Americold Realty Trust: Form 10-Q for the period ended Mar 31, 2024

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. In addition, the following discussion contains forward-looking statements, such as statements regarding our expectation for future performance, liquidity and capital resources, that involve risks, uncertainties and assumptions that could cause actual results to differ materially from our expectations. Our actual results may differ materially from those contained in or implied by any forward-looking statements. Factors that could cause such differences include those identified below and those described in Part I of this report under 'Cautionary Statement Regarding Forward-Looking Statements' and 'Risk Factors' in our Annual Report on Form 10-K for the year ended December 31, 2023.

Management’s Overview

We are a global leader in temperature-controlled storage, logistics, real estate and value added services, and are focused on the ownership, operation, acquisition and development of temperature-controlled warehouses. Our self-administered and self-managed REIT operates 241 warehouses globally, totaling around 1.5 billion cubic feet, with 196 in North America, 25 in Europe, 18 in Asia-Pacific, and 2 in South America as of March 31, 2024.

Our business includes three primary business segments: warehouse, transportation and third-party managed, and we have minority interests in joint ventures, SuperFrio (operates 35 temperature-controlled warehouses in Brazil), and RSA JV (operates two temperature-controlled warehouses in Dubai).

Focus on Our Operational Effectiveness and Cost Structure

Our ongoing initiatives, some of which are detailed below, focus on streamlining business operations and reducing costs. This includes i) centralizing processes; ii) implementing operational standards; iii) adopting new technology; iv) enhancing health and safety programs; v) leveraging our networks’ purchasing power; and vi) fully integrating acquired assets and businesses. Such realignments have allowed us to acquire new talent and strengthen our service offerings.

Additionally, as part of our initiatives to streamline our business processes and to reduce our cost structure, we have evaluated and exited less strategic and profitable markets or business lines, including the sale of certain warehouse assets, the exit of certain leased facilities, and the exit of certain managed warehouse agreements. Through our process of active portfolio management, we continue to evaluate our markets and offerings.

Project Orion

In February 2023, we announced our transformation program “Project Orion” designed to drive future growth and achieve our long-term strategic objectives, through investment in our technology systems and business processes across our global platform. The project includes the implementation of a new, best-in-class, cloud-based enterprise resource planning (“ERP”) software system. Since going public in 2018, we have acquired over 100 facilities, or approximately 40.0% of our total warehouse facility network. Project Orion will enable us to better integrate many of these recent acquisitions and position us well for the integration of future acquisitions. The primary goals of this project are to streamline standard processes, reduce manual work and incrementally improve our business analytics capabilities. Highlights of the project include implementing centralized customer billing operations, a global payroll and human capital management platform, next-generation warehouse maintenance capabilities, global procurement functionality and shared-service operations in certain international regions, among others. We expect the benefits of these initiatives to include revenue and margin improvements through pricing data and analytics and heightened customer contract governance, finance and human resources cost reductions, information technology applications and infrastructure rationalization, reduced employee turnover, working capital efficiency and reduced IT maintenance capital expenditures. The activities associated with Project Orion are expected to be substantially complete within three years. Since inception, the Company has incurred $84.1 million of implementation costs related to Project Orion of which $59.4 million has been deferred within Other Assets on the Condensed Consolidated Balance Sheet as of March 31, 2024.

For further information regarding Project Orion, refer to our Consolidated Financial Statements included in our 2023 Annual Report on Form 10-K as filed with the SEC.

Other costs reduction initiatives

To reduce facility costs we have invested in energy efficiency projects, including LED lighting, thermal energy storage, motion-sensor technology, variable frequency drives, third party efficiency reviews, real-time energy consumption monitoring, rapid open and close doors, and alternative-power generation technologies. We have also fine tuned our refrigeration systems, implemented energy management practices, and increased our participation in Power Demand Response programs with some of our power suppliers. These initiatives have allowed us to reduce our consumption of kilowatt hours and energy spend.

Lastly, we have implemented rainwater harvesting in certain locations to reduce water demand and wastewater treatment costs while managing stormwater runoff.

Significant Risks and Uncertainties

Refer to “Item 1A - Risk Factors” of our 2023 Annual Report on Form 10-K as filed with the SEC.

Seasonality

We specialize in providing services to businesses within the food industry whose businesses are often seasonal or cyclical. On average the first and second quarter segment contributions are relatively consistent. On a portfolio-wide basis, physical occupancy rates are generally the lowest during May and June and gradually increase thereafter, due to annual harvests and our customers’ focus on building inventories for end-of-year holidays, which generally peak between mid-September and early December. The external temperature reaches annual peaks for a majority of our portfolio during the third and fourth quarter of the year resulting in increased power expenses.

To manage earnings volatility due to seasonality, we have implemented fixed commitment contracts with certain customers. These fixed commitment contracts obligate our customers to pay for guaranteed warehouse space to maintain required inventory levels, particularly during peak occupancy periods. Our diverse customer base also mitigates the impact of seasonality as peak demand for various products occurs at different times of the year (for example, demand for ice cream is typically highest in the summer while demand for frozen turkeys usually peaks in the late fall). Additionally, our southern hemisphere operations in Australia, New Zealand and South America complement the growing and harvesting cycles in North America and Europe, further balancing seasonality’s impact on our operations.

Foreign Currency Translation Impact on Our Operations

Our consolidated revenues and expenses are impacted by foreign currency fluctuations, which can significantly affect our results. However, revenues and expenses from our international operations are typically denominated in the local currency of the country in which they are derived, which partially mitigates the impact of foreign currency fluctuations.

The following table shows a comparison of underlying spot and average exchange rates for the three month periods ending March 31, 2024 and 2023. Amounts presented in constant currency within our results of operations are calculated by applying the average foreign exchange rate from the comparable prior year period to actual local currency results in the current period. While constant currency metrics are a non-GAAP calculation and do not represent actual results, the comparison allows the reader to understand the impact of operations excluding changes in foreign exchange rates. We provide reconciliations of these measures in the discussions of our comparative results of operations below. Our discussion of the drivers of our performance below are based upon U.S. GAAP.

