Lineage, Inc. Q3 FY2025 Earnings Call

Thank you for joining us. My name is Desiree, and I will be your conference operator today. I would like to welcome everyone to the Lineage Third Quarter 2021 Earnings Conference Call. I will now turn the conference over to Ki Bin Kim, Head of Investor Relations. You may begin.

Thank you, operator. Welcome to the Lineage discussion of its third quarter 2021 financial results. Joining me today are Greg Lehmkuhl, Lineage's President and Chief Executive Officer; and Rob Crisci, Lineage's Chief Financial Officer. Our earnings presentation, which includes supplemental financial information, can be found on our Investor Relations website at ir.onelineage.com. Following management's prepared remarks, we'll be happy to take your questions. Turning to Slide 2, before we begin, I would like to remind everybody that our comments today will include forward-looking statements under federal securities laws. These statements are subject to numerous risks and uncertainties, as described in our filings with the SEC. These risks could cause our actual results to differ materially from those expressed in or implied by our comments. Forward-looking statements in the earnings release that we issued today, along with the comments on this call, are made only as of today and will not be updated as actual events unfold. In addition, reference will be made to certain non-GAAP financial measures. Information regarding our use of these measures and a reconciliation of non-GAAP to GAAP measures can be found in the press release that was issued this morning. Unless otherwise noted, reported figures are rounded, and comparisons of the third quarter 2025 are to those of third quarter 2024. Now I'd like to turn the call over to Greg.

