Americold Realty Trust

NYSE:COLD

Earnings Call Transcript 2018-Q4

[Operator]

Greetings, and welcome to the Americold Realty Trust Fourth Quarter 2018 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to turn the call over to your host, Kara Smith. Please go ahead.

[Kara Smith]

Good afternoon. We would like to thank you for joining us today for Americold Realty Trust Fourth Quarter 2018 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 on the Investor Relations 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. Management undertakes no obligation to update publicly any of them in light of new information or future events.

During this call, we will discuss certain non-GAAP financial measures. More information about these non-GAAP financial measures and reconciliations to the comparable GAAP financial measures is contained in the supplemental information package available on the company's website. We would also like to note that the 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 the call to your questions.

Now I will turn the call over to Fred.

[Fred Boehler, executive]

Thanks, Kara. Thank you, and welcome to our fourth quarter 2018 earnings conference call. This afternoon, I will provide highlights on our 2018 accomplishments, review certain key operating metrics and discuss our external growth opportunities. Marc will follow with a summary of our fourth quarter and full year 2018 results and then review our balance sheet and our capital markets activity. After our prepared remarks, we will open the call for your questions.

In our first year as a public company, 2018 was a very productive and successful one. In addition to our IPO in January, which was a landmark event for the company, we continue to execute on our core strategy and create value for our shareholders. Specifically, for the full year, we grew total revenue by 3.9% and total warehouse revenue by 2.7% year-over-year.

We grew total company contribution, or NOI, by 8.4% and total warehouse segment contribution grew by 7.5%. We achieved stabilized occupancy levels at our new Clearfield, Utah facility; delivered our Middleborough, Massachusetts build-to-suit facility; and made significant progress on our Chicago, Illinois automated facility expansion.

We also signed an LOI with a major customer for the design, construction and operation of a state-of-the-art 3 facility temperature-controlled network in Australia. We pre-funded our development pipeline and raised an additional $232 million in a well-received follow-on offering with a forward equity component designed to match fund our capital needs. We also recast and expanded our credit facility to nearly $1.3 billion, with the ability to draw on multiple currencies.

In connection with these financings, we also completed a $600 million senior unsecured note private placement. This allows us to lower our cost of capital and transition our capital structure to majority unsecured. We received inaugural investment grade ratings from both Fitch and Morningstar. And finally, we were awarded gold or silver certifications at 56 of our sites as a part of the Global Cold Chain Alliance's new energy excellence recognition program.

2018 was a great year, and we are extremely proud of these accomplishments. We thank all of the Americold associates worldwide for their hard work and dedication. We believe our efforts in 2018 have resulted in a strong foundation and a platform for growth for years to come.

Subsequent to year-end, in January, we announced yet another growth opportunity for Americold. We purchased privately held PortFresh Holdings for $35 million. This investment included an operating cold storage business and 163 acres of zoned and entitled land near the Port of Savannah in Georgia. The Port of Savannah is ideally located for international transport of perishable goods due to its southern U.S. location. On this land, we intend to build a 15 million cubic foot state-of-the-art temperature-controlled facility and expect to begin construction in the second quarter. We anticipate opening in the first quarter of 2020 and to achieve returns consistent with our typical development and acquisition yield. We are very excited by this opportunity and our ability to support our customers in this market.

Due to the widening of the Panama Canal and investments made by the port, trade has continued to increase in the Port of Savannah and temperature-controlled food has been one of the fastest-growing cargoes in that port. As a result, we and our customers view the Port of Savannah as a key logistics location. We have numerous requests from our customers to establish a presence there. And as a part of our underwriting process before completing the transaction, we obtained signed nonbinding commitments from several of those customers, which allowed us to appropriately size the project.

Our business development team is working now to affirm these commitments. The Georgia Port Authority has also committed to significantly expanded its throughput capacity over the next 10 years, and Americold is working closely with them to support that market growth.

Now I'd like to update you on industry fundamentals and our quarterly results. Fundamentals in the temperature-controlled warehouse industry remains favorable. Supply is limited by high barriers to entry, including cost, customer relationships and operational expertise, while demand is driven by consumption growth and favorable secular trend. We continue to focus on ways to better service our customers who see Americold as a mission-critical part of their supply chain. We believe that commitment will allow us to continue to grow with our customers.

