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Iron Mountain Inc

Exchange: NYSESector: Real EstateIndustry: REIT - Specialty

Iron Mountain Incorporated is trusted by more than 240,000 customers in 61 countries, including approximately 95% of the Fortune 1000, to help unlock value and intelligence from their assets through services that transcend the physical and digital worlds. Our broad range of solutions address their information management, digital transformation, information security, data center and asset lifecycle management needs. Our longstanding commitment to safety, security, sustainability and innovation in support of our customers underpins everything we do.

Did you know?

Carries 118.2x more debt than cash on its balance sheet.

Current Price

$106.97

+2.14%

GoodMoat Value

$69.80

34.7% overvalued
Profile
Valuation (TTM)
Market Cap$31.62B
P/E218.68
EV$48.71B
P/B
Shares Out295.59M
P/Sales4.58
Revenue$6.90B
EV/EBITDA24.02

Iron Mountain Inc (IRM) — Q3 2017 Earnings Call Transcript

Apr 5, 202610 speakers7,275 words62 segments

Operator

Good day, and welcome to the Iron Mountain Third Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Melissa Marsden, Senior Vice President of Investor Relations. Please go ahead.

O
MM
Melissa MarsdenSenior Vice President of Investor Relations

Thank you, Austin. Good day and welcome everyone to our third quarter 2017 earnings conference call. We appreciate that the timing of today's call is a bit unusual for our U.S. audience as we are conducting it today from Sydney, Australia and will be meeting with some new and legacy Recall investors later today and tomorrow. The user-controlled slides that we will be referring to in today's prepared remarks are available on our Investor Relations site along with the link to today's webcast. You can find the presentation at ironmountain.com under About Us/Investors/Events & Presentations. Alternatively, you can access today's financial highlights, press release, the presentation and the full supplemental financial information together in one PDF file by going to investors.ironmountain.com, under Financial Information. Additionally, we have filed all the related documents as one 8-K, which is also available on the Web site. On today's call, we'll hear from Bill Meaney, Iron Mountain's President and CEO, who will discuss highlights and progress toward our strategic plan; followed by Stuart Brown, our CFO, who will cover financial results and guidance. After our prepared remarks, we'll open up the phones for Q&A. Referring now to Page 2 of the presentation, today's earnings call, slide presentation and supplemental financial information will contain forward-looking statements, most notably our outlook for 2017 financial and operating performance. All forward-looking statements are subject to risks and uncertainties. Please refer to today's press release, earnings call presentation, supplemental financial report, the safe harbor language on this slide, and our most recently filed annual report on Form 10-K for a discussion of the major risk factors that could cause our actual results to differ from those in our forward-looking statements. In addition, we use several non-GAAP measures when presenting our financial results and the reconciliations to these measures, as required by Reg G, are included in this supplemental financial information package. With that, Bill, would you please begin?

WM
William MeaneyPresident and Chief Executive Officer

Thank you, Melissa, and hello, everyone. We are pleased to report strong third quarter financial and operating results and solid progress against our 2020 plan. We achieved financial performance in line with our expectations and drove robust internal revenue growth and enhanced profitability across the business. Our results reflect the durability of our high margin storage business and improved contribution from Recall synergies and our transformation initiative, both of which have enhanced profitability and cash flow growth. As a result, today we also announced a 6.8% increase in our quarterly dividend per share, well in excess of inflation. Even after this growth in the dividend, we expect the payout ratio to be a little below our prior guidance with the previous lower dividend per share rate. During the quarter we made meaningful progress on the execution of our strategic plan across all facets of the business. As you know, our plan is focused on extending our durable business model through continued investment in our core developed markets, expanding into faster growing emerging markets and adjacent storage related businesses such as data center and art storage, and capturing opportunities to provide new innovative solutions to both our new and existing customers. We also achieved internal storage rental revenue growth of 3.5%, which reflects our revenue management focus and 1.3% growth in internal records management volume or prior to the effects of acquisitions and dispositions. As noted last quarter, trailing 12 month volume growth now includes Recall volume in the base which increased by about 20%, making percentage growth figures a bit lower even though the growth in underlying cubic feet of records remains consistent. In fact, new volume from new and existing customers of 49 million cubic feet over the past 12 months is consistent with last quarter's reported figure and compares favorably with pre-Recall levels of about 43 million cubic feet on a trailing 12 months basis, which you can see in the chart in the appendix. These favorable trends demonstrate the consistency of customer service behaviors, and importantly, these new records stay with us for an average of 15 years. Slide 4 is a review of the highlights related to our strategic plan. In developed markets, which include both our North American RIM and Western European segment, we achieved weighted average internal storage revenue growth of 3.2% with 1 million cubic feet of net internal volume growth on a trailing-12 month basis. We are pleased with the durability of volume growth and our ability to achieve price gains in developed markets. In addition, I am pleased to report solid progress from our dedicated focus on the U.S. federal market opportunity. We recently secured an additional multiyear contract from the United States Patent and Trademark Office or PTO. We will be responsible for relocating more than 4.5 million patent files, which includes capturing file level metadata, packing, removal, and transportation of all records to our secure federal government compliant storage facility. This contract reflects our unique ability to address the government's needs for improving the security and accessibility of government owned records with superior chain of custody and highly responsive service, while helping to reduce its operational expenses and real estate footprint. With this award, we now protect all significant repositories of PTO's intellectual property, including their data center and continuity of operations records, their patent and trademark files in micrographic format, and their hard copy patent files. Looking at our goal of expanding our business into faster growing emerging markets, we are at about 18% of total revenue on a 2014 constant dollar basis, almost double the relative size from about 10% just three years ago. Progress against this goal was supported by emerging market acquisitions closed during the quarter, including the acquisition in Cyprus noted on last quarter's call and a small deal in South Africa totaling about $25 million. In adjacent businesses, we have laid the foundation for significant expansion of our data center and entertainment services businesses, both of which have growth rates in excess of those of the traditional records management, data management businesses. Turning to Slide 5. During the quarter we opened the first phase of our Northern Virginia data center campus in late September with the first third of that building being fully developed and more than 50% pre-leased. When adding existing capacity from our Boston, Boyers, Pennsylvania, and Kansas City locations to current and planned expansion capacity associated with recent acquisitions and Northern Virginia development, we have the potential to provide roughly 110 megawatts of multi-tenant and hyper scale data center capacity. We have included a capacity Slide in the appendix of this presentation for your reference. We see the data center business as an area where one plus one equals three. In other words, we see our unique combination of additional data center capacity plus our deep data management customer base as an opportunity to add significant value and achieve higher fill rates. In September, we closed on the acquisition of FORTRUST, which we discussed on our last conference call. We also entered into a sale leaseback agreement for two Credit Suisse data centers in London and Singapore, among the fastest growing global markets in terms of data center absorption. We expect to close this transaction in Q1 2018. After closing, we will have the ability to leverage the existing infrastructure and in 12 to 18 months time, develop up to 10 megawatts of new data center capacity in both buildings for lease to other customers. The sale leaseback structure is attractive to both us and corporate data center operators who increasingly are utilizing such strategies to refine their IT infrastructure. Most enterprise data center facilities are over-engineered and overbuilt. We can help these companies monetize their assets as they look to focus on core capabilities while regenerating rental income from captive, high credit quality tenants, and develop the remaining capacity to support new customer requirements. Synergies will come over time as we build out the additional data center capacity and gain economies of scale from the existing operations. Operational costs are in place to scale up the business in these locations. We expect a double digit stabilized yield from this transaction following build out and lease up of the expansion capacity. As noted earlier, this transaction is not part of our 2020 growth plan. That plan, which didn’t assume data center acquisitions also did not assume the issuance of equity. You may have noted that at the time we announced the Credit Suisse deal, we also filed a registration statement for an ATM or at the market equity issuance plan. We think ATM issuances are a prudent way to match and to fund smaller transactions that are not included in our core M&A plan. Our ATM plan can support up to 500 million of equity issuance over time, but we have earmarked just $100 million, about 2.5 million shares or less than 1% of total outstanding for the Credit Suisse deal. Also in adjacent businesses, we acquired Bonded Services, a leading provider of media asset management services for global entertainment and media companies for approximately 57 million pounds or $77 million. This acquisition is included in our year-to-date total of approximately $195 million, of which $55 million is the cash portion of the FORTRUST consideration. Entertainment and media companies require specialized services for protecting and preserving intellectual property while also ensuring they can monetize it. Such as the project for MTV's 30th anniversary that we supported last year and similar relationships with major studios, recording artists, and sports franchises. Providing these customers with both physical and digital storage as well as capabilities to transform content from monetization and longer term preservation in one place is ideal. Bonded also provides fine art vaults and shipping, logistics, and distribution and related services through locations in the U.S., Canada, United Kingdom, France, The Netherlands, and Hong Kong. And it doubles our existing entertainment services businesses and solidifies our position as the partner of choice. Turning to Slide six. We also made good progress on our innovation agenda in moving certain projects out of the garage. We launched Iron Cloud and expanded our Policy Center offering which we previewed at April's investor day. Iron Cloud's on demand storage can be accessed through a secure connection from customers to our network of secure data centers and caters to the unique security and operational needs of medical imaging, surveillance video, and other specialty media. Our suite of data management solutions enables organizations to manage risk by complying with industry standards and implementing advanced schemes to protect against cyber attacks. Just in a few short weeks since the launch, we have already secured a major win with a U.K. pharmaceutical company. To wrap up, we had a very eventful quarter with solid fundamental results underpinning our progress with new initiatives and the expansion of our faster growing emerging markets and adjacent businesses. We continue to leverage our deep customer relationships and leading brand attributes of trust and security to offer more technology enabled solutions as our customers continue to transform to a more digital way of working. These are early days but we are encouraged by the progress we are seeing and we will continue to be disciplined about how and where we deploy capital to accelerate growth outside the traditional businesses. Our progress supports growth in adjusted EBITDA and cash flow that ultimately underpins our ability to grow our dividend per share and to deleverage over time. With that, I would like to turn the call over to Stuart.