Good morning, everyone. Thank you, Ki Bin, and welcome to the Lineage family. We're thrilled to have you. As many of you know, Ki Bin joined us from a distinctive career at Truist, bringing 20 years of experience in the real estate industry, most recently as a leading sell-side analyst. He's now two weeks into his new role, and we are already feeling his positive impact. Let me start by walking you through our agenda for this morning. First, I'll recap our third quarter performance, which came in slightly ahead of our expectations. Then we will review occupancy and price, followed by our latest view of supply and demand for our industry. We know this is an important topic that many of you are interested in. Following my remarks, I will turn it over to Rob Crisci, who will walk through the details of segment performance, capital structure, and our updated guidance. I'll then return to share closing comments before we open up the line for your questions. Turning to our quarterly performance on Slide 4. Total revenue increased by 3% and adjusted EBITDA increased 2% to $341 million, which is a quarterly record for the company. Total AFFO grew 6% year-over-year, and we delivered AFFO per share of $0.85, which declined 6% year-over-year. As a reminder, our IPO occurred in the third quarter of last year, which impacts the comparability of these periods. Looking at our business segments, global warehousing performed in line with expectations, consistent with the outlook we shared on last quarter's call. Same-store physical occupancy improved sequentially by 50 basis points to 75%, and we anticipate further occupancy gains in the fourth quarter, consistent with the muted seasonal pattern we discussed last quarter. Same-store NOI increased sequentially to $351 million from $340 million, although it declined 3.6% year-over-year. Same warehouse storage revenue per physical occupied pallet remained stable as expected, growing at 1%. Our global integrated solutions business saw a year-over-year NOI growth of 16%, led by our U.S. transportation and direct-to-consumer businesses. In the quarter, we invested $127 million of growth capital, primarily in our development projects. We're pleased with the continued progress on these projects. As a reminder, we have 25 facilities that are in process or ramping. We expect these assets to deliver $167 million of incremental EBITDA, once stabilized. In Q3, we delivered in-line same-store NOI and exceeded our adjusted EBITDA and AFFO per share guidance. However, we expect a lower fourth quarter than previously anticipated and are, therefore, moving to the lower end of our full-year guidance range for both EBITDA and AFFO per share. This is largely driven by a $20 million decline in our outlook for same warehouse NOI due to two primary factors. First, tariff uncertainties impacting import and export container volumes, leading to softer year-end services revenue. Second, while our total occupancy outlook for the fourth quarter is unchanged versus our previous guidance, U.S. occupancy is slightly lower due to import and export volumes and less-than-expected U.S. new business hitting in the quarter. This is being offset by higher occupancy outside the United States, where we are in lower margins. Despite these near-term headwinds, we remain focused on providing world-class service to our valued customers by leveraging our industry-leading network and cutting-edge technologies. I'm confident that we are well positioned to grow as the food industry normalizes, new capacity is absorbed, and our LinOS labor management and energy efficiency initiatives accelerate. Moving to Slide 5, as I mentioned, Q3 and Q4 total occupancy are in line with our prior forecast and pricing remains stable as expected. Note that we typically see a sequential decline in storage revenue per pallet in the fourth quarter due to normal seasonal mix changes. Additionally, we saw a sequential 180 basis points increase in our minimum storage guarantees to 46.7% as our customers continue to want to secure space across our network. Turning to Slide 6, we understand that our industry is a specialized part of the real estate landscape with limited publicly available data. Accordingly, we continue to collaborate with CBRE to provide insights into new supply growth for the cold storage industry. At this point, our analysis is focused on the U.S. where we have the most successful data and in certain markets, are seeing the most acute supply-demand imbalance. Let me quickly walk through this slide. The upper left-hand chart, labeled A, shows from 2021 through 2025, public refrigerated warehouse supply grew at approximately 14.5% on a square foot basis, which is weighing on occupancy and pricing in certain markets. Importantly, CBRE's outlook for new capacity in 2026 is down substantially from recent levels to 1.5%. The upper right-hand chart, labeled B, is based on Nielsen and Circana data for fresh and frozen food volumes in both the retail and foodservice channels. The data shows demand for the food category stored in our network grew cumulatively by 5% during the 2021 to 2025 time period. To be clear, in spite of continued pressure from tariffs, consumer price inflation, and other headwinds, end-consumer demand for the products that flow through our network has been and continues to grow. On the bottom left-hand of the slide, we bring these two concepts together to calculate estimated excess capacity of approximately 9.5% for the U.S. market over the last four years. Despite this nearly 10% imbalance, our 2025 total estimated average physical occupancy is 75%, down only 3 points from 78% in 2021. We are using our network size and the strength of our operations to perform relatively well in a very challenging environment. Looking forward, CBRE is expecting less new supply, which we believe is logical, as further speculative development is not supported by current industry dynamics. Before handing it over to our CFO, Rob Crisci, most of you are aware that he announced his retirement in June and will be handing over the reins to our new CFO on Monday. I just want to take this opportunity to sincerely thank Rob for his numerous contributions to Lineage over the last few years, helping to lead us through the IPO process with a lot of passion and building an excellent finance team here at Lineage. It's been a pleasure getting to know you, both personally and professionally. I also cannot thank you enough for all your help in making this a smooth transition. I look forward to getting together in Sarasota and wish you the very best in retirement. Robb LeMasters, our incoming CFO, what we call BB because he spells his first name with two Bs, has been with us in an unofficial capacity over the last few weeks shadowing our earnings process. He has an exceptional background with two decades of finance and buy-side investing experience, including a very successful run as a public company CFO at BWX Technologies. He has a lot of great experience managing complex financial operations at asset-intensive businesses. Robb has already been out to visit a bunch of our sites, and I know he is very excited to officially get started next week. Welcome, Robb. We're excited to work with you and expect great things. With that, I'll turn it over to Rob Crisci.