For the fourth quarter, we reported revenue growth in our Global Warehouse segment of 2.6% and our NOI grew by 7%. These results were primarily driven by a favorable customer mix, net new business, improvements in our commercial terms and contractual rate escalation. We also continue to benefit from further operating efficiency gains driven by labor productivity and the leveraging of fixed expenses. As a result of these initiatives, which are collectively focused on driving profitable growth, our fourth quarter Global Warehouse segment contribution margin expanded 130 basis points over the same quarter of the prior year to 32.9%.

Regarding our development activity, we continue to finish our work at our state-of-the-art expansion project in Chicago. Due to weather delays, inclusive of record cold temperatures in the Midwest and changing customer requirements, our construction schedule has been impacted, which has increased our total estimated cost to the range between $91 million and $93 million from $85 million. Despite this increase, we still project our stabilized return to be within our underwritten target range.

Consistent within this range, we have signed a binding agreement with an anchor key customer who has committed to take 38% of the new capacity on a fixed commitment basis. We have received our certificate of occupancy for Phase 1 of the building, and that customer is expected to begin inbounding product in the first quarter of 2019.

We are having productive discussions with other potential customers for the remaining pallet. And consistent with our underwriting, we expect this facility to reach stabilization 12 months from launch.

As previously discussed, we signed an LOI with a major customer to design, construct and operate a state-of-the-art 3 facility temperature-controlled network in Australia. We are working diligently with our customer in the detailed design phase of this project, and we are under contract with a deposit on a site in Sydney.

And finally, rounding out our pipeline is our new project in Savannah that I mentioned earlier, which we expect to deliver next year in early 2020.

In addition to these projects, we have over $1 billion of other opportunities in various stages of solutioning and underwriting.

Over the long term, we continue to seek a balance on our development pipeline with targeted acquisition. While we remain disciplined in our approach, we believe the fragmented temperature-controlled industry continues to present opportunities for us to leverage our competitive cost of capital and our platform while enhancing our ability to serve our customer base. We will provide further details on specific transactions as and when appropriate.

In summary, we are very pleased with our 2018 results. We believe our business provides investors with strong, durable cash flows with internal and external growth levers that should position us to drive attractive shareholder returns over time. We remain focused on executing on the opportunity in front of us.

I will now turn the call over to Marc.

[Marc Smernoff, executive]

Thank you, Fred, and good afternoon, everyone. For the fourth quarter 2018, we reported total revenue of $416 million and total contribution or NOI of $109 million, which reflects a 3.5% increase and an 8.3% increase, respectively. Core EBITDA was $85 million for the fourth quarter of 2018, an increase of 7.6% year-over-year driven by increased revenue and more favorable customer mix, continued operating efficiency gains as well as the contribution from our recently delivered facilities in Utah and Massachusetts. Our core EBITDA margin expanded by 80 basis points to 20.4% despite incurring incremental SG&A related to being a public company.

We reported net income of $3 million compared to net income of $8 million for the same quarter of the prior year. Net income for the current quarter included the impact of approximately $20 million of onetime cash charges consisting of defeasance cost related to the repayment of our CMBS debt and interest rate swap termination costs related to the repayment of our Australia and New Zealand term loans. Additionally, net income for the current quarter was impacted by $6 million of onetime noncash charges due to the write-off of unamortized financing costs associated with the repayment of our CMBS debt and used term loans. Excluding these charges, net income would have been $29 million for the quarter.

For the fourth quarter, core FFO was $53 million or $0.35 per diluted share. Our fourth quarter AFFO was $49 million or $0.33 per diluted share.

As a reminder, the full definition and reconciliation of core EBITDA, core FFO and AFFO to reported net income can be found in our supplemental.

For the fourth quarter of 2018, Global Warehouse segment revenues grew by 2.6% year-over-year to $305 million. Segment NOI grew 7% to $100 million. Global Warehouse margin was 32.9% for the fourth quarter compared to 31.6% for the same quarter of the prior year. This represents a 130 basis point improvement driven by the same factors discussed earlier.

As of December 31, our total portfolio consisted of 155 mission-critical facilities, which serve approximately 2,400 customers globally. We would note that as part of our active portfolio management, we sold a vacant building located in Bettendorf, Iowa during the fourth quarter for $1 million. Additionally, we purchased a leasehold at one of our facilities serving the Dallas-Fort Worth market for $14 million, which represented a 9.5% cap rate on in-place rent. Having already owned half of the facility and leased the remaining half of the facility, we are pleased to complete this acquisition and gain control over the entire building.

