Americold Realty Trust, Inc. (COLD) Earnings Call Transcript & Summary

Greetings, and welcome to the Americold Realty Trust Fourth Quarter and Full Year 2021 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Scott Henderson, Investor Relations. Thank you, Scott. You may begin.

Good afternoon. Thank you for joining us today for Americold Realty Trust's Fourth 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 Investor Relations section on our website at www.americold.com. This afternoon's conference call is hosted by Americold's Chief Executive Officer, George Chappelle; Chief Commercial Officer, Rob Chambers; Chief Financial Officer, Marc Smernoff. Management will make some prepared remarks, after which, we will open up the call to your questions. On today's call, management's prepared remarks 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 and AFFO. 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. Now I will turn the call over to George Chappelle.

Thank you, Scott, and welcome to our fourth quarter 2021 earnings conference call. This afternoon, I will summarize our 2021 results and then discuss current market conditions that are impacting our full year 2022 guidance. Rob will then provide an update on our recent pricing initiatives, and Marc will review results in more detail, providing commentary on full year guidance. But before I begin, I would like to take a moment to comment on my appointment as permanent CEO that was announced this afternoon. Having spent decades in operational roles in the food industry, I've been responsible for many cold storage operations, including providers like Americold and many of its competitors. I've always considered Americold the industry leader in quality and customer service. As I've worked with the team over the past few months, I've been impressed by their commitment to delivering operational excellence and disciplined growth. I am very excited to be here and look forward to getting to know more of you in the future. On to our results. While in consumer demand for temperature-controlled food remains strong, COVID-related supply chain and labor disruptions continue to impact the global food supply chain. At the time of our last earnings call in early November, Delta was the dominant COVID variant, and it seemed to be peaking in various regions of the world. Businesses, including us and our customers, were making progress in adapting to Delta. However, by late November, the Omicron variant began to rapidly spread worldwide. This highly contagious variant introduced more uncertainty and disruption into an already strained supply chain. The impact of Omicron can be seen in our results. For the full year, our global warehouse same-store pool generated total revenue growth of 0.3%, while we experienced an NOI decline of 5.8% on a constant currency basis. AFFO per share was $1.15 in line with our guidance. The main factors that led to these results were the following: First, a meaningful decrease in the year-over-year economic and physical occupancy across the same-store pool of 327 basis points and 500 basis points, respectively. These same pressures were also felt in the non-same-store pool, which is made up of recent acquisitions and completed developments. Second, as discussed on last quarter's call, there was a significant increase in our labor, power and other expenses beginning in the latter part of the third quarter. As you know, we are not able to offset all of this cost pressure immediately through price increases in our warehouse segment business, there is a lag period. Rob will provide an update on our progress in this area. However, we remain on track to exit the first quarter with a run rate to cover all known inflation in our cost structure. Third, a reduction in throughput volumes also created a drag on contribution dollars in our warehouse business. For the full year, our same-store pool throughput volume decreased 2.8%. The non-same-store pool was also impacted by throughput volume decline. While we've made significant progress on the price increases in our warehouse business, we also need the throughput volume to recover for our contribution dollars to fully normalize. Let me now discuss current market conditions that are underpinning our 2022 AFFO per share guidance of $1 to $1.10. Many of these challenging conditions carry over from 2021. Beginning with the revenue side. As in many of other labor-intensive industries, labor availability continues to be a challenge for our food production customers, which negatively impacts their production levels. This, in turn, negatively impacts our economics and physical occupancy as well as throughput volumes. We are confident our manufacturing customers have the desire to increase production and satisfy rising demand. However, the labor challenges continue to be a barrier. Once labor normalizes, we are confident inventory will turn to historic norms. Economic and physical occupancy in our portfolio and the overall cold storage industry continues to be significantly below pre-COVID levels. Our economic and physical occupancy for the 2021 same-store pool averaged approximately 77% and 68.4%, respectively. Our 2019 same-store pool, the most recent pre-COVID year, averaged 79.4% and 75.4%. A similar pattern exists in the USDA data. Overall total holdings in cold storage are down 8% to 10% throughout 2021 versus 2019 levels. Our commercialization efforts, particularly our fixed commit structures, helped us to mitigate part of the decline in overall holding. Throughput volumes have been equally impacted over the year, driven by the same challenges. These are expected to be lower than pre-COVID levels in the near term. The fast rise of the Omicron variant further strained an already challenging labor environment. Many of our customers saw an increase in absenteeism late in 2021 and into 2022, as did we. Omicron has delayed labor recovery by 3 to 6 months and proven how fragile the operating environment is. On to the cost side of the equation. Inflation in the global food supply chain remains a significant concern. In many of our markets, we raised wages beginning in the third quarter last year to remain competitive. While we believe we are paying competitive wages today, inflation remains a concern and there is still a possibility wages will rise again. We have taken action through price increases to address the cost pressures we faced last year. We will seek to offset additional inflation through operating efficiencies, but we may take further pricing actions outside of our normal course general rate increases, if needed. As a reminder, there is a lag period between when cost increases occur and when the price increases go into effect. Rob will discuss this in more detail. Omicron has proven that our ability to predict when economic and physical occupancy levels will fully recover is impossible. So we'll refrain from doing so going forward. The global food supply chain continues to be strained and is not operating anywhere near normalized levels. Our 2022 guidance has these assumptions embedded in our range, which Marc will discuss. I have outlined some significant near-term challenges in our business due to the large amount of uncertainty created by COVID, inflation and the challenged labor environment. The good news is that structurally, our business model remains intact, and end consumer demand for temperature-controlled food remains strong. Prior to COVID, industry standard fill rate objectives were 98.5%. Now it is not uncommon to see fill rates in the 70% range. During my many years in the food industry, I've never seen general fill rates at such a low level. Additionally, our retail customers have struggled to keep storage shelves fully stocked. All of our customers are keenly focused on producing more food, returning to normalized inventory levels in support of higher fill rates and satisfying unmet consumer demand. At the end of the day, the state of the current food supply chain is challenged for all participants, food producers, retailers, food service companies, restaurants, the cold storage industry, including Americold, and ultimately the end consumer. We are absolutely confident that our food manufacturing customers want to satisfy unmet demand. When they are able to produce more, we are fully prepared to accept their inventory and support their business with our strategic network of facilities and best-in-class customer service. At this point, I wanted to quickly highlight the recognition we received from Newsweek for our ESG efforts. For 2022, Americold is included in Newsweek's list of America's Most Responsible Companies. We are very proud of this achievement. Additionally, in 2021, the Global Cold Chain Alliance awarded 41 of our facilities, gold, silver or bronze certification as part of its Energy Excellence Recognition Program, bringing our total of year-end to 203. As of today, 84% of our warehouse segment portfolio is now certified in this program. Lastly, for the past 2 years, the Americold team has continued to work in an unprecedented, extremely challenging operating environment in order to protect the integrity of the global food supply chain. We firmly believe that our success continues to rely on having a best-in-class team, and we continue to take actions to ensure this remains the case. Over the past year, we have adjusted wages and offered enhanced incentive programs for our frontline associates and will continue to do so to remain competitive in the marketplace and ensure Americold remains a rewarding place to work. With that, I will turn it over to Rob.

