Iron Mountain: Tune Out The Noise And Collect This Steady Check

May 29, 2022 8:05 AM ETIron Mountain Incorporated (IRM)16 Comments25 Likes

Summary

  • Iron Mountain has strong pricing power, which has allowed it to generate impressive AFFO/share growth.
  • It's seeing robust leasing trends in its data center business, and management raised leasing guidance.
  • I also highlight the dividend, balance sheet, valuation, and other points worth considering.
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Many beaten down stocks have seen a decent recovery over the past week, but nobody knows what the market will do in the near-term, and the volatility will certainly make many investors jittery. That's why it pays to own dividend stocks that have steady and recurring income streams.

This is perhaps best exemplified by the core business model of Iron Mountain (NYSE:IRM), which produces income rain or shine. This article highlights why IRM may be an ideal stock for those who seek income and growth, so let's get started.

IRM: Tune Out The Noise And Collect This Steady Check

Iron Mountain was founded in 1951 and today, is a REIT that owns, operates, and develops storage facilities for both physical and digital records. It's the largest provider of storage and information management services in the world with over 2,000 locations in 58 countries, serving more than 225,000 customers including 95% of the Fortune 1000 companies.

What makes IRM attractive is its virtual lock on its customer base, as existing customers who store large amounts of physical assets with the company depend on IRM for information retrieval. They are therefore unlikely to change service providers considering the complexities and cost of switching.

Plus, IRM's reputation as a global leader precedes it, as business customers want a to know that their assets will be properly stored and handled. This is not a service that can be provided by just anyone, as there are strict regulations in place regarding the handling of customer data.

Another key strength is that businesses are increasingly moving towards storing data electronically, which is a service that IRM just happens to excel at. In fact, the company's Electronic Records Management business has been one of its fastest growing segments in recent years.

While the growth potential from ERM is significant, it still only makes up about 15% of IRM's total revenue base. The remainder comes from its Physical Records Management business, which is still quite large and very profitable. This provides a nice buffer for the company in case the growth in ERM slows down for any reason.

But what really gives IRM an edge is its pricing power. This can be seen in the company's net retention rate, which for IRM, has consistently been in the 90% range over the past decade, which indicates that it's able to pass on price hikes to its customers without losing them in droves.

Pricing power like this is a rare commodity, and it's one of the key reasons why IRM has been able to generate strong growth. This is reflected by IRM's first quarter results, during which storage rental revenues grew by 6.8% YoY, through a combination of price increases and 2.3% global volume growth to 728 million cubic feet.

Also encouraging, IRM saw its most successful quarter of leasing in its growing data center business at 35 megawatts, including the entire 27-megawatt LON-2 facility. These drivers resulted in record quarterly top and bottom-line performance, with AFFO per share growing by 11.4% YoY.

This results in a better protected dividend, with a trailing four quarter dividend to AFFO payout ratio of 69%. Management is targeting an AFFO payout ratio in the low to mid-60 percentage range, at which point it expects to resume dividend growth.

Looking forward, I remain optimistic around IRM's prospects, as it recently increased its target for new/expansion data center leases from 50 megawatts to 130 megawatts for full year 2022. IRM also has a well-positioned balance sheet to support this growth, with a net lease adjusted leverage of 5.4x and $1.8 billion worth of liquidity. Plus, 81% of IRM's debt is fixed rate with a 4.5% weighted average interest rate, and 6.8 years weighted average maturity.

Risks to IRM include the obvious concerns around the future for physical record storage in an increasingly digital world. This, along with the business's inherent pricing power, was addressed by management during the Q&A session of the recent conference call:

Q: I'm just wondering if you could give us some more color on 4Q to 1Q, I understand that the company's got very strong pricing and being able to offset that in that way. But you know, the expectation was for flat to potentially up on the volumes, I want to get some more color on, you know, the reason for kind of sequential decline?

A: So looking within records management, we always kind of consider that to be more flat to slightly down. And if you look at the trend, even between Q4 and Q1, and as you watch the business for a long time, you know that both Q4 and Q1, usually have a little bit of noise. And then because people tend to do their destruction programs, either at the end of the year, and some of that goes into the beginning of the year. So you'll always see a little bit noise. So overall, you know, we'd still remain kind of flat to up for the year in physical volume. And then of course, pricing takes that up.

You know, we do have very strong pricing power. And, as we've always said that, while inflation is really hurting all of us in many different ways for the business, it's actually a net positive because we're able to price ahead of inflation, and we have a high gross margin business, so it naturally expands the margins of the business.

Meanwhile, I continue to see value in IRM at the current price of $54.94 with a forward P/AFFO of 14.6, based on the midpoint of management's AFFO/share guidance of $3.76, representing 8% growth YoY. Sell side analysts also remain bullish on the company, with a consensus Buy rating and an average price target of $61.67. This translates to a potential one-year 17% total return including dividends.

Investor Takeaway

Income investors looking for a high-quality, dividend growth stock should consider Iron Mountain. The company has strong pricing power, which has allowed it to generate strong AFFO/share growth. It's also well positioned for the future and maintains a well-covered dividend, whose payout ratio is getting closer to management's targeted range. As such, IRM may be an ideal choice for those seeking steady income and growth.

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This article was written by

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I'm a U.S. based financial writer with a BSc in Economics and an MBA in Finance. I have over 12 years of investment experience, and generally focus on stocks that are more defensive in nature, with a medium to long-term horizon. My goal is to share useful and insightful knowledge and analysis with readers.  Contributing author for Hoya Capital Income Builder. 

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Disclosure: I/we have a beneficial long position in the shares of IRM either through stock ownership, options, or other derivatives. 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 an investment advisor. This article is for informational purposes and does not constitute as financial advice. Readers are encouraged and expected to perform due diligence and draw their own conclusions prior to making any investment decisions.

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