Thanks, Greg, and good morning, everyone. I greatly appreciate the kind words. My colleagues at Lineage have also become great friends, which is a testament to the culture you, Kevin, Adam, and the team have built here. Robb LeMasters is a great fit for Lineage, and I've really enjoyed getting to know him. The finance organization is in excellent hands. I'm here to help as needed in my advisory role, but I doubt Robb will need much. I'd also like to add, we are incredibly excited to add Ki Bin into the team. It's been great having you as part of our process the last couple of weeks. Turning to our global warehousing segment, total revenue grew 4% and total NOI grew slightly to $384 million, in line with our expectations. Same warehouse NOI declined 3.6%. We continue to focus on operating efficiency. And to that end, we saw our same warehouse cost of operations decline 1%. We will dive deeper into this on the next slide. Looking to the fourth quarter, we now expect the same warehouse NOI to decline in the range of 3% to 6%, a reduction of approximately $20 million at the midpoint versus our prior implied Q4 outlook. Greg already outlined the main drivers behind this reduction, including the impact of tariffs on the import and export activity. We've been monitoring the tariff situation closely and are cautiously optimistic about some of the recently announced trade agreements, which should benefit both our customers and Lineage. We continue to fight through the competitive environment, as Greg discussed earlier. We feel good about the positive trend in occupancy and the return to more normal seasonality this year, albeit somewhat muted. Turning to Slide 8, diving deeper into warehouse efficiency. As we all know, the current inflationary environment has driven labor cost increases. As a reminder, labor is by far our largest controllable cost at $1.5 billion per year. On a same warehouse basis, we've been able to hold labor costs flat over the last couple of years. This year, throughput has declined low single digits, making the progress our operations team has made on labor per throughput pallet even more impressive. You can see this on the right-hand chart. We remain hyper-focused on lowering costs and increasing warehouse efficiency. This benefits us both in the short term and will drive strong operating leverage by the incremental growth. Next slide. Shifting to Slide 9 and covering our global integrated solutions segment, revenue was flat and NOI grew 16% to $65 million. Our NOI margin was up 250 basis points to 17.9%. We're continuing to see strong momentum in our U.S. transportation and direct-to-consumer businesses due to the value these integrated solutions provide to our customers. For the fourth quarter, we expect strong momentum to continue with 10% to 15% growth. Notably, we benefited in the third quarter from approximately $4 million of NOI that was previously expected for the fourth quarter. We now see full-year NOI growth of 8% to 10% versus a prior range of 8% to 12%. The slight reduction at the midpoint is due to fewer trade services, also associated with lower import-export activity. Really great year overall and solid execution by Greg, Brian, and the global GIS team. Turning to Slide 10, we ended the quarter with total net debt of $7.55 billion. Total liquidity at the end of the quarter stood at $1.3 billion, including cash and revolving credit facility capacity. Our leverage ratio, defined as net debt to adjusted EBITDA, was 5.8x at the end of the quarter. We remain highly disciplined on future capital deployment. We continue to actively manage our interest rate exposure in light of our existing SOFR hedges that expire at year-end. We have been opportunistically executing new hedges and working to further optimize our investment-grade balance sheet. Given these year-end expirations, we are providing a very early look for 2026 forecasted interest expense to help with your modeling. At this time, we see approximately $340 million to $360 million of total interest expense in 2026, which is approximately $80 million higher than this year. A little more than half of the increase is due to the expiring hedges, and the remainder is due to our recent capital deployment, which we anticipate will drive attractive risk-adjusted returns and further support customer-driven growth. Turning to the guidance slide. We are initiating Q4 with EBITDA of $319 million to $334 million, and an AFFO per share of $0.68 to $0.78. For the full year, EBITDA is expected at $1,290 million to $1,305 million and AFFO per share at $3.20 to $3.30. In short, we are going to the lower end of our previous ranges on adjusted EBITDA and AFFO per share. We see total and same warehouse NOI about $20 million lower than previous guidance for the reasons mentioned earlier. With that, I'll turn it back over to Greg to wrap up before opening up to your questions.

Rob has walked you through our updated guidance, and I want to reaffirm that while we are operating in a challenging environment, we believe Lineage remains positioned to win. As outlined in detail on our prior earnings call, we're focused on driving competitive differentiation across three key areas: delivering customer success, leveraging our network effects, and enhancing warehouse productivity. Before summarizing and turning it over for your questions, I'd like to provide a quick update on LinOS, our proprietary warehouse execution system. As of today, we've deployed the platform in seven conventional sites. The results have exceeded our expectations. We're seeing double-digit productivity improvements in key metrics like units per hour, translating to higher output and lower unit costs. We expect to complete 10 deployments by year-end, setting the stage for an accelerated rollout in 2026. We look forward to sharing more details at NAREIT, where we'll be hosting an in-person and webcast-ed investor forum on Monday afternoon. The presentation will focus on operational excellence and our LinOS technology. Turning to Slide 13 and in summary, it's obviously been a very bumpy road since our IPO last July for our external investors and for our Lineage team, who are also owners of our company. But when I take a step back and look at the company, I see the largest, best positioned player in a mission-critical business where underlying consumer demand has been growing, even in the face of some of the worst food inflation in decades. This is a great company in a resilient long-term industry that is clearly facing short-term challenges due to excess supply and macro headwinds like tariffs. The cash flow generation of our company remains strong, our trading valuation is currently about half of the replacement cost of our assets, and we believe we have an unmatched portfolio of buildings in critical markets for our customers. While Q4 will be challenged due to near-term headwinds, there are green shoots of optimism, including less new supply coming online, growing demand, and potential global trade policy resolution. We grew this business successfully for 15 years leading up to the IPO. And while we can't predict the moment of inflection, we believe in this industry's fundamentals and that stability is on the horizon. In the meantime, we will continue to focus on the areas of our business that are under our control, becoming a leaner, smarter company, investing in our people, processes, and technology. When the industry does inflect, we will come out stronger than ever. Finally, I want to thank our global team members for their dedication and commitment to our customers. Operator, I'd like to open it up for questions now.

