Converts to a REIT, Increases Cash Distributions 76%, Shares Under-Valued Relative to Peers

Iron Mountain, Inc. (IRM) is a global provider of information and data management services to a wide range of industries, and derives its revenues from records management, data management and document shredding. In June 2014, the company received IRS approval to convert to a REIT and subsequently raised dividends 76% for a 6% annualized yield. Iron Mountain is uniquely positioned to create value through its operating model and real-estate strategy, with a brand, global presence and competitive advantage that delivers long-term value and business trends that support stable growth. Over the long run, management expects to deliver total shareholder returns of 8% to 9% through earnings growth and dividends.


To understand its conversion to a REIT, investors should think of Iron Mountain’s documents storage business as fundamentally equivalent to rental revenue per square foot of box storage at its massive storage facilities with occupancy costs incurred by the square foot and revenue earned per cubic foot. Its storage rental model drives value through Iron Mountain’s facility design expertise, low maintenance and capital expenditure requirements, storage portfolio management of multiple tenants and related services.

Iron Mountain earns attractive rental income on its facilities, with 14% annual pre-tax return on invested capital (ROIC).


 

Iron Mountain Converts Corporate Structure to REIT

In June 2012, the company’s Board of Directors approved a proposal by hedge fund sponsor Elliot Management Corporation to change the company from a C-Corp. to a Real Estate Investment Trust (REIT) to return excess cash to shareholders and boost enterprise value, and filed necessary documents for the change. However, conversion plans were dogged by uncertainty as the Internal Revenue Services (IRS) stepped up filing reviews to stem REIT conversions for tax avoidance.

Finally, in June 2014, the company received IRS approval for its conversion to a REIT and began retroactively operating as a REIT effective January 1, 2014. As a REIT, Iron Mountain plans to distribute at least 90% of its income to stockholders as dividends.

Stock Jumped 20% on REIT Approval

Shares climbed approximately 20% from $29.77 to $35.74 on June 26, 2013, after news of REIT approval was made public but have settled down since and now offer excellent upside at $31.90 levels (as of 9/26/14). In response to REIT approval, several analysts increased their share price targets, to a high of $44 and a mean of $40.50.


 

Iron Mountain shares closed the week at $31.90 per share (on 9/26/14), near the middle of their 52-week range of $25.03 – $37.10, with a market capitalization of $6.7 billion, about 5.3x Book Value with a price-to-earnings ratio of 18.6x that is in-line with peers and at 4.7x cash flow. Iron Mountain has solid profitability metrics with 15.7% operating profit margin and 12% net profit margin.


As REIT, Iron Mountain Initiated 76% Higher Dividends with 6% Annualized Yield

Iron Mountain has paid dividends for 20 consecutive quarters since March 23, 2010, and has steadily increased dividends over the years from $0.063 per share to $0.270 per share on June 23, 2014.


 

After receiving REIT approval, Iron Mountain’s Board declared the company’s first quarterly distribution as a REIT with stockholders on record September 25, 2014, set to receive a Q3 distribution of $0.475 per share on October 15, 2014 ($1.90 annualized) for a 6.0% annualized yield (up 76% from $0.27 quarterly or $1.08 annualized pre-REIT approval). The company also declared a special distribution of $700 million, or approximately $3.62 per share, payable to stockholders on November 4, 2014, in either stock or cash.


Management expects Q4’s distribution to be the same $0.475 per share amount as Q3 2014 and will distribute a ‘catch-up’ distribution of $0.2475 per share (80% stock, 20% cash) before December 31, 2014, to compensate for lower distributions paid through July before the company’s conversion to a REIT. Iron Mountain expects total 2014 distributions of $400 million in cash.

Shares Under-Valued Relative to Self-Storage and Industrial Comparables

As the chart below illustrates (based on IRM’s stock price of $34.75 as of 8/14/14), Iron Mountain shares are priced at a significant discount to peers on funds from operations (FFO) and adjusted funds from operations (AFFO) while its dividend yield is higher than peers – making shares attractive for income, dividend growth and capital appreciation.