1Prior period exchange rates used to adjust current period operating results for constant currency metrics used herein.

How We Assess the Performance of Our Business

Segment Contribution Net Operating Income (“NOI”)

We evaluate the performance of our primary business segments based on their NOI contribution to our overall results of operations which aligns with how our decision makers evaluate performance.

• Warehouse segment contribution NOI is calculated as warehouse segment revenues less its cost of operations (excluding any depreciation and amortization, impairment charges, corporate-level selling, general and administrative expenses and corporate-level acquisition, cyber incident and other, net).
• Warehouse rent and storage contribution NOI is calculated as warehouse rent and storage revenues less power and other facilities cost.
• Warehouse services operations NOI is calculated as warehouse services revenues less labor and other service costs.
• Contribution NOI margin for each of these operations is calculated as the applicable contribution (NOI) measure divided by the applicable revenue measure.

Segment NOI and NOI margin contribution metrics help investors understand revenue, costs, and earnings among service types. These NOI contribution measures are supplemental and are not measurements of financial performance under U.S. GAAP. We provide reconciliations of these measures in the results of operations sections below.

Same Store Analysis

We believe that same store metrics are key performance indicators commonly used in the real estate industry. Evaluating the performance of our real estate portfolio on a same store basis allows investors to evaluate performance in a way that is consistent period to period. We define our “same store” population once annually at the beginning of the current calendar year. Our population includes properties owned or leased for the entirety of two comparable periods with at least twelve consecutive months of normalized operations prior to January 1 of the current calendar year. We define “normalized operations” as properties that have been open for operation or lease, after development or significant modification (e.g., expansion or rehabilitation subsequent to a natural disaster). Acquired properties are included in the “same store” population if owned by us as of the first business day of the prior calendar year (e.g. January 1, 2023) and are still owned by us as of the end of the current reporting period, unless the property is under development. The “same store” pool is also adjusted to remove properties that were sold or entered development subsequent to the beginning of the current calendar year.

Beginning January of 2024, changes in ownership structure (e.g., purchase of a previously leased warehouse) will no longer result in a facility being excluded from the same store population, as management believes that actively managing its real estate is normal course of operations. Additionally, management will begin to classify new developments (both conventional and automated facilities) as a component of the same store pool once the facility is considered fully operational and both inbounding and outbounding product for at least twelve consecutive months prior to January 1 of the current calendar year. These changes reflect a better alignment of our disclosures with industry practices.

For all same store properties (as defined above), we calculate “same store contribution NOI”, “same store rent and storage contribution NOI”, “same store services contribution NOI”, and the related margins in the same manner as described above. To ensure comparability in our period-to-period operating results, we also calculate same store contribution NOI measures on a constant currency basis, removing the impact of foreign exchange rate fluctuations by using prior period exchange rates to translate current period results into US dollars. These metrics isolate the operating performance of a consistent set of properties and thus eliminates the effects of changes in portfolio composition and currency fluctuations.

The following table shows the number of same-store and non-same store warehouses in our portfolio as of March 31, 2024. The non-same store warehouse count in the table below includes the partial period impact of sites exited during the periods presented.

(1) The non-same store facility count of 10 consists of: five sites in the expansion and development phase, two facilities that we purchased in 2023, one facility that requires capital investment in anticipation of repurposing, one leased facility expiring during the second quarter of 2024 which we have already ramped down operations ahead of expiration, and one site in which we have ceased operations and intend to lease to a third party.

Same store financial metrics are not a measurement of financial performance under U.S. GAAP. In addition, other companies providing temperature-controlled warehouse storage and handling and other warehouse services may not define same store or calculate same store financial metrics in a manner consistent with our definitions and calculations. Same store financial measures should be considered as a supplement, but not as an alternative, to our results calculated in accordance with U.S. GAAP. We provide reconciliations of these measures in the discussions of our comparative results of operations below.

Economic Occupancy of our Warehouses

We define average economic occupancy as the aggregate number of physically occupied pallets and contractually committed pallets for a given period, without duplication. We estimate the number of contractually committed pallet positions by subtracting the physical pallet positions from the contractually committed pallet positions specified in each customer’s contract.

Economic occupancy is a key driver of our financial results. Historically, providers of temperature-controlled warehouse space have offered storage services to customers on an as-utilized, on-demand basis. We now aim to establish contracts with fixed storage commitments for new customer relationships and transition existing customers to such contracts in conjunction with contract renewals or changes in customer profiles. This strategy mitigates the impact of seasonal changes on physical occupancy and ensures our customers have the necessary space to support their business needs.

Throughput at our Warehouses

The level and nature of throughput at our warehouses significantly impacts out warehouse services revenues. Throughput refers to the volume of pallets entering and exiting our warehouses, with higher levels of throughput driving warehouse services revenues as customers are typically billed based on throughput. The nature of throughput can be influenced by various factors including product turnover and shifts in consumer demand.

Food manufacturers’ production levels are influenced by market conditions, labor availability, supply chain dynamics and consumer preferences, which impact inbound pallets. Shifts in consumer demand may also impact outbound pallets.

Components of Our Results of Operations

Warehouse

Rent, storage and warehouse services. Our primary source of revenues are rent, storage, and warehouse services fees. Rent and storage revenues are related to the storage of frozen, perishable or other products in our warehouses. We also offer a wide array of value added services including: i) receipt, labeling and storage of goods, ii) customized order retrieval and packaging, iii) blast freezing and ripening, iv) government approved periodic inspections, fumigation, and other treatment services, v) e-commerce fulfillment and many more.

Rent storage and warehouse costs of operations consist of labor, power, other facilities costs, and other service costs.

Labor, the most significant part of warehouse expenses, covers wages, benefits, workers' compensation, and can vary due to factors like workforce size, customer needs, compensation levels, third-party labor usage, collective bargaining agreements, customer requirements, productivity, labor availability, government policies, medical insurance costs, safety programs, and discretionary bonuses.