Thank you, George. I'll provide a brief update on our pricing initiatives related to our warehouse business and comment on our commercialization efforts. As we discussed on our last call, beginning in the third quarter, we raised hourly wages in many of our locations to retain our associates and recruit top talent. The impact of these wage increases is reflected in our fourth quarter results. In order to offset these and other inflationary pressures, we have taken action by increasing the pricing of our warehouse business. Please remember, our pricing for our customers is very prescriptive, and we do not take a one-size-fits-all approach. As you can see on Page 37 of our IR supplemental, we were able to increase our service revenue per throughput pallet in our same-store on a constant currency basis by 3.8%, with this improvement accelerating through the quarter. The most meaningful increases occurred in December, up 5.9% versus prior year's month of December. As a reminder, our customer mix is made up of the following: Approximately 30% of our warehouse revenue is with smaller customers, where our pricing can be adjusted at any time with a 30- to 45-day notice. We took action on this customer group, and almost all of this increase is in our fourth quarter results. Approximately 70% of our warehouse revenue is with our top 100 customers. About half of these customers have contracts with formulaic mechanisms in place to allow for us to equitably adjust our pricing as long as there's been a demonstrable increase in our costs. The remaining half of these customers have come to the table clauses that require a good faith negotiation to increase prices. For the top 100, we initiated these conversations in the third and fourth quarter of 2021, and a meaningful amount of these pricing increases are in our fourth quarter 2021 results. The remaining will be reflected in our results throughout the rest of the first quarter of 2022. Second quarter 2022 results should show a full period of all pricing increases in place. As a reminder, for our top 100 customers, we usually need to see the elevated cost for at least 60 days before we can either trigger our price increases or begin negotiations. This is the lag period that George mentioned. Please remember, our normal course escalators or general rate increases, GRIs as we call them, have historically ranged from 2% to 4% across both storage and services rates for our customers. These are used to cover normal levels of inflation in our cost to serve our customers, not just labor but power costs, property taxes and insurance and warehouse supplies and equipment. If we see that our costs are outpacing our GRIs, we will revisit our pricing initiatives again and take similar action with our customers. On to our commercialization efforts. At quarter end, within our Global Warehouse segment, rent and storage revenue from fixed commitment contracts increased on an absolute dollar basis to $356 million compared to $284 million at the end of the fourth quarter of 2020. On a combined pro forma basis, we derived 39.3% of rent and storage revenue from fixed commitment storage contracts. Within our Global Warehouse segment, we had no material changes to the composition of our top 25 customers, who account for approximately 49% of our global warehouse revenue on a pro forma basis. Additionally, our churn rate remained low at approximately 3.3% of total warehouse revenues. This metric demonstrates we are not losing a meaningful amount of customers. They are simply not using as much of our infrastructure and services while their production volumes are lower. Finally, our global development pipeline remains strong. Now I'll turn it over to Marc.