Finally, as Fred discussed, subsequent to quarter end, we purchased PortFresh Holdings in Savannah, Georgia. The $35 million acquisition consisted of an operating cold storage business and 163 acres of zoned and entitled land. For that $35 million, we underwrote approximately $20 million for the operating business, consisting of a 4.3 million cubic foot cold storage facility at an entry yield of 7% and approximately $15 million for the land value. We expect to invest an additional $55 million to $65 million to develop a new approximately 15 million cubic foot facility, which includes capabilities for blast freezing and refrigerated container transport. Taking into account the cost of the entitled land and the development spending, we expect the aggregate return to be consistent with our underwriting standards for developments of this type.

Additionally, we continue to make progress on our build-to-suit project in Australia. During the fourth quarter, we went under contract with a $5 million deposit on a land site in Sydney for a total purchase price of approximately $47 million. Our customer has backstopped our investment in this property.

I will now turn to our same-store results and our Global Warehouse segment. We define same-store facilities that have at least 24 months of normalized operations. For the fourth quarter 2018, 136 of our 143 warehouses were included in our same-store pool. For the fourth quarter of 2018, our same-store Global Warehouse segment revenues grew by 2.5% year-over-year to $294 million. This revenue growth was driven by the same factors that benefited our total portfolio, which offset the year-over-year declines in physical occupancy of 200 basis points and throughput pallets of 0.5%. As Fred discussed earlier, our network optimization initiatives and improved commercialization efforts have resulted in a more favorable customer mix, allowing us to drive profitable growth.

On a constant currency basis, same-store Global Warehouse revenues for the fourth quarter increased 4.5%. Global same-store rent and storage revenue grew by 1.3% year-over-year or 3% on a constant currency basis, and we continue to transition more of our customers to fixed commitment storage contracts. At quarter end, 42.8% of our rent and storage revenues or $220 million on an annualized basis were derived from customers with fixed commitment storage contract. This compares to $215 million in the third quarter of 2018 and $196 million for the fourth quarter of 2017, which translates to an increase of 100 basis points and 360 basis points, respectively.

I would remind you that our fourth quarter same-store average physical occupancy of 80% is relative to the 85% occupancy that we would consider to be our optimal physical occupancy. As we continue to transition to a higher mix of fixed commitment storage contracts, at times, there are a number of unoccupied pallet positions that continue to generate monthly revenue. In an effort to help illustrate this concept, we are introducing a new economic occupancy metric. We define this as the aggregate number of physically occupied pallets and any additional pallets otherwise contractually committed for a given period without duplication. Our fourth quarter same-store economic occupancy was 83.3%, 311 basis points higher than our physical occupancy.

Global same-store warehouse services revenue for the fourth quarter increased 3.4% year-over-year or 5.7% on a constant currency basis. Our favorable mix resulted in growth of 3.9% in our same-store warehouse services revenue for throughput pallet, offsetting the lower volumes associated with this mix. Our same-store warehouse services contribution was $9 million, an increase of $3 million or 48.5%. The warehouse services contribution margin improved 160 basis points to 5.3% in the quarter.

In total, our fourth quarter 2018 global same-store warehouse NOI was $97 million, up 5.6% over the prior year results driven by the same factors previously discussed. On a constant currency basis, same-store NOI grew by 6.9%.

Within our Global Warehouse segment, we had no material changes to the composition of our top 25 customers who account for approximately 63% of our Global Warehouse revenue and who have been with us, on average, for over 30 years.

Additionally, year-to-date churn rate was approximately 3.3%, a 185 basis point improvement from the prior year-end. Despite these strong quarterly results, we believe the best way to measure our success is on an annual basis due to the seasonal nature of our business.

To recap our full 2018 growth: Total revenues were $1.6 billion and Global Warehouse segment revenues were $1.18 billion, a 3.9% and 2.7% increase, respectively. Total contribution, or NOI, grew by 8.4% to $406 million. Global Warehouse segment NOI was $375 million, an increase of 7.5%. Core EBITDA grew by 6.8% to $307 million. Net income was $48 million. Excluding certain onetime items totaling $48 million associated with our debt financing, net income would have been $96 million. And finally, core funds from operations was $175 million or $1.21 per diluted share and AFFO was $170 million or $1.18 per diluted share.

Turning to our balance sheet. We took significant steps in 2018 to enhance our access to attractively priced capital that will support us as we pursue the internal and external growth opportunities that are part of our strategy. As part of being good stewards of capital, we intend to continue to maintain ample liquidity and capacity on our balance sheet.

During the fourth quarter in December, we completed an institutional private placement offering of $600 million of senior unsecured notes. The notes carry a weighted average interest rate of 4.8% and a weighted average duration of 9 years. The transaction consisted of $400 million of 10-year 4.86% note and $200 million of 7-year 4.68% note. We utilize the net proceeds along with the cash -- along with cash on the balance sheet to retire approximately $624 million of indebtedness, including CMBS debt due in 2021 as well as our Australia and New Zealand term loans, which were both due in 2020. As a reminder, in connection with this transaction, we incurred certain onetime cash and noncash charges, which I outlined for you a few moments ago.

Additionally, we will recast and upsize our $925 million secured credit facility to a $1.275 billion unsecured credit facility, having increased our revolver by $350 million. The new facility provides us with interest rate savings and flexibility to draw proceeds in multiple currencies. Going forward, resulting from the repayment of the CMBS debt and our refinancing, the company will benefit from a cash flow standpoint by the elimination of approximately $18 million of annual principal amortization and reduced annualized cash interest expense of approximately $8 million.

Finally, as we announced in November, we received investment-grade rating of BBB with a stable outlook from both Fitch and Morningstar. It is important to note that we entered [ into ] intercompany loans to our Australia, New Zealand subsidiaries to pay off the term loans in the fourth quarter with proceeds from our private placement offering. In order to reduce cash flow volatility from Australian and New Zealand currency fluctuations, we entered in a cross-currency swap, allowing us to pay interest on these intercompany loans in local currency, which reduces our overall earnings exposure and volatility in these 2 countries and retain a natural currency hedge.

At December 31, 2018, we had total liquidity of $978 million, including cash and capacity on our revolving credit facility. This amount excludes the $140 million of proceeds from our forward equity offering, with an outstanding settlement date of no later than September 2019.

If you turn to the debt detail and maturities page of our supplemental, you'll see that we have added disclosure in the form of new schedules which summarize our outstanding debt. Our total debt outstanding was $1.52 billion, of which 71% was in an unsecured structure. We have no material debt maturities until 2022, assuming we exercise the 1-year extension option on our revolver.

At quarter end, our net debt to core EBITDA was approximately 4.3x. Of our total debt, $1.36 billion relates to real estate debt, which excludes sale-leaseback and capitalized lease obligations. Our real estate debt has a weighted average term of 6.3 years and carries a weighted average contractual interest rate of 4.6%. At December 31, 2018, 69% of our total debt outstanding was at a fixed rate. Subsequent to the year-end, we entered into an interest rate swap on our term loan, increasing the fixed rate portion of our total debt outstanding to 75%.

Before I turn the call to Fred, I would like to provide some perspective on our outlook for 2019. We continue to work to expand our disclosure and to provide additional guidance to enhance understanding of our unique business.

Please keep in mind that the ranges for these metrics do not include the impact of acquisitions, dispositions or capital markets activity beyond which has been previously announced, and we expect to update our expectations as needed as we move through the balance of the year.

In 2019, we expect the following: Global Warehouse segment same-store revenue growth to range between 2% and 4% and same-store NOI growth to be 100 to 200 basis points higher than the associated revenue growth both on a constant currency basis; selling, general and administrative expense as a percent of total revenue is expected to range between 6.8% and 7.2%; recurring maintenance and IT capital expenditures are expected in the range of $50 million to $60 million; growth and expansion capital expenditures are expected to aggregate in the range of $225 million to $325 million, which includes spending related to the company's announced projects in Chicago, Illinois, Savannah, Georgia and Australia as well as anticipated projects that have yet to be announced; anticipated AFFO payout ratio of 65% to 68%; full year weighted average fully diluted share count of 155 million to 157 million shares, inclusive of the 6 million share equity forward issued in September 2018 with an outstanding settlement date of no later than September 2019.

I will now turn the call back to Fred.

[Fred Boehler, executive]

Thanks, Marc. We are proud of all we accomplished during the fourth quarter and full year 2018. As we look ahead, we believe COLD is well positioned to continue to produce strong, consistent growth for our shareholders. Industry and macro fundamentals are positive for our business. Further, we are the U.S. and global market leader for temperature-controlled storage due to the considerable investment we have made over the years in our portfolio, operation, talent and technology. As a result, we have the scale and platform to profitably provide mission-critical services to our global customer base with a clear path for growth ahead of us.

