This Once Red-Hot REIT Remains Ice Cold

Americold Realty Trust (COLD 0.07%) burst on the scene in 2018. The cold storage-focused real estate investment trust's (REIT) stock price nearly doubled in value during its first two years as a public company. However, it has cooled off considerably since then, falling almost 40% from its peak. 

Unfortunately, a turnaround doesn't appear imminent. That's apparent from the industrial REIT's recent first-quarter results.

The headwinds continued

Data source: Americold Realty Trust.

On the bright side, Americold Realty delivered double-digit revenue growth, driven by acquisitions, recently completed expansion and development projects, contractual and market-driven rate increases, and the timing of Easter. However, the ongoing pandemic and related supply chain issues continued to impact its operations as food production hasn't been able to keep up with steady demand, affecting throughput across its network. As a result, occupancy declined year over year despite a positive boost from the timing of Easter in the quarter.

Those headwinds, along with labor shortages and wage and other inflationary pressures on nearly all categories, weighed on the REIT's margins, causing NOI to barely budge. Meanwhile, surging sales, general, and administrative costs caused its AFFO to tumble. AFFO was down even more on a per-share basis because of a surging share count caused by acquisitions and equity compensation.

Image source: Getty Images.

Battling the headwinds

The company discussed the steps it's taking to offset the issues impacting its operations on the first-quarter conference call. George Chappelle, who became the permanent CEO in February, stated: "We have made great progress in repricing our warehouse business to offset inflationary pressures in our cost structure. As a reminder, exiting the first quarter, we committed to recover all known inflation incurred through the end of 2021, which I am pleased to say we have achieved." 

The company's ability to push through price increases is helping offset some of its inflationary pressures. However, there is a bit of a lag. Chappelle noted:

We have seen inflation continue to rise and we expect that trend to continue. Our pricing initiatives are ongoing and are targeted at addressing the incremental inflationary pressures that have arisen during the quarter. We will exit the second quarter at a run rate covering all known inflation incurred through the first quarter.

Another area the company is working to address is labor. Americold is trying to hire more permanent workers. Chappelle pointed out that before the middle of last year, "we were staffed at approximately 70% permanent hours to 30% temporary hours in our warehouse portfolio." However, because of the challenging labor market, that ratio moved closer to 60/40. It's working to get back to its prior mix. That should help improve its customer service, productivity, and efficiency.

Overall, the CEO noted that future improvement across four key issues should help improve its NOI and drive AFFO per share growth. He said:

The four prerequisites for seeing NOI contribution dollars returned to pre-COVID levels are: first, we need to continue our current pricing initiatives to offset inflation; second, we need to integrate and fully commercialize recently added same-store facilities; third, we must achieve the proper mix of perm-to-temp hours ratio; and finally, we need occupancy and throughput volume to recover to pre-COVID levels.

The company is making progress on passing inflation-related increases to its customers and hiring more permanent workers. However, there aren't yet any signs of an industry recovery, so it could be a while before occupancy and throughput volumes rebound. That will impact its legacy facilities and its ability to commercialize recently added locations. While the company believes a recovery will occur -- Chappelle noted on the call that there's unmet customer demand -- it can't predict when that might happen.

Ice cold market conditions

The pandemic has upended the food production supply chain, impacting the demand and utilization of cold storage facilities. That market condition shift exposed some weaknesses in Americold's business model, which has weighed on the shares. While the company is working to fix some of its issues, it needs the market to heat back up again to maximize the value of its facilities. Given that there's no hint of a recovery on the horizon, this REIT could continue to languish.