Iron Mountain Incorporated (IRM) Earnings Call Transcript & Summary

Yes. Thanks, Sheila. So ESG, we're blessed with a very good ESG or CSR team. And the work that they're doing, not just on Green Power Pass but, more broadly, is becoming more and more important for our customers, but it's super important for my fellow Mountaineers in terms of both attracting talent and retaining them is more and more your recruits are asking what's your ESG program and for our people internally. A little bit on the same theme is volunteerism is super important. People want to feel like that they can give back to the communities that they're working in. So very similar to the theme that we just talked about. Specifically on Green Power Pass, I'm really happy that the team actually initiated it. So 100% of our data centers are covered with renewables. And these are very long contracts. On average, 15 to 17 years where we buy forward electricity that comes from renewable sources. And we're able to offset 100% of our data center capacity, 60% in total as a company, and we're committed to have a 0 carbon footprint by 2050. So we're making good progress. But specifically on data center and the Green Power Pass is we quickly -- we first made sure that we could cover all our data centers, and we're the only data center company that completely offsets its carbon footprint. And we want to make sure we could do that. And the next thing in the team, actually, and I'm quite proud of, it's now available from other data center customers as well, but our team led the consortium to actually put the Green Power Pass in place is we are allowed to send those green credits to our customers or our tenants. So not only we're covered, but if a tenant is renting data center space in one of our data centers is we can pass that on to them. So the reason why we can talk about the Boeing company, Goldman Sachs, Crédit Suisse and a few others as data center customers is -- and normally, companies are very sensitive talking about who they source data center capacity from is exactly this point because the Green Power Pass was such a game-changer for these companies because the secret that a lot of people don't speak about is that data centers actually emit more carbon into the atmosphere than global aviation, even in a pre-COVID world, because the power that we use to run -- to both power the compute equipment or the IT equipment as well as to cool it is substantial. So we're -- it's really important in that data center sector to be able to provide that type of carbon offset. And our customers are really appreciative that we can, in turn, pass that through to them so that they can, in their own CSR reports say that they've completely offset the carbon that they're creating.

Okay. Thanks, Bill. And Steve, if you can touch on Alexandria's environmental initiatives with many Platinum LEED certified and Gold-certified buildings fit well and just talk about how -- your efforts there and how it helps you competitively with tenants?

Sure, Sheila. We've always pursued a leadership position in this realm. And certainly, when you think about environmental, it's typically more about sustainability and building materials. But again, to be consistent with the mission of advancing human health, really the well-being of the occupants, the scientists, the teams that are operating in these 24/7 laboratories is critically important. So over time, as you referenced, we have those designations. We also have a GRESB 5 Star designation, which is actually the highest designation that can be awarded. We have a Fitwel Champion designation. And what that really means is you're committing to a portfolio, the entirety of your portfolio to pursue the well-being and health of the occupants, not just a one-off building where you might get credit for. And then finally, we are one of the pioneers in WELL certification and really have the first laboratory facility that's WELL certified, and what they've done is they've taken scientific and medical research, merged that with design, construction and ongoing operations and really looked at the optimal blend of the well-being of occupants there. So something the company has a keen focus on, we think it provides a significant competitive advantage. Certainly, our client base is -- has a heightened and enhanced awareness on the benefits of this. So it's something we've always pursued a leadership position in.

Hamid, you guys have been very active in terms of solar rollout and LED within the portfolio, which makes sense given the flat roofs and the amount of lighting that you've got in the buildings. You guys have, I think, 50 million square feet of LED, and you have added 200 megawatts of solar capacity, I think, by this year, and you recently upped your goal to 400. So maybe just sort of talk about some of those costs and the returns that you get on those programs. And how much more can you sort of do? And how do we at least sort of keep tabs on that or sort of measure that in terms of your bottom line profitability?

