The cold-storage industry is anything but cold right now. The Global Cold Chain Alliance estimates that the cold industry responsible for storing and transporting food and refrigerated products will see a 4% compounded annual growth rate from 2018 to 2022. CBRE Group, Inc. (NYSE: CBRE) found that nearly half of all U.S. consumers buy food products online, with the expectation that this number will rise by 20% by 2022.
Growing population sizes, consumer preferences shifting from in-store grocery shopping to more online grocery shopping, and recent food supply-chain interruptions have made consumers and suppliers more aware of the need for increased cold storage in order to meet demand.
Currently, there's an estimated 3.6 billion cubic feet of cold storage warehouses (214 million square feet). While there is no exact figure as to how much cubic square feet is needed to meet demand, the current supply isn't enough. According to CBRE, there are 21 new cold-storage developments that were either completed in 2019 or are currently underway. Certain barriers, like the high cost of entry and construction; specialized knowledge of the industry, like adhering to governmental regulations regarding food storage; and risk of oversupply makes investors keen on cold storage but hesitant to build.
Since cold-storage facilities require certain specifications that other industrial buildings, including dry storage warehouses, don't, it's a niche building that really only serves cold-storage tenants. For this reason, current developers typically only build a project if they have a tenant in place to reduce the potential risk of oversupply or sitting on an expensive up-front and ongoing investment.
That means those who control the space currently are set to be in the best position given the growing demand. Right now the two largest companies with controlled ownership of cold storage are Lineage Logistics, a privately held company making up 31.8% of the market share, and Americold Realty Trust (NYSE: COLD), a real estate investment trust (REIT), which owns 29% of the marketplace, with the remainder comprising smaller private companies.
Considering the largest supplier is a privately held company that receives funding from large hedge funds, the easiest way to participate in the rise of cold storage over the next several years and decade is by purchasing shares of Americold Realty Trust.
Americold Realty Trust owns 176 cold-storage warehouses with over 1 billion cubic feet under management. Its Q2 2020 results came in strong with a 10% increase in revenues, 6% increase in net operating income (NOI), and earnings across the board. These results aren't a surprise considering Q2 2020 was the peak of the pandemic when demand soared for cold storage and the company has recently completed several acquisitions providing a boost of new income.
Its low debt-to-earnings before taxes, interest, depreciation, and amortization (EBITDA) is 4.1x, meaning the company has a low balance of debt in relation to income. Its payout ratio of 77% means it's well positioned to maintain dividends even if there is a shift in supply and demand over the next several years.
This is a unique industry, and while there are several risks for it, the largest of which is oversupply, it's likely this industry will see major growth over the next few years.