Iron Mountain Incorporated (IRM) Earnings Call Transcript & Summary

Welcome, everybody, to our fireside chat with Iron Mountain. With us from the company is Mark Kidd, the Executive Vice President and Global General Manager of Data Centers. I think we're going to go through 25, 30 minutes of kind of combination of operational strategic topics. But first, Mark, welcome, and maybe give us a little bit about your background and the evolution of the data center franchise to date within the company.

Sure. Thanks, Jon. Really appreciate you having me here today. Just by way of quick background, I've been with Iron Mountain over 17 years now, a number of different roles from leading the corporate strategy group and then started incubating the data center business probably 7 or 8 years ago now. And the data center business in Iron Mountain really was growth and offshoot of the strong customer relationships that we have in the enterprise, really, the top 2,000-plus companies in the world, 250,000 customers worldwide. And we saw an opportunity both to extend our REIT franchise from a real estate perspective and also go deeper with those IT infrastructure buyers from the data management business. Obviously, that's evolved as the markets evolved the last few years. And so today, we have much more of a blend of those core original customers, but also rounding that out with the larger content cloud providers as well.

Maybe talk a little bit about, at a high level, how the management team thinks about returns in the data center segment, what's driving, whether it's expansion, M&A. Do you expand in existing markets? Do you enter new markets? You've done all of the above, but talk about target project IRRs, development yields for the different flavors of your business?

Absolutely. And so when we think about target yields, target returns, IRRs, and we do sort of use all the different metrics at different times, sort of like speaking a few different languages at once, but in a good way. I think the way that we think about it and look at it is that broadly, those returns and those targets are a function of our customer mix. And so we have a pretty good understanding that different segments of customers really want different product and different pricing. So I think when we look at the market holistically today and look at it around the world, there's a broad range of expected yields and returns. And so as we think about portfolio allocation, we certainly keep that in mind. For instance, when we think more about the hyperscale segment, we've seen in the market returns, sort of yield-based returns come down below even at 8% in some of the most highly competed markets in the United States. Whereas in Europe or Asia, we can see markets that might have yields for hyperscale transactions 12%, 13-plus percent. And so it's a broad range. So when we think about that in our business, the other segments usually have higher returns. And so on average in the portfolio, we're certainly aiming for double digits. But there could be a [indiscernible] project which take that 1 direction or the other as we go forward. But certainly, a good blend and we see a lot of strength to keep those numbers high as we look at allocating capital around the world.

And are there segments within the industry that you see yourselves being more active in? Or are you going to be offering essentially all products from, say, cabinet level, connectivity sorts of needs, all the way up to hyperscale? There's a wide range. It might be geography and metro dependence. But where won't you play? And where do you prefer to play?

Absolutely. So the way we think about it is a combination of both market and then the customer segment within the market. Our preferred approach, which isn't always the approach we end up taking, sort of, again, situational, is that we're able to get campus-level economics insofar as we can get a large plot of land, a lot of access to power, which enables us to, on that plot, offer potentially build-to-suit hyperscale transactions, but equally put aside space for more network-dense retail-type transactions where we can start to pull in some of those platform-type customers. You've seen us do that in markets like Manassas in the U.S., Phoenix in the U.S., albeit on a much smaller basis than Singapore where we're being really intentional about the blend and mix of customers into pulling in those that have more attraction, bringing other customers with the other network connectivity with them. And if we can accomplish that at the campus level, then we're in really good shape because we can create those options. Inevitably, if you can't do it at the campus level, you start to run and to serve the challenges that everybody does insofar as that build-to-suit construction is a different model when working with the hyperscalers in terms of the capital that's included. And so we do try to keep that separate because you can't compete on those types of transactions with a higher cost base than you would have in normal retail-type product. So overall, I would say, we recognize we're certainly not in the category of like an Equinix by any stretch of the imagination in terms of connectivity, but we do try to recreate some more connectivity-rich, tethered-type hubs in those larger markets. So kind of an underlying theme across everything I just said there is we do like generally the bigger markets insofar as that we can attract that range of customers across the campus setting.

And then how do you think about capital allocation across geographical regions? You are global. You've been earlier than some of your global pure-play peers in entering some countries. And then you've been kind of a fast follower in others. But geographic mix, is there any kind of high-level strategy driving that?