Steve, I love it. You're consistent. You're always looking to fill in the columns and roads in your model for our business. And you do it in all kinds of creative and subtle ways. I admire that. And you haven't changed a bit in 20 years. So before I answer your question, I want to underscore a couple of things that these gentlemen said, particularly, Bill, which are really important to our business as well. Bill talked about these substitution of just-in-case inventory strategies as opposed to just-in-time inventory strategies, sort of supply chains were built for efficiency. And when the world is volatile, that doesn't work. So you've got to build the supply chains for resilience, and that requires more inventory across the system. So that's a tailwind for our business that I just wanted to -- and you're seeing it. Essentially, customer is saying the same thing. The second really important thing that he said is the customer intimacy, which is not something that real estate companies are really good at, is a source of a lot of great ideas about how to improve your business. You don't have to be a genius. You just have to have your ears wide open and you're mouth pretty close, usually not traits that go with real estate entrepreneurs. So that's important. And the third thing that Bill said is that these ESG things are becoming so important to the new generation of not just investors, but really talent that you're trying to attract the company. And I know you can't put it in the model directly, but it is a very, very important part of running a business as a leader. So let me respond to your question. First of all, we're doing a lot more than 50 million square feet of LED. We do about that every year, and we've been at it for a number of years, and we generate more than 200 megawatts of power. We are, in fact, depending on the year, the #2 or #3 producer of renewable energy, rooftop renewable energy, anything other than the solar form in the country. And Walmart and Target sort of bounce around the top position, but we're right after them. And a really important distinction that I've spent 37 years of my career is that we are, by far, the largest owner of -- owners of flat roofs in the world or any kind of roofs. So that gives us the ability to do that. So you would think it's all about energy savings and the dollar and cents of it to the customers. And certainly, that's a really important consideration. But there are 2 other important considerations for the customers. One, quality of lighting. If you're fighting for that scarce labor, having a better facility is really important in a way of winning that war. And by basically having LED lighting, which is much higher quality lighting in your base that are stacked to the ceiling, allows you to actually attract employees with better working conditions. The other one is that the -- a lot of the companies that occupy our buildings are very focused on ESG considerations for the same reasons that you heard from the gentlemen here. So while the dollars and cents are important to these customers, those other considerations should not be overlooked. The return on those investments is in the teens on an unleveraged basis. And it really depends on the market and the subsidiaries that are available, particularly on the solar side. On the LED side, we are buying these fixtures at 1/3 the cost we were buying the same fixtures 2 years ago. Why? Because instead of localized decision-making, we've now centralized it. We have Prologis-branded fixtures that are being made for us that look just like the normal, for instance, they just have a Prologis part number on them and Prologis logo, and we're buying them at significantly cheaper than we were before and anybody else is building them. So it's a profitable business for us. That business is in mid-teens IRR -- unleveraged IRR business. The solar business is around a 9% to 10% unleveraged IRR business. But when you factor in some of the tax benefits, it gets into those mid-teens. So very, very profitable. But again, you need scale to do that. And the opportunities don't exist everywhere. For example, it's very big in Japan. It's very big in Germany, in the U.S., it's in New York and New Jersey. But more and more states are catching on, and it's becoming more and more important in terms of having the financial incentives to do this.

And maybe since we're sort of talking a little bit about ESG and this just broad conversation, Hamid, you all recently hired somebody as an SVP of ESG. And it is becoming a much bigger component of investors -- framework for investing in companies. So maybe just talk about some of the initial goals that you've set out for the company? And sort of how you're measuring these things? And where you want to see them unfold over the next, say, 3 to 5 years?

Okay. Before I do that, I want to make a request of your audience and you. Very prominent magazines in this country rank corporations based on their sustainability standards. Categorically, they exclude real estate. Other than transportation, real estate is the biggest contributor to greenhouse taxes. But because we are cursed with this thing called the REIT designation, they don't even count us. If they counted us, most of the companies that you have at your conference would be near the top of that list, they just don't. So you, investors, need to put pressure on them. In places where they do count real estate companies like in Davos, 2 years ago, we were a #6 global company, global company of any kind, and #1 U.S. company in that ranking. So we've been at this game for a long time. And why? Because it's really important. Because it is good for our customers, it's what they want, and more efficient buildings save money for people. The first -- I remember the first day we started on this, which was about 15 years ago, and I told the team, look, there are only 2 places this investment in sustainability can come from. One, is out of the marketing budget or as additional return to our investors. Guess what? If you can't prove it in terms of dollars and cents and benefits, it's coming out of the marketing budget. So put it in there, that's fine. You want to do good budget, do it that way. But to this stage, we haven't had it come out of the marketing budget because there are significant dollars and cents associated with it. You burn less energy, you spend less money, your customers spend less money. So it is all economically driven. It happens to be the right thing to do, but it's all economically driven. And you heard about the WELL standard earlier. We just did the first WELL warehouse ever done in the United States. Every one of our buildings has been certified a LEED for probably 10 years now. So we've been at this game a long time, and we've always had a head of sustainability. We've just hired that new person who actually comes from Bose Corporation, not from real estate, and also was -- did not start in sustainability. He started in the supply chain business, sourcing components for Bose Equipment. So the supply chain has a big environmental impact. So understanding how a customer operates from that perspective and having that procurement background and global supply chain background has made our new hire particularly focused on solving customer pain points around this area. Covered a lot of territory there, but I thought it was important.

