Iron Mountain Incorporated

Good morning and welcome to the Iron Mountain Fourth Quarter 2018 Arnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal our conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I now would like to turn the conference over to Greer Aviv, Senior Vice President of Investor Relations. Please go ahead.

Thank you, Keith. Hello and welcome to our fourth quarter and full year 2018 Arnings Conference Call. The user controlled slides that we will be referring to in today's prepared remarks are available on our Investor Relations site along with a link to today's webcast. You can find the presentation at ironmountain.com under About Us slash Investors slash Events and Presentations. Alternatively, you can access today's financial highlights press release, the presentation and full supplemental financial information together in one PDF file by going to .ironmountain.com under Financial Information. Additionally, we have filed all the related documents as -8-K available on the IR website. On today's call, we hear from Bill Meaney, Iron Mountain 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 our 2019 guidance. After our prepared remarks, we'll open up the lines for Q&A. Referring now to page two of the presentation, today's earnings call, slide presentation and supplemental financial information will contain forward-looking statements, most notably our outlook for 2019 financial and operating performance. All forward-looking statements are subject to risk, consent and uncertainty. Please refer to today's press release, earnings call presentation, supplemental financial report, the safe harbor language on this slide and our annual report on form 10-K, which we expect to file later today for a discussion of the major risk factors that could cause actual results to differ from those in our forward-looking statements. In addition, we use several non-GAP measures when presenting our financial results. And the reconciliations to these measures, as required by Reg G, are included in this supplemental financial information. With that, Bill, would you please begin?