SB
Stuart BrownExecutive Vice President and Chief Financial Officer

Thank you, Bill, and good day everyone. We are pleased to announce another strong quarter of growth in our core storage rental business and progress in enhancing our capital flexibility through refinancing. We are on track to achieve our financial goals with a careful investment strategy. As Bill mentioned, based on the ongoing demonstration of growth and business resilience, our board of directors has increased the fourth quarter dividend by 6.8% to about $0.59 per share, which translates to an annualized rate of $2.35 per share, up from $2.20 previously. During today's call, I will discuss the third quarter's operational and financial drivers, the implications of our refinancing efforts, and our outlook for 2017. We will provide specific guidance for 2018 during our fourth quarter earnings call in February, in line with most peers. As highlighted in our key financial metrics, our total revenues grew by 2.4% compared to last year, or 1.4% on a C$ basis, affected by the sale of our legacy Australian operations and our businesses in Russia and Ukraine. Internal storage rental revenue showed strong growth of 3.5% this quarter, while internal service revenue fell by 20%. The increase in internal storage revenue can be attributed to our revenue management focus and continued growth in internal global net volume. Our gross profit margin improved by 210 basis points year over year, mainly due to synergies from the Recall acquisition and the benefits of our revenue management initiatives, partially offset by a $3.5 million charge from recent natural disasters. Specifically, our service gross profit increased by $10 million year-over-year to $102 million. Furthermore, SG&A as a percentage of total revenues decreased by 20 basis points year-over-year, excluding Recall costs, owing to the advantages of our transformation initiatives and synergies. Adjusted EBITDA in the third quarter grew by roughly 10% to $323 million, representing over 8% growth on a C$ basis, and the adjusted EBITDA margin increased by 230 basis points to 33.5%. AFFO reached $210 million in the third quarter, up by $32 million or about 19% from the previous year. This growth was driven by an almost 10% increase of $29 million in adjusted EBITDA, more than covering the 7% dividend increase we announced today. On another note, over 80% of our adjusted gross profit comes from storage activities, which have a gross profit margin of 75%. We continue to innovate our new service and storage offerings for our customers, focusing on value-added services that contribute to gross profit growth, and we are happy with the progress made in supporting our strategic objectives in both developed and emerging markets. Regarding internal growth performance, our developed markets, which include North America records and information management, North America data management, and western Europe, achieved internal storage revenue growth of 3.2%, largely due to our revenue management initiatives aimed at improving customer mix. For the third quarter, internal volume growth in developed markets was modest at 0.2% on a trailing 12-month basis. Focusing on North America records and information management, while internal volume growth was slightly negative at 0.2%, we observed a strong internal storage revenue growth of 3.5% this quarter. Looking ahead, we expect North America internal storage revenue growth to exceed 2.5%, with flat internal volume growth as we work towards optimizing returns by balancing revenue management and capital efficiencies. Internal service revenue in developed markets was down 0.1%, as growth in areas like information governance and digital projects was offset by reduced activity in data management and other segments. In other international markets, we continue to see strong internal storage revenue growth at 5%. Service internal growth in this segment was flat after experiencing high levels from Recall construction. Adjusted EBITDA margins improved across all segments compared to last year, with the exception of North America data management where we continue to invest in new product development. Despite this segment, adjusted EBITDA margins remain strong at 53%. Our corporate and other segment includes overhead costs and adjacent businesses like data center and fine art, and internal results are affected by a small comparative base from last year and integration costs linked to recent acquisitions. On our balance sheet, we strategically completed several significant debt transactions in the third quarter that have increased our capital flexibility. This included amending our credit facility with improved covenants for better recognition of our real estate value, redeeming senior notes, and extending our AR securitization program. Overall, these moves have extended our average maturity to 6.5 years and reduced our average cost of debt by about 30 basis points. As of the end of the quarter, our lease adjusted leverage ratio decreased to 5.5 times from 5.8 times in Q2, keeping us on target to lower our lease adjusted leverage. Our guidance for 2017 remains unchanged, transitioning to reported dollar guidance due to limited impact from currency changes. We anticipate our storage internal revenue growth to be between 3% and 3.5%, leading to total revenues expected to be at the high end of our guidance range. While we maintain our adjusted EBITDA guidance range despite the delayed timing of acquisitions and other factors, we foresee limited adjusted EBITDA growth in the fourth quarter compared to third quarter. Following our margin improvement goals for 2017, we aim for continued margin enhancements through 2020. Additionally, we expect our structural tax rate for 2017 to be between 21% and 22%. For AFFO guidance, we anticipate being closer to the upper end of the $760 million range, benefiting from improved efficiencies and discipline post-Recall acquisition. Overall, we are very satisfied with our performance this quarter, reflecting the dedication and effort throughout our organization, positioning us well to meet our financial expectations for 2017. Our performance continues to highlight the stability of our storage rental business, which supports our cash flow growth and enables us to reinvest in growth while providing returns to shareholders. I will now hand the call back to Bill for his closing remarks before we move to Q&A.