And our first question comes from Caitlin Burrows with Goldman Sachs.

I was wondering if you could talk a little bit more about that expected lower U.S. new business in Q4. I guess, how important is new business versus existing business throughout the year and in Q4 specifically? And how has new business fared to date? And are you suggesting some change for Q4? Or is it more of the same?

Thank you for your question. Let me provide more detail on the lower performance regarding tariffs and new business. We are all tired of discussing tariffs, but we are definitely noticing that the uncertainty around them is affecting import-export volumes more than earlier this year and more than what we anticipated last quarter. This has particularly influenced our West U.S. business unit, where ocean import-export container volumes have decreased by about 20% compared to the trends observed earlier in the year through July and when we provided guidance. This business is quite profitable, generating significant additional revenue from services such as customs documentation and bonded fees. For instance, in our seafood category, many customers placed orders back in the summer and are now using up their inventory while waiting for a resolution on tariffs. They have indicated that while there is a chance they might reorder by the end of the year, it is more likely to happen after the New Year, which is the basis for our guidance. We also expect that this decline in container volume will impact not only our warehousing same-store NOI but also our GIS in the fourth quarter, as we provide significant drayage services around the ports for our GIS segment.

Our next question comes from the line of Michael Goldsmith with UBS.

Greg, can you provide an update on the pricing strategy during the quarter, just given some of the demand headwinds that you talked about and then also the supplies? So I'm just trying to get an update on how you've approached pricing as a lever to maintain occupancy.

Yes. I want to begin by mentioning that in Q2 we introduced, for the first time, a multiyear revenue per pallet chart for services, rent storage, and blast. It's essential to emphasize every quarter that the metric we monitor externally will exhibit volatility from quarter to quarter due to various factors. While rate is a component, other aspects such as volume guarantees, inventory turns, blast freezing, rising volumes, commodity mix, and exchange rate seasonality also influence this metric, contributing to short-term volatility. This is why we present a multiyear view to illustrate that our pricing is improving over time. There was no alteration to our pricing strategy during the quarter. In some challenging markets, we had to discuss the balance between volume and price as the year went on. Overall, we anticipate a net price increase between 1% and 2% this year. Nothing changed in the quarter. One of our key strategies is to avoid trading volume for price. We engage with each customer individually, and collectively, we observed net price increases this year.

Next question comes from the line of Steve Sakwa with Evercore ISI.

Greg, I appreciate the added color you provided on the excess capacity. And it's nice to see that you guys didn't take as big of a hit on occupancy. But given that there's still a lot of excess capacity, I guess, in the market overall and there's still some new supply to come on in '26, I guess just sort of what are your expectations looking forward kind of on that physical occupancy? And how is that excess capacity kind of being absorbed and priced in the marketplace against the existing stock?

Yes. That's a great question. Currently, the new supply is coming in slowly. The CBRE forecast for next year predicts a 1.5% increase in new capacity. We believe that this will either remain the same or decrease over time, as it doesn't seem practical to add more capacity speculatively in this market. This situation is mainly a U.S. issue and is not the same elsewhere. Some markets, like Jacksonville and Miami, continue to face challenges. Chicago has seen a lot of new capacity, and we're working through the integration of that new supply. However, we are more optimistic about certain key markets that have received new capacity in the last couple of years, such as New Jersey, Dallas, and Houston, where we have successfully absorbed that new capacity. We've navigated our business challenges and are now starting to rebuild inventories in those areas. This is a market-by-market situation. Once the supply is in place and we engage with our business in those markets, we see it as a reset that allows us to build up from that point. This is what we are observing in the mentioned markets.

Next question comes from the line of Craig Mailman with Citi.

Considering the recent guidance cuts we've encountered, I'm curious about the challenges you're facing in underwriting your portfolio. How can we be assured that the yields on the capital you're allocating for development and potential acquisitions won't be significantly lower than expected? Looking at your schedule, it appears that only about 15% of your portfolio is stabilized. Additionally, have you considered if a REIT structure might be more suitable for your company? Since you operate more like a 3PL rather than a traditional real estate company, this could allow you to retain and redeploy capital more effectively. Just some thoughts on that.

