Data center REITs are a relatively new type of real estate investment trust. While data hasn't traditionally been thought of as a real estate investment, the rising demand for data storage requires a lot of physical real estate to hold it all.
Inside a data center are multiple rows of racks with servers stacked one on top of another. These servers are where all the information you have stored in the cloud is sitting.
Data centers are a unique real estate investment. Instead of leasing square footage, companies lease the amount of power consumption they will require for their data storage needs. These leases are based on watts, either kilowatts or megawatts.
Iron Mountain -- the specialty REIT
I know; Iron Mountain (NYSE: IRM) isn't technically a data center REIT. They are playing in that arena now, though, and they're taking a lot of market share quickly. The company that has been securely storing documents for most of the Fortune 1000 companies has expanded into data centers to also store their digital information.
Iron Mountain's core business is secure storage for items such as documents, medical supplies, and artwork. While this still provides the majority of their revenue, the demand for document storage is decreasing while the demand for cloud storage is increasing.
Iron Mountain has seen this trend coming and was quick to get ahead of it by expanding their investments and developments into data centers. Their core storage business isn't going anywhere anytime soon, with 50% of their new storage leases from last year having terms of at least 15 years.
It is, however, easy to get nervous about how successful any company will be when they begin putting a lot of emphasis on a new segment -- like a durable storage company investing in data centers. This doesn't appear to be affecting their core business negatively in any way and may possibly help to increase it even.
Strong, established customer base
Iron Mountain's current customer base includes 95% of Fortune 1000 companies. This is an impressive network of established relationships, which should make it easier to win more data storage business.
Their services also include digital imaging. This allows a company that already has their hard documents stored with Iron Mountain to have those documents converted into digital files. This provides a much simpler transition into digital data storage as they begin converting their documents into images they can access from anywhere.
Focus on security
Iron Mountain's core business was built on security. With their long history of document shredding and secure storage, companies have turned to them specifically for the security they provide.
The need for strong cyber security is greater than ever now with new threats emerging daily. Cyber attacks from domestic and foreign threats can be severely damaging for companies when hackers gain access to their data as well as their customer and client data.
The REITs that can provide the most protection for their data tenants will be the ones that shine the brightest in the coming years.
Unlike a standard storage unit, Iron Mountain's facilities have strong perimeter, entrance, and interior security measures. They also employ strict chain of custody procedures, so records can't easily just become lost.
Iron Mountain is bringing that focus on security into their data centers as well. Aside from their audited cyber security measures, they also provide strong physical security. Servers are secured behind cages with cage-door access-denied technology.
Companies that want an additional level of security and reliability can lease private data suites. This essentially gives customers their own secured data center inside the building inside their own secured suite.
The fact that Iron Mountain has always had such an emphasis on security, and has been the best at providing it in their core business, will likely rank them as one of the most secure data storage providers.
Iron Mountain is built on an incredibly solid foundation. Their 2019 revenue exceeded $4.26 billion and funds from operations (FFO) of over $658 million, for an FFO per share of $2.29 and a price-to-FFO ratio of $11.68.
Revenue growth has been consistent year over year, and that growth is expected to accelerate with the aggressive growth of their data center portfolio. The data center growth is already proving itself with a 9.9% year-over-year increase in data center revenue from the first quarter of 2019 through the first quarter of 2020.
Their existing global network of customers puts them in a strong position to take market share in several countries. The full year plan for 2020 is to lease an additional 15 to 20 megawatts (MW) of data, and they had already executed 6.4 MW of that by the end of the first quarter. This grew even further with a 27 MW pre-lease to a Fortune 100 company in Germany in June, shortly followed by another 3 MW lease to a company in Singapore.
Iron Mountain should be a great earner
This REIT has a lot of growth ahead of it with its expansion into the data center space and the speed at which that segment of their business is taking off. However, the hardest thing to ignore about Iron Mountain is their dividends.
This REIT has historically been a high-dividend REIT, with their four-year average yield being 7.19%. Currently their forward yield is up to 9.25%, which is some great cash flow for investors.
At first glance, this dividend looks unlikely to sustain itself with such a high FFO payout ratio of roughly 150%. However, Iron Mountain has a lot of income from service business, which is taxable income. This service business is known as a taxable REIT subsidiary. This means there's a much higher gap between their taxable income and FFO than most other REITs. This sort of makes the payout ratio an apples to oranges comparison when looking at other REITs.
Iron Mountain fits into the specialty REIT sector. They're a bit of a hybrid between industrial, storage, and data centers. Iron Mountain would be priced at a bargain in any of these sectors, with their FFO multiple being almost half of the averages between them.
Between their attractive valuation, high dividend, and promising growth in the data center arena, I would say Iron Mountain is heavy on the reward side of their risk-to-reward ratio. Regardless of whether they ever become the most successful REIT in the data center sector, they could likely be the most profitable one for their investors.
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