WM
William MeaneyPresident and Chief Executive Officer

Thank you, Stuart, and just to sum up. We had a very good quarter punctuated by another period with strong revenue growth and particularly strong storage revenue growth of 3.5% before acquisitions. We continue to be on track with our integration of Recall which shows through our continued growth in EBITDA margin. Based on this performance, we have pulled forward our anticipated 6.8% dividend per share increase by a quarter and even with this payout ratio of roughly 80% of AFFO, we will be below our original guidance for the year with the previously lower dividend. We continue to make good progress in our adjacent business areas with the closing of the FORTRUST data center business in this quarter and the announcement of our agreement to purchase some of Credit Suisse's data centers. And doing all this whilst improving our financial flexibility, extending debt maturity and reducing our interest cost. With that, I would like to turn the call over to the operator so we can begin Q&A.

Operator

Our first question comes from Sheila McGrath with Evercore. Please go ahead.

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SM
Sheila McGrathAnalyst

Good morning in Australia. Another solid storage same store revenue growth of 3.5%. You did cite the yield management system. I am just wondering if there are any other factors driving that strong growth relative to your 2016 kind of growth levels.

WM
William MeaneyPresident and Chief Executive Officer

No. I mean you can see if you look at the overall business, it's the result of the volume growth that we had. And so if you look across the whole business it’s positive volumes, and the revenue management together yield to 3.5%. But I think that the big difference as you say, the year ago, Sheila, is the revenue management program that we started putting in place two years ago. And it takes a while to ramp that through as contracts become renewed. And you can see the difference between, say, North America, from an internal revenue growth versus Europe. Where in Europe we are probably about a year behind, in developed markets as well, about a year behind from when we rolled it out in North America. So we think there is still more to be done specifically in Europe and developed markets as those results are flowing through from the work that we did starting a year ago in those geographies. But a big part of it is the revenue management systems.

SM
Sheila McGrathAnalyst

Okay. Great. And just one follow up. On the data center space, I know it's still small in your adjacent business, but you are allocating more capital there. I just was wondering if you could talk about pricing of the two acquisitions. How you look at it? Is it just on a stabilized basis or how you are underwriting it because I realize it's a competitive environment out there.

WM
William MeaneyPresident and Chief Executive Officer

It's a good question, Sheila. Having observed this phase for some time, you know we have passed on more opportunities than we have pursued. This means we need to be disciplined regarding our capital allocation. Our primary objective is to ensure that we achieve returns that align with our cost of capital, evaluated through both internal rate of return (IRR) and net present value (NPV) perspectives. Generally, for a Greenfield project like Northern Virginia, we target an internal rate of return of about 14% to 15%. For acquisitions, we maintain discipline and aim for a return above 11%. While buying assets with existing revenue may yield slightly lower internal rates of return, it involves less risk since they come with established customers. Therefore, we assess potential investments using both NPV and IRR metrics, as well as comparing the cost of acquiring a megawatt to the cost of building it. We focus exclusively on high-quality assets, which encompasses not only the physical attributes of the properties but also the absorption rates in their respective markets. We are particularly excited about the Credit Suisse acquisition and anticipate its closure, as both London and Singapore rank among the world’s best markets for absorption, with the London operation located in the desirable Floyd estate. Denver also ranks among the top ten markets. Another great question.