Thank you, Rob. Today, we will provide updates on our fourth quarter and full year results. I will also provide our outlook for 2022. For the fourth quarter, we reported total company revenue of $716 million and total company NOI of $161 million, which reflects a 37% increase and a 6% increase year-over-year, respectively. Corporate SG&A totaled $49 million for the fourth quarter of 2021 as compared to $40 million in the prior year, reflecting our external growth over the past year, net of synergies, and higher stock compensation expense. This growth was partially offset by a decrease in our annual performance-based cash incentive compensation expense. Core EBITDA was $124 million for the fourth quarter of 2021, an increase of 5.6% year-over-year. Our core EBITDA margin decreased 511 basis points, 17.3%. Our fourth quarter AFFO was $82 million or $0.31 per diluted share. Now I will turn to our results within our Global Warehouse segment. For the fourth quarter of 2021, Global Warehouse segment revenue was $554 million, an increase of 36% compared to the prior year. This growth was driven by the recently completed acquisition and ramp of recently completed development projects paired with contractual and market-driven rate escalations. This growth was partially offset by the impact of food supply chain disruption resulting in lower economic occupancy and throughput in our same-store portfolio. Warehouse segment NOI was $151 million for the fourth quarter of 2021, an increase of 3.6%. The increase in warehouse NOI is driven by our recently completed acquisitions, largely offset by the impact of inflationary pressures across our global portfolio. Global Warehouse segment margin was 27.2% for the fourth quarter of 2021, an 849 basis point decrease compared to the same quarter of the prior year due to lower margin acquisitions and inflationary cost pressures. Now I will turn to our same-store results within our Global Warehouse segment. For the fourth quarter of 2021, our same-store Global Warehouse segment revenue was $379 million, up 2.5% year-over-year and 2.7% on a constant currency basis. Same-store Global Warehouse NOI was $126 million, down 8.2% year-over-year and a decrease of 8.1% on a constant currency basis. Same-store Global Warehouse NOI margin decreased 389 basis points to 33.2%. The ongoing disruption in food production, combined with the challenging labor market and elevated inflation, continue to weigh on our same-store results. For the fourth quarter, same-store global rent and storage revenue increased by 2.9% year-over-year and increased by 3.1% on a constant currency basis. This was driven primarily by rate escalation, partially offset by a decline in economic occupancy. Our same-store economic occupancy was 79.5%, which reflects a decrease of 129 basis points from last year's fourth quarter economic occupancy as we were impacted by reduced food production level but stable consumer demand. The occupancy decline was partially offset by a 4.9% increase in our constant currency average storage rate per economic pallet driven by rate escalation and business mix. Consistent with the fourth quarter seasonal increase on a sequential basis, economic occupancy improved approximately 285 basis points from the third quarter. Our same-store global rent and storage NOI increased by 2.8% year-over-year and 3% on a constant currency basis. This was due to rate escalations, partially offset by lower economic occupancy and higher costs, inclusive of power, property taxes and insurance year-over-year. Same-store global rent and storage NOI margin decreased 5 basis points to 68.4% due to the same factors. Same-store Global Warehouse services revenue for the fourth quarter increased by 2.3% year-over-year and 2.4% on a constant currency basis. This revenue growth was driven by rate increases in business mix, which increased our constant currency warehouse service revenue per throughput pallet by 3.8%. This was partially offset by a 1.3% decline in throughput. Our same-store Global Warehouse services NOI decreased by 46.3% year-over-year and 46.4% on a constant currency basis. This was primarily driven by higher cost of labor and warehouse supplies due to elevated inflation. Same-store warehouse services NOI margin was 7.5% for the quarter, a decrease of 684 basis points from the prior year. Now let me summarize our full year 2021 results. Total revenues were $2.7 billion and Global Warehouse segment revenues were $2.1 billion, a 36.6% and a 34.6% increase, respectively. Total NOI was $630 million and Global Warehouse segment NOI was $586 million, an increase of 14.2% and 12.7%, respectively. For the same-store pool, Global Warehouse segment revenue grew by 1.3% or 0.3% on a constant currency basis. And same-store NOI decreased 4.9% or 5.8% on a constant currency basis. Core EBITDA was $475 million, an increase of 11.4% or 11% on a constant currency basis. And AFFO was $299 million or $1.15 per diluted share using a weighted average share count of 261 million. Finally, we announced $168 million of development starts and completed $766 million of global acquisitions. At this point, I will briefly comment on a onetime retentive stock grant we awarded to certain non-EVP associates in the fourth quarter. The grant is being amortized over the next 2 years for $4 million already incorporated in our Q4 results. Our noncash share-based compensation expense will increase by approximately $11 million in 2022 and $5 million in 2023. As a reminder, we exclude noncash share-based compensation from AFFO. Now turning to external growth. Today, we announced an expansion project in Barcelona for approximately $15 million. This is a conventional build and will support the growth of existing and new customers in consumer packaged goods and protein sectors. Spain is a key producer and exporter of protein, and our 2 distribution sites in Barcelona are within 20 miles of the port, which is one of the largest ports in the Mediterranean. We're excited to continue to grow our footprint in the strategic market. Turning to acquisitions. On November 12, we closed on the previously announced acquisition of a newly completed cold storage facility in Denver, which replaced a smaller lease facility we exited within the market. On November 15, we closed on the previously announced acquisition of Lago Cold Stores in Brisbane, Australia. All of these investments were or will be match funded using a combination of cash, equity forwards that we had previously raised and our multicurrency revolver. Now turning to our balance sheet and capital markets activity. During the quarter, we exercised 1.4 million of previously raised forward shares for approximately $55 million in net proceeds to help fund our developments and acquisitions. Additionally, in December, we closed on a $150 million increase to our multicurrency revolver and $50 million increase to our term loan A. These actions improve our already strong liquidity and increases our fixed rate debt position. At quarter end, total debt outstanding was $3.1 billion. We have total liquidity of $803 million, consisting of cash on hand and revolver availability. Our net debt to pro forma core EBITDA was approximately 6.1x. Turning to our full year 2022 guidance. For the full year, we expect AFFO per share in the range of $1 to $1.10. Please refer to Page 46 of our IR supplemental for detail on the additional assumptions embedded in this guidance. While George already provided an update on the current environment, let me provide some additional commentary around this guidance. COVID-related supply chain and labor disruption continued to impact the global food supply chain in 2022, and this can be seen in our occupancy and throughput. Achieving the high end of our guidance range would result from macroeconomic factors driving an improvement in food manufacturing, which would result in higher levels of occupancy and throughput volumes. The lower end implies that occupancy levels and throughput volumes deteriorate. The low end of guidance implies wage and inflationary costs running at elevated levels above our expectations, taking into account the lag Rob previously mentioned. The high end implies inflationary pressures moderate. Please note that we ended 2021 with total SG&A expense, inclusive of stock compensation of $182 million. Our 2022 range is $210 million to $229 million, inclusive of stock compensation. At the midpoint, the increase is approximately $37 million. The key drivers of this increase are: The resumption of performance-based annual cash incentive compensation; incremental noncash share-based compensation expense from the stock retention grants I discussed earlier; increased IT spend as we begin to transition to more software-as-a-service solutions; and inflationary pressures on corporate salaries and other overheads, such as travel, insurance and benefits. We are guiding to development starts in 2022 in the range of $100 million to $200 million this year. Additionally, please note that we have 6 development projects that are expected to be completed later this year. As a reminder, these projects will initially be a drag on overall warehouse NOI as they ramp to stabilization. We estimate an initial in-year start-up costs associated with these projects of $10 million to $12 million in the aggregate. Our 2022 same-store pool now includes 216 facilities, which is approximately 90% of the total properties in our warehouse segment. I would like to point out that our new same-store pool includes almost all the properties from our AM-C, Caspers, Hall's and Agro acquisition that were completed in 2020. We have not yet fully implemented our commercialization practices such as fixed commitment for the Americold operating system into these facilities. While both our legacy properties and recent acquisitions continue to be impacted by the current market environment, our legacy sites continue to benefit from our operational practices and business systems, which helped offset some of the pressures felt in this environment. Finally, 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 George for some closing remarks.