The cost of power, also a significant cost of operations, fluctuates based on the price of power in the regions that our facilities operate and the required temperature zone or freezing required. We may, from time to time, hedge our exposure to changes in power prices through fixed rate agreements or, to the extent possible and appropriate, through rate escalations or power surcharge provisions within our customer contracts.

Other facilities costs include utilities other than power, property taxes and insurance, sanitation, repairs and maintenance, operating leases rent charges, security, and other related facilities costs.

Other services costs include equipment costs, warehouse consumables (e.g. shrink-wrap), employee protective equipment, warehouse administration and other related services costs.

Transportation

Transportation services revenue is derived from fees charged for transportation of our customers products, often including fuel and capacity surcharges.

Transportation services costs of operations are primarily affected by third-party carrier costs, which are influenced by carrier factors like driver and equipment availability. In select markets, we use our drivers and assets, incurring costs like wages, fuel, tolls, insurance, and maintenance to operate these assets.

Third-Party Managed

Third-party managed services revenue. Reimbursements that we receive for expenses incurred for warehouses that we manage on behalf of third party owners are recognized as third-party managed services revenues. We also earn management fees, incentive fees upon achieving negotiated performance and cost-savings results, or an applicable mark-up on costs.

Third-Party managed services costs of operations, which are recognized on a pass through basis, primarily consist of labor charges similar to those described above as a component of the warehouse costs of operations.

Consolidated Operating Expenses

Depreciation and amortization charges relate to the depreciation of buildings and equipment related improvements, leasehold improvements, material handling equipment, furniture, fixtures, and our computer equipment. Amortization relates primarily to intangible assets for customer relationships.

Selling, general and administrative expenses consist primarily of non-warehouse related labor, administrative, business development, marketing, engineering, human resources, information technology, performance and time based incentive compensation, communications, travel, professional fees, bad debt, training, and office supplies.

Acquisition, cyber incident and other, net consists of non-recurring or non-routine costs including acquisition related costs, costs related to Project Orion, litigation and settlement costs outside of the normal course of business, severance, terminated site operations costs, and cyber incident related costs, net of insurance recoveries all of which are not representative of our normal course of operations.

Impairment of indefinite and long-lived assets represents charges represents the impairment of goodwill and other long lived assets whose values are considered unrecoverable.

Loss (gain) from sale of real estate represents gains or losses recognized from the sale of Company owned real estate.

Interest expense is associated with interest charged on unsecured revolving credit facilities, term loans, and notes.

Loss on debt extinguishment, modifications, and termination of derivative instruments is representative of charges associated with debt extinguishments and modifications as well as the termination of derivative instruments.

Loss from investments in partially owned entities is representative of our share of gains and losses associated with our minority ownership interests in joint ventures.

Other, net primarily includes foreign currency remeasurement, interest income, gains and losses on asset disposals, and other miscellaneous items.

RESULTS OF OPERATIONS

Comparison of Results for the Three Months Ended March 31, 2024 and 2023

Warehouse Segment

The following table presents the operating results of our warehouse segment for the three months ended March 31, 2024 and 2023.

(Dollars in thousands)

(1) The adjustments from our U.S. GAAP operating results to calculate our operating results on a constant currency basis are the effect of changes in foreign currency exchange rates relative to the comparable prior period.

(2) Includes real estate rent expense of $9.2 million and $9.4 million, on an actual basis, for the first quarter of 2024 and 2023, respectively.

(3) Includes non-real estate rent expense (equipment lease and rentals) of $3.5 million and $3.6 million, on an actual basis, for the first quarter of 2024 and 2023, respectively.

On a constant currency basis, our warehouse segment revenues increased $12.0 million, or 2.0%, as compared to the same period in the prior year. This growth was primarily driven by $4.9 million of growth in our same store pool and $7.2 million of growth in our non-same store pool, further discussed below.

On a constant currency basis, our warehouse segment cost of operations decreased $13.1 million, or 3.1%, during the three months ended March 31, 2024, as compared to the same period of the prior year. This is primarily driven by a $13.8 million decrease in same store warehouse costs of operations, further discussed below.

On a constant currency basis, warehouse segment NOI increased 14.4% during the three months ended March 31, 2024, as compared to the same period of the prior year. This is primarily due to increased NOI in our same store portfolio of $18.7 million on a constant currency basis, attributable to factors described below.

Same Store and Non-Same Store Results

The following table presents revenues, cost of operations, contribution (NOI) and margins for our same stores and non-same stores with a reconciliation to the total financial metrics of our warehouse segment for the three months ended March 31, 2024 and 2023.

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(1) The adjustments from our U.S. GAAP operating results to calculate our operating results on a constant currency basis are the effect of changes in foreign currency exchange rates relative to the comparable prior period.

n/a - not applicable, the change in actual and constant currency metrics does not apply to site count.

n/r - not relevant

Same store handling revenue increased $7.5 million on a constant currency basis, primarily due to our pricing initiatives and rate escalations, partially offset by a decline in throughput as a result of consumer buying habits as a result of the current market environment.

Same store storage revenue decreased $2.6 million on a constant currency basis, primarily due to a decline in economic occupancy from lower physically occupied positions, partially offset by an increase in fixed commitments.

Same store warehouse costs of operations decreased on a constant currency basis by $13.8 million primarily driven by lower labor, other service costs, and power expense. Labor costs decreased as a result of lower throughput volume resulting in less overtime and needed contract labor, in addition to labor efficiencies. Other service costs decreased from lower throughput volumes resulting in lower freight costs. Power expense decreased primarily due to higher cost per kilowatt-hour during the first quarter of 2023 resulting from the impact of the Ukraine conflict on our European operations, which have moderated compared to the prior year.

Non-same store revenue increased $7.2 million on a constant currency basis, due to recently completed expansion and development projects, as well as completed acquisitions, including the Ormeau, Australia acquisition during July of 2023, and the Safeway acquisition during October 2023.

The following table provides certain operating metrics to explain the drivers of our same store performance.

