- IRM yields 4.57%, with an improved 65% dividend payout ratio.
- Its business continues to grow - revenue rose 13%, EBITDA was up 12%, and AFFO grew ~10% in 2022.
- Management expects ~7% midpoint EBITDA growth in 2023.
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If you think paper storage is a thing of the past, taking a look at Iron Mountain's (NYSE:IRM) business might make you change your mind.
In year 2022, IRM's storage rental revenue rose 5.7%, with 8.9% organic growth. Yes, its service segment's revenue growth was much higher, at 27.6%, but storage rental contributed 59% of IRM's 2022 revenues.
IRM is the global leader for storage and information management services. serving over 225,000 organizations around the world, with a real estate network of over 90 million square feet across ~1,450 facilities in approximately 50 countries. It was founded in 1951.
IRM's Global Data Center Business operates in 21 data centers across 19 global markets, either directly or through unconsolidated joint ventures. its ALM business provides hyperscale and corporate IT infrastructure managers with services and solutions that enable the decommissioning, data erasure, processing and disposition or sale of IT hardware and component assets. (IRM site)
On January 25, 2022, in order to expand its ALM operations, IRM acquired an ~80% interest in ITRenew, at a purchase price of $725M.
On October 5, 2022, in order to further expand its data center operations in Europe, IRM bought XData Properties S.L.U., a data center colocation space and solutions provider with a data center in Spain, for cash consideration of 78.9 million Euros, and up to 10.0 million Euros, payable based on the achievement of certain power connection milestones through December 2024. (IRM 10-K)
IRM also acquired a 27% interest in the Clutter JV, in exchange for its 49.99% interest in the MakeSpace JV, from which it recognized a gain related to its contributed interest in the MakeSpace JV of ~$35.8M.
Q4 '22 saw continued growth in storage revenue, up 6.2%, and service revenue, up 17.5%, while Net Income jumped 125.6%, Adjusted EBITDA rose 9.5%, and AFFO rose 7.5%. As we've frequently seen elsewhere in 2022, interest expense rose in Q4 and in full year 2022. The share count was flat.
2022: As noted earlier, full year 2022 saw storage revenue growth of 5.7%, and service segment revenue growth of ~27.6%. Net Income rose 24%, and Adjusted EBITDA rose ~12%. AFFO rose 9.7%, while Normalized FFO rose 7%.
"For the year ended December 31, 2022, the increase in revenue was driven by organic storage rental revenue growth, organic service revenue growth and our acquisition of ITRenew. Foreign currency exchange rate fluctuations decreased our reported revenue growth rate by 3.4% in the year ended December 31, 2022 compared to the prior year period.
Restructuring and other transformation costs for the years ended December 31, 2022 and 2021 were approximately $41.9 million and $206.4 million, respectively, and related to operating expenses associated with the implementation of Project Matterhorn in 2022 and Project Summit in 2021." (IRM 10-K)
IRM's Records & Information Management - RIM - business segment EBITDA rose 10.4% in full year 2022, with segment revenue rising 7.5%.
Its Data Center business continued to expand, with revenue rising ~23% in 2022, and EBITDA growing 28%. Management has invested in the data center business over the past several years, in order to diversify operations. It has grown to be ~9% of total segment revenue. IRM completed 14 megawatts in the fourth quarter, and 139 for the full year, ahead of its updated leasing projection of 130 for the full year.
North America is by far the most valuable piece of IRM's RIM business, with a carrying value of 55% of total segment value as of 12/31/22. Asset Lifecycle Management - ALM - is next in line, at ~12%:
Management issued 2023 guidance whose midpoints imply topline growth of ~9%; Adjusted EBITDA growth of ~7%, AFFO growth of ~5%, and AFFO/Share growth of ~4%. Not huge growth numbers, but solid all the same, considering that many economists are predicting a recession. Management is projecting growth Capex of $850M in 2023, with the vast majority of that dedicated to data center development.