Thanks, Marc. I'd like to reiterate how pleased I am to join Americold on a permanent basis and lead the company's next chapter. We are committed to providing best-in-class service for our customers, and I'd like to thank our customers for their confidence in us. I'm also incredibly proud of our 16,000-plus associates who are the heart of our business. I want to extend a special thank you to each of them for their hard work and dedication every day. I look forward to spending more time with them in the near future. Thank you again for joining us today, and we will now open the call for your questions. Operator, please open the call for Q&A.

[Operator Instructions] Our first question is from Dave Rodgers with Baird.

I wanted to start with you, George, if I could. First, congratulations on your appointment as CEO. But 2 questions around that, if I could. You, the Board and management were pretty clear that this is not a possible outcome, and so it probably comes as a little bit of a surprise. So one, I wanted to give you the chance to talk about kind of what the change of heart was that kind of brought you to this permanent position. And then two, maybe what do you see as kind of the focus of your tenure here as the CEO, in replacement of Fred?

Yes. Thank you, Dave. Appreciate the question. I consistently said, when asked that, look, Americold was the industry leader in cold storage and that anybody would have been privileged to lead the company. I certainly felt that way from the very beginning. In my case, I was coming out of retirement, even though it was a relatively short retirement, and those decisions aren't individual decisions. So it took a little bit of time to work through. But what I can tell you is once the decision was made, joining Americold was probably the easiest professional decision I've ever made in my life. And like I said in my prepared remarks, I couldn't be more happy to be here. So moving on to the second part of your question, I'd say the top 3 priorities for me is starting literally immediately are: one, labor management; enhancing our recruitment and retention processes; reducing our dependence on temp labor; increasing our ratio of permanent labor. And we know when we increase permanently, we get, number one, far more productivity, which transfers into lower cost per throughput pallet. So that's one. Number two, I think the industry has suffered in customer service, driven by COVID and labor issues. I want to make sure that when we build back our labor force, we come back with customer service levels that are not only at pre-COVID levels but best-in-class. I can tell you as a customer, nothing means more than best-in-class customer service, and we're committing to getting back to those levels. And then last, ensuring our development projects remain on track. We believe in each of those business cases. But as you know, development projects are not immune to the current macroeconomic environment nor are they immune to the supply chain issues. So they require constant attention. They're very complex builds, and we remain dedicated to making sure they stay on track, particularly with respect to the business case. So I hope that answers your question.

It did. And if I could follow up one on operations, maybe related to Rob's comments around pricing and the increases that you've been able to achieve. Rob, thanks for your pointing out Page 37, it's a good table. But how do we kind of track through the pricing increases on that table? We can see the labor increases, but as you look at kind of either same-store revenues on a throughput basis, or economic or physical occupancy, they really haven't caught up in the fourth quarter relative to those labor cost increases. So maybe a little bit more color on that and how you're thinking about that tracking through 2022.

Yes, sure. Thank you. I mean for us, what we thought about is we've engaged in conversations with the majority of those customers, with our customers, and ultimately, I think we still consistently feel like we'll be -- the full impact of the price increases that we put in will be felt really coming out of the first quarter and into the second quarter. And at that point, we will have offset the inflation that we've seen, particularly on the services side of the business.

Our next question comes from Mike Mueller with JPMorgan.

The sequential revenue growth in service revenue per throughput pallet, it was about 3.8% in the quarter. In the prior few quarters, it was mid- to high 4s year-over-year growth. So I was wondering what drove that deceleration.

Yes. There's a number of things that factor into that, which include business mix. So obviously, it's -- going in and throughout the year, you had lower throughput volume overall. We had a slight shift overall in business mix to less volume, less value-added services. So with that lower volume, you tend to have less value-added services. And I think given the state of the supply chain, some of the challenges, what we saw is product moving through more quickly and less value-added services being done within our warehouse to get the product more quickly to the end consumer.

Mike, it's Scott. I just want to follow up. The 3.8% was the revenue for throughput pallet in the same store, actually, as Rob called out, accelerated throughout the year. So that was the average for the quarter. But remember, as Rob worked the prices in there, you saw that increase to 5.9% in December. As those increases, as those price increases came in, that's the way it worked its way through the quarter.

