Iron Mountain Vs Digital Realty: Which Is The Best Data Center Dividend REIT Stock To Buy?

Iron Mountain Inc IRM is a data storage REIT that is currently on investors' radar after the company posted solid second-quarter results and raised its quarterly dividend by 10%. Iron Mountain, which has a dividend yield of 2.68%, expects 2024 results at the upper end of its guidance.

Digital Realty Trust Inc DLR is a Texas-based data center REIT that has seen its shares rise 22% over the past year. The stock has a 3.24% dividend yield. DLR recently fell after the company posted mixed second-quarter results.

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Let's analyze these two businesses and see which is the best data center REIT dividend stock to buy with long-term growth potential. 

Iron Mountain: Long-Term Growth Catalysts

Iron Mountain provides physical storage solutions for documents and records. Its customers are major businesses with data storage and information management requirements. The company makes money via contracted storage rental fees with long-term agreements. Government offices, tech companies, hospitals, and practically all kinds of businesses are on the list of Iron Mountain customers. The company claims to have 90% of Fortune 1000 companies as its customers. 

Iron Mountain's Legacy Data Storage Business

While many believe Iron Mountain's legacy business is in danger of going extinct amid the rise of digital record management, the company's transformation into digital business and data centers has created a diversified income stream. During the second quarter storage rental revenue saw an 11% year-over-year growth. The company's record and information management business posted organic revenue growth of about 8%.

Iron Mountain's Data Center Growth

Iron Mountain's data center business is growing. During the first half, the company leased 97 megawatts and expects the figure to reach 130 megawatts in 2024. It won several data center contracts, including a seven-year contract with a new hyperscale customer in Western Pennsylvania, a 10-year, 25-megawatt contract at its London data center and a 15-year, 36-megawatt contract in Phoenix. 

Iron Mountain's Moat: Diversified Revenue Stream and Ability to Cross-Sell

Iron Mountain is better than a pure data center REIT like Digital Realty because of its diversified revenue stream and ability to cross-sell. For example, according to the company, a major oil and gas company that hired Iron Mountain to maintain its geological data later bought its IT asset disposition solutions while a notable UAE bank using IRM's records management services later subscribed to its document capture and asset life cycle management solutions. In the latest earnings call the company said a major Cloud software company that was using its records management and digital solutions signed up for Iron Mountain's asset life cycle management business services to securely retire or recycle data center assets at 30 locations in North America, EMEA, Latin America and Asia Pacific.

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Digital Realty Trust: Is Data Center Growth Sustainable?

Digital Realty is a data center REIT with about 300 data centers across 25 countries. Ever since the data center boom started, the stock has seen a lot of enthusiasm from investors. However, the company's second-quarter results came in mixed as expenses climbed and revenue fell about 0.7% year over year, missing the Street's estimates by $20 million. 

While Digital Realty affirmed its full-year FFO guidance and signed several contracts in the June quarter, the reality remains unchanged: the company is running a highly capital-intensive business that is burning a lot of cash. Digital Realty's operating expenses jumped to $1.35 billion during the second quarter from $1.18 billion in the previous quarter and $1.21 billion in the prior-year quarter. 

Was Jim Chanos Right About Digital Realty? 

Famous short-seller Jim Chanos mentioned Digital Realty in a podcast last year, saying that his calculations showed it took Digital Realty, on average, $11 in new capital since 2016 to generate $1 in new revenues at a 50% EBITDA margin. Chanos calculated that Digital Realty was burning about $220 to $230 million per month as of 2022, and the return on investment was in the low single digits.

Digital Realty Vs. Iron Mountain: Valuation Comparison

Digital Realty's valuation remains high as investors keep piling into the stock to ride the data center bandwagon. The stock is trading at a forward P/E of 84, compared with the industry median of about 35. It trades 106 times 2025 earnings estimates set by Wall Street analysts. On the other hand, Iron Mountain's forward P/E is 63.69 and based on its 2025 earnings estimates the stock trades at a multiple of 51.

Argus Research analyst Marie Ferguson recently downgraded Digital Realty Trust DLR to Hold citing valuation concerns amid softer growth projections due to "slower data center demand and stabilization expectations."

While IRM and DLR are operating in a capital-intensive data center business where the return on investments still lies far into the future, Iron Mountain's diversified revenue stream and fundamental strengths make it a better buy than Digital Realty at current valuations.

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