Iron Mountain Inc

NYSE:IRM

Earnings Call Transcript 2021-Q4

[Operator]

Good morning, and welcome to the Iron Mountain Fourth Quarter 2021 Earnings. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Gillian Tiltman, Senior Vice President and Head of Investor Relations. Please go ahead.

[Gillian Tiltman, SVP & Head, IR]

Thank you, Emily. Good morning, and welcome to our fourth quarter 2021 earnings conference call. On today's call, we will refer to materials available on our Investor Relations website. We are joined here today by Bill Meaney, President and Chief Executive Officer; and Barry Hytinen, our Executive Vice President and Chief Financial Officer. After prepared remarks, we'll open up the lines for Q&A. Today's earnings materials contain forward-looking statements, including statements regarding our expectations. All forward-looking statements are subject to risks and uncertainties. Please refer to today's earnings materials, the safe harbor language on Slide 2 and our 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. We have included the reconciliations to these measures in our supplemental financial information. And with that, I'll turn the call over to Bill.

[William Meaney, President, CEO & Director]

Thank you, Gillian, and thank you all for taking time to join us today. We are pleased to have delivered record performance for both the fourth quarter and the full year. These record results are reflective of our broad offerings, deep customer relationships, resilient business model and our dedicated teams. Despite the challenges associated with the pandemic and most recently with the Omicron variant, our Mountaineers around the world have continued each and every day to put our customers first now with renewed and invigorated focus on growth. And our historically high revenue and profitability are a testament to our Mountaineers' commitment. Speaking about our Mountaineers, I wish to begin my remarks by stating that we are all saddened by the overnight events in the Ukraine. Our thoughts and prayers are with our customers there and our fellow 60 Mountaineers and their families living and working in the Ukraine. I am sure for all of us, given the current events in Europe, it deals in many ways inappropriate discussing our financial results with this backdrop. Yet at the same time, it is in keeping with our Mountaineer spirit. With that, let me begin our discussion of our remarkable and record year. In the fourth quarter, we achieved our highest ever quarterly revenue of $1.16 billion, yielding 8.5% of total organic revenue growth and record EBITDA of $431 million. For the full year, we achieved record revenue of nearly $4.5 billion and EBITDA of $1.6 billion. These results were fueled by increased demand for our services across key markets. For the full year, we delivered organic storage rental revenue growth of 2.6%, reflecting continued benefit of pricing combined with positive volume trends. We drove double-digit growth in digital offerings, including data center inside our digital transformation services and secure IT disposition, now referred to as ALM, or asset life cycle management. Our digital services and ALM businesses continue to build momentum, growing over 20% in the fourth quarter and capping off an excellent year of growth. Further to our recent success in the ALM area, we are also pleased to report that the acquisition of ITRenew, announced in December, closed in January. This acquisition will accelerate our growth trajectory in this $30 billion market, which is growing over 10% per year. Our newly created ALM division will absorb our historical secure ITAD business line. This enlarged division not only helps us provide chain of custody for our customers' IT assets, but our ALM activities also assure our customers that their IT assets are wiped of any data at the end of their life and destroyed and recycled in a responsible way. On this last point, in terms of recycling, our expanded offerings in this space around a circular economy are important for both IRM's and our customers' ESG goals leading to carbon neutrality. This expanded ALM division also strongly complements our fast-growing data center business, bringing capabilities to serve some of the largest and most innovative companies in the world in a more cradle-to-grave way, consistent with the best security and ESG practices. This expanded ALM platform will directly benefit from Iron Mountain's 225,000 loyal customer base, which includes 95% of the Fortune 1000. This global customer base is supported by 25,000 Mountaineers across 1,450 facilities in 63 countries. Our recent expansions in data center, machine learning-driven data analytics and insights and now ALM are just some of the examples of how we continue to invest in growth to capitalize on our many opportunities ahead, serving a customer base which has been loyal to Iron Mountain for decades. I have shared with you previously how in the last 5 years, these investments have taken the total addressable market, or TAM, of our products and services from $10 billion to some $80 billion. I am happy to report our continued build-out of new products and services in the last year as well as growth in these underlying markets has now taken our TAM to over $120 billion. Our continued drive in building an ever-expanding set of synergistic and customer-centric solutions, together with global reach and scale, is the fuel behind much of the acceleration in our growth. Let me share a few examples of how we've been empowering our customers' success in growth through our diverse solution offerings and unmatched customer service. Our recent customer win with a large aerospace company, where we won a backfile digitization deal of over $20 million, is a superb example of collaboration amongst our entertainment services, technology organization and our global records organization, or GRO. In order to achieve its goal of being a 100% model engineering company and to most effectively use designs and data from historical archives