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Study Finds REIT Board Governance Practices Strong; More Diversity Needed

REITs outperform other publicly traded companies in key facets of board governance and best practices, according to a new report, although there is room for improvement in the industry in terms of board diversity.

The report released by Ferguson Partners, Ltd., a global professional services firm, and Board Governance Research, an independent research company, compared 151 REITs included in the Russell 3000 Index to 2,979 other companies in the index.

The report found that 87 percent of REITs included in the study require board directors to stand for election annually, far ahead of the broader market rate of 58 percent. In general, investors are in favor of annual director elections because they prefer the opportunity to vote on each director every year, the report noted.

At the same time, 64 percent of REITs separate out the roles of CEO and board chairman, compared with 58 percent of the other Russell 3000 companies, the report found. The study pointed out that many governance experts advise companies to separate the roles of CEO and board chair upon the next CEO succession.

On the other hand, REIT boards would benefit from increasing their diversity of gender, age and background, according to the report.

The study showed that the other Russell 3000 companies’ boards are more likely to have two or more female directors. Moreover, according to the data, 14 percent of Russell 3000 boards had three or more female directors, compared with 6 percent of REITs.  Fifty-two percent of REITs included in the study had only one female director, compared with 36 percent for the non-REITs surveyed.

REITs’ directors are also more likely to be older when compared against board directors outside the industry, according to the research. One quarter of REIT directors are 70 or older, while only 19 percent of the directors of Russell 3000 companies are in this age range.

Furthermore, the study found that REIT directors are slightly less likely to be under 50 years old. Only 8 percent of REIT directors are under the age of 50, compared with 10 percent of the Russell 3000 directors.

Annalisa Barrett, founder and CEO of Board Governance Research, highlighted the need for REITs to recruit directors outside of their industry. Currently, more than 52 percent of REIT directors are actively employed by a real estate company or a REIT, the study found.

“More forward-thinking boards are now recruiting directors outside of the real estate industry to obtain more diverse views, bring fresh ideas to the table and to avoid possible conflicts of interest issues,” Barrett said.

(Why?)

Published at Wed, 04 Oct 2017 12:51:25 +0000

FTSE NAREIT All REITs Index Down 0.6% in September

REITs moved modestly lower in September as broad concerns about the economy, the direction of interest rates and the length of the current real estate cycle combined to keep the sector in a holding pattern, observers said.

The total returns of the FTSE NAREIT All REITs Index dropped 0.6 percent in September, while the S&P 500 posted a total return of 2.1 percent. For the first nine months of 2017, total returns of the FTSE NAREIT All REITs Index gained 6.7 percent, while the S&P 500 returned 14.2 percent.

Total returns of the FTSE/NAREIT All Equity REITs Index lost 0.8 percent in September and 6.0 percent through the first nine months of the year. The total returns of the FTSE NAREIT Mortgage REIT Index rose 1.5 percent in September and 20 percent for the year to Sept. 29.

The yield on the 10-year Treasury note rose 0.2 percent in September. Through Sept. 29, the yield was down 0.1 percent for the year.

Alexander Goldfarb, a senior REIT analyst at Sandler O’Neill & Partners, noted that despite factors weighing on the REIT sector, underlying fundamentals have not changed during the course of this year. “Overall, the fundaments are fine,” Goldfarb noted.

David Rodgers, senior analyst at Baird, agreed: “Real estate is a little bit status quo right now.”

“Real estate is seven, eight years into the recovery, if not more. Now it’s positioning for whatever that next phase of the economy is — be it inflation or slower growth,” Rodgers said.

Looking ahead to REITs’ third quarter earnings reports, Goldfarb said some of the stories to watch include the impact of severe weather events on REITs active in Puerto Rico and Houston, as well as potential development delays in the multifamily sector related to labor shortages and permitting problems.

Turning to the performance of property sectors during September, retail REITs bucked the overall trend to post total returns of 0.7 percent in the month. Self-storage REIT returns gained 5.6 percent last month, while office REIT returns were 1.8 percent higher. Returns for lodging REITs were 4.7 percent higher.

(Why?)

