2023-12-23 01:37:13 ET
Summary
- Iron Mountain has experienced a 40% surge in its stock price, reflecting a strong recovery after years of subdued gains.
- The company's strategic focus on data-centric solutions and recent acquisitions indicate a total addressable market exceeding $140 billion by 2023.
- Despite solid Q3 performance, Iron Mountain's "junk" credit rating and conservative dividend growth should be considered, as well as its current valuation.
Introduction
The past few weeks were fascinating, to put it mildly.
For example, the Vanguard Real Estate ETF ( VNQ ) has rallied so hard that it is now up 11% over the past twelve months. It has erased the entire decline since July in a matter of weeks.
Meanwhile, the S&P 500 is back at its all-time high, returning 25% during this period.
Then there's Iron Mountain ( IRM ) , one of the strongest REITs this year, which is up more than 40%, including dividends.
In this article, we'll take a closer look at this $20 billion market-cap giant to assess if it still makes sense to jump in after this massive rally.
So, let's get to it!
Iron Mountain's Multi-Billion Dollar Business
As this is my first article on Iron Mountain, let's start at the very beginning.
Iron Mountain helps organizations globally manage information effectively, offering solutions for information protection, storage cost reduction, regulatory compliance, disaster recovery, and efficient use of IT infrastructure.
In other words, it's doing business in one of the hottest places to be: data.
The company operates in physical records storage, data backup, and information management and provides data center space.
Founded in 1951 (before REITs were established in 1960), Iron Mountain serves over 225,000 customers in 60 countries.
It caters to various industries, including commercial, legal, financial, healthcare, and government organizations.
With approximately 26,000 employees, it is a part of the S&P 500 and MSCI REIT index.
Iron Mountain focuses on four pillars for growth:
- expanding physical storage in emerging markets,
- leveraging global scale for data center offerings,
- developing hybrid physical and digital solutions and
- investing in growth initiatives.
In September 2022, Iron Mountain launched Project Matterhorn, a global program aiming to transform its operating model.
With a focus on solution-based sales and optimizing shared services, the company plans to invest approximately $150 million annually from 2023 to 2025.
Needless to say, it isn't the sole operator in its industry.
The company faces competition from numerous storage and information management service providers globally.
It distinguishes itself through a differentiated global offering, strong brand, global footprint, and commercial relationships, allowing for effective competition in various markets.
The company's strategic focus on developing and offering new products and services that cater to the hybrid physical and digital world aligns with the evolving needs of businesses.
As organizations navigate a more complex regulatory environment, Iron Mountain aims to provide innovative solutions that help customers transition from physical storage to a digital ecosystem.
That's what sets it apart.
A Much Bigger Total Addressable Market
During the November JPMorgan ( JPM ) Ultimate Services Investor Conference, the company elaborated on its success in growing its business.
For example, Iron Mountain's cross-selling strategy was discussed, highlighting the company's intentional investments in new products and services.
The conversation included benchmarking success in cross-selling, with a particular focus on measuring key performance indicators to these efforts.
This also included the acquisition of Clutter , a B2C consumer concierge storage business that provides synergies in terms of absorbing capacity and operational efficiencies.
Furthermore, the company's Asset Life Cycle Management ("ALM") segment presents significant growth opportunities, driven by organic market share capture, expansion into new verticals, and strong demand for hyperscale decommissioning services.
The recent acquisition of Regency Technologies further strengthens Iron Mountain's position in this growth-oriented segment. They bought the company for $200 million, with $125 million due at close and the remainder in 2025. The deal is expected to close late in 2023 or early in 2024 and is viewed as a strategic fit to enhance ALM capabilities.
Iron Mountain's growth projections for its ALM business indicate a pro forma revenue outlook exceeding $900 million by 2026.
This optimistic forecast is supported by factors such as organic growth, OEM relationships, hyperscale decommissioning, and anticipated improvements in component pricing.
