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Iron Mountain (NYSE:IRM)
Q4 2018 Earnings Conference Call
Feb. 14, 2019 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Iron Mountain fourth-quarter 2018 earnings conference call. [Operator instructions] Please note this event is being recorded. I'd now like to turn the conference over to Greer Aviv, senior vice president of investor relations. Please go ahead.

Greer Aviv -- Senior Vice President of Investor Relations

Thank you, Keith. Hello, and welcome to our fourth-quarter and full-year 2018 earnings conference call. The user-controlled slides that we will -- we will be referring to in today's prepared remarks are available on our Investor Relations site along with a link to today's webcast. You can find the presentation at ironmountain.com under About Us/Investors/Events and Presentations.

Alternatively, you can access today's financial highlights press release, the presentation and full supplemental financial information together in one PDF file by going to investors.ironmountain.com under Financial Information. Additionally, we have filed all the related documents as one 8-K available on the IR website. On today's call, we'll hear from Bill Meaney, Iron Mountain's president and CEO, who will discuss highlights and progress for our strategic plans, followed by Stuart Brown, our CFO, who will cover financial results and our 2019 guidance. After our prepared remarks, we'll open up the lines for Q&A.

Referring now to Page 2 of the presentation. Today's earnings call, slide presentation and supplemental financial information will contain forward-looking statements, most notably, our outlook for 2019 financial and operating performance. All forward-looking statements are subject to risks and uncertainties. Please refer to today's press release, earnings call presentation, supplemental financial report, the safe harbor language on this slide and our annual report on Form 10-K which we expect to file later today for a discussion of the major risk factors that could cause actual results to differ from those in our forward-looking statements.

In addition, we use several non-GAAP measures when presenting our financial results, and a reconciliation to these measures are required by Reg G are included in the supplemental financial information. With that, Bill, would you please begin?

Bill Meaney -- President and Chief Executive Officer

Thank you, Greer, and thank you all for taking the time to join us. We are pleased to be here this morning to discuss our fourth-quarter and full-year 2018 performance. 2018 marked a year of continued strong growth for Iron Mountain, highlighted by global storage organic revenue growth, significant growth in our Data Center business and further scale in our emerging markets. Turning to Slide 3 of our financial results presentation, full-year revenue increased 10%, which was in line with our expectations, driven in part by the contribution from recent data center acquisitions and strong growth in services.

Notably, total organic revenue growth was 3.6% for the full year, a strong acceleration from the 2.3% we reported in 2017. Adjusted EBITDA was also in line with expectations, growing 14% year over year and resulting in 120 basis point improvement in our margin. Lastly, we generated 16% growth in AFFO at the high end of our expectations, while continuing to reinvest in the growth of our business in supporting our commitment to our dividend. The strong AFFO performance compares to an increase in our fully diluted shares outstanding of 7.4% and resulted in 160 basis points reduction of our payout ratio to 78%.

As it relates to our fourth-quarter performance, we achieved constant currency revenue and adjusted EBITDA growth of 10% and 12%, respectively, while our margin expanded 100 basis points year over year. I'll provide more detail around volume trends in a few minutes. But on a global organic basis, records management volume was flat in 2018. Importantly, 2018 was a year of continued evolution for Iron Mountain.

We made significant progress in increasing our mix to high-growth businesses, completing more than $1.7 billion in targeted acquisitions. This evolution is highlighted by the ongoing expansion of our Global Data Center footprint with the acquisitions of IO, the Credit Suisse data centers and EvoSwitch. We continue to also expand in faster-growing Emerging Markets with acquisitions that increase scale and reach in key markets including South Korea, China and the Philippines. We continue to build from our strong capabilities and core competencies developed over many decades of managing our customers' valuable physical and information assets to extend our storage capabilities beyond records management and data management to a more comprehensive portfolio of physical storage solutions.

Today, we store many of our customers' valuable assets in addition to information assets which leverages our know-how and utilizes our existing storage facilities and logistics expertise while maximizing our revenue and NOI per square foot. To this point, we made targeted acquisitions to further a number of our faster-growing businesses, such as market-leading fine arts and entertainment services capabilities and valet consumer storage. All of this enables us to help customers manage the storage of valuable assets beyond the more than 690 million cubic feet of records and digital information we store in our records and information management or RIM business area. Turning to our business performance.

Organic records management global volume was flat, a modest improvement from Q3 as new volume increased 10 basis points sequentially. More specifically, in North America, new volume from existing customers and new sales together increased almost 40 basis points sequentially, while destructions picked up 10 basis points. In a few moments, I will highlight some of the recent wins in North America records and information management that have helped to support this performance. Volume in the Emerging Markets continues to grow at a faster clip increasing 7% for 2018, though we saw a modest tick-down in new sales compared to Q3.

Our investments are focused on increasing the scale of our businesses in these geographies and growing market share as evidenced by the recent acquisitions I highlighted earlier. Organic storage revenue growth increased 1.9% and 2.4% year over year in Q4 and 2018, respectively, as revenue management continues to contribute positively to growth. Destructions remain at elevated level that we saw a moderation in recent trends. Organic service revenue growth was strong in 2018, growing at 5.4% driven in part by continued strength in secure shred, as well as momentum in digital projects from our Information Governance and Digital Solutions business, or IGDS.

Overall, we had a successful Q4 with a number of strong new business wins across the North America RIM. Turning to Slide 4, an example of one such win was a five-year agreement with CitiMortgage which was a looking to outsource their noncore business functions within their mortgage workflows. Once successfully implemented, we expect to gain 550,000 cubic feet of records plus more than 820,000 files. Additionally, a new customer signed in Q4 was The Hoover Institution at Stanford University.

The Hoover Institution has begun a major renovation of their facilities at Stanford which will directly impact their archival collections located in three historic buildings. Most of their collections are moving offsite during the renovation, some indefinitely, and Iron Mountain was selected to relocate 64,000 cubic feet of material from Stanford University to a customized Iron Mountain facility. Specialized relocation processes designed by our team, along with the Hoover archivists and preservationists, will be utilized during the move. The collections will be maintained and circulated from a private climate-controlled vault modified specifically for this project.

