While the Covid-19 pandemic has been a pure nightmare for many sectors, it has been a tale of two cities for the cold storage industry.

At the onset of the pandemic, investor appetite for this defensive, mission-critical asset class grew and prompted companies like Americold to go on the offensive, buying up competition to win new markets while strengthening existing ones.

This appetite appears to have eased up as logistical bottlenecks forced companies to reduce inventory levels, sapping demand for storage. Wage increases due to labor shortages have also compressed margins, further dampening investor appetite for the asset class.

Acquisition Spree

Competition between Americold and Lineage Logistics, the top two industry players with each having 20%+ of the U.S. market share, heated up as demand for online grocery purchases surged. Both clinched to gain market share by upgrading existing facilities and buying up smaller players, both domestically and internationally.

Property Map – Lineage Logistics (orange), Americold (green) / Source: Pelion Intelligence

Atlanta-based Americold closed on $2.6 billion acquisitions last year, including the $1.74 billion deal for Agro Merchants Group. This year, the company has closed over $800 million in acquisitions so far, $390 million of which was the recent purchase of Newark Facility Management, which closed in September.

Similarly, Novi-headquartered Lineage Logistics completed 38 acquisitions in 2020, adding temperature-controlled capacity in 11 countries. This year, the company completed six North American acquisitions, the most recent of which was Hanson Logistics in August, which earned it over 46 million cubic feet of capacity across Michigan and Indiana.

Tempered Demand

Supply chain disruptions driven by product and labor shortages are affecting producers in every industry and food production is no exception.

During its third-quarter earnings call, Americold reported that its survey showed customers were producing at 80%-85% of their capacity and do not expect inventory levels to normalize until the second half of next year.

With fewer pallets moving through its facilities, Americold’s physical occupancy has taken a hit, falling to a 5-year low of 68.8% during the second quarter of this year before rebounding slightly to 69.3% in the third, according to data tracked by Pelion. Americold’s Chief Commercial Officer Robert Chambers reported that this level of occupancy is indicative of the overall industry.

The rise in wages has also put pressure on cold storage providers. Americold had to increase wages by 8%-12% on average with some markets reaching as high as 20%. While the company expects to be able to pass this cost inflation on to its customers, the stock has taken a beating after the company revised its AFFO guidance downward by 15% for 2021.

Overall, however, cold storage fundamentals remain strong despite near-term headwinds. The indispensable nature of the service and limited supply of land near population centers are likely to continue to encourage investors to allocate more capital to the sector and top players like Lineage and Americold to continue their offensive play.

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