UNITED STATES IRM US Price (at 20:03, 07 Oct 2015 GMT) Outperform US$31.83 Valuation - DCF (WACC 6.1%) US$ 40.00 12-month target US$ 40.00 12-month TSR % +31.6 GICS sector Real Estate Market cap US$m 6,711 30-day avg turnover US$m 45.7 Number shares on issue m 210.8 Investment fundamentals Year end 31 Dec 2014A 2015E 2016E 2017E Revenue m 3,117.7 3,080.0 3,140.0 3,205.0 EBIT m 480.2 585.5 633.3 667.5 Reported profit m 329.0 203.1 328.0 359.5 Adjusted profit m 250.4 254.9 328.0 359.5 Gross cashflow m 571.6 603.5 688.0 727.5 CFPS US$ 2.91 2.85 3.24 3.43 CFPS growth % 4.7-2.1 14.0 5.8 PGCFPS x 11.0 11.2 9.8 9.3 EPS adj US$ 1.27 1.20 1.55 1.70 EPS adj growth % 16.5-5.6 28.7 9.6 PER adj x 25.0 26.5 20.6 18.8 Total DPS US$ 1.49 1.90 1.90 1.90 Total DPS growth % 38.0 27.5 0.0 0.0 Total div yield % 4.7 6.0 6.0 6.0 ROA % 7.3 8.9 9.4 9.4 ROE % 26.0 28.6 30.3 26.4 EV/EBITDA x 12.0 12.4 11.4 10.9 Net debt/equity % 521.6 488.7 331.5 262.8 P/BV x 7.5 7.4 5.4 4.6 IRM US vs MSCI US REIT Index, & rec history Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Capital (USA), October 2015 (all figures in USD unless noted) 8 October 2015 Macquarie Capital (USA) Inc. US$10 worth Recalling at investor day Event IRM investor day 10/14 Mandarin Oriental, NYC 8:00am-1:00pm; sign-up: LINK Look for IRM to discuss Recall we see US$10 of equity value proposition. At investor day, we expect to discuss its long-term strategic outlook + offer updates on the amount +/or timing of potential synergies. We note that Iron Mountain has suggested it expects to capture a total of US$155m in synergies from the Recall deal, as outlined in Fig 4. While we do not expect to explicitly comment on any updates in terms of antitrust, we believe commentary on the potential for pricing gains or the status of the timing of the Recall REIT conversion could boost the IRM stock. We expect the US$2.6b Recall acquisition to close early in Q116 + will expedite the integration process. At current levels, sees US$10-US$15m in advisory fees in both Q3 + Q4 and US$20m-US$25m in non-recurring Recall REIT conversion costs in H215. Impact IRM likely to reiterate 2015 guide + focus on organic growth story. We believe management will also focus on the core business. Despite global uncertainty, we believe should be able to reiterate its mid- internal storage revenue growth guidance. We also expect management to focus on the pace of improvement in its services growth + margin expansion. +5%/-1% ahead of investor day [Fig 2]. While the stock has returned ~ one week prior + ~1% on the day of the investor day, we think the Recall deal could drive a 5% move. US$2.6b Recall deal is worth at least US$10 in equity value. has also committed to limited divestments required for regulatory clearance. Use Pierce Leahy as proxy for 30%+ upside to IRM stock. While no two deals are the same, we offer s US$1.1b acquisition of Pierce Leahy in 2000 as a proxy for a positive regulatory outcome, shareholder approval, + how IRM stock could rally 30%+ in the months to come [Fig 8]. In Feb-00, Iron Mountain closed its acquisition of Pierce Leahy in a stock-for-stock merger. At that time, Pierce was 's largest competitor in business records storage + related services with 5%+ share of the total US records management market. In terms of parallels, we believe + Recall combined would have 10%+ share. expected to realize US$15m in annual synergies within three years of the merger in 2000, versus US$155m models for Recall. Earnings and target price revision Our estimates remain unchanged at this time. US$40 DCF-based target price implies ~13.0x 2016E EBITDA of US$993m. Price catalyst 12-month price target: US$40.00 based on a DCF methodology. Catalyst: Investor day, Q315 results. Action and recommendation We remain Outperform; maintain our US$40 TP. Please refer to page 9 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