SB
Stuart BrownExecutive Vice President and Chief Financial Officer

Yes. I would like to quickly add that when looking at the replacement cost, we paid about $13 million per megawatt for FORTRUST, which is 85% leased. This is a positive indicator, and the cost to build out future capacity is $6 million per megawatt. Considering the replacement cost, we are very optimistic about this investment as well.

Operator

The next question is from Shlomo Rosenbaum with Stifel. Please go ahead.

O
SR
Shlomo RosenbaumAnalyst

So why are you guys not giving guidance out for '18? Again, usually you have been doing that ever since I have been covering you. Just why are you not giving it out now?

SB
Stuart BrownExecutive Vice President and Chief Financial Officer

Shlomo, this is Stuart. I will address that. Since I joined about a year ago when we provided guidance for the third quarter, we have seen some changes in the business from February to March. Ultimately, we shared the 2020 outlook during our investor day, which gives you a bit of a roadmap. It’s more beneficial for us to finalize 2017 results, including tax rates, before providing accurate guidance. In February, we’ll be able to offer more precise guidance based on the business decisions made. We discussed this in the first quarter and mentioned it in the fourth quarter last year.

SR
Shlomo RosenbaumAnalyst

Did you mention anything about adjusted EBITDA for 2018? I thought I heard you say something about it, but I'm not sure if I misheard.

SB
Stuart BrownExecutive Vice President and Chief Financial Officer

Yes. I mean basically I said consistent with the 2020 plan that we expect EBITDA margins would be 50 to 75 basis points higher in '18 relative to '17.

SR
Shlomo RosenbaumAnalyst

I mean based on what I am seeing in terms of both the transformation, the integration, some of the pricing, that sounds like kind of a low ball number to me.

SB
Stuart BrownExecutive Vice President and Chief Financial Officer

No. We will give more detailed guidance in February. We are just trying to lay out the roadmap with what the 2020 plan is and that’s consistent with that.

SR
Shlomo RosenbaumAnalyst

Okay. And can you just talk a little bit more about the North American volumes? You are negative by two-tenths of a percent, last quarter one tenth of a percent. Excuse me, this quarter one tenth of a percent to last quarter. I think you alluded a little bit to the kind of juggling between pricing and volume over there. Can you just elaborate on that a little bit more?

WM
William MeaneyPresident and Chief Executive Officer

Yes, of course. Shlomo, this is Bill. The best way to understand this is by comparing North America and Western Europe, as both regions have similar market maturity levels. In North America this quarter, we experienced a 3.5% growth in internal revenue storage, while Western Europe had a growth of 2.3%. When examining volume, North America saw a slight decline of 0.2%, whereas Western Europe achieved a positive volume growth of 2%. This indicates that we are slightly ahead in North America with the rollout of our revenue management system, which we initiated about a year ago in Europe. We are currently optimizing this system, and it’s important to note that pricing adjustments can affect the speed of volume coming in from customers, which is evident in the differences between the two regions. Ultimately, our focus is on cash flow, and we are pleased with North America's 3.5% growth in internal storage revenue. This performance enables us to further optimize our capital expenditures since we are capturing more value from our inventory. While a 2.3% growth in Western Europe is satisfactory, we believe there is potential for further improvement. There is a balancing act to manage as we optimize this, which is reflected in the numbers from both regions this quarter.

SR
Shlomo RosenbaumAnalyst

Okay. That’s good color. And then just two kind of metrics type numbers. I want to get some color on, first, my calculation on the mature markets is, between pricing and mix. The west was 2.7%-2.8%. Stuart, does that look right to you? And then also for Stuart, it looks like ARDSO moved up both sequentially and year-over-year. Maybe you could give us a little color on what's going on there.

SB
Stuart BrownExecutive Vice President and Chief Financial Officer

I missed the second question, Shlomo. Can you say it again?

SR
Shlomo RosenbaumAnalyst

The second question is receivables days. It looks like they were up to me sequentially and year-over-year. So just wondering what's going on over there.

SB
Stuart BrownExecutive Vice President and Chief Financial Officer

Yes. To address the first question, receivables have increased, particularly in North America where accounts receivable are up, primarily due to fewer collection days experienced in September in the U.S. Additionally, there was a slight increase in India as well, which can be attributed to a recent tax law change. Consequently, in India, there is a noticeable delay in billing and collections as the entire system adjusts to the new regulations. This is the situation regarding receivables. Looking at the developed markets and other international volumes detailed in the appendix of the presentation, the net internal growth rate there is approximately 0.2%.