Published at Mon, 02 Oct 2017 19:02:58 +0000

Green Street Analyst Says Single-Family Residential REITs Maturing

In the latest episode of The REIT Report: NAREIT’s Weekly Podcast, analyst John Pawlowski of Green Street Advisors offered his take on the maturation of the single-family residential REITs.

The size and quality of the single-family residential sector have “improved dramatically” from when it first started to emerge earlier this decade, according to Pawlowski.

Pawloski said the sector’s operating fundamentals currently compare favorably with the apartment segment of the residential market. The single-family residential REITs are enjoying the benefits of refined operating processes and doing a better job of cutting costs, according to Pawloski. He added the while the apartment market has experienced an influx of new supply in recent years, additional supply has been “fairly restrained” in the single-family segment.

Pawlowski did note that valuations for single-family residential REITs “are becoming a little pricier… But they’re still very reasonable give the favorable near-term operating outlook.” Single-family residential REITs and apartment REITs still have “fairly compelling valuations versus some property types,” he said.

Regarding recent subpoenas issued by the Securities and Exchange Commission (SEC) to companies in the single-family rental sector, Pawlowski said the securities watchdog is investigating a third-party provider of broker price opinions used for single-family rental securitizations. “We’re seeing this as more noise than any meaningful impact on REITs,” he said.

In terms of factors for potential investors in single-family residential REITs to consider, Pawlowski pointed to capital expenses. “Nobody knows how these homes are going to age over time,” he said. Investors will also have their eyes on the REITs’ capital allocation skills.

“Their capital allocation skills will need to be proven over time in good and bad times,” Pawloski said.

(Subscribe to The REIT Report via iTunes.)

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Published at Mon, 02 Oct 2017 17:59:22 +0000

REITs Aiding Recovery, Assessing Damage in Puerto Rico

More than one week after Hurricane Maria swept across the island, Puerto Rico remains without electricity. Meanwhile, roads are impassable due to extensive flooding, and essential supplies are running low.

For REITs that operate in the storm-devastated territory, the process of contacting employees, providing assistance and assessing damage is only just starting.

Shopping center REIT DDR Corp. (NYSE: DDR) has 12 properties in Puerto Rico. DDR CEO David Lukes said the company continues to work to provide basic supplies to its local team and their families. DDR has also made steady progress assessing damage and is preparing repair plans.

“We expect full recovery to span a significant period of time given damage to Puerto Rico’s critical infrastructure and the current difficulty procuring building materials and making necessary repairs,” Lukes said.

Plaza Palma Real, DDR’s property on the southeastern portion of the island, sustained major damage, the company said.  While the company’s remaining 11 assets sustained less significant damage, DDR noted that it remains unclear when re-openings could occur.

American Tower Corp. (NYSE: AMT) reported that of the sites it has been able to gain access to and inspect, it appears that the structural integrity of the towers has held. However, a substantial amount of the carrier customer equipment on the towers and at the sites is badly damaged. This damage to carrier equipment and the loss of electrical power has resulted in very few cell sites being operational, the company said.

American Tower has resources on the ground now who are helping with recovery efforts, performing full site audits on its 118 towers and identifying priority projects. The company is working with the Federal Communications Commission, Federal Emergency Management Agency and the Department of Homeland Security on a coordinated response.

Retail REIT Kimco Realty Corp. (NYSE: KIM) is busy ensuring its employees are safe and providing them with necessary assistance, according to Jennifer Maisch, director of corporate communications. As for damage assessment, infrastructure challenges are preventing a complete review of its seven shopping centers at this time, she said.

Maisch said Kimco is encouraging employees throughout the company to donate to the Red Cross through the International Council of Shopping Center’s (ICSC) portal. Kimco is matching employee donations up to a total of $50,000. The ICSC Foundation, the charitable arm of ICSC, said it will match the first $500,000 contributed by ICSC members to the American Red Cross’ hurricane relief efforts.

Mall REIT Taubman Centers, Inc. (NYSE: TCO) had a seven-person security team on site at its only property in Puerto Rico, The Mall of San Juan, during the hurricane. That lessened the impact to certain areas of the center, the company said.

