Warehouse REIT Exec Fred Boehler Takes Us Behind Americold’s Freezer Door

As the head of the Atlanta-based real estate investment trust Americold, America’s largest owner and operator of temperature-controlled warehouses, Boehler knows he’ll never own anything as glamorous as a Midtown office tower or a luxury condominium building. But that hasn’t dampened the REIT’s prospects in the slightest. Since Americold debuted on the New York Stock Exchange in January, the company’s stock has risen 27 percent to a market cap of more than $3 billion, with shares trading as of Monday at $21.90.

Look at the fundamentals, and rosy expectations for Americold begin to look pretty darn rational. Technological challenges and sky-high expenses—the company’s electricity bill last year at its 158 facilities totaled about $90 million—present high barriers to entry for potential competition. And whether consumer tastes shift towards buying groceries, eating out or ordering from Amazon, someone will always have to keep all that food cold until it gets to the table.

During a visit to Lower Manhattan last month to ring the NYSE’s opening bell, Boehler stopped by Commercial Observer’s offices to give us the lowdown on Americold’s deep freeze.

Commercial Observer: So, cold storage. How big is Americold, and how big is this industry?
Fred Boehler: Worldwide, Americold owns just under a billion cubic feet. [That’s equivalent to 100 million square feet of space with 10-foot ceilings.] We’re the world’s largest and have a 4.5 percent market share. So you can do the math. It is a huge industry, and in particular, we focus on the food sector. That’s primarily what’s coming through our warehouses, and at multiple temperatures: everything from ice cream that’s stored at -20 degrees [Fahrenheit] to most of your frozen foods that might be at zero degrees to fresher meats and deli that might be 32 or 28 degrees. But the same assets can be used for chemicals, pharmaceuticals, for flowers and for some metals.

What’s your geographic reach?
We are international, but the majority of our assets are here in the U.S. We have 158 assets worldwide, and 140 of them are here. Our other markets are Australia, New Zealand, Argentina and Canada.

Why does it fall to a specialized company to do cold storage?
The vast majority of product you see in a grocery store in a temperature-controlled environment comes through someone like us. The manufacturers, like Nestlé, Conagra, Kraft and Heinz, these guys don’t have their own storage facilities. They outsource all of that. The reason they outsource is, first of all, that temperature-controlled infrastructure is very expensive. And number two, there’s a technical aspect to the business, in understanding what different products need to be stored at which temperatures, and what products can be commingled. You need to know how to take product off a manufacturing line when it’s warm and bring it to a frozen temperature without degrading the quality of the product or having it crystalize.

Walk me through your role in the supply chain.
It helps to think about what happens to a potato. Whether it’s your French fries at McDonald’s, or the Ore-Ida tater tots you buy in the grocery store, most of that product is being manufactured in Idaho. In Idaho, you’re going to find big manufacturers like McCain, Simplot and Lamb Weston that have major manufacturing infrastructure to do the processing, the coating, the breading and all of that. Attached to that facility, either with a tunnel, a shared wall or maybe across the street, is a facility that Americold owns and operates [rented out by the food manufacturer]. So we take that product hot off the line and bring it to whatever temperature it needs to be stored at—that might be zero, or 10 degrees, or whatever. That product is then stored in our facility.

So this business takes you far off the beaten track of major commercial real estate markets.
Right. You’re talking about Burley, Idaho; Ontario, Ore.; Sikeston, Mo; Sebree, Ky.; that middle part of the United States is where all the food is manufactured. From that site, we are then distributing those goods forward to your major logistics corridors that you would be more familiar with: Chicago, Atlanta, Dallas, Los Angeles.

