The shares of Iron Mountain Incorporated (NYSE:IRM) have witnessed a remarkable uptrend of 17.5% so far in the year, in contrast to the 4.8% decline experienced by its industry.
In recent weeks, the Boston-based real estate investment trust (REIT), known for its diverse portfolio, reported second-quarter adjusted funds from operations (AFFO) per share at 94 cents. This exceeded the Zacks Consensus Estimate by a narrow margin. The figure also displayed a 1.1% year-on-year growth, driven by enhanced adjusted EBITDA. These results were driven by robust performances in both the storage and data center segments.
The company reasserted its 2023 outlook for AFFO per share, estimating a range of $3.91 to $4.00. The Zacks Consensus Estimate currently aligns with this projection at $3.96.
Now, let’s delve into the factors behind the surge in stock price and explore the sustainability of this trend.
Iron Mountain thrives on consistent revenues from its core storage and records management businesses. The majority of its earnings originate from fixed storage rental fees, which are periodically charged to customers based on their records’ volume.
Furthermore, the REIT’s diverse tenant and revenue base, spanning various industries and geographical regions, positions it favorably for future growth. Impressively, the company maintains an approximately 98% customer retention rate over the years.
In Q2, storage rental revenues surged to $830.8 million, marking a 10.3% YoY increase. Although service revenues experienced a 1.7% dip from the previous year, they saw a sequential growth of 4.5%, amounting to $527.2 million. The adjusted EBITDA for the quarter displayed a 4.6% YoY improvement, reaching $475.7 million.
Iron Mountain is strategically enhancing its storage segment’s performance through expansion in high-growth areas, notably the data center segment. The company actively pursues organic growth and expansion initiatives, capitalizing on the growing demand for connectivity, interconnection, and colocation space.
Q2 revealed an impressive 17.9% increase in data center revenues. In H1 2023, Iron Mountain successfully leased 55 megawatts of data center capacity. Building upon its accomplishments in 2022, the company surpassed its initial 130-megawatt projection by leasing 139 megawatts. Current leasing activity suggests the potential to exceed its 2023 target of 80 megawatts.
On the financial front, Iron Mountain boasts a robust balance sheet with approximately $1.7 billion in total liquidity as of June 30, 2023. The weighted-average maturity stands at 5.6 years, providing ample financial flexibility for debt obligations and growth initiatives. Remarkably, the company has no significant debt maturities until 2027, with 83% of its net debt being fixed. The projected cash flow growth of 11.88% outperforms the expected 9.37% growth in the industry.
For REIT shareholders, consistent dividends are a major attraction, and Iron Mountain remains committed to this aspect. Earlier this month, coinciding with its Q2 earnings release, Iron Mountain announced a 5.1% increase in its cash dividend to 65 cents per share, up from the previous 61.85 cents.
Given its solid operating foundation, sustainable payout ratio, and strong financial position, the recent dividend hike is likely to be well-maintained.
Nonetheless, challenges like industry fragmentation and a service business slowdown warrant attention. Additionally, the impact of rising interest rates further adds complexity to the company’s outlook.
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