Taubman said it continues to work with tenants to fully understand the extent of the damage.

“With nearly all of the island’s power out and Puerto Rico’s residents highly disrupted, it is very hard to tell when we will have the full resources and manpower needed to complete the task,” said Ryan Hurren, director of investor relations at Taubman.

Meanwhile, tower REIT Crown Castle International Corp. (NYSE: CCI) has 262 cell towers located in Puerto Rico and is still in the process of conducting inspections.

“So far, we have found that our towers maintained their structural integrity and continue to provide the infrastructure required to host our wireless carrier customers,” Crown Castle said.

Crown Castle noted that it is clearing debris so that wireless carriers can gain access to their equipment to make repairs as needed and restore network service for customers.  The company is also working to bring in additional resources, equipment, water and fuel to help support the needs of the community.

Business storage REIT Iron Mountain Inc. (NYSE: IRM) said its facilities will be closed and all service in Puerto Rico will be suspended until further notice.

“Widespread destruction caused by Hurricane Maria is hampering our efforts to quickly assess our facilities as there are limited options for communicating with our employees and recovery partners,” Iron Mountain said. The REIT said it is preparing to secure its facilities and begin remediation as soon as possible.

(Why?)

Published at Fri, 29 Sep 2017 17:46:38 +0000

Multifamily REIT UDR CEO Takes On Urban Development Challenges

Tom Toomey, president and CEO of multifamily REIT UDR, Inc. (NYSE: UDR), is the first CEO of a public firm to serve as global chairman of the Urban Land Institute (ULI). His two-year term began in June. In an interview with REIT.com, Toomey spoke about the forces shaping real estate project development today, the impact of severe weather events and prospects for the multifamily sector.

REIT.com: What do you see as some of the key factors impacting development today?

Thomas Toomey: I tend to think of four things that are influencing development challenges today: demographics and population shifts, new economic growth engines, technology and sustainable development.

The United States is going through one of the most tremendous demographic shifts that we will witness in our lives. At 80 million [people], the millennials are extraordinarily strong and are entering the housing and employment markets in large numbers. At the same time, the baby boomers at 75 million-plus are downsizing and retiring or contemplating retirement.

On the economic front, we’re moving into something that’s very unique. Two big drivers are the knowledge economy and the sharing economy. Both are dramatically changing our cities and our daily lives. It won’t be long before we have a significant amount of artificial intelligence and robotics that are offshoots of both of these new economies.

It’s an exciting time. Innovation and challenges breed opportunity.

REIT.com: Is the real estate industry adequately prepared for severe weather events like those we’ve seen recently?

Toomey: Recent weather events are changing dramatically the real estate industry and the lives of the people who live in those cities. The “storm of the century” is happening more frequently and with greater severity – we have to get used to that.

But what I see is that businesses and cities are also adjusting. The ability to bring infrastructure back on line today is extraordinary. You’re seeing the built environment being improved, along with better planning by cities to prevent the loss of life and ensure that businesses are up and running quickly.  That’s going to drive a lot of our behavior going forward. It really takes a partnership between the builders, cities and government.

REIT.com: What impact could these weather events have on future development?

Toomey: Capital may move to safer places, and migration patterns may change. That being said, New Orleans, for example, has built a thriving community off of a smaller population base. What I am amazed at is our ability to go back to cities like New Orleans or New York and rebuild the impacted areas better than they were before.

At UDR, we were significantly impacted by Hurricane Sandy. We moved all our co-generating electrical equipment out of basements and first floors basically to 100 feet in the air. As an industry, we adjust and come back stronger every time.

REIT.com: How would you describe fundamentals in the multifamily business?

Toomey: We’ve enjoyed a great run, now almost stretching a decade. With the change in demographics, we have seen new supply, but what’s unique about it is that the U.S. economy is still averaging 180,000 jobs a month. It’s still in balance. We’ve lost a little bit of pricing power, but I think supply is abating and it’s just a matter of time before we get back to a higher growth rate than where we are today.

