Americold Realty Trust

NYSE:COLD

Earnings Call Transcript 2021-Q1

[Operator]

Greetings, ladies and gentlemen, and welcome to Americold Realty Trust First Quarter Earnings Call. [Operator Instructions]

It is now my pleasure to introduce your host, Mr. Scott Henderson. Thank you. You may begin.

[Scott Henderson, executive]

Good afternoon. We would like to thank you for joining us today for Americold Realty Trust First Quarter 2021 Earnings Conference Call. In addition to the press release distributed this afternoon, we have filed a supplemental package with additional detail on our results, which is available in the Investors section on our website at www.americold.com.

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

During this call, we will discuss certain non-GAAP financial measures, including core EBITDA, core FFO and AFFO. The full definitions of 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.

[Fred Boehler, executive]

Thank you, and welcome to our first quarter 2021 earnings conference call. We hope everyone on this call is well. This afternoon, I will summarize our first quarter 2021 results, our current view of market conditions, and our external growth activity. Marc will then review our quarterly results in more detail as well as our recent capital markets activity and guidance for 2021. After our prepared remarks, we'll open the call for your questions.

For the first quarter of 2021, Global Warehouse segment revenue was $485 million, which reflects growth of 27% year-over-year. Global Warehouse segment NOI was $146 million, which reflects growth of 15%. For the first quarter 2021, our Global Warehouse same-store revenue decreased by 3.8% on a constant currency basis. Our Global Warehouse same-store NOI decreased by 6.9% on a constant currency basis. I'll note that if we normalize for the acquisitions that were added into our same-store pool this quarter and the COVID surge from the first quarter of last year, our same-store results would have been essentially flat on revenue and slightly positive on NOI.

As discussed on the last earnings call, we fully anticipated continued supply chain disruption. As such, quarterly comps will be less relevant over the course of the year. We factored in supply chain variability, food service levels well below historic norms, elevated retail activity, food production at less than full capacity and continued sanitation and PPE costs. We are reaffirming our annual guidance for the year.

Let me provide a bit more perspective. Entering into first quarter 2021, existing inventory in cold storage was below prior year's levels. While demand continues to remain steady, manufacturers have not yet gotten back up to full pre-COVID production levels. As such, their safety stock, which is represented by our physical inventory, is literally being eaten into. As the quarter progressed, conversations with our food manufacturing customers have indicated that production volumes are expected to increase, and many of them are seeking to improve their inventory positions to better support their customers or the retailers and food service companies.

We continue to be optimistic about global demand for all types of food production in our diverse portfolio, and we are confident that food manufacturers will return to pre-COVID inventory levels as end consumer demand remains firmly intact. Our commercial business processes, including our fixed commitment contracts, mitigates some but not all of this impact. While we continue to make progress, we would remind you that nearly all of our recent acquisitions over the past few years did not initially have a meaningful number of fixed commitment structures.

Further, while almost all categories of food manufacturers' production lines have been impacted by COVID, certain subsets such as protein have been impacted more. As a reminder, PortFresh, Cloverleaf, Lanier, MHW, Nova Cold and Newport are all part of our same-store pool, but were not in Q1 2020. These acquisitions are indexed greater towards protein. That said, we are actively working with our customers to bring these acquisitions onto our commercial standards. This is how we continue to enhance value for customers and shareholders.

Finally, we are comparing to the first quarter 2020, where we saw a buildup of inventory for export activity and, more importantly, the historic COVID-related surge. As a reminder, the first half of the year is typically lighter than the second half. However, we all remember the hurricane effect we experienced in the food supply chain when the global stay-at-home orders went into effect at the end of the first quarter 2020. This makes the year-over-year comparisons far less meaningful. The quarterly cadence of our results in 2020 was very unique. And as previously discussed, we expect it will continue to be so in 2021.

Starting late in the first quarter 2021, we have seen food manufacturer activity start to ramp up, and our recent conversations with our customers have been very positive. As the vaccine continues to roll out and reopenings expand, we expect this will continue to help manufacturers with their staffing and processes, which should enable them to continue to ramp up production to more normalized levels and inventory positions. Further, individual states, regions and countries are continuing to progress through the various stages of reopening, though we would note this has been very uneven. We expect this return to the norm to happen very gradually over 2021 and into 2022.

Through it all, we continue to benefit from our portfolio's diversity and scale, the effectiveness of the Americold operating system and our commercial processes. Barriers to entry remain high in our business, and our integrated global platform, which now spans 4 continents, would be difficult, if not impossible, to replicate. Finally, we expect that food consumption will remain stable and in line with historical trends. For these reasons, we feel confident that our business will remain steady on an annual basis, which is reflected in our full year 2021 guidance targets.

Now let me turn to our external growth activity. We continue to execute on strategic development and acquisitions that will help us better serve our customers and their supply chain needs on the global scale. In specific, we completed 2 transactions since the start of the year, totaling $118 million, and we have entered into a purchase agreement for an additional acquisition for $102 million expected to close this month. As we have said previously, strategic tuck-in acquisitions meaningfully enhance our existing network. Just as important, all of these transactions bring opportunity to drive NOI growth as we commercialize existing business and implement the Americold operating system.

On March 1, we closed on the acquisition of Liberty Freezers in Canada for $46 million. Liberty consists of 4 assets totaling 10 million cubic feet, 2 owned facilities in Montreal and London, and 2 lease facilities in Toronto. This acquisition grows our exposure with several of our top 100 customers as well as add some new customers. And it's a mix of protein, consumer packaged goods, bakery and dairy. The Greater Toronto area is one of Canada's most important distribution markets, and this transaction increases our existing footprint in Toronto by nearly 40%. Finally, this transaction includes approximately 20 buildable acres of land across the 3 cities to support additional development.