IRM Price S&P 500 Macquarie Wealth Management Trading opportunity ahead of investor day Recurring business model set to re-accelerate in 2016 + beyond We expect to outline its ability to deliver internal storage revenue growth in line with guidance of ~2.5%, despite lingering macro concerns. In the near term, we believe this will be driven by consistent trends in North American storage, partially offset by decelerating service activity declines. We believe internal revenue growth will be the key metric to focus on, as it has historically been the primary driver of any weakness in the stock. Fig 1 Recent IRM share price activity $45 $40 REIT Conversion (3/7/11-4/19/11) IRM traded higher on succesive steps indicating the company would pursue a REIT conversion. IRM rose 35.6% to $25.73 from $34.90 over this time frame, on average volume of 3.8mm shares. Investor Day (10/11/12) 2014-16 internal revenue guidance targeted at 2-5% and company announced special dividend in conjunction with planned REIT conversion. IRM rose 4.7% to $35.96 from $34.35, on 4.7mm shares. $2,500 $2,000 $35 $1,500 $30 $1,000 $25 Investor Day (10/05/10) Internal growth targeted at 2-4%, but company announced US$30.0m comp accrual. IRM fell 8.6% to $20.45 from $22.37, on 16.3mm shares. $20 Sep-09 Feb-10 Jul-10 Dec-10 May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 Feb-15 Jul-15 Period News of Recall deal (9/29/14) Street Events reported intra-day that is working to acquire global competitor Recall Holdings. IRM rose 6.3% to $33.90 from $31.90 on 9.3mm shares. $500 Source: Factset, Macquarie Capital (USA), October 2015 8 October 2015 2
Historical trading patterns suggest favorable reward-risk of +/-1% ahead of investor day In the past, the IRM stock has traded well the week before its investor day through the next earnings report, benefiting from its preliminary guidance, as outlined in Figure 2 below. Given the stock s weakness YTD [down 18.0% vs. S&P 500 (3.5%)], coupled with the positive anticipated benefit from the Recall acquisition, we anticipate a similar historical trading pattern ahead of the company s investor day next Wednesday. At the event, we expect IRM to outline its ability to deliver internal storage revenue growth in line with Q215 s 2.7%, guidance of mid- range and the company s historical 2.0%-2.5%+ growth rate, despite lingering macro concerns. Should this occur, we believe the IRM stock could rally +, versus less than 1% downside if guidance disappoints. Fig 2 Investor day return (average) 2001-2014 [ex-2011 + 2013] = = = - = = + + = = = 15% 10% 5% 0% (5%) (10%) (15%) 13% 3% 4% 3% 1% 1% 0% 0% (0%) (1%) (1%) (11%) 11% 10% 7% 6% 4% 5% 3% 3% 1% 0% 0% 0% 1% (0%) (0%) () (4%) (4%) (7%) (8%) (9%) (13%) Average 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2012 2014 Week Before Day of Meeting Week After Notes: Internal growth guidance positive [+]; inline [=]; negative [-] Source: Company data, Macquarie Capital (USA), October 2015 8 October 2015 3
Q4 is historically the best quarter to own the IRM stock At the current valuation, we would be buyers of the stock in front of the investor day and use any weakness (if applicable) around Q3 results to add to positions, as Q4 has historically been IRM s best quarter returning, on average 7%, as outlined below. Fig 3 Average quarterly return since IPO in 1997 8% 7.0% 6% 4% 3.8% 2.5% 0% -0.6% () Q1 (Mar) Q2 (Jun) Q3 (Sep) Q4 (Dec) Average quarterly return since IPO in 1997 Source: Company data, Macquarie Capital (USA), October 2015 8 October 2015 4
We see reaffirmed 2015E guidance During the Q2 earnings call, the company had guided to the lower end of its revenue guidance range due to FX headwinds, though guidance ranges for revenue, OIBDA, AFFO and EPS were left unchanged. We will look for an update likely reaffirmed 2015 guidance during investor day. Fig 4 IRM 2015 guidance vs. MSGE + Street estimates 2015 Guidance Prior to Analyst Day Q2 Q1 Q4 Initial MSGE 1 st Call Revenue $3,030m-$3,150m $3,030m-$3,150m $3,030m-$3,150m $3,135m-$3,290m $3,080m $3,055m OIBDA $905m-$945m $905m-$945m $905m-$945m $945m-$985m $911m NA AFFO (new def.) $2.26-$2.45 $2.26-$2.45 NA NA $2.30 $2.34 EPS $1.15-$1.30 $1.15-$1.30 $1.15-$1.30 $1.21-$1.36 1 $1.20 $1.21 2016 Estimates prior to Analyst Day MSGE 1 st Call Revenue $3,140m $3,116m OIBDA $993m NA AFFO (new def.) $2.55 $2.50 EPS $1.55 $1.39 Source: Company data, Factset, Macquarie Capital (USA), October 2015 8 October 2015 5
Recall acquisition will generate significant synergy and accretion IRM expects the Recall acquisition to provide Total net synergies of $155M at full integration, with upside potential Fully synergized adjusted EPS accretion of 26% Fully synergized AFFO accretion of 13% Expected 0.8x debt multiple turn reduction by end of 2018 Fig 5 Synergy components + costs to achieve $180 $160 $140 $120 $100 $80 $60 $40 $20 Estimated US$155 mm Total Net Synergies Anticipated at Full Integration $15 $110 $140 2016 2017 2018 Fully Synergized Overhead Cost of Sales Tax Real Estate $155 $350 $300 $250 $200 $150 $100 $50 Estimated Cumulative One-time Costs to Achieve and Integrate Includes Operating and Capital Expenditures $105 $210 $255 $80 $220 2016 2017 2018 Fully Synergized Operating Expense Capital Expense $300 Source: Company data, Macquarie Capital (USA), October 2015 Fig 6 Adjusted EPS + AFFO/share accretion from Recall deal 30% 25% 20% Adj. EPS Accretion 25% 20% 26% 14% 1 10% 8% AFFO Accretion 11% 8% 13% 15% 6% 4% 10% 5% 0% 2016 2017 2018 Fully Synergized 0% () (4%) () 2016 2017 2018 Fully Synergized Source: Company data, Macquarie Capital (USA), October 2015 Fig 7 Pro forma forecasted lease adjusted leverage Source: Company data, Macquarie Capital (USA), October 2015 8 October 2015 6
8 October 2015 7 IRM Stock Price REC - ASX IRM Stock Price PLH Stock Price Fig 8 IRM/PLH + IRM/REC stock trading around mergers IRM rallied 25% from when the US$1.1b Pierce Leahy deal was announced in Oct-99 + closed in Feb-00 $45 $40 $35 A$9 A$8 A$7 $14 $12 IRM acquires Pierce Leahy (10/22/99) agreed to acquire rival Pierce Leahy for US$1.1b US$515m in stock + US$570m in debt. The IRM stock rose 1.6% to US$8.02 from US$7.89. The Pierce Leahy stock rose 3.6% to $24.49 from $23.64; PLH stock rose 30% from US$18.92 in September. $45 $40 $35 $30 $25 $20 Shred-It Deal Rumors(4/15/15) Recall was reported to be weighing a bid for Canadian company Shred-It. REC stock was flat at A$7.82 from A$7.81 on 1.4m shares traded. IRM stock was down 1.3% to $36.41 from 36.88 previously on 1.2m shares traded. A$6 A$5 A$4 $10 $8 $6 $30 $25 $20 $15 $10 $5 Talks to Acquire REC (9/29-30/14) in talks to acquire Recall for US$2-2.5b. IRM rose 6.3% to $33.90 from $31.90 with 9.3m shares traded. Recall rose 11.6% on 9/30 following this announcement to A$5.60 from A$5.02 with 7.3m shares traded. REC rejects IRM bid (12/14-15/14) REC rejects IRM's A$7/bid + REC board estimates US$250m in synergies. REC stock rose 15.3% to A$7.38 from A$6.40 on 5.2m shares traded. IRM stock rose 1.4% to $36.95 from $36.44 on 3.9m shares. IRM Q115 (4/28-29/15) IRM agrees to purchase Recall for A$8.50/share [0.1722 ratio] + outlines US$125-140m in synergies. IRM rose 2.9% to $37.28 from $36.24 on 6.5m shares traded. REC was up 0.3% to A$7.64 from A$7.62 on 9.8m shares. A$3 A$2 A$1 $4 $2 closes deal (2/1/00) closes ~US$1.1b PLH deal; IRM stock fell 1.1% to $9.67 from $9.78., but was up almost 25% from when the deal was announced that October. $15 $10 $5 A Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Period Jan-99 Feb-99 Mar-99 Apr-99 May-99 Jun-99 Jul-99 Aug-99 Sep-99 Oct-99 Nov-99 Dec-99 Jan-00 Feb-00 Period Source: Factset, Macquarie Capital (USA), October 2015
Fundamentals Macquarie Wealth Management Macquarie Quant View The quant model currently holds a marginally positive view on Iron Mountain. The strongest style exposure is Growth, indicating this stock has good historic and/or forecast growth. Growth metrics focus on both top and bottom line items. The weakest style exposure is Quality, indicating this stock is likely to have a weaker and less stable underlying earnings stream. 278/911 Global rank in Real Estate % of BUY recommendations 44% (4/9) Number of Price Target downgrades 0 Number of Price Target upgrades 0 Attractive Quant Local market rank Global sector rank Displays where the company s ranked based on the fundamental consensus Price Target and Macquarie s Quantitative Alpha model. Two rankings: Local market (United States) and Global sector (Real Estate) Macquarie Alpha Model ranking A list of comparable companies and their Macquarie Alpha model score (higher is better). Factors driving the Alpha Model For the comparable firms this chart shows the key underlying styles and their contribution to the current overall Alpha score. The GEO Group 1.5 The GEO Group Fortune Brands Home & Sec 0.7 Fortune Brands Home & Sec Recall Holdings Corrections Corp of Ameri 0.4 0.2 0.0 Recall Holdings Corrections Corp of Ameri -3.0-2.0-1.0 0.0 1.0 2.0 3.0-100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% Valuations Growth Profitability Earnings Momentum Price Momentum Quality Macquarie Earnings Sentiment Indicator The Macquarie Sentiment Indicator is an enhanced earnings revisions signal that favours analysts who have more timely and higher