Real Estate Acquisitions Will Enhance Long-Term Returns

Iron Mountain runs its operations over 67.3 million square feet across 1,092 facilities worldwide, of which 64% are leased and 36% are owned. As a REIT, management plans to start acquiring facilities as leases expire and come up for renewal, and expects to spend $700 million to $1 billion on selective real estate acquisitions over the next 10 years to reduce financing costs, for solid investment return potential and for higher real estate residual value. In all, the company’s facilities sit on leased real estate valued at between $2.5 billion and $3.5 billion. Real estate acquisitions will add to cash flow and should result in higher dividend payouts.


Strong Competitive Barriers to Entry

Iron Mountain has several strong competitive advantages that give it distinct competitive advantages such as its global platform, scale and customer network, high operating leverage, well-known brand reputation, high-level relationships at customer accounts and demonstrated ability to reliably meet customer needs at low price points. As a result, Iron Mountain is a distinct leader in its $23 billion segment and well-ahead of competitors Recall Holdings (RCLHF), Cintas (CTAS) and Shred-It.


Strong Global Presence Helps Iron Mountain Dominate the Market

Iron Mountain controls approximately
40% of the $7 billion global records management market through a leading global platform and network that gives the company a significant competitive advantage. The company operates in 36 countries across five continents, and is growing marketshare in
31 of its major markets. Its emerging markets’ operations are organically growing at 11% annually and account for 12% of global revenues. Its large global footprint gives it the ability to offer services to customer locations across geographies and reduce overall record management costs.


Iron Mountain has about $3 billion in annual revenues with over 155,000 customers across its diversified global business base. The company serves
950 of all Fortune 1000 companies across healthcare, federal, legal, financial, insurance, life sciences, energy and business services industries,
with each F-1000 client accounting for no more than 2% of Iron Mountain’s total revenue.

Iron Mountain helps reduce cost and risk associated with storing and protecting information assets, with the broadest range of services and geographical presence, and delivers compelling value for customers.

While several industries, such as healthcare, are switching to electronic records and cloud storage, they still have to maintain physical documents for regulatory compliance. Typically, customers store records for an average of 15 years which provides a long-term, high visibility and stable source of revenue. The sticky nature of its documents management business also supports its annual customer retention rate of 93%.

Iron Mountain has steadily grown storage rental revenue to about 60% of total revenue with about 4% to 5% constant dollar growth annually.


In parallel, Iron Mountain is expanding its data center business with a model that delivers 10% to 14% ROIC.

Strategic Growth Plan Focuses on All Markets


Iron Mountain has experienced 12% new volume growth
in emerging markets and approximately 6% – 7% new volume growth in developed markets despite a decline in the use of paper in virtually all markets. To continue its growth trajectory as paper use slows, management plans to focus on customer retention (organic growth) and acquisitions (inorganic growth) to push year-over-year global net volume growth to 7.6% and drive revenues up about 4% annually to $3.36 billion to $3.47 billion by 2016. As part of its strategic plan, management has established a streamlined acquisition process and identified $500 million in acquisition targets
in emerging markets by 2016.


Iron Mountain has also indirectly benefited from recent high profile data breaches (where hackers have stolen customer information from prominent U.S. retailers) and reinforced the value of un-hackable physical content storage and shredding. So the shift to digital technologies doesn’t pose any imminent threat to the company’s core businesses.

New Partnerships Help Iron Mountain Maintain Its Competitive Advantage

Companies are also leveraging Iron Mountain’s services for its expertise in secure physical and digital data management, and these partnerships help secure long-term revenue.

For example, Iron Mountain entered into a multi-year agreement to provide data center collocation services to private student loans provider First Marblehead Corporation (FMD) at Iron Mountain’s Tier III LEED Gold certified Boston data center. First Marblehead’s financial operations are highly regulated and the company turned to Iron Mountain for the highest security available for its data, extending a previous working relationship with the company.

In August 2014, Iron Mountain began using circuit and cross-connect solutions provider Network Capacity Solutions’ Circuit Inventory Management System (CIM) and Cross-Connect Inventory Management System (XCIM) to monitor status and track connections at its data center, and to simplify its processes while bringing down costs.