Yes, I got that. I definitely picked up on that. I appreciate that. And then I guess in your conversations with customers, have you had any instances where customers who were on fixed commitments have actually wanted to back off just because of the past couple of years' experience?

We haven't. I think all of our customers, as George mentioned, recognize that there is a goal to get back to pre-COVID production levels. And as folks are able to bring labor back on, I think everybody is going to be rising around a similar time frame. And so that leaves everybody to wanting to make sure that, that space is available for them when the production ultimately does come back. So we haven't. And even in our prepared remarks, we referenced the fact that our fixed commitments have continued to grow quarter-over-quarter and year-over-year. So it's still a structure we're very comfortable with.

Our next question comes from Craig Mailman with KeyBanc Capital Markets.

And George, I apologize, I kind of cut off on Dave's first question, but I just wanted to kind of follow up just because when we had chats around NAREIT, I kind of asked you directly if you thought you'd be kind of the guy permanently in the seat and you were almost adamant that you wouldn't be, and it's been not that long with time period since. I mean, could you just go through kind of what changed in your view that got you comfortable being the permanent guy? And also just how deep you got and the search firms got into interviewing external candidates?

Yes. Well, what I can tell you is that there was nothing professional or Americold-based, let's say, in my comments when I said I was not a candidate. It was about being retired and being retired with the family and working through the decision to come back to work full time, which, as everybody knows, is a massive commitment. So I -- it had nothing to do with Americold. It had nothing to do with the industry. It had nothing to do other than the personal situation that I was in at the time and the decision to leave that personal situation and go back to working full time. So -- and that did take a while to make sure it was the right decision for me in my particular circumstances. So that was it. When it comes to the search process, I know it was extensive. I know that it had a number of highly qualified candidates. I think I mentioned, and it probably was with you, that it would attract a lot of incredibly talented people because Americold is an industry leader that has been an industry leader for a long time and has the capability to attract that type of talent. So that's really it. I can't really add any more to it.

That's helpful. And then just on the expense side, it sounds like you're through on your top tenants. You kind of gave some retention bonuses or true-ups to kind of nonexecutives. It sounds like about $16 million in total. I don't know if it's more than that. I know you said there was $4 million maybe in the fourth quarter, so maybe $20 million.

Correct. It's about $20 million spread over. It will hit 3 years, but it's $4 million that was already in this fourth quarter, $11 million, which will impact next year or 2022 and $5 million impact in 2023.

Okay. And then I'm just trying to figure out what kind of cushion you guys gave yourself in 2022 above that 2% to 4% to absorb some maybe higher use of contract labor in the near term or just kind of higher wages above and beyond normal inflation?

Craig, did you reference the -- what, 2% to 4% are you referencing? I just want to make sure...

Just the normal cushion you guys have in your contracts to pass through costs.

Yes. So I think what our guide implies and if you look in particular in our same-store where we're guiding actually negative 2% to flat, really while we're getting the benefit of all the rate increases Rob's mentioned, our guidance is that the disruption in the industry, and I think you've seen this both in the USDA report both for last year and even the January report that was just filed just the other day that the starting inventory, the state of the inventory has not yet fully recovered. We're still seeing negative year-over-year comps which are weighing into the overall guidance. So if you think about our outlook for the year and the implications that, that same-store guide entails is we -- at the midpoint, we don't expect to see a significant recovery in 2022 for degradation. As I mentioned in my prepared remarks, if we do see improvement in occupancy, that will help us get to the upper end of our range. It will also drive associated throughput. If we see degradation of occupancy and associated throughput, that will get us closer to the lower end of the range.

Our next question comes from Emmanuel Korchman with Citi.

It's Michael Bilerman here with Manny. George, in your opening comments, you said your ability to predict when economic and fiscal occupancy levels will fully recover was impossible. And I assume the same goes for the expense recapture in terms of amount and timing that you just don't yet have the confidence, and it's basically impossible to understand. You ended your comments with some -- about sort of what you're doing for your customers and all that. I'm wondering if you can spend some time on the investor side of things. Obviously, it's been a pretty tumultuous 4 months. And then actually, if you go back prior to you getting there, there was a number of missteps that arguably led to the Board deciding to bring 3 new members on and terminate the prior CEO. And so what I really want to understand from your vantage point, now that you've made the decision -- you made the decision to join the Board and offer your advices on retiree, you've now made the decision to be active and fix the problems, what confidence do you give to a shareholder, both that could be existing or that could be wanting to buy your stock, about when you believe earnings will recover? And I'm sure you've looked at the numbers, last year, it was supposed to be $1.50 for this year. That's where the Street was thinking prior to the declines after the 3Q print? Even this year, it was supposed to be $1.40 if you go back a year. So being at $1, 50% down, at what point will those earnings come back so that shareholders can start underwriting at that level? And what confidence can you give them?

Yes. No, very good question, and I appreciate the sentiment. Look, my objective is in the short term, control what we can control, right? That's labor management. I mentioned getting back to a permanent workforce that, on a percentage basis, is far higher than it is today. It's controlling our development projects to ensure that they come in on time, on budget and hit the yield that was published. What I can't control is the recovery of the food industry, when it occurs and how fast it occurs. What I can tell you based on my years in the food industry is that when you have service levels at 70%, which I referenced in my prepared remarks, and you also have unmet demand, the likes of which is higher than anything that I ever experienced in decades in the food industry with very large customers -- very large manufacturers. What I can tell you is they want to produce more. They view that as a huge opportunity, and they will do everything they can to produce more. So my confidence that it will come back historic inventory levels at Americold, specifically, and in the cold chain in general, will come back. I can't be more confident of that. What I can't tell you is when. But when it does, if we do a good job on things we can control, labor and development being the 2 biggest ones, I'm confident that investors will see the type of performance they expect from us. The issue is when it comes back. And in my prepared remarks, I was being as honest as I could. I can't tell you when it's going to happen.