The product we are building today in the multifamily space is extraordinarily better than we’ve ever built before and appeals to a broader range [of people]. The economics of homeownership or renting have remained pretty much in favor of the renter pool. Supply and demand, demographics and growth of the economy continue to be in our favor over the long term.

REIT.com: Do you foresee any changes to UDR’s development pipeline?

Toomey: We’re very sensitive to our cost of capital to ensure we’re creating long-term value for our shareholders. As we’re facing short-term supply challenges, development gets harder. Construction costs have risen dramatically. The wind at our back for pricing opportunities has slowed a little bit, so development is harder to pencil today.

I would see us staying pretty level in our development activity, but changing the market mix and the price point of our products to be more sensitive to the current environment.

REIT.com: And what about the future of UDR’s Developer Capital Program, which invests in alternative development structures, including participating loans and preferred equity investments?

Toomey: I’m comfortable that the program will continue for probably another three to five years, given the current dynamics of the markets.

When we started the program in 2013, we saw that the financial markets were pulling back in terms of loan proceeds for new development activity. It became apparent that there was an opportunity to invest with some of the best developers in the country and retain an option to purchase the asset or participate in the value creation at a later date. We’ve been able to reap significant rewards by participating in some of the risk.

(Why?)

Published at Tue, 26 Sep 2017 16:37:11 +0000

U.S. REITs Outperform in 2017 GRESB Assessment

Participating U.S. listed REITs outperformed their global peers overall in environmental, social and governance (ESG) performance in 2017, according to the latest edition of the Global Real Estate Sustainability Benchmark (GRESB) Real Estate Assessment.

The GRESB Real Estate Assessment provides an investor-centric ESG benchmark and reporting framework for listed real estate companies, property funds, real estate developers and private real estate investors. Participating U.S. listed REITs earned an average score of 67, putting them ahead of the global GRESB average of 63.

Listed REITs accounted for 42 of the 204 North American companies and funds reporting on their ESG performance in 2017, according to GRESB. The average GRESB score for the North American region as a whole stood at 64.

Dan Winters, head of the Americas for GRESB, said the U.S. REIT industry made “tremendous strides” in 2017. He noted that U.S. REITs recorded their fifth straight year of improved GRESB scores. Winters also pointed out that the five-year carbon dioxide reductions of participating REITs exceeded sustainable development goals set forward by the United Nations.

“This year’s GRESB results offer credible evidence [participating REITs] will continue to set the tone for the industry,” Winters said.

NAREIT Vice President for ESG Issues Fulya Kocak highlighted the growing number of U.S. REITs participating in the GRESB survey, as well as their recognition for strong performance. “At NAREIT, we believe that benchmarking ESG performance results helps to identify opportunities for environmental, social and financial gains,” she said.

GRESB noted that the 2017 results showcase a drive by North American participants with more than five years of benchmarking experience to increase the availability of ESG data, with 90 percent or more of companies having data management systems in place to monitor energy and water consumption. Winters pointed out that in 2012, less than 25 percent of U.S. REITs were comprehensively tracking consumption data.

Globally, a record 850 property companies and real estate funds completed the 2017 GRESB assessment. In total, they represent 77,000 assets with a value exceeding $3.7 trillion combined.

“We hope that the commitment and meaningful actions taken by the 850 GRESB participants serve as an example to others and help to drive improved sustainability performance more broadly across the market,” said Sander Paul van Tongeren, co-founder and managing director at GRESB.

NAREIT’s Leader in the Light Awards, which are announced in November, use GRESB data as part of the selection process.

(Why?)

Published at Mon, 25 Sep 2017 14:25:07 +0000

A New Benchmark for the Fibra Industry

When it held its initial public offering in 2014, Fibra Mty, S. C.(MEXBOL: FMTY14 MM) became the first Mexican REIT, or fibra, to adopt an internal management structure. In May, Fibra Mty went a step further to become the first fibra to launch an at-the-market (ATM) program to fund future growth.

Based in the northeastern Mexican city of Monterrey, the owner of 42 office and industrial properties across seven Mexican states has worked hard to become a benchmark for the rest of the fibra industry.