SR
Shlomo RosenbaumAnalyst

Okay. So we should see that reverse in the fourth quarter on receivables?

SB
Stuart BrownExecutive Vice President and Chief Financial Officer

Yes. You should see some improvement in trend in the fourth quarter.

SR
Shlomo RosenbaumAnalyst

Okay. And I am sorry I have used up a lot of the time but just a pricing thing I want to confirm. Was that 2.7, 2.8 between mix and pricing sound right in developed markets.

SB
Stuart BrownExecutive Vice President and Chief Financial Officer

Yes. In total that’s about right. Both North America and in Europe, yes.

Operator

Our next question comes from Andy Wittmann with Robert W. Baird and Company. Please go ahead.

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AW
Andy WittmannAnalyst

Thank you for presenting the cash chart, that was very helpful. When I look at the cash chart, it looks like you took up your guidance for the year in terms of the customer inducements and customer relationship spend from $60 million up from $35 million, which is a pretty decent amount, I wanted to ask you, Bill, what you are seeing in the marketplace? Was this just you guys being opportunistic on a select handful of deals or is the inducement need a little bit higher today to get those organic boxes in the door?

WM
William MeaneyPresident and Chief Executive Officer

Andy, you have been observing us for quite some time. It's all about timing and seizing opportunities when they arise. There tends to be some fluctuations in that number because it is influenced by the market.

AW
Andy WittmannAnalyst

Got you. And then I guess my next question was related to the Credit Suisse acquisitions. It sounds like there is already some vacancy there. Sounds like there might be a little bit more. Can you talk about the lease up plan and how long it takes to get to some level of stabilization? Maybe the way to look at it from our point of view externally is at what point do you get this to be FFO accretive.

WM
William MeaneyPresident and Chief Executive Officer

Yes, that's a good question. The Credit Suisse acquisitions involved shifting some of their operations away from non-data center activities in 2018 and preparing the data halls for leasing. In that year, you will notice a slight dilutive effect, but by 2019 it should stabilize and be flat, and by 2021 it will be fully stabilized. Thus, by 2019, it will be flat to slightly accretive, marking the first year we can start leasing out part of the 10 megawatt capacity I mentioned. Essentially, 2018 is about setting up the 10 megawatts.

AW
Andy WittmannAnalyst

Got it. Thank you for that. Stuart, maybe one for you. I wanted to ask about, I guess sequentially here with the refinancing we got some benefit to the lease adjusted leverage ratio. Can you talk about the mechanics of the new credit agreement and how that had an impact on that reported results? I guess maybe the fundamental question there is, was it definitional? Was it mostly a definitional change or was there an improvement in the least adjusted ratio sequentially here?

SB
Stuart BrownExecutive Vice President and Chief Financial Officer

Yes. The most important aspect is that there was a change in the definition and calculation. This change enhances our overall capacity regarding our current leverage and the covenants, allowing us to build real capacity and maintain the ability to fund future growth if we choose to be opportunistic. Our objective is to continue reducing our lease adjusted leverage ratio. The key mechanics of the lease adjusted leverage ratio involve adjusting for rent expense and capitalizing that in the lease adjusted figure. The previous credit facility was based on eight times rent, while the new facility is based on six times rent. Our annual rent is approximately $300 million, which effectively reduces our overall leverage by around $600 million. This adjustment was made to recognize the value of the 28 million square feet of real estate that we own on our balance sheet. The value of this real estate has increased since we last amended the credit facilities, necessitating a mechanism to give us credit for that, and this is how we achieved it.

WM
William MeaneyPresident and Chief Executive Officer

Yes. Andy, the important thing about these ratios is if you look at our total level of indebtedness, it's actually pretty consistent with our peer group, both on the industrial REIT and belt storage and the data center REITs. You don’t see a big diversion. But the important thing is now at 5.5 we have a full turn against our most restrictive covenant which kicks in at 6.5. And what we have always said is, it's less about the absolute number, the 5.5 for instance, it's more about that we would like to see 1.5 over time we would like to see 1.5 to two turns of free board between our most restrictive covenant is versus our debt, it just gives us the flexibility to steward this thing. So right now, I mean the good news is we have got a full turn below where our most restrictive covenant is and over time as we have guided to, is we will see that widen to 1.5 or better.

AW
Andy WittmannAnalyst

Very helpful and very clear. I wanted to just go one other question on some of these matters and specifically talking around the usage of the ATM. I guess since the Credit Suisse deal is going to be funded with these fresh proceeds of the ATM, is it your intent, Bill, that you have those proceeds in the door before that closes? And maybe more broadly speaking, is the ATM going to be done under a 10b-51 plan or is it going to be at management's discretion opportunistically in the marketplace?

