Americold Stock Is Becoming One Of The Best Buys In The REIT Universe (NYSE:COLD)

This article was coproduced with Leo Nelissen.

Current times are challenging for real estate investment trusts, or REITs.

There’s no doubt about it.

REITs are in a tough spot, as the mix of potentially prolonged elevated interest rates and sticky inflation puts pressure on some REITs. After all, most REITs do best when inflation is low and subdued rates allow for cheap financing.

For example, the Vanguard Real Estate ETF (VNQ) has been unable to gain meaningful upside momentum after peaking in December 2022. Back then, the long bond started to gain downside momentum due to rising rates.

While this is unfavorable for investors with real estate exposure – I’m obviously one of them – it opens up new opportunities.

After all, when do we want to buy more REITs? When stock prices are red-hot, or when the market has seemingly lost interest?

I can obviously only speak for myself, but when it comes to investing, I want to buy assets when others are looking the other way.

That said, in real estate, I’m a picky investor. I’m picky in general, but especially in sectors with low entry barriers. I want companies with fantastic business models and secular growth tailwinds.

That’s where Americold Realty Trust, Inc. (NYSE:COLD) comes in, the largest public owner of cold-storage facilities.

Since its IPO in 2018, the stock price has been a disappointment. This is no surprise. After an initial surge to $37 per share, the stock has been sold off along with the broader REIT sector, pressured by investors betting on weakening fundamentals in the warehousing industry.

The good news is that COLD is doing just fine. The company, which is now yielding close to 4%, has a well-covered dividend, fantastic operations with long-term growth opportunities, a healthy balance sheet, and a great valuation.

It also has our Strong Buy rating.

While it may take time until the market recognizes the value many REITs bring to the table, investors can use weakness to their advantage.

Now, let me walk you through the details!

The End Of A Boom?

One of the hottest places in real estate was warehousing. This applied to giants like Prologis (PLD), Rexford Industrial Realty (REXR), and cold storage-focused Americold.

Now, this trend is slowing down.

As reported by The Wall Street Journal on April 12 (emphasis added):

“Now, Wood sees signs rents are flattening nationwide and even ticking down in some logistics-heavy markets like Southern California that were effectively sold out for years. Warehouse owners remain wary about publicizing lower rents, but there are more deals to be had and concessions being offered, he said.”

Moreover:

“But in mid-2022 companies began pulling back on inventory restocking, and now they are delaying decisions to lease distribution centers amid high interest rates and an uncertain retail economy, said Dustin Burke, leader of the supply-chain practice at consulting firm Boston Consulting Group.”

While rents remain well above average, we’re seeing some normalization, which is causing investors to take some money off the table.

Luckily for long-term investors, this opens up new opportunities.

Why Americold Is So Special (Mission Critical!)

Americold isn’t just a random warehouse operator.

No, it owns high-value cold-storage warehouses. The kind of warehouses that are needed to support the food supply chain. This makes COLD a “mission-critical” REIT.

Going into this year, the company operated a global network of 245 warehouses covering roughly 1.5 billion cubic feet. 197 warehouses are located in North America.

In addition to being “mission-critical,” these warehouses are strategically located in key logistics corridors, serving as integral components of the “cold chain” infrastructure that maintains the quality and safety of the food we eat.

It owns roughly 75% of its warehouses, which gives it better control over its assets. It also adds safety to customers who need to have long-term visibility.

With that said, 94% of its net operating income (“NOI”) is generated from its warehouse operations, with the remaining 6% coming from third-party management operations (services provided for customer-owned facilities) and transportation, including brokerage services to complement the warehousing segment.

After all, we’re not dealing with tenants looking for quick and handy self-storage boxes, but food corporations requiring reliable storage.

These customers include major producers like Smithfield, Conagra, Kraft Heinz, Unilever, Safeway, Sprouts, Ahold, and others. To them, reliable storage and efficient supply chains are what sets them apart.

In fact, the company has roughly 3,800 customers and a market share of almost 20% in its industry.

Moreover, it not only enjoys stable revenues due to predictable rents but also strong relationships with its biggest tenants.

It has a weighted average relationship length of more than 35 years with its biggest 25 tenants. Of its biggest 25 customers, 15 have investment-grade balance sheets, while most come with additional revenues, including transportation.

A Steadily Growing Business With Subdued Financial Risks

Diving a bit more into the details, we find that Americold had an 83.7% occupancy rate in its fourth quarter. This was a slight decline compared to the occupancy rate of 84.2% in 4Q22 due to counter-seasonal inventory builds.

The overall trend of demand remains strong, with a full-year occupancy rate of 84.3% – a company record.

Moreover, rent and storage revenue from fixed commitment contracts increased to $577 million compared to $420 million in the fourth quarter of 2022. In fact, 52.2% of rent and storage revenue came from fixed-commitment storage contracts.

The 52.2% number is a great development, as it was just 39% in 2Q21.

Why?

Historically, providers of temperature-controlled warehouse space operated on an as-utilized, on-demand basis, where customers paid for storage as they used it.

However, Americold actively seeks to transition towards fixed commitment contracts, which offer several advantages for both the company and its customers, including more stable revenues and better visibility.

The benefit for customers is guaranteed space.

It’s like a big parking lot.

If you don’t reserve a spot, you may have lower costs if you need parking only a few times a year. However, if you really depend on it, you may not get a spot.

Moreover, despite some headwinds from lower power surcharges, the company saw 3.4% higher rent and storage revenue per economically occupied pallet in the fourth quarter. Even better, service revenue per throughput pallet saw a 9.1% improvement.