Yes, we definitely do not want to be here reducing our fourth quarter expectations. The reality is that our industry is facing challenges with new supply, making predictions very difficult. We engage with our 15,000 customers each month regarding their forecasted volumes, and it's tough for them to predict, as noted by producers in their quarterly statements. We are experiencing short-term volatility as a result. However, the underlying demand for our products is increasing, which is promising for the long-term outlook as we adapt to the new supply and work towards balancing the market. While we cannot pinpoint exactly when this will happen, we are confident in our position, technology, and the aspects within our control that are progressing well. We monitor new developments quarterly, which is a key performance indicator for my bonuses each year, and we have consistently met our projections over the years. These developments are mostly customer-driven, with many including strict volume and revenue guarantees. We do not engage in speculative construction without confidence in our expected returns. There is certainly pressure due to uncertainty, but our performance in the third quarter aligned closely with our expectations. As we look towards the fourth quarter, our customers are indicating a projected 20% decrease in container volumes in our largest business unit. Such fluctuations are extremely challenging, if not impossible, to foresee. Our focus is on executing our plan, managing what we can control, treating our customers and team members well, and navigating through this tough period.

Yes, we believe that a REIT is the right structure for us. We have a highly valuable real estate portfolio, and we think the advantages far exceed any potential drawbacks of being a REIT. Therefore, we are very pleased to be a REIT.

Yes. If you can choose to pay taxes or not, we're going to choose not to.

Next question comes from the line of Ronald Kamdem with Morgan Stanley.

There are many useful insights regarding 2026, particularly concerning interest guidance. I want to revisit the topic of excess capacity. Could you reflect on the next 12 to 18 months in this environment and highlight what aspects you can manage? What are your thoughts on the potential impacts of pricing versus occupancy? What have you observed in this context?

Sure. Regarding pricing, we have reset a lot of our volume guarantees for 2025 earlier this year after the significant destocking due to COVID that I mentioned in previous quarters. We are currently in a more stable phase. We are already discussing pricing for 2026 with customers, although these discussions are still ongoing. Even with the new supply we talked about, we are aiming for inflationary-level increases and anticipate achieving net increases in the low single digits for 2026. We don't expect to sacrifice occupancy to obtain these low single-digit price increases. Our customers recognize that we need to increase wages for our staff and that inflation is a factor. While we don't expect increases of around 10%, we believe that low single-digit gains are very feasible.

Next question comes from the line of Michael Carroll with RBC.

Greg, can you give us some color on how Lineage was able to push their guarantee contracts up a little bit this quarter? I mean, is it abnormal to do this in the third quarter? And is that the reason why economic occupancy was up bigger sequentially in Q3 versus physical occupancy?

The progress in volume guarantees is due to recent developments led by new customers, which include long-term contracts that have higher volume guarantees than our average. Our sales team has done a great job expanding the customer base that utilizes these volume guarantees. Despite some challenges in certain regions of the U.S., we are seeing new business with higher volume guarantees than usual. These are the key factors impacting our results.

Next question comes from the line of Alexander Goldfarb with Piper Sandler.

And first, Robb with the BB, welcome aboard. Rob with the single B, congrats on retirement. Ki Bin, welcome to the inside. Greg, you mentioned that international is performing much better versus the U.S. Is it simply a matter of the excess supply, and that's really the difference? Or are there other things at work? I mean, there are always trade disputes from country to country. There are always geopolitical things, inflation tension, whatever happening overseas. So I'm just trying to isolate what the key difference is for why global is performing well versus the U.S., and I wonder if it's simply the supply or if there's other factors at work?

Alex, that's a good question. I don’t want to overemphasize this. The occupancy in the U.S. is slightly lower than what we forecasted after Q2, while Europe is performing a bit better. That’s where the difference lies. The impacts are exactly as I described, specifically with container volume, primarily in seafood, which is an area we value greatly. It represents 13% of our business, and currently, our customers are reporting a 20% decrease in import-export volume as this quarter progresses, which is significant. More generally, there is competitive pressure in certain U.S. markets, as I mentioned earlier. These are the two main factors affecting our outlook compared to what we thought previously. However, these issues are confined to specific markets, and we are managing to maintain our occupancy levels despite the new supply. We are also achieving price increases despite that supply. In this unpredictable and challenging environment, I believe our company is executing as effectively as possible.