This is a great example of our teams working to implement solutions to meet our customers' specific needs. Turning to our federal business, we have made significant inroads in further penetrating this historically un-vended channel. Across our entire federal business, revenue grew 14% year over year in 2018 led by strength in Data Center and Records Management. To this point, a U.S.

government regulatory agency expanded with a new data center deployment in Northern Virginia adding to their existing deployment in New Jersey. On the records management side of the federal business, we had net Q growth of 4% during 2018 and continued to see good momentum. We are encouraged by the progress made in Q4 in North America in accelerating volume from existing customers and driving new business to Iron Mountain. Another area of solid progress in 2018 was the momentum of our IGDS business as customers increasingly live in a hybrid world of both physical and digital storage.

We recently signed a contract with a large retailer to enhance our value-adding services. We are beginning a digital solution involving more than 75 million images of employee files, which are currently housed on-premise at each individual store, as part of an HR file conversion project. Digitizing HR documents and centralizing it into a single repository helps achieve greater efficiency, reduce risk and improve compliance with a variety of federal and state requirements. We are currently in discussions with this customer to assist them in extracting even greater value from their HR information through the use of our InSight platform and its machine learning and artificial intelligence capabilities.

These are great examples of how we are solving problems of our customers and adding value in the areas of digital transformation and compliance. We had an extremely active pipeline of opportunities for our IGDS business as we ended 2018, a nearly 50% increase over the prior year. Importantly, we are seeing these opportunities increasingly translating into income as revenue has doubled over the past two years. Regarding our Data Center business on Slide 5, you can see Q4 and 2018 performance was strong with full-year revenue of nearly $230 million and adjusted EBITDA of $100 million.

We continue to see solid leasing momentum as we closed out Q4, achieving our targeted 10 megawatts of new and expansion leasing for the year consisting of 261 leases signed with strength in the financial services, professional services and federal verticals. Of those new and expansion leases, 34% were new logos to our Data Center platform, of which 43% had a pre-existing customer relationship with Iron Mountain, reinforcing the strength of the Iron Mountain brand and its extension to our Data Center business. To that point, we signed a new cloud-based provider of medical information in Northern Virginia as this customer was very sensitive to proximity to its own local IT team. Additionally, this customer also has a long-standing relationship with our data management team.

So our core competencies in compliance and security resonated well with their data center needs. Another great example of a new customer is Wasabi Technologies, a hot cloud storage company which deployed in Northern Virginia. Iron Mountain was able to fulfill all of their data center requirements, including a hyperscale-ready facility which meets the strict compliance requirements for FedRAMP. Demand from existing customers remains strong, with a number of customers expanding their footprint in existing data centers, as well as deploying with us in additional markets.

A large global bank, which came to us as a Data Center customer through the IO acquisition, increased its capacity needs 3x during 2018, expanding its usage in New Jersey by 47%. Turning to Slide 6, our development pipeline reflects construction in key markets including New Jersey, Phoenix, London and Amsterdam, as we continue to see good demand from existing customers. Subsequent to the end of the fourth quarter, we acquired a parcel of land in Frankfurt with power reserved in a permitted design which will ultimately support 20 megawatts of capacity. Frankfurt is the second-largest multi-tenant data center market in Europe behind London.

This land acquisition improves our competitive position across Europe and allows us to have a presence in three of the four key European metro areas. We now have total potential capacity of almost 350 megawatts across our Data Center platform including the land in Frankfurt and Chicago. We expect the leasing momentum exiting 2018 will continue into 2019 as we build on our strength with enterprise customers and attract more hyperscale demand. We currently expect to be able to achieve robust leasing activity with a target of executing 15 to 20 megawatts of new and expansion signings in 2019.

Turning to Slide 7, our strong performance in 2018 has enhanced the solid foundation we have created and increased our financial strength as an organization to support sustained growth. Once our acquisitions from last year are fully incorporated in our base numbers, the business, as it is configured today, is expected to deliver 4% plus organic adjusted EBITDA growth going into 2020, well in line with our original 2020 plan to exit 2020 with a 5% organic EBITDA growth. This is all compared to less than 2% growth just five years ago. As it relates to our outlook for 2019, we issued guidance this morning which reflects consistent performance expectations for Records and Information Management business fundamentals with further physical storage potential from newer adjacencies, ongoing strong growth in emerging markets, data center and adjacent businesses, and continued investment in the business to support strategic initiatives and innovation around digital solutions to support our customers' evolving needs.

We do anticipate that the strong dollar will create headwinds over the course of 2019 relative to our reported results, so this has no operational or margin impact. On a constant currency basis, we expect revenue growth of 3%, adjusted EBITDA growth of 4% and AFFO growth of 4.5%. And if we normalize for the impact of adoption of lease accounting, our adjusted EBITDA margin would increase by 100 basis points further. Stuart will have more detail on our 2019 guidance in a moment.

Putting this all into historical context, Iron Mountain is entering into 2019 in great shape. Our brand continues to resonate with our customer base where trust is ever more important especially when it comes to information, as well as valued assets. This trusted relationship with more than 225,000 customers and covering over 95% of the Fortune 1000 is demonstrated both by the continued relevance of our RIM business with expanding margins through higher pricing, as well as the rapid growth of our digital solutions business and data center offerings. In terms of how our services have delivered bottom-line value, it is worth noting the accelerating growth of the businesses since 2014.

We have grown revenue and adjusted EBITDA on a constant currency basis at a 10% CAGR. AFFO has delivered a 10.9% CAGR with a 7.8% CAGR in share count. Our business is more diversified both by business line, as well as geography, all yielding the acceleration and underlying growth mentioned earlier. Altogether, over the past five years, we have built significant momentum into the business and feel good going into the year.

We will remain disciplined regarding the pace with which we deploy capital to support these growth initiatives, while ensuring we remain true to our financial model. With that, I will turn the call over to Stuart.

Stuart Brown -- Chief Financial Officer

Thank You, Bill, and thank you all for joining our fourth quarter and 2018 results conference call. We delivered very strong AFFO growth in 2018 of 16%, and continued to expand our adjusted EBITDA margins while also achieving 3.6% organic revenue growth. This growth was supported by results of our revenue management program and continued expansion of value-add services in our data center platform, with growth of records volumes in our international markets offsetting declines in North America. We are pleased with the healthy performance across our business segments, as well as our progress investing in and integrating faster-growing businesses.

