Iron Mountain: Sustainable Capital Allocation and Upside Potential (NYSE: IRM)


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Iron Mountain (NYSE: MRI) primarily manages information-related assets and has only invested heavily in data centers since 2017. This part of its business is currently growing faster than Equinix (NASDAQ:EQIX) which is the largest in industry. Additionally, as shown in the deep blue chart below, IRM’s share price has risen steadily since late February, coinciding with the value outpacing growth strategy in an interest rate environment. rising.

Data by Y-Charts

This may be due to its hefty dividend payments, but given higher inflation, IRM’s high debt levels may become a problem, and so it is important to assess whether capital has been deployed. sustainably to power the rapidly growing data center. Business.

I start with the consolidation currently taking place in the industry, and how IRM has become one of its major players.

Data Center Consolidation

First, consolidation or merger and acquisition activities are carried out to enhance revenue growth and access new markets. As shown in the table below, QTS Realty Trust (QTS) and CoreSite were acquired by infrastructure company Blackstone (BX) and American Tower (AMT) respectively. Interestingly, these are not strategic acquisitions made by other industry players. Another such example is CyrusOne (CONE) acquired by KKR (KKR) and Global Infrastructure Partners (GIP).

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Table built by the author using data from (

Now, according to my thesis from last week, it is possible that Switch (SWCH) is also an acquisition target in an industry where there is an insatiable appetite for real assets in light of inflationary concerns. Now, Switch is up more than 26% year-over-year in the last quarter of 2021, compared to less than 5% for specialist REITs like Equinix or Digital Realty Trust (DLR). This is one of the reasons that prompted these two major data center players to enter into agreements in Africa and Latin America.

As for IRM, sales of its global data center business increased 22% and 25% on an annual basis in the third and fourth quarters of 2021 respectively. This was made possible through the acquisition of data center assets totaling 3.5 million square feet worldwide. These span 19 locations, as shown on the map below.

Opera website

MRI Data Centers (

The company began by erecting ground constructions in the key state of Northern Virginia, which is densely packed with fiber backbones and offers lower electricity rates. Later, it also acquired other service providers and even converted underutilized enterprise data centers for colocation rental purposes. More importantly, its reputation as a leader in document storage with over 225,000 customers has helped a lot.

Now, these investments require huge sums of money, while the IRM, with its REIT status, has to give away most of the profits as dividends, resulting in a high level of debt. However, focusing exclusively on debt is counter-intuitive and it is necessary to look at the big picture, i.e. how capital is allocated.

The capital allocation strategy

The Boston-based REIT has a high debt-to-equity ratio, as shown in the deep blue chart below, a level well above that of Equinix. However, the downward slope shows that the use of leverage has been slowing since the first quarter of 2020, while at the same time the return on invested capital (second blue graph below the first) is increasing.

Data by Y-Charts

This is ironic because companies that need to convert cash into dividends normally take on more debt and use the cash to generate more returns. Conversely, as illustrated by the orange Equinix charts above, moderating the use of debt can lead to stagnant returns.

Specifically for IRM, the use of relatively less debt in its capital structure is partly explained by the stability of storage rental revenues which amounted to $2.87 billion in 2020 after increasing by 4% compared to 2020.


Company presentation (

Another reason for IRM’s ability to generate more returns while reducing the use of debt is the way it grows its capital, notably through its capital recycling strategy (figure above). Examples are the facility sales to Intermediate Capital Group (OTCPK:ICGUF), for approximately $178 million in June 2021, and entering into a sale-leaseback agreement to remain at the site as part of a 12 year lease. Along the same lines, there was a $358 million deal with Blackstone in December 2020.

Now, I’m not claiming that IRM has completely stopped issuing new debt. It still raises funds through senior notes or private placements, but at the same time pursues a strategy of gradually shifting the product mix from record management to data centers, synonymous with stronger growth. Looking into the details, IRM adheres to a long-term debt range of 4.5x to 5.5x and it was at 5.3x in the last quarter, which means that the downward trend in the debt ratio indebtedness is expected to continue.

IRM’s capital allocation strategy did not go down well with some Wall Street analysts in 2019-20 and they downgraded the stock as a result. As a result, IRM has underperformed the Dow Jones REIT Index (REIT.IND) and its peers for the past 2-3 years. It also failed to capitalize on the market enthusiasm associated with data center mergers and acquisitions. I consider them when evaluating the stock.

Valuations and risks

To this end, despite its market capitalization of only $16.7 billion, IRM is now part of the list of major players in the IDC MarketScape which includes global data center colocation and interconnect services for 2021. Incumbents Equinix and DLR remain the leaders, but to its credit, IRM is now ranked as a major growth colocation and interconnect service provider fast. Moreover, just like the typical big player in the industry, its data centers are now mostly leased (60% to 70%) to hyperscale or big cloud customers with stable revenue streams.

To be realistic, the data center segment represents only around 7% of total sales, but its role is gradually becoming more synergistic with the REIT’s digital offerings, as seen with the acquisition of ITRenew. The latter is dismantling data centers and with the acquisition, IRM is expanding its access to the estimated $30 billion ALM (asset lifecycle management) market. Additionally, with its information destruction segment for the disposal of obsolete computer backups and the shredding of paper records, the FPI now has an end-to-end solution in ALM.

As for valuations, just assuming it captures 2% of that market means adding $600 million to its $4.49 billion in annual revenue after adding in segment revenue as per the chart below. -below.

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Sector results (

This implies total sales of $5.09 billion, an increase of 13.3% compared to 4.2% last year. Higher sales should result in a P/S of 4.2x (5.09/4.49 x 3.71) given the current value of 3.71x. Adjusting the stock price accordingly, I get a target of $64.6 based on the current value of $56.5. The calculated P/S does not take into account the forecast for 2022 and remains lower than that of Equinix or DLR.

On the other hand, with annual interest payments of $418 million and Fed rate hikes, financial distress comes to mind. However, with the recycling of capital, controlled debt issuances and the positive dynamics of cash and cash equivalents since 2018, these risks are mitigated. In addition, on the rental business, the company has visibility on colocation and retail customers where it continues to observe consistency in terms of transactions despite the rise in the cost of energy and wage inflation. . Executives are also seeing “good pricing in terms of new deals” because of how IRM is positioned in the market.


In conclusion, IRM is a buy with 13% upside potential. The company also has a higher return on investment which proves to be sustainable due to its particular way of allocating capital. Moreover, since the majority of data center rentals are large-scale, it has stable revenue as well as product prices compared to retail and colocation customers.

Additionally, in the largest revenue segment, or document management, there was an 8% growth in 2021 on a year-over-year basis. This was due to higher volumes and better prices. At the same time, a key indicator of an uncertain economic situation, the retention rate has indeed increased by 0.4%.

Continuing with the momentum factor, IRM’s 6-month price performance is the best among some illustrious REIT peers American Tower, Prologis (PLD) and WP Carey (WPC), as shown in the chart below.


Price Performance Comparison (,WPC,AMT,PLD,EQIX,DLR&interval=6M)

On a note of warning this time, with the hawkishness of the Fed on Thursday and some companies announcing dismal financial results on Friday, bearish sentiment prevails and IRM stock is down more than 1%. However, the economy is still growing and is expected to expand by 2.8% this year as the worst of Covid is over. So, barring severe supply chain disruptions, the company should continue to improve its financial results.

Finally, Wall Street analysts have a buy rating, with a target price of just $55.2, but that doesn’t seem to take into account the potential upside from data center M&A activity and the fact that IRM’s capital allocation strategy is sustainable.


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