WM
William MeaneyPresident and Chief Executive Officer

It's going to be at management's discretion depending on the marketplace. I think again, looking at our balance sheet right now, we are not going to have guns to our heads to say that we are absolutely going to use the ATM to fund the Credit Suisse. Our intention is to do that, and Stuart and myself and the board will make a decision on when to use the ATM but the good thing is we have the financial flexibility. So over time I think you are right. You look at a macro level, is it wasn’t a coincidence that we announced the ATM when we announced the Credit Suisse acquisition because what we said at the 2020 plan stood on its own. But we didn’t have any data center acquisitions built into that 2020 plan. So we just think an ATM is the very efficient and kind of great mechanism to fund specific acquisitions such as the Credit Suisse opportunity. So that’s our intention. It's to use the ATM to kind of match fund these tuck-in acquisitions that weren't part of the original plan, original 2020 plan. But again with our balance sheet we have the flexibility on timing. We are not kind of forced to draw down any of it today.

Operator

Our next question comes from Andrew Steinerman with JPMorgan. Please go ahead.

O
MC
Michael CohenAnalyst

This is Michael Cohen for Andrew. Just a quick follow up on that discussion around leverage and the ATM. I mean it seems like a lot of financing capacity or flexibility coming on board. I mean is there anything particular that’s driving that decision for more flexibility now versus some other point.

WM
William MeaneyPresident and Chief Executive Officer

I believe Michael can elaborate on this. The most relevant year for the ATM is clearly in the data center space. We are very satisfied with the results we have achieved over the last three years in this sector. The pre-lease commitments we received in Northern Virginia also make us quite pleased. The evidence in the market supports the idea that one plus one equals three. Currently, the ATM is primarily focused on ensuring that if opportunities like FORTRUST and Credit Suisse arise, we have the necessary tools to pursue them efficiently. While we don’t provide guidance on acquisitions in the data center, as I mentioned to Sheila, we have passed on more opportunities than we have pursued because we remain disciplined. Nonetheless, we are very happy with the progress we’re making in that area.

MC
Michael CohenAnalyst

Understood, thanks. And if I could just follow one quick question around, I know we touched on this on the North America volumes. And I knew you gave some color with North America and western Europe. Did you say for North America, I just want to make sure I got this that that customer's are holding back new volumes because of pricing. Is that what I heard or...?

WM
William MeaneyPresident and Chief Executive Officer

What you see is there is a relationship between organic volume growth from existing customers based on the pricing. I mean like people will determine whether or not they decide to store it on site or how quickly they sent boxes in to trust to be stored depending on the price of that. Like anything else it's not completely inelastic. So we do try to optimize that and so we feel pretty good where we planned it right now and as Stuart remarked is that we expect volume going forward is as a result in North America to be kind of plus or minus with zero points as we continue to drive better results in terms of internal storage revenue growth. Because revenue growth is the thing that drives EBITDA which drives our ability to grow cash flows. It drives our ability to grow dividend. So that’s really the name of the game. So since I have been in the company this is the best result that we had in North America overall, say looking at optimization. If you look at western Europe which as I say is similar level of maturity and similar customer behavior is much stronger internal volume growth but the overall result, in other words how much price growth we are getting at the same time is lower. So we are only getting 2.3% internal storage revenue growth and going forward we will continue to look to optimize western Europe as well.

Operator

Our next question comes from Karin Ford with UMFG Securities. Please go ahead.

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KF
Karin FordAnalyst

First a clarification. Stuart, did you say that there would be limited EBITDA growth looking quarter-over-quarter from 3Q to 4Q and if so, just why is that?

WM
William MeaneyPresident and Chief Executive Officer

Yes. The answer is yes, that's what I said. The main reasons for this are the higher integration costs we will incur, which will impact adjusted EBITDA in the fourth quarter, as well as the fact that some of the innovation spending for shared services is more weighted towards the backend. These are the two primary factors. The timing of acquisitions also plays a role; the original guidance assumed acquisitions would occur earlier in the year, allowing for EBITDA recognition and integration costs to be incurred by now. Instead, we are experiencing a delay in EBITDA. Additionally, year over year, we have divested from Russia and Ukraine, which impacts our comparison, though it's not sequential.

KF
Karin FordAnalyst

Right. Got it. And the $3.5 million of disaster expenses, what line item is that in on the income statement?

SB
Stuart BrownExecutive Vice President and Chief Financial Officer

That amount is included in the corporate overhead costs, specifically in the cost of sales.