Thank you, Grier, and thank you all for taking the time to join us. We are pleased to be here this morning to discuss our fourth quarter in full year 2018 performance. 2018 marked a year of continued strong growth for Iron Mountain, highlighted by global storage, organic revenue growth, significant growth in our data center business, and further scale in our emerging markets. Turning to slide three of our financial results presentation, full year revenue increased 10%, which was in line with our expectations, driven in part by the contribution from recent data center acquisitions and strong growth in services. Notably, total organic revenue growth was .6% for the full year, a strong acceleration from the .3% we reported in 2017. Adjusted EBITDA was also in line with expectations, growing 14% year over year and resulting in 120 basis point improvement in our margin. Lastly, we generated 16% growth in AFFO at the high end of our expectations, whilst continuing to reinvest in the growth of our business in supporting our commitment to our dividend. The strong AFFO performance compares to an increase in our fully diluted shares outstanding of .4% and resulted in a 160 basis points reduction of our payout ratio to 78%. As it relates to our fourth quarter performance, we achieved constant currency revenue and adjusted EBITDA growth of 10% and 12% respectively, whilst our margin expanded 100 basis points year over year. I will provide more detail around volume trends in a few minutes, but on a global organic basis, records management volume was flat in 2018. Importantly, 2018 was a year of continued evolution for Iron Mountain. We made significant progress in increasing our mix to high growth businesses, completing more than $1.7 billion in targeted acquisitions. This evolution is highlighted by the ongoing expansion of our global data center footprint with the acquisitions of IO, the Credit Suisse data centers, and EVO Switch. We continue to also expand in faster growing emerging markets with acquisitions that increase scale and reach in key markets including South Korea, China, and the Philippines. We continue to build from our strong capabilities and core competencies developed over many decades of managing our customers' valuable physical and information assets to extend our storage capabilities beyond records management and data management to a more comprehensive portfolio of physical storage solutions. Today, we store many of our customers' valuable assets in addition to information assets, which leverages our know-how and utilizes our existing storage facilities and logistics expertise, whilst maximizing our revenue in NOI per square foot. To this point, we made targeted acquisitions to further a number of our faster growing businesses such as market-leading fine arts and entertainment services capabilities and valet consumer storage. All of this enables us to help customers manage the storage of valuable assets beyond the more than 690 million cubic feet of records and digital information we store in our records and information management or RIM business area. Turning to our business performance, organic records management global volume was flat. A modest improvement from Q3, his new volume increased 10 basis points sequentially. More specifically, in North America, new volume from existing customers and new sales together increased almost 40 basis points sequentially, whilst destructions ticked up 10 basis points. In a few moments, I will highlight some of the recent wins in North America records and information management that have helped to support this performance. Volume in the emerging markets continues to grow at a faster clip, increasing 7% for 2018, though we saw a modest tickdown in new sales compared to Q3. Our investments are focused on increasing the scale of our businesses in these geographies and growing market share as evidenced by the recent acquisitions I highlighted earlier. Organic storage revenue growth increased .9% and .4% year over year in Q4 in 2018 respectively, as revenue management continues to contribute positively to growth. Destructions remain at elevated levels, though we saw a moderation in recent trends. Organic service revenue growth was strong in 2018, growing at 5.4%, driven in part by continued strength and secure shred, as well as momentum in digital projects from our information governance and digital solutions business, or IGDF. Overall, we had a successful Q4 with a number of strong new business wins across the North America rim. Turning to slide 4, an example of one such win was a five-year agreement with Citi Mortgage, which was looking to outsource their non-core business functions within their mortgage workflows. Once successfully implemented, we expect to gain 550,000 cubic feet of records plus more than 820,000 files. Additionally, a new customer signed in Q4 was the Hoover Institution at Stanford University. The Hoover Institution has begun a major renovation of their facilities at Stanford, which will directly impact their archival collections located in three historic buildings. Most of their collections are moving offsite during the renovation, some indefinitely, and Arie Mountain was selected to relocate 64,000 cubic feet of material from Stanford University to a customized Arie Mountain facility. Specialized relocation processes designed by our team, along with the Hoover archivist and preservationist, will be utilized during the move. The collections will be maintained and circulated from a private climate-controlled vault modified specifically for this project. This is a great example of our teams working to implement solutions to meet our customers' specific needs. Turning to our federal business, we have made significant inroads in further penetrating this historically unvendored channel. Across our entire federal business, revenue grew 14% year over year in 2018, led by strength in data center and records management. To this point, a U.S. government regulatory agency expanded with a new data center deployment in Northern Virginia, adding to their existing deployment in New Jersey. On the records management side of the federal business, we had net Q growth of 4% during 2018 and continued to see good momentum. We are encouraged by the progress made in Q4 in North America in accelerating volume from existing customers and driving new business to Arie Mountain. Another area of solid progress in 2018 was the momentum of our IGDS business, as customers increasingly live in a hybrid world of both physical and digital storage. We recently signed a contract with a large retailer to enhance our value-adding services. We are beginning a digital solution involving more than 75 million images of employee files, which are currently housed on-premise at each individual store, as part of an HR file conversion project. Digitizing HR documents and centralizing into a single repository helps achieve greater efficiency, reduce risk, and improve compliance with a variety of federal and state requirements. We are currently in discussions with this customer to assist them in extracting even greater value from their HR information through the use of our Insight platform and its machine learning and artificial intelligence capabilities. These are great examples of how we are solving problems of our customers and adding value in the areas of digital transformation and compliance. We had an extremely active pipeline of opportunities for our IGDS business as we ended 2018, a nearly 50% increase over the prior year. Importantly, we have seen these opportunities increasingly translate into income as revenue has doubled over the past two years. Regarding our data center business, on slide 5 you can see Q4 in 2018 performance was strong with full year revenue of nearly $230 million and adjusted EBITDA of $100 million. We continue to see solid leasing momentum as we closed out Q4, achieving our targeted 10 megawatts of new and expansion leasing for the year, consisting of 261 leases signed with strength in the financial services, professional services, and federal verticals. Of those new and expansion leases, 34% were new logos to our data center platform, of which 43% had a pre-existing customer relationship with Iron Mountain, reinforcing the strength of the Iron Mountain brand and its extension to our data center business. To that point, we signed a new cloud-based provider of medical information in Northern Virginia as this customer was very sensitive to proximity to its own local IT team. Additionally, this customer also has a long-standing relationship with our data management team, so our core competencies in compliance and security resonated well with their data center needs. Another great example of a new customer is Wasabi Technologies, a hot cloud storage company which deployed in Northern Virginia. Iron Mountain was able to fulfill all of their data center requirements, including a hyperscale-ready facility which meets the strict compliance requirements for FedRAMP. Demand from existing customers remains strong, with a number of customers expanding their footprint in existing data centers as well deploying with us in additional markets. A large global bank, which came to us as a data center customer through the I.O. acquisition, increased its capacity needs three times during 2018, expanding its usage in New Jersey by 47%. Turning to slide 6, our development pipeline reflects construction in key markets including New Jersey, Phoenix, London, and Amsterdam, as we continue to see good demand from existing customers. Subsequent to the end of the fourth quarter, we acquired a parcel of land in Frankfurt with power reserved and a permitted design which will ultimately support 20 megawatts of capacity. Frankfurt is the second largest multi-tenant data center market in Europe, behind London. This land acquisition improves our competitive position across Europe and allows us to have a presence in three of the four key European metro areas. We now have total potential capacity of almost 350 megawatts across our data center platform, including the land in Frankfurt and Chicago. We expect the leasing momentum exiting 2018 will continue into 2019 as we build on our strength with enterprise customers and attract more hyperscale demand. We currently expect to be able to achieve robust leasing activity with a target of executing 15 to 20 megawatts of new and expansion signings in 2019. Turning to slide 7, our strong performance in 2018 has enhanced the solid foundation we have created and increased our financial strength as an organization to support sustained growth. Once our acquisitions from last year are fully incorporated in our base numbers, the business as it is configured today is expected to deliver 4% plus organic adjusted EBITDA growth going into 2020, well in line with our original 2020 plan to exit 2020 with a 5% organic EBITDA growth. This is all compared to less than 2% growth just five years ago. As it relates to our outlook for 2019, we issued guidance this morning which reflects consistent performance expectations for records and information management business fundamentals with further physical storage potential from newer adjacencies, ongoing strong growth in emerging markets, data center and adjacent businesses, and continued investment in the business to support strategic initiatives and innovation around digital solutions to support our customers' evolving needs. We do anticipate that the strong dollar will create headwinds over the course of 2019 relative to our reported results, though this has no operational or margin impact. On a constant currency basis, we expect revenue growth of 3%, adjusted EBITDA growth of 4%, and AFFO growth of 4.5%. And if we normalize the impact of adoption of lease accounting, our adjusted EBITDA margin would increase by 100 basis points further. Stuart will have more detail on our 2019 guidance in a moment. Putting this all into historical context, Iron Mountain is entering into 2019 in great shape. Our brand continues to resonate with our customer base where trust is ever more important, especially when it comes to information as well as valued assets. This trusted relationship with more than 225,000 customers and covering over 95% of the Fortune 1000 is demonstrated both by the continued relevance of our RIM business with expanding margins through higher pricing, as well as the rapid growth of our digital solutions business and data center offerings. In terms of how our services have delivered bottom line value, it is worth noting the accelerating growth of the business since 2014. We have grown revenue and adjusted EBITDA on a constant currency basis at a 10% CAGR. AFFO has delivered a .9% CAGR with a .8% CAGR in Sharecow. Our business is more diversified both by business line as well as geography, all yielding the acceleration and underlying growth mentioned earlier. Altogether, over the past five years, we have built significant momentum into the business and feel good going into the year. We will remain disciplined regarding the pace with which we deploy capital to support these growth initiatives, while ensuring we remain true to our financial model. With that, I will turn the call over to Stuart.

