.

Across our active development pipeline, we have 5 projects currently underway totaling 42 million cubic feet and representing $261 million of total investment. These projects remain on track to be completed at dates ranging between the end of the fourth quarter 2019 to mid-2021. At our recently completed 15.7 million cubic 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&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 acquisition, which had fewer fixed commitments. I'm pleased to say that in the third 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 third quarter. This sale generated approximately $15 million in cash proceeds.

Finally, I'm pleased to welcome Khara Julien as our new Executive Vice President and Chief Human Resources Officer. Khara 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 Khara on our team.

I will now turn the call over to Marc, who will provide more details on our quarterly results, balance sheet and outlook.

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Marc Jason Smernoff, Americold Realty Trust - CFO & Executive VP [4]

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Thank you, Fred, and good afternoon, everyone. Today, we'll provide updates on our actual performance as well as certain metrics on a constant currency basis.

We reported total company revenue of $466 million and total company NOI of $121 million, which reflects a 16% increase and an 18.9% increase year-over-year, respectively. Core EBITDA was $93 million for the third quarter of 2019, an increase of 21.6% 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 health care expenses related to an increase in high dollar claim, 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 health care costs were not related to workers' comp, but rather made up of certain high dollar claims from associates and their dependents utilizing their health care benefits.

As we have noted in the past, our quarterly results can be lumpy due to the timing of certain factors such as health care expenses, which is why we recommend continuing to focus on an annual, rather than quarterly results. For the third quarter 2019, we reported net income of $27 million compared to net income of $25 million for the same quarter of the prior year. Our third quarter core FFO was $59 million or $0.30 per diluted share. Our third quarter AFFO was $52 million 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 third quarter of 2019, Global Warehouse segment revenue was $366 million, which reflects growth of 23% year-over-year. Global Warehouse segment NOI was $113 million, which reflects growth of 21.1%. Global Warehouse segment margin was 31% for the third 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 million of our rent and storage revenue was derived from customers with fixed commitment storage contracts, as compared to $232 million in the second quarter of 2019 and $215 million in the third quarter of 2018. For the third quarter of 2019, 40% of rent and storage revenue was generated from fixed commitment storage contracts, a sequential increase of 170 basis points from the second quarter of 2019 on a combined pro forma basis. As of September 30, 2019, our global portfolio consisted of 176 facilities, 2 less than what we reported at the end of the second quarter of 2019. We ended the third quarter of 2019 with 165 facilities in our Global Warehouse segment portfolio and 11 facilities in our third-party managed segment portfolio. During the third quarter, we exited a lease facility in Heyburn, 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 one of our third-party managed facilities in Crete, Nebraska, and there was no material contribution to NOI in the third quarter 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 third quarter 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 third quarter of 2019, our same-store Global Warehouse segment revenue was $298 million, which reflects growth of 2% year-over-year and 3.3% on a constant currency basis. Same-store global warehouse NOI was $93 million, 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 million of health care expenses related to higher claims reported in the third quarter that I previously mentioned.

I will now discuss our same-store results in a little more detail. For the third quarter, 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 the result of continued portfolio management combined with our efforts to grow our fixed commitment storage contracts and disciplined cost controls through the Americold Operating System of our power and facility-related costs.

Same-store Global Warehouse services revenue for the third quarter increased 2.4% year-over-year or 3.9% on a constant currency basis. These results included the benefit of one extra business day in the third quarter 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 services 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 first 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 million nonrecurring 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 forma 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 contributes to our ability to retain customers.

Corporate SG&A totaled $32 million for the third quarter of 2019 as compared to $27 million for the comparable prior year quarter. This increase is primarily a result of the SG&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 million for the third quarter as shown in the acquisitions, litigation and other line items within our statement of operations, which primarily reflects M&A-related integration, retention and severance costs. Of the $10 million in total cost savings that we expect to realize from the core release integration, we have already eliminated approximately $6 million on an annualized basis, and we have taken action to eliminate $4 million 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 first 12 months after closing.