What happens next?
At those sites, I now have the French fries, but I also have the Johnsonville sausages, the Tyson chicken, the Butterball turkeys, the SmartOne Lean Cuisine meals, all these different types of products. So now I have multiple tenants in a distribution center. From that point, we’re distributing that product to a retail distribution center, like ShopRite, and in some cases, we own and operate [infrastructure at the] retail center. So from there, instead of a full pallet of that Tyson chicken, we’re taking three cases off and sending it to one store, and taking two cases and sending it to another. So this isn’t really last mile the way you’d think about it from e-commerce, but we also do that work.

So you’re really involved in the supply chain from start to finish.
The infrastructure required from the point of manufacture to the point of consumption is all ours. Whether you’re eating at a restaurant, you’re shopping at a grocery store or you’re having it delivered to your home, all that product is coming through our infrastructure to that final point.

Who owns the other 95 percent of this industry?
We’re the only [real estate investment trust]. You kind of have a hodgepodge out there: It’s a very fragmented industry. You have people that have passed [a cold-storage warehouse] down from generation to generation, a niche warehouse, and they might own one that’s been in the family for four generations. Most operators have from two to five warehouses. Forty-eight percent of all the space in the U.S. that’s temperature controlled is managed by someone that has seven or fewer assets.

Why don’t manufacturers build and operate their own facilities?
It’s because of the cost. As a manufacturer, where do you want to play your capital? You’re going to deploy it in the manufacturing process itself, and on the merchandising and marketing to get it to retail. And then you have the retailers, who are spending all their money on their storefront. So we’re in the middle connecting all those dots.

How did Americold build an expertise in this very niche sector?
Number one, Americold is 114 years old. The company has been around for a long time and it’s taken many different shapes and directions over those years. And if you look at our management team, we come from all walks of life. I did that intentionally. [Elsewhere], most of the people grew up in the industry in the temperature-controlled space. But I’m a supply-chain guy. I came from grocery retail, and then I was with Borders, and then I worked at Newell Brands and Rubbermaid. So I’ve been in manufacturing, retail, specialty retail and grocery. We’ve brought in people from retail, from food manufacturing, and from private equity, so we’ve really cross-pollinated if you will. We have industrial engineers, and we have our own IT staff in-house, so we’re kind of a full-service shop. Our approach with our customers is design, build and operate. So we’re going to come in, look at what your needs are, analyze the movement of your goods, and then give you a proposed solution. We design it, and then we build that infrastructure, which might be an expansion or a build-to-suit. And then we’re going to operate it. The beauty is that it’s one team. We’ll design something that can truly be operated.

Is that a problem for others in the sector?
The old traditional model is that you might hire a consultant like McKinsey or Currie to come in and do a design. You pay them, and then they walk away, and then someone else builds it and you have to find someone else to operate it. You usually get a lot of [confusion] trying to figure out who did what and why things don’t work. We’re all integrated.

What are some of the technical challenges in running one of these facilities?
Think of a 450,000-square-foot distribution center. If that distribution center is required to be at zero degrees, it has to be at zero degrees in every nook and cranny: on the sixth level of a rack, up in the ceiling, all the way down to the floor and all the way to the corners. There’s a lot of technical expertise in maintaining our engine rooms and making sure we know when we need to have all the compressors operating. The science of maintaining that temperature [is complicated].
And there’s more sophistication beyond that. The association that [oversees] this world is called the Global Cold Chain Alliance. They have a scientific board made up of 13 professors from different universities around the world that study this stuff and determine the best temperature for chicken to be frozen at—as well as beef, and different types of fish. How do you blast-freeze it? There’s so much science around it, and a lot of people don’t understand that. They think you just pop it in your freezer and it’s all good.

Is the technology fundamentally the same as in a household freezer?
No, it’s ammonia systems, not little Freon packets. When you open and close your freezer door at home, the temperature is changing plus or minus two or three degrees. If you’ve got kids, they leave the door open for a few minutes, and it’s worse. We can’t do that. So we have high-speed, rapid doors. When a forklift goes in, the doors have to close rapidly right behind it. A lot more goes into controlling the temperature.

