Iron Mountain: Costly Relative To Different REITs (NYSE:IRM)

Expensive readers,

Iron Mountain Included (NYSE:IRM) is a knowledge storage REIT centered on modern options in information middle infrastructure, asset lifecycle administration, and data administration companies. The REIT primarily owns two distinct sorts of properties – paper storage amenities and information facilities. Whereas the previous is prone to expertise a secular decline over time, the latter has boomed currently because of the rise of AI. Each section enhances one another fairly nicely as IRM typically takes in paper paperwork that it digitizes and shops in a digital type on their servers, subsequently offering end-to-end information storage options to their prospects.

I started coverage on the inventory with a HOLD score at $63 per share again in July 2023 and was fairly skeptical concerning the inventory’s future prospects for plenty of causes, particularly:

• a heavy presence in a declining paper storage market
• excessive (preliminary and upkeep) CAPEX of knowledge facilities
• decelerating income development, notably within the companies section
• and most significantly premium valuation at a time when most different REITs have been buying and selling at a reduction

Since my article, IRM has outperformed the broader REIT index (VNQ) and has returned RoR of 11%. However the inventory stays costly relative to the remainder of the REIT sector, regardless of clear deceleration traits seen within the newest earnings.

The corporate has additionally lately made an acquisition of Regency Applied sciences for $200 Million. The acquisition is supposed to broaden IRM’s lifecycle enterprise into a brand new section of recycling IT property. The corporate made the next assertion relating to the advantages of the acquisition:

This strategic transaction represents a major milestone in our efforts to strengthen Iron Mountain’s presence within the Asset Lifecycle Administration sector and our sustainability choices and can propel our enterprise development ahead.

I just like the acquisition as a result of it continues to shift the portfolio additional away from conventional paper storage amenities, which have a questionable future.

Good efficiency, however decelerating development

After I wrote the unique article, IRM had reported an important first quarter with year-over-year AFFO development of 9%, which at the least considerably supported the premium valuation. I warned that service income development began decelerating and that going ahead natural income development, in addition to AFFO development, would possible sluggish.

Certainly, year-to-date AFFO per share grew by simply 3% YoY, and through the third quarter development was minimal at simply 1% YoY as AFFO per share reached $0.99.

The deceleration in AFFO development was, largely, pushed by flat service revenues over the previous 9 months.

Yr-to-date, natural storage revenues grew properly at 10.5% YoY, however have additionally began to come back down from document ranges seen in late 2022 and early 2023. Progress in natural storage revenues was pushed by 20% YoY development within the information middle enterprise, pushed primarily by new information middle commencements.

For the total 12 months, administration expects AFFO to come back in at $3.91-$4.00 per share, up 4% YoY. Past that, analyst consensus requires 7% development in 2024 and 9% in 2025. Notably, these analysts have a 100% 2-year hit charge (with a 20% error margin), however I see their estimates as formidable in mild of present development deceleration traits. To err on the facet of warning, I assume income development of solely 4% per 12 months in my calculations which is according to the long-term development CAGR.

I additionally need to level out that IRM’s stability sheet has a comparatively poor score of BB-. Their leverage is comparatively affordable at 6.1x adjusted EBITDA, however they’ve 19% of floating charge debt and an already high-weighted common rate of interest of 5.6%. Amongst their costliest debt is the $1.28 Billion excellent on their revolving line of credit score which at present accrues curiosity at a whopping 7.2%. I discussed in my earlier article that IRM tried to refinance the credit score line with 7% notes due in 2029 however has made little progress on this entrance.

The REIT has no materials debt maturities till 2025, however given their excessive publicity to floating charge debt, the curiosity expense will possible rise in 2024, posing headwinds to an formidable AFFO development forecast.

An costly price ticket relative to different REITs

IRM pays a 3.9% dividend yield and the dividend hasn’t elevated a lot through the years regardless of a wholesome 64% payout ratio. I see no imminent threat of a dividend minimize right here and absolutely anticipate the dividend to stay and develop barely within the following years.

However this is the factor. IRM trades at a excessive a number of of 16.8x AFFO, which is meaningfully above its historic common of 12x AFFO.

IRM does not report NOI, however it may be approximated by deducting the price of gross sales and SG&A from complete revenues. With internet debt of $11.5 Billion and a market cap of slightly below $20 Billion, I estimate that the inventory trades at an implied cap charge of 6.2%.

To place issues into perspective, Realty Revenue (O) which is among the most secure REITs, trades at 5.5%. Lengthy-term treasury bonds commerce at 4%, which suggests a 220 bps threat premium for IRM. I take into account such a premium relative to treasuries kind of honest given IRM’s BB- score.

It is also price noticing that IRM is the truth is fairly inefficient in the way in which it runs the enterprise and consequently has very low working and revenue margins of 17% and 6.5%, respectively. That is extraordinarily low for a REIT.

All issues thought of, I can see why the REIT would attraction to buyers who consider in AI. However on the similar time, I can’t ignore the truth that income development has slowed materially this 12 months. I do not really feel fully comfy with the consensus forecast which requires an acceleration in development, largely out of nowhere, regardless of headwinds from the next curiosity expense. Extra importantly, I’m not comfy shopping for a REIT at what I take into account honest worth after I should buy others at steep reductions. For these causes, I downgrade IRM to a SELL right here at $66.50 per share.

The one threat to my thesis is that IRM, for some cause, continues to commerce at a premium to the remainder of the REIT sector. This might occur if the AI-fueled rally continues and/or strengthens. Furthermore, a re-acceleration in income development and/or a decrease valuation which might put the risk-reward in step with the remainder of the sector would additionally make me rethink my stance.