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Iron Mountain (IRM) Shares Rally 20% YTD: Will the Trend Last?
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Shares of Iron Mountain Incorporated (IRM - Free Report) , carrying a Zacks Ranks #3 (Hold), have rallied 20.1% year to date against its industry’s fall of 11.3%.
Iron Mountain’s stable and resilient core storage and records management business positions it well to ride the growth curve. Moreover, the company’s data center business expansion efforts, backed by a robust balance sheet position, are likely to drive long-term growth.
Iron Mountain’s Project Matterhorn aims to capture a higher share of the large, global addressable markets by investing 16% of its revenues (roughly $4 billion) over the next four years to accelerate its growth. The program will help the company shift from a product-based approach to a solution-based sales approach to better serve customers’ needs. It will also aid in establishing a global operating model designed to help optimize the company’s shared services and best practices.
Image Source: Zacks Investment Research
Let us now decipher the factors behind the surge in the stock price and also check whether this trend will last.
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. IRM’s tenant base is diversified, and it has enjoyed a consistent customer retention of approximately 98% over the years.
In the second quarter of 2023, Iron Mountain’s organic storage rental revenues increased 10.8% from the prior-year period. The strength came from the continued benefit of pricing and positive volume trends. We estimate a year-over-year increase of 10% in storage rental revenues in the current year. For 2024 and 2025, the metric is expected to witness growth of 10.9% and 11%, respectively.
Iron Mountain is supplementing its storage segment’s performance with expansion in its faster-growing businesses, most notable being the data center segment. The company is actively pursuing organic growth initiatives and expansion endeavors to tap the robust demand for connectivity, interconnection and colocation space, thereby stimulating leasing operations.
In the second quarter, Iron Mountain achieved substantial 17.9% growth in data center revenues, and in the first half of 2023, it successfully leased 55 megawatts (MW) of data center capacity. For 2023, given the leasing activity so far, management anticipates surpassing its guidance of 80 MW.
On the balance sheet front, Iron Mountain had total liquidity of approximately $1.7 billion as of Jun 30, 2023 and a weighted-average maturity of 5.6 years. Iron Mountain ended the second quarter of 2023 with a net total lease-adjusted leverage of 5.1X, the lowest since 2017.
It has no significant debt maturities until 2027, and 83% of its net debt was fixed. Additionally, IRM’s current cash flow growth is projected at 11.88% compared with the 8.10% expected for the industry. With this, it has ample financial flexibility to meet its near-term debt obligations and other capital commitments while pursuing growth opportunities.
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. In the last five years, the company increased its dividends thrice. Given its healthy operating platform, our adjusted funds from operations (AFFO) year-over-year growth projections of 4.2% for 2023, a lower-than-industry payout ratio and a solid financial position, the latest dividend hike is likely to be sustainable.
However, the fragmentation of the storage and information management service industry and a slowdown in the service business are concerning for the company.
Also, 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 Jun 30, 2023, Iron Mountain’s net debt was approximately $11.2 billion. For 2023, our estimate for net interest expenses indicates a rise of 20.4% year over year. Further, with high interest rates in place, the dividend payout might become less attractive than the yields on fixed-income and money-market accounts.
The Zacks Consensus Estimate for SBA Communications’ current-year FFO per share has moved marginally northward over the past month to $12.90.
The Zacks Consensus Estimate for Americold Realty Trust’s ongoing year’s FFO per share has been raised 2.4% upward over the past month to $1.26.
Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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Iron Mountain (IRM) Shares Rally 20% YTD: Will the Trend Last?
Shares of Iron Mountain Incorporated (IRM - Free Report) , carrying a Zacks Ranks #3 (Hold), have rallied 20.1% year to date against its industry’s fall of 11.3%.
Iron Mountain’s stable and resilient core storage and records management business positions it well to ride the growth curve. Moreover, the company’s data center business expansion efforts, backed by a robust balance sheet position, are likely to drive long-term growth.
Iron Mountain’s Project Matterhorn aims to capture a higher share of the large, global addressable markets by investing 16% of its revenues (roughly $4 billion) over the next four years to accelerate its growth. The program will help the company shift from a product-based approach to a solution-based sales approach to better serve customers’ needs. It will also aid in establishing a global operating model designed to help optimize the company’s shared services and best practices.
Image Source: Zacks Investment Research
Let us now decipher the factors behind the surge in the stock price and also check whether this trend will last.
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. IRM’s tenant base is diversified, and it has enjoyed a consistent customer retention of approximately 98% over the years.
In the second quarter of 2023, Iron Mountain’s organic storage rental revenues increased 10.8% from the prior-year period. The strength came from the continued benefit of pricing and positive volume trends. We estimate a year-over-year increase of 10% in storage rental revenues in the current year. For 2024 and 2025, the metric is expected to witness growth of 10.9% and 11%, respectively.
Iron Mountain is supplementing its storage segment’s performance with expansion in its faster-growing businesses, most notable being the data center segment. The company is actively pursuing organic growth initiatives and expansion endeavors to tap the robust demand for connectivity, interconnection and colocation space, thereby stimulating leasing operations.
In the second quarter, Iron Mountain achieved substantial 17.9% growth in data center revenues, and in the first half of 2023, it successfully leased 55 megawatts (MW) of data center capacity. For 2023, given the leasing activity so far, management anticipates surpassing its guidance of 80 MW.
On the balance sheet front, Iron Mountain had total liquidity of approximately $1.7 billion as of Jun 30, 2023 and a weighted-average maturity of 5.6 years. Iron Mountain ended the second quarter of 2023 with a net total lease-adjusted leverage of 5.1X, the lowest since 2017.
It has no significant debt maturities until 2027, and 83% of its net debt was fixed. Additionally, IRM’s current cash flow growth is projected at 11.88% compared with the 8.10% expected for the industry. With this, it has ample financial flexibility to meet its near-term debt obligations and other capital commitments while pursuing growth opportunities.
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. In the last five years, the company increased its dividends thrice. Given its healthy operating platform, our adjusted funds from operations (AFFO) year-over-year growth projections of 4.2% for 2023, a lower-than-industry payout ratio and a solid financial position, the latest dividend hike is likely to be sustainable.
However, the fragmentation of the storage and information management service industry and a slowdown in the service business are concerning for the company.
Also, 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 Jun 30, 2023, Iron Mountain’s net debt was approximately $11.2 billion. For 2023, our estimate for net interest expenses indicates a rise of 20.4% year over year. Further, with high interest rates 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 SBA Communications (SBAC - Free Report) and Americold Realty Trust (COLD - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for SBA Communications’ current-year FFO per share has moved marginally northward over the past month to $12.90.
The Zacks Consensus Estimate for Americold Realty Trust’s ongoing year’s FFO per share has been raised 2.4% upward over the past month to $1.26.
Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.