On May 5, we closed on the acquisition of KMT Brrr! in Southern New Jersey for $71 million. KMT consist of 2 owned facilities totaling 13 million cubic feet, supporting the ports of Philadelphia and Wilmington. KMT also has a transportation business that provides less-than-truckload services to support its customers in the 2 warehouses. This acquisition increases our exposure to both new and current customers and is a mix of produce, protein, seafood and bakery. This transaction grows our New Jersey footprint by 15% and complements our current portfolio in the region, which grew significantly through the Agro and Halls acquisitions.

As we stated when we acquired Agro, we continue to find opportunities to build our network in Europe. Subsequent to quarter end, we entered into a purchase agreement to acquire Bowman Stores, which operates a single campus located in Spalding, England for $102 million. The campus aggregates 10 million cubic feet along with 4 buildable acres of land to support additional development. Nearly all of the customers in this facility are new to Americold, and the commodity mix is distributed between protein, prepared foods and produce. The facility is also one of the few businesses in the U.K. with a protein export license to China. The asset is located approximately 100 miles north of London and complements our existing Whitchurch site. Please see Pages 34 and 35 of our IR supplement for more detail on these 3 acquisitions.

Finally, we continue to be very active on the ESG front. We recently posted our 2020 Sustainability Report to our corporate website. We encourage everyone listening to review it and learn about the progress on this important effort. As we noted in our report, we implemented 55 sustainability projects in 2020. In 2021, we look forward to pursuing additional sustainability projects as well as increase our GCCA Energy Excellence certifications. I'm very proud of the accomplishments across our organization with respect to ESG.

In closing, it has been another busy quarter here at Americold. We continue to work to support our customers and their global supply chains through COVID-related disruptions as we look to return to normal. We thank our associates for their continued hard work and dedication.

I'll now turn the call over to Marc, who will provide more details on our results, balance sheet and outlook for 2021.

[Marc Smernoff, executive]

Thank you, Fred, and good afternoon, everyone. For the first quarter, we reported total company revenue of $635 million and total company NOI of $157 million, which reflects a 31.1% increase and a 16% increase year-over-year, respectively.

Core EBITDA was $118 million for the first quarter of 2021, an increase of 13.1% year-over-year. This was driven by our 2020 acquisitions and recent developments over the past year. This was partially offset by lower revenue due to volumes impacted by COVID, higher COVID-related costs and incremental corporate SG&A related to our recent acquisitions. Our core EBITDA margin declined by 295 basis points to 18.6%. This margin decline was primarily driven by the increase in revenue and NOI from our transportation segment due to our acquisition activity and a reduction in our same-store Global Warehouse segment revenue. As you know, the transportation segment has lower NOI margins than our primary warehouse business.

For the first quarter 2021, we reported a net loss of $14 million compared to net income of $24 million for the same quarter of the prior year. The net loss was driven by an increase in acquisition and integration costs. As a reminder, these expenses are excluded from core EBITDA, core FFO and AFFO. Our first quarter core FFO was $63 million or $0.24 per diluted share. Our first quarter AFFO was $76 million or $0.30 per diluted share.

For the first quarter of 2021, Global Warehouse segment revenue was $485 million, which reflects growth of 27% year-over-year. Global Warehouse segment NOI was $146 million, which reflects growth of 15%. Global Warehouse segment NOI margin was 30.1% for the first quarter, a 316 basis point decrease compared to the same quarter of the prior year. The NOI growth was primarily due to our acquisitions and development that stabilized over the past year as well as contractual rate escalation. This was partially offset by softness in our same-store pool, including reduced throughput due to lower food production and food service volume, driven by continued COVID impacts.

We are also impacted by lower holdings as compared to the inventory held for export during the first quarter of 2020 and ongoing COVID-related expenses. At quarter end, rent and storage revenue from fixed commitment storage contracts increased on an absolute dollar basis to $307 million from the sequential quarter. On a combined pro forma basis, we derived 36.5% of rent and storage revenue from fixed commitment storage contracts, which is a 420 basis point decrease from the sequential quarter, primarily driven by our acquisition activity. As a reminder, our acquisitions have had a very limited percentage of fixed commitment contracts.

The opportunity to commercialize business is part of the value we create through our platform, but this value is realized over time. For example, we are pleased to announce that we recently converted another top 5 customer to a fixed commitment contract, the impact of which will be seen starting in the second quarter. At quarter end, our global portfolio consisted of 242 facilities, including the 4 we acquired from Liberty Freezers. Our total facility count includes 233 facilities in our Global Warehouse segment portfolio and 9 facilities in our third-party managed segment.

Now I will turn to our same-store results in our Global Warehouse segment. We count a facility as same-store if it meets our definition at the beginning of the year, and same-store for 2021 consists of 162 facilities. Our same-store pool in 2021 now includes the facilities acquired from the PortFresh, Cloverleaf, Lanier, MHW, Nova Cold and Newport acquisitions. In the aggregate, these facilities have a meaningful protein component and comparatively low levels of fixed commitment contracts. This is seen in our same-store results.

Additionally, our comparables this quarter include the impact in the first quarter 2020 of both a buildup in protein inventory related to increased export activity as well as the historic retail surge. We are actively working to commercialize our acquisitions as our fixed commitment structure provides enhanced stability in our results. For the first quarter of 2021, our same-store Global Warehouse segment revenue was $355 million, which reflects a decrease of 1.8% year-over-year and a decrease of 3.8% on a constant currency basis.