Now let me update you on our development spending. In aggregate, we have spent $155 million year-to-date on expansion development capital, including $50 million in the third quarter. As Fred mentioned, in Chicago, we have completed construction of commissioning our systems and are currently onboarding and serving our customers. Our active expansion and development projects are on track and are expected to achieve our targeted returns. 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 or the revenue generated for the period may not cover the start-up costs.

Now turning to our balance sheet. As of September 30, 2019, total debt outstanding was $1.9 billion, 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 $1.5 billion. This includes $372 million of net proceeds from our previously announced equity forward. Our net debt to pro forma core EBITDA was approximately 4.1x. Additionally, during the third quarter, we filed a $500 million 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 million term loan from 145 basis points to 100 basis points, resulting in a $2.1 million in annual interest savings. Additionally, our annual spread on our $800 million 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 resulted in $1.2 million 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% and 4%. Given the higher-than-expected health care cost 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 million to $60 million. Growth in expansion, capital expenditures are expected to be $205 million to $215 million. 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 million to 184 million shares.

I will now turn the call back to Fred.

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Fred W. Boehler, Americold Realty Trust - CEO, President & Trustee [5]

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Thanks, Marc. 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?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Ki Bin Kim with SunTrust Robinson Humphrey.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [2]

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Can we first start off on the expenses side. So if I just try to remember correctly, I thought the expense comp's still negative -- still will be tough in the second half, but I thought it was supposed to get better because I think you had a $2 million negative comp variance last quarter, year-over-year, and it was supposed to be like $1 million in the second half. It was supposed to get better, but it looks like it got worse. So can you help me understand that better?

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Marc Jason Smernoff, Americold Realty Trust - CFO & Executive VP [3]

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Yes. So clearly, as we spoke about in our prepared remarks, the third quarter, we had a higher number of high dollar health insurance claims, approximately $3 million in our same-store portfolio. So if you look at that, that contributed roughly to 330 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 health care 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 the trend. But over time, over a long thing, given that population, you may have quarters where you have higher health care costs. This happened to be one of them.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [4]

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Okay. And that $3 million, I'm just trying to get a better sense of when that starts to -- how that does space over time?

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Fred W. Boehler, Americold Realty Trust - CEO, President & Trustee [5]

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It was fully incurred this quarter.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [6]

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Yes. So I mean -- sorry, 1 year from now that will be gone? Or will it kind of ratchet down pro rata from now over the next 4 quarters?

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Marc Jason Smernoff, Americold Realty Trust - CFO & Executive VP [7]

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Ki Bin, this is -- these are like cost for medical procedures that happened during the quarter. So they're fully accrued.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [8]

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I see. Now maybe bigger picture, is there a way -- are there ways that you're 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?

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Marc Jason Smernoff, Americold Realty Trust - CFO & Executive VP [9]

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Yes, we do retain reinsurance for extreme high dollar claims. The increase that we saw this year, these were -- when we talk high dollar claims, we're talking about claims in excess of $0.25 million 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.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [10]

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And just the last...

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Fred W. Boehler, Americold Realty Trust - CEO, President & Trustee [11]

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And Ki Bin, just a follow-up on that again, looking at it on an annual basis, this is one of those items that we've 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, just another reason why we kind of focused on the full year.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [12]

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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 so just that we get a better business sense of what's going on.

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Marc Jason Smernoff, Americold Realty Trust - CFO & Executive VP [13]

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Yes. As I mentioned, in the individual categories and breaking 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 kind of midpoint of our guidance range.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [14]

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Yes. I guess, I was asking about what line items contributed to that 2.6% growth. So for example, I think (inaudible) lease expiration schedule, you obviously ran -- you ate 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?

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Marc Jason Smernoff, Americold Realty Trust - CFO & Executive VP [15]

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Yes. So if you come back to look at and this is in our supplement, so our same-store rent and 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.

