Description

Americold (COLD)

Americold is the world’s second largest cold storage platform, with 1.5 billion cubic square feet of storage space globally. The company has two segments: a high margin dry warehousing business, like other traditional industrial REITs, but with more specialized cooling equipment to maintain refridgerated temperatures in the warehouse, and a lower margin but high-barrier of entry service business that provides supply chain management and services to its tenants. One can simplify the warehousing business model to look like a traditional real estate landlord relationship (occupancy x leasing rates) less typical operating expenses (property taxes, utilities, insurance, etc.), and its service business cash flows are based on throughput (how much inventory gets turned inside the warehouse over a specific period of time) x pricing, with the main operating expense being labor.

The company’s share price has underperformed the broader REIT index and industrial REIT peers for the past three years due to a combination of factors. Cyclical issues including labor price inflation, declining food demand and production volumes have hit both revenue and expense growth, while more idiosyncratic issues including a cyber attack, c-suite management turnover, and poor investor communications have amplified underperformance. The compounding of these issues have led to market capitulation, just as cold storage fundamentals begin to positively inflect and COLD’s idiosyncratic issues become tailwinds in the form of easy comparable periods. It is likely that COLD will have three quarters of “beat and raises” and I forecast 2024 FY AFFO/sh of $1.48 versus its guidance of $1.42, which in turn will lead to a rerating of the company’s share price. Said differently, it seems the market is overly punitive today, applying a trough multiple on troughing earnings. In addition, COLD’s primary competitor, Lineage, is rumored to be preparing an IPO shortly, which I believe to be an overhang on COLD’s share price due to forced selling by certain shareholders to create capacity - but should be removed upon that transaction occurring. Assuming COLD trades at 17x EBITDA, still 14% below its average in 2019 (chosen to normalize for its IPO overhand in 2018 and covid-related impacts between 2020-2023), I get to a price target of $42/sh by the end of 2027, representing a 65% premium to the current share price, and a 17.6% IRR / 1.77x MOIC, including dividends.

High Quality Business with Defensive Growth Characteristics

- COLD is one of the global leaders in temperature controlled warehouses. Cold storage is a moated business due to its core function for food production, while supply chain services are necessary for customers to better manage food supply. Demand drivers in cold storage are stable over time, with food consumption growing in-line or slightly above GDP supported by a combination of population and pricing growth

- COLD is one of two large scaled platforms that together control 46% of cold storage in the US, and 17% globally. Scale is an important barrier to entry as their size allows customers to coordinate food production and processing across a large footprint, thereby providing complicated and technical operational services that smaller operators wouldn’t be able to compete against.

Fundamentals in Cold Storage are Beginning to Inflect

- On the back of food price inflation particularly accelerating since 2022, consumer demand has waned, which has resulted in lower volume throughput for COLD. Today, early signs from food producers have indicated that throughput volumes have reached trough levels, which should result in volume inflection in 2H 2024. COLD on its Q1 earnings call mentioned that throughput volumes achieved positive year over year growth for the first time in several quarters, which is earlier than expected

- Protein producers, among the more cyclical food categories within cold storage, have commented that volumes are set to inflect positively in 2H of 2024 based on customers demand and production cycles

Easy Comparable Periods Creates Upside to Guidance

- Throughput volumes grew positively year over year in April, while management is holding flat volumes for the rest of 2024 despite signs that throughput will continue to improve throughout the year

- A cyber attack in Q2 2023 created a ~$15mm quarterly revenue headwind to earnings. Management has not accounted for a return to normalcy in their earnings guidance despite these costs largely being recouped based on customer demand returning to prior peak

- Cost controls measures over the past three quarters have resulted in Q1 2024 warehouse service NOI margins reaching 10.7% (typically one of its weaker seasonal quarters), while full year guidance is only 9%. Conservativity was included in the guide due to a new ERP system being put in place during March, but early reports have indicated there to be no slow down in productivity. The beat was due to signficant cost cuts that were achieved much earlier than expected. For reference, in the beginning of this year, mgmt expected the company to get to only 9% service margins in Q4 2024 (its strongest seasonal quarter). COLD will likely continue to be the beneficiary of a softer job market, which adds to the defensive nature of the business.

Model Assumptions / Valuation

- Storage business assumes return to 65% NOI margins (achievable given COLD's ability to grow "fixed commitment" i.e. take or pay contracts to 54% of revenue from 37% of revenue 3 years ago), and rent growth near historical averages. 2024 forecast specifically based on managements commentary that economic occupancy should decline 0-100 bps and pricing grow 3-4% YoY - which I am taking at face value)

- Service business price and volume in 2024 slightly better than management commentary, and NOI margins at 9.8% for the full year vs guidance of 9%. For context, COLD did 10.7% in Q1 based on signficant cost cuts that should be mostly sustainable.

- One notable component that contributes to COLD's above average earnings growth is the stabilization of three automated developments (~10% stabilized yields vs market cap rates of ~6.5%, very good use of capital). A major reason for COLD's selloff after Q4 earnings was due to the "miss" on AFFO/sh, which was primarily due to these developments taking longer to stabilize. I think that was overly punitive given that earnings growth is still likely to occur, just one year later.

Risks

- Food demand continues to be low and throughput margins remain muted, resulted in lower warehouse services and storage revenue growth

- COLD’s development pipeline takes longer to stabilize, which will impact 2025 and beyond earnings growth rates

- Other unknown idiosyncratic issues will cause investors to lose confidence in management’s projections based on a prior history of unforeseen misses to guidance

Catalyst

- Lineage IPO

- Earnings release

- Food production volumes return to normalcy