Units in thousands except per pallet and site number data - unaudited

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Units in thousands except per pallet and site number data - unaudited

n/a - not applicable

n/r - not relevant

Economic occupancy for our same store pool was 80.9% for the three months ended March 31, 2024, a decrease of 352 basis points compared to the same period of the prior year. Economic occupancy decreased primarily due to our customers’ slow down in food production levels, which is impacted by the economic strains felt by the end-consumer resulting in basket sizes shrinking and less pantry stocking. Economic occupancy for our same store pool for the three months ended March 31, 2024 was 1,066 basis points higher than our corresponding average physical occupancy of 70.2%.

On a constant currency basis, our same store rent and storage revenues per occupied pallet increased 3.9% during the three month period ending March 31, 2024 as compared to the same period of the prior year. This is primarily due contractual rate escalations.

Throughput pallets for our same store pool decreased 7.6% during the three months ended March 31, 2024 as compared to the same period in the prior year. This decrease was related to a decline in end-consumer demand due to the broader economic slowdown.

On a constant currency basis, our same store services revenue per throughput pallet increased 10.8% during the three months ended March 31, 2024 as compared to the same period in the prior year primarily due to contractual rate escalations.

Transportation Segment

The following table presents the operating results of our transportation segment for the three months ended March 31, 2024 and 2023.

(Dollars in thousands)

(1) The adjustments from our U.S. GAAP operating results to calculate our operating results on a constant currency basis are the effect of changes in foreign currency exchange rates relative to the comparable prior period.

Transportation revenues are $56.9 million for the three months ended March 31, 2024, a decrease of $11.2 million or 16.5% compared to $68.1 million for the same period in the prior year. On a constant currency basis transportation revenues were $58.3 million, a decrease of $9.8 million, or 14.4%, during the three months ended March 31, 2024, compared to the same period in the prior year. The decrease was primarily due to the strategic transition of transportation business in the UK to a third party logistics model, and the softening of transportation demand in the general macro-environment.

Transportation cost of operations is $45.3 million for the three months ended March 31, 2024, a decrease of $11.1 million or 19.7% compared to $56.4 million for the same period in the prior year. On a constant currency basis transportation cost of operations was $46.5 million, a decrease of $9.9 million, or 17.6%, during the three months ended March 31, 2024, compared to the same period in the prior year. The decrease was due to the same factors contributing to the decline in revenue mentioned above.

Transportation NOI is $11.5 million for the three months ended March 31, 2024, a decrease of $0.1 million or 1.2% compared to $11.7 million for the same period in the prior year. On a constant currency basis the transportation segment contribution NOI is $11.8 million an increase of 1.0% during the three months ended March 31, 2024, compared to the same period in the prior year due to the factors mentioned above.

On a constant currency basis, the transportation segment margin increased 309 basis points during the three months ended March 31, 2024, compared to the same period in the prior year. The increase in margin was primarily due to the strategic transition of transportation in the UK business previously mentioned above.

Third-Party Managed Segment

The following table presents the operating results of our third-party managed segment for the three months ended March 31, 2024 and 2023:

(1) The adjustments from our U.S. GAAP operating results to calculate our operating results on a constant currency basis are the effect of changes in foreign currency exchange rates relative to the comparable prior period.

Third-party managed revenues are $10.4 million for the three months ended March 31, 2024, a decrease of $2.9 million or 22.0% compared to $13.4 million for the same period in the prior year. On a constant currency basis, third-party managed revenues were $10.6 million a decrease of $2.7 million, or 20.3%, during the three months ended March 31, 2024 as compared to the same period in the prior year.

Third-party managed cost of operations is $8.2 million for the three months ended March 31, 2024, a decrease of $4.0 million or 32.9% compared to $12.3 million for the same period in the prior year. On a constant currency basis, third-party managed cost of operations were $8.4 million, a decrease of $3.9 million, or 31.5%, during the three months ended March 31, 2024 as compared to the same period in the prior year.

The decrease in third-party managed revenues and cost of operations is due to the previous exit and continued wind down of operations of our historically largest domestic customer in this segment.

Third-party managed segment contribution (NOI) is $2.2 million for the three months ended March 31, 2024, an increase of $1.1 million or 102.3% compared to $1.1 million for the same period in the prior year. On a constant currency basis, third-party managed segment contribution (NOI) was $2.2 million for the three months ended March 31, 2024, an increase of $1.2 million, or 107.2% as compared to the same period in the prior year. The improvement in margin is primarily due to operational improvements in Australia and certain North America locations.

Other Consolidated Operating Expenses

Depreciation and amortization. Depreciation and amortization expense increased $7.1 million, or 8.3%, during the three months ended March 31, 2024 as compared to the same period in the prior year. This increase was primarily due to acquisitions, expansions and developments, partially offset by the favorable impact of foreign currency translation.

Selling, general and administrative. Corporate-level selling, general and administrative expenses increased $2.6 million, or 4.1%, compared to $62.9 million for the three months ended March 31, 2023. This was primarily driven by an increase in routine legal and professional fees.

Acquisition, cyber incident and other, net. Corporate-level acquisition, cyber incident and other, net include the following:

Acquisition, cyber incident and other, net. Corporate-level acquisition, cyber incident and other, net was $15.0 million for the three months ended March 31, 2024, an increase of $7.9 million compared to the three months ended March 31, 2023. Project Orion expenses represent the non-capitalizable portion of our Project Orion costs, which is an investment in and transformation of our technology systems, business processes and customer solutions. The project includes the implementation of a new, best-in-class, cloud-based enterprise resource planning (“ERP”) software system. These costs have increased by $5.9 million primarily due to increased contract labor and ERP testing and implementation costs.

Cyber incident related costs, net of insurance recoveries increased by $2.7 million and is primarily related to incremental claims reserve expense, and professional and legal fees related to the 2023 Cyber incident further described in Note 2 - Acquisition, cyber incident and other, net and Note 7 - Commitments and Contingencies to these Condensed Consolidated Financial Statements.

Severance costs increased by $0.4 million, or 12.3%, mainly due to realignment of certain international operations.

Acquisition and integration related costs decreased by $0.8 million or 43.7%, due to less integration related expenses and professional fees from lower acquisition activity.

Other costs decreased by $0.4 million related to a litigation adjustment.

(Gain) loss from sale of real estate. For the three months ended March 31, 2024 we recorded a $3.5 million gain from the sale of real estate related to the strategic sale of a facility as we continually optimize our portfolio.

Other Expense and Income

The following table presents other items of other expense and income for the three months ended March 31, 2024 and 2023.

Interest expense. Interest expense was $33.4 million for the three months ended March 31, 2024, a decrease of $1.0 million, or 2.9%, compared to $34.4 million for the three months ended March 31, 2023. Our effective interest rate on our outstanding debt decreased from 4.1% in the first quarter of 2023 to 4.0% in the first quarter of 2024, primarily due to a favorable rate received at expiration of a portion of our Unsecured Term Loans, as well as lower average outstanding borrowings, and further benefiting from the impact of our interest rate hedge instruments.

Loss on debt extinguishment and termination of derivative instruments. Loss on debt extinguishment and termination of derivative instruments was $5.2 million for the three months ended March 31, 2024, an increase of $4.6 million, compared to $0.5 million for the three months ended March 31, 2023. The increase was primarily due to the purchase of two failed sale-leaseback facilities, resulting in a loss on debt extinguishment of $4.7 million.

Loss from investments in partially owned entities. Loss from investments in partially owned entities was $0.9 million for the three months ended March 31, 2024, an increase of $0.3 million, or 46.5%, compared to $0.6 million for the three months ended March 31, 2023. This is primarily due to decreases in revenue from both ventures due to lower occupancy rates and loss of a customer.

Other, net. Other, net was a benefit of $9.5 million for the three months ended March 31, 2024, a increase of $8.1 million, compared to a benefit of $1.4 million for the three months ended March 31, 2023. This is primarily due to an $8.3 million settlement related to a representations and warranty claim related to a prior acquisition.

Loss from discontinued operations, net of tax. Loss from discontinued operations, net of tax was zero for the three months ended March 31, 2024, a decrease of $2.4 million, or 100.0%, compared to $2.4 million for the three months ended March 31, 2023. This is primarily due to our share of losses from the Comfrio joint venture prior to disposition during the three months ended June 30, 2023.

Income Tax Benefit (Expense)

Income tax expense for the three months ended March 31, 2024 was $2.0 million, an increase of $3.6 million from an income tax benefit of $1.6 million for the three months ended March 31, 2023. The change is primarily from improved operating results.

Non-GAAP Financial Measures

We use the following non-GAAP financial measures as supplemental performance measures of our business: NAREIT FFO, Core FFO, Adjusted FFO, NAREIT EBITDAre, Core EBITDA and net debt to pro-forma Core EBITDA.

We calculate funds from operations, or FFO, in accordance with the standards established by the Board of Governors of the National Association of Real Estate Investment Trusts, or NAREIT. NAREIT defines FFO as net income or loss determined in accordance with U.S. GAAP, excluding extraordinary items as defined under U.S. GAAP and gains or losses from sales of previously depreciated operating real estate and other assets, plus specified non-cash items, such as real estate asset depreciation and amortization impairment charge on real estate related assets and our share of reconciling items for partially owned entities. We believe that FFO is helpful to investors as a supplemental performance measure because it excludes the effect of depreciation, amortization and gains or losses from sales of real estate, all of which are based on historical costs, which implicitly assumes that the value of real estate diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, FFO can facilitate comparisons of operating performance between periods and among other equity REITs.

We calculate core funds from operations, or Core FFO, as NAREIT FFO adjusted for the effects of gain or loss on the sale of non-real estate assets; Acquisition, cyber incident and other, net; goodwill impairment (when applicable); loss on debt extinguishment; modifications and termination of derivative instruments; foreign currency exchange losses; and gain on legal settlements related to prior period operations. We also adjust Core FFO for our share of reconciling items for partially owned entities. We believe that Core FFO is helpful to investors as a supplemental performance measure because it excludes the effects of certain items which can create significant earnings volatility, but which do not directly relate to our core business operations. We believe Core FFO can facilitate comparisons of operating performance between periods, while also providing a more meaningful predictor of future earnings potential.

However, because NAREIT FFO and Core FFO add back real estate depreciation and amortization and do not capture the level of maintenance capital expenditures necessary to maintain the operating performance of our properties, both of which have material economic impacts on our results from operations, we believe the usefulness of NAREIT FFO and Core FFO as a measure of our performance may be limited.

We calculate adjusted funds from operations, or Adjusted FFO, as Core FFO adjusted for the effects of Amortization of deferred financing costs and pension withdrawal liability, Non-real estate asset impairment, Amortization of below/above market leases, Straight-line rental revenue adjustment, Deferred income taxes expense (benefit), Stock-based compensation, Non-real estate depreciation and amortization, and Maintenance capital expenditures. We believe that Adjusted FFO is helpful to investors as a meaningful supplemental comparative performance measure of our ability to make incremental capital investments in our business and to assess our ability to fund distribution requirements from our operating activities.

FFO, Core FFO and Adjusted FFO are used by management, investors and industry analysts as supplemental measures of operating performance of equity REITs. FFO, Core FFO and Adjusted FFO should be evaluated along with U.S. GAAP net income and net income per diluted share (the most directly comparable U.S. GAAP measures) in evaluating our operating performance. FFO, Core FFO and Adjusted FFO do not represent net income or cash flows from operating activities in accordance with U.S. GAAP and are not indicative of our results of operations or cash flows from operating activities as disclosed in our condensed consolidated statements of operations included elsewhere in this Quarterly Report on Form 10-Q. FFO, Core FFO and Adjusted FFO should be considered as supplements, but not alternatives, to our net income or cash flows from operating activities as indicators of our operating performance. Moreover, other REITs may not calculate FFO in accordance with the NAREIT definition or may interpret the NAREIT definition differently than we do. Accordingly, our FFO may not be comparable to FFO as calculated by other REITs. In addition, there is no industry definition of Core FFO or Adjusted FFO and, as a result, other REITs may also calculate Core FFO or Adjusted FFO, or other similarly-captioned metrics, in a manner different than we do. The table below reconciles FFO, Core FFO and Adjusted FFO to net (loss) income, which is the most directly comparable financial measure calculated in accordance with U.S. GAAP.