Same-store Global Warehouse NOI was $118 million, which reflects a decrease of 5.2% year-over-year and a decrease of 6.9% on a constant currency basis. Our revenue was impacted by lower rent and storage revenue and services revenue, primarily due to the ongoing impact of reduced food production volumes and food service activity, partially offset by elevated retail activity. As a reminder, first quarter 2020 benefited from approximately $6 million of incremental NOI due to elevated inventory and the historic surge related to COVID. Same-store Global Warehouse NOI margin decreased 120 basis points to 33.3% due to the reduced economic occupancy and throughput volumes.

For the first quarter, same-store global rent and storage revenue decreased 2.4% year-over-year and by 3.5% on a constant currency basis. This was driven primarily by a decline in economic occupancy. Our same-store economic occupancy was 76.7%, which reflects a decrease of 597 basis points from last year's strong first quarter economic occupancy as we are impacted by reduced food production level yet stable consumer demand.

Our same-store global rent and storage NOI decreased by 5.9% year-over-year and decreased by 7% on a constant currency basis. This was due to lower occupancy as well as increased cost year-over-year, including increased property insurance expense, higher property taxes and COVID-related sanitation expenses, partially offset by lower power expenses and embedded rate escalation. Same-store rent and storage NOI margin decreased 247 basis points to 65.9% due to the same factors.

Same-store Global Warehouse services revenue for the first quarter decreased by 1.3% year-over-year and decreased by 4.1% on a constant currency basis. Our same-store Global Warehouse services NOI decreased by 1.5% year-over-year or 6% on a constant currency basis. This decrease in NOI was driven by fewer throughput pallets and incremental COVID PPE costs and inefficiencies. Same-store warehouse services NOI margin was 9.7% for the quarter, which was roughly flat with prior year. The disciplined cost control embedded in the Americold operating system helped to maintain our margins given we were able to reduce labor and other service expenses.

We continue to work to enhance the diversity of our customer base while growing our wallet share with our key customers. Within our Global Warehouse segment, our top 25 customers account for approximately 48% of our Global Warehouse revenue on a pro forma basis. While this is down approximately 959 basis points from first quarter 2020, our actual wallet share with these customers continues to rise. Our acquisition strategy continues to benefit the portfolio with increased diversity. Additionally, our churn rate was approximately 3.5% of total warehouse revenue.

Corporate selling, general and administrative expense totaled $45 million for the first quarter of 2021, as compared to $37 million for the comparable prior year quarter. The increase was driven by SG&A absorbed net of synergies through our recent acquisitions to support our global platform. We remain on track to deliver the synergies from the Halls and Agro acquisitions.

Now let me update you on our external growth activity. With respect to our development, we invested approximately $70 million on expansion development capital during the first quarter. We are making progress on all-in process developments. We remain on track to complete Atlanta and Auckland, New Zealand on time and on budget. Regarding our acquisition activity, as Fred mentioned, we completed 2 transactions since the start of the year, and we entered into a purchase agreement for another acquisition, which is expected to close this month. All these were or will be funded using our multicurrency revolver.

In March, we acquired Liberty Freezers in Canada for a total investment of CAD 58 million or approximately USD 46 million. This transaction translates into a net entry NOI yield of 7%, which assumes the consolidation of the 2 Toronto facilities at lease expiration of the smaller facility in September. Subsequent to the quarter end, in May, we acquired KMT Brrr! for a total investment of USD 71 million. This translates into a net entry NOI yield of 9%. The warehouse business generates 60% of the NOI, and the transportation business generates the balance. Additionally, as part of this acquisition, we are assuming approximately $1.8 million in SG&A, which implies an in-place EBITDA yield of approximately 6.5%. Of this $1.8 million in SG&A, we believe that we can eliminate approximately half over the next 12 months.

In addition, we entered into a purchase agreement to acquire Bowman Stores in the U.K. for a total investment of GBP 74 million. This translates to USD 102 million and is expected to close this month. This translates into a net entry NOI yield of 6.8%. We continue to execute on our strategic growth plan in Europe. Please see Pages 34 and 35 of our IR supplement for more detail on these acquisitions. Pro forma for these acquisitions, our portfolio consists of 245 facilities.

Now turning to our balance sheet and capital markets activity. We continue to believe maintaining a low levered, flexible balance sheet provides a competitive advantage as we seek to drive internal and external growth over the long term. In January, we completed an amendment to our credit facility and increased the capacity on our revolver from $800 million to $1 billion. We concurrently paid down the balance on our U.S. dollar term loan A from $325 million to $125 million using the cash on the balance sheet. We did not utilized our ATM program during the first quarter.

As of March 31, we had 252.5 million shares outstanding. At quarter end, total debt outstanding was $2.8 billion. Our real estate debt had a weighted average remaining term of 7.5 years and carries a weighted average contractual interest rate of 3.1%. We had total liquidity of approximately $1.5 billion, consisting of cash on hand, revolver availability and $388 million of outstanding equity forwards. Our net debt to pro forma core EBITDA was approximately 4.8x.

Now let me discuss our outlook for 2021. We are maintaining our guidance for AFFO per share in the range of $1.36 to $1.46. As a reminder, we look at our business on an annual, not a quarterly, basis. We continue to expect that the quarterly cadence of this year will be unique, and we are impacted by a very difficult comp in the first quarter. We have also factored in uncertainty around reopening trends and consumer behavior. At the same time, we know that food consumption remains relatively consistent, and we benefit from the scale and diversity of our portfolio as well as our strong market share. Please refer to our supplemental for detail on the assumptions embedded in this guidance. Please keep in mind that our guidance does not include the impact of acquisitions, dispositions or capital markets activity beyond that, which has been previously announced.

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

[Fred Boehler, executive]

Thanks, Marc. Americold remains a mission-critical part of the global temperature-controlled food supply chain. Our global network has produced stable and consistent growth over many years, and we expect it will continue to do so. We also recently took opportunities to complete several acquisitions and would like to welcome the Liberty, KMT and Bowman associates to the Americold family. Finally, we again want to thank all of our associates, especially our frontline associates, for their hard work and dedication.