to refine new designs, this aerospace company sought help with the digitization and auto classification of over 50 million digital engineering assets. We were tasked to store, classify and utilize machine learning to identify relevant information whilst maintaining compliance with International Traffic in Arms Regulations known as ITAR. To this end, we developed and implemented an ITAR-compliant solution using our InSight machine learning platform operating in the AWS government cloud environment. Iron Mountain is uniquely positioned to assist our partner with this initiative with our storage capabilities, our understanding of ITAR compliance complexities, our machine learning-trained analytic engines and our technological support to ensure efficiency and success. Moreover, this project enables us to deliver critical insight into engineering data, not just to this company but also to other manufacturing and engineering customers across the globe. Another key win worth highlighting is with a branch of the U.S. federal government. We concluded a Phase 1 contract and have also been awarded a Phase 2 contract for this branch. The agency originally planned to select 3 vendors for the first contract due to the high volume of microfilm reels needing to be processed, but our solution surpassed the customer's expectations, and Iron Mountain was awarded the exclusive contract to process all 177,000 of microfilm reels or over 2 billion records needing analysis. This win was based on our unique splitting technique, proprietary machine learning, automated QA process and processing scalability that helped us to differentiate our offer from the competition. These technology innovations for the customer have enabled future use cases, which rely on advanced pattern recognition at scale, including OCR microfilm processing projects, applying machine learning extraction techniques for digital mailroom, invoice processing and extracting information from claims documents, to name a few. Another example how Iron Mountain is working with customers to support their digital transformation is our recent partnership with a production and development company operating in the U.K.'s North Sea. We've undertaken a significant back scan of their legacy archive records to meet their regulatory obligations to the U.K. oil and gas authority in order to relinquish their license to operate on 230 wells they wish to abandon. They're required to digitally upload all information assets to the National Data Repository. Using the InSight platform, we were able to solve the problem of having enormous amounts of data to sift whilst consolidating physical and digital data in disconnected information silos and resulting in millions of dollars of annual savings. Moving back above ground, recently in our Crozier Fine Arts division, we won a contract to provide comprehensive storage solutions and logistical support for the museum operations of the Academy Museum of Motion Pictures. We were excited and proud that based upon a foundation of long-term partnership and trust built up through many years of support from Iron Mountain's Entertainment Services division, they came to us to meet their evolving needs where Crozier services were an ideal match. Now turning to wins in our data center business. Recall that our bookings target for the year was 30 megawatts. We are pleased to have finished the year with nearly 49 megawatts of leases signed with over 27 megawatts of leases in the fourth quarter alone. This includes the new 20-megawatt lease in our Manassas, Virginia data center announced in December. This lease is expected to commence in phases from mid-2022 through mid-2023. We continue to see strong demand for comprehensive data center solutions from our existing customer base. This lease is indicative of our ability to meet that demand and reflects our commitment to strategically partnering with our customers to meet their individual requirements. Based on current design plans, we now expect that the VA2 facility to support 36 megawatts, up from 30 megawatts previously. With these changes and other additions to our portfolio, our total capacity is now in excess of 600 megawatts. Finally, we continue to be recognized for our leadership around ESG. This has been an important focus for us for many years, having produced annual sustainability reports outlining our commitments and progress since 2013. Some of our past recognitions have included: 100% of our data center power is generated by renewables; we were the launch provider of Green Power Pass, which allows our customers to report reductions in their carbon footprint when using our data centers; we were a co-signer with Google to expand our commitment to green-powered data centers to 24/7 carbon-free electricity; and we were one of the original signatories of the UN Global Compact on Sustainability back in 2016. More recently, we announced, in addition to their RE100 program, we have joined the Climate Group's EV100 initiative and reached a key milestone in electrifying our global vehicle fleet in line to reach our climate pledge commitment to achieve net zero carbon emissions by 2040. We have made real progress towards our carbon reduction goals. Since establishing our first science-based targets, we have reduced absolute greenhouse gas emissions by over 60% from our 2016 baseline whilst growing the business. We believe that our commercial growth and ESG initiatives make us stand out, and we suspect they were a major factor of our being ranked amongst the top 100 on Newsweek's list of America's most responsible companies. In summary, our future ahead is bright. We are building on our growth momentum as we expand our portfolio to meet our customers' evolving needs. And with our strong footprint, powerful portfolio and deep customer relationships, we are confident that we can continue this momentum as we ascend our mountain range and provide another set of performance records this year and the years ahead. With that, I'll turn the call over to Barry.

