Best REIT Pick Of The Year: 8.8% Yield Iron Mountain

Summary

• IRM made significant improvements in 2020.
• An improved balance sheet, numerous growth projects, and streamlining at the corporate level will all add to the bottom line.
• 2021 will be a home-run year for IRM.
• Today you can lock in an 8.8% yield and collect dividends while you wait.
• Looking for a portfolio of ideas like this one? Members of High Dividend Opportunities get exclusive access to our model portfolio. Get started today »

Co-produced with Beyond Saving

As we go into 2021, we consider the changes caused by 2020 and COVID-19 to help us identify which opportunities will be the most lucrative as the world adjusts to the new normal.

One opportunity that's screaming "buy me!" is Iron Mountain (NYSE:IRM). 2020 was a "blah" year for IRM. They are entering 2021 at approximately the same price they entered 2020. Their performance in 2020 was quite good considering the headwinds caused by COVID-19. Through the first nine months, IRM's AFFO was 10% higher than it was in 2019. Revenues were down a couple of percent, but margins were up.

However, under the surface numbers, IRM was making some very significant changes. They took the opportunity in 2020 to make some very wise decisions that will have long-term benefits for the company. In 2021, we expect that we will be seeing the benefits of IRM's efforts, combined with the natural recovery as we move into a post-COVID world. For these reasons, IRM is one of the picks in our portfolio that we are most excited about for 2021.

2020 was a year of curveballs that businesses had to adapt to. It was a year of anxiety, fear and significant opportunity to snag stocks at extraordinarily low prices.

Today, we look at a company that took advantage of 2020 in the best way possible. Iron Mountain took COVID-19 in stride as much as any business could. IRM not only dealt with the immediate problems, but they took the opportunity to identify permanent changes in their business practices that would lead to long-term savings.

In 2020, IRM made several long-term improvements to their business. They refinanced $3.5 billion, extending their maturities while decreasing overall leverage. Their core business continued to grow at a similar pace to 2019. Their newer digital business grew at a faster pace than originally projected and IRM started more data center projects. Finally, IRM's "Project Summit," an effort to identify and fix inefficiencies in their corporate structure, is substantially exceeding their expectations with $375 million in annual savings compared to $200 million initially expected.

Going into 2021, IRM can expect all three of their segments to be firing on all cylinders. That combined with their improvements at the corporate level will lead to a home-run year. Investors today can get an 8.8% dividend yield and you can expect capital gains as IRM's cash flows improve.

Growing Core Business

Paperwork has a well-deserved reputation for putting people to sleep. Talking about storing paper is something the market approaches with equal disinterest.

Yet for IRM, storing paper is the business that has built the company up. You might be shocked to hear that it is a business that is still growing.

Source: IRM Q3 2020 Supplement

In Q3, IRM was storing over 726 million cubic feet of documents, more than they ever have before. IRM has been growing their volume through acquisitions of much smaller peers, however their revenue has been growing organically as well. It didn't even take a meaningful pause from COVID-19:

Source: IRM Q3 2020 Supplement

IRM has built a very successful model in the US, and now they are exploiting their knowledge and scale by building up their overseas presence.

We all know that computers are dramatically changing how we create and store data. Eventually, paper storage is going to decline - though as of today, it's still growing. IRM is wisely positioning their business for that reality.

One example is the recent sale-leaseback of a portfolio of industrial buildings. IRM sold 13 of their industrial properties at the nosebleed price of $358 million. IRM has leased the properties for 10 years, with extension options for an additional 20 years.

This is a great move by IRM as they are selling at a time when industrial properties are very hot and when their leases expire, they will have the option to just walk away if the space is no longer required.

Going into 2021, we can expect IRM's core business to continue growing at its 2.5% pace. Additionally, with a growing portion of its business being international, it will benefit from weakness in the US dollar. Storing paper might not be exciting, but its reliability and stability ensure that your dividends will be paid.

Service Revenue Recovery

The negative impact of COVID-19 for IRM fell squarely on the "service" side of the business. Service revenues were down 23% year over year in Q2, and while they recovered substantially in Q3 they were still down over 13%.

Source: IRM Q3 2020 Supplement

IRMs services include things like shredding, digitizing documents and retrieving documents. It's a segment of IRMs business which is going to do best when customers are working.

Fortunately for IRM, their services segment might account for one-third of their revenue, but it's much lower margin than the storage business and only accounts for 14% of gross profits.

Source: IRM Q3 2020 Supplement

A drop in revenue in the service category is not catastrophic. In fact, IRM's AFFO was up over 10% the first nine months of 2020. Still, a recovery of service revenues can be expected as economic activity picks up following the deployment of COVID-19 vaccines. Add a recovery of their service segment, onto the storage segment which has been growing all along and IRM's earnings will be much higher in 2021 than they were in 2020.

Digital Growth

We all recognize that computers are the future of information storage. So does IRM, which is why they have been expanding into digital storage to leverage their existing relationships.

Currently, data centers make up approximately 7% of IRM's revenues, but it's also their fastest-growing segment.

Source: IRM Q3 2020 Supplement

Going into 2021, this growth is going to be even faster as their capacity under construction is 48.5 megawatts, which will increase their capacity by over 38%.

Source: IRM Q3 2020 Supplement

In other words, IRM's projects under construction are five times larger than they were at this point in 2019. The rate of revenue growth from their data center side is going to increase as the year goes on.

Project Summit

In addition to the growth you can expect from all three of IRM's segments, IRM also has launched a cost-savings initiative they call "Project Summit." IRM has grown over the past decade through numerous acquisitions of much smaller peers. These "bolt-on" acquisitions improved their volumes and have transformed IRM from being a dominant US company to being a truly international company.

As a result of numerous business combinations, a number of inefficiencies were created and jobs were duplicated as employees from the new company overlapped with existing IRM employees.

So in 2019, IRM decided to set out on an effort to simplify their management structure, streamline their structure and while they were at it, identify areas where new technology could be implemented.

Source: IRM Q3 2019 Presentation

Initially, IRM was targeting $200/million in EBITDA savings per year by the end of 2022. In 2020 they revised that guidance upward and now expect that by then end of 2021 they will have $375 million in additional EBITDA annually. That's approximately a 25% increase in EBITDA.

Conclusion

Going into 2021, IRM is positioned to fire on all cylinders. Their paper storage business can be expected to continue growing at the pace it has held for the past several years. COVID-19 couldn't slow it down. The 2%-3% growth is slow and steady, and will continue for the foreseeable future.

Their service segment took the brunt of the COVID-19 impact. As vaccines are distributed, we can expect demand for those services to come back. It recovered meaningfully in Q3 and that trend will continue into 2021.

IRM's investment in the digital segment is starting to pay off. IRM invested a substantial amount of capital years ago, and those investments are starting to pay off. It was their fastest growing segment in 2020 and the momentum will accelerate in 2021 as IRM has increased their capacity under construction by over five times.

Finally, IRM spent 2020 making some material changes to their corporate structure. Streamlining their management teams and their services. Project Summit initially targeted $200 million in annual savings, and IRM has blown that target away.

All three of IRM's segments are positioned to outperform their 2020 results, plus IRM will be realizing significant savings at the corporate level. The outlook for IRM's 2021 could not be brighter. You can invest today and lock in an 8.8% yield before the market realizes how much cash flow will be improving in 2021. This is why IRM is one of our high-dividend opportunity picks of the year!

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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.