Iron Mountain Incorporated (IRM) Earnings Call Transcript & Summary

Yes. Maybe just a follow-up quickly. So the 20% now, are you -- is the intention to retain that 20% indefinitely or is that something that will be paired down? Maybe you can just speak to why you decided to go with AGC over other bidders? And maybe just comment on the depth of the pool of the other builders? And then whatever you can tell us on pricing that you're willing to disclose will be helpful.

Okay. Few questions there. Let me see, if I can get them all. So we ran a competitive process. We had interest from many different players, which you probably won't be surprised in light of how much interest there is in the broader data center market and in particular, this kind of unique asset with such a strong asset really in Frankfurt. And so we had a lot of interested parties. In terms of why 20% and our intention, certainly, it's our intention to maintain the 20%. We went into the joint venture that way with that expectation. A number of factors come into play in terms of where you split the relative economics, but that was a, what we deem to be, a good place for us to be in terms of the ownership. And as you would appreciate, just in light of the competitively sensitive nature of it, among other factors, we really can't disclose the cap rate or the multiple that sort of thing. But I will say that we think we have clearly boosted the returns on this with this transaction, and it gives us that much more capital to go deploy into development projects that we can monetize over -- generate returns off of over the next many years.

Okay. That's helpful. Maybe the data center business is still below 10% of EBITDA as a whole, but in the context of the data center space, you guys are a pretty large player. So I would be curious to hear what your thoughts are in terms of demand, just heading into next year because I think going into the quarter, there were some cross currents with some people saying that the hyperscale guys might be going through a digestion phase in the back half, but then we saw really good leasing numbers across the space in the third quarter and pretty much everybody kind of reiterated that things are quite good. So I'm just -- as one of the bigger players in the data center space, I'm just -- would be curious if you actually echo those comments.

Well, thanks for those compliments. I would say what we've seen in the market, Nate, is that the interest in data center continues to be expanding. I would say hyperscale is probably growing faster than enterprise colo, as you would imagine. It really is a local-oriented market, and you know the markets that we play in, I would say, are still doing very well. We see incremental interest with building our pipeline. As you know, hyperscale deals tend to have a little longer gestation period in most cases. So we are pleased to see the pipeline continue to build, and I think it bodes well for the future. In terms of pricing, I would say, generally speaking, it's been quite stable. Absent some one-off situations like mark-to-market, et cetera, generally speaking, I would say the pricing in the markets that we've been doing business in are back to slightly up, if you look at our ex mark-to-market kind of GAAP or cash basis. And I think in light of what's going on in the broader economy and what's going on with how companies are working to collaborate more, whether it be in things like G Suite or Teams and online video conferencing, things of that nature, there's just some continued secular growth drivers that will power demand going forward to say nothing for on the enterprise side companies as they move more bandwidth over, you get the opportunity to see more come into data centers and as they get out of on-prem locations. So we feel really good about the space and appreciate you noting that we are one of the larger players now. We're going to continue to -- our endeavor, as you know, is to have our data center business be an increasingly large portion of our company's EBITDA. It's a business for us that already has very nice margins in the mid-40s, and we think it's a good opportunity for that to continue to expand over time. And it's -- if we have a nice land bank that will be -- continue to build out over many years. So we feel very well positioned with data center business and -- together with the demand curve that we're seeing.

Yes. That's helpful. The price thing, the stabilization that you've seen this year, I'm just curious why you think maybe that's recurring this year? Is it just there's less supply in certain markets? Or is it that these larger hyperscale players one, kind of proof of concept, if you will, somebody who has scale in many markets who can execute and so maybe there's less private competition. Like we know there's a lot of money that wants to be involved in this space, but not everybody can execute. So I'm just curious, your comments on why you think maybe pricing has kind of stabilized?

