Iron Mountain Incorporated (NYSE:IRM) has experienced a remarkable 20.1% year-to-date increase in its stock price, even as its industry faced an 11.3% decline.
Iron Mountain’s robust and enduring core storage and records management business has positioned it favorably for ongoing growth. Additionally, the company’s expansion efforts in the data center business, supported by a strong balance sheet, are expected to drive long-term growth.
Iron Mountain’s Project Matterhorn, which plans to invest 16% of its revenues (approximately $4 billion) over the next four years, aims to capture a more significant share of global addressable markets. This initiative will help the company transition from a product-based approach to a solution-oriented sales approach, better serving customer needs. It also seeks to establish a global operating model designed to optimize shared services and best practices.
Let’s delve into the reasons behind this stock price surge and assess whether this trend is likely to continue.
Iron Mountain enjoys a steady stream of recurring revenues from its core storage and records management businesses. The majority of its revenues come from fixed periodic storage rental fees charged to customers based on the volume of records stored. The company boasts a diversified tenant base and an impressive customer retention rate of around 98% over the years.
In the second quarter of 2023, Iron Mountain saw organic storage rental revenues increase by 10.8% compared to the same period the previous year. This growth was fueled by pricing improvements and positive volume trends. Projections suggest a 10% year-over-year increase in storage rental revenues for the current year, with expected growth of 10.9% and 11% in 2024 and 2025, respectively.
Iron Mountain is complementing the performance of its storage segment with expansion in faster-growing businesses, notably the data center segment. The company is actively pursuing organic growth initiatives and expanding its reach to meet the strong demand for connectivity, interconnection, and colocation space, thereby stimulating leasing operations.
In the second quarter, Iron Mountain achieved a substantial 17.9% growth in data center revenues, and in the first half of 2023, it successfully leased 55 megawatts (MW) of data center capacity. For 2023, management anticipates exceeding its guidance of 80 MW based on the leasing activity observed so far.
In terms of the balance sheet, Iron Mountain boasted total liquidity of approximately $1.7 billion as of June 30, 2023, with a weighted average maturity of 5.6 years. The company ended the second quarter with a net total lease-adjusted leverage of 5.1X, the lowest since 2017. It also has no significant debt maturities until 2027, with 83% of its net debt being fixed. Additionally, IRM’s current cash flow growth is projected at 11.88%, compared to the industry’s expected 8.10%. This provides ample financial flexibility for meeting near-term debt obligations and capital commitments while pursuing growth opportunities.
Solid dividend payouts are often a significant draw for REIT shareholders, and Iron Mountain remains committed to this. In August 2023, coinciding with its second-quarter earnings release, the company announced a 5.1% increase in its cash dividend. Over the past five years, Iron Mountain has increased dividends three times. Given its robust operating platform, our adjusted funds from operations (AFFO) year-over-year growth projection of 4.2% for 2023, a lower-than-industry payout ratio, and a strong financial position, the recent dividend hike is likely to be sustainable.
However, certain factors warrant caution. The fragmentation of the storage and information management service industry and a slowdown in the service business are areas of concern for the company.
Additionally, the current high-interest-rate environment presents a challenge for Iron Mountain. It may face difficulties in acquiring or developing real estate with borrowed funds, as costs are expected to be higher.
As of June 30, 2023, Iron Mountain’s net debt stood at approximately $11.2 billion. Our estimate for net interest expenses in 2023 indicates a 20.4% year-over-year increase. Furthermore, with elevated interest rates in place, the attractiveness of the dividend payout might be less compelling compared to yields offered by fixed-income and money-market accounts.
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