2023-11-10 09:15:00 ET
Summary
- Iron Mountain Incorporated has transformed from a mushroom company to the world's largest document storage company.
- The company has invested in Data Centers in recent years, which has become a growing part of its business.
- Iron Mountain reported record earnings in Q3 2023, with growth in storage revenue and the leasing of 65 megawatts of capacity in its Data Center business.
What began as a mushroom company back in 1936, transformed into the world's biggest paper storage company, beginning in 1951.
In our modern digital age, bears have peddled the idea that digitization would send paper storage facilities the way of the buggy whip, but Iron Mountain Incorporated ( IRM ) has continued to thrive. In recent years, management has invested in Data Centers, which has become a small, but growing part of the business.
Company Profile:
Real estate investment trust ("REIT") Iron Mountain has been a strategic partner to care for your information and assets for over 70 years. It is a global leader in storage and information management services and trusted by more than 225,000 organizations around the world, including 95% of the Fortune 1000.
IRM has a real estate network of over 90 million square feet across ~1,450 facilities in approximately 50 countries. IRM's Global Data Center Business operates in 24 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.)
Earnings:
Q3 '23 : This was a record quarter. IRM's Storage Revenue grew 13%, to $859M, while its Service Revenue was steady, at $530M.Adjusted EBITDA rose 6.6%, to $500M, a company record, while normalized funds from operations, or NFFO, and adjusted FFO, or AFFO, were flat. As seen in most other companies, Interest Expense rose - in IRM's case it was up over 25%.
IRM's Data Center business leased 65 megawatts of capacity in Q3 '23, for a total of 120 MW leased so far in 2023.
Management signed an agreement to acquire Regency Technologies, a U.S. provider of IT asset disposition ((ITAD)) services. Regency Technologies currently processes over 50,000 metric tons of material annually, reselling more than 2,000,000 units across eight locations. Numerous Fortune 500 corporations, government agencies, defense contractors, and educational institutions consider Regency to be their preferred ALM partner. Regency has over $100M annual revenue. (IRM site.)
Q3 '23 Net Income fell 53%, mainly due to an $85M increase in Cost of Sales and G&A, in addition to $35M in higher restructuring expenses:
Q1-3 '23: Storage revenue was up 1.4%, while Service revenue was flat. Adjusted EBITDA was up 6%, AFFO rose 2%, with NFFO and NFFO/Share up ~1%. Interest expense jumped 23.6%, to $434.15M; the share count was flattish:
Guidance:
Management expects Q4 '23 Revenue of ~$1.44B, Adjusted EBITDA of ~$520M, (up 4% vs. Q3 '23); AFFO of ~$310M, (up ~7% vs. Q3); and AFFO/share of ~$1.05, (up 6%).
Management reiterated its full year 2023 guidance, which calls for 9.7% revenue growth, 6% growth in Adjusted EBITDA, and 3.6% AFFO growth:
Dividends:
While IRM isn't a big dividend growth stock - its 5-year average is 1.35%, management did make a 5% increase in the quarterly dividend in September '23, raising it from $.6185 to $.65/share.
At its intraday 11/9/23 price of $59.30, IRM yielded 4.38%. It'll go ex-dividend next on 12/14/23, with a 1/4/24 pay date.
IRM's AFFO dividend payout ratio improved slightly in Q1-3 '23, dropping to 65.07%, vs. 65.80% in Q1-3 '22. Its trailing AFFO payout ratio is 64.57%.
Taxes:
"At December 31, 2022, we have a 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 10K.)
~91% of IRM's 2022 distributions were characterized as section 199A dividends.
Profitability & Leverage:
IRM's Return on Equity and Debt/Equity figures are glaringly high due to IRM's shrinking Equity base. The Equity balance was $636.79M as of 12/31/22, but shrank to $262.63M as of 9/30/23, largely due to Net Income of $155.75M not covering $554.27M in dividends. REITs use AFFO as a clearer indication of dividend sustainability - IRM had AFFO of $699.3M in Q1-3 '23.
IRM Q3 '23 10Q
The lower net income dropped IRM's ROA to 1.68%. Its Net Debt/EBITDA and Debt/Equity leverage have both moved higher in 2023, whereas its Interest coverage has declined from 3.92 to 3.34X, but still appears healthy.
Debt & Liquidity:
IRM had ~$1.8 billion of liquidity, as of 9/30/23. 81% of its debt is fixed rate, with a weighted average of 5.6%, and a weighted average maturity of 5.5 years. IRM's corporate debt is rated BB- stable by S&P, and Ba3 stable by Moody's. In May '23, management completed a private placement of $1B in aggregate principal amount of its 7.000% Senior Notes due 2029.
Performance:
IRM has had a good run over the past year and so far in 2023, outperforming the S&P 500, the Real Estate sector, and the mixed bag Specialty REIT sub-sector by wide margins.
Analysts' Price Targets:
Wall Street analysts have decreased their price targets for IRM over the past 3 months. The biggest decrease was from $58.00 to $44.00 this week, on November 7th, when UBS initiated coverage, with a Sell rating, and a $44.00 price target. Prior to that, RBC and Barclays both rated IRM Outperform/Overweight in August '23.
At its 11/9/23 intraday price of $59.30, IRM was selling at ~35% the low UBS target, ~9% below the $65.13 average price target, and 18.8% below the $73.00 highest target.
Valuations:
IRM has a unique business model, with no clear-cut peers. The Specialty REIT sub-sector includes everything from casino landlords to cell tower firms to lumber management companies. Other than P/Sales, IRM is selling at premium valuations when compared to the Specialty REIT sub-sector.
We can compare IRM to its own valuations from earlier in the year.
Back in April '23, after it had reported Q4 '22 and full year '22 earnings, IRM was selling at lower valuations of: P/NFFO 18.48X; P/AFFO 14.25; and P/AFFO 2023 of 13.71.
Parting Thoughts:
IRM has a unique, wide moat, but it's not a high-flying Tech growth stock. Rather, it can provide a well-covered dividend to income investors, and has also provided capital gains over the past year.
With CD's and some U.S. Treasuries north of 5%, IRM may be more of a trading vehicle. It's ~9% below its 52-week high, and ~20% above its 52-week low. We rate it a Hold for now - wait for a market pullback, and/or try selling put options below IRM's price/share.
All tables furnished by Hidden Dividend Stocks Plus, unless otherwise noted.
For further details see:
Iron Mountain: From Mushrooms To High Tech, Record Q3 Earnings