Great. Sheila, I'll hand the mic to you.

Sure. This question is to everybody. So we'll go one by one. But while we're all weary of COVID discussions, just wanted you to each briefly touch on your thoughts on the impact to your business, whether you've gained some short-term lessons, maybe managing the business a little bit differently or long term? Just thoughts on each of those. And I guess, we'll start with you, Steve.

Thanks, Sheila. Yes, certainly, I've just been very proud and a shout out to our team for how quickly and decisively we reacted to support our tenants that are fighting the COVID-19 issue. I mean we've got tenants in the diagnostic realm, the testing realm, the vaccination realm. And we've been able to support them with continuous operations, and we've talked for years about these being mission-critical facilities. The pandemic couldn't have put that into sharper focus [Technical Difficulty] basically driven home more. So when you talk about benefits, I mean, there are certainly financial benefits that ultimately flow from this. But really, when you think about the health and the safety of the people who are actually going to [Technical Difficulty] in some form or fashion and their health and safety as they enter our buildings every day, conduct their critical work, those are important benefits. And the feedback we hear is very positive. Our teams on the ground are critically focused on that. So we're just very, again, passionate and enthusiastic about supporting these people and the work that they're doing in our facilities.

Okay. That's great. Bill, do you want to comment on any lessons learned or -- during the COVID?

I think it's probably kind of maybe 3 things. I mean first echoing is we're extremely grateful that we had really focused on employee safety. So as I said, we have 25,000 people around the world, a lot that are at risk either from driving on roads or falls from height. So there's been a very strong focus for the last, I would say, 5 or 6 years on employee's safety, health and mental well-being, which, thank God, we did that coming into this current environment. Because whilst we've had our share of -- we've had 3 employees that sadly have passed away. As we sit here today, we have 2 people in hospital. So we haven't been unscathed. But statistically, if you kind of look at market by market, our leaders have put the right protocols in place. We have a centralized security and a safety team. So we really have kept up to date. And as I said, 97 -- or 96% of our facilities stayed open throughout. So we had Mountaineers going into facilities, coming to work every day throughout that period. So sometimes it's better to be lucky than good, but I think that focus on safety allowed us to have the communications, the processes, the ability to get the protocols out because it was a moving peaks, right, in terms of how to protect people in the best way. And then -- and of course, we saw it early because of our Asian operations. So that -- so I think I couldn't be more proud in terms of the way the team actually did that. The second thing is that we were -- Hamid was talking about the customer intimacy. And I wish to say -- we did a really good job during this, but we're still on a journey as a company. I think it's fair to say, historically, we were much more transactionally oriented in terms of what we sold to our customers. And -- but we've been on a customer-centric view, again, our mission to try to be closer to our customers. We stood up strategic accounts a little over a year ago, really, with that in mind, what we call delivering the mountain to the customers, not just a piece of the mountain. And luckily, which is I think is actually going to set us up well as part of, as you know, Sheila, our Project Summit is a $375 million cost takeout, but it's a cultural change. And I think going through this crisis, people went into their customers and they knew they couldn't just sell what they had in their bag, right? Because they knew this thing called COVID was tipping everybody's world upside down, and they had to listen, coming back again to Hamid's comment is, close the mouth, open the ears, and really listen carefully what the customer needed. So I think we actually are coming out of COVID accelerating -- with acceleration on our mission to really change the culture around going from a transactional sales model much more to a customer intimacy or solution-selling model. So that's been really helpful. And then the last aspect of it is, I think, as a lot of people going into this thing, you just didn't know how financially we were going to fare. And luckily, we were one of the blessed ones, right, in the sense that having virtually 97% of our storage revenue in the bag at the beginning, which is 80% of our profit, that gave us the strength to weather it, but at the same time, we really kind of focused on what we could do better to bulletproof our balance sheet. So I'm really proud of the finance team coming out of this is that we refinanced -- between June and August, we refinanced $3.5 billion worth of debt. And well, we are not investment-grade, is it was, we pushed out the tenure, we increased our covenants by at least 0.5 turn. So we've created more freeboard in our covenants, and we've done that at flat interest rates. And in fact, the 10.5 year that we issued in August for $1.1 billion was down at 4.5%, which, again, is not as attractive as my colleagues on the call. But for Iron Mountain, that was a record level of finance that we were able to do. So I think that having our team really focused on that early on in the crisis. Many times, there's always gifts that come out of this. And a lot of the gifts that you receive is from internal inspection and reflection, and I think we've come out in fairly good shape.