[Barry Hytinen, EVP & CFO]

Thanks, Bill, and thank you for joining us to discuss our results. In the fourth quarter, our team delivered strong performance, exceeding the expectations we provided on our last call. Before I dive into our results, I would like to take a moment to thank our dedicated Mountaineers for their outstanding performance and continued commitment to Iron Mountain. On a reported basis, revenue of $1.16 billion grew 9.4% year-on-year with total organic revenue up 8.5%. Revenue was $10 million ahead of the high end of the expectations we shared previously despite the U.S. dollar strengthening and being more of a headwind in the quarter. As an example of the momentum we are building, on a 2-year basis, our total organic revenue growth continued to accelerate in the quarter. Organic storage revenue grew 3.6% in the quarter, reflecting our strong pricing and data center commencements. Organic service revenue increased $65 million or 17.6% driven by continued strong growth in digital solutions and asset life cycle management. As revenue associated with our traditional transportation services were still down nearly 10% from pre-pandemic levels, we are even more pleased with this performance. Adjusted EBITDA was $431 million, an increase of $56 million from last year. As a result of strong flow-through driven by pricing and productivity, fourth quarter EBITDA exceeded the high end of our expectations by $6 million despite additional FX headwind. AFFO was $267 million or $0.92 on a per share basis, up $76 million and $0.26, respectively, from the fourth quarter of last year. In both cases, we significantly exceeded the high end of our expectations. Now let me briefly summarize the full year. Revenue of $4.5 billion increased 8% on a reported basis and over 6% on an organic constant currency basis. Adjusted EBITDA increased 11% year-on-year to $1.635 billion, an increase of $159 million year-on-year. We achieved the high end of our full year guidance. AFFO increased 14% to $1.01 billion or $3.48 on a per share basis, in both cases, exceeding our full year guidance ranges. Now let's turn to segment performance. In the fourth quarter, our Global RIM business delivered revenue of $1.02 billion, an increase of $76 million from last year or 8% on a reported basis from last year. On an organic basis, revenue increased 7%. Constant currency storage rental revenue growth of 4.2% or 2.5% on an organic basis reflects our focus on revenue management and solid volume trends. With positive volume trends and growth in our adjacent and consumer businesses, total physical volume was in line with our expectations for the quarter and the year. Global RIM adjusted EBITDA was $453 million, an increase of $49 million year-on-year. Adjusted EBITDA margin was up 160 basis points year-on-year, reflecting continued pricing strength and productivity. Turning to our global data center business. Our team booked 27 megawatts in the quarter. For the full year, bookings came in at 49 megawatts, significantly exceeding our full year guidance of 30 megawatts. We are very pleased with the team's leasing performance. To give some historical context, we leased 10 megawatts in 2018, 17 megawatts in 2019 and excluding our joint venture in Frankfurt, 31 megawatts in 2020. In terms of revenue, as we projected, fourth quarter growth accelerated to 25% year-over-year. Storage revenue grew 18% year-on-year, and service revenue was up sharply and in line with our projections. As a reminder, service revenue in the second half includes fit-out services we are providing to our Frankfurt joint venture. We expect that activity will be completed early in 2022. Even with the large service component, EBITDA margin increased sequentially with strong commencements. We are pleased with our data center performance, and our pipeline has continued to strengthen, both in terms of hyperscale and retail colocation. In 2022, we expect to lease 50 megawatts, which would represent 28% annual bookings growth. We project full year data center revenue growth in a range of high teens percent year-on-year with even higher growth rates on storage. With our strong prior year bookings and recent commencements, we have very good visibility to revenue. With pricing and improved mix, we expect data center margin for the full year to be up modestly compared to 2021. Turning to Project Summit. This quarter, the team delivered $30 million of incremental year-on-year adjusted EBITDA benefit. For the full year, as compared to 2020, Summit delivered $160 million of benefits. We continue to expect another $50 million of year-on-year benefit in 2022. Total capital expenditures were $219 million, of which $173 million was growth and $46 million was recurring. For the full year, total capital expenditures were $606 million, of which $309 million was growth capital related to data center development. In 2022, we expect total capital expenditures to be approximately $850 million. We are projecting