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Spring Sale At Iron Mountain: Closing The Valuation Gap


  • Two weeks ago, Iron Mountain announced Q4-17 and full-year results. The market sentiment was negative and shares fell 10%.
  • As the company continues to shift its business mix to data centers, it will generate higher margins and the valuation gap should continue to narrow.
  • I am upgrading Iron Mountain from Buy to Strong Buy, as I believe shares could return over 25% annually in 2018 and 2019.

I began covering Iron Mountain (NYSE:IRM) in 2012, when the company announced it was considering a REIT conversion. The CEO at the time said “a key element of our strategic plan is a disciplined capital allocation strategy to increase stockholder payouts and the REIT structure supports this plan.”

In December 2014, Iron Mountain announced that its registration statement was declared effective, and on January 20, 2015, the company held a special meeting for the purposes of voting on the REIT merger (between the company and Iron Mountain REIT). As I explained then:

“That's just a ‘rubber stamp’ though since Iron Mountain is already a REIT in many ways. The biggest hurdle for the Boston-based company was receiving a Private Letter Ruling (or PLR) from the IRS and specifically a ruling regarding the characterization of the company's steel racking structures as real estate. Earlier this summer Iron Mountain achieved IRS approval for REIT status retroactively as of January 1st, completing the process that began in 2012.”

By converting to a REIT, Iron Mountain was forced to pay out at least 90% of taxable income to investors, resulting in a substantially higher dividend than it previously paid. Also, in addition to the clarity with regard to the definition of steel racking as real estate, Iron Mountain is considered somewhat of a hybrid as it relates to its REIT peer classification.

Although Data Center REITs have racking systems (like Iron Mountain), the business model is entirely different from traditional data storage or self-storage because of the service component that is associated with Iron Mountain's integrated data management business.

Conversely, Iron Mountain rents out space in larger buildings that are comparable to Industrial REITs. So in terms of peer orientation, it does not trade at full real estate values, and that valuation gap is the topic of this

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This article was written by

Brad Thomas profile picture

Brad Thomas is the CEO of Wide Moat Research ("WMR"), a subscription-based publisher of financial information, serving over 175,000 investors around the world. WMR has a team of experienced multi-disciplined analysts covering all dividend categories, including REITs, MLPs, BDCs, and traditional C-Corps.

The WMR brands include: (1) iREIT on Alpha (Seeking Alpha), and (2) The Dividend Kings (Seeking Alpha), and (3) Wide Moat Research. He is also the editor of The Forbes Real Estate Investor

Thomas has also been featured in Barron's, Forbes Magazine, Kiplinger’s, US News & World Report, Money, NPR, Institutional Investor, GlobeStreet, CNN, Newsmax, and Fox. 

He is the #1 contributing analyst on Seeking Alpha in 2014, 2015, 2016, 2017, 2018, 2019, 2020, 2021, 2022 and 2023 (based on page views) and has over 111,000 followers (on Seeking Alpha). Thomas is also the author of The Intelligent REIT Investor Guide (Wiley) and is writing a new book, REITs For Dummies (Wiley/Amazon).  

Thomas received a Bachelor of Science degree in Business/Economics from Presbyterian College, and he is married with 5 wonderful kids. He has over 30 years of real estate investing experience and is one of the most prolific writers on Seeking Alpha. To learn more about Brad visit HERE.

Analyst’s Disclosure: I am/we are long ACC, AHP, APTS, ARI, BRX, BXMT, CCI, CHCT, CIO, CLDT, CONE, CORR, CUBE, DDR, DEA, DLR, DOC, EPR, EXR, FPI, FRT, GEO, GMRE, GPT, HASI, HTA, INN, IRET, IRM, JCAP, KIM, LADR, LAND, LMRK, LTC, MNR, NXRT, O, OFC, OHI, OUT, PEB, PEI, PK, PSB, QTS, REG, RHP, ROIC, SBRA, SKT, SPG, STAG, STOR, TCO, UBA, UMH, UNIT, VER, VTR, WPC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (74)