But that's the nature of IRM's legacy business - governments and businesses are required to maintain records for many years, and a recession isn't going to prevent them from doing so. For those entities that want to go with digital storage, IRM has solutions as well, and also offers shredding services.
Management announced Project Matterhorn in September 2022 - a global program designed to accelerate the growth of IRM's business.
Project Matterhorn investments focus on transforming the operating model to a global operating model, focusing on the formation of a solution-based sales approach that is designed to allow IRM to optimize its shared services and best practices to better serve its customers' needs. Management expects to spend ~$150M/year on this project from 2023 through 2025, including restructuring costs, employee severance costs, and professional fees.
Management has maintained the quarterly dividend at $0.6185 since Q4 2019, hence the low 2% dividend growth rate. At its $54.15 4/12/23 closing price, IRM yielded 4.57%. It should go ex-dividend next on ~6/14/23, with a ~ 7/6/23 pay date.
The AFFO/Dividend payout ratio improved from 67.23% to 63.11% in Q4 '22, vs. Q4 '21; and was 65.11% for full year 2022, an 11.8% improvement vs. 2021:
"At December 31, 2022, we have federal net operating loss carry forwards of $63.5 million, which can be carried forward indefinitely, of which $57.1 million is expected to be realized to reduce future federal taxable income. We have assets for foreign net operating losses of $81.9 million, with various expiration dates (and in some cases no expiration date), subject to a valuation allowance of approximately 56.0%." (IRM 2022 10-K)
~91% of IRM's 2022 distributions were characterized as section 199A dividends.
Profitability & Leverage:
ROA improved a bit in 2022 vs. 2021, while ROE soared, due to 24% growth in Net Income, vs. a lower Equity base.
Management increased debt in 2022, from $11.7B to $13.3B, and invested $820M in growth capex and $142M in recurring capex, vs. $458M in growth Capex and $148M in recurring capex in 2021. Net Debt/EBITDA rose from 5.48X in 2021 to 7.19X in 2022, while Debt/Equity jumped from 9.45X to 20.87X.
Keep in mind that the Specialty REIT sub-industry is a mix of many different types of businesses. One of the traditional problems with analyzing IRM is that it has a unique business - it's not quite a Tech company, nor is it a typical REIT.
Debt & Liquidity:
In March '22, management extended the maturity date of IRM's Revolving Credit Facility and the Term Loan A from June 3, 2023 to March 18, 2027. They also refinanced and increased the borrowing capacity under the Revolving Credit Facility from $1,750M to $2,250M.
They increased the net total lease adjusted leverage ratio maximum allowable under Term Loan A from 6.5x to 7.0x, and removed the net secured lease adjusted leverage ratio requirement.
IRM's weighted average interest rate, inclusive of the fees associated with its outstanding letters of credit, was 5.1% and 4.7% at December 31, 2022 and 2021, respectively.
It had liquidity of ~$1.2B, as of 12/31/22.
IRM has continued to outperform the S&P, the Specialty REIT sub-sector, and the Real Estate sector over the past month, 6 months, 1 year, and year to date periods. It has also outperformed on a total return basis over the past year:
IRM received 2 new ratings from Street analysts in December '22: A sector perform rating with a $58.00 price target from RBS Capital Markets; and an outperform rating with a $66.00 price target from BNP Paribas.
At $54.15, IRM is 3.3% below the $56.00 average price target, and 20% below the $68.00 highest price target.
There's nothing showing a big undervaluation for IRM on this table, vs. the mixed group of specialty REITs. Its P/Book is quite high, while its forward P/AFFO is a bit lower than the group average. Comparing it to Digital Realty (DLR), the leading data center REIT, shows DLR with a forward P/AFFO of 14.96, a bit higher than IRM's 14.40.
We see IRM as a long term dividend stock to buy in a big market pullback. IRM's business is durable, and management seems to be making the right moves to continue to diversify. The higher debt bears watching. If you're bullish, maybe take a look at some out of the money put-selling, in order to get a cheaper entry point.
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