Key Takeaways: We have had our heads down ahead of our Best Idea Long presentation on Iron Mountain (IRM) this coming Monday, 7/12 at 12:30pm ET, but we are previewing some key points that will be discussed to lay the groundwork ahead of the call. An updated link to the presentation and materials when posted can be found HERE.
- First, need to understand that IRM is somewhat of a unique creature in the REIT universe - it is probably most akin to the Industrial/Logistics sector with its Global Records & Information Management business ("Global RIM"), which stores physical records and backup digital media, but additionally provides services such as digital information conversion and document shredding. IRM charges its Storage (65% of Global RIM) customers "rent" for volume stored in space on the physical racking in its warehouses, with volume retention rates consistently in the low-90% range, average "length-of-stay" before destruction at ~15 years, and volume growth flat-to-up 1% annually excluding customer acquisitions. Pricing growth/inflation is typically in the 2-3% range on top of that, leading to a 2-3% revenue grower on average over time. The services business (35% of Global RIM) is more volatile and sensitive to the macro and took a significant hit in COVID, but is beginning a cyclical recovery. This combined segment comprises roughly ~90% of annual revenues currently and is therefore by far the most important for the story right now
- However, IRM (1) leases more buildings/square footage than it owns which is unusual, and therefore EBITDAR and rent coverage increase in importance, (2) the business throws off a fair amount of internally-generated cash flow after dividends which is rare for a REIT, therefore NOT needing to rely as much on external capital to grow, and (3) recognizing that a digital transformation is ongoing, management is in the middle of growing a global data center business which is the ongoing use of that internally-generated capital. Because of the unusual business mix with lots of moving pieces versus straight rent collection from a standard property type, the company is probably "on the periphery" so to speak and under-covered and under-followed. We would argue that it shouldn't be, however, as it is the third largest logistics REIT by equity market cap behind PLD and DRE, and underneath the surface there is an interesting transformation happening
- The stock is heavily shorted at over 12% of the float on the most recent reading in June, which is exceedingly rare for any REIT in general but especially expensive for one with a 5.8% dividend yield. The stock has been heavily shorted for years with the thesis being that (1) physical paper records storage is an accelerating melting ice cube leading to declining earnings and cash flow (it is indeed melting, but probably over a longer duration), leading to (2) a significant dividend cut or (3) a dilutive equity raise to fund data center development. We will make the case that IRM (1) has multiple and sufficient sources of funds with a high level of confidence given the relative stability/predictability of the underlying business, and (2) is setting up for its first dividend increase potentially in the second half of 2023. The data shows us that the shorts are beginning to figure this out, and a 12% short interest is setting up a mini-squeeze relative to some of McGough's names which is a potential catalyst to the upside
- It makes sense that IRM should trade at discounted multiples relative to pretty much every other REIT in our coverage across all subsectors (currently 11.8x/14.5x our 2022E EBITDA/FFO), given the lower-growth nature of ~90% of its revenue. As the mix shifts over time towards data center and higher-growth TAM, there should logically be some multiple pickup
- From where we added we see a stock with low-20% IRR potential on the long side over the next 12-18 months through year-end 2022, with a relatively large portion of that return coming from the 5.8% dividend yield which we see as safe
Please call or e-mail with any questions.
Rob Simone, CFA
Managing Director
Twitter: @HedgeyeREITs
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