Iron Mountain (NYSE: IRM) is a unique real estate investment trust, or REIT. The company's core business of long-term records storage has some advantages and disadvantages that investors should know about, and the small but rapidly growing data center portion of the business could help offset weakness elsewhere in the company.
But we're getting a little ahead of ourselves. Here's a rundown of what Iron Mountain does, the pros and cons of investing in its business from a long-term perspective, and whether this 8.3%-yielding REIT could be a good fit for your retirement portfolio.
What Iron Mountain does
Iron Mountain has been in business for nearly 70 years and is the undisputed leader in its core business of information storage. When it comes to long-term storage of business records, artwork, and other sensitive documents, Iron Mountain is in a class of its own. It serves more than 225,000 customers and owns or operates more than 1,450 facilities located all around the world, with over 90 million square feet of space. In fact, 95% of the Fortune 1000 uses Iron Mountain for its records storage needs.
In addition to its records storage business (which makes up nearly two-thirds of revenue), Iron Mountain also operates several other business segments. For example, its document shredding business is used by companies all over the world -- in fact, most people know Iron Mountain for its mobile shredding trucks seen driving around in major U.S. cities.
Also, Iron Mountain has been quietly getting into the data center business. Currently, this makes up less than 10% of the company's revenue, but is a high-growing area of the business with a ton of long-term potential.
The good and the bad
There are positive and negative aspects of the physical records storage business. It has all of the positive attributes of self-storage properties (low maintenance costs and operating expenses, facilities are relatively easy to build) but without the drawback of month-to-month leases -- the average item in an Iron Mountain facility has been there for about 15 years.
On the other hand, Iron Mountain is an analog player in a digital world. As sensitive business records get more digitized over time, the company's core business will inevitably decline. Whether the decline happens quickly or over an extended time period remains to be seen, but it's difficult to make an argument that Iron Mountain's core business will grow over time.
The future growth potential is in Iron Mountain's digital businesses. Iron Mountain's data management business is the modern equivalent of its physical records storage business, and as mentioned, Iron Mountain has been growing its data center business, which is arguably the most exciting part of the company from a long-term-growth perspective.
The need for data centers has grown exponentially over the past decade or so and is likely to continue to grow rapidly as the amount and sophistication of connected devices grows. And aside from leading data center operator Equinix (NYSE: EQIX), Iron Mountain has the most potential to leverage its brand name, which has become synonymous with information security.
Iron Mountain currently has 14 data centers, but this could be just a starting point. The company has the potential to roughly triple the capacity of its current data center portfolio, which means the number of data centers Iron Mountain owns could conceivably multiply several times over in the coming years.
What about that dividend?
That brings us to Iron Mountain's dividend. The 8.3% yield is extremely high even for a REIT. Iron Mountain has increased the dividend for nine consecutive years, but is it sustainable?
The short answer is "maybe." Through the first six months of 2020, Iron Mountain generated $1.12 per share in normalized funds from operations (FFO), which is not quite enough to cover the company's roughly $1.24 in dividend payments. However, the company's adjusted FFO, which makes some adjustments that disproportionately affect Iron Mountain's business, comes out to about $1.67 per share, which covers the dividend.
The bottom line
In full disclosure, I own shares of Iron Mountain in my retirement account, so obviously I think it's a good fit for my retirement portfolio.
The bottom line is that Iron Mountain's business is a mixed bag, and this isn't exactly a low-risk REIT at this point. There are some big unanswered questions, such as how well the physical records storage business will hold up over the next several years and beyond and whether the growth in the data center and electronics record storage sides of the business will be enough to offset any declines.
Having said that, with a massive 8.3% yield, a leading market share in its core business, and the tremendous growth potential on the data center side of the business, the risk-reward profile could make sense for a reasonably sized investment in a retirement portfolio if your risk tolerance is relatively high.