Once again, I would like to thank our outstanding associates for all of their hard work and dedication in making 2018 the success it was. This talented team continues to overdeliver against our mission of being the global provider of choice for temperature-controlled infrastructure and supply chain solutions through our innovation, experience and people. We are off to a running start in 2019. And as we look ahead, we are extremely excited for the future.

Operator, this completes our prepared remarks. Please open the call for questions.

[Operator]

[Operator Instructions] Our first question today is coming from Michael Carroll from RBC Capital Markets.

[Michael Carroll, analyst]

I wanted to touch on your guys' same-store results and your expectations going forward. I know in 2018, you generated 7.4% growth, kind of surpassing your longer-term target, and I actually believe that your results exceeded that target 3 of the past 4 years. Can you talk a little bit about what drove that outperformance? And can we expect that to continue in 2019?

[Marc Smernoff, executive]

Sure, Mike, it's Marc. I think a number of things, as we said, have contributed to the overall performance. One, it's really the core team, what we've been able to do in terms of winning new business, the way we've been able to commercialize the business in terms of bringing in the contracts. And then on the other side of it, it's also driving disciplined expense management through Americold operating system, the efficiencies we gained there, and so -- and then really working proactively to really manage the type of business we're doing to get the optimal business mix in the facilities across the network. So it's really those combination of things that overall contributed to the performance.

[Fred Boehler, executive]

Michael, this is Fred. I would just add to that and say that, remember, this is a 115-year-old company with 2,400 or so different customers across 155 sites worldwide. So there's a lot of activity that goes on, a lot of commercial agreements that come up and come due, a lot of system enhancements that we continue to roll through the network, a lot of new talent that we bring to the market. So every day, we are working the operational efficiency aspects of the business as well as the commercialization aspects of the business that we've discussed in the past. So we think we have a pretty good forecast that this product will continue to be made. I think we hesitate to give guidance that high in terms of recent performance because we believe that we're working through many of those customers. And so we kind of maintain our overall guidance of that annual 2% to 4% top line and 3% to 6% on the NOI side.

[Michael Carroll, analyst]

Okay, makes sense. And can you provide some color on what you're seeing on the acquisition front? And congrats on the PortFresh deal. Can you talk about what else you're tracking out there?

[Fred Boehler, executive]

Well, you know I can't name names. But what I would say is that we obviously continue to be involved from a diligence standpoint on a number of different opportunities. I would say that we are going to continue to stay true to what we said. We're going to be very, very diligent and very disciplined on the types of acquisitions that we make, recognizing that we are an infrastructure. We want to make sure that anybody that we do acquire is somebody that's going to fit into our portfolio nice and be able to be fully integrated, which is our differentiated model.

[Michael Carroll, analyst]

Okay. And then guidance, it looks like you have about $100 million of capital allocated to acquisitions, kind of just our estimate. Is that fair? Is that how you guys think about potential acquisition activity going into 2019?

[Marc Smernoff, executive]

Yes. Really, that guidance has much more to do with the development side. I think as Fred mentioned in his prepared remarks, really, we'll provide further guidance on acquisition kind of as those situations evolve.

[Operator]

Our next question is coming from Ki Bin Kim from SunTrust Robinson Humphrey.

[Ki Bin Kim, analyst]

So you guys give a lot of the moving parts to 2019 guidance, but not the FFO part of it. And I get it. I mean, there's probably many moving parts to that. But any range that you can provide?

[Marc Smernoff, executive]

We are committed to providing [ strong ] disclosure that helps you, our analysts, and our investors understand our business. I think as you've seen, we've provided additional metrics to help you think about our 2019 performance and our long-term growth benchmarks for the business, and we'll continue to be looking at providing additional guidance metrics going forward. But I think, really, what we've tried to do, especially in a year, as Fred said, we are busy, we are looking at a number of things. Really the focus around the core and knowing that we're continuing to look at inorganic opportunities, that will obviously be accretive to the story as we move forward.

[Ki Bin Kim, analyst]

Okay. And your core FFO per share was $0.35 this quarter, much higher than, I think, the consensus estimates. Is that a good starting point for a recurring FFO number? Or was there something onetime in nature in that number?

[Marc Smernoff, executive]

There was not anything onetime in nature in that number. But as we do say, we think it's really important to look at our business on a full annual basis, just due to the seasonal nature of the business.

[Ki Bin Kim, analyst]

Great. So one thing that's a little bit trickier to model is understanding your development projects and when the cash flow is actually coming into your company. The recently completed projects, did you get like a full quarter of yield in the fourth quarter? Is that one of the variances?