What would happen if the temperature were a degree or two off?
Ice cream is a great example. Ice cream needs to be stored between minus 10 and minus 20. Most of the manufacturers want it at minus 20. So it’s minus 20 degrees in [our warehouse], and it needs to go in a truck that’s minus 20, and then kept in the freezer at the store at minus 20. But when you get home, your freezer is at zero degrees. And if you don’t eat it pretty quick, it crystallizes after a week, and it’s kind of nasty. But it sat in our freezers and went through our supply chain for maybe two months and maintained perfect quality.

And what are your challenges on the logistics side?
In the temperature-controlled world, everything has a lifespan. There are date codes, and we have to manage that with technology. But it gets more difficult. A date code on yogurt may be 30 days, but one retailer might only take it during the first 15 days. Another retailer might be more open and take it during the full 30 days. Our systems have to keep track of that and segregate the inventory and rotate it appropriately. And our customers look at reports from our monitoring devices to make sure our temperatures are not going above or below the appropriate levels.

Everybody has to eat. Is this an unusually stable real estate niche?
It’s very stable. I always say, what we eat and where we eat will change, but consumption will remain the same, and it grows with population. When the economy is strong and people eat out a little more, that just means the products coming through our warehouse will be put on US Foods or Cisco trucks to go to a restaurant. If the economy is weak and we hunker down and shop more at grocery stores and bring the food home, then more of that product goes on a Kroger truck. When Amazon comes in, that just means that 3 percent that used to go to Kroger gets put on an Amazon truck. It doesn’t matter [to us]. We’re completely agnostic to it.

How does your business use information technology?
Obviously, the technology plays a critical role. I can’t even imagine how they used to [manage inventory] back in the day [without computers]. It’s one thing if you’re just moving a pallet [of food] in and out, but to manage that level of sophistication—you look at a typical grocery store today, they carry 45,000 different [products]. It’s a lot of different products and complexity. Trying to do that manually is virtually impossible. We use state-of-the-art systems to help manage all of that. And one thing that differentiates us from our competitors is that we have our own IT staff. We actually have developers on staff who have made a proprietary supply-chain visibility tool that gives access to our customers to see where their inventory is.

How does that tool work?
A typical large manufacturer might be in 20 warehouses. They can use this portal and see where their product is in every facility, if they need to put product on hold. If they tried to do that business with some of our competitors, not all of them are integrated [well enough] to have a tool like that.

What was investors’ response when you went public earlier this year?
In the past, they weren’t as receptive. But data centers and self-storages have made a big splash, so I think the market was more open to us [as a specialized REIT]. There were a couple folks, the more traditional guys, where it took us a good half-hour of conversation before they understood. But they ended up buying in. We were able to convert 95 percent of the people we met with on the roadshow to purchase.

Where do you get your financing?
Historically, we financed ourselves with [commercial mortgage-backed securities] debt. When we started going public, we refinanced into the institutional term-loan market, and we’ve been very successful there. We always saw strong demand. Recently, as we went public, we refinanced into the bank market, and saw strong demand there, too. We’re truly blessed to be able to show strong access to capital in every venue.

Has the shift towards e-commerce affected you at all?
I’m always fascinated when I talk to analysts about Amazon. Amazon’s never going to make its own food. We supply Whole Foods. Whole Foods is a customer of ours. The food will still be produced by Kraft, Heinz, etc. Even all your private-brand stuff is made by name-brand manufacturers, of course. It all comes through the warehouse, and it’s just a different distribution channel. No matter where the product is consumed, it has to go through a supply chain. What changes is, maybe, who we’re doing that for—because we do help retailers with their operations.

So maybe we [will be] supporting Amazon now. We do things for, like, [e-commerce gift-basket seller] Harry & David, where we’re storing all the different products you’d get in one of their baskets, and then we assemble the kit for them, and then ship it out via UPS.

You actually put their baskets together for them? That seems like it should be their job!
We do. We’re their extension and their infrastructure.