Iron Mountain (NYSE:IRM) is mostly well-known for its products related to shredding services for corporations and businesses with information-sensitive operations. You may often see its trucks on the road which offer this service, or you may see the company's trucks transporting important papers which must be maintained in a storage facility for years to come. Investors are cautious and often avoid Iron Mountain, as a simplistic approach to analyzing the company's business model is that paper records will one day no longer exist. However, paper has its place in the world, and for those documents that can be digitized, Iron Mountain has expanded its focus into the data center realm, preparing itself for any downward pressure on its legacy business.
Iron Mountain recently reported results. With a beat on revenue more important to REIT investors than EPS, the company reported what appears to be a solid quarter.
Revenues for the third quarter were $1.06 billion in 2018, compared with $966 million in 2017. Total revenues grew 12.4% compared to the prior year, reflecting strong results from recent data center acquisitions. Revenues thus far for 2018 are $3.16 billion, compared with $2.85 billion in 2017, an increase of 10.4% on a constant currency basis.
While concerns exist about its internal storage business, the company continues to see low-digits growth in revenue. With growth year to date coming in at 2.6%, it is evident there is now a slowdown in the need for physical storage. The company also saw YTD growth of 5.2% in its services business, which includes things like shredding, transforming paper documents into digital documents, and transportation. This is a positive for investors, as the company shows it is not reliant just upon one segment of its business to provide revenue or growth, for that matter.
While the "Records Management" division is clearly the largest contributor to Iron Mountain, the company has quickly grown its "Data Center" segment to a considerable portion of revenue. This should be a positive for the stock and investors going forward. Management is showing it's not blind to the possibility and threat to its largest business, and is willing to adapt to ensure it survives.
(Source: Earnings Slides)
As the company continues to focus on its expansion into digital offerings, it is increasing its returns from its core business. Iron Mountain has been able to increase its storage rates, allowing for a higher return on already utilized space.
The fact that the company can implement rate increases shows strength in its business model and should fend off fears that physical storage is not in demand.
As the company continues to transform into a global player from a domestic player and begins to focus on new avenues of revenue generation, patient investors can be rewarded.
Iron Mountain would like to reduce its dependency on any single market or product offering and focus on having a diverse revenue stream from several markets by 2020. This should also help grow margins as the focus turns to digital storage. It takes less staff and fixed costs to run a digital data center than it does a physical storage center. Additionally, the company can now cross-sell its current customer base and offer digital storage product as well.
As the company continues to grow its margin, it retains a strong capital position, being prepared for anything that may present itself as an opportunity.
With leverage in line with peers, the balance sheet is able to support operations and should not be affected by rising rates. At the end of the quarter, a bit more than 70% of Iron Mountain’s borrowings were fixed-rate, with an average rate of 4.8%. Management continues to be focused on reducing leverage, targeting 5.0x by the end of 2020. While Iron Mountain is rated BB- by S&P and Ba3 by Moody’s, it is certainly not the strongest REIT in my portfolio, but the durability in its business model is.
During an economic recession, the need to reduce stored information, documents, stop shredding services is not high on the list of corporate cost-cutting measures. Generally, the services Iron Mountain offers are necessary in nature and should continue to do well in any part of an economic cycle.
While most storage REITs and data center REITs trade at high P/FFO multiple, IRM trades at a cheap valuation comparatively.
(Source: Rhino Real Estate Advisors)
The ability to purchase a company with such a low P/AFFO comes partially from the weaker investment grade rating and, perhaps, the higher payout ratio. However, the payout ratio is safe and is sub-80%, meaning investors should sleep well at night knowing IRM is generating them a tidy return on capital.
With an investment in IRM offering a historically high yield of 7.7%, investors can lock in now for hopes of higher returns.
(Source: Yield Chart)
As the chart above shows us, only 6.4% of the time since 2010 has IRM had a yield greater than 7%. It is so rare to have a yield above 7% that there isn't a measurement above 7% for the stock. With 6.4% of the time in the past 8 years being about 6 months in total, it is not very often that it happens to offer such a tasty dividend.
Investors should look at this as an opportunity to add a REIT at a time when it is operating well, the dividend is sound, and it is fundamentally cheaper than peers while transforming its business. Should the stock even fetch a valuation that is 20% lower than a peer trading at the next-lowest P/AFFO, the shares should appreciate 20%+.
While the market may have fallen out of love with Iron Mountain, I decided to take the time to put some Iron into my portfolio. While growth is steady and reliable, the business is recession-resistant, and the yield is strong, investors may be wise to look into adding shares into their portfolio. A close to 8% return each year before capital appreciation is attractive and can offer a growing stream of income, as the company is slated to continue raising its dividend 4% a year for the next two years. While management reduces leverage and integrates new business segments, investors are paid to wait. Should the company make another acquisition of size, however, and weaken its balance sheet or lose investment grade status, I would reconsider my position, as there are plenty of safe spots to capture a high yield. Investors should expect somewhere around a 12-15% annual return with dividends included for the next 2 years, which is what some would call a healthy return on investment.
Disclosure: I am/we are long IRM.
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.
Additional disclosure: I am not a financial advisor. Before making any investment decision, consult your financial advisor. All ideas in this article are not advice just insight into my investment making decisions.