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Reconciliation of Net Income (Loss) to NAREIT FFO, Core FFO, and Adjusted FFO

(In thousands)

(a) Maintenance capital expenditures include capital expenditures made to extend the life of, and provide future economic benefit from, our existing temperature-controlled warehouse network and its existing supporting personal property and information technology.

We calculate NAREIT EBITDA for Real Estate, or EBITDAre, in accordance with the standards established by the Board of Governors of NAREIT, defined as, net loss before interest expense, income tax benefit, depreciation and amortization, gain or loss on sale of real estate, and adjustment to reflect share of EBITDAre of partially owned entities. EBITDAre is a measure commonly used in our industry, and we present EBITDAre to enhance investor understanding of our operating performance. We believe that EBITDAre provides investors and analysts with a measure of operating results unaffected by differences in capital structures, capital investment cycles and useful life of related assets among otherwise comparable companies.

We also calculate our Core EBITDA as EBITDAre further adjusted for Acquisition, cyber incident, and other, net; Loss from investments in partially owned entities; Impairment of indefinite and long-lived assets (when applicable); Foreign currency exchange loss (gain); Gain on legal settlement related to prior period operations; Stock-based compensation expense; Loss on debt extinguishment, modifications and terminations of derivatives instruments; Loss on other asset disposals; and Reduction in EBITDAre from partially owned entities . We believe that the presentation of Core EBITDA provides a measurement of our operations that is meaningful to investors because it excludes the effects of certain items that are otherwise included in EBITDAre but which we do not believe are indicative of our core business operations. EBITDAre and Core EBITDA are not measurements of financial performance under U.S. GAAP, and our EBITDAre and Core EBITDA may not be comparable to similarly titled measures of other companies. You should not consider our EBITDAre and Core EBITDA as alternatives to net income or cash flows from operating activities determined in accordance with U.S. GAAP. Our calculations of EBITDAre and Core EBITDA have limitations as analytical tools, including:

• these measures do not reflect our historical or future cash requirements for maintenance capital expenditures or growth and expansion capital expenditures;
• these measures do not reflect changes in, or cash requirements for, our working capital needs;
• these measures do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our indebtedness;
• these measures do not reflect our tax expense or the cash requirements to pay our taxes; and
• although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and these measures do not reflect any cash requirements for such replacements.

We use EBITDAre and Core EBITDA as measures of our operating performance and not as measures of liquidity. The table below reconciles EBITDAre and Core EBITDA to net (loss) income, which is the most directly comparable financial measure calculated in accordance with U.S. GAAP.

Reconciliation of Net (Loss) Income to NAREIT EBITDAre and Core EBITDA

(In thousands)

42

LIQUIDITY AND CAPITAL RESOURCES

The Company and the Operating Partnership have filed a registration statement on Form S-3 with the SEC registering, among other securities, debt securities of the Operating Partnership, which will be fully and unconditionally guaranteed by the Company. Separate Consolidated Financial Statements of the Operating Partnership have not been presented in accordance with the amendments to Rule 3-10 of Regulation S-X. Furthermore, as permitted under Rule 13-01(a)(4)(vi), the Company has excluded the summarized financial information for the Operating Partnership as the assets, liabilities and results of operations of the Company and the Operating Partnership are not materially different than the corresponding amounts presented in the Consolidated Financial Statements of the Company, and management believes such summarized financial information would be repetitive and not provide incremental value to investors.

Our principal sources of funding for our financial commitments include:

• current cash balances;
• cash flows from operations;
• our Senior Unsecured Revolving Credit Facility;
• our ATM Equity Programs; and
• other forms of debt financings and equity offerings, including capital raises through joint ventures.

We expect that our funding sources as noted above are adequate and will continue to be adequate to meet our short-term and long-term liquidity requirements and capital commitments. These liquidity requirements and capital commitments include:

• operating activities and overall working capital;
• capital expenditures;
• capital contributions and investments in joint ventures;
• debt service obligations;
• quarterly stockholder distributions; and
• future development, expansion, and acquisition related activities.

On March 17, 2023, the Company and the Operating Partnership filed with the SEC an automatic shelf registration statement on Form S-3 (Registration No. 333-270664 and 333-270664-01) (the “Registration Statement”), registering an indeterminate amount of (i) the Company’s common stock, $0.01 par value per share, (ii) the Company’s preferred stock, $0.01 par value per share, (iii) depositary shares representing entitlement to all rights and preferences of fractions of the Company’s preferred shares of a specified series and represented by depositary receipts, (iv) warrants to purchase the Company’s common stock or preferred stock or depositary shares and (v) debt securities of the Operating Partnership, which may be fully and unconditionally guaranteed by the Company. As circumstances warrant, we may issue equity securities from time to time on an opportunistic basis, dependent upon market conditions and available pricing. We may use the proceeds for general corporate purposes and to fund the liquidity requirements noted above.

On March 17, 2023, the Company entered into an equity distribution agreement pursuant to which we could sell, from time to time, up to an aggregate sales price of $900.0 million of our common stock through an ATM Equity Program (the “Prior ATM Equity Program”). Sales of our common stock made pursuant to the Prior ATM Equity Program could be made in negotiated transactions or transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act, including sales made directly on the NYSE, or sales made to or through a market maker other than on an exchange, or as otherwise agreed between the applicable Agent and us. Sales could also be made on a forward basis pursuant to separate forward sale agreements.

During August of 2023, we sold 13,244,905 common shares under the prior ATM Equity Program for net proceeds of $412.6 million. The net proceeds from sales of our common stock pursuant to the prior ATM Equity Program were used to repay a portion of the revolver borrowings.

On November 9, 2023, we entered into an equity distribution agreement that was substantially identical to and replaced the prior equity distribution agreement, and pursuant to which we may sell, from time to time, up to an additional $900.0 million of our common shares through our ATM Equity Program (the “Current ATM Equity Program”). During the three months ended March 31, 2024 we did not sell any shares of our common stock under the Current ATM Equity Program.