Thank you, Bill, and thank you all for joining our fourth quarter in 2018 Results Conference Call. We delivered very strong AFFO growth in 2018 of 16% and continue to expand our adjusted EBITDA margins, while also achieving .6% organic revenue growth. This growth was supported by results of our Revenue Management Program and continued expansion of Value-Ed services and our data center platform, with growth of records volumes in our international markets offsetting declines in North America. We are pleased with the healthy performance across our business segments as well as our progress investing in and integrating faster growing businesses. Not only do these new businesses create value for shareholders, but also allow us to be better partners with our customers for their critical physical and digital storage needs. I'd like to start off the financial discussion with the performance highlights, which you can see on slides 8 and 9 of the presentation. For the quarter, revenue was in line with expectations approaching $1.1 billion, growing about 7% on a reported basis and almost 10% on a constant currency basis. This is driven by contributions from our recent data center acquisitions and strong organic revenue growth, including solid contributions from our emerging markets and our businesses. Total organic revenue grew by .5% in the fourth quarter compared to the prior year and .6% for the full year. Organic storage revenue grew .9% for the quarter and .4% for about $60 million for the full year. Organic service revenue grew .1% in the fourth quarter and about .4% for the full year. Service growth was primarily driven by increased contributions from our expanding secure shred business, continued strength and recycled paper prices, as well as additional digitization and special projects. Our adjusted EBITDA grew over 12% on a constant currency basis for the fourth quarter to $360 million, with margins expanding 100 basis points year over year to 33.9%. The margin improvement resulted primarily from the flow through of revenue management, the impact of the adoption of the revenue recognition standard and improved labor productivity. STNA as a percentage of revenue, excluding significant acquisition costs, declined about 80 basis points in the fourth quarter versus a year ago due in part to lower bad debt expense and increased operating leverage on the revenue growth. Adjusted EPS for the quarter was $0.25 per share, down from 2017 due mostly to higher appreciation and amortization associated with data center acquisitions and impacted by a 6% increase in shares outstanding following our December 2017 offering to fund the acquisition of IO data centers. For the full year, AFFO was $874 million, up $122 million or 16% over the prior year, reflecting the strong operating performance, our data center acquisitions and a very disciplined approach to capital allocation, while continuing our investments in new products and businesses. AFFO came in at the high end of our expectations due to lower cash taxes and interest, as well as slightly lower capital spending. To touch on operating performance in more detail, on slide 10 you can see developed markets organic storage revenue growth came in at .9% for the quarter, slightly better than Q3 and .4% for the full year, despite the negative volume growth, again reflecting the contribution from revenue management. Organic service revenue in developed markets increased .1% for the quarter and .2% for the full year, due mainly to growth in our shred business, project revenue and digitization projects as mentioned earlier. In other international, we continued to see healthy organic storage revenue growth of .1% for the quarter. Full year organic storage revenue growth was .4% on .2% growth in organic volume. Organic service revenue growth was .1% in the quarter and 5% for the full year in this segment. Further, the data center business delivered strong organic revenue growth of 12% for the quarter and 9% for the full year. Our adjacent businesses also performed well with revenue growth growing almost 19% on an organic basis in the quarter and nearly 11% for the full year. Turning to slide 11, you can see the detail of our fourth quarter, 100 basis point adjusted margin expansion with growth in most segments. We saw a margin decline in North America data management or our tape business driven by lower volumes and mix as well as investments made in growing new products and services. In the tape storage business, the amount of digital data being stored continues to grow, however greater physical tape density is resulting in lower physical volumes. Revenue management has helped offset some of the tape volume trends and margins have remained north of 50%. In Western Europe, fourth quarter margin expansion returned to levels seen in the first half of the year expanding by 240 basis points, reflecting lower bad debt, our focus on continuous improvement and stronger project-based revenue in the UK, Germany and Austria. In the global data center segment, adjusted EBITDA margins were .5% in the fourth quarter and .5% for the full year, reflecting the increased scale of the business and progress on integration activity. As Bill noted, we are pleased with our leasing activity reflecting the successful integration of a strong commercial team and demand in the markets where we operate. During the quarter, we executed 3.3 megawatts of new and expansion leasing for total 9.6 megawatts for the year. The leasing was primarily enterprise and federal government customers, in turn remains quite manageable at .2% in 2018. Turning to slide 12, you can see their least adjusted leverage ratio at the end of the year was 5.6 times, comfortably in line with other REITs, especially when considering that our business is more durable than many other REIT sectors. But we did not have any significant financing activity in the fourth quarter. We did sell two properties as part of our capital recycling program, which generated net proceeds of $56 million. As of December 31, our borrowings were 73% fixed rate, our weighted average borrowing rate was 4.9%, and our well-lettered maturity averaged 6.2 years with no significant maturities until 2023. Our strong balance sheet and capital structure is supported by our significant real estate portfolio and long-term nature of our customer relationships. Turning to guidance, this is detailed in the supplemental for your review and on slide 13. We are expecting 2019 revenue to be in the range of $4.2 to $4.4 billion, adjusted EBITDA to be in the range of $1.4 to $1.5 billion, adjusted EPS to be in the range of $1.8 to $1.18, and AFFO to be in the range of $870 to $930 million. This reflects solid performance following 2018's growth, though impacted by a stronger dollar, the new lease accounting standard, and continuing investments in Iron Mountain Insight, IT infrastructure, and our data center pipeline. 2019 total organic revenue growth is expected to be in a range of 2 to 2.5%, including organic storage revenue growth of 1.75 to 2.5%. Global organic record volumes are expected to be flat, with declines in North America offset by growth in other international markets. Globally, we expect new incoming volume to continue offsetting destruction rates of 4.5 to 5% and outperms of around 2%. We expect service organic growth will be in the low single digits for 2019 from continued growth in our shred business and information governance and digital solutions. As many of you know, record recycled paper prices were tailwind to our service business in 2018, but we anticipate moderating paper prices in 2019. We also expect continued strong growth in the data center business, with low teens' organic revenue growth compared to 2018. We will, though, have elevated churn in the first quarter in Phoenix due to two customer move-outs that were part of our deal underwriting when we acquired I.O. Anticipated investments, which are detailed in the supplemental, will be funded by a combination of cash available from corporations, capital recycling, and new borrowings supported by the higher expected adjusted EBITDA. We may also utilize third-party capital, particularly for data center development, and equity from our ATM, depending on market conditions. We expect our least adjusted leverage ratio to improve 10 to 20 basis points from the 5.6 times at the end of 2018. As you think about 2019 outlook, there are several factors affecting comparability that I would like to bring to your attention. First, we divested our fulfillment business at the end of Q3 2018, which generated approximately $25 million in annualized revenue. Second, the adoption of the new leasing standard is expected to result in a non-cash increase in rent expense of $10 to $15 million, lower interest expense of $3 million, and lower depreciation expense of about $3 million, due primarily to certain capital leases converting to operating leases under the standard. Third, current foreign exchange rates relative to 2018 are expected to result in a $60 to $70 million headwind of revenue and a $20 to $25 million impact to EBITDA. As a reminder on FX, we derive about 40% of our revenue from non-US dollar currencies, and as a result, exchange rate volatility can have a significant impact on our reported results. While we have very low transactional exposure with our costs well matched to our revenue in the respective countries, we do have unhedged translation exposure and a somewhat higher proportion of our debt is US dollar denominated. As the business continues to evolve with data center growth, we will also be reviewing our disclosure to determine where we can make changes to reduce complexity and enhance transparency. You should expect to see some changes to the supplemental beginning in the first quarter. In summary, as we close out another year of continued growth and evolution, we are pleased to see progress on multiple fronts. Our records and information management business continues to deliver durable cash flow and steady organic revenue growth through solid revenue management. We've had continued success extending into higher growth in emerging markets, and our fast growing data center business and adjacent businesses continue to increase scale and have become very competitive platforms poised for even greater success. We are pleased with the adjusted EBITDA, KFFO, and dividend growth rates achieved in 2018, and the contributions from our team serving customers around the world, and look forward to strong performance again in 2019. With that, I'll turn over the call to Bill for closing the remarks before we open up for Q&A.