Thanks again for joining us today, and we will now open the call for your questions. Operator?

[Scott Henderson, executive]

Thank you, Fred. Before we take questions, you may have noticed we posted our earnings release today at approximately 3:30 p.m. Eastern Time due to a technical issue with our third-party website provider. All of our materials are now posted and have been filed as appropriate.

[Operator]

[Operator Instructions] Our first question comes from the line of Dave Rodgers with Robert W. Baird.

[Dave Rodgers, analyst]

Fred, I wanted to start with you on the protein impact to the same-store pool and your overall kind of guidance. But starting with the protein, I think when we talked last year, you had made it, I thought, fairly clear that there was kind of a rolling impact but it wasn't that severe, and it just kind of happens from time to time. I think your comments today suggest that it has not normalized and won't be normal for most of '21. So I guess I'm wondering what changed in that kind of view that you guys had shared last year, if anything. And then I guess the second question is -- maybe for Marc, is can you give us a sense of what the core legacy cold same-store portfolio delivered versus the contribution because you only grew the portfolio by about 20% on the same-store side, and it seems like it might have had an outsized impact?

[Fred Boehler, executive]

Yes. So first of all, on the protein piece, we -- there's many products. I think we talk about protein as kind of being the lead indicator from what we've seen. Given the disproportionate amount of protein that came with the acquisition, really all manufacturers have been impacted by a slowdown in manufacturing. So we talked about that the last couple of quarters. Everybody is affected. Anybody that runs a manufacturing operation is impacted by having to mitigate their line speeds and such. And so as a result, that's eaten into kind of the physical inventory, which is their safety stocks. So think about it. Demand for the consumers remain steady. As I say, we're always going to eat, right?

So that demand has remained steady. The problem is the manufacturers have been unable to keep up with that demand, hence the reduction in our physical inventory. So we use protein as an example because it's been the most public out there in the marketplace in terms of what's been going on through some of their manufacturing operations and supported by the USDA report. So it's one industry that does a pretty good job of putting public information out there and talks about the declines and kind of the pressure on that particular part of the food and supply chain. So that's why we're using it as just kind of a barometer to give a sense.

As it pertains to the same-store pool, again, we did over-index, if you will, on the acquisitions that we made, particularly globally. And that's now part of our same-store pool. So the impact on that particular segment has been a little bit more than others. I will remind folks that if you kind of go back, we talk about protein. We talk about substitutability and such. This is unique. The COVID is impacting all manufacturers regardless of what they're processing. Usually, when one protein is down, the other one is up, and it kind of stabilizes through our network. But this is a bit different and unprecedented because it has more to do with just manufacturing overall. So Marc?

[Marc Smernoff, executive]

Yes. And I think Fred said it best. If you look at our same-store results and you pull out the acquisitions, the protein-heavy piece, which Fred just discussed, and you pull out what we called out last year as the historic surge, overall -- our overall portfolio revenue on the same-store would have been slightly down and then -- or flat, sorry. And then NOI would have been slightly positive in the 1 percentage range. So...

[Dave Rodgers, analyst]

Okay. That's helpful. With reiterating the guidance overall, I guess, 2 questions. One is, can you give us a peek into April and May in terms of, are you seeing kind of continued improvement off of what was maybe a low point in the first quarter? And then, Marc, I guess, to get to that midpoint of your guidance for the year, you're looking at about 14% year-over-year growth for the remaining 3 quarters of the year against a pretty tough comp. Big picture, big pieces that contribute to that, that you have a lot of confidence in, color there would be helpful.

[Fred Boehler, executive]

Yes. I think I'll give a little probably and then let Marc pick up on it. But as we've talked about in our prepared remarks, we are seeing a little bit of an uptick. We're seeing manufacturers start to come back as the vaccinations are rolling out and restrictions are starting to free up a little bit. So manufacturers are geared back up. At some point -- and this is just the way the food industry works, that inventory is going to get built back up. So nobody is happy with their inventory levels. They're struggling to keep up with retailer and distributor demand fulfilled.

So yes, they're going to rebuild those inventories. So as those manufacturing lines start to get more and more productive, we expect to see that build in inventory. And as we've talked about, the build in inventory and storage is the more profitable part of our business. And we expect that to gradually increase as we go throughout the year. So -- whereas it was down quite a bit last year, gradually declined over the course of last year.

[Marc Smernoff, executive]

Yes. And as it relates to the full year and the outlook, I think Fred really said it best in his prepared remarks and his just recent remarks that we're seeing kind of renewed activity from our manufacturing clients, which gives us encouragement that we're going to see improved activity as you move throughout the balance of this year. I would remind people. We looked at our business on a full year basis. We knew going into this year that given all the activity in Q1 last year and the strength, that, that was a tough comp. But when we looked for the balance of the year with this renewed activity, we're very confident that we'll be able to deliver within our guidance range.

[Operator]

Our next question comes from the line of Manny Korchman with Citi.

[Emmanuel Korchman, analyst]

Fred, you sort of just touched on this in response to Dave's question, but maybe I'll ask it a different way. Is there the risk that the manufacturers are actually going to take advantage of this situation? Say, maybe we were paying too much for the storage of our product before. We've learned to become leaner, meaner. We've got better systems in place. We found spots that maybe we don't need as much, product or space or however you want to look at it. And there's a new normal, if you will, between sort of old inventory levels and the new ones.

