Is Iron Mountain (IRM) Stock Apt for Your Portfolio Now?
Iron Mountain Incorporated IRM is set to benefit from its recurring revenue business model and diverse tenant base. Also, its accretive acquisitions and data center business expansion efforts bode well. A robust balance sheet is likely to support its growth endeavors.
However, competition from industry peers may lead to aggressive pricing pressure and lower margins, weighing on the company’s profitability. High interest rates add to its woes.
What’s Aiding IRM?
Iron Mountain enjoys a steady stream of recurring revenues from its core storage and records management businesses. The company derives the majority of its revenues from fixed periodic (usually earned on a monthly basis) storage rental fees charged to customers based on the volume of their records stored. Its retention rate for its records management business was 93% in the third quarter.
Iron Mountain is also seeing strong customer retention in the global data center business. This durable business drives significant cross-selling synergies across different segments and delivers robust cash-flow growth.
In the third quarter of 2023, Iron Mountain’s organic storage rental revenues increased 10% from the prior-year quarter, led by the Global RIM business growth of 8%. Strength came from the continued benefit of pricing and positive volume trends. We estimate a year-over-year increase of 11.1% in storage rental revenues in the current year. For 2024 and 2025, the metric is expected to witness robust growth of 9% and 9.8%, respectively.
Iron Mountain is supplementing its storage segment’s performance with expansion in its faster-growing businesses, most notable being the data center segment. It is making organic growth efforts along with expansion projects and developments. Such moves will enable the company to capitalize on strong demand for connectivity, interconnection and colocation space and drive leasing activity.
In the third quarter, the company attained data center revenue growth of 27.1%. It leased 120 megawatts of data center capacity in the nine months ended Sep 30, 2023. Moreover, in 2022, it leased 139 megawatts, surpassing its projection of 130 megawatts for the year.
Iron Mountain had a total liquidity of more than $1.8 billion as of Sep 30, 2023 and a weighted-average maturity of 5.5 years. With this, it has ample financial flexibility to meet its near-term debt obligations and other capital commitments while pursuing growth opportunities.
Iron Mountain ended the third quarter of 2023 with a net total lease-adjusted leverage of 5.1X, the lowest level in a decade. It has no significant debt maturities until 2027, and 81% of its net debt was fixed.
Solid dividend payouts are arguably the biggest enticements for REIT shareholders, and Iron Mountain remains committed to that. In August 2023, concurrent with its second-quarter 2023 earnings release, it announced a 5.1% hike in its cash dividend to 65 cents per share from 61.85 cents paid out earlier. Given its healthy operating platform, our year-over-year adjusted FFO (AFFO) growth projections of 4.6% for 2023, a lower-than-industry payout ratio and a solid financial position, the latest dividend hike is likely to be sustainable over the long run.
Shares of this Zacks Rank #3 (Hold) company have rallied 25.1% in the past six months, outperforming the industry’s increase of just 9.4%.
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What’s Hurting IRM?
However, as the archiving of original hard-copy documents loses its relevance, paper needs are shrinking at the enterprise level. This, along with shifts in data storage through non-paper-based technologies, is affecting physical storage volume and demand for the handling of records. This is reducing service activity levels and records management volume. In addition, the digitization of records might shift its revenue mix from more predictable storage revenues to service revenues that are more volatile.
The records and information management services industry is highly fragmented, with numerous competitors in North America and worldwide. Although Iron Mountain offers compelling products and has a strong market position, the company faces significant competition. This is likely to result in aggressive pricing and will keep margins under pressure going forward.
A high interest rate environment is a concern for Iron Mountain. The company may find it difficult to purchase or develop real estate with borrowed funds as the costs are likely to be on the higher side. As of Sep 30, 2023, Iron Mountain’s net debt was approximately $11.6 billion. For 2023, our estimate for net interest expenses indicates a rise of 21.5% year over year. Further, with high interest rates still in place, the dividend payout might become less attractive than the yields on fixed-income and money market accounts.
Stocks to Consider
Some better-ranked stocks from the REIT sector are Lamar Advertising Company LAMR and STAG Industrial, Inc. STAG, each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for Lamar’s current-year FFO per share has been revised 1.7% upward over the past two months to $7.31.
The Zacks Consensus Estimate for STAG Industrial’s 2023 FFO per share has moved 1.3% upward in the past two months to $2.28.
Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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