And it's another benefit of having a very diversified global footprint, right? So we can benefit from growth in other markets to help balance out our performance. So I think it's a positive for Lineage overall.

Next question comes from the line of Tayo Okusanya with Deutsche Bank.

Yes. Ki Bin, welcome aboard. Rob with the BB, also welcome aboard. First quarter in a while you guys really haven't done much on the acquisition side. Just curious what you're seeing from that perspective. I know I kind of curious, again, is it just really more tied to your overall cost of equity right now that you slowed down or kind of how you're kind of looking at acquisitions going forward?

Yes. So we're highly disciplined as always on capital deployment. We're cognizant of developments that we're working on. We see our leverage ratios; they're in a really good spot. We don't view our equity as a place anywhere but very, very undervalued, so we're not interested in issuing equity, and we're managing the portfolio. We'll be really smart on capital deployment. There's obviously a ton of opportunity out there, and there are more things becoming available in the market. So we'll be opportunistic, but we're going to be very disciplined.

Next question comes from the line of Greg McGinniss with Scotiabank.

Greg, I was hoping to get some more insight into the earnings commentary regarding the improvement in fresh and frozen demand that Lineage is seeing. Is that in reference to the Q2 seasonality trend? Or is there something more broadly that you're seeing in the market?

So it's third-party data that is being referred to, not our perspective; it originates from a third party.

This is third-party data from Nielsen, which includes retail data, and Circana, which provides rolled-up food service data. This gives a comprehensive view of food consumed in the United States from two leading sources that we acquired last quarter because our data indicated that underlying demand was increasing, although we lacked third-party data. We wanted to present that each quarter. What this indicates is ongoing growth in the categories we supply, specifically in fresh and frozen. We are confident in its accuracy, and that aligns with our belief. Despite elevated food inflation, the underlying categories continue to experience growth.

Next question comes from the line of Daniel Guglielmo with Capital One.

You all mentioned the stronger international trends versus the U.S., which does align with what we've seen for other global brands this earnings season. Can you just remind us what the rough revenue breakdown is between the U.S. and international? And then are there certain international markets where you see opportunities to lean in?

Yes. So overall, we're 70-30 sort of U.S. versus Rest of the World.

Yes. I think Europe overall, our European team is crushing it and winning in a lot of different markets in Europe, and we're excited about continued growth there, both in same-store and non-same-store.

Next question comes from the line of Vikram Malhotra with Mizuho.

Congratulations to everyone on their new roles. I have two clarifications. First, regarding the numbers, could you provide some insight into what you've observed in October, particularly in relation to the seasonal increase in occupancy? Your peers seem to predict an uptick in occupancy, so what is your basis for continuing to expect these increases? Additionally, concerning your confidence in pricing for next year, particularly if supply volumes remain low, what gives you that assurance? Second, could you share specific examples from the acquisitions you've made over the past five years? It would be helpful to understand how actual performance has compared to your underwriting projections, particularly in terms of NOI growth, yields, or any other relevant metrics to illustrate how those recently acquired properties are performing?

Sure. Regarding occupancy, it is aligned with our expectations from last quarter. The total occupancy guidance and the anticipated seasonality are playing out as we projected. On Monday, I received our weekly occupancy report, and for the first time in about eight quarters, the occupancy was higher than the prior year at the same store. This is encouraging. We are noticing a positive trend, which seems to be a result of the new supply stabilizing and our strong performance in the market. On the pricing side, our confidence in achieving price increases next year stems from our success in doing so this year, despite this being one of the toughest years in our industry's history due to the recent influx of new supply. We've managed to secure net price increases, and our early discussions with customers for next year suggest they are amenable to modest price hikes, which we believe we can secure. Regarding mergers and acquisitions, we have acquired 70 companies in the past five years, with variations depending on the region and facility. Overall, we are pleased with the network of acquisitions we have built, which we consider invaluable and industry-leading. While we do not provide detailed breakdowns of each past acquisition, the overall impact has been incorporated into our global operations. Significant changes arise from our acquisitions, and we have certainly advanced in terms of cost productivity and occupancy as we integrate these companies into the Lineage family.