Thank you, sir. Just a couple of comments before we begin the question and answer. First of all, it was a very strong year, which was punctuated by double digit EBITDA and AFFO growth, well ahead of the shares we issued to support our acquisition of the IO data center. The business also has never been stronger or better positioned. Continued organic storage revenue growth with remaining untapped storage segments or reserves, a broader range of businesses and services still tied to our existing business relationships built on decades of trust, and accelerating organic growth of EBITDA and AFFO, which underpins future dividend growth whilst we're levering. With that, operator, I'd like to open it up to questions.

Yes, thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchstone phone. If you're using a speakerphone, please pick up your headset before pressing the keys. To join a question, please press star then two. You may submit questions throughout today's webcast by clicking the submit a question box on your screen. At this time, we will pause momentarily to assemble the roster. And the first question comes from Nate Crossyette with Barronburg.

Hi, good morning. Maybe you could just talk a bit about your appetite for further data center acquisitions. I know you have plenty of room to build out based on the current pipeline, but I wanted to get your thoughts on just outright acquisitions. Is it possible to see some more EVO switch type transactions going forward?

Good morning, Nate. Look, I wouldn't rule it out, but it's not really what we think we need to do in the plan. In other words, the EVO switch, if you think about EVO switch specifically, which is a good example, is we look at the top 10 international markets and the top 10 US markets and we say, how do we prioritize those? Which ones do we think we should enter? And then when we look at that, we look at what's the best way to enter that market. So Chicago, Northern Virginia, and Frankfurt are all great examples where we decided the best way for us to enter that, because it's important for our customers that we have decades of relationship with, plus some of our newer customers on the data center side, that we have product on the shelf in those key markets. And we decided the best way to enter those markets was through green field development, which we've done. In Amsterdam, we looked at the same thing, because as you know, in Europe, we refer many times to the flat markets. The top markets in Europe are Frankfurt, London, Amsterdam, and Paris. So Amsterdam is absolutely a key market in Europe, and it's one that our customers wanted to see us in. And when we looked at Amsterdam, quite frankly, EVO switch for us was the best entry point. So that's how we think about those markets. But if you think about overall, in terms of our growth plan, with now almost 350 megawatts of capacity that we can build out both with sites that we've already started building and the Frankfurt and Chicago site, then we feel really good about being able to achieve our financial plan with little or no acquisitions.

Okay, thanks. Maybe just a quick follow-up. Can you talk a bit about just data center competition? We've heard from some of the wholesale providers that price can be very competitive in certain markets. So I'm just curious to hear your thoughts, and maybe you could talk a bit about how you're trying to differentiate.