Hi Brad,
I am a member. You have had a really bad year or so with your tips. I understand and agree with you on about 80% of them.
The market has been horrible.
I did not agree yet with IRM's data center investment and you have no evidence to present for this big strategic move. So I am not buying. My view is for them to JV with a big center.
I agree with other commentators that you should submit yourself to published performance metrics. Be brave. You are good enough too get over these over time and keep your reputation.
Consider that this time may be different becasue of interest rate moves for the first time in 25+ years.
Frankj78 profile picture
This may be neither here nor there. I worked for a company that stored many of its records on site in a large room with concrete block walls and sprinkler pipes and heads above. Fireproof. But, during a nasty cold snap over the holidays when no one was present, pipes burst and water spewed down on all the nice cardboard boxes stored neatly on the shelves.

An outside outfit was called in to salvage what could be salvaged. So, penny wise and pound foolish. These records were not critical to the operation of the firm and could have been stored off site. People rarely went in to this area to retrieve stuff, but documents were added regularly. Yeah, it would have cost something to store off site, but the clean up was expensive and for what? To salvage material that was of little or no importance.

Long IRM and following it, considering adding. Thanks, Brad
Technology Assessment Group profile picture
Frank, That is a good story that illustrates one of IRM key use cases, and why you want professionals handling valueable data driving by Compliance. The water pipe scenario is an amateur hour mistake/example and that is one reason why IRM exists.

Cold storage is just another stage of tiered storage management. After living on cold storage for a while data will be discarded or......moved to IRM as the retrieval time requirement diminish. At the end of the day, there is need for IRM services, and they are a credible player in this space.
Kershaw profile picture
Like IRM in an oversold REIT environment. Looking at $28 to add. Very Long.
06 Mar. 2018
Good article, i started a small position.
Brad always writes good articles. I do not necessarily always agree with his recommendations, but he consistently does a very thorough analysis and needs to get ample credit for that.

My only hesitation with IRM is that material goodwill they have on their balance sheet, which to me is a red flag for REITs to have such high goodwill (roughly 40% of total assets).
Methinks IRM is becoming too good to resist.
Started a small position in IRM this morning at $31.95.
Technology Assessment Group profile picture
I only understand part of IRM's business, and was talking to them a couple of months ago.
Cold Storage (such as provided by Amazon and Google) is a different business than Iron Mountain. In cold storage you will have powered down disk drives in racks holding data
that might need to be retrieved. Those racks have networks, power supplies and are managed by servers. They use SMR disks which store more data but have poor retrieval times. One part of IRM's business is storing tapes, where they store only the tape cartridge and don't have to incur the costs of the rack etc above, and don't power up the tape cartridges because they are stored in boxes. So it is really cheap from an operating expense perspective. While tape use is indeed in decline, it is not declining as fast as some people think. For customers with 75 year and 100 data retention policies, IRM is one of the few games in town. This is consistent with what a prior poster (banker) said. This is often used to store compliance data that you need to store, but hope you never have to retrieve.
Brasada profile picture
Curious the type of businesses with 75 and 100 year data retention policies....Seems like it would be limited but don't know and asking?
Technology Assessment Group profile picture
Big companies do 75 and 100 year data retention policies. Just saying that IRM is a strong player in this business, and is able to delivery a product with low operational cost, which is necessary to play. Also pointing out incorrect statements that the Cold Storage business is the same as IRM; they are not. They are very different with different use cases and cost structures
Technology Assessment Group profile picture
Well, it is limited. Only the largest companies in the world that have these types of policies, or can afford the equipment, process, and people to implement. Your small mom and pop, mid-range, and even large companies have no need for 75 - 100 year data retention policies. But the biggest companies in the world do.
Just made my first purchase of a little IRM last week at $31. Was tempted to buy more, but concerned that their business model is vulnerable to competition. They basically have little moat other than their large group of existing established customers. The future trend will tempt companies to store less and less paper, and transition to digital storage of scanned documents etc... While it sounds like IRM recognizes this future trend and is participating in it, there is less barrier to entry for competitors in the digital storage space. Do you agree ?
stan11 profile picture
Steven- First of all, congratulations on our first purchase of IRM. You have made a wise investment decision. As I replied to rice above, I do not think that most corporations that have competition sensitive data will want to put that in the cloud with Google, Microsoft, or Amazon. They will go with the company that they have used for decades, and have that data scanned and accessible. Best of luck to your in your investment. We will do alright.
Toofuzzy profile picture
I imagine that there will be a distinction between bulk data storage and a data center that needs to sit on top of a communication node so data can flow in and out quickly.
Guy at Work reading SA profile picture
In the presentation it states Adjusted EPS fully diluted growth (-15%)-+2, and Brad states
using AFFO/share, Iron Mountain is forecasted to grow by 4% in 2018. Can someone explain why earnings per share is expected to be quite negative but AFFO/share is expected to be +4%? Is it from cost saving synergies? Is Revenue/share also decreasing? From what I can tell everything but AFFO/share is decreasing, am I missing something?
DivvySam profile picture
Brad, I appreciate all of your articles. However, I am on the other side of the fence on this one. I've been watching IRM for years and have not bought any of it, even with such a high recommendation. I'm still waiting for "real" improvement to its quarterly reports, i.e. including debt levels, credit rating, good will reduction. I just don't feel as warm and fuzzy about IRM as you do. IMHO, IRM should be a Speculative Buy at best. I am going to continue to watch...
Other Side Of Trade profile picture
From what I can see these guys have been raising the dividend regularly, with 'specials' to boot. The storage part of their business that meets NARA Federal standards seems a bit like a 'moat' to me. Like Macy's being killed by Amazon (didn't happen--could have doubled your money in 7 weeks) "THE CLOUD" is not making secure document storage obsolete. Like the 'end of shopping' and 'the end of oil' I think the market is mispricing 'the end of paper'. It took 2 hours to sign all the paperwork at my new broker last month. Was that just for fun?
rlp2451 profile picture
Did you take all that paper to IRM to be stored or recycled?