Next question comes from the line of Blaine Heck with Wells Fargo.

Just following up on guidance. With respect to the fourth quarter, it's a relatively wide range between $0.68 and $0.78. So can you just share your thoughts on what key drivers or line items are kind of the biggest variables that could result in AFFO coming in towards the upper or lower end of the range?

Yes. The most significant aspect we can control is the recurring maintenance capital expenditures. The fourth quarter is typically our highest season for spending, and we anticipate it could fluctuate by $5 million or $10 million based on actual expenditures. The most critical metric for us is same-store net operating income. We are making every effort to manage this, and as Greg noted, October appears to be on track, though that is already included in our guidance. Additional activity at year-end could be beneficial, particularly since a significant portion of our services revenue is tied to tariffs and containers, which, as Greg mentioned, could improve considerably by year-end. However, we remain very cautious based on current observations. Predicting activity for November and December is challenging, and that influenced our guidance approach.

Next question comes from the line of Michael Lewis with Truist Securities.

Great. Thank you. While we're welcoming people, I'll welcome Robb. I'll, of course, welcome my good buddy and pal, Kevin, and maybe welcome myself to covering this name as well. My question, I wanted to ask, I don't think anybody asked about this lapsing SNAP benefits, right? So it will be a temporary thing. I just wonder if there could be any impact on 4Q from that. Surprisingly to me, I guess, 1 out of every 8 Americans is on food stamps. Is there any potential for that to cause anything in the numbers in 4Q if this drags on? Or is that not really a concern?

Yes. Ki Bin is concerned because part of this compensation package includes food stamps. Let me begin by addressing SNAP and then I'll discuss the broader implications of the government shutdown. To provide some context, in 2024, U.S. consumers are expected to spend about $2.7 trillion on food, with SNAP benefits totaling around $100 billion, representing about 4% of total food spending. However, data indicates that for every dollar change in SNAP benefits, total food spending only shifts by approximately $0.30, as consumers tend to adjust their budgets while continuing to eat. The future remains uncertain regarding whether the courts will intervene, if states might cover the costs, or if things will revert to normal. Even in the worst-case scenario where SNAP benefits are entirely cut, the effect on overall food consumption would be merely about 1%. We anticipate that this will not have a significant impact in the short, medium, or long term because we don't expect SNAP benefits to completely disappear. On a broader scale, regarding the government shutdown, we are observing other effects. For instance, the USDA cold storage survey, which is typically reported monthly, is not being issued due to the shutdown. We are experiencing delays in import-export orders; although customs operations are ongoing, the FDA, EPA, and USDA are operating with reduced staffing, resulting in inspection, certification, and documentation delays. Consequently, there are increased dwell times at ports and terminals, along with delays in export license approvals. However, it is important to note that food inspections by the USDA and FDA have not been impacted.

Next question comes from the line of Samir Khanal with Bank of America.

I guess, Greg, I was looking at this chart on Page 30, which is the presentation you have up there, where you show economic and physical, an 80% economic today; I mean, do you have data going back prior to, let's say, '21 and even 2020? Just trying to see if there was any other time before 2020 or '21, where occupancy was below 80%. It’s clearly been a problem forecasting occupancy in this business, so I was trying to figure out how today's levels compare to historically before 2020.

Yes, that's a good question. In the second half, we did forecast occupancy accurately, but it is indeed very challenging to predict in this environment. It's difficult to look back prior to 2020 since we acquired many new companies during that time, making the same-store pool quite different. From my recollection, although I don't have similar data to back it up, there were definitely times before 2021 when our occupancy was lower than it is now. I'm thinking about 2016, 2017, and 2018, when we were still a young and smaller company. The footprint was obviously different, as we weren't in Europe yet. However, there were periods in our core business when our economic occupancy was lower.

Next question comes from the line of Michael Mueller with JPMorgan.

Curious, what are your larger customers telling you at this time about volume expectations for 2026? And have you seen any customers wanting to shrink their fixed commitment agreements yet?

Predicting 2026 is quite challenging based on what our customers have been communicating. We haven't finalized the numbers for October yet. Our business unit leaders are currently working on their 2026 budgets with the finance team, and I expect to see a summary in the coming weeks. The uncertainty is influenced by our discussions with customers globally, who also perceive their business prospects as unpredictable. However, we believe the current situation is healthy, and our volume guarantees were adjusted in the first half of this year, putting us at a sound level now without any significant additional resets.

