Iron Mountain (NYSE:IRM) is something of an anomaly among real estate investment trusts (REITs). There is, quite literally, no other REIT exactly like it, for reasons I'll explain shortly. Now add in 10 years' worth of annual dividend increases and a roughly 8% dividend yield, and income investors should be intrigued. Here's a primer on what you need to know before you decide to pull the trigger on this high-yield REIT.

The good stuff

Iron Mountain's core business is providing storage for paperwork. OK, that might not be exactly what you were expecting when I said it was unique. However, this is a pretty sizable business, and Iron Mountain is a giant in the space. It hardly has a monopoly, but it certainly has a scale that few, if any, can match.

A mess of paper files on the ground

Image source: Getty Images

What's particularly nice about this business is that once a company puts boxes of paperwork into Iron Mountain's care, it very rarely wants them back. And companies certainly don't want to take their boxes and move them to a new provider. To put some numbers on that, Iron Mountain has a 98% customer retention rate, and roughly 50% of the boxes for which it is responsible remain in its care for at least 15 years. This is a sticky business. 

This core physical-world operation is helping to fund an expansion into the digital realm -- so Iron Mountain isn't a one-trick pony, and it isn't sitting on its laurels. It is using its existing connections with business partners to sell the data center services it is building out. Look at it as providing storage in a new, high-tech way. It currently has 14 data centers located in key markets around the world. Over time, investors should expect this new business to become Iron Mountain's main business.  

That said, with the long-term nature of its physical storage operations, a full digital makeover could take a very long time. This isn't a bad thing, however, because it means that Iron Mountain can take its time, and there's plenty of leeway for minor missteps along the way.

The bad stuff

So far, so good, but there's always something to worry about.

The first key issue is that Iron Mountain's physical-storage business feeds a number of service-oriented businesses it runs. This is a mixed blessing, and I could have mentioned it in the section above. However, demand for services waxes and wanes, so this revenue isn't as stable as the fees Iron Mountain earns for storing boxes. For example, services revenue fell 3.7% in the third quarter of 2019, and it was down 1.9% through the first nine months of that year. It is an important part of the company's business, but one that isn't exactly a stable grower. 

The next negative is related to the first one. The business of storing boxes full of paper is mature and, in developed markets, in decline. It is a slow decline, to be sure, and one that the company's digital transformation is meant to address. But the paper storage business is really a cash cow, not a growth engine. And as it slowly withers, many of the services that Iron Mountain provides (like shredding) will shrink with it. So the digital push is a necessity, and vitally important to the REIT's long-term future. It has to go well or Iron Mountain's future will be bleak.

Iron Mountain's 8% yield, meanwhile, is fairly high, given that the average REIT, using the Vanguard Real Estate Index ETF as a proxy, is about 3.4%. Why so high? One of the big reasons is that Iron Mountain's debt load is material, with financial debt to equity sitting at roughly 0.93 times. Even though there really isn't a direct peer to which Iron Mountain can be compared, that ratio is well above those of some of the bellwether names in the REIT space. To be fair, the recurring nature of Iron Mountain's revenue suggests it can handle the debt burden. And it is building out a new business, which requires cash to construct and buy new assets. So there's a reason for the leverage. But that doesn't mean investors can ignore that leverage.

IRM Financial Debt to Equity (Quarterly) Chart

IRM Financial Debt to Equity (Quarterly) data by YCharts

Finally, there's dividend growth and dividend safety. During the third-quarter conference call, Iron Mountain announced that dividend growth would be slowing down so it could free up more cash to invest in its digital business. That's a mixed blessing, with management highlighting that it is better, long-term, for investors that the company supply the demand in this new business by expanding than grow the dividend at a higher rate. This is probably true. That said, the third quarter was the first time in a year that the dividend was actually covered by funds from operations (FFO), which are like earnings for an industrial company. 

The REIT would likely argue that its adjusted FFO (AFFO), a non-standard figure, is higher than its FFO, which is true. So the dividend coverage is probably better than it looks. Only the company doesn't give an easy way to see that, because it doesn't report AFFO per share. To put some numbers on this one, the FFO payout ratio was roughly 98% in the third quarter (it was over 100% in the four previous quarters), while the AFFO payout ratio was a touch under 80% once you go through the step of dividing the gross AFFO number by the number of shares outstanding.

There's a big difference there in terms of dividend safety, and investors can't afford to simply buy Iron Mountain and forget they own it. Indeed, a heavy debt load and skimpy FFO dividend coverage are two important warning signs that a dividend could be at risk

What to do?

Conservative investors should probably err on the side of caution here and not buy Iron Mountain. The heavy debt load, plan to slow dividend growth, and a tight FFO payout ratio are risks that probably aren't worth the sleepless nights. However, dividend investors with a bit more risk tolerance might want to take a deep dive. The company has clearly seen that it needs to change, and is taking action to do just that. The transition period will take some time to work through, but if Iron Mountain is successful in the shift toward digital storage investors will likely reward it with a higher price. The hefty 8% yield will pay you well for sticking out the ups and downs as the company works to shift in the new direction. Just make sure you keep an eye on the debt load and the dividend coverage as you monitor the progress management is making.