[Fred Boehler, executive]

Yes. Thanks, Manny. Fair question. But the answer is no. Look, like I said, we talk to all of the food manufacturers. I was just with a couple big ones earlier this week. They are scrambling like crazy to rebuild inventory. So they are failing to meet the needs of the retailers today. Their line fills -- so a customer orders 10. They're only able to fill 8. So their line fills are horrible. They're getting penalized by retailers as a result of not being able to service it. The retailers are upset because they never want a customer to walk into their store and have a stock out. And so that's why the safety stock exists and has existed for decades. So I fully expect it to get back. Nobody is happy with where those levels are. This is not the type of industry that can be run just in time.

[Emmanuel Korchman, analyst]

Right. And then just in terms of competition in the space, whether that be for acquisitions or for customer agreements? Have you seen any changes over the last few months or quarters?

[Fred Boehler, executive]

No. It's really been pretty steady. Obviously, on the acquisition front, we run into the usual suspects. I haven't really seen any new entrants into that. In terms of customer contracts, we reported our churn rate again at being at a low 3.5%, and it's pretty steady there. That just goes to show you that we're not losing any of our big deals to competition. So matter of fact, it's quite opposite most of the time. So...

[Emmanuel Korchman, analyst]

And maybe 1 last quick one for me. It looks like one of these deals came with more transportation services. Is that a business that you'd maintain, grow, shrink, otherwise?

[Fred Boehler, executive]

I'd say that we're evaluating it. It's kind of a gift with purchase, if you will. So lots of companies are pure-play warehouse companies. They do have some ancillary aspects of their business. This particular business is focused on consolidation, which is what we believe is the real strength of transportation. And so that's where we're able to pool off the smaller customers together and create full truckloads going to the retailers and the food service guys. That's the most efficient. It's the most ESG-friendly. It's -- that's the good transportation engine that we continue to drive. As for other ancillary, we'll get in there, we'll assess the profitability, and we'll determine how we move forward with it. But by no means do we have a desire to become a transportation company. That is not our core. We are more brokers of consolidation.

[Operator]

Our next question comes from the line of Nate Crossett with Berenberg.

[Nathan Crossett, analyst]

Maybe just a follow-up on the previous questions in form of clarification. So what are you guys kind of underwriting that you expect to see pre-COVID inventory levels? Is it at any point later this year? Or is it still a 2022 event? I mean I know it's incredibly difficult, but what is your guidance in underwriting kind of assume right now?

[Marc Smernoff, executive]

Yes. As we look at it and based on the conversation we're having with our customers, we really see getting close to pre-COVID levels coming into the back half of the year, really going into the seasonal build. And so we're encouraged -- as we said, we're encouraged by the conversations we're having with our clients. We're encouraged by what we see and hear them doing in terms of adding additional production lines and really doing their best to try to ramp up production. As Fred mentioned earlier, they're struggling to meet their customers' needs. So we think it doesn't bode well for us. And as we've said, this isn't an industry that runs just-in-time. It needs a sufficient safety stock through the different nodes to run efficiently.

[Fred Boehler, executive]

Yes. And Nate, I think if you think about our guidance, right, that we're reaffirming here, it's fairly wide, if you will. And when we built that guidance, we did so without being able to pinpoint exactly when we would reach pre-COVID levels. We knew the supply chains were going to be disrupted over the course of the year. So the way I would look at things is if manufacturers ramp up faster -- remember, we have 5,000 customers. So all of them are in a different location, different restrictions, different type of situation.

But if they all ramp up and it happens faster than we think, that would obviously push us towards the top end. If it lags a little bit and takes a little bit longer to get up to those levels, we believe we'll be at the low end. So we think we have that kind of flexibility. And really, there's just no lens that we can see other than what we've seen happen in the recent weeks in terms of an uptick that makes us feel comfortable that we're going to be able to hit the range. Hope that helps.

[Nathan Crossett, analyst]

Okay. Yes. I mean is there any large disparity between what you're seeing in the U.S. versus Europe customers? Just due to vaccines rolling out quicker in the U.S. I didn't know if you're -- if that's kind of translating to customer behavior for you guys.

[Fred Boehler, executive]

Yes. It's very, very similar. It's shocking how similar it is really around the entire world. So we're seeing the same type.

[Nathan Crossett, analyst]

Okay. And then just one quick one on inflation. What are you guys seeing in terms of input costs just for development? And like is this going to have any impact on maybe the yields that you can execute on? And then also, if you do have higher build costs, does that kind of impact how customers think about maybe outsourcing more development to you guys?

[Fred Boehler, executive]

Yes. No, good question, Nate. In terms of -- I'll take the inflation in 2 pieces just so we cover them both. The inflation to our base business is pretty nonexistent really. I mean if you think about it, we're all labor and utilities. So we don't really have raw materials and those types of goods that you'll undoubtedly see inflation. As we've talked about in the past, labor rates haven't increased yet. I would expect that we'll see some pressure on that, but we do have protections and the ability to be able to pass that on through. So we feel pretty comfortable both on the labor and on the utilities front.

As for development, the biggest impact -- it's not impacting any of our existing current development projects. However, we do see it impacting some of the new projects that we're working on, and it is definitely having an impact on the cost of that construction. In terms of the returns that we did on that, look, we build all that into our models and we pass them through to try to protect the margin that we want. So in other words, we will price that into our pricing with our customers to be able to protect that return on that investment. So we feel very comfortable that we're capable of doing that. As for in-source versus outsource, look, all of our customers are going to experience the exact same cost. So it really doesn't change the equation because it's neutral. It's affecting everybody.

[Operator]

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

[Michael Carroll, analyst]

So talking a little bit about the manufacturing side, can you kind of quantify how much has activity improved? I think in the press release, it said that activity improved in the back half of 1Q and into 2Q. I mean how big of an improvement was that?

