The Highest-Paying REIT

October 28, 2020 Dr. Thomas Carr

I’m a sucker for a good company history story, and this is a good one.

Herman Knaust, a mushroom grower in New York, paid $9,000 in 1936 for a depleted iron ore mine and 100 acres of land in order to expand his business.

After World War II, Knaust sponsored the relocation to the United States of many Jewish immigrants whose personal records and identities were destroyed during the war. At the same time, Cold War nervousness over atomic security was growing.

It was a classic problem in search of a solution. The problem: How to protect vital records from wars and other disasters. Knaust’s solution: The mushroom mine, which Knaust had dubbed “Iron Mountain.”

Thus was founded in 1951 the Iron Mountain Atomic Storage company, replete with vaults inside the mine and a sales office in the Empire State Building. The first customer was East River Savings Bank, which was looking for a secure place to store microfilm copies of deposit records and duplicate signature cards. Other New York-based corporations soon followed.

One thing led to another and, well, I’ll let contributor Tom Carr take it from here.

— Bob Bogda, Editor

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Are you familiar with data centers? If you’ve traveled through a suburb of any major U.S. city, you probably drove right past one without even noticing. They tend to be four- to five-story, non-descript buildings, mingled among other light industry centers, with small or no windows, no signage, and surrounded by ominous looking, spiked metal fences. These are the buildings that process, store, and protect your credit card information, medical records, Amazon orders, Spotify songs, Facebook friends, and countless other digital data that track your every move online. These buildings are a big deal, and they are popping up everywhere.

With the rise of the Internet of Things, the massive growth of ecommerce, the oncoming rush of Industry 4.0 connectivity, and all the cloud space needed for storage, it is no surprise that the data center industry is booming. Most companies cannot handle the load of their own data, so they outsource data handling to other companies. Those other companies rent space and network platforms from data centers. The more data grows, the more data centers are needed.

According to a recent report from Research and Markets, the global data center market is expected to grow at a compounded annual rate of 2% through 2025. In the United States alone, data center revenues are expected to reach over $70 billion by that time. Wouldn’t it be great if there were a company uniquely poised to benefit from all that growth? Especially one that isn’t dependent on fast-moving changes in the technology needed to run these centers but, rather, is able to profit just from the footprint growth?

Good news: there is such a company. And it’s been around since 1951 as the global leader in data storage. With over 225,000 clients around the world, this $8 billion company with $4.2 billion in annual sales offers the whole range of data services: from storage and protection to digital transformation, info management, and secure destruction. But most important, it’s just beginning to position itself to become the world’s largest landlord of data centers. The company I am targeting today is Iron Mountain (IRM).

Iron Mountain has morphed over the years from storing paper files to storing digital files, of course, but it’s also made a recent, and potentially hugely profitable, change: it’s been building and leasing out data centers. The company now operates 14 such centers, and through them it serves five of the world’s top 10 cloud providers. Data center output is measured in megawatts, and Iron Mountain has plenty of them. Currently it is leasing out 122 megawatts of storage to the big cloud names – most of which were already Iron Mountain clients for their other services – with a potential to up that number to 358 though new and expansion leases. There is also another 30 megawatts under construction. All good stuff.



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Set up as a real estate investment trust (REIT) – though not exclusively a real estate play – Iron Mountain pays a whopping 9% of those lease profits back to shareholders. This is more than 400% higher than its nearest competitor (American Tower (AMT)). It is also the largest REIT dividend available. Shares trade at a premium of nearly 40 times earnings, but so do all the other REITS. In fact, some of the bigger players trade at even higher multiples (Equinix (EQIX)) or don’t have any earnings at all (SBA Communications (SBAC)). It should be noted that Iron Mountain trades at only 1.9 times sales, the best among the larger REITs in this metric.

A better metric for comparison, however, is the price-to-funds-from-operations valuation. This is the preferred measure for REITS since it includes certain non-cash costs unique to real estate operations, costs such as amortization and depreciation. When we look at this value, we see that, again, Iron Mountain sits atop the list. Shares of IRM trade at just 10.6 times FFO vs. its nearest big competitor, EQIX, which trades at 30 times FFO. Clearly, there is great value here in this unique angle – real estate leases vs. technology sales — on the data-center growth story.

On the technical side of the trade, the price chart of IRM shows a modest but steady uptrend off the March Covid-induced lows. Shares are up about 30% since then, having pared back from the recovery highs above $30 per share set back in June. The stock is trading just above the key support line for the trend, giving us a lower risk entry ahead of the fourth quarter.

Action to Take: Consider buying shares of IRM for your conservative, long-term, income portfolio at a price under $28 with a view of holding the stock through to the end of 2024 to capture as much of the data center boom as possible.



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