Great. And Hamid, do you want to chime in on anything, takeaways that you might have changed operating your business or your thoughts?

Sure. We saw this thing coming, as Bill did, first in China. They were a couple of months ahead of us, so we saw it first in our business in China. And we had the opportunity to be a little bit more prepared for it when it finally got here. First, with respect to employees, we don't have -- we're not as employee-intensive as some of these other companies. But for the employees that we have, we very quickly put in place financial support systems for our employees to support the lower-paid employees that had spouses who had lost jobs, et cetera, et cetera. We set up community support initiatives to support the communities we operate in. And we did all that stuff very quickly. And we obviously immediately went to remote working, working from home, like everybody else, but we've been very, very patient in terms of bringing people back. And I think permanently, our business is going to change. I know I won't be going to the office every day. I'd be working a lot harder, I'd be spending a lot less time in airplanes. But I think we're going to see a mix of people from 0 days at the office to every day at the office or at the facilities for our customer-facing people. So I think some of the effects of this are going to be very long term and some are going to be temporary, and we need to distinguish between those. So that's one topic. The second topic is how all of this affects demand for logistics space in the long term. And Bill, you should do my IR presentations because you do a better job than I do. I mean this, first of all, push to higher safety stock and more inventory has been really great for the industrial business in the long term. And I don't think it's going away because I think people are learning the dangers of carrying -- being too lean on inventory. The second thing is, obviously, the transition that was occurring with respect to off-line to online retail. We got 10 years of growth in 6 months. And we introduced a whole new category of consumers to online shopping, namely older people. And I don't think they're going to all go back to their old ways now that they have confidence with this new modality. So I think on the demand side, it's been nothing but good for the industrial business in the short term and in the long term. We'll give some of this e-commerce stuff back temporarily and then we build off of that basis. I don't expect it to continue surging from these peak levels. But I think it has legs and we'll continue in a major way. So I think the demand drivers are really good. The third thing is that this created an opportunity for us to accelerate our digital transformation agenda. And our digital transformation agenda is a topic that will take me hours literally to tell you about, not to scare you, I'm not going to hear. But it's focused around 2 things: one, how we serve our customers and how we interact with them in terms of, for example, simple things like electronic leasing, digital leasing, very quick leasing and doing these agreements or virtual tours of facilities, et cetera, et cetera, how we conduct, how we interact with customers and how we support them. That's one set of activities. And another set of activities is how we do our own work inside the company. And we got something like 9 different work streams going in the digital transformation area. And this has created the urgency and the opportunity, by the way, at the same time to do this. We're going to get around to it, but in a more measured basis. Now we're just pouring it out on in a big way. And I would say my final comment about all this is that a lot of the things that I just talked about were happening anyway. I just think COVID accelerated them and made them obvious to a lot of people. So look, my heart goes out to 200,000 of people that have lost their lives. This is a serious issue. It's a big challenge. It's one that none of us have had an experience. So I don't want to sit here and paint a pretty picture for everybody. But out of every crisis comes some opportunity in. Then on the other side of this, too, in 2008, 2009, the logistics sector was the problem child of the industry. So I feel for our colleagues who are in the hospitality business and certain kinds of retail and all that, they ran perfectly good companies. They'll continue to run perfectly good companies, and they're going to have to deal with a short-term challenge, and they will. They're good at what they do, and they will.