approximately $700 million of growth CapEx, with data center development representing about 3/4 of that. We expect recurring CapEx to approach $155 million. Turning to capital recycling. As we have said before, we view the market for industrial assets as highly attractive as a means to supplement our growth capital. With that backdrop, in the fourth quarter, we upsized our recycling program and generated approximately $63 million of proceeds, bringing the full year to $278 million. Turning to the balance sheet. We ended the quarter with net lease adjusted leverage of 5.3x, in line with our projection and modestly improved compared to last quarter. As we have said before, we are committed to our long-term leverage range of 4.5 to 5.5x. For 2022, with the closing of the ITRenew transaction, we expect leverage to tick up modestly in the first quarter. We expect to exit the year at levels within our target range. In December, thanks to strong support from the fixed income community, our team successfully issued 10-year notes to support the ITRenew transaction. From a cash perspective, I would like to recognize our team for driving strong collections, improving our days sales outstanding and resulting in year-on-year improvement in our cash cycle. The collective performance has resulted in a 5-day improvement from pre-pandemic levels. With our strong financial position, our Board of Directors declared our quarterly dividend of $0.62 per share to be paid in early April. Also, as you may have seen, we are pleased to announce an important strategic milestone related to our unconsolidated joint venture focused on the fast-growing valet consumer storage market. MakeSpace recently completed a merger with Clutter, a similarly sized business also focused on valet storage. We expect the combination will result in considerable benefits, including a focus on a single brand, Clutter, broader reach and natural synergies. Iron Mountain will continue to provide storage services to the business, and our ownership interest will be nearly 25% of the combined entity. We are excited about the opportunities that lie ahead and expect continued benefit to our total physical volume. Now turning to our outlook. For the full year 2022, we currently expect revenue of $5.125 billion to $5.275 billion. We expect adjusted EBITDA to be in a range of $1.8 billion to $1.85 billion. At the midpoint, our guidance represents revenue growth of 16% and EBITDA growth of 12%. We expect AFFO to be in the range of $1.085 billion to $1.12 billion, which represents 9% year-on-year growth at the midpoint point. We expect AFFO per share to be in a range of $3.70 to $3.82. Our guidance assumes organic global physical volume will be consistent to slightly positive year-on-year. We expect revenue management will be a significant benefit, and I will note that the majority of those actions have already been taken as we speak to you today. And nearly all of them will be in place by the end of the quarter. As Bill mentioned, we are planning for a continuation in the strong trends we are seeing in digital solutions and our organic ALM business, combined with a slight recovery in our service activity across the year. Our guidance also assumes the contribution from our acquisition of ITRenew. As we closed the deal at the end of January, we are including 11 months of the results in our guidance. Our guidance includes approximately $450 million of revenue from ITRenew. We estimate the stronger U.S. dollar will result in foreign exchange headwinds to revenue of approximately $60 million year-on-year with the vast majority of that in the first half. In terms of EBITDA, our expectations include the benefit from revenue management and top line growth, the contribution from ITRenew as well as Project Summit benefits. Our EBITDA guidance also assumes a prudent outlook for inflation, rent from our recent sale leaseback transactions, increased innovation spend, the stronger U.S. dollar and the divestiture of the software escrow business, which we sold in late second quarter. With the ongoing volatilities in the market associated with the pandemic as well as the closing of the ITRenew transaction during the quarter, we felt it would be helpful to share our expectations for the first quarter. We expect total revenue to be in excess of $1.2 billion. We expect EBITDA to be approximately $425 million. We expect AFFO to be in excess of $250 million. In summary, our team is executing well. Our pipeline continues to expand, and momentum continues to build across our business. Our addressable market has grown significantly over the last several years, and we expect this to continue to expand. We feel confident in our ability to deliver higher levels of growth. Thanks to our team's collective efforts, together with our strong customer relationships, brand position and investments in innovation, we feel very well positioned as we enter 2022. And with that, operator, please open the line for Q&A.