“One of our main goals is to become a world-class investment vehicle with the best corporate governance standards. Transparency, alignment to our shareholders and compliance have been our drivers,” says Fibra Mty CEO Jorge Avalos Carpinteyro.

Following the U.S. Model

Avalos, who holds an MBA from the University of Dallas and invested in U.S. REITs during his previous 20-year career as a banker, was eager for Fibra Mty to follow the U.S. REIT model as closely as possible. To that end, Avalos said he and his team turned to advisory and consulting firm Green Street Advisors for help in establishing “a U.S. REIT with a Mexican zip code.”

AT A GLANCE

Address:
Blvd. Antonio L. Rodríguez 1884
Oficinas en el Parque, Torre 1-PM,
Col. Santa María, Monterrey, N.L.
64650
Mexico
Phone: +52 (81) 4160-1400
Website:fibramty.com
Management Team:
Jorge Avalos Carpinteyro, CEO
Javier Llaca García, COO
Jaime Martínez Trigueros, CFO

By adopting an internal management structure, Fibra Mty saw its costs drop from 1.7 percent of assets at the time of its IPO to 0.9 percent in the first quarter of 2017. Those savings have been passed on in the form of additional dividends for shareholders, according to the company.

“We are completely aligned with our shareholders’ interests – they win, we win,” Avalos says.

David de la Rosa, senior vice president of advisory and consulting at Green Street, describes the internalization of management at Fibra Mty as a “game-changer,” and notes that there is a general sense in the investment community that this is the way the rest of the fibra market will eventually go. In fact, another Monterrey-based company, Fibra Inn (MEXBOL: FINN13), opted to internalize management last year. “I think that’s by virtue of what Fibra Mty did,” he says.

“Fibra Mty was very open-minded about what it would take to be best-in-class,” de la Rosa says. “They are very cognizant of how important it is for them to have a robust investment approach and a conservative balance sheet, which I think is very important.”

The Company’s 2020 Vision

When it went public, Fibra Mty held an initial portfolio of nine properties, located almost entirely in Monterrey and valued at 2.7 billion pesos. By the first quarter, the portfolio’s value had climbed to 8 billion pesos.

Fibra Mty has set a goal, outlined in its Vision 20/20 strategic plan, to grow its asset base to 20 billion pesos by 2020, using the proceeds of its 10 billion pesos ATM program. By adopting an ATM program, Fibra Mty will be able to quickly obtain resources from the market, avoiding excessive issuances by seeking only the necessary resources for upcoming acquisitions, according to Avalos.

As it grows its portfolio, Fibra Mty anticipates a mix of 60 percent office buildings and 40 percent industrial, Avalos says. In terms of tenants, the CEO says Fibra Mty is focusing on long-term contracts with multinational corporations that are “looking for high-quality buildings in great locations.”

Currently, about 21 percent of Fibra Mty’s tenants are in the technology sector, followed by 19 percent in the automobile logistics industry and 13 percent in both the services and manufacturing sectors. To maintain the portfolio’s diversity, Fibra Mty has set a 25 percent cap on any one tenant sector.

In the office segment, Fibra Mty generally focuses on acquisitions in a $20 million to $40 million range. As such, it faces limited competition, Avalos points out. The two other fibras that target office buildings are more interested in trophy assets located mainly in Mexico City, he says.

“Those assets are too expensive for us. There’s been a lot of cap rate compression,” Avalos says.

When it comes to industrial properties, the company does not compete against the major industrial fibras or listed private equity funds known as CKDs, Avalos explains. Instead, Fibra Mty tends to venture with local developers that have large land reserves and are looking to cash out.

Solid Support from Pension Funds

Since its inception in 2014, Fibra Mty has mostly been funded by the country’s private pension fund managers, termed AFORES. This has resulted in low stock liquidity, according to Avalos.

“As long as we keep on delivering results, they have been funding every follow-on we announce…so far this has been a very positive strategy in order to gain scale and reach a market cap above 7 billion pesos by the end of the second quarter,” Avalos observes.

De la Rosa at Green Street points out that, ideally, Fibra Mty will eventually seek capital beyond the domestic pension funds. “By being internalized, that’s a great starting point,” he says.

