The stock market got off to a great start this year. The S&P 500 rallied 14.5%, driven up by AI-related enthusiasm.
However, not all segments of the market participated in this rally. Most real estate investment trusts (REITs) underperformed. That was due to persistently high interest rates, which, among other things, weigh on the value of high-yield dividend stocks.
There was one outlier among REITs: Iron Mountain(NYSE: IRM). Its shares soared 28.1% in the first half. Add in its high-yielding dividend (which at its recent level of 2.6% is more than double the S&P 500's yield), and the outperformance was even wider (30.1% for Iron Mountain compared to 15.3% for the S&P 500). Here's a look at what drove that rally and whether it has the power to continue outperforming.
Project Matterhorn is paying dividends
Iron Mountain is a specialty REIT. It's a global leader in information management services. It securely stores physical and digital records and other valuables in 1,400 warehouses and data centersaround the world. The company also provides related services, including secure destruction and asset lifecycle management.
The REIT's growing focus on data centers positions it for accelerating growth. It launched its Project Matterhorn initiative in early 2023, which has ushered in a new growth phase. It envisions revenue rising 10% to 12% this year (up from 7% growth in 2023) while its adjusted funds from operations (FFO) would increase by 8% (double last year's growth rate).
That strategy paid dividends in the first quarter. Iron Mountain's revenue rose 12%, while its adjusted FFO increased by 9% per share. It benefited from growing storage rental revenue, strong service revenue growth, and recent data center completions. The company also leased 30 megawatts (MW) of capacity in its data centers during the quarter, which will benefit its earnings in future periods. With its results exceeding expectations and Project Matterhorn clearly working, investors bid up shares of the REIT in the first half.
More growth ahead
Iron Mountain entered the second half of the year in an excellent position. Its strong first-quarter results drive its confidence in achieving its full-year guidance. Meanwhile, despite a recent acquisition (it bought Regency Technologies earlier this year to boost its asset lifecycle management business) and heavy investments to build out its data center platform, it's in its best financial shape in years. Iron Mountain ended the first quarter with a 5.1 times leverage ratio, its lowest level in a decade.
Those growth investments position the company to continue expanding its revenue and earnings at accelerated rates. Its Project Matterhorn strategy has it on track to grow its revenue from $5.5 billion last year to a target of $7.3 billion in 2026.
The company believes that it's just scratching the surface of its potential. Iron Mountain estimates that the total addressable market (TAM) for its data center, asset lifecycle management, and digital solutions is more than $140 billion. That's an increase from a $10 billion TAM in 2015.
The data center market, in particular, represents a massive growth opportunity for the company. It has 860 MW of capacity currently operating or under development, 375 MW of which it has available to sell to customers. That gives it lots of visible growth as it secures customers for this capacity. Meanwhile, the overall data center market is growing briskly, powered by digital transformation initiatives and emerging new technologies like AI. These catalysts, along with its strong balance sheet, put Iron Mountain in a strong position to continue growing its revenue and earnings briskly.
Still a potentially compelling investment opportunity
After surging in the first half of the year, Iron Mountain's stock currently trades at more than 22 times its adjusted FFO forecast for 2024. That's right in line with the S&P 500's forward P/E ratio and those of pure-play data center REITs Digital Realty and Equinix. However, it is higher than most other REITs, which is why its dividend yield is below the sector's average of more than 4%.
If you're a more value-conscious or income-focused investor, Iron Mountain might not be the most attractive opportunity following its first-half rally. However, if you're seeking higher growth and total return potential, Iron Mountain still looks compelling.
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Matt DiLallo has positions in Digital Realty Trust, Equinix, and Iron Mountain. The Motley Fool has positions in and recommends Digital Realty Trust, Equinix, and Iron Mountain. The Motley Fool has a disclosure policy.