Not only do these new businesses create value for shareholders but also allow us to be better partner with our customers for their critical physical and digital storage needs. I'd like to start off the financial discussion with the performance highlights, which you can see on Slides 8 and 9 of the presentation. For the quarter, revenue was in line with expectations approaching $1.1 billion, growing about 7% on a reported basis and almost 10% on a constant-currency basis. This was driven by contributions from our recent data center acquisitions and strong organic revenue growth, including solid contributions from our emerging markets in our businesses.

Total organic revenue grew about 3.5% in the fourth quarter compared to the prior year and 3.6% for the full year. Organic storage revenue grew 1.9% for the quarter and 2.4% or about $60 million for the full year. Organic service revenue grew 6.1% in the fourth quarter and about 5.4% for the full year. Service growth was primarily driven by increased contributions from our expanding secure shred business, continued strength in recycled paper prices, as well as additional digitization and special projects.

Our adjusted EBITDA grew over 12% on a constant-currency basis for the fourth quarter to $360 million, with margins expanding 100 basis points year over year to 33.9%. The margin improvement resulted primarily from the flow-through of revenue management, the impact of the adoption of the revenue recognition standard and improved labor productivity. SG&A as a percentage of revenue excluding significant acquisition costs declined about 80 basis points in the fourth quarter versus a year ago due in part to lower bad debt expense and increased operating leverage on the revenue growth. Adjusted EPS for the quarter was $0.25 per share, down from 2017 due mostly to higher depreciation and amortization associated with Data Center acquisitions, and impacted by a 6% increase in shares outstanding following our December 2017 offering to fund the acquisition of IO data centers.

For the full year, AFFO was $874 million, up $122 million or 16% over the prior year, reflecting the strong operating performance, our data center acquisitions and a very disciplined approach to capital allocation, while continuing our investments in new products and businesses. AFFO came in at the high end of our expectations due to lower cash taxes and interest, as well as slightly lower capital spending. To touch on operating performance in more detail, on Slide 10, you can see the developed markets. Organic storage revenue growth came in at 0.9% for the quarter, slightly better than Q3; and 1.4% for the full year despite the negative volume growth, again reflecting the contribution from revenue management.

Organic service revenue in developed markets increased 5.1% for the quarter and 5.2% for the full year due mainly to growth in our shred business, project revenue and digitization projects, as mentioned earlier. In other international, we continued to see healthy organic storage revenue growth of 4.1% for the quarter. Full-year organic storage revenue growth was 5.4% on 3.2% growth in organic volume. Organic service revenue growth was 6.1% in the quarter and 5% for the full year in this segment.

Further, the data center business delivered strong organic revenue growth of 12% for the quarter and 9% for the full year. Our adjacent businesses also performed well with revenue growing almost 19% on an organic basis in the quarter and nearly 11% for the full year. Turning to Slide 11, you can see the detail of our fourth quarter 100 basis point adjusted margin expansion with growth in most segments. We saw margin decline in North America data management or our tape business, driven by lower volumes in mix, as well as investments made in growing new products and services.

In the tape storage business, the amount of digital data being stored continues to grow. However, greater physical tape density is resulting in lower physical volumes. Revenue management has helped to offset some of the tape volume trends, and margins have remained north of 50%. In Western Europe, fourth-quarter margin expansion returned to levels seen in the first half of the year, expanding about 240 basis points, reflecting lower bad debt, our focus on continuous improvement and stronger project-based revenue in the U.K, Germany and Austria.

In the global data center segment, adjusted EBITDA margins were 41.5% in the fourth quarter and 43.5% for the full year, reflecting the increased scale of the business and progress on integration activity. As Bill noted, we are pleased with our leasing activity reflecting the successful integration of a strong commercial team and demand in the markets where we operate. During the quarter, we executed 3.3 megawatts of new and expansion leasing for a total of 9.6 megawatts for the year. The leasing was primarily enterprise and federal government customers, and churn remains quite manageable at 3.2% in 2018.

Turning to Slide 12, you can see that our lease adjusted leverage ratio at the end of the year was 5.6 times, comfortably in line with other REITs, especially when considering that our business is more durable than many other REIT sectors. While we did not have any significant financing activity in the fourth quarter, we did sell two properties as part of our capital-recycling program, which generated net proceeds of $56 million. As of December 31, our borrowings were 73% fixed rate. Our weighted average borrowing rate was 4.9% and our well-laddered maturity average is 6.2 years with no significant maturities until 2023.

Our strong balance sheet and capital structure is supported by our significant real estate portfolio and the long-term nature of our customer relationships. Turning to guidance, this is detailed in the supplemental for your review and on Slide 13. We are expecting 2019 revenue to be in the range of $4.2 billion to $4.4 billion, adjusted EBITDA to be in the range of $1.4 billion to $1.5 billion, adjusted EPS to be in the range of $1.08 to $1.18 and AFFO to be in the range of $870 million to $930 million. This reflects solid performance following 2018's growth, though impacted by a stronger dollar, the new lease accounting standard and continuing investments in Iron Mountain InSight, IT infrastructure and of our data center pipeline.

2019 total organic revenue growth is expected to be in the range of 2% to 2.5%, including organic storage revenue growth of 1.75% to 2.5%. Global organic record volumes are expected to be flat, with declines in North America offset by growth in other international markets. Globally, we expect new incoming volume to continue offsetting destruction rates of 4.5% to 5% and outperformance of around 2%. We expect service organic growth will be in the low-single digits for 2019 from continued growth in our shred business and Information Governance and Digital Solutions.

As many of you know, record recycled paper prices were a tailwind to our service business in 2018, but we anticipate moderating paper prices in 2019. We also expect continued strong growth in the Data Center business, with low teens revenue growth compared -- organic revenue growth compared to 2018. We will, though, have elevated churn in the first quarter in Phoenix due to two customer move-outs that were part of our deal underwriting when we acquired IO. Anticipated investments, which are detailed in the supplemental, will be funded by a combination of cash available from operations, capital recycling and new borrowings supported by the higher expected adjusted EBITDA.

We may also utilize third-party capital, particularly for data center development, and equity from our ATM depending on market conditions. We expect our lease-adjusted leverage ratio to improve 10 to 20 basis points from the 5.6 times at the end of 2018. As you think about 2019 outlook, there are several factors affecting comparability that I would like to bring to your attention. First, we divested our fulfillment business at the end of Q3 2018, which generated approximately $25 million in annualized revenue.

Second, the adoption of the new leasing standard is expected to result in a noncash increase in rent expense of $10 million to $15 million, lower interest expense of $3 million and lower depreciation expense of about $3 million due primarily to certain capital leases converting to operating leases under the standard. Third, current foreign exchange rates relative to 2018 are expected to result in a $60 million to $70 million headwind to revenue and a $20 million to $25 million impact to EBITDA. As a reminder, on FX, we derive about 40% of our revenue from non-U.S. dollar currencies, and as a result, exchange rate volatility can have a significant impact on our reported results.

While we have very low transactional exposure, with our cost well matched to our revenue in the respective countries, we do have unhedged translation exposure and a somewhat higher proportion of our debt is U.S. dollar denominated. As our businesses continue to evolve with data center growth, we will also be reviewing our disclosure to determine where we can make changes to reduce complexity and enhance transparency. You should expect to see some changes to the supplemental beginning in the first quarter.

In summary, as we close out another year of continued growth and evolution, we are pleased to see progress on multiple fronts. Our records and information management business continues to deliver durable cash flow and steady organic revenue growth through solid revenue management. We've continued -- we've had continued success extending into higher growth in emerging markets, and our fast-growing data center business and adjacent businesses continued to increase scale and have become very competitive platforms poised for even greater success. We are pleased with the adjusted EBITDA, AFFO and dividend growth rates achieved in 2018, and the contributions from our teams serving customers around the world and look forward to strong performance again in 2019.

With that, I'll turn it off the call over to Bill for closing remarks before we open up for Q&A

Bill Meaney -- President and Chief Executive Officer

Thank you, Stuart. Just a couple of comments before we begin the question and answer is, first of all, it was a very strong year which was punctuated by double-digit EBITDA and AFFO growth, well ahead of the shares we issued to support our acquisition of the IO Data Center. The business also has never been stronger or better positioned, continued organic storage revenue growth with remaining untapped storage segments or reserves, a broader range of businesses and services still tied to our existing business relationships built on decades of trust and accelerating organic growth of EBITDA and AFFO which underpins the future dividend growth while delivering. With that operator, I'd like to open it up to questions. 

Questions and Answers:

Operator

[Operator instructions] And the first question comes from Nate Crossett with Berenberg.

Nate Crossett -- Berenberg Capital Markets -- Analyst

Maybe you could just talk a bit about your appetite for further data center acquisitions. I know you have plenty of room to build out based on the current pipeline. But wanted to get your thoughts on just outright acquisitions. Is it possible to see some more EvoSwitch-type transactions going forward?

Bill Meaney -- President and Chief Executive Officer

Good morning, Nate. Look, I wouldn't rule it out, but it's not really what we think we need to do in the plan. In other words, the EvoSwitch -- if you think about EvoSwitch specifically, which is a good example, is we look at the top 10 international markets and the top 10 U.S. markets and we say, "OK, do we feel -- how do we prioritize those, which ones do we think we should enter." And then when we look at that is we look at what's the best way to enter that market.

So Chicago, Northern Virginia and Frankfurt are all great examples where we decided the best way for us to enter that, because it's important for our customers that we have decades of relationship with, plus some of our newer customers on the Data Center side, that we have product on the shelf in those key markets. And we decided the best way to enter those markets was through greenfield development, which we've done. In Amsterdam, we looked at the same with thing because, as you know, in Europe, we refer many times to the flat markets. The top markets in Europe are Frankfurt, London, Amsterdam and Paris.

So Amsterdam is absolutely a key market in Europe and it's one that our customers wanted to see us in. And when we looked at Amsterdam, quite frankly, EvoSwitch for us was the best entry point. So that's how we think about those markets. But if you think about overall in terms of our growth plan, with now almost 350 megawatts of capacity that we can build out both with sites that we've already started building in, in the Frankfurt and Chicago sites, we feel really good about being able to achieve our financial plan with little or no acquisitions.

Nate Crossett -- Berenberg Capital Markets -- Analyst

OK. That's helpful. And maybe just a quick follow-up. Can you talk a bit about just data center competition? We've heard from some of the wholesale providers that price can be very competitive in certain markets.

So I'm just curious to hear your thoughts, and maybe you could talk a bit about how you're trying to differentiate.

Bill Meaney -- President and Chief Executive Officer

No, I think it's a good question, Nate. I think that -- well, first of all, I would differentiate between the enterprise customers and the hyperscale. So it's fair to say right now, as Iron Mountain is, we're more -- the bulk of our customers are in the enterprise segment, which is what you would expect. We notice that of the new logos we signed this year, 43% of them, we already had in existing customer relationship with, and obviously, those were enterprise customers.

So for us, I think when you talk about pricing, we see less price sensitivity on the enterprise side, quite frankly. So Iron Mountain hasn't been exposed to that as much. When you see the analyst talking about the pricing compression, it's more on the hyperscale. Now what does that mean for us? We do have an appetite to be present in the hyperscale market, and I think I've covered this before on the calls, and it's more about getting to optimize in the yield on the site.

So if you look at Northern Virginia, which is 82 acres and can build out well north of 80 megawatts of critical IT load, then if you want to fill that, the rate that you fill it is as important in some ways as what the specific revenue per kilowatt that you're getting on that site. So to fill that out at a pace that we think is optimum, then we would expect that site to be somewhere when it is fully built out, between 40% to 60% hyperscale. And our standpoint is our models are built on current hyperscale pricing. So I think what you're hearing coming out of the industry is hyperscale pricing has come down, and quite frankly, these things typically are kind of 8% to 9% cash on cash returns.

They are at least approaching that level now, but that's where we built our model and that's where we expect our entry point, which are still well above our weighted average cost of capital and is still a good return. So I think the noise coming out of the market I think is more about people who have been heavily present in that segment before and they're realizing that the pricing is coming down to what I will call as a normal clearing price in terms of what a reasonable return is for these very large-scale projects which have very long contract duration.

Operator

And the next question comes from Sheila McGrath with Evercore.