[Fred Boehler, executive]

Well, we really try to stay away from monthly information. I would just say that we're seeing an uptick. Again, we guide on a full annual basis, not on a quarterly basis. And we believe that, that uptick is giving us the confidence to be able to deliver within that full year. So volume is picking up. We are seeing it -- all signs are pointing to recovery both from our customers and externally if you look at the macroeconomic climate right now, especially here in the U.S.

[Michael Carroll, analyst]

Okay. And then, I guess will this cause your same-store trend to kind of trend towards the lower end of that long term range? I mean, I guess while manufacturing will pick up, that will help your throughput. I mean you'll probably regain that throughout the year, but you're probably going to lose the storage revenue, right, from the lower inventories in the first quarter. I mean, how big of a deal will that have on the full year results?

[Fred Boehler, executive]

No. I think what we're saying is while the manufacturers pick up, yes, that will help with throughput. But throughput is kind of -- I mean it's not lagging as much as storage, if you will, because again, the throughput is coming out of storage instead of literally going through the building and not hitting inventory. So we expect inventory to start building back up as the manufacturers come up. We think that they're going to produce pretty aggressively to refill those stocks.

[Michael Carroll, analyst]

So the lost inventory revenue though that you had in 1Q from lower -- the lost storage revenues from the lower inventory in 1Q, I mean that's the bigger margin, right? So that's something you're not going to be able to regain, but the throughput you'll be able to regain on the full year result at least?

[Fred Boehler, executive]

We'll be able to regain on the storage as well if all things go as what we're seeing because if you recall, last year, it was a steady decline of physical inventory over the course of the year. So we'll see an opposite trend this year as that recovers.

[Michael Carroll, analyst]

Okay. And then can you remind us about the J-curve for acquisitions? I mean I know that you're talking about the acquisitions were heavily protein-related. So I guess those trends are going to be lower probably in the second year after acquiring them. But how should we typically think about that? So PortFresh, for example, had a net entry NOI of 6.7% but stabilized NOI between 9% to 12%. I mean, how long -- or I guess what does that yield look like in year 2 and 3 before you get to that stabilized yield in year 3?

[Fred Boehler, executive]

Yes. I think if you look at our supplement in the guidance, our acquisitions really don't have a J-curve, right? So the J implies that you're going to go negative or below that yield. The way that we guide on acquisitions is that, typically, there's kind of a 3-year run, right? So the first year is relatively neutral-ish. So we are investing in the business as well as taking cost out of the business. And then in years 2, 3, we start ramping up 100 to 200 basis points on top of that yield. So that's our typical guidance and typical trajectory that we see with all of our acquisitions. That said, I will call out that we did give a little bit different guidance on the Agro deal where we made it a 5-year.

So we said 2 years kind of even on the inbound yield, and then ramp up that 100 to 200 basis points over the course of those following 3 years. And the reason why that was different is just, number one, the size and the number of entities contained within Agro, as well as, at the time that we did that acquisition, we were starting to hear things. And sure enough, it happened with COVID. And then -- well, not starting to hear things. We were in the middle of COVID. So we weren't sure exactly when we were going to be able to get over there and how aggressive we would be able to get after it. So that's why we gave ourselves 5 years on that integration effort.

[Operator]

Our next question comes from the line of Ki Bin Kim with Truist.

[Ki Bin Kim, analyst]

I was wondering if you can go back to the comments about manufacturing output being lower for your top tenants. Just help us understand what that really means.

[Fred Boehler, executive]

Yes...

[Ki Bin Kim, analyst]

So not for your throughput volume, but like what are we talking about here is in terms of like how much more and -- how much has that actually improved to your tenants in April?

[Fred Boehler, executive]

Yes. So if you think about it, I'm not going to -- I don't have exact numbers here, but I would point you and tell you to take a look at some of the USDA information that's out there, which talks about pork stocks and beef stocks and poultry stocks and et cetera. And I think if you look at something like pork, I don't have it right in front of me, but I want to say their stock, their inventory levels are like 30% down. So that is a function of the manufacturers not being able to produce to meet the demand.

So what is happening is there that -- again, I will keep using the phrase, eaten into the safety stock. So their inventory levels that are in our storage are meant to do 2 things: number one, to be able to make sure that they're able to deliver to customers as they need it and have that inventory ready to go within a moment's notice; and number two, to be able to weather storms literally like hurricanes and disruptions in the marketplace, plant shutdowns and that type of thing. So that's why they have inventory in the first place.

And so what they're being impacted by is an elongated plant disruption, if you think about it. Let's talk about that hurricane effect, right? So it's elongated. Instead of just being a month, it's a year. So if consumer demand is the same, let's say, the demand pull is 100 units and they have 30 units in inventory and the manufacturers are only able to produce at 90 units, they're 10 units shy of the 100 in demand. And so that 10 units comes out of the physical inventory, which is our safety stock -- their safety stock, our physical inventory.

So that's what's happening. So due to the lower production, not only do I see lower throughput coming through from the manufacturers, but the bigger impact is I'm losing inventory space. Now that gets mitigated a little bit with those customers that we have fixed commitments with. So we're protecting their space and locking in their space. But as we've discussed, that's not holistic around all 5,000 of our customers and all 100% of our physical inventory. So -- or our economic inventory. So that's kind of the dynamics at play here, Ki Bin.

[Ki Bin Kim, analyst]

So using that particular example, if the port manufacturers' output is down 30%, I guess it makes sense that to your business the impact is probably greater than 30% because of inventory drawdown. Am I thinking about that correctly?

[Fred Boehler, executive]

Probably a little bit less. It kind of goes the opposite way because they're actually able to produce some product, but they're taking down the inventory, right.

[Marc Smernoff, executive]

Net-net it's going down.