I think there is, and it comes from a few different angles. The reason I paused is I think our comfort with geographic mix is much higher, where in our other businesses, we operate in 50-plus countries. That sort of gives us a higher comfort level entering some of these other markets where we see growth and returns to be higher. And so as we think about extending the portfolio and capital allocation, making decisions like getting money to work in India, for instance, where we see both growth and returns higher, we're certainly -- and we have a very large franchise in our core business there already, we see that as a big opportunity to jump out. I think as Bill mentioned, Bill Meaney, our CEO, mentioned on the last earnings call, I think we continue to have appetite looking at some of those more emerging-type markets, even on a global basis. They're often Tier 1 cities. They just aren't Tier 1 data center markets. And so we certainly are keeping our eye on those and paying attention to kind of how we could approach in a capital sensible way.

Got it. So maybe hitting a little bit more to operational topics. You had a leasing target for new and expansion signings of 15 to 20 megawatts in 2020. You exceeded that. You signed more than 9 megawatts in 1Q and raised your target for 2021 to 25 to 30 megawatts. What type of demand are you seeing that's driving this expectation?

Absolutely. So I think a small correction there. I think we actually kept the guidance the same for -- in year -- on 2021. So I think we kind of started at 25 to 30 and reiterated that kind of out of the gate here. Really, demand is -- it's twofold, and you saw that in our numbers and results last year, where we really saw kind of a nice core demand from more of a retail, and I'd call it maybe kind of scale kind of going up to 2-megawatt-type transactions. It really drives that sort of 20- to 30-megawatt number very routinely. And then as we start to broaden the portfolio, we have a little more capacity, a little more power at the sites, there's an opportunity to catch more demand, which is what you saw happen at some of our larger locations last year. And so over time, we hope to position ourselves to do a bit more of that, but we certainly are in a position where that's recurring. By any means, that's bespoke opportunity that we're able to take advantage of and continue to take advantage of. So I think if you look back 2 or 3 years, we have had a really nice increase in that sort of core demand below those larger transactions, where we have been able to kind of continue to increase that year-over-year. And that certainly comes as we look at new markets, and we continue to grow the franchise and the brand as we go forward. So good question.

Core business and existing enterprise relationships, so how has your sales and marketing approach within the data center segment kind of evolved in that context? And I imagine it must differ to some degree from that of pure-play data center operators.

It does. And so it's a really good question, and it's been a journey, to be very honest. And so when you think about when we started 6, 7, 8 years ago, it really was on that enterprise outsourcing, and we knew that was being driven by cloud growth, but that was really sort of our core permission to play. And in fact, a lot of our lead gen very early on [indiscernible] before we were a public segment and those types of things, was very much driven from that data -- what was the backup data protection organization where we were very disproportionately focused on enterprise. And so today, as we've expanded the Iron Mountain commercial model across all the other products and services, that remains a really important channel. In particular, verticals like U.S. federal business. That's a very big segment that we continue to rely on those relationships, and drive from global financial services is another area that we take advantage of. And you probably heard Bill on our earnings call -- again, Bill, our CEO, on earnings calls talk about our investment in those core global account coverage. And we're able to kind of continue to drive and take advantage of that as we go forward. Now on a percentage basis, even though it's grown from -- on a dollars basis year-over-year, and we get more and more from that, the percentages have actually shifted because the mix of the overall market has shifted, and we continue to have coverage and direct sales into those cloud and content providers, which have become a bigger part of the business. And so that core channel, without a doubt, is still a strength. It's something that we focus on, take advantage of and lowers our cost of sale. Because if you think about kind of the typical financial services firm, they might have a couple of small deals somewhere in the world once or twice per year, and having a data center dedicated salesperson cover that is very costly. Where in our model, what we can take advantage of is we have a dedicated Iron Mountain person covering it, and then we can kind of come in and play the subject matter expert role in the data center transaction. So our cost of coverage and relationship in those gets a lot more scale.

Got it. A question about customer behavior and then a follow-up, one about maybe development time lines, resource procurement. But on the customer side, how is 2021 looking compared to last year as it relates to things like decision time frames, move-in cycles, overall demand levels?

Sure. I think 2020, we saw -- sort of in the first 6 months of the pandemic, we saw that sort of huge spike in conversations and demand, not just for us but for the industry where the large cloud providers were pulling forward demand from their demand cycle. And so there definitely was a -- like a visceral acceleration in conversations in the systems and the pace of just things going on in the market more broadly. I would say that we're sort of back to normal. I think a lot of that capacity has been caught up, absorbed. And the way we think about it is from our seat, we're having more conversations than ever, which is great. I think from an industry, some of that is, I'd say, a little bit industry as usual, and we've continued to kind of change our position inside of it. So I think as we look forward to 2021, we still see strong demand. Cycles aren't quite as compressed as they were last year, but they certainly aren't elongated from our position.

Got it. And then as it pertains to resource procurement, land power, permits, development around construction, labor materials, any kind of general comments as we look at -- through the remainder of 2021 versus what you saw last year?