Sheila McGrath -- Evercore ISI -- Analyst

Your EBITDA margins in 2018 continued to improve. Just wondering what your outlook for margin improvement is in 2019. Is it achievable to maintain or grow margin in North American storage? And how is the mix shift shifting to data centers driving margin improvement?

Stuart Brown -- Chief Financial Officer

Yes. Sheila, this is Stuart. So if you look at sort of the midpoint of guidance, it implies about a 30 basis point improvement in margin. And as Bill mentioned in his prepared remarks, that's impacted also negatively by the change in lease accounting.

So if you normalize for that, it's 50 to 100 basis point margin expansion. And I think you're going to see similar trends in '19 to what you saw in '18, with revenue management continuing to contribute to margin expansion in the developed markets. Emerging Markets, you'll see some margin expansion really due to continuing increased scale, right, because we've got a pricing program into those markets, but we're really there focused on driving scale and continuing to increase our market presence. And then you will get then, in the Data Center business as that business grows and as a percentage of total business, you will get some uplift in margins because that business has a higher average EBITDA than the rest of the business.

Sheila McGrath -- Evercore ISI -- Analyst

OK. Great. And as a follow-up, Bill, you mentioned the federal vertical records growth of 4% in 2018. Just wondering how the backlog is looking in 2019, and any insights on how meaningful that opportunity might be.

Bill Meaney -- President and Chief Executive Officer

No, thanks, Sheila. No, I think that we expect to continue to build on that. Obviously, with the federal government, the gestation period of it is longer that our, say, normal private enterprise customers. But we continue to see the backlog growing.

And I think we highlighted our Homeland Security win on the last call. And we start getting those, what I'd call, kind of iconic brands is the momentum is starting to build in the business. And we see an acceleration in terms of the pipeline. That being said is that the government is on fiscal budget, so you work this year to deliver the project generally for next year.

But we really like what we see in the pipeline in terms of momentum. So I would expect that to tick up over time.

Operator

And the next question comes from George Tong with Goldman Sachs.

George Tong -- Goldman Sachs -- Analyst

You're now several years into your revenue management initiative. Can you provide us with an update on the rollout of revenue management across your geographies and the amount of pricing benefit you expect through 2020?

Bill Meaney -- President and Chief Executive Officer

OK. Yes, George. So first of all, in terms of the program, is that it's pretty much completely rolled out, obviously, in North America and now Western Europe. We started rolling it out this year -- or last year, in 2018, with four centers across the broader international beyond Western Europe.

So we expect to see real traction in those markets. Whereas, Western Europe will be fully online this year; last year, it was partially online. Obviously, North America will continue online. So what we expect is similar levels of price increase in North America, in Europe as we -- well, in North America as we got this past year, we expect an uptick on -- coming out of Europe and also the emerging markets or the international markets this year.

So we feel pretty good in terms of the momentum that we're getting on that. So I think you can expect that we'll have further strength from price and revenue management coming into 2019, and we've built that into our guidance.

George Tong -- Goldman Sachs -- Analyst

Got it. That's helpful. And on margins, you've essentially achieved all your targeted transformation savings and recall cost synergies through the end of 2018. Can you remind us of your 2020 EBITDA margin target, taking into account the lease accounting changes and discuss some of the initiatives you have to bridge from your current margins to 2020 margins?

Stuart Brown -- Chief Financial Officer

Yes. I mean, if you normalize for the impact of the lease accounting, and even if you go backwards and normalize actually for the rev rec accounting, right, that we had that helped us in 2018, right, we've been seeing margin expansion of 50 to 100 basis points a year. Looking forward, right, you -- and that's benefited also by the -- obviously the flow-through of rev rec, as well as synergies. We continue to have cost improvement programs in place that you will continue to see benefit from going forward.

So we expect to see sort of similar levels of margin expansion going forward. But in addition, we've historically been investing $20 million to $30 million a year in new business growth and new business initiatives and starting to see some green shoots come out of those businesses. And as you look forward, expect to see some margin expansion coming out of those businesses as well. So I think as you look forward, we feel quite comfortable with sort of continuing a similar track of that margin expansion.

Operator

And the next question comes from Andy Wittmann with Robert W. Baird & Co.

Andy Wittmann -- Robert W. Baird and Company -- Analyst

Yes. Great. I guess my question kind of builds on the last question here. Just want to understand some of the moving parts of the long-term guidance to 2020 that you guys have talked to.

Obviously, a multiyear look is going to have lots of puts and takes as things change over the years. But maybe just to start out to level set us. Stuart, can you talk about -- can you quantify the FX headwind that the target is seeing to revenue and EBITDA so we could kind of really look on it as -- on the 2019 currency rates? And I mean, it looks like you need to find something like -- I don't know exactly what the FX is, double-digit EPS growth or EBITDA growth in the next year and margin increases '20 over '19 of probably 200 basis points or so. So can you just talk about some of the puts and takes in a little bit more detail in achieving that 2020 guidance, and how you feel about the key metrics of revenue and EBITDA specifically?

Stuart Brown -- Chief Financial Officer

I'm glad you asked the question. And today, we're really focused on the 2019 guidance, right, so we didn't want to sort of confuse that with sort of putting out 2020 numbers, right? So let me walk you through the puts and takes as to how to get there. And to answer your first question on the currency, if you go back to my script, we talked about, in 2019, FX headwinds by itself or on revenue were $60 million to $70 million, on EBITDA are $20 million to $25 million. And...

Andy Wittmann -- Robert W. Baird and Company -- Analyst

Is that cumulative since beginning, though, just so we can kind of compare more easily? Do you have that handy by any chance?

Stuart Brown -- Chief Financial Officer

I don't have that handy. I would -- again, exchange rates prior to sort of really the recent changes haven't been that significant. So we go back to what our 2020 plan has been, this is now really the biggest impact. Now you have to remember the 2020 plan was built on currency rates at a certain period of time, so we should always be normalizing for FX when it goes up or down.

