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Berko: You’ll be mad if you come down off Iron Mountain

By Malcolm Berko

Published: May 27, 2018, 6:05am

Dear Mr. Berko: In early January 2016, I had a $16,000 certificate of deposit that came due and couldn’t stomach the low yields. An accountant friend told me about Iron Mountain, which he hired to store the records for his practice. It yielded 8 percent, and I bought 400 shares at $25 on his recommendation. It went up to $41 in each of the past two years. I didn’t sell, and now it is just $33 and yields 7 percent. My accountant friend, who knows several people in the company’s Boston headquarters, told me to buy 400 more shares, but I think I should sell, as it may go down even more. Please help me make a decision.

— H.L., Bloomsburg, Pa.

Dear H.L.: Don’t sell. If you did, you might be mad as a foaming camel with a bad case of piles in two years!

Herman Knaust made his first million dollars in the 1930s growing mushrooms. In 1936, he bought an iron ore mine with 100 acres of adjoining land to increase his mushroom production. By 1950, the mushroom business had changed, and Knaust decided to put his mine to good use, with a new business called Iron Mountain. After World War II, Knaust sponsored the relocation of many Jewish immigrants whose personal records had been destroyed during the war. Simultaneously, the U.S. was in the Cold War, and there was serious apprehension concerning nuclear energy secrets. Both factors encouraged Knaust to focus on protecting vital information from wars and other disasters. Resultantly, Iron Mountain was founded in 1951. It opened its first vaults inside its iron ore mine. Iron Mountain’s first customer was the East River Savings Bank, where deposited signature cards and microfilm copies of deposit records were stored. From these humble, cavelike beginnings emerged a multibillion-dollar business.

Today Iron Mountain (IRM-$32) has a network of 1,409 facilities in 46 countries, with 87 million square feet. IRM has become a global leader in the highly fragmented business of off-site storage of records and retrieval of documents while providing information and management solutions to businesses. IRM enables its 92,000 customers to manage their records without burdening their employees and reduces costs and risks associated with the protection and storage of their information assets.

This is a predictable noncyclical business with necessarily recurring revenues, and in 2014, management converted IRM to a real estate investment trust. Management believes that increased ownership of storage real estate (rather than leasing) can provide high return investment opportunities. Now that the company is a REIT, management can increase its capital allocation toward ownership of currently leased real estate, such as the 1.8 million-square-foot Pennsylvania limestone mine. Management has subsequently developed a section of this mine into an energy-efficient data center, called Room 48. Owning more facilities supports IRM’s valuations and reduces leasing costs, and because income is not taxed at the corporate level (providing 90 percent of its income is returned to investors), shareholders will receive larger quarterly distributions.

Earlier this year, IRM completed its purchase of IO Data Centers, a leading co-location data center provider headquartered in Phoenix. IRM acquired land and buildings (730,000 square feet) with four state-of-the-art data centers in Arizona, New Jersey and Ohio for $1.34 billion. The four facilities also provide 62 megawatts of capacity, with expansion potential of an additional 77 MW in Arizona and New Jersey to furnish power to IRM’s data centers. Last year, IRM acquired Fortrust’s U.S. data center operations and then bought two data centers in London and Singapore from Credit Suisse. These transactions will bring IRM’s portfolio to more than 90 MW of existing power capacity, with an additional 26 MW under construction and expansion potential of another 135 MW. And in the past 15 years, IRM has acquired 47 providers of information management services.

There are several thousand smaller providers in the U.S. alone, and over the next dozen years, IRM acquisitions could propel revenues from today’s $4 billion to $9 billion. And considering that IRM’s net profit margins have jumped by 80 percent since the company became a REIT, IRM’s earnings could triple in the coming decade. Baird, Deutsche Bank, J.P. Morgan and Stifel have good research reports on IRM.

Malcolm Berko addresses questions about stocks. Reach him at P.O. Box 8303, Largo, FL 33775 or mjberko@yahoo.com

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