03/18/22 02:05 PM EDT

REITS DAILY BRIEF | COLD REMAINS TOP SHORT IDEA | 3.18.22 | (COLD)

Rob Simone, CFA

@HedgeyeREITs

Takeaway: Investors should prepare for sub-$1.00/share AFFO in FY22 - SHORT IT

Hedgeye Cartoon of the Day: BEARBELL SHRUG

Ticker: COLD

Subsector: Industrial / Logistics

Headline: New management team has set a terrible bar for themselves

Following Best Idea Short COLD's 4Q21 results and FY22 outlook provided by the new management team, we are in a place where the risk/reward on the short side may actually be MORE ATTRACTIVE here than when we first added as a short in Summer 2021. The inaugural earnings call was a depressing, uninspiring disaster where new management literally said they have no idea when the fundamental backdrop for the cold chain will improve. At the same time, they set the FY22 warehouse constant FX SSRev growth range absurdly narrow at only 200bps wide (flat-to-down -2%), and called for SSNOI growth to come in flat to +200bps higher vs. the top line. That math candidly makes absolutely no sense in a world where labor (~70% of opex) could be up +8% to +10% this year, virtually guaranteeing total SSExp up +4% to +5% on the year. This would obviously drive SSNOI growth below SSRev growth. We think management has set a scenario for a likely massive earnings miss and guide down for the second consecutive year. Short the stock.
Although eye-popping at first glance, we think warehouse constant FX SSNOI could realistically decline -8% to -10% this year given the operating leverage in the business, which would likely send FY22 AFFO below ~$0.90/share. We are modeling FY22 AFFO of $0.87/share vs. consensus at $1.05/share and the company guiding to $1.00 to $1.10/share.
COLD has over ~$300 million of development spend to fund over the next ~18 months which would normally be funded through ATM/secondary issuance. With each move lower in the stock, raising the requisite external capital obviously becomes more expensive and dilutive. We have not modeled in any acquisition activity this year, which would obviously increase the uses of funds. We think net debt/EBITDA leverage could approach ~7x this year before recovering to sub-6x in FY23. Not an existential issue by any means, but we do not believe investors are thinking enough about external funding requirements amidst a really tough operating environment.
We would highlight that Europe represents ~8% of NOI and has operated at over ~80% economic occupancy, significantly higher than the mid-70% level in North America which continues to see ongoing (and in some cases increasing, bird flu outbreak in the Midwest for example) throughput challenges. For sensitivity purposes, if Europe economic occupancy were to fall towards ~70% amidst the Russia/Ukraine-induced food supply chain turmoil, that could represent up to an incremental ~100bps of total occupancy headwind.
Thinking through the potential downside here, a miss and guide down of this magnitude heading into and amidst a deepening Quad 4 could send the forward EBITDA multiple (currently ~25x, see Figure 1 below) towards the range seen when the company IPO'd in 2016. Confidence in the business model (which by the way, does NOT deserve an industrial multiple) and new management team would likely collapse. Applying 16x to "normalizing" FY23 EBITDA of ~$520 million (vs. a trough number) results in a $19/share stock price, for nearly ~30% downside from here. We think the stock price could be heading south of $20/share, and are actually MORE concerned than late-2021 about the fundamentals.
The risk here on the short is activist and/or M&A activity, which is hard to handicap given the lack of depth in the cold storage market outside of Lineage. We think that is likely more of a 2H22 story, however.