I think 2 big themes. One is just there's a slight slowdown in supply chain, and some of that's manufacturing, and this is depending on where you're building in the world. If you have labor crossing boundaries, some of that's been restricted because of COVID-type items. I think on any given project, those delays are measured sort of in the 2- to 3-month time frame. I think there probably isn't a project that hasn't had some type of delay in the entire portfolio. But nothing that's impacted revenue or customer relationship. And so I think we continue to see those. I actually think the supply chain elements have elongated a little bit in the last 6 months, but some of the other things that were causing delays have come back in. So I think the net-net is sort of the same. I think those delays are kind of in the same zone they were last year. And definitely, we aren't fully back to kind of that condition where everything is available perfectly, labor, supplies, everything around the world all the time. The other angle, I would say, you didn't explicitly raise this in terms of power sourcing, is we definitely are hearing more concern from governments around kind of overall data center power usage. And obviously, we've talked about Singapore and Amsterdam and their efforts in the past to sort of get their arms around it. I think coming earlier this week, some early -- I think its news is probably premature, but early indications that Frankfurt might be kind of thinking about a similar type of step back and evaluate the market. I think that's just a big global trend that we have to be very eyes light open on. And in these larger markets that haven't sort of really thought about what's their long-term sort of country-level green procurement strategy, is it aligned with their country level goals? And how does that impact the data center industry? I think it will continue to be ongoing in our day-to-day life, and we have to be ready for it and aware of it.

Yes. That certainly mirrors what I've been seeing as well. So power procurement taken a little bit longer, obviously, details to provide metro and country. Now post quarter end, shifting to Italy, you closed on the JV with Web Werks. And how does that acquisition compare to, say, the GPX acquisition that Equinix made? Are the position -- are the companies positioned differently? How are they similar? Maybe provide a little bit of comparison there.

Absolutely. So I think the intent of the 2 companies is different. I think the starting point is sort of similar with some important differences. And so Web Werks, which you mentioned we closed in India, I guess, a month or 2 ago now, losing track of time, we -- really, the focus there in that business historically was they're one of the most network-dense facilities in Mumbai proper. And so if you use sort of the peering database, they're very high up there. You can sort of -- if it's #2 or #1 or somewhere near the top of the list. The difference with Web Werks is that the vast majority of their peering is within inside of India companies. And that's really how they built their business model historically. And so they haven't had that opportunity to take advantage of pulling in more network connectivity from some of the global providers that would normally have network-type deployments that you have a little bit of that. Whereas GPX, definitely, that was a primary focus and success story for them. And so from a distance, I don't know, Equinix' strategy completely intimately -- I think what they did is they bought sort of the leading network provider that also has that strong global connection already set up. I think as we go forward, what we like about Web Werks is twofold. One is it has a really nice connectivity base and a strong retail customer base in India, which we see as part of any story. But we also see that as a platform to go in and start to go after more scale and potentially sort of market-appropriate hyperscale opportunities. That's obviously not the same level as like a Virginia or some place like that. So I think as we look at it, our view is to use it as a jumping off point for that campus-led approach, where we want to -- we're initially in 3 cities. We'll be expanding. We already announced the expansion to a second building in Mumbai. And we have other markets that we've identified in India that we want to get into in that press release. So I think we're excited about it. We think it's a really good foundation, great team and a lot of energy. And even in the first 30, 60 days here, the customer conversations we've seen globally in terms of interest demand in India and being able to pull our global customers into that market, where we're able to put the Web Werks and Iron Mountain brands together, we see that as a really, really strong play. And we're looking forward to seeing how that plays out as we bring more inventory online.

Makes a lot of sense. Can you remind us of the path you have in place for increasing ownership over the next few years, given that it's a JV currently?

Absolutely. So we announced it as $150 million investment effectively in a way that structured is 3 tranches of $50 million over a 2-year period. And the second tranche, and there's some valuation metrics that go on related to growth in the business during that 2-year period, but no matter what, the second tranche will be in a control position of that business, so sort of somewhere in the middle of the 2-year period. And then at the end of the $150 million, a little -- again, a little bit based on kind of growth and value, we anticipate that being in the neighborhood of 70-ish percent ownership at that point. The thing I would say was that with any of these transactions that we structure, we always, at some point in the future, have a right to buy in the whole business. That isn't the case. That isn't our immediate intent here by any stretch of the imagination. I think we have great partners, and they're very excited to stay in the business, and we see value with them for a long time. But with any transaction, we do build that mechanism and for us in the future.

