As that table shows, these two information storage REITs have quite different financial profiles. Equinix has stronger numbers across the board. It has a much lower dividend payout ratio, which is one factor behind its lower dividend yield. It also has an investment-grade credit profile backed by a lower leverage ratio. That investment-grade rating is worth nothing because it provides REITs with greater access to financing at lower costs.
Iron Mountain recognizes that its balance sheet is a concern. The company has a long-term target to get its leverage ratio down to between 4.5 and 5.5 times debt-to-EBITDA. That will provide it with the additional financial flexibility needed to make growth-focused investments as well as more breathing room on its debt covenants. It aims to achieve its targeted leverage ratio by holding back on growth-focused spending in the near-term and selling assets to bolster its balance sheet.
A look at what's ahead for these two data storage companies
Given its weaker balance sheet, Iron Mountain's focus this year is preservation due to the uncertainties relating to the COVID-19 outbreak. This year's goal is to maintain its dividend, manage its leverage ratio, and continue recycling capital and finding alternative funding sources.
Because of that focus, the company has deferred growth-focused capital investments and merger and acquisition (M&A) activities. Longer-term, Iron Mountain aims to have a more sustainable dividend that it can grow as its business expands. It also wants to achieve its leverage target, giving it the flexibility to invest in organic expansion opportunities and strategic M&A.
Equinix has a lot more financial flexibility to pursue growth opportunities. It views its investment-grade balance sheet as a strategic weapon that it can use to access low-cost capital to make acquisitions as well as invest in development projects. Meanwhile, its low-dividend payout ratio means it retains a meaningful amount of cash that it can also use on expansion-related investments.
The company recently used its financial flexibility to acquire 13 data centers in Canada for $750 million. The deal will provide an immediate boost to the company's funds from operations (FFO), which was already on track to climb by 11% to 16% this year. That added boost will give it even more power to grow the dividend in the future.
The value proposition
A final factor that REIT investors should consider is valuation. That's a bit tricky in this case because Iron Mountain pulled its 2020 guidance due to the uncertainties surrounding COVID-19. However, assuming it achieved its original outlook, here's how these two information storage REITs stack up: