REITs can make excellent investments for growth and income. The property portfolios of most real estate investment trusts, or REITs, fall nicely into a specific category of properties, such as shopping malls, office buildings, or apartments. One exception is Iron Mountain (NYSE:IRM), which is somewhat in a category of its own. Its combination of specialized storage facilities, data centers, and a thriving service business is unique among REITs.
With that in mind, here's a rundown of what this 6.7%-yielding REIT does, what its future growth catalysts might be, the risks involved, and whether it's a buy.
What does Iron Mountain do?
The company specializes in records storage and security for a variety of clients. It owns a massive real estate portfolio, mainly consisting of records-storage facilities -- think self-storage properties, but instead of individuals storing their belongings, customers are corporations storing records and other documents. In all, Iron Mountain has more than 680 million cubic feet of hard-copy records in its facilities. And, in an effort to adapt to the new business climate, Iron Mountain has quietly started to amass a portfolio of data centers and build on its digital-solutions and data-protection business.
When it comes to secure records management, there's Iron Mountain and there's everyone else. I'd even go so far as to refer to the company's business as a near-monopoly. Ninety-five percent of the Fortune 1000 are among Iron Mountain's 225,000 customers. The company has an impressive 98% customer retention rate, and its brand name is unmatched in its core business.
Iron Mountain also has a thriving service business, especially when it comes to secure disposal of records. If you think about it, you've probably seen an Iron Mountain document-shredding truck at some point.
Reasons to buy
I already mentioned that Iron Mountain has incredible loyalty among its vast customer base, which I view as a massive competitive advantage. More than half of records boxes stored at Iron Mountain facilities 15 years ago are still there, for example.
Furthermore, although Iron Mountain has a massive market share in its record storage business, that doesn't necessarily mean there's no room for growth. Even in this digital age, there's still a big need for physical records -- documents with original signatures are still highly important in many industries, for instance. Iron Mountain believes there's roughly 720 million cubic feet of currently untapped records storage opportunities, based on BCG market research. To illustrate this point, in 2017 alone, net storage volume grew by about 7 million cubic feet.
As I mentioned, Iron Mountain has been quietly building a data center portfolio -- it's now in the top 10 worldwide by capacity -- and I don't see things slowing down anytime soon. In fact, Iron Mountain sees its "growth portfolio," which consists mostly of its emerging markets and data center businesses, growing from 19% of the total revenue currently to 30% by 2020.
Finally, Iron Mountain has been doing an excellent job of increasing its margins in recent years. Adjusted EBITDA margin has expanded from 29.6% in 2013 to 34% currently, with improvement every year in between, and the company believes there's more room to grow.
Risks involved with Iron Mountain
No stock capable of double-digit returns is without risk, and Iron Mountain is no exception.
Interest rate risk is a big factor for all REITs. Without getting too deep into the mechanics of interest rate sensitivities, the general rule is that as interest rates rise, REIT stocks come under pressure. The 10-year Treasury yield is a good REIT indicator, so if we see the 10-year yield spike, I'd expect REITs to drop.
Financing and debt risk is another issue. Like most REITs, Iron Mountain uses considerable leverage to finance its operations, but I'd call a leverage ratio of 5.6 a bit on the high end. Iron Mountain plans to lower that number to 5.0 by 2020, but for now it's a significant risk factor. For context, the average industrial and self-storage REITs, which I'd consider to be the closest comparisons to Iron Mountain, have leverage ratios of 5.2 and 4.0, respectively. Plus, only 72% of the company's debt is fixed-rate, so its interest expense could go up considerably if rates rise.
Adaptation is another big risk. Iron Mountain's future success relies on keeping up with industry trends. While the company's core records storage business is still highly relevant now, I think it's fair to assume that more and more records-keeping activities will migrate to digital methods in the future. So far, Iron Mountain is doing an excellent job of doing that, but it remains a risk factor.
The bottom line
I wouldn't exactly call Iron Mountain a risk-free investment, but with a near-monopoly in its core business, a generous 6.7% dividend yield, and lots of room to grow, especially in its data center business, there's strong potential for market-beating returns. In short, the risk-reward profile of Iron Mountain makes a lot of sense -- which is why it's a part of my own portfolio.
Check out the latest Iron Mountain earnings call transcript.