Iron Mountain: The Quiet Man
Excerpt from Footnotes and Flashbacks: Week Ending April 16, 2023
We published an in-depth Credit Profile on Iron Mountain over the weekend that should be of use to owners of IRM stocks and/or bonds (see Iron Mountain: Credit Profile 4/15/23). The company is a large cap BB tier member of the S&P 500 that ranks among the Top 100 HY bond issuers along with a range of multicurrency bank loan and lease exposures out there in the broader world.
The company has gone through an extraordinary decade as it started planning a REIT conversion in 2012, converted in FY 2014, and then set about driving a multiyear expansion plan in data centers with a major global acquisition in Storage along the way.
The chart above plots the IRM stock performance since the start of 2019 vs. two companies that have relevance in considering IRM’s valuation. One is a data center (Digital Realty ticker DLR) and one is a self-storage REIT (Extra Space Storage, ticker EXR). Both have larger market caps than IRM and both are also in the S&P 500. The exercise is more for illustration.
I picked DLR for a stock comp since the data center business is the clear driver of IRM’s growth plan and a cornerstone of its post-conversion REIT strategy. EXR is a major self-storage REIT, and thus not a direct competitor, but it is a storage REIT and trades at a premium.
In picking EXR, I looked at the three largest market caps in self-storage and picked the best trailing 3Y and 5Y time horizon total return performer. EXR was the name (I do not follow EXR or DLR). Both EXR and DLR have shown higher EV/EBITDA multiples than IRM and their peer group subsectors (Self-Storage REITs, Data Centers) also have higher EV multiples.
This is not investment advice on IRM vs. either of these two names, but the historical performance is food for thought on a name – Iron Mountain – that does not seem to get a mountain of respect vs. some other benchmark names from the rating agencies or street coverage in equities. The transition of the IRM business mix and the redeployment of free cash flow from its high margin (as in 70+% gross margins) legacy storage business makes for a very interesting story. We cover that in the report.
The street’s data center equity coverage has been dialed back in recent years as a number of the major names were taken private or were rolled into strategic acquisitions. During 2021, American Tower acquired CoreSite and QTS Realty was acquired by Blackstone. During 2022, CyrusOne was acquired by KKR and Global Infrastructure Partners (GIP).
The data center business has its own distinctive set of fundamentals, but the color over time has been that the intermediate term growth trajectory is favorable and pricing power has been in evidence. IRM’s strategy on data centers is in good company with KKR, Blackstone, GIP, and AMT. There are some interesting angles on IRM that are worth thinking through.