Summary
- Americold Realty Trust has had some disappointing returns in recent months, even as the company continues to grow its top line.
- Bottom line results are mixed and the business is trading at rather lofty multiples.
- I was previously too bullish on the firm and have managed to revise down my expectations as a result.
Buying into a quality company can be a great way to generate attractive returns over the long haul. Having said that, paying too high a price for that company can result in lackluster results in the near term. Although I didn't buy the company I'm about to discuss, that message otherwise applies to the topic of this article. Last year, one business that I found to be attractive in the REIT space was Americold Realty Trust ( COLD ). Although the company continues to generate strong upside from a revenue perspective and most of its profitability metrics are encouraging, shares have not performed particularly well because of how pricey the stock currently is. Although the stock is perhaps fairly valued or even slightly undervalued compared to similar firms, this doesn't change the fact that this is an expensive space to play in. In all, my findings have led me to decrease my rating on the company from a ‘buy’ to a ‘hold’, reflecting my belief that returns achieved by the company are more likely than not to match the returns of the broader market for the foreseeable future.
Putting my enthusiasm on chill
One really interesting niche in the warehousing space, in my opinion, involves temperature-controlled warehousing. Certain products just require temperatures to be at certain levels in order to remain in good condition for the end user. As its name suggests, Americold Realty Trust specializes in precisely that. Last year, I wrote an article about the company wherein I ended up writing it a ‘buy’. I based this off of strong fundamental performance achieved by management. But I said at the time that shares of the company were pricey, but not outrageously so if growth for the firm were to persist. Since the publication of that article, shares have not performed particularly well. While the S&P 500 is down by 11.2%, shares of Americold Realty Trust have generated a loss for investors of 18.5%.
Given this return disparity, you might think that the overall fundamental performance of the company was suffering. But that's not the case. Consider, for instance, how the company finished off its 2021 fiscal year. For that year, sales came in at $2.72 billion. That's 36.8% higher than the $1.98 billion the firm generated just one year earlier. By all accounts, that is tremendous upside. One of the key drivers for the company then as now, has been its willingness to acquire other properties. Last year alone, the firm purchased eight different assets, the largest one being its acquisition of Newark Facility Management in New Jersey for $391.4 million. In all, 98.8% of the revenue increase the company saw from its warehouse operations in 2021 came from acquisitions.
With rising revenue should also be seen rising profitability. Operating cash flow did manage to decline year over year, falling from $293.7 million to $273.1 million. But if we adjust for changes in working capital, it would have risen from $291.4 million to $329.2 million. We should also pay attention, of course, to other profitability metrics. For instance, FFO, or funds from operations, grew from $157.3 million in 2020 to $232.8 million last year. On an adjusted basis, this metric increased from $267.9 million to $299.5 million. Meanwhile, EBITDA for the company also improved, climbing from $425.9 million to $474.5 million.
Growth on the top line has continued into the current fiscal year. Total sales for the first six months of the 2022 fiscal year came in at $1.44 billion. That compares favorably to the $1.29 billion generated the same time one year earlier. Interestingly, this came even as the number of warehouses the company has decreased by 1 to 249. Management attributed the increase to a combination of factors, with the largest being the company's pricing strategy and rate escalations. They also benefited to some extent from a rise in occupancy. But of course, acquisitions were also a key factor in this, namely acquisitions that were made last year that did not have therefore impact felt on sales until this year.
This increase in revenue has brought with it some mixed profitability. Operating cash flow, for instance, has risen from $127.8 million in the first half of last year to $133.2 million the same time this year. If we adjust for changes in working capital, it would have risen from $160.7 million to $166.4 million. FFO rose from $101.2 million to $111.7 million, while the adjusted figure for it managed to decrease from $147.7 million to $142.7 million. What also saw a decline was EBITDA, which fell from $236.1 million in the first half of 2021 to $231.1 million the same time this year.
When it comes to the 2022 fiscal year as a whole, management does have some plans . For starters, they do plan to fuel additional growth in part through starting development on new projects. Total investments on this front should be between $100 million and $200 million. Regardless of the impact this should have on sales, the company is forecasting adjusted FFO of between $1.00 and $1.10 per share. At the midpoint, this should translate to roughly $310.9 million. If we apply that same growth expectation to other profitability metrics, we should get FFO of $241.7 million, adjusted operating cash flow of $341.7 million, and EBITDA of roughly $402.6 million.
Using these figures, valuing the company is a breeze. On a forward basis, the company is trading at a price to adjusted operating cash flow multiple of 23.7. The price to FFO multiple is 33.5, while the price to adjusted FFO multiple is 26. Meanwhile, the EV to EBITDA multiple for the company should be 22.5. As you can see in the chart above, these numbers are all lower than what the company would be trading at if we used last year's results. As part of my analysis, I used the data from 2021 and compared that data to the results of five similar firms. These results can be seen in the table below. But the general conclusion here is that, in three of the ways the company is trading near to the low end of the scale. The fourth scenario has it being the most expensive of the group.
Company | Price / Operating Cash Flow | Price / FFO | Price / Adjusted FFO | EV / EBITDA |
Americold Realty Trust | 24.6 | 34.8 | 27.0 | 23.3 |
EastGroup Properties ( EGP ) | 25.1 | 25.6 | 22.8 | 31.4 |
First Industrial Realty Trust ( FR ) | 16.8 | 24.5 | 32.0 | 23.8 |
STAG Industrial ( STAG ) | 15.7 | 15.0 | 17.2 | 18.5 |
Rexford Industrial Realty ( REXR ) | 37.5 | 34.7 | 40.9 | 39.5 |
Terreno Realty Corporation ( TRNO ) | 35.0 | 34.2 | 49.9 | 38.3 |
Takeaway
At this point in time, Americold Realty Trust seems to be doing fairly well from a fundamental perspective. It would be nice if profitability metrics were not mixed. But beyond that, the company is a solid operator. Growth continues to be particularly appealing on the top line, but that doesn't make the company a great prospect to buy into right now. Yes, shares are cheaper than some similar firms. But on the whole, the company is a bit lofty. In all, I would say that my prior decision to rate the company a ‘buy’ was perhaps a bit too optimistic. As such, I've decided to decrease my rating on it from that to a ‘hold’.
For further details see:
Americold Realty Trust: Lowering My Expectations