AMERICOLD REALTY TRUST quarterly report, Q3 FY2020

Americold Realty Trust — Q3 2020 Form 10-Q

Business context and period. This filing covers the quarter and nine months ended September 30, 2020. Americold is a temperature-controlled warehouse REIT. At quarter-end it operated 185 warehouses with more than one billion cubic feet of refrigerated capacity and held a 14.99% interest in a Brazilian joint venture operating 21 warehouses. The quarry business was sold July 1, 2020.

Financial results

Amounts below are in millions, except per-share data and percentages.

Metric	Q3 2020	Q3 2019	Nine months 2020	Nine months 2019
Total revenue	$497.5	$466.2	$1,464.0	$1,297.7
Operating income	$37.5	$39.4	$141.7	$84.9
Net income	$12.4	$27.1	$68.5	$27.4
Diluted earnings per share	$0.06	$0.14	$0.33	$0.15
Cash from operating activities	Not separately reported for the quarter	$227.2	$151.9

Quarterly revenue rose 6.7%, while net income fell about 54%. Operating income declined despite revenue growth; depreciation, amortization and other expenses increased.
Nine-month revenue increased 12.8% and net income more than doubled. Results included a $21.4 million gain on real estate sales in 2020; the prior-year comparison included a $7.4 million income tax benefit and a $4.3 million gain from selling a partially owned entity.
Warehouse segment contribution (a company-defined, non-GAAP measure) increased 12.7% in Q3 to $127.8 million, with margin rising to 32.9% from 31.0%. Nine-month contribution rose 17.8% to $374.7 million.
Adjusted FFO, another non-GAAP measure, was $62.7 million in Q3 versus $52.4 million; nine-month Adjusted FFO was $191.0 million versus $154.8 million. The company cautions that these measures are not substitutes for GAAP income or operating cash flow.

Balance sheet, debt and liquidity

At September 30, cash and cash equivalents were $173.9 million; restricted cash was $7.4 million. Total assets were $4.62 billion and total liabilities were $2.51 billion.
Debt principal was $1.84 billion ($1.83 billion net of deferred financing costs), up from $1.71 billion at year-end 2019. Weighted-average effective interest rate was 4.13% at quarter-end. The company reported compliance with all debt covenants.
The 2020 credit facility includes an $800 million revolving facility, with no revolver borrowings outstanding at quarter-end; $21 million of letters of credit were issued. The revolver matures in 2024, with two possible six-month extensions.
Nine-month investing cash outflow was $611.7 million, primarily reflecting acquisitions and $241.6 million of additions to property and equipment. Financing cash inflow was $323.3 million, including equity proceeds and term-loan financing. Cash, cash equivalents and restricted cash declined $61.2 million from the beginning of the year.
Common-share distributions declared were $0.63 per share for the first nine months, versus $0.60 in 2019. Shares outstanding at September 30 were 203.7 million, compared with 191.8 million at year-end 2019.

Operating changes and management commentary

Q3 warehouse revenue grew 6.1%; acquisitions contributed substantially, alongside contractual rate escalations and fixed-commitment storage growth. Grocery demand remained elevated, while protein and food-service activity and throughput were affected by pandemic-related disruptions.
Same-store economic occupancy was 78.6% in Q3, down 13 basis points year over year; physical occupancy fell 442 basis points to 70.3%. Same-store throughput declined 3.9%, partly offset by higher services revenue per throughput pallet.
Management reported no significant COVID-19 operating disruption through the period but cited elevated labor, sanitation and protective-equipment costs, operational inefficiencies and uncertainty about future effects.
Transportation revenue declined 4.5% in Q3 as the company exited certain international business; nine-month transportation contribution increased 4.3% as the mix shifted toward more profitable services. The managed segment’s Q3 revenue increased 19.9%, largely reflecting higher managed-site volumes and reimbursements.
Capital spending included maintenance expenditures of $45.3 million and expansion and development expenditures of $174.6 million for the first nine months. Projects included automated facilities, Atlanta redevelopment, Savannah and New Zealand expansions.

Outlook, transactions and risks

The filing gives no specific full-year earnings or revenue guidance. Management expected available cash, operating cash flow, equity programs and debt financing to support working capital, capital spending, debt service, distributions and growth, while noting that COVID-19 could affect funding availability or cost.
After quarter-end, Americold agreed to acquire Agro Merchants for $1.74 billion, with closing expected late Q4 2020 or early Q1 2021, subject to conditions and approvals. Planned funding included equity forward proceeds, debt and 14.2 million shares issued to sellers. The company warned of closing, integration, customer-retention, lease, European-market, financing and REIT-qualification risks.
Americold completed the Halls Warehouse acquisition for $480 million on November 2, 2020, initially funded through its revolver and equity forward contracts. It also priced €750 million of senior unsecured notes, expected to close in December 2020.
Material legal matters include a Fenway lawsuit alleging damages exceeding $400 million and related Preferred Freezer litigation; Americold denies the allegations and states that potential liability cannot be reasonably estimated. A separate employment class action was settled for $2.5 million. Management said it did not expect other described proceedings to materially affect the company.
Other risks include customer defaults or nonrenewals, foreign-exchange and variable-rate debt exposure, labor and power costs, environmental and workplace-safety obligations, and acquisition and development execution. The filing reports a significant customer representing more than 10% of revenue; much of that customer’s managed-services revenue is reimbursed at matching expense.

Important facts for investors to verify

Whether same-store occupancy, throughput and customer demand recover, and how pandemic-related costs and service mix affect margins.
Agro acquisition closing, final financing and dilution, integration costs, customer and lease retention, and continued REIT qualification; also the effects of the completed Halls acquisition.
Debt capacity, covenant headroom and liquidity after acquisitions and planned development spending; the filing does not provide a clear value for remaining revolver availability after quarter-end transactions.
The status and potential exposure of the Fenway and Preferred Freezer cases, for which the filing says liability cannot be reasonably estimated.
Future cash generation relative to maintenance and growth capital spending, distributions, and the company’s use of equity issuance and forward-sale agreements.