This 6.9%-Yielding REIT Has A Long Runway Of Growth

Summary

• Iron Mountain has a growth portfolio (data centers, emerging markets, and adjacent businesses) that should help to expand its business rapidly.
• Its storage business benefits from economies of scale and higher customer switching costs.
• The company has consistently increased its dividend in the past and has an attractive dividend yield.

Investment Thesis

Iron Mountain (NYSE:IRM) is the global leader in physical record storage. It has a growth portfolio (data centers, emerging markets, and adjacent businesses) that should help to expand its business rapidly. Its large global footprint allows it to operate efficiently. Its storage business also benefits from higher customer switching costs. As a result, the company has consistently increased its dividend in the past. Its dividend yield is currently at the high end of its historical average. This creates an attractive entry point for dividend growth investors with a long-term investment horizon.

Source: Company Website

Iron Mountain’s Growth Drivers

Iron Mountain has a strategic plan to shift revenue mix to faster growing businesses. These businesses should provide a long runway of growth for the company. These businesses include:

Data center facilities

Iron Mountain has expanded towards building data center facilities. In the past quarter, the company closed the acquisition of IO Data Centers, as well as Credit Suisse facilities in London and Singapore. Iron Mountain is also developing capacity in Phoenix and New Jersey on top of new development in Northern Virginia and Denver locations. Its global data center segment has an EBITDA margin of 44.6% in the past quarter. This is significantly higher than Iron Mountain’s overall margin of 32.9% in the past quarter.

Data center locations should provide Iron Mountain with a long runway of growth. As the chart below shows, revenues from global colocation market are expected to grow from $29.7 billion in 2016 to $48.6 billion in 2020. This is equivalent to a compound annual growth rate of 13%. The demand for data center also creates favorable outsourcing trend as service provider data centers are expected to consist about 21% of market share in 2019 (it was only 10% in 2015). Iron Mountain is well positioned to capture this trend.

Source: Q4 2017 Investor Presentation

Emerging markets

Iron Mountain has tremendous growth opportunities in the emerging markets. This is because these markets generally do have higher GDP growth rate than developed countries. In the past quarter, the company continues to experience strong internal growth in its records management business in these markets. The company also closed several transactions, including acquisitions in South Africa, India, Dubai, and South Korea.

Source: Q1 2018 Presentation

Adjacent Businesses: Art business

In addition to its existing Crozier Fine Art entity, Iron Mountain announced its acquisition of Artex Fine Art Services in the past quarter. This will help Iron Mountain establish a more significant presence with important museums and institutional customers. On the other hand, Crozier has traditionally had a deeper presence with art dealers and galleries.

Iron Mountain’s growth portfolio (adjacent businesses, emerging markets, and data centers) now consists about 25% of its revenue mix. The company expects these businesses to consist 30% of its revenue mix by 2020.

Source: Q1 2018 Presentation

What we like about Iron Mountain

Beside Iron Mountain’s tremendous opportunities in its growth portfolio, we also like Iron Mountain’s overall business:

A Global Footprint

Iron Mountain operates across 6 continents in 53 countries and has over 230,000 large and small clients all over the world. Most of its customers are from record-intensive industries. This strong global presence attracts many large global companies that might need multiple storage locations across the world. Its large customer base also allows it to operate efficiently.

Source: Investor Presentation

High Customer Switching Costs

Iron Mountain enjoys one important fact that many REITs do not have: higher customer switching costs. Customers with a large volume may take a long time to move all of its stored documents to a new service provider. Many of these documents also contain sensitive information (e.g. medical records), and special attention is needed when moving these documents. This explains why Iron Mountain has a very high customer retention rate of about 98% and an average customer life of 50 years.

Recurring Revenues

The REIT’s high retention rate means that the company has a predictable recurring revenue from its current storage volume. As Iron Mountain’s customers continue to store their documents in the storage facilities, the recurring revenue base will continue to grow. The higher switching cost also means that the company has more bargain power to increase its rental fees.

A Growing Dividend

Iron Mountain currently pays a quarterly dividend of $0.5875 per share. This is equivalent to an annualized dividend yield of about 6.9%. Its dividend is safe with an adjusted funds from operation (“AFFO”) payout ratio of 81% (based on its 2018 guidance, see chart below). The company is projecting to grow its dividend by 5% in 2018, and 4% in each of 2019 and 2020. Based on management’s AFFO growth estimate of 11.2% in the next few years, Iron Mountain’s payout ratio should be able to improve to 73% by 2020.

Source: Q1 2018 Presentation

Attractive Yield

Iron Mountain has an attractive dividend yield. The chart below shows Iron Mountain’s dividend yield in the past 10 years. As can be seen from the chart below, its trailing-twelve-months (“TTM”) dividend yield of 6.63% is near the high end of its historical average. Given the company’s growth prospect, I believe this is an attractive entry point for investors with a long-term horizon.

IRM data by YCharts

Investor Takeaway

Iron Mountain is well positioned to expand its business with its established growth portfolio. It has a global presence with a large customer base. Together with higher customer switching costs, the REIT has been able to consistently grow its revenue and dividend in the past. The company has an attractive forward dividend yield of 6.9%, and its TTM dividend yield is at the high end of its historical average. This offers an attractive entry point for dividend growth investors. Hence, I believe the company is a good investment choice for investors with a long-term investment horizon.

Note: This is not financial advice and that all financial investments carry risks. Investors are expected to seek financial advice from professionals before making any investment.

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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.