But if you look forward, and relative to our last 2020 plan, right, you can see that we've delivered right on track for 2018. To get to the 2020 plan adjusted for FX from 2018 reported results, EBITDA would need to grow about 15% or $200 million to get to the range of the 2020 numbers, right? So when you think about -- you got about 4% organic EBITDA growth per year, so that adds in and of itself around $120 million, continue to expect -- in our long-term plan, continue to expect $150 million -- actually $150 million plus of M&A per year, so that $300 million total M&A, that would add about another $50 million of EBITDA. And then when you think about the comments I just made around we've been investing in new businesses and services, about $30 million per year, so those should start to deliver EBITDA growth as well, combined with the savings from continuous improvement, can get you back into that range from what our longer-term models were. We will, at some point, be issuing sort of new long-term growth targets in the future.

We're looking at sort of when the best time is to do that now.

Bill Meaney -- President and Chief Executive Officer

Yes. And the only thing I would just add, Andy, on this is that -- from an FX standpoint is that our view is we take FX, right? The good news is we don't have a margin exposure on that. So whether it gives us a tailwind, which it did a couple of years ago, and now it's giving us headwinds is what your -- what our shareholders are paying for us to do is to manage the business through those tailwinds and headwinds. So we're really focused on line of sight to the operational plan that we have to do to deliver that original 2020 guidance, and we're well on track with that.

And we think the -- looking at some of the R&D pipeline that Stuart relied -- mentioned the $30 million that we're spending roughly a year on that that includes things like Iron Cloud and InSight, which we effectively have seen very little benefit today on. So we feel pretty good in terms of where we stand versus our original outline.

Andy Wittmann -- Robert W. Baird and Company -- Analyst

Great. That's helpful. And then just kind of a cleanup question here. On the AFFO for the year, you guys came in a bit ahead, you mentioned, I think it's just in taxes.

But the thing you control most here is the CAPEX side. Is that a delay of some planned CAPEX that we're going to see in the future? Or have you been able to manage the business so that CAPEX is altogether unneeded?

Stuart Brown -- Chief Financial Officer

Let me just give you a quick example of one of the big drivers of CAPEX improvements. And I can't remember if I talked about this on the last call or not. But if you look at what we spend annually on our fleet, for example, a few years ago, our operations team did a great job putting in place new management tools for our drivers to improve fuel utilization, reduce wear and tear on the trucks. As we've gone back now and reevaluated the impact of that, we realized that the quality of our trucks and the time that they can stay on the road just increased.

So we've been able to actually reduce the rate at which we replace trucks annually. I think that was around $15 million or $20 million of capital savings in and of itself this year.

Operator

And the next question comes from Andrew Steinerman with JPM.

Michael Cho -- J.P. Morgan -- Analyst

This is Michael Cho for Andrew. My first question, just a quick clarification, should we still assume the previously stated 2020 plans have not changed? Stuart, I know you mentioned long -- new long-term targets are coming, but you were referring to something past 2020, right?

Stuart Brown -- Chief Financial Officer

Yes, we will -- I mean, again, our -- we want to keep sort of long-term targets out there. And if you look at sort of what we've been talking about in the past in terms of growth rate of the dividend, how do we support that with AFFO and EBITDA, those general trends all remain on track, and we think our current business plans support those. And the only thing that we'd say -- the only thing that you need to make sure that you're doing is when you're looking at 2020 is -- first of all, is to make sure that you're looking at the FX impact to that and adjusting those targets for that. But we're not issuing 2020 guidance today.

Bill Meaney -- President and Chief Executive Officer

But I think your point is that the walk that Stuart just took Andy through is, since we're still on the 2020 number, correcting for the FX. The other thing to note, if you are trying to kind of go beyond 2020, which we're not talking about today, but at the same time you can see that we're also on track to be able to deliver on an exit organic EBITDA growth of 5% at the end of 2020. So we expect that the momentum will continue to build in the business. So if we're sitting here at a little over 4% organic EBITDA growth as we sit here today -- which we think is really great progress, because we started -- you've been following the story, is we've started less than 2% four or five years ago.

So we've got that up to a little bit north of 4% on an organic basis, and we have line of sight and on track to exit 2020 at 5% organic EBITDA growth.

Stuart Brown -- Chief Financial Officer

And I'll add one other point as well, just so that people don't think we're sort of walking back, is on our leverage targets as well, right, the original multiyear plan. We've got in there either five times lease-adjusted EBITDA if we issue the full ATM, or 5.2 times target for the end of 2020, and that remains our target as well in our business plan.

Michael Cho -- J.P. Morgan -- Analyst

Great. That's helpful. And just one quick one. On the Data Center side, you mentioned low double-digit organic revenue growth outlook for 2019.

Can you give a quick comment on EBITDA contribution as well?

Stuart Brown -- Chief Financial Officer

On? I'm sorry.

Bill Meaney -- President and Chief Executive Officer

EBITDA on data center.

Stuart Brown -- Chief Financial Officer

Yes. So I mean, the EBITDA on the Data Center we're sitting right now at the mid-40s percent range on the EBITDA margin. As that scale continues to grow, you've got to remember we're still sort of putting the infrastructure together from an integration standpoint and also still incurring integration costs. I think we had a little over $2 million of integration costs in 2018.

So we're well on track to sort of getting back to the mid-50% margin and a 10% of total EBITDA by the end of 2020.

Operator

And the next question comes from Marlane Pereiro from Merrill Lynch.

Marlane Pereiro -- Bank of America Merrill Lynch -- Analyst

Most of my questions have been answered, but I just wanted a clarification. So on the leverage target, you said you would get down about 20 basis points to the 5.2 times. I'm sorry, can you clarify why that's not the five times?

Stuart Brown -- Chief Financial Officer

Yes. So the 10 to 20 basis point expansion is -- or improvement is in 2019 relative to the 5.6 at the end of 2018. So we'll get down to 5.5, 5.4 at the end of the 2019 and then another improvement in 2020.

Bill Meaney -- President and Chief Executive Officer

Yes. And I think to your point about the difference between the 5.2 and the five is whether we run the ATM. So the -- as you know, we had a $500 million ATM, which we've drawn down a little over $60 million of. So if -- and we haven't run that for over a year now.

If we ran that that would reduce the leverage by 0.2. If we don't run the ATM, then instead of five, it would be 5.2 would be the endpoint for 2020.

Marlane Pereiro -- Bank of America Merrill Lynch -- Analyst

Got it. And is there a longer-term target that you think is ideal for the business? So...

