Happy Sunday, everyone! The NY Giants stink and things are looking dicey for the Yankees, so we wanted to take our minds away from the sorry state of New York sports and shift the focus to the sorry state of the U.S. cold storage industry ahead of our Best Idea Short Black Book on COLD this Thursday, 10/7 at 12:30pm ET. As we have dug in further on the story an interesting dichotomy has emerged: on the one hand, the long-term thesis for COLD and its scarcity factor in the public REIT market is REALLY interesting, but on the other hand the U.S. "cold chain" is a complete mess right now and it seems likely we will be talking about the challenges well into FY22. There is nothing structurally wrong with COLD or its model per se (other than poor messaging / being too aggressive on its outlook), rather its operating model, exposure to the labor and production issues in the cold chain and heavy reliance on non-fixed commitment contracts (including from rolling up recent large acquisitions) make the company uniquely vulnerable right now.
We have spoken on The Call about how numbers need to come down. When we first added COLD to the Short Bench on 8/24 consensus AFFO estimates were hovering around the ~$1.50/share range. Post-15% guidance reduction FY22 numbers have moved -10% lower to ~$1.35/share. As shown in Figure 1 below, our model suggests an additional -7% downside to FY22 estimates with the Street still too aggressive, after which we forecast a +15% recovery in FY23 AFFO to the low-to-mid $1.40/share range. Growing off a lower basis drives more divergence from consensus in FY23. The FY22 estimates actually incorporate +3% SSNOI growth in the Warehouse segment on a constant-FX basis driven by 2H22 results, along with ~$800 million of additional acquisition activity next year + schedule development deliveries. So it is possible that even we are being too aggressive depending on the length and severity of the labor and cost issues in cold storage. Zooming out, however, numbers have been relatively slow to come down and STILL and need to drop further, and the stock cannot be owned on the long side until expectations fully rest. The signal remains Bearish Trade/Trend. We will go through this all in more detail on Thursday.
Figure 1: Hedgeye vs. Consensus COLD AFFO Estimates
Please call or e-mail with any questions.
Rob Simone, CFA
Managing Director
Twitter: @HedgeyeR
