Key takeaways: As always a lot happening simultaneously with IRM, so lets embrace the chaos and break it down:
- First off at a very high level, adjusted EBITDA increased +9% in the quarter on a constant currency basis driven by a recovery in the Services business as expected, and increased +5.5% YTD implying a sequential acceleration in 2Q21. The revised FY21 outlook calls for further improvement in the ROC on adjusted EBITDA in 2H21 bringing full year growth to +8% to +11%. This comes despite a ~$20 million headwind from a stronger USD versus the last outlook provided in May, so on a constant currency basis even better. Additionally, global volumes are still expected to be flat to +1% for the year. Zooming out we see a business showing further improvement this year, and question the logic/prudence of being short here versus pre-pandemic. Nearly ~14% of the float is currently short and eating a 5.7% annual dividend yield on top of borrowing costs
- We need to correct ourselves a bit - IRM beat the Street by $0.04/share but actually came in $0.02/share light of Hedgeye on Core FFO (see Figure 1 below), driven by higher costs/expenses and a slightly higher weighted average share count. On the expense front it appears there was some "front-loading" in the quarter ahead of new business growth in the back half of the year, so taken together we think nothing to worry about as the overall outlook for both the top and bottom line as well as margins improved
- One thing that we did wrong was model Core FFO not adding back stock-based comp, which the company does and consensus seems to mirror. Going forward we are going to focus on IRM's definition and also AFFO to keep things apples-to-apples, especially at 6:30am in the morning. The FY21 range on AFFO was raised +0.7% at the midpoint to $3.33 to $3.45 with Hedgeye at $3.44 coming into the quarter
- Based on the commentary we think it is probable that storage organic revenue growth likely approaches +4% for FY21, again implying an organic revenue growth acceleration through 4Q21 and most likely 1Q22 given the easy comp (comps get tougher thereafter)
- We asked a question on the call regarding labor, just given the fact that IRM carries a much higher headcount than the typical REIT as well as the Hedgeye Macro team's focus on labor and related style factors - on the margin its a little tougher to recruit new employees and they are seeing wage inflation, but employee attrition remains low, EBITDA growth is outpacing revenue growth resulting in expanding margins obviously, and there is another ~$50 million of net EBITDA benefit on the come in FY22 from Project Summit. Near-mid-single-digit organic growth despite flat to up +1% volumes indicates pricing power, with additional leverage to the EBITDA line
- We continue to see improving leverage with rent-adjusted net debt/EBITDA heading to the mid-5x range, and an AFFO dividend payout heading towards the low-70% range by 2H22 and a possible dividend increase around that time
Figure 1: IRM 2Q21 Earnings Variances
Please call or e-mail with any questions.
Rob Simone, CFA
Managing Director
Twitter: @HedgeyeREITs
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