George, can you help us -- again, I remember when we spoke at NAREIT, it was -- I even reread our note, it was pretty definitive that you weren't going to take the CEO seat. Look, I'm extraordinarily happy that you're in it, but obviously, it does come as a surprise. Can you just talk through a little bit on the timing? Because I assume acting as an interim CEO, the decisions that you were making may be very different than if you were sitting in the seat for the longer term. I view it as a caretaker versus someone who's strategically thinking about the business, the organization, the management team. There's a lot of things that you would do as a permanent CEO that you wouldn't do as an interim. And so when was the switch made? And how much time due diligence have you really spent in the organization? And I recognize you've been now, it's been 4 months, but what activities have you done? But how much more is coming, right? Is the Board active? You have 3 new Board members, including yourself. I don't know if you're going to add someone else in for an independence perspective. But like on a new Board, are they going through a strategic review? Are you going to rechange the executive management team? How much more change, just from an organization? But about all the industry stuff. But clearly, the Board thought there was an issue in the way the company was being run. So I think I'm really trying to get at is, what else should we be expecting in terms of changes from an organizational capital deployment, everything that goes into it from a CEO perspective?

Yes. Thanks for the question. First off, though, I never considered myself a caretaker. I had joined the Board, I had a very vested interest in Americold being successful as a Board member. I was given the support of the Board to act as a leader, not as a caretaker. And there's very little that has changed in my posture or my decision-making literally since I arrived as the interim leader. So the mindset has been a -- mindset and energy has been consistent throughout the time period. So there's absolutely 0 change. In terms of changes in the company, I've said a number of times, in my mind, there is nothing flawed with the business model of Americold. It is a vital component of the food cold chain. It's not an optional component. It's a vital component. Our task right now is to get our house in order and the things we can control. I mentioned labor management and I mentioned the development projects, and be ready to accept all of the inventory we possibly can when key producers can produce and to service customers at service levels that are at least 98.5%, if not higher, when that occurs. That would have been exactly what I said, had somebody asked me what the goal was 4 months ago, and it's the exact answer today.

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

Obviously, the macro environment still remains fairly dynamic right now. I guess with the current Russia conflict, it seems like that's going to materially impact fertilizer and food exports. I mean will this or could this further disrupt food production? And how has this impacted your recovery outlook or expectations on the business?

Well, obviously, very recent news. Will it have an impact on our European business? I'm sure it will, right? I mean it's hard to imagine that something of this magnitude, as unfortunate as it is, would not have an impact on our European business. How that manifests itself? I honestly don't know. I'm sure you could theorize that energy may be an issue, for sure, and there could be some others. You mentioned a couple. I can't really predict it, but I can tell you, we're extremely focused on it. We were on the phone with our European team this morning. We discussed it, but I think it's waiting to see at least for the next couple of weeks to see what happens.

Okay. Then within your -- I mean, you obviously have a pretty global portfolio and the supply chain is pretty interlinked. I mean, will the weakness mainly be in Europe? Or could you see issues in your Australian and South American and potentially our U.S. portfolio? I guess how insulated is the U.S. portfolio from this?

Look, I think if you step back and look, the U.S. portfolio is being impacted and the supply chain challenges that are being discussed are really global in nature, so they're not unique to Europe, they're not unique to the U.S., they're not unique to the other geographies that we operate in. So we're seeing global challenges, similar challenges around the globe around labor, labor availability, power, inflation. So we're addressing those on all fronts, Mike. So I don't think we see unique things. If you step back, many of the geographies that we serve tend to be bread basket geographies where they are producers of food that we do export around the globe, right? So we'll have to be seen how import flows, import-export flows change as a result of what's going on in Europe, but the general markets we serve are bread basket.

Yes. And maybe I'll just add, if I was to think of impacts in geographies such as North America or Australia, New Zealand, it probably is more on the import, export side and how those flows change given our recent events and less so in country impact. That's, at least, what we think today. But we'll see. Again, as you can imagine, incredibly fluid situation and very new.

Our next question comes from Samir Khanal with Evercore ISI.

Marc, you talked about the guidance a little bit earlier. Maybe help us understand what's sort of baked into the low end of guidance? I know you talked about factoring in the deterioration of occupancy. I mean, can you help us sort of quantify that? Just trying to understand a bit more how the worst-case scenario and maybe on the other side of the high end, what occupancy you're assuming?

Yes. So if you look at our economic occupancy and these occupancies, just to remind everyone, are the average for the quarter, but we're roughly carrying in Q4 roughly 144 basis point decline year-over-year across the portfolio. And so roughly, if you think about our guidance going into next year, it really carries that rough year-over-year decline forward. So we're thinking somewhere occupancy should be on a year-over-year basis, anywhere between 100 to 200 basis points down on average throughout the year. So what gets us improvement, obviously, is if we see a more quick recovery, and we see greater occupancy and throughput that will drive us up to the upper end of the range, if the market continues to deteriorate. So just as George mentioned in his remarks, all of our end consumers remain strong, but the challenges definitely persist in the industry in terms of labor availability and food production. So if those continue to be challenged and degrade from where they are today, that could put pressure on and move us towards the lower end of the guidance.

Got it. And I guess, George, the second question here is, I guess, what have you heard from your food manufacturing customers given your background as to when do you think we'll get back to sort of a normalized inventory level? I know you said it's sort of a lot of uncertainty out there. But based on kind of your context, what are you hearing directly from them?