[Marc Smernoff, executive]

Yes. And so if you look at the recently completed projects in both Utah and Massachusetts, as I think Fred reported in the third quarter, that we achieved kind of our underwritten stabilized occupancy. So we would have had the benefit of the full quarter of that in the fourth quarter. Also, the Middleborough project, the way -- that was a dedicated build-to-suit, so we did get the full benefit of that facility given that it was delivered right before the quarter and in time for us to harvest.

[Operator]

Our next question today is coming from Dave Rodgers from Baird.

[Dave Rodgers, analyst]

Fred, Marc, I wanted to ask a little bit more about operating margin and the improvements that you continue to see. I think in the second quarter, you both kind of cautioned that you don't expect these margin gains to continue. In the third quarter, it changed, so maybe they could continue. And in the fourth quarter, I think your commentary in the release was your system allows for continuous improvement going forward with the margins. So I like the improvement in the tone. Can you kind of point to some things maybe that are getting you there? What's changed in the last couple of quarters, maybe the focus for 2019? If you could dive in a little bit more, that would be helpful.

[Fred Boehler, executive]

Sure. Dave, this is Fred. So look, it's everything that we've talked about. Again, it's really hard to predict exactly where we're going to come out. But we have this continuous improvement mindset through the Americold operating system. And again, as I've said before, with 155 sites, we have different sites that are at different parts of that evolution, in that journey, along our optimal model. And there is a continuous improvement mindset that's built into it. We use lean principles and such to really drive performance in the operations. And with labor being our highest cost element, it's the area of the highest focus. And then, of course, from an energy management standpoint, energy is our second largest cost element, we continue to do great things there in terms of driving cost out of the system and driving more efficiency there as seen by those certifications that we were able to achieve this past year. So I think that, number one, from an operating standpoint, I continue to believe that our teammates out there will outperform and continue to drive improvements against our engineering standards. And then, again, on the commercialization side, we're getting pricing, we're getting the right margins and the right balance with our customer mix that's helping to lift the overall margin. So I think it's that combination of both sides of the equation. And I believe that that's sustainable for an indefinite period of time.

[Dave Rodgers, analyst]

Great, that's helpful. Appreciate that. On the same-store, I think that the trends in your same-store revenue for occupied pallet and your throughput revenue for occupied pallet were not on kind of the same trend that you had seen year-to-date. Is that the seasonal nature of the fourth quarter? Was there something different in those numbers? Can you comment on that?

[Marc Smernoff, executive]

Yes, that would be impacted by the seasonal nature. So when you have especially crops that come in late in the third quarter and really are there in the fourth quarter, there tends to be a different profile associated with that business and different models. So those types of customer mix will impact the overall. That's why we do encourage people, again, to look at the business on a full year basis, and also, the year-over-year growth on the quarters because those will have some nature.

[Dave Rodgers, analyst]

Last one for me. On the buyout of the facility in Dallas, the 9.5% cap rate, is that market for that type of an asset? Any additional color would be helpful. Or is that just market because you own the other half of the building?

[Fred Boehler, executive]

Yes, I think it was more of the latter, yes. It was kind of an awkward structure that we inherited. Literally same building, we own the building on the one side and we own the land on the other side of this building. So it was kind of an awkward piece of the puzzle. So definitely not representative of cap rate.

[Operator]

Our next question is coming from Joshua Dennerlein from Bank of America Merrill Lynch.

[Joshua Dennerlein, analyst]

A question on occupancy trends and rent growth. It looks like for the 4 straight quarter, physical occupancy has been declining but you've been getting some good rent growth on a per pallet basis. What's driving that? And should we kind of expect that trend to continue as we look forward into 2019?

[Marc Smernoff, executive]

I think one of the things you will see in our business is just a few things. And this is one of the things as we look forward and have tried to work to kind of improve the overall business model and to get better visibility. But we still will be impacted by seasonal trends. We'll be impacted by promotional activity of our customers and our customers' customer. So those different things will play and move our individual margin. But what you've seen and as we introduced this quarter also is the economic occupancy metric. And you'll notice that, that really has helped stabilize as we kind of transform how we've contracted the business, both to benefit our customers and the way their business works to get them to have fixed definite cost, allow them to have fixed cost to scale, but also give us better visibility in terms of the results going forward. So I think it's a number of those things that have all contributed.

[Joshua Dennerlein, analyst]

Okay, awesome. And then can you maybe elaborate on -- I saw someone at the PortFresh company is going to be joining your team. Can you maybe elaborate on the plans on what that person will do and how it will impact your overall business?