[Operator]

[Operator Instructions]. Our first question today comes from Sheila McGrath from Evercore.

[Sheila McGrath, Evercore ISI]

The revenue growth that you're targeting in 2022 is very strong. I was wondering if you could give us a little more detail on the drivers of that growth. And if it's more momentum in services, how should we think about the EBITDA margin in 2022 as compared to 2021?

[William Meaney, President, CEO & Director]

Thanks for the question. So I think I'll talk about, first of all, where the revenue growth comes. And then I'll let Barry comment a little bit on the EBITDA margin, the impact that has. So I think we continue to see 2022 to have the same kind of momentum that we had in 2021. And the momentum that you saw in 2021 was driven by 2 things. First of all, a very solid foundation from our GRO business across the globe. So that continues to drive low single-digit growth and highly profitable. And then a continued acceleration in terms of our new areas, which are everything that includes data center, the digitization platform, which uses the artificial intelligence, machine learning InSight platform as well as the acceleration in asset life cycle management. So we still see that to be strong double-digit growth in those new service areas. So some of those have a different margin associated with it, but that's where we see the fuel of the revenue growth. And maybe, Barry, you want to comment in terms of what that does in terms of EBITDA progression.

[Barry Hytinen, EVP & CFO]

Thanks for the question. So we feel great about where we're positioned as it relates to profits and revenue and really see the business building quite well. The things I would call out to add to Bill's comments are you're right, there's a fair bit of services. On a total EBITDA margin, you will see the margin mix down, but that's the contribution of ITRenew. I'd say for planning purposes, if I were you, what we're using in our model is that business, as you would have seen from prior disclosures, is kind of a mid- to high-teens EBITDA margin. But when you get underneath that and back that out, you'd see that our core Iron Mountain margins are actually continuing to improve, and that's driven by the fact that we have very strong pricing contribution this year. From a planning posture, we kind of assumed 2 to 3 points. But as you probably saw in the most recent results, we're seeing the upper ends of that and probably more going forward, so feel very good about our revenue management program. Our data center business is doing phenomenally well, as you've seen, and that is a margin benefit as we move forward. As I mentioned in the prepared remarks, we expect our data center profitability to be up modestly year-to-year as a lot of revenue growth coming out of our storage side of the data center business. Of course, our Summit contributions continue to roll in. We'll have $50 million or more from Summit, thanks to the team's very strong contributions. You would have noticed from seeing our most recent results that our services gross margins and EBITDA margins are at very high levels. You can think like up 500, 600 basis points year-on-year in the fourth quarter. I expect that we will continue to see very strong service margin out of the core going forward. So we feel very well positioned, Sheila, and I appreciate the question.

[Operator]

Our next question comes from Shlomo Rosenbaum from Stifel.

[Shlomo Rosenbaum, Stifel, Nicolaus & Company]

Barry, maybe I could just piggy back off the last comment on the services business and the services margin. Can you talk about what drove the gross margin improvement? You had very strong services revenue. Maybe you could talk about how much of that was maybe Frankfurt versus some services that might still be coming back versus just new wins that you've got. And then it's a pretty significant margin improvement sequentially as well. If you could talk about where it's coming from and particularly in the face of inflation and wage inflation and how you're managing that.