Moreover, the company maintains strong margins, with higher same-store NOI growth compared to the pandemic years.

Going forward, the Global Warehouse segment anticipates same-store constant currency revenue growth of 2.5% to 5.5%, supported by factors such as pricing initiatives, contractual escalations, and market-based pricing strategies.

It expects 1-3% lower volumes, resulting from weaker consumer demand.

Additionally, same-store constant currency NOI growth is projected to be in the range of 6.5% to 10.0%, indicating operational efficiency and effective cost management.

On top of this, the company is expanding its footprint through new assets and valuable partnerships.

For example, the company announced plans to build distribution centers in Kansas City and Dubai, with ongoing expansions in Spearwood, Australia, Dubai, and Allentown, Pennsylvania.

In this case, it is crucial to keep in mind that the company has a current development pipeline exceeding $1 billion, with a focus on “build-to-suit” projects, as it only expands if it has enough demand. Building cold-storage warehouses without commitments is just too risky.

It also has partnerships, including a deal with Canadian Pacific Kansas City (CP), which has become the only Class I railroad combining all three North American nations through its own network after the merger between Canadian Pacific and Kansas City Southern.

This deal allows COLD to build and operate cold-storage facilities on strategic nodes within CPKC’s network, meaningfully lowering supply chain costs and reaching new customers.

With all of this in mind, it helps that COLD has a stellar balance sheet, providing safety for investors and room for future investments.

As we can see below, the company has no maturities in 2024 and 2025, which buys a lot of time in the current environment of elevated rates.

Even better, it has roughly $800 million in liquidity, which mainly consists of undrawn credit from its credit facility, which comes with a rate premium of less than 90 basis points (above SOFR).

A rate this attractive is a strong vote of confidence from lenders, confirmed by an investment-grade credit rating of BBB from Fitch.

Moreover, 92% of its debt is unsecured. 88% has a fixed rate, with a weighted average remaining term of 5.3 years.

All of this bodes well for shareholders.

Terrific Shareholder Value

COLD pays a $0.22 per share per quarter dividend. This translates to a yield of 3.9%.

The dividend is protected by its healthy balance sheet and $1.37 in expected 2024 adjusted funds from operations (“AFFO”), as analysts expect 8% AFFO growth after 14% growth in 2023.

This indicates a 64% payout ratio.

While COLD comes with a juicy yield, the dividend has not been hiked since March 11, when the company hiked its dividend by 4.8%. The company has mainly been focusing on expanding its business, which I expect to pay off handsomely in the years ahead.

Why?

That’s because COLD has elevated expected growth rates.

Using the FactSet data in the chart below:

• COLD is expected to grow its per-share AFFO by 14% in both 2025 and 2026 after potentially growing it by 8% in 2024.
• The company trades at a blended P/AFFO ratio of just 17.2x, which is below its long-term normalized P/AFFO ratio of 26.7x.
• In this case, the long-term P/AFFO ratio needs to be taken with a grain of salt. After all, COLD went public in 2018, which means we have a limited history to work with, including multiple years of subdued rates and elevated euphoria in the warehousing industry.
• However, even applying a 20x AFFO multiple would give COLD a fair stock price of $35, which is roughly 60% above its current price.

The problem is that market participants are not yet willing to buy, as COLD shares are down 26% year-to-date!

On the one hand, I cannot blame them. We are likely in a higher-for-longer inflationary environment, which will require the market to adjust its longer-term outlook for REITs – among many other assets.

On the other hand, COLD’s valuation has come down a lot, it has a mostly anti-cyclical business model, and lasting secular growth tailwinds on top of strategic initiatives that are poised to keep growth rates elevated.

While it may take a while until COLD gets the valuation it deserves, it offers good value and a yield that pays investors to “wait.”

Personally, I’m looking to buy COLD as well, as I currently own supply chain plays like Canadian Pacific Kansas City, and believe that it would be a terrific addition to my wide-moat dividend growth portfolio.

Takeaway

In a challenging REIT landscape, Americold Realty Trust emerges as a standout opportunity.

Despite market volatility, its unique position as a “mission-critical” provider of cold-storage facilities, robust balance sheet, and steady growth prospects make it an attractive buy.

While short-term fluctuations may keep investors at bay, those with a long-term view can capitalize on its undervaluation and attractive dividend yield.

Pros & Cons

Pros:

• Mission-Critical Asset: Americold owns high-value cold-storage warehouses, making the company essential for the food supply chain—a “mission-critical” advantage.
• Steady Growth: With a global network of strategically located warehouses and strong customer relationships, COLD maintains stable revenues and offers long-term growth opportunities.
• Financial Stability: COLD boasts a healthy balance sheet, low debt maturities, and ample liquidity, providing safety for investors and room for future investments.
• Attractive Dividend Yield: COLD’s 3.9% dividend yield has become very attractive, supported by its robust financials and expected AFFO growth.

Cons:

• Market Volatility: Short-term fluctuations in the REIT market may impact COLD’s stock price.
• Limited Dividend Growth: While COLD’s dividend yield is attractive, the company has not increased its dividend recently, as it focuses on expanding its business—a trade-off for future growth.
• Sector Dependency: COLD’s performance is closely tied to the health of the warehousing and logistics sector, which may be prone to economic downturns or disruptions in supply chains.
• Cybersecurity: Disrupting events could hurt the company’s relationship with customers. While this is a low-probability event, the critical food supply chain is a national security issue.