Bill Meaney -- President and Chief Executive Officer

Well, I think that what we've always -- yes, well, I think what we've always said is that, to us, it's not about our ability to run the business or finance the business, I mean -- and you can see that when we issue debt, it's usually at the upper end of investment grade as it stands today. It's more where our covenants cut is. So our covenants are at 6.5. And we think that ideally we would like one and a half to two turns of daylight between wherever our covenants are and where our leverage is because it just gives us much more flexibility.

Whether it's looking at our own stock from time to time or if it's looking at opportunistic acquisitions, we just think that one and a half to two turns between your covenants and where your debt levels are is ideal. So we're not in a rush. That's why we -- our view is the right balance again from capital allocation as we continue to invest in growth in the business, we continue to grow the dividend, and that still leaves us enough left over that we can slowly tick down leverage to the targets that we set for ourselves. And over time, that will continue to go down.

Marlane Pereiro -- Bank of America Merrill Lynch -- Analyst

Great. And then just lastly, in terms of how high you would go for the right data center acquisition or any thoughts on that?

Bill Meaney -- President and Chief Executive Officer

Well, it's really high hard to talk about hypothetical because, look, we really like our plan. Obviously, the area where the biggest demand for CAPEX -- don't forget we have $150 million of M&A built into the plan annually and another $250 million plus built in in terms of expanding data center. So it's not like we're constraining the business for capital. So if you put those two together, we've got over $400 million that we're plowing to growth and M&A for business each year.

So -- and then if you say that we -- just in data center, being the one that's probably the most obvious, is we -- what we have in terms of greenfield and insights that we've already started developing, is we can take that to almost 350 megawatts. So we've got plenty of daylight to hit our plan. So it's really hard to respond to hypothetical at this point.

Operator

And the next question comes from Karin Ford with MUFG Securities.

Karin Ford -- MUFG Securities -- Analyst

I wonder if I could get a little but more detail on the assumptions underlying the 1.75% to 2.5% organic storage revenue growth forecast. I think you said in your comments that you think volumes will be flat. Does the low end of the range accommodate volume declines at all? And what do you think is going to be the primary driver of the acceleration from the 1.9% you printed in the fourth quarter to 2.1% at the midpoint?

Stuart Brown -- Chief Financial Officer

No, I think -- Karin, this is Stuart. I think if you look at the trends we had overall, right, you get some variability from quarter to quarter, and you got to remember our volume numbers is our trailing four quarters. So we get around to the end of the year, you're looking at total volume changes by market is what we put in the supplemental, and you also then can back into sort of implied price. So if you look at sort of the buildup in the numbers and you look at developed markets and emerging markets both volume and price, we actually don't expect to see that much difference in trends in 2019 from 2018.

So we've talked about revenue management and our continued upside in that program. And if you think about sort of what those are, we're really pricing consistent with inflation, so we're not out there doing anything too crazy on that front. You will get some tick-down from organic revenue growth in the Data Management business, right, we've talked about that as well, and then that'll be offset by continued growth in the data center in the adjacent businesses, where you're getting storage and service growth on both of those, albeit in 2019, the Data Center core base or organic base will grow as the acquisitions sort of move into -- as we lap over the acquisition dates. So I think very comfortable with the growth rates that we put out there.

Karin Ford -- MUFG Securities -- Analyst

OK. Second question is where are EBITDA multiples on business acquisitions today and where cap rates on real estate acquisitions today?

Stuart Brown -- Chief Financial Officer

We haven't really done a lot of real estate acquisitions today in that sense. I mean, the real estate purchases that we've done are really opportunistic and it's more -- we'll do some real estate acquisitions in 2019, where we've got a couple of purchase options actually in California, a couple of records center that are well below market. And actually, in our plan, we'll fund that with capital recycling from selling some other real estate, which is also in our plan. So we'll continue to recycle capital opportunistically.

If you look at sort of where multiples are trading in the business from a multiple of revenue basis. And again, we try to look at it actually including integration cost and things like that, and we're still sitting sort of 3% to 3.5%. Shred actually quite a little bit cheaper than that. And as a multiple of EBITDA, six to seven times EBITDA.

That's pre-synergies. So synergies will add another turn or so improvement onto those numbers.

Karin Ford -- MUFG Securities -- Analyst

On the capital recycling front, what's the spread, do you think, between dispositions and acquisitions this year?

Stuart Brown -- Chief Financial Officer

I mean, we talked about in the past sort of the -- and the spreads are -- you'll see the gains -- you saw the gains, actually, that we recorded in the P&L in the fourth quarter from some real estate sales and we'll -- you'll see some nice numbers next year as well. I mean, cap rates on industrial real estate, and we did some valuation work with last year. You look at the real estate portfolio that we own in just North America is a -- for the -- excluding racking, before racking is about $2.5 billion, and that's on a 6% cap rate. I'd argue cap rates are actually probably below that given the markets that we're in.

And we own, primarily in markets like Boston, New Jersey, California, Chicago, Dallas. We really try to own in the primary markets. And you'll actually see us selling -- actually the real estate is what we're going to sell, the recycle is going to be more in the secondary and tertiary markets.

Karin Ford -- MUFG Securities -- Analyst

Great. And then just last question, just is a technical one on Page 7 of the slides. You showed that the growth portfolio moved from about 19% of the revenue mix to 25% from the third quarter to the fourth quarter. Was it just a reclassification? Or why did that number move so much?

Bill Meaney -- President and Chief Executive Officer

It is more of a pro forma just because we're lapping the IO, EvoSwitch and Credit Suisse data center acquisitions. So we were quite busy in 2018. And if you actually -- once those are all lapped, we're sitting at a 75%-25% mix today.

Operator

[Operator instructions] And the next question is a follow-up from Nate Crossett from Berenberg.

Nate Crossett -- Berenberg Capital Markets -- Analyst

I just wanted to ask about investment-grade potential. I'm just curious to hear about any recent conversations with the rating agencies and how they are viewing the data center buildout. And the reason I ask is because DLR has similar leverage levels and they have investment grade. So can you just...

Stuart Brown -- Chief Financial Officer

You're just saying that to make me jealous, don't you, Nate?

Nate Crossett -- Berenberg Capital Markets -- Analyst

No, I'm just curious. I mean, I feel like -- go ahead.

