Shares of Lineage (NASDAQ:LINE) have seen a successful public offering. After shares were sold just above the midpoint of the preliminary offering range, shares have seen decent 10% returns ever since in volatile market conditions.
This looks decent, and while Lineage is a great long-term business with a great track record, I wonder if current demanding valuations leave investors in the cold in the near to medium term here.
Cold Storage
Lineage aims to transform the global food supply chain in an effort to eliminate waste and subsequently feed the world. The company is the world’s largest global temperature-controlled warehouse REIT after it has aggressively pursued M&A activities in recent years.
The portfolio now spans some 482 warehouses, which entail some 3 billion cubic feet, about 84 million square feet, supporting operations of more than 13,000 customers, with the largest being responsible for just over 3% of sales.
Founded in 2008 with a mission and vision to build a company which one would like to own forever, Lineage has grown towards its current state as the company explicitly states that this public offering is not an exit, but a new beginning for the firm. Starting out as just an idea in 2008, Lineage has focused heavily on quality, in terms of locations, building quality and maintenance.
The role that cold storage, or better said, temperature-controlled storage, plays is huge. About a third of global food is lost or wasted, with some 12% lost by lack of refrigeration, according to the filing documents. Understanding the complexity of the cold supply chains from farmer to fork, Lineage plays a key role in addressing this by storing foods such as seafood, packaged goods, poultry, potatoes, beef, dairy, bakery, pork, and others.
The company categorizes its services across two segments. Global warehousing provides temperature-controlled warehousing storage and services to clients, so basically making these assets available to customers. This is responsible for the vast majority of net operating income. This is complemented by global integrated solutions, responsible for nearly 15% of net operating income.
If we look at the business, it is North America which is responsible for roughly two-thirds of the number of warehouses, cubic feet and pallet positions, and even a more outsized revenue contribution. This is complemented by smaller activities in Europe and Asia-Pacific. With some 3.0 billion in cubic feet of space, the company is the undisputed leader with an estimated 12% market share, nearly twice as large as Americold (COLD).
Valuation & IPO Thoughts
Lineage aimed to sell 47 million shares in a preliminary pricing range between $70 and $82 per share, as solid demand made that pricing took place above the midpoint of the offering range, with shares being sold at $78 per share.
With a total share count of just over 233 million shares outstanding, the equity of the business is valued at $18.2 billion. That coincidentally comes close to the book value of the properties, but this excludes an estimated $5.8 billion pro forma net debt load, for a $24 billion enterprise valuation.
This values the business at around 4.5 times sales of $5.3 billion generated in 2023, while net operating income was reported at $1.7 billion, for a 14 times multiple on that metric. While full-year revenues rose some 8% in 2023, first-quarter sales for 2024 were dead flat, in fact, they were down nominally.
If we look at more standard and normalized metrics such as adjusted funds from operations, we see a $789 million number on this metric, for a demanding 23 times adjusted FFO multiple based on the equity of the business. I have a real issue with this, as the FFO methodology adds back historical depreciation charges, which, because of inflationary pressures, tend to lag (to various degrees) compared to (maintenance) capital expenditure needs.
All these observations become a bit more pricey as shares are trading at $86 in the week following the offering, pushing up the equity valuation close to another $2 billion here, for an FFO multiple over the mid-twenties.
Concluding Thoughts
It goes without saying that Lineage is a great business, which has rapidly built up the leading market position in a stable, growing, and attractive long-term market. However, as we have seen above, valuations are quite demanding. While any business has risks, the defensive nature of stable food clients and great diversification makes that risks outside of valuations are quite modest.
A key risk is geographical concentration (as many warehouses are located in clusters). Other risks include debt levels (although they appear manageable), tough labor conditions (in a competitive labor market), short-term customer contracts, and volatile power prices (as key input costs), as well as reliance on key staff.
Going back to the point of competition and valuations, a peer like Americold has actually been trading sideways since 2019. Currently, it commands an $8.5 billion equity valuation, and roughly $11.5 billion enterprise valuation based on the 2023 results. This compares to a $26 billion enterprise valuation of Lineage which posts revenues twice its peers, suggesting that at least in terms of sales it trades at a roughly 10-15% premium. In terms of margins, Americold posts adjusted funds from operations margins of around 13% of sales, lagging margins of Lineage by a point or two (due to its scale advantages).
For now, I am happy to avoid the shares, as while the company claims that the IPO is a new beginning, it is some kind of exit event as well, with valuations being quite demanding. Amidst all this, I certainly do not rule out a great long-term success, but given the demanding valuations from the start, I find the near to medium term risk-reward not necessarily attractive.
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