In general, it can be said that the company's expansion into areas with faster growth has allowed it to expand its total addressable market from $10 billion in 2015 to more than $140 billion in 2023.
Lasting Growth & Shareholder Benefits
In the third quarter, the company achieved strong performance across all metrics, with record revenue and EBITDA.
Revenue reached $1.4 billion, an 8% year-over-year increase on a reported basis and 7% on a constant currency basis.
Organic storage rental revenue grew by an impressive 10%, driven by revenue management, data center commencements, and positive volume trends.
Total service revenue was $530 million, consistent year-over-year on a constant currency basis, slightly improved sequentially.
Excluding the ALM business, total company constant currency revenue growth would have been 9%. Adjusted EBITDA reached a new record at $500 million, a 7% year-over-year increase.
The global RIM business achieved revenue of $1.18 billion, an 8% increase, with strong organic storage rental revenue growth of 8%.
The global data center business reported revenue of $128 million, up over $27 million, and organic storage rental revenue growth of 22%.
The company signed 65 megawatts in the quarter, bringing total bookings for the year to 120 megawatts.
Cross-selling efforts were successful, with 95% of megawatts booked attributed to cross-selling activity. The weighted average lease expiration increased to 8.1 years.
It also made progress with regard to its balance sheet.
Thanks to the strong EBITDA performance, the company ended the quarter with net lease-adjusted leverage of 5.1x, marking the lowest leverage level in a decade. This robust financial position indicates solid financial management and stability.
81% of its debt has a fixed rate. The weighted average interest rate is 5.6%.
It has a BB-negative credit rating, which is a "junk" rating. It is far less safe than some of the REITs I usually discuss. However, bankruptcy risks are subdued due to $1.8 billion in liquidity and a falling leverage ratio.
The company also reiterated its full-year guidance, reflecting strong year-to-date performance and a positive outlook.
For the fourth quarter, revenue is projected to be approximately $1.44 billion, representing 12.5% growth. Adjusted EBITDA is estimated at approximately $520 million, with AFFO at approximately $310 million and AFFO per share of around $1.05.
With regard to the dividend, the company currently pays $0.65 per share per quarter.
This translates to a 3.8% yield. This dividend is protected by a 62% 2024 AFFO payout ratio.
The most recent dividend hike was on August 3, when the Board approved a 5.1% hike.
Unfortunately, the five-year dividend CAGR Is just 1.3%, as the company hasn't hiked its dividend in the 2020-2022 period.
The good news is that I expect dividend growth to remain close to 5% going forward.
Why do I think that?
As we can see in the chart below, AFFO is expected to grow by 7% next year, followed by 9% growth in 2025! This would indicate that IRM is in one of the longest and strongest growth streaks in recent history.
Unfortunately, it doesn't make the stock cheap.
Using the data in the chart above, IRM shares are trading at a blended P/AFFO ratio of 17.2x. The normalized valuation is 12.1x.
Hence, the fair value is close to $60. The current consensus price target is $66.
Although I would make the case that expected growth rates warrant a higher multiple, we should not forget that the company has a slightly worse credit rating than the companies I usually cover.
All things considered, I'm very much impressed with IRM's recovery. It is making smart choices to prepare its business for consistent long-term growth.
The only problem is its stellar stock price rally, which is a reason for me to give the stock a Hold rating.
Takeaway
In a volatile real estate environment, Iron Mountain stands out with an impressive 40% stock price surge, reflecting a remarkable recovery after years of subdued gains.
The company's strategic focus on data-centric solutions, evident in Project Matterhorn and recent acquisitions, unveils a broader total addressable market exceeding $140 billion by 2023.
Despite solid Q3 performance, including record revenue and EBITDA, its 'junk' credit rating and conservative dividend growth pose considerations.
The same goes for its valuation.
However, as I like the new-and-improved IRM business, I believe it is a good buy on corrections.
For further details see:
Up 40%, A Closer Look At 4%-Yielding Iron Mountain