Stuart Brown -- Chief Financial Officer

No. I can look at a number of my peers across the REIT sector, they have similar leverage levels and better ratings than we do. We've been having ongoing discussions with both S&P and Moody's in a very healthy way, right, as our business has shifted from historically business services, we became a REIT. We're continuing to grow the Data Center business.

I think Moody's actually has put out a report and published that we've moved over to their REIT team. And so I think we're making good progress. We're having great dialogue with them, and I think they, over time, will give us more credit for the REIT-like durability of the cash flow that comes out of the business.

Bill Meaney -- President and Chief Executive Officer

And the only thing I would just add to that, Nate, is that while some -- like totally, we're both focused and we would love to be treated like digital. The other part for us is we still want to delever because of this free space that we have where our covenants -- our covenants are set at 6.5, why that's historical, but it is what it is. One thing I would say is we're already getting kind of upper end of investment grade pricing when we go out and issue debt. So we're already getting the benefit, it's just that the rating agencies just don't rate us that way.

So when you actually see our debt get priced is we're not far off, but it would be nice to have the rating as well.

Stuart Brown -- Chief Financial Officer

Yes. Our debt investors give us credit for the strength of the balance sheet and cash flow.

Operator

And the next question also is a follow-up from Sheila McGrath from Evercore.

Sheila McGrath -- Evercore ISI -- Analyst

Yes. I was wondering given your storage locations in North America are close to many major metropolitan areas, and you have the trucking and logistics expertise, I'm wondering if there's a way to capture some additional demand for your storage space from last-mile demand. Or is that what's FLEXE, the industrial company that you've referenced before, is that kind of a last-mile offering?

Bill Meaney -- President and Chief Executive Officer

That's a great question, Sheila. So it's kind of, I would say, three things that -- and I kind of highlighted it, and we'll try to incorporate that so that people can see the total volume that we're storing rather than just purely the records information. The 690 million cubic feet of records that we are storing doesn't include these things that we're already doing like under the FLEXE program, which is exactly -- which has similar margins, by the way, or revenue per square foot as our core business. We also have a similar type of operation in Amsterdam where we're doing both last-mile customs and delivery for a number of the large global e-commerce platforms, as well as local posts -- European postal offices.

And then the third area, which I also alluded to and we've talked about it a few times, is that we continue to like certain aspects of the valet consumer storage, which is a logistics-heavy portion of the consumer storage market. So we think those three areas are areas that will continue to add volume to our network. And our intention is to be able to incorporate that in the number so you see it. Because right now, it's hard to actually see the level of impact.

Stuart Brown -- Chief Financial Officer

The thing that I'll just add on quickly too, right, when you think about how do we leverage our real estate and locations, our logistics know-how, our asset tracking. And you can really see it in our art business as well and entertainment services, where we're doing a lot of specialized transport packing, tracking of unique items, and a number of the major auction houses have outsourced their back office to us for us to handle that for them. How do we keep expanding that and growing that, we think, it's interesting area.

Sheila McGrath -- Evercore ISI -- Analyst

Great. And if you could just quickly comment on the pre-leased development pipeline and data centers moved up, especially in New Jersey. Just comment on the leasing activity there.

Stuart Brown -- Chief Financial Officer

Yes. No, I mean, again, we had a strong fourth quarter leasing activity. We're a little over 20% pre-leased in the development pipeline. And as Bill mentioned, I mean, we had a large global bank take additional space at that location.

And we continue to see good leasing pipeline in almost all of our markets.

Operator

And the next question comes from Yilma Abebe with JPMorgan.

Yilma Abebe -- J.P. Morgan -- Analyst

I had a follow-up question on that investment-grade question that was just asked. From a financial-policy perspective, do you want to be investment grade? Or are you working toward becoming an investment-grade-rated company?

Stuart Brown -- Chief Financial Officer

What I'd tell you is that, unfortunately, I don't control the ratings, the rating agencies do. I mean, we want to operate the business heading in a direction that we think is prudent for us to be able to continue to grow on the business, but I wouldn't say that that's something that we aspire to. We want to keep those types of metrics, but it'll be up to the rating agencies to figure out what they do.

Yilma Abebe -- J.P. Morgan -- Analyst

OK. So from the company's perspective, irrespective of what the rating agency says, you're sort of not managing the balance sheet to become investment grade, you want to remain in high yield.

Stuart Brown -- Chief Financial Officer

I think I would say we want to manage our balance sheet consistent with being able to fund the business and not that different with the other REITs. And if you look at our balance sheet structure, I think we're pretty close to that today.

Yilma Abebe -- J.P. Morgan -- Analyst

OK. And then sort of the lease versus owned mix, the agencies, I think in the past, have had an issue with that as they rate you compared to other REITs, leased versus owned. Is that still an issue from their perspective or have they moved on?

Stuart Brown -- Chief Financial Officer

I would say, first of all, let me refer you back, I think it was the NAREIT presentation that's on our website from last fall where we disclosed some of the valuation of our real estate in a little bit more detail. We've done that now a couple of times. Obviously, we've shared that with the rating agencies as well, and so there's some detail in there. The important point here is you have to look at it on a percentage of value versus a percentage of square feet.

So while it looks like we own 30% of our overall square feet, if you look at it from a valuation perspective, the markets that we own are the markets you want to be in and control real estate. So from a valuation perspective, we're over 50%.

Yilma Abebe -- J.P. Morgan -- Analyst

OK. And have the agencies come around to that way of thinking, you think?

Stuart Brown -- Chief Financial Officer

I mean, I think Moody's changing the ratings team is maybe a sign of that.

Operator

[Operator signoff]

Duration: 64 minutes

Call Participants:

Greer Aviv -- Senior Vice President of Investor Relations

Bill Meaney -- President and Chief Executive Officer

Stuart Brown -- Chief Financial Officer

Nate Crossett -- Berenberg Capital Markets -- Analyst

Sheila McGrath -- Evercore ISI -- Analyst

George Tong -- Goldman Sachs -- Analyst

Andy Wittmann -- Robert W. Baird and Company -- Analyst

Michael Cho -- J.P. Morgan -- Analyst

Marlane Pereiro -- Bank of America Merrill Lynch -- Analyst

Karin Ford -- MUFG Securities -- Analyst

Yilma Abebe -- J.P. Morgan -- Analyst

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