conviction revisions. Current score shown below. Drivers of Stock Return Breakdown of 1 year total return (local currency) into returns from dividends, changes in forward earnings estimates and the resulting change in earnings multiple. The GEO Group Fortune Brands Home & Sec Recall Holdings 0.2 0.3-0.4 0.1 The GEO Group Fortune Brands Home & Sec Recall Holdings Corrections Corp of Ameri -1.0 Corrections Corp of Ameri -3.0-2.0-1.0 0.0 1.0 2.0 3.0-40% -30% -20% -10% 0% 10% 20% 30% 40% Dividend Return Multiple Return Earnings Outlook 1Yr Total Return What drove this Company in the last 5 years Which factor score has had the greatest correlation with the company s returns over the last 5 years. Price to Cash FY1 Price to Cash NTM Price to Earnings FY1 DPS Revisions 3 Month PE Growth FY1 Working Capital Inc. Profit Margin NTM Momentum 12 Month -34% Negatives Positives -2-23% -26% -40% -20% 0% 20% 40% 36% 34% 33% 33% How it looks on the Alpha model A more granular view of the underlying style scores that drive the alpha (higher is better) and the percentile rank relative to the sector and market. Alpha Model Score Valuation Growth Profitability Earnings Momentum Price Momentum Quality Capital & Funding Liquidity Risk Technicals & Trading Normalized Score 0.38-0.15 0.52 0.25 0.06-0.18-0.40-0.23-2.18 0.21-0.62 Percentile relative to sector(/911) Percentile relative to market(/3016) 0 50 100 0 50 100 0 0 1 1 Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group (cpg@macquarie.com) 8 October 2015 8
Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie First South - South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down 60 100% in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 30 September 2015 AU/NZ Asia RSA USA CA EUR Outperform 48.87% 59.96% 35.63% 42.13% 59.44% 42.11% (for US coverage by MCUSA, 3.54% of stocks followed are investment banking clients) Neutral 33.44% 25.00% 39.08% 52.55% 37.06% 38.4 (for US coverage by MCUSA, 5.05% of stocks followed are investment banking clients) Underperform 17.68% 15.04% 25.29% 5.3 3.50% 19.47% (for US coverage by MCUSA, 0.51% of stocks followed are investment banking clients) IRM US vs MSCI US REIT Index, & rec history (all figures in USD currency unless noted) Note: Recommendation timeline if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Capital (USA), October 2015 12-month target price methodology IRM US: US$40.00 based on a DCF methodology Company-specific disclosures: Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures. Date Stock Code (BBG code) Recommendation Target Price 31-Oct-2014 IRM US Outperform US$40.00 26-Jun-2014 IRM US Outperform US$43.00 10-Dec-2013 IRM US Outperform US$41.25 07-Jun-2013 IRM US Outperform US$40.50 01-Nov-2012 IRM US Outperform US$42.00 Target price risk disclosures: IRM US: Internal revenue growth fell to 1.7% in 2011 from 10.5% in 2007 because of weak core (85%) and complementary services (15%). We will focus on the pace of recovery. had net debt of $2.7 billion, or 3.9x net-debt-to-ebitda, within its range of 3.0-4.0x at the end of 2012. We are comfortable with its debt given its strong free cash flow, but we will monitor this carefully. As the industry shifts more towards digital technologies, Iron Mountain needs to evaluate these types of services in their portfolio. Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Ltd total revenues, a portion of which are generated by Macquarie Group s Investment Banking activities. 8 October 2015 9
General disclosure: This research has been issued by Macquarie Securities (Australia) Limited (ABN 58 002 832 126, AFSL No. 238947) a Participant of the Australian Securities Exchange (ASX) and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Equities Limited (ABN 41 002 574 923, AFSL No. 237504) ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited ( MENZ ) an NZX Firm. Macquarie Private Wealth s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN 46 008 583 542, AFSL No. 237502) ( MBL ) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act 1989. Any MGL subsidiary noted in this research, apart from MBL, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research is general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return e-mail and delete the document. We do not guarantee the integrity of any e-mails or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures. 8 October 2015 10