Great. Maybe, Tony, you mentioned Manassas. And so a lot of activity there. Maybe a little bit more weighted towards self build, but you obviously have your legacy presence Power Loft, I believe, and kind of have been built upon that. But how do you view that market? I was told that there's more construction there in the past 18 months than the entire Chicago market. So that's quite a lot of growth, but it doesn't get as much airplay, say, Ashburn by slightly different operating environment. But how do you think about Northern Virginia in general, the role of Manassas, Ashburn and kind of your growth path within that framework?

Absolutely. So interestingly, we were not the Power Loft asset. That was with COPT. But you are -- Jonathan, you're showing how long you've been around the industry here to be able to talk about the Power Loft asset. The -- but in all seriousness, we went in, in 2017 into Manassas with a large greenfield site. We initially sort of targeted about 35, 40 critical megawatts for that campus in terms of the power that we just secured out of the gate. And we went greenfield, and we went to kind of a hope of making it something bigger. Now I will say why we went there a few years ago when we did is power rates at scale are slightly cheaper than some of the surrounding markets. Tax rates are slightly more favorable. And there's a ton of data center deployed there. To your comment a minute ago, some of the self-built hyperscalers had really sort of paved the way in that market and demand. And so as we set that up and get going, it was really just a great opportunity. And so in a couple of years, we had over 20-plus carriers on that in a market and a campus that didn't even exist. I think that was 2, 2.5 years in. And we continue to be able to build that up as we go. And the network density, the customer mix has been really good. And equally, it sets us up for some overflow capacity on these larger hyperscalers. And we've started to take advantage of that. I think we see really good depth in that market long term. We recently announced sort of site expansion where we took more land and increased the total power at the site. I think the -- we're adding 150-megawatt [ NDA ] substation. And so we walked through the math on that in our last press release. And so I think that campus, which we'd originally slated for sort of 35 megawatts, we hope to be able to put significantly more capacity onto as we go forward.

So I think we're nearing the end. I want to maybe close this out by giving you an opportunity to talk about M&A in the sector, both as it pertains to your strategy as well as just what you've seen in the broader market. There's been some cap rate compression on things like Amazon shelves in [indiscernible] Virginia, for example. But thoughts on overall activity and then your role within the broader M&A framework.

Absolutely. I think M&A has become a -- in sort of the broader market has become a really complicated issue because understanding the difference in yields and growth rates around the world and markets and sort of the credit quality of those yields in terms of what customers might be there, I think there's a pretty broad range of outcomes in terms of valuations and multiples. And so I think sometimes numbers that appear big are -- it's like really big. And other times when they appear big, they actually are much more reasonable when you look at kind of the yield that's being achieved. And the growth rate, you can have really your arms really around the next 3 or 4 years in the market. And so I think when we look at the world, we see -- we're always paying attention to the M&A market. As you know, we haven't been active in that in a material way besides the Web Werks transaction, which was a joint venture in the last few years. But we certainly pay attention to it. And I think we know what we believe has value. And we've been really clear, we're not kind of overextending or going forward in any big way on M&A. But on the flip side, we also are intelligent market participants. And I want to make sure we know what's going on around us. I do think as we look forward, I think there's a lot of single city or maybe 2 city providers around the world, probably 15 to 20 that have emerged in the last few years with really nice growth rates. And these were businesses that no one had heard of a few years ago but suddenly have $20 million, $30 million, $35 million of EBITDA. And so I think there's going to be another wave of this more -- this is an industry comment. I do think there's going to be another wave of consolidation here over the next couple of years with the global providers really pulling some of these in. And so we're still working on our strategy, and we continue to [indiscernible] for today to drive aggressively against that organic growth with those intelligent market entries like we did with Web Werks.

So we got a little bit of time. So we talked about Asia, talked about the U.S. Maybe you put out press release as I think about some of your leasing success in Phoenix. But Europe, given the way you've entered that market and then some of the metros in which you've sort of targeted for expansion, any kind of regional strategy that you could articulate for us specifically within EMEA.

Yes. So I think EMEA, we definitely want to further bolster our presence in Frankfurt, London and Amsterdam. We're building actively in all 3 right now. We probably don't have as much capacity on the shelf as we'd like, given the demand that we see in the market. And so I think those are markets where you see us investing very aggressively moving forward. I do think there are other markets in Europe that have quite nice supply/demand characteristics. And so as with many parts of the world, I think, are there opportunities for us to infill some additional markets in Europe, really bridging off those same customers, those relationships and taking advantage of a little bit of supply-demand imbalance? It's certainly something we look at thinking there could be value in, but nothing acted on so far.

Great. That will be the last word. I really appreciate you taking the time with us. Covered quite a lot of ground. And thanks once again.

Awesome, Jon. Thank you so much, and have a great day. And good conference.

Thank you.

Thank you.