Key Takeaways: Following our presentation on Best Idea Long IRM on 7/12, we wanted to share some initial feedback/chatter on the idea received over the last two days:
- As expected, definitely a surprising/non-consensus idea in the space, and several investors have not taken a deep dive on the name given its pre-2021 track record, which could present some opportunity. Also some curiosity on why we included IRM in the Logistics group versus Data Center or Storage - the fact is DC remains a small part of the business at ~7% of revenues and a slightly larger portion of EBITDA, and for now the real estate (whether owned or leased) most closely resembles industrial or logistics warehouses
- There is agreement that the bias is to the upside given the 12% short interest. While IRM has been working in Quad 2 following the 1Q21 beat-and-raise and upward estimate revisions, we would stress that historically IRM is a great Quad 4 stock, so if and when the phase transition happens we think there is a high probability of a potential mini-squeeze
- There is also general agreement that dividend increases could be forthcoming in 2H22. There was some chatter that IRM should consider issuing equity post the recent stock price rise, however the cost of equity from a Core FFO earnings perspective is currently around ~6.5% (1/15x FY22E Core FFO) and closer to ~9% on AFFO. The bar is just too high right now and any equity raise would be dilutive, save investing in a sizeable ~10% yielding DC development with a short runway to lease-up. We also do not believe the cash flow profile requires it, especially if IRM can continue to selectively sale-leaseback assets at low-4% cap rates
- Some view IRM as residing in a sort of purgatory right now - not "cheap" enough to go long or "expensive" enough to go short here with conviction. It could be a function of investment horizon, however - to be clear, we are thinking about the long inside of 18 months vis-a-vis the short interest, beyond which the long-term structural challenges of the core business and runway to ramp data center need to be considered
- Several investors believe the declines in physical paper volume are more acute than we have modeled. Also there is a risk (which candidly we had not considered), that ESG concerns drive a mandate and/or government regulation to more quickly move away from paper volumes. Both of these would lower the long-term growth rate and obviously change the analysis. Our growth framework for now is flat annual volume growth (~3% of volume growing mid-single-digits in the form of Consumer and Adjacent business), +2.5% pricing, plus at least ~100bp or so of positive margin pickup and cash flow conversion, combing for a +3.5% LT growth rate in cash flow (not revenue). It is possible that this is too aggressive long-term, but again we are thinking about a much shorter duration
- Candidly several investors have serious concerns about this management team's long-term ability to grow and steward the DC business. Again, would just highlight that this is likely a concern beyond the 12-18 horizon for our long thesis
- As we spoke about on The Call yesterday, from a signal perspective IRM is Bullish Trade/Trend/Tail
Please call or e-mail with any questions.
Rob Simone, CFA
Managing Director
Twitter: @HedgeyeREITs
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