Yes. So I'll get started, and then I'll let Greer add on. So I would say, certainly, on the hyperscale side, Nate, we think that there is a bias toward working with larger players like ourselves, where we've got long, deep customer relationships. And we can play across multiple locations with them, and over time, scale with them as we think about things like new opportunities for executing and things of that nature going forward and over the long term. So we're -- we feel good about our hyperscale relationships. On the enterprise side, I think it just is kind of another long-term trend toward -- moving toward data center from on-prem. And as it relates pricing, I do think that the pricing is generally like the market for data center is quite locally oriented and the markets that we're leveraged to, I think, are -- we're very pleased with them. But Greer, do you have anything you want to add?

Yes. The only thing I'd say, you probably are very well aware of this from your coverage is the enterprise pricing tends to be pretty stable overall, where hyperscale moves around depending on the market and the requirements. So I think given the fact that our core data center business is weighted toward enterprise, that helps the stability as well.

Okay. Maybe just shifting focus a little bit to capital allocation, capital recycling. Obviously, we talked about the JV, but it sounds like, to me, then some of the newer news in the quarter was just your willingness to maybe do more sale leasebacks within your own portfolio. So I was just kind of -- if you can touch on how much of that are you willing to, I guess, give up ownership and do a sale leaseback with. And if there's any kind of numbers you can give us in terms of where you think your own portfolio is valued today so at least we can get a sense of how much capital potentially you could free up?

Yes. Sure. So we -- for a few years now, the company, as you know, has been focused on adding some level of capital recycling into our plan each year. This year, for example, we started the year by saying that we thought we'd recycle about $100 million worth of proceeds out of our industrial real estate portfolio and then use that capital for other investments such as data center. And we continue to feel very good about the capital recycling efforts that we've got. As you probably are well aware, through the first 9 months of the year, we've recycled about -- almost $120 million of industrial real estate. $110 million almost of that came in the third quarter. It was 2 facilities that we recycled on the West Coast, and they're a good testament for one of the reasons why we think this is a good time to, as you mentioned, do a little more recycling going forward than at the levels we've been at, because, frankly, I think the market for industrial real estate is very, very strong. Think about cap rates that are 5, even, in some cases, sub 4. And so it's -- when we look at capital allocation, we see the opportunity to harvest some of that value that's in the industrial real estate portfolio and go redeploy it into data center and drive higher returns through those development projects. Now a key point here, Nate, is that we're still in control of these facilities when we do the sale leaseback that you mentioned. So for example, in light of the favorable nature that it is right now for industrial real estate, we're able to strike deals on long-term leases where we effectively have control whether we're leasing it or owning it. So think about very long-term leases with multiple renewal periods, with relatively low escalators and in that way, we know we've got the space and we also know that we can harvest those proceeds and then redeploy it. So I would say, going forward, what you ought to expect is, if you think about the company has historically recycling 100-plus over the last couple of years, it's probably averaged -- well, it is averaged about, call it, over the last 1.5 year, 9 months, somewhere in the vicinity of a gross, call it, $300 million, not quite. So $150 million a year or $130 million of that vicinity, you should expect us to be recycling, again, provided that we like the terms relatively more. That will give us that much more capital to go redeploy into data center as well as other growth initiatives, of course, data center being the principle. You asked about the total relative value of the portfolio. It's probably measured in the $2.5 billion to $3 billion, but frankly, Nate, that value is a little bit stale from the last time the company did a valuation. It's been almost a couple of years, so it's time for us to do an update probably of the total portfolio because, as I would note, in light of what we've seen on the industrial real estate side here over the last couple of years, cap rates have continued to move -- become more favorable. And my guess is that, that value has even moved up. So we -- you should expect us to continue to monetize a small portion of the industrial assets, keep control of them for the long-term and then be able to use that capital to further high IRR projects.

Okay. That's helpful. This is a question from the audience, and it is similar to the question I was about to ask. It says, where is the dividend today versus the taxable REIT payout requirement? And two, why not cut the dividend to pay down debt and make more acquisitions?

