Americold Realty Trust — Q2 2019 Form 10-Q
Business context and period: This unaudited quarterly report covers the three and six months ended June 30, 2019. Americold is a temperature-controlled warehouse REIT operating 178 facilities with approximately 1.1 billion refrigerated cubic feet across the U.S., Australia, New Zealand, Argentina and Canada. It also manages third-party facilities, provides transportation services and owns a limestone quarry.
Financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $438.5 million | $394.7 million | $831.5 million | $785.8 million |
| Operating income | $29.1 million | $49.3 million | $45.5 million | $85.2 million |
| Net income | $4.9 million | $29.4 million | $0.3 million | $20.8 million |
| Diluted earnings per share | $0.03 | $0.20 | $0.00 | $0.14 |
| Operating cash flow | Not separately stated | Not separately stated | $79.8 million | $76.9 million |
- Q2 revenue rose 11.1%, while operating income fell 41.0% and net income fell 83.4%. Six-month revenue rose 5.8%, while operating income and net income declined substantially.
- Revenue growth primarily reflected acquired facilities and, in the warehouse business, improved customer mix, commercial terms and rate escalations. Q2 warehouse segment contribution (NOI) increased 25.3% to $113.8 million; its margin rose to 33.7% from 31.6%. These are non-GAAP operating measures.
- Q2 results included $18.0 million of acquisition, litigation and other charges, $0.9 million of impairment, and $2.7 million in unused bridge-loan commitment fees. Six-month impairment charges were $13.5 million. The prior-year six-month period included a $21.4 million debt-extinguishment charge and an $8.4 million gain on real estate sales.
- Q2 warehouse same-store physical occupancy was 72.5%, down from 75.0%; economic occupancy was 76.7%, down from 78.2%. Higher revenue per occupied pallet and operating efficiencies supported same-store NOI growth despite lower occupancy and throughput.
Balance sheet, debt and liquidity
- At June 30, 2019, total assets were $4.16 billion, cash and cash equivalents were $320.8 million, and restricted cash was $6.4 million.
- Debt principal was $1.73 billion, or $1.71 billion net of deferred financing costs, compared with $1.36 billion principal at year-end 2018. Total liabilities were $2.31 billion. The filing reports no debt outstanding on the $800 million revolving facility at quarter-end; $29.2 million of letters of credit were issued under it.
- The weighted-average effective interest rate on total debt was 4.89% at June 30. Debt maturities include approximately $741.0 million in the year ending June 30, 2023. The company reported compliance with debt covenants.
- Six-month investing cash outflow was $1.45 billion, primarily reflecting business combinations; financing cash inflow was $1.49 billion, including approximately $1.21 billion of net proceeds from the April share offering and $350 million from a new 4.10% senior unsecured note issuance. The $100 million revolving-credit draw was repaid during the period.
- A 100-basis-point increase in market rates was estimated to increase annual interest expense by approximately $3.8 million, after accounting for the $100 million interest-rate swap.
Material developments, outlook and risks
- Americold acquired Cloverleaf Cold Storage on May 1 for approximately $1.25 billion and Lanier Cold Storage for approximately $82.6 million. It acquired PortFresh in February for $35.9 million. Cloverleaf and Lanier purchase-price allocations remained preliminary. Management cited network expansion, customer relationships, growth opportunities and potential synergies as strategic benefits.
- The April 2019 follow-on offering generated approximately $1.21 billion in net proceeds and funded the Cloverleaf acquisition. An additional 8.25 million shares under a 2019 forward sale agreement had not initially generated proceeds and were expected to settle within one year. A separate 2018 forward agreement covered 6 million shares; after quarter-end, its maturity was extended to September 18, 2020. Settlement could increase share count and dilute earnings per share.
- Management described ongoing efforts to improve productivity, energy efficiency and operating processes, and a transportation strategy shift away from certain low-margin services. No specific company-wide financial guidance or quantified full-year outlook is provided in the supplied filing text.
- Key exposures include acquisition integration and realization of synergies, customer contract renewals and concentration, occupancy and storage rates, labor and power costs, interest rates, foreign currency movements, financing access, and environmental and real-estate risks. One customer represented more than 10% of revenue; much of that customer’s managed-services revenue was reimbursed pass-through cost.
- Americold disclosed ongoing Kansas settlement-agreement litigation and a Preferred Freezer Services lawsuit seeking injunctive relief and damages. The company disputed the allegations; it said a liability for the PFS matter could not be reasonably estimated. Management did not expect these matters to have a material adverse financial impact.
- Approximately 58% of the workforce was covered by collective bargaining agreements; agreements covering about 2% of employees were due to expire in the second half of 2019. The company was integrating acquired businesses’ controls, which it expected to include in its 2020 internal-control assessment.
Important facts for investors to verify
- Whether Cloverleaf, Lanier and PortFresh deliver expected integration benefits and operating returns, and how final acquisition accounting changes goodwill and intangible assets.
- Whether declining same-store occupancy and throughput stabilize, and whether higher pricing and improved margins persist.
- How recurring acquisition, integration, litigation and impairment costs affect reported earnings relative to supplemental FFO and EBITDA measures.
- Debt maturities, covenant headroom, variable-rate exposure, and the timing and dilution impact of both forward sale agreements.
- Developments in the PFS and Kansas litigation, customer concentration and renewals, and collective bargaining negotiations.