It’s been a while since I last visited Iron Mountain (IRM) back at the end of December 2020. I was bullish on the stock at that time, making it my top REIT pick for 2021, as highlighted in this article. The stock price performance certainly did not disappoint investors, as it rose 81% in 2021 from $29 in January to over $52 by the end of last year.
Recent price weakness, however, has driven the stock price down to $44.77 at present, and this is perhaps due to fears around inflation and higher interest rates. In this article, I highlight why this presents a good buying opportunity, so let’s get started.
Iron Mountain: Why This Cash Cow Is Now A Buy
Iron Mountain was founded in1951 and is a global leader in information storage and management services. This includes critical business information, highly sensitive data, and cultural and historical artifacts. IRM has 225K customers worldwide, storing their information assets across a real estate network of more than 90M square feet in 1,450 facilities in 50 countries.
The market hasn’t been so kind to IRM since the start of the year, with the share price dropping from the $53 level achieved at the end of 2021 to $44.77 at present. IRM is now trading below its 50-day moving average of $48, and just around its 200-day moving average of $44. As shown below, IRM now carries an RSI score of 29.7, indicating that the shares are now in oversold territory.
The underlying business, however, isn’t showing any signs of slowing down, with adjusted EBITDA growing by 11% YoY (9.9% growth excluding foreign exchange effects) in the third quarter. This was driven by respectable 3% storage rental revenue growth, and a strong 21% ramp in services revenue.
Importantly, IRM saw organic storage revenue growth of 2.3%, reflecting the continued benefit of pricing, and I’m also encouraged by global storage volume growing to a record 744M cubic feet. As shown below, global physical storage volume now sits well above the near 720M cubic feet level in Q3 of 2020.
Looking forward, IRM is well-positioned to grow its asset base and transition towards digital storage. This is supported by ~$1.6 billion worth of liquidity, and a reasonably low net lease adjusted leverage of 5.5x, sitting below the 6.1x of the JPMorgan (JPM) REIT Composite.
Moreover, 83% of IRM’s debt is fixed rate, carrying a 4.5% weighted average interest rate and 6.7 years weighted-average maturity. As such, IRM is poised to capture healthy rent spreads as it raises storage rates in an inflationary environment.
Meanwhile, the dividend is well-covered at a 69% dividend to AFFO payout ratio (based on Q3’21 AFFO/share of $.90). I would expect for dividend growth to be muted until management reaches its stated long-term target AFFO payout ratio of low to mid-60s.
Risks to IRM include potential for higher interest rates down the road, which would increase its cost of debt funding on new acquisitions and developments. In addition, a long-held refrain among IRM investors is the potential for paper storage to carry less relevance in an increasingly digital landscape.
The latter risk is mitigated by the fact that paper volumes have continued to grow. In addition, I see IRM as continuing to be a trusted business partner to organizations, as it’s well-positioned as the incumbent partner to guide them in their transition to digital storage if they so choose.
In addition, IRM has effectively rolled out newer solutions that seek to complement the traditional service side of the business (i.e. paper shredding). I want to highlight these comments by the CFO during the recent Wells Fargo TMT conference:
“We have been seeing our traditional services continue to recover generally quarter by quarter. Obviously, they’ve recovered far faster than returned to office as clients have figured out how to use our services which are very important to their overall business, regardless of where their employees are working.
So, I think as return to office occurs, we’ll see more refiles, more activity on those traditional service lines. Some people have asked me how have our service revenues rebounded so nicely and been up over the last few quarters, and that’s a testament to the fact that the team has developed some great new products and services around digital solutions, our insight platform, secure IT asset disposal, that are I think long-term secular growing markets, which we can relatively easily cross-sell into our large client base on the core side. So that’s, I expect that trend to continue to happen in any environment.” – CFO of IRM
Lastly, I see the latest drop in IRM’s share price as presenting a buying opportunity, as this has pushed IRM dividend yield up to 5.5%. This sits well-above that of most net lease and shopping center REITs, despite IRM’s durable income streams.
IRM stock carries a blended P/AFFO payout ratio of 13.0x, sitting above its normal P/AFFO of 11.9x. I see the premium as being justified, however, considering storage trends that it’s seeing. Sell side analysts have a consensus Buy rating with an average price target of $47.57, implying a potential one-year 12% total return including dividends.
Investor Takeaway
The recent weakness in IRM’s share price has pushed the valuation down to a more attractive level. Meanwhile, its storage business is expanding nicely, and the services side of the house has recovered well. Meanwhile, it maintains a well-funded balance sheet and pays a respectable dividend yield that’s well-covered by AFFO. I see value in IRM for its durable income and growth.