Easy Access to Equity and Debt Capital Markets

Iron Mountain has easy access to the capital markets for sizable scale transactions. In September 2014, Iron Mountain Europe closed a private offering of $653.7 million of 6.125% senior notes due 2022 in the U.K. The notes are senior unsecured obligations of the subsidiary and are guaranteed by Iron Mountain. Net proceeds will be used to repay amounts outstanding under Iron Mountain’s revolving credit facility and for other general corporate purposes. Iron Mountain’s access to the capital markets supports strategic growth initiatives and acquisitions, and helps the company improve its profit margins.

Experienced Management Team Focused on Long-Term Growth

Iron Mountain is led by William Meaney who has served as President and CEO since January 2013 and brings over 20 years of professional management experience to the company, including global experience in Europe, Asia and Africa.

Rod Day serves as Executive Vice President and Chief Financial Officer, a position he has held since November 2013 after being promoted from CFO International Operations. Day has extensive financial control and planning experience at publicly-traded firms.

Marc Duale serves as President – International and has been with the company since May 2006. Duale has significant business growth experience in the Asia-Pacific region in high-volume service oriented businesses, and heads the company’s Asia expansion initiatives.

John Tomovcsik is General Manager of Records and Information Management in North America. Tomovcsik handles long-term strategy planning a focus on bottom-line profits and losses. Tomovcsik previously served as the company’s COO and has over 28 years of relevant operational experience.

Annie Drapeau serves as Executive VP – Strategy and Talent and creates, communicates and sustains the company’s strategic planning to ensure proper execution. Drapeau has over 17 years of strategy and management experience with several publicly traded companies and is instrumental in driving the company’s volume growth in the U.S. and abroad.

Q2 2014 Revenue Gains Underscore Steady Business Growth

For its second quarter ended June 30, 2014, Iron Mountain had total revenues of $786.9 million (up 4%) with adjusted Operating Income Before Depreciation and Amortization (OIBDA) of $241.8 million (up 4%), net income of $271.6 million (up 930% on a one-time benefit for income taxes) and earnings of $1.41 per diluted share (up 907%).

Revenues increased through geographic expansion into Brazil and from new customer acquisitions in established U.S. markets such as Buffalo, New Orleans and Philadelphia. Year-over-year storage rental revenues increased 5.7% while service revenues increased 2.3%. As the table below shows, storage rental accounted for 59.3% of total revenues while service brought in 40.7% of the total, reflecting healthy revenue diversification.


As of June 30, 2014, Iron Mountain had $145.3 million in cash and cash equivalents, $2.6 billion in depreciated property, plant and equipment (PP&E) and $6.74 billion in total assets. The company had $4.3 billion in long-term debt and total stockholders’ equity of $1.29 billion. The company reported normalized cash available for distributions and investments of $480 million for 2014 and $515 million for 2015.


 

Raises 2014 Adjusted Earnings Guidance After REIT Conversion

As a C-Corp, Iron Mountain expected 2014 revenues of $3.09 billion to $3.17 billion, OIBDA of $930 million to $960 million, adjusted earnings-per-share of $1.03 to $1.14, and annual dividend payouts of $207 million.

As a REIT, Iron Mountain maintained revenue guidance but lowered OIBDA to between $915 million and $945 million but increased adjusted earnings-per-share significantly to between $1.37 and $1.52, and almost doubled annual dividend payout projections to between $400 million and $420 million.

Summary

Iron Mountain is a leader in its niche with a nicely diversified revenue stream, stable cash flow and established relationships with top-tier clients across diversified industries that help it maintain stable long-term revenue growth with low correlation to economic cycles or rental terms. The company’s global presence has established a defensive moat that it leverages for customer acquisition, retention and volume growth, and for acquisitions to increase market share. Management is dedicated to its strategic plan of returning cash back to stockholders and has almost doubled distributions after receiving REIT approval. With shares now trading near the middle of its 52-week range, shares offer significant upside with conservative growth for investors looking for current income through quarterly distributions.

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