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Fred W. Boehler, Americold Realty Trust - CEO, President & Trustee [16]

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I think, remember, on the leases and the renewals and such, our churn rate is very, very low, right? I mean, I think we're talking about 3% to 4% churn rate. So very little rotation. So we -- our customers are with us long term, and we renew their contracts as we go.

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Operator [17]

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Your next question comes from the line of Michael Carroll with RBC Capital Markets.

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Michael Albert Carroll, RBC Capital Markets, Research Division - Analyst [18]

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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?

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Fred W. Boehler, Americold Realty Trust - CEO, President & Trustee [19]

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Yes, I think we said in the release that we expected 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, dust, ice, snow, rain, any weather condition you can think of, affected our ability in being able to erect that -- the racking and then the sizing 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 racked. 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 the same time that we're commissioning. So we're burning in, if you will, the automation and getting it fine-tuned. And we've made some decisions as we're trying to get 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've on-boarded. We've got a couple of 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'll start ramping more business into there. And that stabilization could be somewhere between 12 and 18 months.

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Michael Albert Carroll, RBC Capital Markets, Research Division - Analyst [20]

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So what happened in third quarter related to the financial impact? I guess, how much money did Rochelle add? And then, I guess, I'm assuming fourth quarter is going to be fairly stable, and then we start seeing a ramp-up as you go into 2020. Is that correct?

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Fred W. Boehler, Americold Realty Trust - CEO, President & Trustee [21]

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Yes. As we mentioned in our prepared remarks, typically with the launch of a facility, there will be a J-curve. I think we called out certain of the types of expenses that you'd expect to see at the launch of the facility. Obviously, we're bringing on the labor, we're bringing down the temperature. Before the business is ramping in, we're dialing in the automation. So it's not uncommon, and this is why we talked about the typical standard year to stabilization being the first 6 months, roughly being breakeven. Just because you have much higher costs as you're onboarding, learning the business, making sure you're servicing the business. And then it really ramps from there. And we expect to exit, just as we've always said, that first year on our stabilized run rate.

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Michael Albert Carroll, RBC Capital Markets, Research Division - Analyst [22]

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So was there a contribution in the third quarter? Because I guess, it was completed when -- between the first and second quarter. And then if you're not bringing on new customers in the fourth quarter, should we expect a J-curve ramp there? Or is it going to be kind of similar to what it was this quarter?

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Fred W. Boehler, Americold Realty Trust - CEO, President & Trustee [23]

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Yes. As I said, that J-curve typically could take upwards of the first 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.

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Michael Albert Carroll, RBC Capital Markets, Research Division - Analyst [24]

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Okay, great. And then last question, Marc...

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Fred W. Boehler, Americold Realty Trust - CEO, President & Trustee [25]

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That's reflected in our full year guidance.

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Michael Albert Carroll, RBC Capital Markets, Research Division - Analyst [26]

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Okay. And then last question. Marc, 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 first 9 months, it seems like it's only 20 basis points higher. So what's going to happen in the fourth quarter? Is it just that you typically see higher margins in the fourth quarter, given the seasonality, and that's what's taking it up so significantly?

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Marc Jason Smernoff, Americold Realty Trust - CFO & Executive VP [27]

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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.

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Operator [28]

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Your next question comes from the line of Dave Rodgers with Baird.

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David Bryan Rodgers, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [29]

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Just wanted to follow-up on Mike's question. So it sounds like you had a full expense run rate for Rochelle and in the fourth quarter, if not before. Is that right?

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Marc Jason Smernoff, Americold Realty Trust - CFO & Executive VP [30]

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That's correct.

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David Bryan Rodgers, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [31]

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Okay. And then, I guess, on the second question, with 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 fourth quarter to kind of get you on pace for the year? I mean, it's almost upwards of 400 you need and that would be a great performance in the fourth quarter. And obviously, you guys have confidence in that. But just on top of the occupancy and the throughput, we 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.

