Iron Mountain Incorporated (Delaware) REIT (NYSE:IRM) missed its quarterly estimates. Since becoming a real estate investment trust (REIT) four years ago, the record storage company has expanded its digital storage capacity and grown its international footprint.
However, with its third consecutive earnings miss, signs of trouble may be emerging for IRM. Its expansions and increasing dividend payments have brought with it higher debt levels. Given its debts and dividend payment levels, investors should likely look for improving financial conditions before taking a position in IRM stock.
IRM Stock Misses Earnings Estimates
The company reported earnings per share (EPS) of 53 cents, missing estimates by 5 cents per share. However, the company still increased earnings from the 50-cent per share level seen in fourth quarter 2016. The company reported revenues of $991 million for the same quarter, an increase from the $934 million reported in 4Q 2016.
For all of 2017, IRM brought in $3.85 billion in revenues, up 9% from $3.51 billion in 2016. The company had an EPS of $2.13 in 2017, up from earnings of $1.98 per share in 2016.
IRM Stock Strength Is Rapid Expansion
The Boston-based specialty REIT, which itself is an S&P 500 component, supplies 94% of the Fortune 1000 with record-management services. It operates in 37 countries. It stores paper records, physical media assets and digital records backup.
Moreover, the company continues its expansion. Its acquisition of FORTRUST, a private data center business, increases storage capacity by 9 megawatts. This will bring the total data center capacity to 30 megawatts.
The company is also growing its footprint offshore. IRM plans data centers in London and Singapore to bolster its global footprint. Iron Mountain also acquired India-based OEC Records Management. This will give IRM 3.6 million cubic feet of storage space in 16 cities across India.
IRM Stock’s Blessing and Curse
Still, the REIT status that has helped to make this expansion possible may also be threatening the company’s financial stability. Since filing to become a REIT in 2014, IRM stock has increased its dividend annually. The company now pays 58.8 cents per share every quarter, higher than its 53-cent EPS from last quarter. This takes IRM’s dividend yield to almost 6.9%.
Due to dividends exceeding net income, financing the dividend has come from debt issuance. Debt levels have begun taking a toll on the balance sheet. The company, which has a $9.7 billion market cap, has now amassed $6.9 billion in both short- and long-term debt.
To avoid federal income tax, the government requires REITs to pay out 90% of net income in the form of dividends. Profits naturally fluctuate from quarter to quarter. However, IRM has also had a recent history of maintaining stable dividend levels.
Unfortunately for Iron Mountain stock, the 90% payout requirement combined with fluctuating profits forces the company to pay out more than it brings in to maintain that stable dividend level.
Now, with debt levels rising, the company may be forced to adjust dividend levels to the 90% minimum level to allow for debt reduction. After years of dividend increases, a sudden cut in the dividend will likely hurt stock prices. Still, IRM may have no choice as debt levels threaten balance sheet stability.
Think Twice Before Storing IRM Stock in Portfolio
Although Iron Mountain’s level of business should grow over time, rising debts will likely force a dividend cut that will hurt IRM stock. As a company that provides necessary data and record storage services to most of the Fortune 1000, the company’s client base appears strong.
Unfortunately for owners of IRM stock, the company’s approach to dividends, coupled with the 90% payout requirement, pushes debt to steep levels. This makes both a dividend cut and a negative impact on the IRM stock price highly likely. Hence, until IRM experiences this fiscal day of reckoning, investors should look to other REITs for dividend income.
[Editor’s Note: This article has been amended to fix the incorrect statement that no other companies offer both physical and digital data storage.]
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.