You know, I think it's a good question, Nate. I think that, well, first of all, I would differentiate between the enterprise customers and the hyperscale. So it's fair to say right now, as Iron Mountain is, we're more, you know, the bulk of our customers are in the enterprise segment, which is what you would expect. You know, we noticed that the new logos we signed this year, 43% of them we already had an existing customer relationship with, and obviously those were enterprise customers. So for us, I think when you talk about pricing, we see less price sensitivity on the enterprise side, quite frankly. So Iron Mountain hasn't been exposed to that as much. When you see the analysts talking about the pricing compression, it's more on the hyperscale. Now, what does that mean for us? We do have an appetite to be present in the hyperscale market, and I think I've covered this before on the calls, and it's more about getting the, optimizing the yield on the site. So if you look at, you know, Northern Virginia, which is 82 acres, and can build out, you know, well north of 80 megawatts of critical IT load, then if you want to feel that, the rate that you feel it is as important in some ways as, you know, what the specific revenue per kilowatt that you're getting on that site. So to fill that out at a pace that we think is optimum, then we would expect that site to be somewhere at, when it's fully built out, between 40 to 60% hyperscale. Now, on our standpoint is our models are built on current hyperscale pricing. So I think you're hearing coming out of the industry is hyperscale pricing has come down, and quite frankly, these things typically are kind of 8 to 9% cash on cash returns. They're at least approaching that level now, but that's where we built our model, and that's what we expect our entry point, which are still well above our weighted average cost of capital, and it's still a good return. So I think the noise coming out of the market, I think, is more about people who have been heavily present in that segment before, and they're realizing that the pricing is coming down to what I would call is the normal clearing price in terms of, you know, what a reasonable return is for these very large scale projects which have very long contract duration.

Okay, that's helpful. Thanks. I'll get back in line. Thank you. And the next question, Constance Sheila McGrath with Evercore.

Yes, good morning. Your EBITDA margins in 2018 continued to improve. Just wondering what your outlook for margin improvement is in 2019. Is it achievable to maintain or grow margin in North American storage, and how is the mixed shift shifting to data centers driving margin improvement?

Yeah, good morning, Sheila. This is Stuart. So if you look at sort of the midpoint of guidance, it implies about a 30 basis point improvement in margin, and as Bill mentioned in his prepared remarks, that's impacted also negatively by the change in lease accounting. So if you normalize for that, you know, it's a 50 to 100 basis point margin expansion. And I think you're going to see similar trends in 2019 to what you saw in 2018 with, you know, revenue management continuing to contribute to margin expansion in the developed markets. Emerging markets, you'll see some margin expansion due to continuing to increase scale, right? Because we've got a pricing program in those markets, but we're really there focused on driving scale and continuing to increase our market presence. And then you will get then in the data center business, if that business grows as a percentage of the total business, you will get some uplift in margins because that business is a higher average EBITDA margin than the rest of the business.

Okay, great. And as a follow-up, Bill, you mentioned the federal vertical records growth of 4% in 2018. Just wondering how that backlog is looking in 2019 and any insights on how meaningful that opportunity might be?

No, thanks, Sheila. No, I think that we expect to continue to build on that. Obviously, it's with the federal government, the gestation period of it is longer than our, say, normal private enterprise customers. But we continue to see the backlog growing. I think we highlighted our homeland security win on the last call. And we start getting those, what I call kind of iconic brands, is the momentum is starting to build in the business. And we see that we see an acceleration in terms of the pipeline. But that being said, is that the government is on, you know, fiscal budgets. So, you know, you work this year to deliver the project generally for next year. But we really like what we see in the pipeline in terms of momentum. So I would expect that to tick up over time.

Okay, thank you. Thank you. And the next question, Constance George Tong with Goldman

Sachs. Hi, thanks. Good morning. You're now several years into your revenue management initiative. Can you provide us with an update on the rollout of revenue management across your geographies and the amount of pricing benefit you expect through 2020?

Okay, yeah, good morning, George. So, first of all, in terms of the program is that it's pretty much completely rolled out, obviously, in North America and now Western Europe. We started rolling it out this year, or last year in 2018, with four centers across the broader international market out beyond Western Europe. So we expect to see real traction in those markets, whereas Western Europe will be fully online this year. Last year was partially online. Obviously, North America will continue online. So what we expect is similar levels of price increase in North America, in Europe as we, well, in North America as we got this past year, we expect an uptick on coming out of Europe and also the emerging markets or the international markets this year. So we feel pretty good in terms of the momentum that we're getting on that. So I think you can expect that we'll have the strength from price and revenue management coming into 2019. And we've built that into our guidance.

Got it. That's helpful. And on margins, you've essentially achieved all your targeted transformation savings and recall cost synergies through the end of 2018. Can you remind us of your 2020 EBITDA margin target, taking into account the lease accounting changes and discuss the initiatives you have to bridge from your current margins to 2020 margins?

If you normalize for the impact of the lease accounting and even if you go backwards and normalize actually for the Revrec accounting that we had that helped us in 2018, we've been achieving margin expansion of 50 to 100 basis points a year. Looking forward, and that's been benefited also by the obviously the flow through of Revrec as well as synergies.

We

continue to cost improvement programs in place that you will continue to see benefit from going forward. So we expect to see similar levels of margin expansion going forward. But in addition, historically we've been investing 20 to 30 million dollars a year in new business growth and new business initiatives and starting to see some green shoots come out of those businesses. And as you look forward, expect to see some margin expansion coming out of those businesses as well. So I think as you look forward, we feel quite comfortable with continuing a similar track of margin expansion.

Got it. Thank you.

Thank you. And the next question comes from Andy Whitman with Robert W. Barrett & Company.

Yeah, great. I guess my question kind of builds on the last question here. I just want to understand some of the moving parts of the long-term guidance to 2020 that you guys have talked to. Obviously multi-year look is going to have lots of puts and takes as things change over the years. But maybe just to start out to level set us. Stuart, can you talk about and quantify the FX headwind that the target is seeing to revenue in EBITDA so we could kind of really look on it on the 2019 currency rates? And I mean, it looks like you need to find something like, I don't know exactly what the FX hit is, but double-digit EPS growth or EBITDA growth into next year in margin increases 20 over 19 of 200 basis points or so. So can you just talk about some of the puts and takes in a little bit more detail in achieving that 2020 guidance and how you feel about the key metrics of revenue in EBITDA specifically?