Sure. So naturally, as you would guess, it's above the REIT minimum well so. And that's a factor of the -- principally over the fact that we're in the pandemic, and EBITDA has been challenged in light of service revenue. But as we think about our dividend going forward, a couple few things to share. One is we're very committed to the dividend at this level, and we think that this is a very sustainable level. That's a consistent message we've been giving before the pandemic and during the pandemic and here again today. We've got a lot of questions about the dividend earlier in the year, in the March-April time frame, and Bill and I as well as the team and the Board looked at the total capital allocation plan for the company and we feel very committed to the dividend at this level. Now with that said, our desired payout ratio over time is for, say, in mid-60s as a percent of AFFO. And I think as we continue to increase the EBITDA of the company, thanks to both our Project Summit efforts, which is going to yield a considerable line of incremental EBITDA over the next couple of years together with improving -- likely improving base trends as we get past the pandemic, and thanks to things like revenue management, we'll glide into that payout ratio. It will probably take a couple more years as we get there, but -- and at that point, with incremental growth from earnings and thereby powering AFFO, you may actually see the dividend start to expand again because, frankly, at that point, if you work through the math, we'd be almost at the REIT NIM. And we'd have to -- we'd almost have to be taking it up at that point under that modeling scenario that I just gave you. So we feel really, really committed to the dividend. It's a key tenet of our capital allocation strategy, Nate.

Okay. That's helpful. You mentioned Project Summit in the answer to that. So I think it would be helpful just to remind everybody, where do we stand in terms of Project Summit? How many cost saves have you done so far? What's left? And yes, I guess that's a good start.

Sure. Okay. Yes, it's a big part of the story over this year and the next couple of years. So Project Summit, for those who are not as aware of, it is our major transformation effort that we have underway. It is both driving better efficiency in our cost structure as well as in driving much more customer centricity and a focus on speeding up the company. In terms of the total program, we expect Project Summit to deliver $375 million of benefit. Now this year, and we recently just increased this number, this year, we think it's going to drive about $165 million of benefit. And so that would leave about a little over $200 million to go with the vast majority of that in 2021 and everything delivered as exiting rate for 2021. So a small stub piece in 2022, that will add up to that full $375 million. To put that in perspective, Nate, that's up accretively from when the company announced the project. At that point, it was a $200 million benefit program. And there's a couple of things that have happened over the course of the last year that have driven the number up. The most appreciable is that, as we discussed on our couple of earnings calls ago, we have the ability to really improve our cost of sales and drive a lot of productivity and cost of sales through adapting our service level agreements such that we essentially deliver boxes back to our customers in 3, 4, 5 days as opposed to the same day. And where customer needs the product -- needs the box back very rapidly, we can digitize that for them in the form of giving them back the content in a format that they can use wherever they are, whether they're working from home or whether they're in the office. So those sorts of changes as it relates to the service level agreements have really helped us unlock an incremental amount of value. And so we feel really, really good about where the program is at this stage. Early on in the program, the first elements of the benefits were really coming from span and layer activities, which we've talked about sometime -- multiple times over the last few earnings calls. And going forward, you'll see incremental benefit coming out of cost of sales. There's also a lot of technology improvements in the program. And so the company is really investing in driving that customer centricity I mentioned. So we feel real good about Project Summit. And when you think about what that can do to the company's total EBITDA, I mean if you -- if all other things equal, if you took Project Summit and put it on top of, let's say, our 2019 results or our 2020 results, it is very, very accretive to the EBITDA margin of the company. Think about this business as being kind of a 35%, round number, EBITDA margin business today, all other things equal, at that level of incremental EBITDA, you could push in high 30s so -- if not even beyond. So we feel good about where Summit's at, at this point. We've been ahead of schedule. We've continued to be ahead of schedule. And so those are some thoughts, Nate. I don't know if you have any follow-up.

No, my follow-up -- I mean, that's all, very helpful. I was curious, maybe on the other side, obviously, you're saving a lot of expenses. But are there material kind of permanent expenses that -- from the pandemic, in terms of how you do things that are going to be kind of a permanent expense going forward. I don't know, PPE, whatever, labor costs, what's that done over this year and then health care costs going forward? So I guess my question is, has the pandemic changed certain costs going the other way?