I know we're running out of time. But Hamid, just anything on the manufacturing side to the extent that things diversify away from China. I know that you're much more consumption-driven, and that's really at the end of the day, what drives your business. But are there any sort of thoughts you have around changing manufacturing, which areas may benefit? Is there anything that you can do to take advantage of that?

Yes. I think, first of all, people have been moving out of China and out of Eastern China for about a decade because labor costs have been really high. So I think by China, you actually mean Asia and lower-cost jurisdictions, sort of on that side of this other pond, and that includes Cambodia, Vietnam and a lot of other lower-cost places where we're importing from. If you look at the trade data, forget about what you hear on TV, if you actually take -- look at the numbers, first of all, you conclude they've become very volatile because of this disruption. China shut down for 2 months ahead of everybody. So there was nothing coming out of that. And that affected, obviously, the port numbers here and all that. So -- but if you ignore that and look at the surge afterwards and sort of average those 2 periods, movement in containers is very much in line with the growth trajectory it's been on but at a slower pace, which is consistent with the recession. So look at the numbers, forget the words, okay? And this is not happening at a very significant scale. Is a near-shoring of essential services happening like some kinds of pharma? Stephen will be in much better position to talk about that. I think some of that stuff will happen. We'll make PPE here. We'll do more drug manufacturing here. It's maybe more really sensitive services, aircraft parts and things of that nature. But in terms of mass manufacturing, I just spent 20 minutes of your time talking about the shortage of labor. Who's going to make this stuff? It's crazy. I do think we'll see a lot of near-shoring. And I think Mexico will be the beneficiary of that in a big way. And China has already graduated through different levels of labor and manufacturing anyway. They're becoming more German-like than just making cheap toys. And all that stuff is moving further, I guess, west of us and east somewhere around the globe. So anyway, that's all I have to say.

Actually, Steve Richardson, do you expect more manufacturing of pharma here in the U.S.?

Sheila, we've been following macro trends. And certainly, this is one of them. I think it's very early days. So we'll be watching this very closely as it unfolds, maybe a combination of kind of these global events as well as new modalities that contribute to manufacturing as well. So we are monitoring it very closely. I think it's too early really to determine where this is headed, though.

And maybe just sort of final question. Hamid, we've talked on a lot of different panels about some of the political wind shifting and a lot of discussion about New York and California and sort of the further left-leaning tendencies of politicians in both of those states. But as you just sort of look at your footprint, at least domestically, how do you sort of think about the changing political landscape, tax situations? Does that have a big impact on how you want the portfolio shaped or where you want it? Or if you look out over the next 5 to 10 years, can you envision large changes in the PLD portfolio?

Look, at the end of the day, as you pointed out, this is all about consumption, and consumption is about population movements. And there will be -- certainly, the growth rate in California will slow down because costs are going up. And frankly, our state is not helping things with all these requirements that they put on businesses every day. It's just crazy. But -- so yes, but California has faced those problems for 30 years. And so no, California is not going to find in the ocean. The thing that is really going to drive our portfolio allocation strategy are 2 things: number one, as big as we are, we're still very small in terms of the percentage of the available stock out there. So we have a growth mode in every market, and that will overwhelm any 1% or 2% shifts in different kind of markets. So more growth everywhere, including California, we're just getting started. So -- and then the second thing is what I talked about earlier, those 2 demand drivers, e-commerce and shift to carrying more inventories. That tailwind will, in my judgment, looking at the data, will way overwhelm any loss of share from the coast to anywhere else, including other countries in the middle of the country and everywhere else. The shift that I'm actually seeing is not so many -- so much from one state to the other, but more from maybe urban downtown areas to more suburban, more open areas. And I'm not sure, I'm not swearing up to know how permanent that is. You've got to ask your partner companies for that, but that I'm hearing a lot about from my friends in those businesses.

Okay. Well, we went a little bit over, but since this was the final presentation, we had a little bit of a -- yes, so I want to thank Steve, Bill and Hamid for joining us on a great discussion, a little bit different topics and just kind of nitty-gritty fundamentals. But I want to thank everybody for joining us on a great day. We look forward to getting this back in person at some point, hopefully, next year. And we look forward to continuing the dialogue with all of you. So stay safe, enjoy the fall, and we'll stay in touch. Take care.

Thank you.

Thanks, everyone.