I'm glad you asked the question. Again, and today we're really focused on the 2019 guidance, right? So we didn't want to sort of confuse that with sort of putting out 2020 numbers, right? So let me walk you through the puts and takes as to how to get there. And to answer your first question on the currency, if you go back to my script we talked about in 2019, FX headwinds by itself on revenue were 60 to 70 million dollars and on EBITDA 20 to 25 million dollars. And you get that

cumulative since the beginning though, just so we can kind of compare more easily. Do you have that handy? I

don't have that handy. It would again, exchange rates prior to sort of the really the recent changes haven't been that significant. So if you go back to what our 2020 plan has been, this is now really the biggest impact. And now you got to remember the 2020 plan was built on currency rates at a certain period of time. So you should, we should always be normalizing for FX when it goes up or down. So, but if you look forward to relative to our last 2020 plan, right? You can see that we've delivered right on track for 2018. To get to the 2020 plan adjusted for FX from 2018 reported results, EBITDA would need to grow about 15% or 200 million dollars to get to the range of the 2020 numbers, right? So when you think about, you've got about 4% organic EBITDA growth per year. So that adds in and of itself around 120 million dollars. You know, to expect in our long-term plan, continue to expect 150, actually 150 million dollars plus of M&A per year. So that 300 million dollars total M&A, that would add about another 50 million dollars of EBITDA. And then you think about the comments I just made around, we've been investing in new businesses and services, about 30 million dollars per year. So those should start to deliver EBITDA growth as well, combined with savings from continuous improvement can get you back into that range for what our longer-term models were. We will at some point be issuing sort of new long-term growth targets in the future. We're looking at sort of when the best time is to do that now.

Yeah, and the only thing I would just add, Andy, on this is that from an FX standpoint is that, you know, our view is we take FX, right? And the good news is we don't have a margin exposure on that. So whether it gives us a tailwind, which it did a couple years ago, and now it's giving us headwinds, is what our shareholders are paying for us to do is to manage the business through those tailwinds and headwinds. So we're really focused on line of sight to the operational plan that we have to do to deliver that original 2020 guidance. And we're well on track with that. And we think looking at some of the R&D pipeline that Stuart mentioned, the 30 million that we're spending roughly a year on that, that includes things like Iron Cloud and Insights, which we effectively have seen very little benefit to date on. So we feel pretty good in terms of where we stand versus our original outline.

Right, that's helpful. And then just kind of a clean-up question here. On the AFFO for the year, you guys came in a bit ahead. You mentioned, I think, interest in taxes, but the thing you control most here is the capex side. Is that a delay of some and capex that we're going to see in the future? Or have you been able to manage the business so that that capex is altogether unneeded?

Let me just give you a quick example of one of the big drivers of capex improvements. I don't remember if I talked about this on the last call or not, but if you look at what we spend annually on our fleet, for example, a few years ago, our operations team did a great job putting in place new management tools for our drivers to improve fuel utilization, reduce wear and tear on the trucks. As we've gone back now and re-evaluated the impact of that, we've realized that the quality of our trucks and the time that they can stay on the road has increased. So we've been able to actually reduce the rate at which we replace trucks annually. I think that was around $15 or $20 million of capital savings in and of itself this year.

Interesting. Thank you.

Thank you. The next question comes from Andrew Steinerman with JPM.

Hi, good morning. This is Michael Chilcote for Andrew. My first question is just a quick clarification. Should we still assume the previously stated 2020 plans have not changed? That's right. I know you mentioned new long-term growth targets are coming, but you were referring to something past 2020, right?

Yeah. I mean, again, we want to keep sort of long-term targets out there. If you look at sort of what we've talked about in the past in terms of growth rate of the dividend, how do we support that with AFFO and EBITDA? Those general trends all remain on track, and we think our current business plans support those. I think the only thing that we'd say, the only thing you need to make sure that you're doing is when you're looking at 2020 is, first of all, is to make sure that you're looking at the effects of impact of that and adjusting those targets for that. But we're not issuing 2020 guidance today.

But I mean, to your point is that the walk that Stuart just took Andy through says that we're still on the 2020 number correcting for the FX. The other thing that, you know, if you're trying to kind of go beyond 2020, which we're not talking about today, but at the same time, you can see that we're also on track to be able to deliver on an exit organic EBITDA growth of 5% at the end of 2020. So what we expect that, you know, momentum will continue to build in the business. So exiting 20, if we're sitting here at a little over 4% organic EBITDA growth as we sit here today, which we think is really great progress because we started, you know, you've been following the story, is we started at less than 2%, you know, four or five years ago. So we've got that up to a little bit north of 4% on an organic basis. And we have line of sight and on track to exit 2020 at 5% organic EBITDA growth.

I'll add one other point as well, just so people don't think we're sort of walking back is on our leverage targets as well, right? The original multi-year plan we've got in there, you know, either five times at least adjusted EBITDA if we issue the full ATM or 5.2 times target for the end of 2020. And that remains our target as well in our business plan.

Great. Thank you. That's helpful. And just one quick one on the data center side. You mentioned low double digits organic revenue growth outlook for 2019. Can you give a quick comment on EBITDA contribution as well?

EBITDA on the data center.

Yeah, so I mean, EBITDA on the data center, we're sitting right now at the mid 40s percent range on the EBITDA margin. As that scale continues to grow, you've got to remember, we're still sort of putting the infrastructure together from an integration standpoint and also still incurring integration costs. I think we had a little over $2 million of integration costs in 2018. So we're well on track to sort of getting back to the mid 50 margin and a 10 percent of total EBITDA by the end of 2020.

Understood. Thank you. Thank you. And the next question comes from Mary Ann Perreo from Merrill Lynch.