I think the pandemic -- so the pandemic, it's a good question. I think the pandemic has clearly added some level of cost to our business this year that I think are more transitory in nature. So think about things like stockpiling, PPE in the form of sanitizer, in the form of masks and also putting up plexiglass dividers and things of that nature to keep our teams safe. One of the things that, I think, as a team we're most proud of is the fact that our team has continued to service our customers day-in and day-out going into our customers' locations, including places like hospitals, where our team did that in, I think, a very unselfish way of -- and we made a commitment that we're going to make sure that we did everything we could do to keep our team safe. So in the second quarter, that was about, call it, $9 million or $10 million of incremental cost. And in the third quarter, we had about $2 million to $3 million of incremental cost made specifically related to direct, what I would call, direct or incremental cost to -- for COVID, keeping people safe for those sorts of PPE type items. The other thing that's transitory, at least, I believe it very strongly that it's going to be transitory is, we have had some level of fixed cost deleverage, and this is both in the most recent quarter and in my forward guidance -- not guidance, but my forward indication, our outlook for the fourth quarter is around the fact that we have been bringing people back from furlough and from reduced hours ahead of demand. And the reason we're doing that is because we want to be in a very good position as those activity trends, I mentioned to you, that have been steadily improving throughout the year, we want to make sure we've got the staff on -- here to be able to service the customer demand. And so that has resulted in some level of incremental margin dilution, but that is, I would describe as transitory because as activities continue to rebound, we will ultimately get to a place where we're back in balance. And so I think as we get through the remainder of this year and into early next year and hopefully have the pandemic behind us, all of those things I just mentioned, I think, are going to be transitory. And we'll be back to a place -- I really don't see, Nate, any incremental costs that are systematically been added to the business.

Okay. That's helpful. We got about 2 minutes left. I was maybe going to ask to wrap up, is there anything else top of mind that we haven't touched on that maybe you've been getting questions on since you guys reported?

We covered a lot of ground, Nate. And again, thanks for including us. I would say, the things -- the questions that we've been getting are very similar to what you've been asking about. So the data center business has clearly got investors' attention, as we continue to build that business and see a really good runway for continuing to lease-up and build out our land bank over time. The durability of our core physical storage business has been one that, I think, has actually been a very pleasant surprise to a lot of investors in terms of how well it has performed throughout the pandemic. The one area that you didn't touch on that I would say has gotten on the top line, gotten some attention on the source side is our emerging consumer business, which obviously had a really nice last couple of quarters in terms of storage growth. And we think that consumer storage, particularly on the valet storage side, that's the joint venture we have with MakeSpace is one that we can continue to leverage and see nice growth from over time and help offset some of the secular trends of just modest growth -- modest decline in terms of volume on the core. And then we've also naturally gotten additional questions around capital allocation and margin and Summit like you've already asked. So I think we covered a lot of ground. Greer, anything else you'd add?

No. I mean, I think we hit on all the topics. Very consistent with our meetings this morning as well.

Okay. There's one more question coming in, if you guys don't mind taking one more from the audience. It says, what does revenue mix of biz look like in 5 years legacy storage versus data center mix?

So recognizing time is short and we're going to bump into another presentation, I'll just say this. The data center business, we certainly expect to be growing for -- every year going forward. It's a secular grower, and we expect it to grow as a percentage of our total appreciably. And from the core standpoint, I look at our revenue management business -- the revenue management portion of the business very much offsetting and continuing to power incremental growth on the core. So I think the way to think about it is, data center is growing faster. It's likely to grow appreciably as we have, as you know, over a couple of hundred megawatts of opportunity to continue to build out. And then from an EBITDA standpoint, I'd look at it and say, as data center is already contributing a large portion of the EBITDA growth and as you know, the data center margins are actually accretive to the total company, quite appreciably, it's currently in the mid-40s against the company average of mid-30s and as data center both grows as a percentage of top line and likely has the opportunity to continue to expand margin together with Summit powering incremental margin, principally on the records management side, I think there's a real nice opportunity to see data center continue to expand as a percent, meaningfully so and -- both on the top line and the bottom line. So I appreciate the question. And again, Nate, thanks for having us.

Yes. Thanks for coming. Stay safe, and have a good holiday season, everybody.

Thanks, Nate.

Yes.