If not, what you have is immaterial to the IRM business model.
Other Side Of Trade profile picture
Coincidence? Brad writes IRM is a strong buy today and the stock is up about 50 cents at noon today.
stan11 profile picture
No, I don't think it's a coincidence. Brad knows his REITS and IRM is a good one to invest in.
Other Side Of Trade profile picture
Brad, thanks again for a well researched article on an interesting company. All the best
There are two issues here that deserve more discussion. First, how much debt should IRM, or for that matter, most REITs carry. Some of the discussion reminds me of discussions that took place around KMI when it was trading in the 40s. Everything was great until investors started focusing on the amount of debt, how much it was increasing each year, and how it was being used to fund distributions. Also, some of us remember when debt was great, until it wasn't. For example, General Growth tried to grow by acquisitions funded by debt, and then couldn't refinance the debt. Frankly, 5x on the debt is a little scary for me.

Second is the entry into the data storage area. I really don't understand how this works in terms of this area and the interface with Amazon, Google and Microsoft. It seems to me that there are too many players in this market, and that it needs to consolidate in order to get efficiencies from scale. I see no mention of the management expertise that IRM has, or doesn't have in this area. Cleary it is much different than putting paper in storage and keeping it there for years.

I am sitting with some significant losses in IRM, and have been catching a falling knife with it for a while. Until I get more comfortable with the two issues I have raised, I am holding off putting more money into it. My concerns about debt, by the way, are not limited to IRM. The market is telling us that interest rates clearly are going up, and that financing is not going to be as easy as it has been over the past several years.
ISTJ Investor profile picture
Regarding data storage, I think the IRM pitch is to exploit their existing customer relationships and extend service from physical to digital storage. I can see the strategic attractions, but running digital data centers is clearly not their previous area of expertise.

I did an IT consulting gig about 15 years ago, for a 2nd/3rd tier oil company. They were in the process of digitizing a couple of warehouses full of paper records and migrating old data tapes - seismic, well log, production data, etc. - lots of records, lots of different formats. The data is quite valuable, and might be referenced 20 or 30 years later. But the migration / storage operation was very price sensitive.

So there is pure physical bulk storage, and there is records management (so you can efficiently find it again and access it), which might require some domain specific and value added knowledge.