Hi, thank you for taking my questions. Most of my questions have been answered, but I just wanted clarification. So on the leverage target, you said you would get down about 20 basis points to the 5.2 times. So I'm sorry, can you clarify why that's not the 5 times?

So the 10 to 20 basis points expansion or improvement is in 2019 relative to the 5.6 at the end of 2018. So we'll get down to 5.5, 5.4 at the end of 2019 and then another improvement in 2020.

I think

to

your point about the difference between the 5.2 and the 5, whether we run the ATM. So as you know, we have a 500 million ATM, which we've drawn down a little over 60 million of. So if we haven't run that for over a year now, if we ran that, that would reduce the leverage by 0.2. If we don't run the ATM, instead of 5, it would be 5.2, would be the

business.

Well, I think what we've always said is that to us, it's not about our ability to run the business or finance the business. And you can see that when we issue debt, it's usually at the upper end of investment grade as it stands today. It's more where our covenants cut in. So our covenants are at 6.5. And we think that ideally, we would like 1.5 to 2 turns of daylight between wherever our covenants are and where our leverage is because it just gives us much more flexibility, whether it's looking at our own stock from time to time or if it's looking at opportunistic acquisitions. We just think that 1.5 to 2 turns between your covenants and where your debt levels are is ideal. So we're not in a rush. That's why our view is the right balance, again, from capital allocation as we continue to invest in growth in the business, we continue to grow the dividend. And that still leaves us enough left over that we can slowly tick down leverage to the targets that we set for ourselves. And over time, that will continue to go down.

Great. And then just lastly, in terms of how high you would go for the right data center or acquisition, any thoughts on that?

Well, it's really hard to talk about the hypotheticals because we really like our plan. Obviously, the area where the biggest demand for capital, don't forget we have 150 million of M&A built into the plan annually and another 250 million plus built in in terms of expanding data center. So it's not like we're constraining the business for capital. If you put those two together, we've got over $400 million that we're plowing into growth and M&A for the business each year. And then if you say that we just in data center, being the one that is probably the most obvious, with what we have in terms of greenfield and sites that we've already started developing, is we can take that to almost 350 megawatts. So we've got plenty of daylight to our plan. So it's really hard to respond to a hypothetical at this point.

Great. Well, thank you for taking my question.

Thank you. Thank you. And the next question comes on Karen Foer with NFUG Securities.

Oh, hi. Good morning. I wanted to see if I could get a little bit more detail on the assumptions underlying the 1.75 to .5% organic storage revenue growth forecast. I think you said in your comments that you think volumes will be flat. Does the low end of the range accommodate volume declines at all? And what do you think is going to be the primary driver of the acceleration from the 1.9 you printed in the fourth quarter to .1% at the midpoint?

No. Good morning, Karen. This is Stuart. I think if you look at sort of the trends that we've had overall, you get some variability from quarter to quarter. And you've got to remember our volume numbers are trailing for quarter. So when you get around to the end of the year, you're looking at total volume changes by market is what we put in the supplemental. And you also then can come back into sort of implied price. So if you look at sort of the buildup of the numbers and you look at developed markets and emerging markets, both volume and price, we actually don't expect to see that much difference in trends in 2019 from 2018. So we've talked about revenue management and our continued upside in that program. And if you think about sort of what those are, it's not – we're really pricing consistent with inflation. So we're not out there doing anything too crazy on that front. You will get some tick down from organic revenue growth in the data management business. We talked about that as well. And then that'll be offset by continued growth in data center and the adjacent businesses where you're getting storage and service growth on both of those. Albeit in 2019, the data center core base, organic base will grow as the acquisitions sort of move into – as we lap over the acquisition dates. So I think very comfortable with the growth rates that we've put out there.

Okay, thanks. Second question is where are EBITDA multiples on business acquisitions today and where are cap rates on real estate acquisitions today?

And we haven't really done a lot of real estate acquisitions today in that sense. I mean, the real estate purchases that we've done are really opportunistic. And it's more – we've done some – we'll do some real estate acquisitions in 2019 where we've got a couple of purchase options actually in California and a couple of record centers that are well below market. And that's in our plan. We'll fund that with capital recycling from selling some other real estate, which is also in our plan. So we'll continue to recycle capital opportunistically. If you look at sort of where multiples are trading in the business from a multiple of revenue basis – and again, we try to look at it actually including integration costs and things like that. I mean, sitting sort of 3 to 3.5 percent shred actually quite a bit cheaper than that. And as a multiple of EBITDA, 6 to 7 times EBITDA. That's pre synergies. So synergies will add another turn or so improvement onto those numbers.

On the capital recycling front, what's the spread do you think between dispositions and acquisitions this year?

I mean, as we've talked about in the past sort of the – the spreads are – you'll see the gains. You saw the gains actually that we recorded in the P&L in the fourth quarter from some real estate sales. And you'll see some nice numbers next year as well. I mean, cap rates on industrial real estate. And we did some valuation work with East Hill last year. You know, you look at the real estate portfolio that we own in just North America is a – for the – excluding racking – before racking is about $2.5 billion and that's on a 6 cap rate. I'd argue cap rates are actually probably below that given the markets that we're in. And we own primarily in markets like Boston, New Jersey, California, Chicago, Dallas. We really try to own in the primary markets. And you'll actually see us selling – actually the real estate that we're going to sell to recycle is going to be more of the secondary and tertiary markets.

Great. And then just last question, just a technical one on page 7 of the slides. You show that the growth portfolio moved from about 19% of the revenue mix to 25% from the third quarter to the fourth quarter. Was it just a reclassification or why did that number move so much?

It's more of a pro forma just because we're lapping the IO EVO switch in credit suite data acquisition. So we were quite busy in 2018. And if you actually – once those are all lapped, we're sitting at a 75-25 mix today.

