It has been awhile since we talked about Best Idea Long IRM, given that Residential has been front-and-center of late. IRM is timely, however, following the downward move in REITs over the past week or so + Quad 2 in Q4 and related factor exposures. To be clear, IRM has some of the most acute long-term secular challenges of the stocks under our coverage, namely the melting paper ice cube, leverage that is still too high all else the same, and lower secular utilization of physical office space which will impact Services. The growing Ancillary businesses + Data Center segment are still just too small to move the needle.
That does not mean that the stock cannot work, however, and we have tried to separate the business from the security and think "timeliness." Our call has always been a shorter-duration idea (versus AMH as a core long, for example) where a recovery in IRM's Services business would drive upside earnings surprises/revisions over 2-3 quarters, cause a partial unwind of the above-average short interest, and then we would take our gains and walk away. Now that we are staring at Quad 2 in Q4, a few things that favor IRM from a style factor perspective:
- The aforementioned above-average short interest which stands at 10% as shown in the Chart of the Day below, high in general but VERY HIGH for a REIT. The "garbage" trade works in Quad 2, which tends to gravitate around stocks with higher short interest,
- Above-average leverage - we calculate 6-6.5x Adj. Net Debt/EBITDA and even higher including rent adjustments following sale-leaseback activity, versus 4-5x for the industrial subsector on average,
- Cyclical growth/recovery (which IRM embodies) versus secular growth.
We have always viewed IRM's upside to the low-$50/share range on the long side, for perhaps a 1.5-2x upside/downside ratio at current levels for a stock that is not an immaterial component of the XLRE. To be clear, we would not think about IRM as a stock to own over 1+ years.
Chart of the Day: IRM Short Interest
Please call or e-mail with any questions.
Rob Simone, CFA
Managing Director
Twitter: @HedgeyeREITs
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