Taking a broader view of the Mexican real estate market, Avalos believes fibras have become a key player in benchmarking the price of any quality asset. In addition, he believes developers have benefitted from access to specialized capital.

“The major real estate projects, that usually were developed by local investors and friends and family money, have turned to institutional developers and institutional resources, benefitting the quality of the projects and the depth of the market,” Avalos states.

(Why?)

Published at Fri, 22 Sep 2017 13:40:50 +0000

Camden CEO Details Houston Hurricane Recovery Effort

In the latest episode of The REIT Report: NAREIT’s Weekly Podcast, Ric Campo, chairman and CEO of Houston-based apartment REIT Camden Property Trust (NYSE: CPT), provided an update on the recovery effort from Hurricane Harvey and discussed how the storm is impacting Camden and the Houston market.

Campo said the remnants of the storm’s damage have essentially disappeared from Houston’s commercial districts. Damage is more extensive in the city’s residential areas.

“It’s sort of two different worlds: one that doesn’t look impacted and one that’s obviously very impacted,” Campo said.

Campo said the storm did very little damage to Camden’s apartment buildings in Houston. He also noted that the storm immediately shifted roughly a year’s worth of demand for apartments in the area into the market. Camden’s occupancy rate in Houston climbed from 93 percent prior to the hurricane to 98 percent afterwards.

On net, the company has leased 500 new apartments since the storm hit, versus just 170 from January to August, according to Campo. “We think that [demand] is going to last for quite a while,” he said.”

Camden implemented special policies for renters in the wake of the storm. To avoid surges in rent pricing, the company turned off its dynamic pricing model and froze rates at the same levels from before the hurricane. It also removed the premiums it normally includes for short-term leases. Additionally, the company isn’t charging late fees on September rent payments.

Looking forward, Campo speculated that repairing damaged homes in the Houston area might take longer than anticipated.

(Subscribe to The REIT Report via iTunes.)

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Published at Fri, 22 Sep 2017 15:17:02 +0000

Canadian REITs in Transition

While large Canadian asset managers, pension funds and pension fund companies have been roaming around the world buying real estate and infrastructure assets, Canadian REITs have also been quietly moving beyond Canadian borders to grow their portfolios.

To be sure, the Canadian domestic real estate investment markets have been strong in most non-oil and gas economy cities. The Bank of Canada is calling for real GDP growth in 2017 of 2.8 percent, which would be the strongest in the G7 countries. The Canadian REIT Index yields 5.9 percent—which is a healthy spread over the 10-year Canada Bond (yielding 2.03 percent as of July 31).

On the other hand, capital values in the public markets have lagged, with the Toronto Stock Exchange (TSX) Composite Index up only 1.5 percent for the first seven months of 2017, and the TSX Capped REIT Index up 2.5 percent over the same period. That lags well behind the FTSE NAREIT Composite Index, which posted a 6.8 percent total return over the same period.

Perhaps that is why the market for new REIT IPOs in Canada has been slow. We had two REIT IPOs in 2016: Mainstreet Health REIT (U.S. sponsored), and the European Commercial REIT (targeted at Europe). To date, there have been no Canadian REIT IPOs in 2017.

What’s really driving this internationalization of Canadian REITs? There are two categories to consider. The first would be Canadian REITs venturing into foreign markets to find growth. The second would be foreign-sponsored REITs, typically with management teams from the U.S., listing on the TSX and raising Canadian capital to grow their asset base in that foreign market.

Canadian REITs have been active in foreign markets for quite some time; and those with sizeable U.S. holdings include Slate Retail REIT, H&R REIT, Pure Industrial REIT, Morguard Residential REIT and American Hotel Income Properties REIT. Those with substantial footprints in Europe include Dream Global REIT, Granite REIT, Inovalis REIT and CAPREIT (and its affiliate REIT). U.S. management team–sponsored REITs listed on the TSX include Milestone Apartment REIT (taken private earlier this year), Mainstreet Health REIT and WPT Industrial REIT.

