Americold Realty Trust, Inc.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 3/5

Americold Realty Trust is a REIT focused on the ownership, operation, and development of temperature-controlled warehouses. The company provides a broad range of services and solutions to facilitate the safe and efficient movement of temperature-sensitive products through the global supply chain.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Americold’s core business is centered around the ownership, operation, acquisition, and development of temperature-controlled warehouses. This isn’t your typical warehouse real estate, because of the very specific requirements required to maintain controlled environments for perishable items.

The company operates through three main business segments:

  • Warehouse Segment: Encompasses the storage and handling of food and other temperature-sensitive products. This is the core function of their operations and generates the majority of revenues. They make a business by collecting, storing, and handling goods such as produce, seafood and other items, whilst maintaining them at their needed temperatures.
*  **Transportation Segment:** Involves moving customer products, primarily through third-party carriers. They are essentially a freight broker, coordinating the shipment of these perishable goods.

*  **Third-Party Managed Segment:** They manage warehouses for others, providing services on a contract basis.

Industry Trends: The temperature-controlled logistics market is experiencing several key trends:

  • Increased Demand: The need for cold storage is rising, due to changing consumer preferences, e-commerce expansion in food retail, and international trade in perishable goods.

  • E-commerce Growth: Rapid growth in e-commerce has led to increase demand in food products and grocery deliveries with a higher need for storage in temperature controlled facilities.

  • Technological Advancements: There are advancements in automation and data analytics are reshaping how companies manage their warehouses, with technology increasing speed and visibility in the supply chain.

*  **Supply Chain Disruptions:** Recent disruptions have made the need for resilient supply chain options more important, increasing the demand for temperature-controlled warehouses.

Competitive Landscape:

  • Fragmented Industry: The temperature-controlled warehousing industry is highly fragmented and still relatively small and local. There are few companies that can compete at a national scale with the breadth of operations that companies like Americold are able to maintain.
  • High Barriers to Entry: Building out large-scale networks requires large amounts of capital and takes years to develop a system and acquire necessary regulatory approvals. For smaller companies looking to break into the market, it’s not easy to get access to land and facilities to compete.

What Makes COLD Different?

  • Scale and Scope: Operates a large global network of temperature-controlled warehouses, giving a wide reach and large scale advantages to new customers. This is not only from a supply chain point of view but that it offers more variety in the kind of space offered and location in a certain market.

  • Strong Customer Relationships: They are a long established entity in this sector, they have long lasting relationships with their customers and most of their customer contracts are quite long term. This means that they are able to provide predictable and consistent cash flows and are not as susceptible to temporary market trends and changes.

  • REIT Structure: They operate as a REIT which requires them to distribute at least 90 percent of their taxable income to shareholders in the form of dividends. This implies that all earnings are passed down to shareholders.

  • In-House Transportation: COLD also offers transportation services (primarily through third party carriers), to compliment their storage abilities, which is a big value proposition for its consumers as its a one-stop-shop for a large part of their perishable goods transit needs.

  • Technology and Innovation: They also offer value add services using technological solutions, such as software for inventory, storage, and transportation tracking, which makes their services even more integrated and useful.

Financials In-Depth:

Income statement: * Revenue: Their primary source of revenue comes from providing storage for their clients, but also include transportation services. Warehouse revenues account for the most revenues and have been growing consistently. They also have increased transportation and third-party revenues over time, as they grow their customer base.

*   **Margins:** Their margins are not as high as a tech or software company due to high fixed cost operations and they are quite cyclical and have had a rough time navigating 2023 market conditions, with lower occupancies and rising operating expenses. They are however, recovering margins as utilization rates are improving and costs are being streamlined.

Balance sheet:

  • Assets: Their main assets are warehouses, machinery, software and other related technology systems to support their operations. Also, it includes trade receivables.
  • Liabilities: Their biggest liabilities are a combination of debt and lease liabilities to operate their facilities and equipment. They also use a variety of senior notes and revolving credit facilities to maintain a low cost of debt. They are highly leveraged which affects their ability to withstand downturns in their operations.
*   **Equity:** The shareholders equity is what is left after liabilities are taken away from assets. Stock is a major portion of equity that is given out to employees for incentives and also to investors.

