Iron Mountain: A Paper Records Storage REIT With Steady Cash Flow but Limited Growth

Iron Mountain started in 1951 to help Jewish immigrants whose personal records were destroyed during World War II. The company owned a depleted iron ore mine where it opened vaults to keep people's vital information safe from wars or other disasters.

Today, Iron Mountain's storage business serves more than 50 industries and over 200,000 customers worldwide, including 95% of the Fortune 1000 companies.

Besides earning rental fees from storing boxes, the REIT provides complementary services such as pickup and delivery of records upon customer request, document shedding, scanning and imaging records, and creating computer backups.

These businesses collectively generate around 85% of Iron Mountain's revenue and have proven reliable cash cows over the years.

Iron Mountain stores almost 700 million boxes of physical documents for its customers. Each of those boxes, on average, generates 25 cents per month of revenue, a relatively trivial cost for most companies.

Customers, therefore, have little incentive to switch storage providers or deal with the hassle of downsizing their pile of boxes filled with sensitive documents.

As a result, Iron Mountain's records management business has historically seen customer retention of 98%, and more than 50% of physical records that entered its facilities 15 years ago are still with the company today.

Since boxes sitting in storage also require very little upkeep, and Iron Mountain's scale gives it one of the most efficient document pickup and delivery networks, the company enjoys high margins and predictable cash flow.

However, the firm realizes its lucrative storage business in North America is somewhat of a shrinking ice cube. Organic volumes have slowed in recent years, driven by the continued rise of paperless (i.e. digital) documents.

Iron Mountain's presence in faster-growing emerging markets, where physical documents remain on the rise, has helped keep overall volumes steady over time. But management wants to gradually reposition Iron Mountain into growth markets.

The company is focused on providing secure disposal of IT assets like corporate laptops and monitors, increasing ancillary services such as entertainment and fine art storage, and expanding into data centers to protect digital information and host customers' IT infrastructures.

Some of these opportunities, such as data centers, require substantial capital. Iron Mountain has primarily funded these expansions with debt, which has weighed on its balance sheet and reinforced the firm's BB- junk credit rating.

Coupled with the firm's high payout ratio, which reduces the amount of retained cash flow available for reinvestment or debt reduction, this minimizes the firm's margin for error.

It may take years to evaluate the success of Iron Mountain's gradual pivot. Still, the firm's broadened portfolio of services and storage capabilities provide beneficial diversification as the world's document storage needs become increasingly digital.

Iron Mountain seems likely to remain a cash cow, but conservative investors may be turned off by the firm's junk credit rating and fuzzy long-term growth outlook.

The dividend is also unlikely to grow quickly, but management has at least shown a strong commitment to the payout, which has been maintained without interruption since the first dividend was paid in 2010.

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