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Marc Jason Smernoff, Americold Realty Trust - CFO & Executive VP [32]

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Yes. No, look, I think the Warehouse segment performance actually is very strong. As I said in my prepared remarks, we had a significant dollar amount, roughly $3 million within our same-store cost that burden -- or health care cost, that burdened our same-store services margin. And that item alone was 330 basis points, that impacted our same-store revenue growth. So we're talking about going from 2.3% revenue growth up to a 5.6%. So that's what we're saying, the business continues to perform, we don't expect to see the heavy health care that we saw this quarter. While the item is lumpy, it tends not to be sustained over long periods of time. So -- and so we look at that like the core business performs and you can also take a look at our year ago margins [to] be impacted the volume that the fourth quarter has in the overall business.

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Fred W. Boehler, Americold Realty Trust - CEO, President & Trustee [33]

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Yes. So again, normalized health care as well as the ramp-up in business, when you talk about occupancy, at this time 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 or 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.

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David Bryan Rodgers, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [34]

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Got you. I appreciate the added color. On the G&A, maybe for Marc, you did talk about synergies that you were getting post the Cloverleaf transaction. And -- but wanted to ask, the G&A was up sequentially, even if you kind of back out, I think, some of the onetime 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?

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Marc Jason Smernoff, Americold Realty Trust - CFO & Executive VP [35]

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No. As I said, roughly, we've identified an action, an additional more $4 million on an annualized basis of synergy that we should continue to see benefit overall spend on a go-forward basis.

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David Bryan Rodgers, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [36]

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And was the $6 million annualized fully reflected in the third quarter?

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Marc Jason Smernoff, Americold Realty Trust - CFO & Executive VP [37]

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Well, the $6 million on an annualized basis, so it wouldn't be all $6 million in that quarter would be the annualized impact of that kind of midway through the quarter, if you think about it.

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David Bryan Rodgers, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [38]

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More midway. So there's some benefit of the fourth quarter. Okay, that's helpful. And then lastly, can you just -- Fred, can you talk about kind of the outlook or the appetite, obviously, the appetite, but the pipeline for acquisitions, the opportunity that you're seeing out there, given your liquidity today?

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Fred W. Boehler, Americold Realty Trust - CEO, President & Trustee [39]

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Yes. No, they're the same opportunities that we've seen. We've got, as I say, on the acquisition front, we cast out a very wide net. We're going to remain disciplined and make sure that we're buying things that makes sense and fits 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 billion. So you'll see us continue to execute on that in addition to the buyback of projects we've got going (inaudible).

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Operator [40]

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Your next question comes from the line of Manny Korchman with Citigroup.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [41]

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Fred, maybe to follow up a little bit on David'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?

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Fred W. Boehler, Americold Realty Trust - CEO, President & Trustee [42]

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I think we're speaking more about acquisitions and development, we are talking about growth.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [43]

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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?

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Fred W. Boehler, Americold Realty Trust - CEO, President & Trustee [44]

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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 pecking to find the right acquisition. But the development pipeline continues to be really strong. So this development pipeline has been the 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.

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Marc Jason Smernoff, Americold Realty Trust - CFO & Executive VP [45]

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Yes. And in our long-term model, I think, as you've heard us talk about is -- our goal is to start roughly between $75 million to $200 million in new development project in a given calendar year, and we believe our pipeline is robust and continues to support that level of development growth.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [46]

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Okay. And if we can hop back to the discussion on the health care cost. Just to help frame sort of what's going on. What is sort of your annual outside of just the premium spent. 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?

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Marc Jason Smernoff, Americold Realty Trust - CFO & Executive VP [47]

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Yes. No, exactly. As we said, on an annual basis, our total health care spending in our same-store could be close to the -- in aggregate dollars, around $40 million. So this gives you a sense of that $3 million move is about roughly a 10% move beyond an annual basis, and obviously, a much larger percent move if you think about the quarterly impact of that.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [48]

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So instead of $10 million, you spent $13 million in the quarter?

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Marc Jason Smernoff, Americold Realty Trust - CFO & Executive VP [49]

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Correct.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [50]

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And so should -- we should think about it being sort of at the $10 million mark, there's no reason for you to think there would be higher costs. So...

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Fred W. Boehler, Americold Realty Trust - CEO, President & Trustee [51]

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Yes. Look, when we look back at our health care expenses over time, not dissimilar, we've seen roughly about 5% growth over the long term and overall health care 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 in select 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 which 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 got investment through HR around health and wellness programs. But look, I wish we all had a crystal ball and can make sure if we knew we're going to get sick, to do something about it. But...

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [52]

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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 (inaudible)?

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Marc Jason Smernoff, Americold Realty Trust - CFO & Executive VP [53]

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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 things that there could be some level of benefits, but I think you'll see the bigger moves in connection with we will make acquisitions.

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Operator [54]

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Your next question comes from the line of Mike Mueller with JPMorgan.

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Michael William Mueller, JP Morgan Chase & Co, Research Division - Senior Analyst [55]

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Two questions here. And first, I apologize for another Chicago one. But if the startup cost in the third quarter, 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 startup cost in Q4 be fairly similar to what we saw in Q3? Or will they be notably different for some reason?

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Marc Jason Smernoff, Americold Realty Trust - CFO & Executive VP [56]

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The cost base is more in there. So -- but as Fred said, this fourth quarter 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.

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Michael William Mueller, JP Morgan Chase & Co, Research Division - Senior Analyst [57]

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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'll see is in a given year once you're ramped up?

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Fred W. Boehler, Americold Realty Trust - CEO, President & Trustee [58]

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Yes, I think -- look, I think we gave guidance today of 75 to 200. Certainly, we're 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've discussed in the past, can fluctuate because we're probably kind of at the mercy of the customer and their timing. So it's really hard to kind of pinpoint the exact number.

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Operator [59]

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Your next question is a follow-up from Ki Bin Kim with SunTrust Robinson Humphrey.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [60]

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Any new updates on the Woolworth development in Australia in terms of timing?

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Fred W. Boehler, Americold Realty Trust - CEO, President & Trustee [61]

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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. I mean, they are working in their fourth quarter, 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're not breaking ground at the beginning of the year, we're confident that something else will be. So again, thanks to having a rich pipeline.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [62]

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And what's the probability of that deal actually ever even canceling? Is there almost like a zero probabilty of that happening?

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Fred W. Boehler, Americold Realty Trust - CEO, President & Trustee [63]

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Well, I'll 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.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [64]

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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?

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Fred W. Boehler, Americold Realty Trust - CEO, President & Trustee [65]

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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 through all of our distribution types. The numbers I quoted earlier are kind of the weighted average across the broad portfolio. Yes, but they're pretty consistent. There's not a whole lot of fluctuation between.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [66]

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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 that in-place rents are 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?

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Marc Jason Smernoff, Americold Realty Trust - CFO & Executive VP [67]

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Look, I think the market, as Fred has mentioned, we've talked about for some time, remains tight. This is still a market where you do not see people building on fact. These are very expensive, purpose-driven, mission-critical assets. And I think the market remains very disciplined.

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Fred W. Boehler, Americold Realty Trust - CEO, President & Trustee [68]

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And 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 customer based on the profile of their business. The space that they take out, the size of their pallets, the amount of times it turns the amount of handling, lots of different things that go into our pricing. So typically, what happens, Ki Bin is that if we're 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're renewing a new 5-year contract, it pretty much carries on through into the new contract.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [69]

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That 2% to 4% increase trend you mean?

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Fred W. Boehler, Americold Realty Trust - CEO, President & Trustee [70]

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Correct. Correct.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [71]

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I see. All right. I mean, you said your turnover rate is 3% to 4%. Is that -- I think that meant annually? I mean, that's pretty low.

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Fred W. Boehler, Americold Realty Trust - CEO, President & Trustee [72]

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Yes.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [73]

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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 effect you're looking at is pretty low.

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Fred W. Boehler, Americold Realty Trust - CEO, President & Trustee [74]

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No. Look, we -- 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 the customers out. So we keep our eye on the market. I mean, 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, in request of proposal and end 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.