[Fred Boehler, executive]

Yes, sure. Yes, Brian joined the team. Brian was the CEO at PortFresh and really started that business up. He's been in kind of the produce fresh food industry for virtually his entire career. So he will come out of the day-to-day operations and we'll put in Americold operators to kind of run the operations and turn his attention really with our business development team. He'll become a part of our business development team, focused on that particular sector. So he'll continue to drive the business that he currently bought in, in the past to PortFresh, continue to grow those opportunities and then look for expanding those types of opportunities across the U.S. So we're really excited about him joining the team. And I think you'll see us penetrate that side of the market a little bit heavier here in the future.

[Operator]

Our next question is coming from Michael Mueller from JPMorgan.

[Michael Mueller, analyst]

Quick question. On the economic occupancy that you started disclosing, do you happen to have those numbers for the first 3 quarters of 2018 as well?

[Marc Smernoff, executive]

Mike, as we mentioned, this is a metric that we have been developing and are happy to report out in this industry. And we, in particular, had always been focused on tracking the physical movement and occupancy of goods throughout our network. And as we've commented over the year, we have been working to bring this metric to bear. So we're happy to announce that metric for this quarter, and we will be reporting on it going forward for both the overall business as well as the same-store portfolio.

[Michael Mueller, analyst]

Okay. And for -- looking at Page 32 in the supplemental where you go through and you talk about the, I guess, the revenues per pallet, et cetera. And I know the occupancy there is based on physical. And just, I'm curious, are the revenues, the [ $52 ], is that tied just to the revenues on those pallets only? Or does it capture the other fixed revenues that aren't necessarily tied to those pallets but they're just spread over the physical pallet?

[Fred Boehler, executive]

Yes, that would capture the whole thing. So this is physically occupied.

[Michael Mueller, analyst]

Got it, okay. And last question. I guess, on the PortFresh acquisition, the initial yield was 7 and the stabilized is 9 to 12. I was wondering, can you bridge the gap from -- what steps do you have to take and how long will it take to go from the 7 to the 9 to 12?

[Fred Boehler, executive]

Yes. We've talked about this. When we look at doing an acquisition because of our integration model, we expect that we'll find back-office opportunities obviously and save on SG&A with a plan to do that during the course of the first year. And then by implementing the Americold operating system, the engineered standards, the commercialization to the business that they currently have and then the growth that we'll be able to bring the business, we feel we'll be able to get up to that range over the course of, call it, the next 2, maybe 3 years.

[Michael Mueller, analyst]

Got it. And if I could ask one more, and then I will let it go here. When you talk about an optimal occupancy of 85%, is that physical? Or should we look at it as the 80% physical plus the other 300 basis points in economic? So it would be that 83% economic going to 85%? Or is it the 80% physical to 85% physical?

[Fred Boehler, executive]

Yes. Really, I would say economic is where we would guide to, only because we don't want to be obviously filling those spaces for our customers that are paying for the vacant space. So that space is not available. So if customer A has 10,000 pallets reserved, and they're only using 9,000, we're not going to take customer B's product and put it in those 1,000 spaces, right? So we consider those full, and they have to work the warehouse accordingly.

[Operator]

Our next question is from Michael Carroll from RBC Capital Markets.

[Michael Carroll, analyst]

Fred, I just wanted to touch on the Rochelle development. And I believe in your prepared remarks, you mentioned that it was about 35% committed already. What occupancy rate do you need to achieve for these assets to breakeven on a cash flow basis?

[Marc Smernoff, executive]

Our breakeven tends to be actually in the mid-30s. And so this is just what Fred committed to when we announced really just the anchor tenant. There's a number of other customers that were very close. But if you look, our typical time line has us ramp these facilities up over a year. And so this is the key anchor tenant and will also be the first tenant in the building later this quarter.

[Michael Mueller, analyst]

Okay. And you typically expect even for these larger automated warehouses to basically stabilize 12 months?

[Marc Smernoff, executive]

Yes.

[Fred Boehler, executive]

Yes.

[Operator]

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

[Ki Bin Kim, analyst]

So you have about 10% of your portfolio that's rolling from the -- at least the fixed rate contract that's rolling in 2019. Any sense of what the mark-to-market opportunity is?