KF
Karin FordAnalyst

Okay. Great. And then just last question is, to sum the revenue management topic, I know you said you still think you have some more wood to chop there and you are going to get some more benefit from there. But once you get at sort of rolled fully through and get your system where you want it. Is that kind of a onetime benefit or do you think that that will help elevate core organic revenue growth going forward?

WM
William MeaneyPresident and Chief Executive Officer

It's a great question. We believe that the level we are discussing, particularly the 3.5% for North America, will allow us to maintain rates above 2.5% in the future. While there is some catching up to do, we feel confident that customers recognize the value we offer and see the price increase as appropriate. Over time, this will naturally enhance our margins as well. We are optimistic about continuing to implement this strategy. However, we still see significant opportunities for improvement in Europe and developed markets. We've already begun addressing this over the past year and a half, but it takes longer to see visible results.

Operator

Our next question comes from Kevin McVeigh with Deutsche Bank. Please go ahead.

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KM
Kevin McVeighAnalyst

Congratulations on the dividend boost. So you are kind of 235 existing this year. If we look at kind of the equity issuance into '18, do we maintain the 235 or is it goal to kind of keep it at the 220 that it was throughout all the 2017? Or would there be a step up commensurate with the equity issuance to keep it at that 235?

SB
Stuart BrownExecutive Vice President and Chief Financial Officer

We would intend to keep the dividend rate the same, right. It's very consistent with what we said even back at investor day in terms of passing the synergies and transformation benefits back to shareholders. If you look at the dividend payout ratio, it's actually improving from what we have put out in the original guidance. So we have got plenty of capital to continue to fund the ongoing business and as Bill said, if we do think sort of our outside of the plan like the data center acquisitions, we would look to fund that either through ATM or we also have, or at least opportunities to sell some of our existing real estate to fund data center growth.

WM
William MeaneyPresident and Chief Executive Officer

Yes. Just to be clear, Kevin, we are very focused on growing the dividend per share. We only increase the dividend when we are confident we can maintain it, and we believe we can do that while also improving our payout ratios as a percentage of AFFO.

KM
Kevin McVeighAnalyst

That's helpful. Going back to pricing, Bill, if we reach around 2.5, is there a specific level we should consider for where unit volume growth stabilizes? If there's a tradeoff, does that mean we might see a decline of around 50 basis points, resulting in a net two? Do you have any insights on the sensitivity of volume to pricing? It seems that while pricing is optimally set, new volume growth appears to have slowed somewhat. Is there an acceptable range for this, or a way to think about the relationship between price adjustments and volume changes?

WM
William MeaneyPresident and Chief Executive Officer

No. No. I mean you don’t see that now Kevin. If you look at the overall company, is we are up in terms of volume growth and up in terms of revenue growth on an internal basis. So, no, you don’t get those types of swings.

Operator

Our next question is a follow-up from Shlomo Rosenbaum with Stifel. Please go ahead.

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SR
Shlomo RosenbaumAnalyst

Just wanted to follow up, just on items that were, I guess you would say taken out of the garage, Iron Cloud and Policy Center. Is there a significant startup cost on those items that, or is it going to be flowing through over the next several years as you try to grow those business? And can you give us just a little bit of color on that and how we should think of it.

WM
William MeaneyPresident and Chief Executive Officer

It's a great question, Shlomo. First of all, as we look at both of those things, a lot of the original startup cost has already been come through. There is a little bit more development that we still have to do or we are doing on Iron Cloud to add more features to it. But that’s kind of on a go forward basis. I mean where I see the bigger investment in both of those things is on the go to market side which typically have a shortage of patient period. I mean if we see an opportunity to ramp that up, we will talk about that on guidance in February for '18. But specifically for those two, most of where I would call the development cost, a little bit still ongoing which is about say building out more features, is pretty much done. And you have seen that in the lower service margins, in the EBITDA margins in data management process which was a reflection of some of the expense that we have done to launch Iron Cloud but still it was 53% but it's lower versus a year ago. But I think if we do make investments in either of those areas next year, it's more in the go to market side.

Operator

This concludes our question-and-answer session. We currently have no more questions.

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WM
William MeaneyPresident and Chief Executive Officer

Thank you, operator, and good evening for those in the United States and good morning to all those here in Australia. Thanks a lot.

Operator

The conference has now concluded. The digital replay of the conference will be available approximately one hour after the conclusion of this call. You may access the digital replay by dialing 877-344-7529 in the U.S., and 412-317-0088 internationally. You will be prompted to enter the replay access code which will be 10112097. Please record your name and company when joining. Thank you for attending today's presentation and you may now disconnect.

O