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The industrial sector has been very popular as demand for warehouse and distribution buildings have driven rents higher.

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The rise of e-commerce has made industrial REITs the darling asset class for investors. One industrial REIT, Americold Realty Trust (COLD), is also growing strongly, but not due to e-commerce. COLD is the only publicly-traded REIT invested in cold-storage; the temperature-controlled warehouse segment.

After its IPO in 2018, COLD’s share price has risen more than 100%.

Where does this leave us now?

Cold storage industrial REITs

The U.S.

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industrial sector is experiencing rising rental rates and declining vacancy rates due primarily to the following factors:

  • Limited new construction and growing demand.
  • Positive economic tailwinds: trade growth, inventory rebuilding and increased industrial output.
  • Growth of e-commerce (transfer of retail tenants to warehouses).
  • Resurgence in domestic manufacturing.

Most of these factors are also true for the cold storage industrial market.

Cold storage is a temperature-controlled storage space.

The method is used by industries such as fisheries, aquaculture, horticulture, agriculture, processed food, and dairy.

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Cold storage systems and refrigerated transportation facilities, which connect the farm-level storage facilities, distribution outlets, and processing units, are estimated to improve the efficiency of the supply chain and reduce wastage of agricultural products.

The market is likely to witness considerable growth over the forecast period, owing to a combination of factors such as technological advancements in processing, packaging, and storage of seafood products.

Integrated refrigerated warehousing is poised to experience high growth.

The U.S. cold storage market size was valued at $15.26 billion in 2018 and is expected to expand at a CAGR of 3.7% from 2019 to 2025.

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The growth can be attributed to a number of key factors, such as technological advancements in packaging, processing, and storage of perishable food products and temperature-sensitive items.

Exhibit 1: US cold storage market

Increasing penetration of connected devices and presence of a large consumer base are the key trends bolstering market growth.

Furthermore, growing automation of refrigerated warehouses is anticipated to enhance the demand for the product. Automation in warehouse is achieved with the use of cloud technology, conveyor belts, robots, energy management systems, and truck loading automation. Integration of workforce management solutions for picking optimization & workforce forecast has led to reduced labor cost.

Cold storage operators are constantly upgrading their technology to stay ahead in the competition and ensure efficiency, integrity, and safety.

Despite high initial investments for automating warehouses, factors such as reduced labor and operational costs, improved productivity, fewer warehouses accidents, and improved order accuracy help in decreasing the overall cost.

Cold storage is an integral part of supply chain management and transportation & storage of temperature-sensitive products.

Growing trade of perishable products is expected to drive the market.

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Industry players are increasingly adopting alternative energy solutions, such as wind and solar energy, to minimize the overall operating costs.

Exhibit 2: US cold storage market

Based on the construction type, the market has been segmented into bulk storage, production stores, and ports.

The production stores segment led the market, in terms of revenue, in 2018 and is expected to maintain its position the coming years.

The bulk storage segment is anticipated to expand at a CAGR of 11.2% from 2019 to 2025.

This type of warehouse is suitable for storing fruits and vegetables in bulk and can be used to extend the availability of the other bulk materials, such as flour, cooking ingredients, and canned goods, protecting them from spoilage and keeping them away from direct sunlight.

The ports segment is also likely to witness significant growth.

Constructing refrigerated warehouses near ports can help simplify the customs procedures required for import and export of temperature-sensitive products.

Improvements in efficiency and automation have widened the gap in operating performance between older and newer cold storage facilities.

In the past few years, operators in the industry have implemented new technologies, such as high-speed doors, energy-efficient walls, automated cranes, and cascade refrigeration systems, to increase efficiency and to reduce operating costs.

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For instance, adoption of automated cranes has enabled operators to pile goods at greater heights, leading to an increase in average building height of newer facilities.

Rising investments in larger facilities have led to an increase in capacity by more than 40.0% since 2000. Moreover, due to increased international trade and consumer spending, cold storage operating profits have significantly increased in the last five years.

Low interest rates have also enabled operators to finance new constructions.

Americold’s management continues to expect that demand will rise steadily with population and consumption growth. In addition, consumer preferences continue to shift towards healthy, perishable food.

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Manufacturers are supporting this demand through the introduction of new products and reformulations of old. This increases the need for temperature-controlled storage.

Cold storage has become a lucrative investment opportunity for real-estate and private equity firms as these firms understand the dynamics of leasing business. Moreover, refrigerated warehouse facilities benefit from less elastic demand as the demand for food and pharmaceutical products remains unchanged regardless of a country’s economic condition.

