COLD - Americold: Have Your Grocer Pay You Back Maintain 'Buy'

2023-09-20 16:35:27 ET

Summary

• Americold Realty Trust, Inc. has bucked the trend of share price declines and has the ability to adjust prices more readily than other REIT classes.
• The company has experienced growth in same-store NOI and is well-positioned to consolidate the sector and strengthen customer relationships.
• The stock is reasonably attractive at present for growth investors who would like to own essential real estate in the food supply chain.

Supply chain disruptions and inflation have thrown a lot of companies off their game over the past couple of years, but things may finally be turning the corner for some, as in the case of Americold Realty Trust, Inc. ( COLD ), as I noted back in June.

I had a "Buy" rating on the stock back then, and it appears that it’s paid off, with the stock giving investors a 5.2% total return since my last piece, surpassing the 2.5% rise in the S&P 500 (SP500) over the same timeframe. In this article, I discuss recent developments and highlight why growth investors ought to consider the stock at present, so let’s get started.

Why COLD?

Americold is a global leader in temperature-controlled logistics real estate and value added services. At present, it owns and/or operates 242 temperature-controlled warehouses across North America, Europe, Asia-Pacific, and South America. As shown below, COLD serves as an essential link between producers and end markets.

Unlike many of its peers, COLD has bucked the trend of share price declines this year due to higher interest rates, as reflected by its 15.5% price appreciation over the past 12 months, as shown below.

That’s likely because investors understand that COLD can more readily adjust the prices it charges customers than say a net lease real estate investment trust, or REIT, which has long-term leases that are around 10 years, with rent escalators that are sometimes capped. At the same time, the labor shortages and wage inflation that plagued the company last year appear to be normalizing.

This is reflected by global warehouse segment same store NOI rising by 13.8% YoY during the second quarter, far surpassing the 3.9% rise in same store revenue on a constant currency basis. That’s because COLD is seeing higher property-level margin due to lower operating expenses. This also contributed to the 17% growth in same-store NOI during the first half of the year. As shown below, COLD’s SS Rent & Storage Margin has recovered to 65.4%, sitting 280 basis points higher than where it was last year.

This has helped to put COLD back on its growth trajectory, with constant currency NOI growth now surpassing its pre-pandemic rate, as shown below.

As the largest player in the niche space, COLD has opportunities to consolidate the sector and build upon its leadership position. This further strengthens COLD’s positioning due to the network effect and existing relationships with leading food producers such as General Mills ( GIS ), Kraft Heinz ( KHC ), Smithfield, Conagra ( CAG ), Unilever ( UL ), and Tyson Foods ( TSN ), to name a few.

Americold’s tenants are likely to stick with the company as it grows, as its top 25 customers have been with the company for an average of 37 years , and 100% of them utilize multiple facilities and nearly all (92%) utilize COLD’s value-add activities. In fact, COLD is developing a facility for Conagra and 2 automated facilities for grocery giant Ahold Delhaize ( ADRNY ) that will serve 750 stores in the U.S.

All three facilities are expected to generate attractive NOI ROIC in the 10-12% range. Ahold is the 2 ^nd largest grocer in the world with BBB+/Baa1 investment grade credit ratings from S&P and Moody’s, and upon completion, will become a top 25 customer for COLD.

Meanwhile, COLD carries sufficient liquidity of around $500 million, a BBB rated balance sheet by Fitch (Baa3 by Moody’s), and no debt maturities until 2026. Plus the majority (80%) of COLD’s debt is at fixed rates, and 93% of debt is unsecured, which gives COLD more financial flexibility.

Risks include potential vulnerability of the workforce to tough winter COVID season, which could drive down productivity and increase costs. In addition, a higher for longer interest rate environment introduces debt refinancing risk as debt matures in 2026 and beyond. While only 6% of COLD’s debt matures in 2026, 33% of debt matures in 2027, but I would expect for management to extend maturities in advance should high interest rates remain sticky.

Lastly, while COLD may appear to be pricier today than before, it still remains well off the $40-level from 2021. At the current price of $32.57, COLD trades at a forward P/FFO of 31. While that may seem pricey on the surface, this valuation could be justified as COLD appears to be back on track to grow for the aforementioned reasons.

Analysts expect to see 13% to 23% annual FFO/share over the next two years, and annual growth in the low teens thereafter. This could support meaningful dividend growth down the line. Meanwhile, investors are paid a 2.7% yield that’s covered by an 85% payout ratio.

Investor Takeaway

All in all, Americold Realty Trust, Inc. looks to be back on track for growth offering upside and potential dividend growth down the line. As the largest player in the space, it's well-positioned to capitalize on its network effect as it consolidates the sector with high ROI projects, while enjoying sticky customer relationships. Lastly, investors are paid a meaningful dividend yield to wait for the potential upside to this growth story. As such, I'm maintaining a "Buy" rating on the shares.

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