What I'm hearing is that when they can attract the labor that they need in terms of numbers, have the time to train them, make them productive and then get the right flow and cadence of how they produce efficiently, then inventories will build, and that makes perfect sense to me. That's exactly how it's done. What they cannot offer is timing. And it gets back to some of the comments in my prepared remarks. I mean, we've seen cases where optimism started to take hold and then it's 3 steps back with Omicron. And I think that has really been a shock to the system in terms of how quickly things can change, and it's prevented people from attempting to predict the future, quite frankly. And I can certainly understand that. Again, I know they're motivated -- beyond motivated to ramp up. It's -- producing food for sale is what they do. And I spent a lot of time in that. I can tell you it's something they take very seriously. But until the labor barrier is removed, they really have -- they're really handcuffed. And again, timing is just something people aren't even willing to discuss because it's just very variable based on labor availability.

Our next question is from Ki Bin Kim with Truist Securities.

Just going back to your ability to push on inflationary costs to your tenants. I didn't get -- I might have missed it, but I don't think I got a full answer on that in terms of like what percent of your customers, including those are variable, I guess, you push it all through, but especially those on the kind of fixed contract basis, like what percent of your customers are actually taking on the increases? How much of the increases are being pushed through?

Yes, we've had conversations across our entire customer portfolio, inclusive of our top 100 customers, those outside of the top 100 and those customers on fixed commitment contracts. The issues that Americold's experience from a cost standpoint are extremely macro in nature, they're not specific to Americold. And we -- so the conversations have been very rational. And our contracts do allow, as we described in the prepared remarks, for cost changes beyond our control, which is what the majority of these costs are. And so we've been able to have the conversations across our entire customer base.

And maybe I can add, having been a customer in the not-too-distant past that a strength of Americold is to be very analytical in the discussion. So to put forth a price increase justified on actual data on customer performance and a cost base that the customer can relate to, I think that's incredibly helpful when passing these price increases through and a big part of the reason that they have hit 100% of the portfolio and have gone through the system exactly as Rob mentioned and in line with our guidance last quarter that exiting the first quarter of this year, we will recover all known inflation in our cost structure debt schedule.

Okay. And in terms of your G&A increase, you're guiding towards almost a $40 million increase. I don't think there's -- I don't cover all of REITs, but that's probably going to be one of the biggest ones, especially in light of your stock price, which is in a challenged situation. I just think that G&A increase needs a little more attention. Can you just help us understand why that size of magnitude and break it down a little bit further, so we understand what's happening?

Yes. Ki Bin, it's Marc. As I said in my prepared remarks, the key drivers of the increase are really the resumption of performance-based cash incentive compensation. So obviously, with the performance in 2021, that was not accrued or included in the year-end results, it wasn't earned. But we do, in our plan going forward, we do plan for that in the ordinary course. Additionally, on top of that, we've talked about, in my prepared remarks, the incremental $11 million of noncash share expense are related to the retention program, the share-based retention program that was put in place this year. So those 2 items make up more than half of that increase. On top of that, one of the things we're doing in IT is we're transitioning more of our software as we integrate businesses to a Software-as-a-Service platform. So what that does is it puts a little more operational expense in G&A, but it actually saves us maintenance CapEx over time. So from an AFFO perspective, those types of investments should be neutral. From -- and then the last thing we continue to see is just inflationary cost pressure still on overall wage environment, insurance, travel, et cetera, et cetera. So those other additional costs that are embedded in our G&A. Your normal annual treadmill costs are what make up the balance.

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

Yes. I wanted to ask about the 8-K, the executive severance benefits plan. Is that -- is the change in control payouts new? Or if it's not new, is it different than what it was previously? And if so, why?

No, they're consistent with what they previously were. I think we've changed our function in terms of employment agreements going to the standard program. And you'll see that the terms of the benefits are very consistent if you look at our proxy from last year.

Okay. Okay. I guess why would this needed like the new one, instead of the old one, just because you have a new CEO or?

Yes, I think it's something in terms of one of the things that our Board has been working on in terms of moving to one of the best practices that they see in the industry and we're following the best practice.

Okay. Got it. And then I wanted to ask about on Page 37, should we be more focused on the economic occupancy or the physical occupancy for the same-store rent and storage revenues per occupied pallet? Because I see that the -- it looks like 4Q '21 on the physical side was declined versus what you had in 3Q?

Yes. Yes. So definitely, the economic occupancy is what truly drives our financial results. So we really encourage people to look at the economic occupancy. The physical occupancy, we always show it because obviously, one of the things that drives throughput is the physical holdings of product in the network. And clearly, as you see with the physical holdings, just as you heard, as mentioned in our prepared remarks, the challenges in the overall food supply chain are definitely weighing on good producers' ability to produce, and that's showing up in our physical occupancy.

Our next question comes from Vince Tibone with Green Street.

Could you elaborate on the operating efficiencies you mentioned that will help offset wage inflation? Given the majority of the wage increases were given in the back half of '21, I was surprised to see that guidance implies same-store expenses to be down in '22? Any just color you can give on these fronts would be helpful.

Yes. When I refer to operating efficiency, it's really the mix between temp and perm labor, which we want to dramatically shift to permanent labor. And then second, the productivity you get with a permanent workforce once you have the ability to train them and get them to work in a rhythm where they're consistently doing the same job for a period of time, which you never get the chance to do with temp labor. So that, in and of itself, drives efficiencies around labor for throughput pallet, et cetera, et cetera. And that's what I was referring to on the productivity front.