Cash Flow: * They maintain a positive cash flow from operations but require constant capital expenditure for upgrades and improvements of their warehouses. As such, they are dependent on external capital for acquisitions and expansion efforts. They pay dividends to maintain their REIT structure and also make debt payments to keep up their financial responsibilities.

Recent Concerns/Controversies & Management’s Response:

  • 2023 Downturn: Management has addressed the market downturn of 2023 which has affected their top line, profitability, and ROIC. They mention that they have cut costs and optimized their operations during the year and the company’s focus on building a more lean and efficient operation has helped them improve margins in 2024 and they plan to carry on with such improvements.

  • High Leverage: They have relatively high leverage, which has been a concern during these times. Management has been trying to reduce it but still have a ways to go before debt levels will be where management wants them to be.
  • Disruptions in Customer Demand: They have faced temporary pull-back in customer demand, mostly attributed to their consumer side of business, due to external factors, but management expects that situation to improve in the second half of 2024.
  • Cyber Attack Incident: They faced a cyber attack in 2022, which cost them $25 million dollars, with much of the cost being allocated to cyber-security improvements. They have implemented new systems and training to protect the company and all its shareholders.
  • Long term contracts: They have to honor long-term contracts that were initiated earlier which put some downward pressure on their margins. However, in the future, management expects to benefit from improved rates in new customer contracts.

Moat Rating: 3 / 5

  • Narrow Moat: While Americold operates in a crucial and essential industry, its moat isn’t as robust as some other wide-moat businesses.
  • Location and Scale Advantages: Their scale combined with geographic density of distribution is hard to replicate in certain local markets, which gives them a narrow economic advantage. It helps them increase profits as their existing customers will have an incentive to utilize them more and new customers will tend to gravitate towards an already established and large network.
    • Barriers to entry are present: Competitors will have a hard time trying to beat their existing infrastructure. So, its a good business with defensive attributes.
  • Switching costs are high for some customers: This is because of a long term relationship with a customer or because they have a heavily integrated operations system with them.

However:

  • Industry Fragmentation: Though the scale and reach of COLD is large, they still face lots of competition from other warehouses in their various markets, leading to an industry that’s competitive on price.
  • Risk of Technological Disruption: The automation and other technological advances could make their current warehouses obsolete if there is a major technological change in their industry.
  • Location based Motes can disappear: As has been discussed earlier in the report, the location advantages that the company has in some regions might dissipate if new locations or routes become profitable, because it will be harder to create a moat in those areas.

Understandability: 3 / 5

  • Moderately Complex: The business is relatively simple to understand and they are in a mature and slow growing industry. The basics are easy to wrap your head around.
  • Complex Financials: It does have complicated financial statements due to its business operations in different geographies, and a number of complicated accounting standards because of its REIT structure.
  • Industry Jargon: The use of terminologies such as EBITDA, FFO, REIT, Core FFO, etc. may seem hard to understand for those not directly in this field. The different types of facilities they offer are not that difficult to conceptualize, but can be too much for the average investor to dig into.

Balance Sheet Health: 3 / 5

  • Leveraged Balance Sheet: The company uses quite a bit of debt to expand its facilities, leading to a relatively high debt-to-equity ratio, and has limited financial flexibility to grow further. They are vulnerable if revenues were to go down, because of their high debt payments.

  • Positive Free Cash Flow: They have a positive cash flow from operations, but they are not consistently generating a lot of free cash flow after investments in their warehouses.

  • Reasonable Cash Reserves: They still maintain a reasonable level of cash reserves to continue to fund operations and pay dividends.

  • REIT requirements: The required payouts for REIT structures, means that it is difficult to retain a lot of profits for debt paydowns.