[Barry Hytinen, EVP & CFO]

Okay. Thanks, Shlomo. I appreciate that. So first thing I'll tell you is on -- since you mentioned Frankfurt is it's not coming from that because those are really almost -- think of those as sort of pass-through revenues on the services business. In fact, that's a hit to our margins. And that's one of the reasons why our data center margin has been a little bit more muted. But as we move through finishing up those services in early '22, that's one of the reasons we expect the margin to be up year-on-year as you'll see a lot more contribution from our storage and, therefore, likely less service revenue coming out of data center. That said, where it's coming from is the core. And as we've said for quite a few quarters now, Project Summit and just general productivity coming out of our operations has been very beneficial. You saw our gross margin to be up, I think it's 550 basis points year-on-year. It was up 400 basis points sequentially. And that's just very strong operating leverage. I would say there's some incremental mix there. Bill spoke a lot about our digital solutions and our asset life cycle management. That is also contributing very nicely. There's some revenue management on our services line as well. So in terms of -- you mentioned about inflation. As I said, at this time last year, I will reiterate, we've been what I think is prudent with our outlook. We have embedded in our guidance a healthy amount of inflation more than we're currently seeing similar posture to what we took last year. And while there is certainly a level of inflation, as we all know, out in the economy, I would look at our more fixed structure and say that together with our revenue management program, we have the benefit of working to drive productivity and seeing a considerable amount of our pricing fall to the bottom line. So we feel very good about where we are positioned currently, Shlomo, with respect to services and the guide in total.

[William Meaney, President, CEO & Director]

Yes. The only thing I would add, Shlomo, because you know the business really well is the other thing -- the uptick that you see in the services, we're doing, quite frankly, more value-added. I mean, more and more of our digitization services have an ML or machine learning component of it. I mentioned auto classification and some of the work that we're doing. It's not just simple scanning. So there's an analytical piece to that as well, which obviously has a higher margin. And we see almost -- I wouldn't say all, but now it's almost all the new projects we're selling have some component of that, which just naturally attract higher margin. And as Barry said, you've heard us talk about inflation for a long time is that, well, inflation is not good for people on the street, and so I'm not trying to be blase about it for our business because it's such a high-margin business that the pricing action generally is expansion. It has an expansive effect on our margins because our margins were relatively high-margin business. So it's -- yes, we feel good about the progression that we're getting.

[Operator]

Our next question comes from Kevin McVeigh from Credit Suisse.

[Kevin McVeigh, Crédit Suisse]

Congratulations on ITRenew and our thoughts with your Ukrainian employees as well. Barry, if you said this -- I missed it, but can you help us because obviously a sizable step-up in CapEx, which feels like that's around data center, but how should we think about free cash flow in 2022?

[Barry Hytinen, EVP & CFO]

Yes. Thanks, Kevin. Appreciate the question. So first up on CapEx. Our total CapEx guide is $850 million. Growth capital is $700 million of that. And you are right, as you point out that the data center is getting basically all of that increase. So we are planning our data center development CapEx at $550 million. That's up from about $300 million in 2021. The thing about that is, of course, as you've seen from the strong leasing we've had and the very strong pipeline we have continuing to build that -- and it's a necessity in the sense because we are -- the team is continuing to win great deals around the world. So we're very pleased with the way the data center team is planning. From a free cash flow standpoint, while the CapEx will be up, I'll note that all of our Summit costs are behind us now, Kevin. So there's -- if you think about last year, we had over $200 million of costs to achieve Summit, which go away this year. Have a little bit more cash taxes, of course, with the ITRenew services business and having some more services revenue in our business. And -- but as you look at it, as you get through your model, I think you'll find that there's considerable growth in free cash flow before growth in the model. So I appreciate the question. We look forward to showing you the strength in the cash flow as we move forward.

[Operator]

Our next question comes from the line of George Tong from Goldman Sachs.

[George Tong, Goldman Sachs Group]

The secure IT asset disposition industry has typically grown in the strong double digits. Can you elaborate on how quickly you expect your new ALM business to grow and what key drivers you're leaning on to support that growth?