Whether IRM can compete with Amazon on bulk storage (unlikely), or DLR on data center operation (maybe?) is unclear, at least to me. Seamless records management "solutions" which include both paper and digital might work for them, particularly with smaller clients. It would be interesting to see a detailed exposition on their strategy, but I doubt that's public.

I bought a very small initial position recently at $31. I think there may reasonable be a chance to buy at $25, which would provide a greater margin of safety.
stan11 profile picture
Very thoughtful comment. My thoughts are IRM has the facilities and customers to make the transition from paper records to digital records. I've worked in the aero engineering field and my company has used IRM for decades, if not longer. IRM always produced the boxes of data within a day or 2 of putting in the request. Digitally, this will be much faster.

I do not think that most corporations that have competition sensitive data will want to put that in the cloud with Google, Microsoft, or Amazon. They will go with the company that they have used for decades, and have that data scanned and accessible.

Me, I'm long IRM.
Mr. Thomas:

Greatly appreciate your occasional updates on securities you cover.

After eyeballing it for some time, finally waded in and bought some IRM a few weeks ago. Plan on adding shares over time.

Retired income/dividend-growth investor
darnoc111 profile picture
Brad do you have any thoughts on the amount of insider sales, since if they do not want shares why should others? Another question is do you think a 4% dividend growth rate will keep up with future inflation? Thanks for your thoughts.
Scarlo profile picture
Most of the insider sales are automatic sales of exercised options.
Brad, one thing I simply do not like about IRM is that, looking at their balance sheet, roughly 40% of their assets are goodwill. For a REIT to have such high intangibles is a no-go for me. I'm not saying that IRM won't turn out to be a good investment, but I am not comfortable with that facet, so I am staying away.
Brad Thomas profile picture
johnnybaiamonte - use AFFO:http://bit.ly/2FV1kP8

Thanks for reading and all the best. Brad
Omiq7 profile picture
05 Mar. 2018
There was some discussion about IRM's way to present AFFO and FFO figures at recent IRM article by Sure Dividend - almost as if to misguide the reader. Also it was unclear how IRM's AFFO can be so much higher than its FFO. I'm new to REITs, so any insight is appreciated!
Bought my first position a few dollars higher and now tempted even more to buy second batch of share as the company and its performance is tempting.
Thank you for the article!
IRM payout ratio 110%. Not sustainable.
stan11 profile picture
Iron Mountain is a 7% yielding REIT with a payout ratio of 77% using AFFO. Definitely worth considering.
Stan11, I try not to use AFFO. Payout 2.35/2.13 earnings = 110.03% payout ratio. Just my safer way if tough times hit.
stan11 profile picture
Payout on earnings is more conservative for sure. But generally, AFFO is used for REITS. Sometimes being a little too conservative may lock you out of a good stock. Good luck to you.
New to this space, from what I gather from investors, price drops do not mean much,
they focus on dividends. While I can't get my arms around that, this chart is interesting,
would like to see more of them.
Thanks for the info.
Brad Thomas profile picture
User 25572753 - Thanks for reading and all the best. Brad
rlp2451 profile picture
Price of IRM when recommendations in articles from the author were posted:

Dec. 15, 2014: $39
Nov. 30, 2015: $27
Jan. 25, 2016: $29
May 12, 2016: $37
Aug. 16, 2016:$38
Nov. 3, 2016: $33
Mar. 27, 2017: $35
Jun. 29, 2017: $36
Aug. 7, 2017: $39
Nov. 2, 2017: $41
Nov. 29, 2017: $38
Jan. 10, 2017: $37
Mar. 5, 2017: $31.50

Total annualized return since first article, including dividends: 0.72% (2.3% total return in 3 1/4 years.
Brad Thomas profile picture
rlp2451 - Thank you....and to put this in context, I have added more shares in 16 and 17 (average price $38) and with shares now priced at $31.50 I am upgrading to STRONG BUY. All the best. Brad
PaulTD profile picture
@rip2451, thanks for taking time to post that, it tells me everything I need to know! Cheers.
Brad this also illustrates my point, don't you ever expect to need your capital, no stop loss for when you are wrong, I see you are no longer long on CBL? also wondering if you use a equal weighting on your holdings, each investor is differant and must follow his or her rules.

Thanks in advance.
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