Americold Realty Trust (COLD) has stormed out of the gate since its IPO in 2018, with a 92% return based on share price appreciation alone. More recently, however, the performance hasn’t been too impressive. The shares have posted a -10% return on a 1-year basis, and in the past month, the shares have dipped by nearly 8%. I believe this presents a “buy the dip” opportunity on this quality company. In this article, I evaluate what makes Americold an attractive buy at the current valuation, so let’s get started.
(Source: Company website)
A Look Into Americold
Americold Realty Trust is a rather unique REIT that invests in cold storage properties across the U.S., and internationally in Canada, Australia, New Zealand, and Argentina. The majority of its properties (164 out of 185) are located in the U.S., and it has a presence in 39 states. It utilizes advanced technology to offer a comprehensive temperature-controlled storage and distribution network. The following graphic provides a good illustration on what Americold does. As seen below, Americold serves as the essential link between producers such as Unilever (UL) and Conagra (CAG) and end users such as restaurants, hospitals, schools, and retailers, such as Walmart (WMT) and Kroger (KR).
(Source: Company website)
Americold continues to demonstrate strong growth in the latest quarter (Q3’20), with revenue increasing by 6.7% YoY, to $497.5M. AFFO/share also grew impressively, by 11% YoY, from $0.27 in Q3’19, to $0.30 in the latest quarter. Internal growth remains strong, as same-store segment NOI increased by 7.9% YoY on a constant currency basis (8.1% actual). Management tightened 2020 AFFO/share guidance to $1.275 at the midpoint. This would represent a strong 9% YoY growth, from $1.17 in AFFO/share for the full year 2019.
Looking forward, I see a long runway for growth. This is supported by active build-to-suit projects that are currently underway in Connecticut and Pennsylvania for Ahold Delhaize (OTCQX:ADRNY), and by two additional development projects in Arkansas and Calgary, Canada, which are for Conagra, with a 20-year initial lease term. Additionally, Americold has made acquisitions and expanded its facilities in another part of Calgary, as well as New Zealand, and Tampa, Florida.
As the number two player in the cold storage sector in the U.S., with an 18.2% market share Americold is in an advantageous position to consolidate this sector. This is supported by Americold’s signing of an agreement in October to acquire Agro Merchants Group, which is the fourth-largest temperature-controlled warehouse company globally, and the third-largest in Europe, for $1.74 billion. This would expand Americold’s presence by 46 additional facilities in 10 countries, totaling 236 million refrigerated cubic feet, serving 2,900 customers. Plus, in November, Americold closed its acquisition of Hall’s Warehouse Corporation, a 95% occupied integrated cold storage operator, with eight facilities in New Jersey.
I see these acquisitions as adding value to Americold in a manner in which the consolidated entity is worth more than the sum of the individual parts. That’s because, as demonstrated in the earlier diagram, Americold operates in a space which has “the network effect”. This means that large owners with many complementary assets are in a better position to serve its clients. From the client’s perspective, it’s easier to work with one landlord in the cold storage supply chain, which may serve multiple upstream or downstream facilities of a client, than to work with multiple landlords. This differs from retail net lease REITs, in which each storefront is an endpoint, and are more or less independent from one another.
Meanwhile, Americold maintains a strong investment-grade rated balance sheet, with a BBB- rating from Moody’s and BBB ratings from Fitch and DBRS Morningstar. 89% of its debt is fixed rate, and the net debt-to-EBITDA ratio is 4.3x, which is below the 6.0x level that I generally consider to be safe for REITs. As seen below, Americold has a well-staggered debt maturity schedule, with no maturities until 2023.
(Source: Q3’20 Investor Presentation)
Plus, as seen above, the company maintains plenty of liquidity, which, at $1.6 billion, is comprised of cash and proceeds from equity offerings, and $779 billion in availability on its line of credit. As such, Americold has plenty of capacity for future expansion. Meanwhile, the 2.5% dividend yield remains well-covered at a 71% payout ratio.
It should be noted that as with all REITs, Americold is subject to interest rate risk, as a rise in rates would increase the cost of funding, and therefore dampen the company’s growth prospects. I don’t see this as a meaningful risk in the near term, as the Federal Reserve has indicated its intent to keep the benchmark short-term rates at zero percent until at least 2023. However, this is still something worth monitoring for the long term.
Americold serves as a critical link between producers and distribution endpoints, and continues to demonstrate strong growth, both internally and externally. Looking forward, I see a long runway for growth, as Americold is able to use retained earnings, and also tap debt and equity markets to consolidate the fragmented cold storage sector. As the number two player in the U.S., I see acquisitions and expansions as having the “network effect” in adding incremental value to Americold’s supply chain network.
At the current price of $34.13, and a P/AFFO of 26.8 (based on midpoint of 2020 AFFO/share guidance), the shares are not necessarily cheap. However, I find it to be reasonable, given Americold’s strong growth this year, and its long runway to consolidate the sector. In what I see as a vote of confidence from underwriters, they recently fully exercised their option to purchase 4.79 million shares at $38 per share, which sits higher than the share price today. Analysts seem to agree that the shares are undervalued, with a consensus Buy rating (score of 4.4 out of 5) and an average price target of $41.96. Buy for income and growth.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article is for informational purposes and does not constitute as financial advice. Readers are encouraged and expected to perform due diligence and draw their own conclusions prior to making any investment decisions.