Okay, great. Thank you.

Thank you. And once again, please press star and then 1 if you would like to speak. And the next question is a follow-up from Nick Cressiette with Barenburg.

Hi, yeah. I just wanted to ask about investment grade potential. I'm just curious to hear about any recent conversations with the rating agencies and how they are viewing the data center buildout. And the reason I ask is because DLR has some more leverage levels and they have investment grade. So – You just say that to make me

jealous, don't you, Nate?

No, I'm just curious. I mean, I feel like – go ahead.

No, no, no. It's – I can look at a number of my peers across the REIT sector that have similar leverage levels and better ratings than we do. We've been having ongoing discussions with both S&P and Moody's in a very healthy way, right? As our business has shifted from historically business services, we became a REIT. We're continuing to grow the data center business. I think Moody's actually has put out a report in Publish that we've moved over to their REIT team. And so I think we're making good progress. We're having great dialogue with them. And I think they, over time, will give us more credit for the REIT-like durability of the cash flow that comes out of the business.

Yeah, and the only thing I would just add to that, to Nate, is that, well, if I'm like totally – we're both focused that we would love to be treated like digital. The other part for us is we still want to delever because of this free space that we have where our governance are set at six and a half. Why? That's historical, but that is what it is. One thing I would say is we're already getting kind of upper end of investment grade pricing when we go out and issue debt. So we're already getting the benefits, just that the rating agencies just don't rate us that way. So when you actually see our debt get priced, we're not far off. But it would be nice to

have the rating as well. Yeah, our debt investors give us credit for the strength of the balance in cash flow.

Okay, that's helpful. Thanks. Thank you. And the next question also is a follow-up from Siddha McGrath with Evercor.

Yes, I was wondering, given your storage locations in North America are close to many major metropolitan areas and you have the trucking and logistics expertise, I'm wondering if there's a way to capture some additional demand for your storage space from last mile demand or is that what flex the industrial company that you've referenced before? Is that kind of a last mile offering?

That's a great question, Sheila. So it's kind of, I would say, three things that, and I kind of highlighted it, and we'll try to incorporate that so that people can see the total volume that we're storing rather than just purely the records information. You know, the 690 million cubic feet of records that we are storing doesn't include these things that we're already doing like under the flex program, which is exactly, which has similar margins, by the way, or revenue per square foot is our core business. We also have a similar type of operation in Amsterdam where we're doing both last mile customs and delivery for a number of the large global e-commerce platforms as well as local post, European post offices. And then the third area, which I also alluded to, and we've talked about a few times, is that we continue to like certain aspects of the valet consumer storage, which is a logistics, the logistics heavy portion of the consumer storage market. So we think those three areas are areas that will continue to add volume to our network. And our intention is to be able to incorporate that in the numbers so you see it, because right now it's hard to actually see the level of impact.

The thing I'll just add on quickly too, when you think about how do we leverage our real estate and locations, our logistics know-how, our asset tracking, and you can really see it in our art business as well and entertainment services where we're doing a lot of specialized transport, packing, tracking of unique items, and a number of the major auction houses have outsourced their back office to us for us to handle that for them. So how do we keep expanding that and growing that? We think it's an interesting area.

Great. And if you could just quickly comment on the pre-leased development pipeline and data centers moved up, especially in New Jersey, just comment on the leasing activity there.

Yeah, no. I mean, again, we had a strong fourth quarter leasing activity. We're a little over 20% pre-leased in the development pipeline. And as Bill mentioned, we had a large global bank take additional space at that location, and we continue to see a good leasing pipeline in almost all of our markets.

Thank you. Thank you. And the next question comes from Jovo Abebe with JP Morgan.

Thank you. Good morning. I had a follow-up question on that investment rate question that was just asked. From a financial policy perspective, do you want to be investment great or are you working towards becoming an investment-grade company?

What I'd tell you is that, unfortunately, I don't control the ratings. The rating agencies do. I mean, we want to operate the business heading in a direction that we think is prudent for us to be able to continue to grow and fund the business. But I wouldn't say that that's something that we aspire to. We want to keep those types of metrics, but it'll be up to the rating agency to figure out what they do.

Okay. So from the company's perspective, respect to what the rating agency says, you are sort of not managing the balance sheet to become investment-grade. Do you want to remain in high yield?

I would say we want to manage our balance sheet consistently, being able to fund the business and not that different than other reaps. And if you look at their balance sheet structure, I think we're pretty close to that today.

Okay. And then sort of the lease versus owned mix, are the agencies, I think in the past, have had an issue with that as they wait to compare to other reaps? Lease versus owned, is that still an issue from their perspective or have they moved on?

I would say, first of all, let me refer you back. I think it was the NAE REAP presentation that's on our website from last fall where we disclosed some of the valuation of our real estate in a couple of times. And obviously we've shared that with the rating agencies as well. And so there's some detail in there. The important point here is that you have to look at it on a percentage of value versus a percentage of square feet. So while it looks like we own 30% of our overall square feet, if you look at it from a valuation perspective, the markets that we own are the markets you want to be in and control real estate. So from a valuation perspective, we're over 50%.

Okay. And are the agencies coming around to that way of thinking? I

mean, I think the Moody's changing the ratings team is maybe a sign of that. Okay. Okay. Great. Thank you very much. That's all I had. Great. Thank you.

Thank you. This concludes our question and answer session and today's conference call. Digital replay of the conference call will be available approximately one hour after the conclusion of this call. You may access the digital replay by dialing -344-729 in the U.S. and -317-0088 internationally. You'll be prompted to enter a replay access code, which will be 1012-7290. Please record your name and company when joining. Thank you for attending today's presentation. You may now disconnect your lines.