Having said that, RioCan REIT, the largest Canadian REIT, has sold off its U.S. assets over the last several years to focus more on its core Canadian asset base, acquiring more properties and focusing on intensification of its domestic assets.

With fierce competition for high-quality and stable income-producing assets in key Canadian markets, it’s no wonder that many Canadian REITs have decided to develop new product. For many Canadian REITs, this has meant a new pipeline of high-quality assets that the market is beginning to recognize. Development risk seems manageable in an environment where demand is still high in two or three key cities, financing is available, and the development skill sets in-house in many Canadian REITs are now reaching maturity. Good results will come as markets begin to re-appreciate these fundamentals and oil- and gas-based markets adjust.

(Why?)

Published at Wed, 20 Sep 2017 17:45:23 +0000

Iron Mountain's Global Mandate

Priceless art is a hot topic at Iron Mountain Inc.(NYSE: IRM), but you won’t find masterpieces adorning the walls of the company’s offices.

Instead, they’re all locked away in the ultra-secure storage facilities of Crozier Fine Arts, which was purchased by Iron Mountain in 2015 to add to its array of storage and information management real estate offerings. The Boston-based REIT owns and operates facilities at 1,400 sites in 52 countries around the world. Its customers include roughly 95 percent of the Fortune 1000 companies.

A small percentage of Iron Mountain’s business involves storing unique assets. Even though the company has the master copies of interviews conducted by director Steven Spielberg with Holocaust survivors in connection to the release of the Oscar-winning film “Schindler’s List,” Iron Mountain’s primary focus lies in providing the real estate to store paper documents and computer tapes for corporate clients.

“We may be a pretty boring business,” jokes CEO Bill Meaney, “but we are very durable.”

Stability comes up as a theme, too, when analysts talk about the company.

Andrew Wittman of Baird Equity Research notes that Iron Mountain’s underlying business is “continuing to prove more resilient than expected.” Andrew Steinerman, an analyst who covers Iron Mountain for J.P. Morgan, likens the business storage REIT to being “as reliable as [pro basketball superstar] Steph Curry” from three-point range. He praises the company’s management team for balancing its longstanding orientation toward physical records with the demands of an evolving economy.

In the five years since Meaney became CEO, Iron Mountain has set its sights on enhancing its position as a truly global company. Meanwhile, Meaney says, it is working to refine the real estate solutions it can provide to become a one-stop shop for corporate clients.

From Mushrooms on a Mountain…

Iron Mountain, which was originally known as Iron Mountain Atomic Storage, took root in 1951 at the hands of former mushroom farmer Herman Knaust. Based in the Hudson River Valley, he initially targeted corporate clientele from the New York metropolitan area.

Knaust offered them a safe place to store documents: an old iron ore mine purchased in the 1930s to farm his fungi. (Hence the Iron Mountain name.)

By 1980, Iron Mountain was eyeing expansion beyond New York. It started with purchases of land and facilities in New England. Eventually, the company was setting up shop in all the major U.S. markets.

Iron Mountain held an initial public offering in 1996, and in 2012, the company’s board of directors approved a plan to become a REIT. It began operating as a REIT on the first day of 2014.

Meet Mr. Meaney

Meaney became CEO of Iron Mountain in 2013 following Richard Reese’s second stint as chief executive. Meaney, a former CIA officer, had a lengthy track record in the international arena. Immediately prior to joining Iron Mountain, he spent eight years as CEO of The Zuellig Group, a $12 billion business-to-business conglomerate based in Hong Kong.

“I’ve spent almost all of my career outside the United States,” he says. “The thing that attracted me to Iron Mountain is that it already was a very strong and very global brand, but its global presence was still fairly limited.”

Meaney set to work improving Iron Mountain’s global visibility. One of his primary objectives became operating in fast-growing emerging markets in places like Asia and South America. Eventually, the company set a goal of generating at least 20 percent of Iron Mountain’s sales from emerging markets by the year 2020.

The business storage REIT is currently ahead of schedule. Iron Mountain’s business in emerging markets grew from 10 percent of its total portfolio when Meaney took over to 18 percent in the second quarter of this year.

“While we’re growing in every market, including in our most developed market in the United States, we have the fastest growth in those emerging markets,” Meaney remarks.