[William Meaney, President, CEO & Director]

So thanks, George, for the question. So as you noticed, we've been getting kind of strong double-digit, roughly, say, 20%. We had a couple of quarters where it was up 30%, kind of in that high teens, kind of low 20s in terms of growth rate going forward, and we continue to see that kind of evolution. We're really impressed by how quickly the book is building, quite frankly, because the ITRenew business had very strong exposure to the hyperscale community, which has direct or synergistic effects with our data center team. So we're finding we're already getting additional traction even beyond what ITRenew is bringing by the discussions that we're having between our data team -- data center team and the ITRenew team that came across talking to the hyperscalers. But then on the other side, to your point, we're -- if you think about our traditional customers, whether it's financial services, insurance or general industry, is those folks that the way they dispose of their IT assets, both from a security standpoint as well as making sure that they disposed in a way that's environmentally sensitive, is becoming more and more important. So we continue to see now with an expanded platform to have similar growth -- organic growth rates that we did this past year, which I said we're, let's say, upper teens to touching into the 20% category. And we'll update you as we go through the progress, but we're really happy in terms of already the synergies that we're getting from that, putting the 2 teams together.

[Operator]

Our next question comes from Eric Luebchow from Wells Fargo.

[Eric Luebchow, Wells Fargo Securities]

So I wanted to touch on the data center business. Barry, I think you said that the target leasing outlook is 50 megawatts for this year. So that probably means you had pretty good visibility and some larger hyperscale wins. So maybe you could talk about or maybe disaggregate that outlook into larger hyperscale versus more traditional enterprise sales. And then on the return side, any changes in the return targets on the higher capital spend this year based on any supply chain or inflationary impacts in the data center space?

[William Meaney, President, CEO & Director]

So let me -- I'll start with the leasing activity, and then Barry can comment further. But I think the -- you're right, I mean, that with the hyperscale folks, you do have more visibility. I mean, I think you can expect that the retail side or the colo side would be -- continue to be kind of in the teens of megawatts a year. So we like that business. We continue to see the same kind of deal flow or pipeline coming in on that side. And then the thing we're also very excited about is that a few years ago, we were relatively a new entrant in the hyperscale. And clearly, if you look at the results this past year, almost hitting 50 megawatts, and this year, we're guiding to another 50 megawatts. We're making really, really good progress. So we're starting to look more like, what I would say, a typical industry player in the data center space where you're getting like kind of 60% to 70% of the volume, maybe even a little bit more from hyperscale and the rest from colocation and retail.

[Barry Hytinen, EVP & CFO]

The only thing I would add is that while we see some level -- as you've heard from other industry participants, some level of inflation in cost, we also see very good pricing. And so we expect mark-to-market to be flat to up, if not better than that. We are seeing good pricing in terms of new deals. And we feel very well positioned. And I'm pleased to be able to say we expect the margin to be rising year-on-year. So thanks for the question.

[Operator]

[Operator Instructions]. Our next question comes from the line of Andrew Steinerman from JPMorgan.

[Andrew Steinerman, JPMorgan Chase & Co.]

Barry, I was hoping you could give us an organic constant currency revenue growth for the '22 guide. I definitely heard you that ITRenew is $450 million of revs and FX is $60 million headwind. I assume this is still a little bit more revenue from other acquisitions that you did as well. And so if you could just kind of total it out for us and give us organic revenue growth for the '22 guide, that would be helpful.

[Barry Hytinen, EVP & CFO]

Yes. Thanks, Andrew. I'll disaggregate it for you. So you would be working with $450 million for ITRenew. The net of all of our other M&A activity in 2021 is about $25 million of benefit year-on-year. So not a lot. And you might be -- might have been thinking that, that would be higher, and I'll just remind folks that we did sell our software escrow business back in June. So that's a headwind to revenue, and then we bought a small data center in Frankfurt and we also did the small acquisition in the -- relatively small acquisition in the Mid East. So the net of all that is about $25 million year-on-year. And it's kind of first quarter, it's about $5 million, and it's about $5 million in the second quarter and with the balance kind of in the third. From an EBITDA standpoint, because as we talked about before that, that software escrow business was a high profit margin business, you're only looking for about $5 million of EBITDA from all of that incremental revenue. And then the FX is about $60 million of a headwind, that's as of yesterday. So -- and that's about $25 million or so of EBITDA headwind. So if you work through that, that would get you to your organic. It's very strong, by the way. And it's benefited by the fact that we have very strong visibility on pricing. And the services side that Bill mentioned, we're growing strength to strength with our digital solutions probably being up at least 20% on top of 20% and the data center business and the storage area there being up in the 20s. So we feel very well positioned. Thank you, Andrew.

