Americold Realty Trust (COLD 0.48%) burst onto the scene a few years ago. The cold-storage-focused real estate investment trust (REIT) went on a blistering run following its initial public offering (IPO) in 2018. The stock rose from its IPO price of $16 per share to more than $40 per share by the middle of 2020, a more than 125% surge.
However, the industrial REIT has cooled off considerably since then, falling more than 35% from its peak. Here's a look at what has been weighing on the stock and whether it can heat back up again.
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Value-destroying empire-building
When Americold Realty went public in early 2018, the REIT owned 160 temperature-controlled warehouses with roughly 1 billion cubic feet of storage space in the U.S., Canada, Australia, New Zealand, and Argentina. Today, the industrial REIT owns 250 facilities with about 1.5 billion refrigerated cubic feet of storage across North and South America, the Asia-Pacific region, and Europe. It's now the second-largest cold-storage operator globally, with 5.8% of the global market share.
Americold Realty spent billions of dollars to expand its portfolio over the past few years. Notable deals included 2019's $1.24 billion purchase of Cloverleaf, the fifth-largest cold-storage operator in the U.S., and 2020's $1.74 billion deal for AGRO Merchants Group, the fourth-largest player globally.
While these deals have grown Americold's size, they haven't increased shareholder value. The company's portfolio is 50% larger than it was at the IPO. That's driven up its adjusted funds from operations (AFFO) by 75% on an absolute basis. However, AFFO per share has fallen from $1.18 in 2018 to $1.15 last year. The culprit here is an astounding 282% increase in the outstanding share count to fund its expansion, significantly diluting existing investors:
COLD Average Diluted Shares Outstanding (Quarterly) data by YCharts.
Debt has also risen sharply. The company ended 2020 with a ratio of net debt to core earnings before interest, taxes, depreciation, and amortization (EBITDA) of 6.1, well above the 4.3 ratio at the end of 2018. That higher leverage is adding to its interest expenses.
On top of that, Americold has been facing significant headwinds from the global supply chain issues in recent years. That's keeping inventory levels down, weighing on its occupancy and margins. Those headwinds and recent lower-margin acquisitions have Americold estimating that AFFO per share will decline even further, to a range of $1.00 to $1.10 per share, in 2022.
Can this once red-hot REIT heat back up again?
With Americold's empire-building not creating value, the REIT's board decided to make a change last year: It fired its CEO and appointed three new trustees. One of those new trustees was George Chappelle, the former chairman of the board of AGRO Merchants Group. He has over 35 years of logistics, supply chain, and information technology experience in the food-and-beverage and consumer-packaged-goods industries, including executive roles with Tyson Foods, The Kraft Heinz Company, and Sara Lee Foods. Americold initially appointed him as interim CEO, a title the company made permanent in early 2022.
The leadership change is a hopeful sign that the company can get back on track. Ideally, Americold's new leadership will shift its strategy away from empire-building and toward growing shareholder value. The company needs to refocus its efforts on improving the operations of its existing assets to maximize their value for shareholders. It also needs to make smarter investments instead of growing for the sake of growth, which has been the case over the past year, given the lower margins of recently acquired assets.
Another hopeful sign that the company could turn things around is the outlook for the cold-storage segment. According to a report by real estate services company JLL, the industry isn't building enough refrigerated warehouse space to meet rising demand from online grocery shopping. Even though construction should reach $18.6 billion in value by 2027, growing at a 13.8% annual rate, that won't be enough to build the storage space needed to satisfy the demand for fresh food.
This forecast bodes well for Americold's future. First, its existing properties should experience rising occupancy levels and rental rates. In addition, the company should be able to invest money to develop new properties. It currently has $581 million of projects under construction, including four expansions and four developments. The REIT estimates that it could invest more than $1 billion in the future to support the need for more refrigerated space. If the company focuses on making returns-focused investments and acquisitions, it could create significant value for shareholders in the coming years as industry fundamentals improve.
A lot is riding on new leadership
Americold Realty's growth strategy hasn't created any value for investors, because the REIT issued dilutive stock to fund its acquisition spree. The hope is that its new leadership will shift gears from expanding the portfolio to growing shareholder value. If management does so, this stock could heat up again, especially as demand for cold storage rises in the coming years.