[Fred Boehler, executive]

Yes, net-net it's down.

[Ki Bin Kim, analyst]

Okay. And...

[Marc Smernoff, executive]

Ki Bin, you see that on a macro basis and what the USDA is reporting. So as Fred said, overall big categories, frozen poultry, down 17% March to March; frozen fruit stocks, down 17% March to March; pork supply is down 27% March to March. So that just shows you demand has been stable. So our -- also as consumers, we continue to eat. You hear Fred talk about -- as Fred was saying, the consumer demand is stable, but what we have seen is the fact that the manufacturers haven't been able to keep up to support that steady demand, which is why we're seeing our safety stock, the physical inventory within our network be drawn down in order to satisfy that stable demand.

[Fred Boehler, executive]

And that's the beauty here. If you think about our model, most companies, when they have down periods of time, it's because the demand is not there. The demand is here. So the demand is steady, and it always will be because we're talking about food and food consumption. So that's the beauty here. We're just artificially hampered right now because of the manufacturer's ability to be able to produce given the COVID environment that we're in. Again, as we come out of COVID, as things start to loosen up, they'll start to get back up to production and the business snaps back. So that's the positive outlook that you're hearing from us.

[Marc Smernoff, executive]

And Ki Bin, just also keep in mind, our -- most of our acquisitions aren't going to have fixed commitments in place.

[Fred Boehler, executive]

Right.

[Marc Smernoff, executive]

And so as we commercialize the business, like our legacy business, you'll see those fixed commitments come into place.

[Ki Bin Kim, analyst]

Okay. And the second part to that question, when you talk about these type of planters showing improvement, what kind of magnitude are we talking about? I don't mean your guidance for throughput pallets. I'm talking about from your tenant perspective.

[Marc Smernoff, executive]

Yes. No, look, as Fred mentioned, they're struggling to meet their end customer demand. So they're trying to get their inventory production back where they can safely satisfy their customer demand and the fill rates required to meet their -- the terms of their contracts with their end customers.

[Fred Boehler, executive]

Yes. And I don't know -- look, again, 5,000 customers. Some customers are going to be a little bit more skittish and they're going to over-index. I think you'll see them go with larger inventory pools as we head into the future. I would say as for the rest of the customers that don't over-index, at a minimum, they're going to get back to their norms. I don't see anybody and I can't think of a single customer that is happy with where their inventory positions are and feel that they could run a lower inventory at this point.

[Operator]

Our next question comes from the line of Joshua Dennerlein with Bank of America.

[Joshua Dennerlein, analyst]

In the past, you've mentioned some inefficiencies from social distancing within your warehouses. Does your guidance assume that those inefficiencies hold throughout the year?

[Fred Boehler, executive]

Yes. We did embed those into our plans, both the inefficiencies with labor as well as the extra PPE costs associated with sanitation and some of that aspect. As we've discussed in the past, we believe some of those practices that were actually put in place are best practices for us to carry forward. We think that it will help us in the future with absenteeism around things like the flu. So the more sanitized areas that we can have and safer work environments, we believe, will stem turnover and help ensure that we have our regular employees at work. And when our regular employees are at work, we're more productive. So a lot of those are going to stay with us, and we will embed that whole cost structure and impact into our activity-based costing models, which we already have. And so we price all new business accordingly.

[Marc Smernoff, executive]

Then the other thing I would add is this was -- Q1 of 2021 was the last quarter where we were comping a period this year where we had COVID-related PPE and sanitation costs more materially than last Q1 we did not. So going as we move into Q2 and beyond, those costs really were sort of in our cost structure.

[Joshua Dennerlein, analyst]

Okay. That's good to know. Are there any other kind of moving pieces that we should be aware of for same-store for next quarter? Any like base effects, the holiday share?

[Marc Smernoff, executive]

The 1 big thing I would just call out in Q2 of last year is the quarter that we paid an appreciation bonus for our frontline workers. So it was just something I would just call out. I think it was in aggregate of about $5 million for the total company.

[Fred Boehler, executive]

So really, outside of that, I mean, the business -- every other aspect of the business is really normal. It's simply a function of getting manufacturing capacity back up.

[Joshua Dennerlein, analyst]

Okay. And then maybe on -- you mentioned that if you normalized for like the pandemic and the change in the same-store pool that like NOI would just be down a little bit. Your revenues would be flat. Is there any way to quantify like how much of that normalization would be driven by the pandemic versus like the change in same-store pool?

[Marc Smernoff, executive]

Yes. So I think we actually tried to do that. So -- and just to be clear, as Fred mentioned in his prepared remarks, adjusting for those 2 items, the -- stripping out the acquisitions and adjusting for kind of the COVID-related upside we saw last year, revenues would be flat and NOI would be slightly up. As we said, the COVID surge impact, we quantified that as roughly about half of our overall growth last year. If you think about the impact, this was about $6 million that we have called out related to Q1's result last year.

[Fred Boehler, executive]

Yes. So think about that. I mean outside of the surge, if you will, the first quarter last year was relatively normal course, a little bit of buildup and some inventory for export in anticipation of China. But it was, for all intents and purposes until the end of that quarter, a fairly normal quarter. And then we had the surge that kind of really, really boost this up, right? So if you think about that, stripping that surge away and looking at like-for-like same-store to that first quarter, the fact that we're up on NOI with so much less physical inventory is actually pretty, pretty good performance. So -- because our -- again, we're looking at a full quarter of COVID impact this quarter versus really no impact last year other than a positive. So the fact that -- that's why I stripped that out to say, hey, look, we're actually positive on NOI with that much less physical inventory.

[Joshua Dennerlein, analyst]

Okay. Awesome. And then maybe one just final one. I think on the Toronto acquisition, if I read the press release correctly, it sounded like it came with warehouse operations. Was that like actual warehouse, like regular dry industrial boxes or something else?