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Operator [75]

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Your next question comes from Bill Crow with Raymond James.

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William Andrew Crow, Raymond James & Associates, Inc., Research Division - Analyst [76]

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Fred or Mark, just on the insurance thing, $40 million a year in costs or $43 million maybe this year. Is that net of whatever premiums you're getting from your employees? Or how does that work? And what...

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Marc Jason Smernoff, Americold Realty Trust - CFO & Executive VP [77]

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That's correct.

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William Andrew Crow, Raymond James & Associates, Inc., Research Division - Analyst [78]

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Yes. And what would be the cost to Americold if you went to traditional insurance?

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Marc Jason Smernoff, Americold Realty Trust - CFO & Executive VP [79]

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It would be significantly greater. So you see this [within those] large companies, once you get -- look, 200 people is statistically significant. Once you get the 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, that people don't get sick at times with certain illnesses that are very expensive to treat.

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Fred W. Boehler, Americold Realty Trust - CEO, President & Trustee [80]

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Sometimes it's not illnesses, it's just people having babies and such, right? So I mean, if 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.

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William Andrew Crow, Raymond James & Associates, Inc., Research Division - Analyst [81]

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Do you kind of budget that on a per employee? Or is that -- how do you think about the cost (inaudible) on an annual basis.

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Marc Jason Smernoff, Americold Realty Trust - CFO & Executive VP [82]

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Yes, as I said, if you look back over time, on average, we're seeing health care cost rising roughly about 5% a year. I don't think that's too dissimilar than what you've seen in the broader marketplace.

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William Andrew Crow, Raymond James & Associates, Inc., Research Division - Analyst [83]

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I think, if you could -- we're 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 nonrecurring items in the quarter that caused EBITDA to go down from 2Q to 3Q, and where would we be? I mean, I get this $3 million in health care, 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?

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Marc Jason Smernoff, Americold Realty Trust - CFO & Executive VP [84]

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Yes, overall, I think the business is growing, total EBITDA is growing, overall EBITDA margin is growing. I think the 1 area where we were down slightly as the warehouse services in our same-store portfolio. The margin's slipping. As we said, we reported overall growth in the same-store of roughly 2.3% NOI, and that's after these $3 million of health care costs. So you can do the math and add back the $3 million. If you pro forma that $3 million back, we would have seen services growth of 5.6% in the quarter, which would have been pretty consistent with what you've from prior, right? So remember, again, we got to look on a full year basis still because the problem is one of the things is, in addition to health care 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 our customers or our customers' customers that are pulling at. And remember, keep in mind, the year-to-date number on NOI growth was 3.4%, and that's with the burden of that health care cost on top of it. So without that, we're smacked out right in the middle of everything that we've guided to.

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Fred W. Boehler, Americold Realty Trust - CEO, President & Trustee [85]

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Yes, (inaudible) the guidance.

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Marc Jason Smernoff, Americold Realty Trust - CFO & Executive VP [86]

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Yes. And please understand our overall cost structure is not -- doesn't -- isn't steady by quarter. As Fred mentioned, this is the back half of the year and especially going into the fourth quarter, this is our busiest time of the year. So you will see us spending more on labor, there's greater activity working through the warehouse.

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Fred W. Boehler, Americold Realty Trust - CEO, President & Trustee [87]

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And also greater opportunity for us to get efficiency.

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William Andrew Crow, Raymond James & Associates, Inc., Research Division - Analyst [88]

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All right. We can continue this later on off this call.

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Operator [89]

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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 Boehler for closing remarks.

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Fred W. Boehler, Americold Realty Trust - CEO, President & Trustee [90]

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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 first quarter and second quarter, where I think people were expecting more out of first quarter, and we kind of said, give us the year and it will smooth out and sure enough, after second quarter came through, it did. So this is really a full year business, and we hope that you can see that. And again, we reconfirmed guidance for the full year. So thank you for all of your support, and have a great evening.

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Operator [91]

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