Cold storage facility operator Americold Realty Trust reeled in expectations due to food production disruptions brought on by labor constraints and a continuation of COVID protocols.
Americold (NYSE: COLD) lowered its full-year 2021 expectations. Adjusted funds from operations (FFO) are now expected to be in a range of $1.34 to $1.40 per share compared to the prior guidance of $1.36 to $1.46 given the “unprecedented uncertainty in the food supply chain and challenges present in the labor market,” Marc Smernoff, CFO, said on a call with analysts.
Management had indicated on the first-quarter call in early May that throughput from food producers was improving and that food inventories would begin to move higher. A continued volume acceleration would be needed for the company to hit its guidance range. That didn’t happen as labor challenges intensified around the same time the government instituted enhanced unemployment benefits.
“The vibe [from food manufacturers] coming out of the first quarter was, hey COVID is starting to subside. The restrictions are starting to mitigate, we’re able to speed up our production lines, that’s great,” said Fred Boehler, president and CEO. “So there was a lot of optimism throughout the first quarter that things were going to start to really ramp back up. And then came the federal subsidy. It just slammed the labor market down.”
Revenue from the warehouse segment is now expected to be in a range of flat to 2% higher year-over-year (on a same-store and constant-currency basis) compared to the prior range of up 2% to 4%. Net operating income (NOI) is expected to be flat to 100 basis points higher than the revenue growth rate versus the prior forecast of 100 bps to 200 bps higher.
A recent survey of Americold’s customers concluded that the food suppliers it services are still only producing product at 80% to 85% of pre-COVID levels. Additionally, inventories remain thin and new product is sitting in an Americold warehouse for much shorter durations as consumer demand remains high, pulling product through the supply chain quickly.
Labor headwinds and stringent COVID safety protocols are the primary hurdles to higher food production rates but Boehler sees relief on the way as schools reopen, freeing up parents to return to work, and supplemental unemployment benefits (more than half of the states have ended the program already) end in September.
“As we look to the future, our food manufacturing clients are working diligently to return to pre-COVID production and inventory levels. We expect a gradual recovery, but based on feedback from our customers, we do not expect to get back to normalized inventory levels until mid-2022,” Boehler said.
The new outlook still implies growth as the Atlanta-based real estate investment trust reported adjusted FFO of $1.29 per share in 2020.
Throughput pallets increased 0.3% year-over-year on a same-store comparison in the second quarter of 2021, up 28.6% to 9.92 million including acquisitions and facility build-outs. Economic occupancy, which includes contracts with fixed commitments for space, declined 300 bps year-over-year to 75.2%. Physical, or actual, occupancy fell 530 bps year-over-year to 66.8% on a same-store basis.
Management said occupancy could step 100 to 200 bps higher in the back half as the labor market loosens.
Warehouse revenue increased 35.3% year-over-year to $504 million due to acquisitions and project completions (warehouse count increased by 65) as well as contract rate renewal increases. However, revenue was flat on a same-store and constant-currency comparison. Rent and storage revenue per economic pallet was up 1.9% excluding currency fluctuations.
The warehouse segment generated NOI of $144 million, 20.2% higher year-over-year, down 2.5% excluding facility additions and currency changes. Contribution margin was 360 bps lower at 28.7% on an absolute basis as inventory holdings declined and operating costs increased.
Table: Americold’s key performance indicators
Americold continues to grow its network through expansion, new developments and acquisitions. Since the end of the second quarter, it has completed one acquisition and entered into two other purchase agreements totaling $488 million.
The company ended the quarter with $1.3 billion in total liquidity and total debt of $2.9 billion, $2.6 billion of which is tied to real estate. Including the earnings before interest, taxes, depreciation and amortization expectations from recent acquisitions, net debt-to-pro forma EBITDA ended the quarter at 4.9x, up from 4.4x at the end of 2020 and 4.8x from the end of the first quarter.
“The manufacturers are all ready to produce and are wanting to produce at the higher levels to rebuild their inventories and to be able to provide good steady demand flow, but they can’t find the labor to do it,” Boehler said.
Shares of COLD were off 4.5% at 1:30 p.m. EDT on Friday compared to the S&P 500, which was up 0.2%
Americold owns and operates 246 cold storage facilities (nine in its third-party managed segment) with more than 1.4 billion cubic feet of space in North America, Europe, Asia-Pacific and South America.