Americold Realty Trust

Americold is the world’s largest publicly traded REIT focused on the ownership, operation and development of temperature-controlled warehouses.

Based in Atlanta, Georgia, Americold owns and operates 176 temperature-controlled warehouses, with over 1 billion refrigerated cubic feet of storage, in the United States, Australia, New Zealand, Canada, and Argentina.

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Americold’s facilities are an integral component of the supply chain connecting food producers, processors, distributors and retailers to consumers.

Exhibit 3: Food supply chain

Cold storage is quite specialized, requiring expensive brick and mortar at a cost several times that of a traditional warehouse. This creates a big barrier to entry.

So what’s the cost to build a cold storage facility or network to get established?

There are many factors involved, some of which have highly variable rates: land, licensing, materials, specialist contractors, proven equipment. The need for robust insulation is a given, but did you know facilities operating rooms with frozen temperatures often need to pump glycerol through the floors to stop the ground from freezing and heaving upwards?

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A temperature-controlled logistics center is much more than a warehouse in a blanket. Construction costs can be 50% or more higher for a standard, non-automated, temperature-controlled facility when compared to a traditional warehouse.

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It can be an expensive business.

On the supply side, significant barriers to new development remain in play according to Americold’s management.

Americold controls about 26% of the US market. The market leader is Lineage Logistics with almost 30% market share. US Cold Storage is number three with a market share of 8.5%.

Exhibit 4: Market shares

During the third quarter, Americold received an investment-grade rating of Baa3 with a stable outlook from Moody’s.

This rating, combined with the BBB ratings from Fitch and DBRS Morningstar, significantly reduces Americold’s cost of capital.

It reduces the annual spread on the $475 million term loan from 145 basis points to 100 basis points, resulting in $2.1 million in annual interest savings.

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Additionally, the annual spread on the $800 million revolver which at the end of the quarter was not drawn is reduced from 145 basis points to 90 basis points, resulting in significant interest savings when the revolver is being utilized.

Also, as a result of this rating, Americold moved to a flat 20 basis point facility fee on its revolver.

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Assuming an undrawn revolver, this results in $1.2 million in annual interest savings.

Industrial REIT sector

Compared to the average REIT, industrial REITs have lower debt ratios and a slightly lower payout ratio and hence a higher dividend safety.

This justifies that industrial REITs trade at a premium to the average REIT.

Exhibit 5: Dividend safety

The premium or discount at which REITs trade can give us an indication of expected growth. The equity markets have a strong preference for higher levels of NAV growth, and at times when this exists, they price REITs at premiums to NAV. When real estate value growth is more muted, short-term focused equity investors look elsewhere leading to REITs trading at a discount.

When a REIT’s equity price is trading above the value of its real estate, it can issue shares to raise capital in the secondary market and acquire properties accretively.

Growth is more difficult for REITs with share prices trading at a discount to their NAV.

The expected growth of industrial REITs is higher than that of the average REIT.

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This is another reason why industrial REITs should have a higher valuation.

Exhibit 6: Expected growth

REITs in general are fairly valued. Industrial REITs trade at a premium to the average REIT, but they deserve to do so because of the higher dividend safety and expected growth. Industrial REITs in general are currently also fairly valued.

Exhibit 7: Valuation

Valuation

After the stellar performance since its IPO, COLD trades more expensively than the average industrial REIT.

Exhibit 8: Valuation

Compared to the average industrial REITs, COLD has lower debt ratios and a lower pay-out ratio.

This justifies that COLD should trade at a premium to the average industrial REIT.

Exhibit 9: Dividend safety

COLD is trading at a premium to NAV as is the average industrial REIT.

The expected growth of COLD is, however, lower than the average industrial REIT. This is a reason why COLD should trade at a discount to the average industrial REIT.

Exhibit 10: Expected growth

All-in-all, Americold deserves in our opinion a valuation in line with the average industrial REIT sector.

Three drivers of expected return

Returns can be decomposed into a set of building blocks:

1.

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Income Return

2. Earnings Growth

3. Multiple Expansion

When we look at Americold, the income return (or dividend yield) is low at 2.3%, earnings growth will be okay but not stellar, and the expectations for multiple expansion (or change in valuation) are rather low.

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All-in-all, not an outlook that gives us warm feet.

Conclusion

Americold performed very well since its IPO in 2018. This results in a low dividend yield of 2.3% and a valuation above that of the industrial REIT sector.

Demand for cold storage will only rise in line with population and consumption growth.

Limited growth, a low dividend yield and little or no room for multiple expansion should temper investor expectations for Americold.

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).

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I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor.

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