[Marc Smernoff, executive]

Ki Bin, I think as we've tried to mention over the quarter, I think we've really done a good job over the last 2 years really as contracts come up for renewal, bringing them up to our commercial business standard. So we continue to look at opportunities. And obviously, we look at changes in the profile of the business to make sure the business is priced appropriately. But we see more traditional, as we gave kind of in that same-store guidance, where we think the overall same-store portfolio top line revenue will go.

[Ki Bin Kim, analyst]

Okay. And as I look back over the past year, one of the most surprising factors for Americold has been, at least to me, the service revenue per pallet that you've been able to increase, the revenue per pallet. So it's interesting. Like how much of that is pricing inflation where you're just kind of charging more for the same thing versus utilization and kind of accepting a wider suite of services from you?

[Fred Boehler, executive]

Probably a combination of that, of course. I would say that because of our activity-based costing model and our customer profitability tool, it's really helped us to hone in on the contribution from each one of our customers across the various aspects of their business. So we can clearly see the contribution on a fixed basis, the contribution on a variable basis. And I would say that -- remember, we didn't have that tool 3.5, 4 years ago. So as we've been going through those commercialization efforts, we're now able to price business, I'd just say, better, right? So Marc and I share the common thought of not having locked leaders. So we don't believe in giving our services away for free. We think it's important that we make some level of profit on every aspect of the business that we conduct. So I think part of it is really driven by that. And then, yes, I mean, in our commercialization efforts, we've talked about the fact that we have price escalation built into all of our contracts. And that price escalation is both across our storage as well as that variable component. So we are seeing an annual lift on that.

[Marc Smernoff, executive]

And as Fred was saying, really, the margin is the benefit of both getting the top line better underwritten, better structured as well as that detailed cost management, that the Americold operating system [ provides ].

[Ki Bin Kim, analyst]

And is there any bucket or group of leases that are kind of older, vintage that hasn't been, as you say, commercialized yet, which are new systems on tracking and services that might be coming up?

[Fred Boehler, executive]

I would say that it would be in the smaller customer areas. We obviously addressed the substantial portions of our revenue with our top customers first. Obviously, as those contracts come up, we'll continue to look at it, and we're smarter today than we were yesterday. So we'll continue to manage that business accordingly and do the right thing from an adjustment standpoint.

[Operator]

Our next question today is coming from Bill Crow from Raymond James.

[William Crow, analyst]

Just a couple of questions. First of all, it seems like the migration from variable to fixed leases has slowed down through the year, right, 1%, 100 basis points this year; obviously, quicker than that last year. Is that fair? And is there anything structural that's limiting that migration?

[Marc Smernoff, executive]

I actually think we -- just to make sure we're clear. Year-over-year, we're actually up 300 basis points. So just sequentially in the quarter, we're up. But you've got to remember, there's 2 things. So it's not just the percent. You actually have to look at the total revenue. So remember, our total revenue base is going. So to actually grow the percent in a growing -- it's actually a much faster growth than that would imply.

[William Crow, analyst]

Okay, great. My follow-up to that is, when tenants say no, they want to stick with the variable leases, what is the argument they use to do that?

[Fred Boehler, executive]

Just uncharted territory. I mean, really, at the end of the day, it's a degree of comfortableness. We're dealing with -- when you deal with the number of customers that we're dealing with, there's different levels of comfort. We have some customers, very small customers that just don't want to get into a contractual agreement. So their on a month-to-month agreement, yet they've been customers of ours for 20 years. So that's what some of these smaller family-operated manufacturers, just kind of the way that they do business. So I think it does take a certain amount of volume. Smaller customers, they don't peak as much, right, in the fourth quarter. So if I'm only storing 100 pallets and I need to go to 120 pallets in the high seas, then it's probably not as much of an issue for them to be able to squeeze in 20 more pallets into whatever facility that they happen to be in. It's the guys that are storing 10,000 pallets that are spiking to 13,000 pallets that really need to make sure that they have the space available so that they're staying in the same market. So it's really kind of a mixed bag. I would just say that our lead -- every time we go to market from a commercialization standpoint, it is our lead to go in with a fixed commitment, and we're seeing a high success rate at that as we approach those, new customers as well as existing customers that are transitioning into new agreement.

[Operator]

We've reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further -- closing comments.

[Fred Boehler, executive]

Thank you, and thanks for all the questions, good questions. We appreciate it. We know last quarter, we happened to hit right in the middle of the NAREIT and we didn't have as much participation. So I apologize for that. But really, really appreciate all the conversation and feedback this quarter. It was a great year. We're excited looking forward to 2019 and continue to progress. Thank you.

[Operator]

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.