Total Recall

To help meet its global mandate, Iron Mountain has made its presence felt in the transactions market. Its biggest deal came in 2016 with the acquisition of international competitor Recall Holdings for $2 billion.

Meaney cites a number of benefits derived from the combination of the two companies. First, a handful of major global corporations are looking for a single source from which they can quickly retrieve documents anywhere around the world, he says.

Other customers want the security of partnering with “the clear market leader,” Meaney notes. “With the Recall acquisition, we feel confident that is Iron Mountain.”

Once it had Recall under its umbrella, Iron Mountain could fortify some of the weak spots in the company’s global portfolio. Notably, this included the Southeast Asia region, where Recall was a stronger player.

Additionally, Meaney points out that profit margins on Recall’s operations have grown since the acquisition. Prior to the deal, Recall was attempting to compete globally, but doing so at roughly a quarter of the size of Iron Mountain, according to Meaney.

Meanwhile, J.P. Morgan’s analysts estimate that Iron Mountain will realize $80 million in annual costs savings in 2017 from the Recall deal. They’re estimating those annual savings to grow to $105 million as of 2020.

So far, Karin Ford, a REIT analyst with MUFG Securities Americas Inc., says the acquisition appears to be paying off.

“We expect Iron Mountain to accelerate its FFO and dividend growth in 2017 as a result of overhead cost savings and synergies generated by its merger with Recall Holdings,” she wrote in a note to investors following Iron Mountain’s second quarter earnings call in July.

Paper Chase and Server Space

As Iron Mountain continues its global expansion, the ever-growing share of work being done digitally and stored in the cloud naturally raises questions about the viability of its foundation in real estate for retaining paper records.

Meaney, however, takes a more macro view of what it is that Iron Mountain has to offer. He emphasizes providing “enterprise storage solutions” with the ability to address all of a company’s needs through “adjacent” lines of business to paper storage. While its paper storage customers keep their boxes with Iron Mountain for an average of 15 years, the company has seen the entry point of the customer conversation shift from a storage-centric one.

“For most of our customers today, the discussion starts with how Iron Mountain can help your digital transformation,” Meaney says. 

That led to Iron Mountain’s entry into data centers, a real estate sector that seems to be a natural fit with the company’s core business. According to Meaney, existing customers actually came to the company in search of digital storage space, which prompted the move into the sector. 

“We view Iron Mountain’s expanding focus on data centers positively, given strong demand trends as well as natural synergies with its traditional customer base,” Ford says.

Iron Mountain’s expansion in data centers has proceeded deliberately through a mix of development projects and M&A. “We’re very disciplined in terms of our return criteria” for data center assets, Meaney says. 

Iron Mountain now leases space to multiple tenants in each of its four data center facilities in Boston, Pittsburgh, Kansas City and Northern Virginia. In July, the business storage REIT announced a $130 million deal to acquire FORTRUST, a private data center company in Denver.

In comparison, Equinix(NASDAQ: EQIX), the largest data center REIT, owns 182 data centers in more than 20 countries.

“Iron Mountain’s data center business is relatively small at the moment, but has seen a nice growth trajectory,” Steinerman says.

An Ongoing Challenge

In terms of what’s next for the business-to-business storage REIT, Meaney says Iron Mountain’s top priority will be maintaining the strength of paper storage-centric business. Storage accounted for 83 percent of Iron Mountain’s net profit margins in the second quarter of 2017 and 62 percent of the company’s $950 million in total revenues, which grew more than 8 percent from the year-earlier period.

Ironically, though, communicating with the investment community about the strength of Iron Mountain’s core storage operations will remain one of the company’s greatest challenges, according to Meaney.

He says he recognizes that the “low-tech” nature of the business in an increasingly high-tech world means investors will continue to raise questions—even as Iron Mountain chugs along.

“You can consider us to the enterprise what the self-storage companies are to the consumer,” Meaney says. “The challenge is just getting the equity markets to understand and really appreciate the durability of the business.” 

(Why?)

Published at Wed, 20 Sep 2017 15:01:55 +0000