Next question comes from the line of Todd Thomas with KeyBanc Capital Markets.

Just in terms of the tariff uncertainty that you cited and the decrease in container traffic, it seems like some of this is just lost business, but is there an impact on inventory levels as a result of this decrease in container traffic that you mentioned that might create some pent-up demand to the extent that there's improved visibility or if there's some change around tariffs here? How could this sort of play out in the quarters ahead?

Yes. The answer is yes. We were seeing consistent container volumes through July, fluctuating month-to-month, but overall it was steady. However, we experienced a decline through September, and that decrease is becoming more pronounced. A 20% drop in our western business unit is significant, and it is not due to new business but primarily because our seafood customers are delaying reorders. While they will eventually reorder for Easter, we do not anticipate that happening in the fourth quarter at this time.

Next question comes from the line of Nick Thillman with Baird.

Good morning, everyone. Just as we think about the excess capacity you all highlighted within the presentation, we’re hearing a lot from the food manufacturers on restructuring, rationalizing supply chains. I was wondering if there's anything Lineage has been doing on their own network, whether it be closing underutilized facilities or just rationalizing their footprint within the U.S. being a large player that could maybe close that gap with excess capacity we’re just seeing from a national picture.

Yes. Great question. There are two things going on with customers. The first big one, the huge impact over the last couple of years was the destocking from COVID. We think that's behind us, that's really good, back to normal inventory levels or bouncing across the bottom, but certainly, there's not more excess inventory that's being depleted at this point broadly. There are customers who have been optimizing their supply chains. Across my 30-year career, we are their partners in helping them position inventory properly to satisfy their customers' requirements and help them determine how much to store where and how to transport those products into our facilities and out to their customers. Tyson is a great example of that. We're right in the middle of their optimization, and we're the recipient of core business, given that optimization. We’re having those conversations with customers all the time. On the new supply as far as how it could come out, it's an excellent question. We've idled eight buildings so far this year; we know some of our competition has as well. We do that for obvious reasons. We take out the labor, we lower or eliminate the energy costs, and we’re able to move that business into the adjacent facilities. That’s part of the value of having such a large network. A lot of our competition doesn't have that opportunity. Some of our competitors are struggling, and we plan to assess these opportunities for consolidation. We think capacity will come out that way, and we are hearing directly from some competitors that they’re struggling in a big way, and there is even instances where companies will close their doors as well.

Next question comes from the line of Tayo Okusanya with Deutsche Bank.

Yes. Could you talk a little bit about sort of labor on your same-store pool, kind of pretty well managed; but on the non-same-store pool, have seen some kind of large year-over-year increases understanding you've added kind of new assets over time? But just kind of curious, are these new rule assets have, again, lower occupancy but are already fully staffed? What’s happening on the non-same-store side to have these really large jumps?

Yes, that's a good question. Regarding the non-same-store pool, I wouldn't concentrate too much on it because there are many developments happening. We currently have 25 buildings either in the process of being ramped up or under development. For example, in the labor aspect, we hire our General Manager, Assistant Manager, and supervisors before any inventory arrives at the facility. All these operations are at different stages of the J-curve, which means you will notice fluctuations in labor until they transition into the same-store pool.

And our last question comes from the line of Caitlin Burrows with Goldman Sachs.

I had a question on the pricing side. So one of the concerns I've heard from investors is that I think it's like half of your portfolio has 1-year agreements. So those were recently reset in '25. But for the other half, that means they are on leases from a few years ago. Maybe you could tell us how far back they go. But what's the risk of rent rollouts from those older contracts that were established a few years ago in '26? And is that incorporated into your view of low single-digit rate increases in '26? Or is that '26 low single-digit price increase only related to those 1-year agreements, and the rest could be an incremental headwind?

Great question. We don't see an overhang from long-term agreements that are going to get reset at lower levels. All of those are included in our projections of low single-digit net price increases.

Thank you. On behalf of the entire Lineage team, thank you for joining us today. We hope you will be able to attend our Investor Forum on Monday, December 8, where we will highlight our operational excellence and unique LinOS platform. We look forward to speaking with you again. Thank you, everyone.

Thanks, everybody.

Ladies and gentlemen, that concludes today's call. Thank you all for joining in. You may now disconnect.