By operation of law and in accordance with our customer contracts (other than leases), we typically receive warehouseman’s liens on products held in our warehouses to secure customer payments. Such liens permit us to take control of the products and sell them to third parties in order to recover any monies receivable on a delinquent account, but such products may be perishable or otherwise not readily salable by us. Historically, in instances where we have warehouseman’s liens and our customer sought bankruptcy protection, we have been successful in receiving “critical vendor” status, which has allowed us to fully collect on our accounts receivable during the pendency of the bankruptcy proceeding.

Our bad debt expense was $0.9 million and $0.7 million for the three months ended March 31, 2024 and 2023, respectively. As of March 31, 2024, we maintained bad debt allowances of approximately $21.2 million, which we believe to be adequate.

Dividends and Distributions

As a REIT, we must distribute 90.0% of our taxable income (excluding capital gains) annually. While historically we have satisfied this distribution requirement by making cash distributions to our stockholders, we may choose to satisfy this requirement by making distributions of cash or other property. All such distributions are at the discretion of our Board of Directors. Historically, we have distributed at least 100.0% of our taxable income annually, since inception, to minimize corporate-level federal income taxes.

The REIT distribution requirement limits our ability to rely on retained earnings to fund our ongoing operations compared to non-REIT companies. To meet financial commitments, capital needs, and REIT distribution requirements, we may raise capital through debt and equity markets and use our revolving credit facility.

For further information regarding dividends and distributions, refer to our Consolidated Financial Statements included in our 2023 Annual Report on Form 10-K as filed with the SEC.

Outstanding Indebtedness

The following table summarizes our outstanding indebtedness as of March 31, 2024 (in thousands):

(1) The total includes borrowings with a variable interest rate that have been effectively hedged through interest rate swaps.

The variable rate debt shown above bears interest at interest rates based on various one-month SOFR, CDOR, SONIA, BBSW, EURIBOR, and BKBM rates, depending on the respective agreement governing the debt, including our global revolving credit facilities. As of March 31, 2024, our debt had a weighted average term to maturity of approximately 4.9 years, assuming exercise of extension options.

For further information regarding outstanding indebtedness, please see Note 3 - Debt and Note 4 - Derivative Financial Instruments to our Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q and Note 8 - Accumulated Other Comprehensive Income (Loss) to our Consolidated Financial Statements included in our 2023 Annual Report on Form 10-K as filed with the SEC, respectively.

Aggregate Future Repayments of Indebtedness

The aggregate maturities of indebtedness as of March 31, 2024 for each of the next five years and thereafter, are as follows (in thousands):

Credit Ratings

Our capital structure and financial practices have earned us investment grade credit ratings from three nationally recognized credit rating agencies as follows:

• BBB with a Stable outlook from Fitch
• BBB with a Stable Trends outlook from DBRS Morningstar
• Baa3 with a Stable outlook from Moody’s

These credit ratings are important to our ability to issue debt at favorable rates of interest, among other terms. Refer to our risk factor “Adverse changes in our credit ratings could negatively impact our financing activity” in our Annual Report on Form 10-K.

Maintenance Capital Expenditures and Repair and Maintenance Expenses

We utilize a strategic and preventative approach to maintenance capital expenditures and repair and maintenance expenses to maintain the high quality and operational efficiency of our warehouses and ensure that our warehouses meet the “mission-critical” role they serve in the cold chain.

Maintenance Capital Expenditures

Maintenance capital expenditures are capitalized investments made to extend the life of, and provide future economic benefit from, our existing temperature-controlled warehouse network. Such expenditures examples include roof and refrigeration equipment replacement, IT system updates, handling equipment upgrades, amongst others. Maintenance capital expenditures do not include acquisition costs contemplated with the purchase of a building.

The following table sets forth our maintenance capital expenditures for the three months ended March 31, 2024 and 2023.

(In thousands, except per cubic foot amounts)

(1) Excludes a nominal amount and $2.2 million deferred acquisition maintenance capital expenditures incurred for the three months ended March 31, 2024 and 2023, respectively.

Repair and Maintenance Expenses

We incur repair and maintenance expenses for normal maintenance, repairs, and replacements at our warehouses that do not materially extend the life of the property or provide future economic benefits. Such expenses are recognized as operating expenses on our Condensed Consolidated Statement of Operations. Examples of repair and maintenance expenses include roof, wall, and other handling equipment repairs.

The following table sets forth our repair and maintenance expenses for the three months ended March 31, 2024 and 2023.

(In thousands, except per cubic foot amounts)

External Growth, Expansion and Development Capital Expenditures

External growth expenditures represent asset acquisitions or business combinations. Expansion and development capital expenditures support customers and our warehouse expansions, including improvements to our information technology platform.

Examples of capital expenditures associated with expansion and development initiatives include funding of construction costs, warehouse capacity and pallet position expansion, implementing energy efficiency projects, such as thermal energy storage, and the delivery of new systems, software and customer interface functionality.

Acquisitions and Dispositions

For information regarding acquisitions and dispositions completed during 2023, refer to our 2023 Annual Report on Form 10-K.

During the three months ended March 31, 2024, the Company purchased two facilities that were previously accounted for as failed sale-leaseback financing obligations for total consideration of $20.4 million, resulting in the recognition of a “Loss on debt extinguishment and termination of derivative instruments” on the Condensed Consolidated Statement of Operations of $4.7 million.

During the three months ended March 31, 2024, the Company sold a facility for proceeds of $9.0 million, resulting the recognition of a “(Gain) loss on sale of real estate” on the Condensed Consolidated Statement of Operations of $3.6 million.

Expansion and development

The expansion and development expenditures (inclusive of capitalized interest, compensation, insurance, and travel expenses) for the three months ended March 31, 2024 include $7.6 million related to our two fully-automated, build-to-suit, development sites in Connecticut and Pennsylvania, $3.9 million related to the Allentown facility, $0.9 million related to our Kansas City facility, $0.5 million related to our Atlanta Major Market Strategy - Phase 2, $1.2 million related to our Russellville, Arkansas expansion, and $3.2 million of corporate initiatives and smaller customer driven growth projects, which are designed to reduce future spending over the course of time. This includes return on investment projects, conversion of leases to owned assets, and other cost-saving initiatives. Finally, we invested approximately $13.6 million during the three months ended March 31, 2024 for contemplated future expansion or development projects.

