Since adding storage real estate investment trust (REIT) Iron Mountain (IRM) to our Income Portfolio two years ago, it has posted a total return (share price appreciation plus dividends paid) of over 100% compared to a 25% gain by the S&P 500 Index, recalls Jim Pearce, editor of Investing Daily's Personal Finance.
Iron Mountain does not produce a commodity that is subject to huge price swings. Instead, it earns money by leasing space in its storage facilities to a wide variety of users. And lately, those users are increasing involved in data processing and blockchain technologies.
You might think that type of business would be suffering given the big drop in Bitcoin and other cryptocurrencies this year. Last November, Bitcoin crested above $65,000 before sliding all the way below $20,000 in June. At the same time, the NFT (non-fungible token) market has all but disappeared.
Nevertheless, demand for Iron Mountain’s data storage services remains brisk as evinced by the company’s fiscal 2022 second quarter results released on August 4. Iron Mountain achieved record financial results during the quarter including all-time highs for revenue, adjusted EBITDA (earnings before interest, taxes, depreciation and amortization), and AFFO (adjusted funds from operations).
That last metric is perhaps the most important since AFFO determines how much of a REIT’s cash flow is available for distribution to its shareholders. During the quarter, Iron Mountain generated $271 million in AFFO, a 10.1% increase over the same period in 2021. Over the first half of this year, AFFO was 11.2% higher than last year.
Despite that success, the company maintained its quarterly cash dividend at $0.6185 per share which works out to a forward annual dividend yield of 4.5% at a recent share price of $54. In fact, Iron Mountain has not raised its dividend in three years as it has used most of its free cash flow to restructure its asset base.
If Iron Mountain can deliver on its aggressive guidance for full-year 2022 results, which includes 14% to 17% growth in total revenue and a 10% to 13% increase in AFFO, Wall Street won’t complain about its stagnant dividend payments. But at some point the REIT will need to start sharing more of the wealth to compete with gradually rising bond yields, especially if escalating inflation forces the Fed into making more rate hikes.
The company states that it is “approaching our long-term AFFO payout ratio (low to mid-60s) — from there we expect the dividend to grow in line with AFFO.” If so, then that portends a 6% to 10% hike in the dividend next year, which is the company’s guidance for AFFO growth. I don’t see any reason to believe that it won’t hit that target so I am raising our buy limit for Iron Mountain to $60.