[Fred Boehler, executive]

No, they're all temperature-controlled.

[Operator]

Our next question comes from the line of Vince Tibone with Green Street Advisors.

[Vince Tibone, analyst]

How do you think cold storage cap rates have changed over the past 6 months? If you were buying the Halls portfolio today, for example, how different do you think that cap rate would be?

[Marc Smernoff, executive]

Over the last 6 months, pretty -- yes, I would say pretty flat to maybe that 25 basis points tighter. As you can see, there's a lot of interest in our category, in our space. And I think you've seen that. You can see some of it as you look in our M&A results and you go through the different deals and you see the overall yields tighten from a couple of years ago. But in terms of the last 6-month movement, it's probably in the 25 basis points to flat range.

[Vince Tibone, analyst]

And just to clarify, 25 basis points lower or higher? Sorry, I wasn't clear on your comment.

[Marc Smernoff, executive]

Lower.

[Vince Tibone, analyst]

Got it. And then one more. Can you just provide an overview of the supply landscape today? Are you seeing an acceleration of supply nationally? And are there any markets where overbuilding is a concern?

[Fred Boehler, executive]

Yes. No. I mean, look, the industry as a whole still remains very, very disciplined. There's some noise out there from a couple of developers here and there, but very few shovels in the ground. And there's a lot of conversations going on. But like I said, the barriers to -- barriers into this industry are very, very difficult. So nobody's starting up new cold storage companies unless they're legacy cold storage individuals. And the reason for that is -- again, we talk about food safety being so critical or so fundamental. We talk about brand recognition being so global. Food manufacturers aren't getting entrust a newbie into this industry and put all of that at risk and stake. So you don't see that happening.

The developers that are talking about developing -- remember, the difficulty here is our business is not just about the asset. It's about the full business. It's about the services and the infrastructure. And they go hand-in-hand. So developers building infrastructure doesn't really do a whole lot. It isn't worth a whole lot unless somebody is running it. And the 2 largest players really aren't interested in leasing space. We're more interested, obviously, in owning our infrastructure, and we're not really interested in buying from developers, quite frankly, because we have our own builders to build, and we don't have to pay a middleman. So I just don't see -- I see a lot of talk about it, as Marc said. There's a lot of interest in our space, and I get it. It's just more complex than building industrial buildings.

[Vince Tibone, analyst]

That's really helpful color. Just maybe if you can just provide a ballpark estimate of supply data for the sector. Tough to come by. Like where do you think construction is as a percentage of existing stock?

[Fred Boehler, executive]

1-ish, 1.5% maybe with all the development going on. And remember, we're probably -- we're the majority of that development right now. I mean we are, I think, developing more than anybody else right now in terms of active projects. There's a fair amount of construction going on. But if you look at the GCCA, they're probably the best reference point in terms of talking about what that existing landscape looks like and the growth year-over-year. They can probably give you the best input.

[Operator]

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

[Michael Mueller, analyst]

I think you mentioned in the comments that you picked up a top 5 customer and moved them to fixed commitment. And just curious, out of the top 10 or so, how many aren't on fixed commitments?

[Fred Boehler, executive]

If you look at our top 25, it's probably 5. So yes.

[Michael Mueller, analyst]

Got it. And then...

[Fred Boehler, executive]

And some of that is -- yes, go ahead. Sorry.

[Michael Mueller, analyst]

No, sorry. Go ahead.

[Marc Smernoff, executive]

88%, Mike, if you look at our most recent deck, utilize fixed commitment of our top 25.

[Michael Mueller, analyst]

And when you're thinking about, I guess, Europe and just how that's going, can you talk about the receptivity there?

[Fred Boehler, executive]

Yes. I mean, so far, so good. I mean I would say that most of our work has been done remotely. A lot of it is getting alignment internally. And I would say that we're very focused -- kind of, inwardly focused right now on SOX compliance and kind of getting all of that rolled together, getting our structure in place organizationally. And that's going really. So we are definitely making progress there. We're starting to have those conversations and get those introductions to the customers.

I think I mentioned on the last call that we're very excited. We've got 2 individuals that know the Americold playbook by the back of their hand, one from the operations side and one from the business development side. And those 2 individuals will be going into leadership roles in Europe to help lead that effort. And I think by having that expertise is going to help us make progress a bit faster than if we were to try to manage that from the States and educate and train the European team on how to do that. So having somebody on the ground full-time every single day, 24/7, I think, is going to help move us a bit faster. So...

[Operator]

Thank you. Ladies and gentlemen, there are no further questions. I would like to turn the conference back to Fred Boehler for closing comments.

[Fred Boehler, executive]

Yes. Thanks, everyone, for participating this evening. Apologize for the minor snafu earlier today with the press release getting out there. Hopefully, that doesn't cause any issues. So look, the business remains -- the business fundamentals remain intact. And I think that's the key message that we want to get through today. Our business -- it's imperative that you look at it on a full year basis. Last year was a perfect example as to why that is so critically important. This hit us out of nowhere last year after the first quarter. We repeatedly confirmed guidance and delivered that guidance.

So we obviously felt some pressure this quarter as compared to the first quarter because the first quarter last year was a non-COVID environment until the last couple of weeks. And this quarter was a full COVID environment. That said, we are bullish and optimistic as to the way that the business is seeming to pick up, the way manufacturers are starting to get back to normal, the way the criteria, the stay-at-home orders and all of those things are starting to loosen up around the United States, gives us great confidence that we'll be able to deliver again in the year. So again, on the strength of steady, stable consumer demand.

So thank you again this evening. Have a great night.

[Operator]

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.