Iron Mountain: A Solid Choice in Data Storage

10/15/2020 5:00 am EST

Focus: REITS

James Pearce

Director of Research, Investing Daily

We are adding Iron Mountain (IRM) to the real estate investment trust sleeve of our model Income Portfolio, explains growth and income expert Jim Pearce, editor of Investing Daily's Personal Finance.

In some respects, Iron Mountain is similar to a self-storage REIT in that the primary purpose of most of its properties is to store documents, personal items, and valuable objects. In other respects, it is more like a data storage REIT since Iron Mountain also provides data storage and digital transformation services.

What sets Iron Mountain apart from all other REITs is the unusual nature of the property it holds. Most of the items are quite valuable or fragile and require special handling.

For that reason, its facilities are highly secure and in some cases are entombed deep underground. According to the company, more than 50% of its storage boxes remain in place for 15 years on average. For that reason, it enjoys a 98% customer retention rate.

As Iron Mountain’s data management and digital solutions revenue expands (now 22% of sales), so does its operating margin. In 2019, its total adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin was 33.7%, a 13% improvement over its 29.7% margin five years prior.

As a result of the pandemic, demand for cloud services has greatly increased; that demand is likely to make another jump over the next five years. To that end, on July 1 Iron Mountain announced it has formed a strategic partnership with privately held Keevo, which describes itself as a “next-gen crypto hardware wallet.”

In plain speak, that means its software allows users to conduct transactions using cryptocurrencies such as Bitcoin over their smartphones without fear of being hacked. To facilitate those transactions, Keevo will rely on Iron Mountain’s highly secure data storage facilities to protect its blockchain technology.

As cryptocurrencies have grown in popularity, so too have the security issues surrounding their use. It is estimated that in 2019 at least $5 billion in cryptocurrency was lost, stolen, or transferred fraudulently.

Since the blockchain technologies behind all cryptocurrencies are entirely digital, once they are lost or stolen there is almost no getting them back. Hence the need for a sure proof system.

Iron Mountain is pursuing a “capital recycling” strategy that entails selling underperforming properties and using those proceeds to expand its data management capacity. That way, the company can gradually transition its portfolio into higher-margin properties without taking on more debt.

In addition, Iron Mountain is refinancing its existing debt to lower its average cost of funds and extend maturities at the same time.

In August, the company issued $1.1 billion of debt at an interest rate of 4.5% that matures in 2031. The proceeds from this offering will be used to retire $800 million of debt due to mature within the next six years and pay down a portion of its revolving credit facility.

Assuming all goes according to plan, Iron Mountain’s adjusted funds from operations (AFFO) should rebound during the second half of this year.

If so, then the company should be able to continue it tradition of hiking its cash dividend payment during the fourth quarter of every year. At its current quarterly rate of 62 cents per share, Iron Mountain’s forward dividend yield equates to roughly 8%.

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