The following table sets forth our acquisition, expansion and development capital expenditures for the three months ended March 31, 2024 and 2023.

(In thousands)

Historical Cash Flows

(In thousands)

48

Operating Activities

For the three months ended March 31, 2024, our net cash provided by operating activities was $62.0 million, a increase of $20.5 million, compared to $41.5 million for the three months ended March 31, 2023. The increase is primarily due to the impact of improved NOI.

Investing Activities

Our net cash used in investing activities was $39.3 million for the three months ended March 31, 2024 compared to $87.6 million for the three months ended March 31, 2023. Additions to property, buildings and equipment were $45.8 million, reflecting maintenance capital expenditures and investments in our various expansion and development projects. This was partially offset by proceeds from a sold facility of $9.0 million.

Net cash used in investing activities was $87.6 million for the three months ended March 31, 2023. Cash used for additions to property, buildings and equipment was $69.3 million, reflecting maintenance capital expenditures and investments in our various expansion and development projects. We also invested $18.4 million in a loan to the Comfrio joint venture as well as minority equity interest in the RSA joint venture.

Financing Activities

Net cash used in financing activities was $22.5 million for the three months ended March 31, 2024 compared to net cash provided of $38.9 million for the three months ended March 31, 2023. Cash used in financing activities for the current period primarily consisted of $126.0 million in repayments to our Senior Unsecured Revolving Credit Facility and $63.0 million in dividend payments, $20.4 million related to the purchase of two failed sale-leaseback facilities, and $14.2 million in aggregate lease repayments, offset by $200.0 million in proceeds from our Senior Unsecured Revolving Credit Facility.

Net cash provided by financing activities was $38.9 million for the three months ended March 31, 2023. Cash provided by financing activities primarily consisted of $186.7 million in proceeds from our Senior Unsecured Revolving Credit Facility, offset by $76.6 million in repayments on our Senior Unsecured Revolving Credit Facility, $60.1 million of quarterly dividend distributions paid, and $11.8 million aggregate lease repayments.

CRITICAL ACCOUNTING ESTIMATES

Refer to Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Form 10-K for a discussion of our critical accounting estimates and assumptions. There were no material changes during the period covered by this Quarterly Report to the critical accounting estimates and assumptions previously disclosed in our 2023 Annual Report on Form 10-K.

NEW ACCOUNTING PRONOUNCEMENTS

See Note 1 - General to our Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

Interest Rate Risk

Our future income and cash flows relevant to financial instruments are dependent upon prevalent market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates.

As of March 31, 2024, we had $645.0 million of outstanding USD-denominated variable-rate debt and C$250.0 million of outstanding CAD-denominated variable-rate debt under the Senior Unsecured Term Loan Facility. This consisted of our Senior Unsecured Term Loan A Facility bearing interest at one-month SOFR for the USD tranches and one-month CDOR for the CAD tranche, plus a margin of up to 0.9%. We have entered into interest rate swaps to effectively lock in the floating rates on all of our USD-denominated term loans at a weighted average rate of 4.2% and all of our outstanding CAD-denominated term loan at a weighted average rate of 4.5%.

Additionally, we had $104.0 million, C$35.0 million, €67.5 million, £78.0 million, A$197.0 million, and NZD44.0 million outstanding of Senior Unsecured Revolving Credit Facility draws. At March 31, 2024, one-month term and daily SOFR was approximately 5.3%, one-month CDOR was approximately 5.3%, one-month SONIA was at 5.2%, one-month AUD BBSW was approximately 4.4%, one-month EURIBOR was approximately 3.8%, and one-month BKBM was approximately 5.6%. The interest rate paid on borrowings can never drop below 0.0%, although the associated benchmark rate does. Therefore, a 100 basis point increase in market interest rates would result in an increase in annual interest expense to service our variable-rate debt of approximately $4.6 million, and a 100 basis point decrease in market interest rates would result in a $4.6 million decrease in annual interest expense. Our interest rate risk exposure at March 31, 2024 was not materially different than what we disclosed in our 2023 Annual Report on Form 10-K as filed with the SEC.

Foreign Currency Risk

As it relates to the currency of countries where we own and operate warehouse facilities and provide logistics services, our foreign currency risk exposure at March 31, 2024 was not materially different than what we disclosed in our 2023 Annual Report on Form 10-K as filed with the SEC. The information concerning market risk in Item 7A under the caption “Quantitative and Qualitative Disclosures about Market Risk” of our 2023 Annual Report on Form 10-K, is hereby incorporated by reference in this Quarterly Report on Form 10-Q.

Evaluation of Controls and Procedures

In accordance with Rule 13a-15(b) of the Exchange Act, the Company’s management, with the participation of the Chief Executive Officer and the Chief Financial Officer, carried out an evaluation of the effectiveness of the Company’s “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2024.

Our management is responsible for establishing and maintaining adequate “internal control over financial reporting,” as defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our management, including the Chief Executive Officer and Chief Financial Officer do not expect that our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs.

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

Changes in Internal Control over Financial Reporting

Effective March 11, 2024, Robert Harris, formerly our Vice President and Corporate Controller, succeeded Thomas Novosel as our Senior Vice President & Chief Accounting Officer. Additionally, effective January 15, 2024, Jay Wells succeeded Marc Smernoff as our Executive Vice President and Chief Financial Officer.

Investing in our common shares involves risks and uncertainties. You should consider and read the information contained in our 2023 Annual Report on Form 10-K, including the risk factors identified in Item 1A of Part I thereof (Risk Factors). Any of the risks discussed in our 2023 Annual Report on Form 10-K and in other reports we file with the SEC, and other risks we have not anticipated or discussed, could have a material adverse impact on our business, financial condition or results of operations. There were no material changes during the period covered by this Quarterly Report to the risk factors previously disclosed in our 2023 Annual Report on Form 10-K.