Iron Mountain: Strength in Data

05/15/2019 5:00 am EST

Focus: REITS

Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

The dividend yield is at an all-time high since we first recommended real estate investment trust Iron Mountain (IRM) two-and-a-half years ago, observes Ian Wyatt, growth and income expert and editor of High Yield Wealth.  

Annual dividend increases have contributed to Iron Mountain’s rising dividend yield. Unfortunately, a plunge in share price has been a greater contributor.

Iron Mountain missed on quarterly earnings. The miss was enough for sellers to drive the share price down 9%. 

Investors’ short-term obsession with quarterly results frequently offers the most enticing buy opportunities. We see an enticing buy opportunity with Iron Mountain. 

Yes, Iron Mountain disappointed for the quarter. That said, management still affirmed 2019 guidance. Total organic revenue growth should be 2% to 2.5% in 2019, including organic storage revenue growth of 1.75% to 2.5%. Management guided for 2.6% adjusted funds from operation (AFFO) per share.

Management remains confident in Iron Mountain’s ability to grow the dividend and reduce debt. We concur. Investors fail to appreciate Iron Mountain’s unique business niche. 

Iron Mountain is the world’s largest physical document storage provider. It owns almost 1,500 facilities in 54 countries on six continents and serves more than 225,000 corporate clients, including 95% of the Fortune 1,000.

The clientele are locked in. Morningstar estimates that the cost of switching storage providers is about $2.94 per cubic foot. Iron Mountain's average customer is paying just $0.16 per month per cubic foot of storage. Why move?

The key to the profitability of physical storage is the 98% retention rate Iron Mountain has with its corporate clients, many of whom have been using its services for decades. Why don’t companies stop storing physical documents? They can’t. Regulators require paper copies.

Iron Mountain is anticipating the future. It’s extending the business model beyond paper storage. It has expanded into data centers. The company has acquired data-center properties totaling $1.5 billion over the past couple of years. Iron Mountain now owns 14 data centers, which are located in America’s top data markets. 

We like Iron Mountain. We like it as much today (if not more) than we liked it in 2016. We like the dividend yield and the value proposition.

Iron Mountain’s yield of 7.7% dividend yield is priced at only 10.5 times adjusted funds from operations. The five-year average is closer to 13 (the REIT sector average is closer to 16.) Whether you consider the cash flow multiple or the yield compared to its historical norm, Iron Mountain is undervalued. 

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