Got it. That's helpful. And then just how should we think about just expenses and how they're trending as occupancy recovers? I know we're focused a lot on this year, but maybe thinking a little bit '23 and beyond. Just as occupancy rebounds, how much more employees expense load do you think would be to support the growing volumes? Or maybe conversely, how much can you cut labor expenses this year when inventory or occupancy could be down again?

Yes. So the way we manage our business on the throughput side is that the labor force is highly variable, and they're managed based on the work content presented. So obviously, as we start to see more production come up, greater volume come in, we will increase our spend on variable labor to support that volume, but there's embedded margin in that. And so with that higher throughput, we'll earn not only greater dollars from storing that product, but we also earn product -- or earn margin handling that product on behalf of our customers.

Our next question comes from Anthony Powell with Barclays.

Question on your developments. I guess you have starts of $100 million, $200 million this year. What returns are you looking at? And are the returns still in those low teens given all the labor cost increases and whatnot? How returns, I guess, trended? Or how should they trend going forward?

Yes. So if you look at Page 41 of our supplement, which details, we're still seeing development opportunities, and this is a cash-on-cash unlevered basis, where we believe we can generate yield, stabilized yield in the low double-digits. So with that, I remind people the yields that we quote upon stabilization include not only the return for the infrastructure, but also the return for the services that we provide within that infrastructure.

And that hasn't changed. I guess, why hasn't that changed? Why hasn't that gone down, I guess, given higher labor cost? What's allowed you to kind of maintain those levels given the environment?

I think because that's how we price. So obviously, the cost side is an input to which we mark it up to drive our returns.

Yes. Just as Rob is pricing inflation in the existing portfolio, he sees pricing inflation exactly the same way in a development project. So it's accounted for identically.

Got it. All right. And I guess on the guidance, so the guidance doesn't assume any kind of additional needed discussion with the customers in terms of price increases, right? So it assumes that what you've done already is all you need to do. Is that right?

Yes. As I think we said in the prepared remarks, we've priced what we've seen. If we continue to see inflation beyond the embedded normal escalation in our contracts, that would require us to go back to customers. And as Rob mentioned and George mentioned both in their prepared remarks, there tends to be a slight lag where we need to experience that for a period of days and then we can work to implement the rate increase.

Our next question is from Bill Crow with Raymond James.

George, maybe it's just me, but the picture that, I think, has been painted tonight is of a company that's not been particularly well run. And you talked about the challenges delivering service to your customers and that sort of thing. I guess the very fact that you're on this call indicates that there's been a problem. And I guess I'm trying to -- I guess maybe, one, did Agro make a mistake selling to Americold? And has that really prompted your decision to come full time to kind of resurrect that? Or number two, going back to Ki Bin's comment. If it has been kind of a challenging business over the past couple of years, why is G&A going up $40 million? And how much of that is staying at headquarters versus workers out in the field?

Yes, I'll let Marc address the G&A question. But the first part of your question is I don't think Americold has been run poorly, just to be perfectly clear. if you look at the companies I'm aware of in the food industry and other than the cold chain like Agro Merchants, the macroeconomic environment driven by COVID and unavailable labor, okay, something I never experienced in my career. I've experienced high cost labor before. I've never experienced unavailable labor to this degree. I think that's what has really impacted service levels. That's what has really disrupted companies. And as we've said a lot of times, Americold is not immune to those macroeconomic issues. So to clarify, now it's still our job to build back to where we were beyond when it comes to customer service, when it comes to our labor mix between permanent and temp labor, and when it comes to ensuring our development projects deliver, those are all things we can control. Those are all things we have to make sure emerge stronger than they were pre-COVID. But it's -- I don't think it's Americold being run in a poor way. It's the macroeconomic environment that impacted every company in the food supply chain. So Marc, if you want to address the G&A?

Yes. So on the G&A front, as I mentioned previously, it's -- the step-up is -- this is a performance-driven culture. And I think you've heard that through what George said. Clearly, last year was not a performance where the leadership team or the management team and the operators of the business earn their full incentive. But when we do plan, we set aggressive targets, and we plan to pay those cash incentives. So that's part of just the year-over-year step-up. The next piece is quite the contrary. Americold is thought of as industry leaders. We develop talent, and our leaders are well thought of throughout the industry. So as part of that, we approved our retentive grant to protect that talent that we have across the organization. As I mentioned, that's approximately $11 million next year of that increase. The final 2 buckets, as I said, is we're transitioning. And as we're integrating systems and integrating our recent acquisitions, we're moving away from buying software to entering into agreements with our software providers, where it's Software-as a-Service. So that manifests itself in our G&A. And what you'll see over time is a reduction in the maintenance capital spend around IT. If you think about it, those are both the component to AFFO, and they'll net offset each other over time. It's a geography question. The final one is there is normal inflationary impact overall in the environment, both on corporate salaries and other overheads such as travel, insurance and just associated benefits. So hopefully, that helps you bridge the gap.

Yes. I appreciate that, Marc. Can you tell me how your thoughts about external growth, acquisitions and development might have changed over the last 6 or 8 months as your cost of capital has gone from kind of an advantage for you to a pretty significant handicap?

Yes. Look, I think we -- obviously, we're very aware of the recent impact to our cost of capital. But I think our core business model is designed around how do we continue to support our customers and their growth. And we accomplish that a number of ways. We're focused on driving organic growth through the portfolio. We're focused on supporting our customers through dedicated development projects that support their business. As I mentioned in my prepared remarks, we have 6 deliveries of projects in 2022. 4 of those are customer dedicated, and those tend to be the larger projects. And then lastly, we remain focused on strategic acquisitions that enhance the platform and enhance our ability to serve our customers around the globe.

Thank you. This completes our question-and-answer session. Thank you for your participation. You may now disconnect.