[Operator]

Our next question is a follow-up question from Sheila McGrath from Evercore.

[Sheila McGrath, Evercore ISI]

Yes. Bill, you called out a number of wins in your prepared remarks with government contracts and other customers. I was wondering if you can help us understand if the legacy traditional storage offering was part of the mix with any of those contracts. Or just what were the different components of Iron Mountain's business offering that helped you win that business?

[William Meaney, President, CEO & Director]

Thank you, Sheila, for the question. And actually, I just got back from a trip to D.C. a couple of weeks ago. So the -- I would say it's kind of yes and no. Yes, in terms of the brand, right, because we have been a very trusted partner operating government-approved facilities for their physical storage for many years, as you know. And I think that brand recognition with the U.S. federal government has been extremely strong. That being said, the recent contracts I've been highlighting have been us actually providing digital service, auto classification analytics around some of these documents, also taking documents that are already in digital form that we're not actually storing on behalf of the federal government. So more and more going forward is that we're providing purely digital services. But I wouldn't underestimate the halo effect of the understanding of the brand and the trust and the security associated with working with Iron Mountain.

[Operator]

Our next question is a follow-up question from Shlomo Rosenbaum from Stifel.

[Shlomo Rosenbaum, Stifel, Nicolaus & Company]

Bill, I think you've missed it if I didn't ask you a question about the RIM volume changes quarter-to-quarter. So I want to bring that up a little. There's a slight decline, and it looks like there was also 30 basis points of sequential decline in records retention. Were there any strong document destruction projects in the quarter? Or how should I be thinking about that in terms of just the movements quarter between quarter?

[William Meaney, President, CEO & Director]

So first of all, I guess -- I thought you were asleep this morning, so I notice someone had taken your voice. No. So first of all, we're really pleased with the progression in terms of our records management business because if you notice that actually, sequentially, it's actually getting stronger, not weaker. And as I said, the slight negative drag on the records management business is really a second derivative effect. And as that kind of wears through, you start seeing a stabilization. And indeed, we're actually seeing an improvement in the trends in the records management. And in terms of total volume, physical storage volume, is our other areas of storage and adjacent business areas and consumer more than offset those flattening trends. I would say -- the only other thing I would say is that, yes, you're right, and you've been watching this business for a long time. You always see a little bit of an uptick in destructions in the fourth quarter because, generally, it's kind of like people do their spring housecleaning in our business as they kind of do their fall housekeeping. So we do see some -- just generally. But that's like every year. I didn't -- we didn't see more of that or less of that this year. And Barry, you might want to talk more specifically about the trend.

[Barry Hytinen, EVP & CFO]

Yes. The only thing I would add to that, Shlomo, and thanks again for the question, is I usually look at the records management retention rate on a year-over-year basis as opposed to sequentially because of the points that Bill was just making. And if you look at that versus the year-end 2020 number, it's actually up 40 basis points. So we feel very good about where the record retention rate finished the year. And the only other thing I guess I would add is if you look at the storage rental revenue growth on an organic basis, it was up 3.6% in the quarter. And that is -- 2/3 of that is coming out of our core and 1/3 of that is coming up from data center in terms of that improvement in terms of organic revenue growth. And when you look -- disaggregate the 2/3 coming out of our core, it's actually both pricing as well as improved volume trends because, as you know, the organic volume on a year -- full year basis was actually up. So we feel very good about where things are trending. We expect our volume to be consistent to up again in 2022. Thank you for the question.

[Operator]

Our next question is a follow-up from Eric Luebchow from Wells Fargo.

[Eric Luebchow, Wells Fargo Securities]

So I just wanted to touch on the capital allocation outlook for this year. So Barry, you said that leverage should be within the range by year-end, but just wanted to know what was embedded in that. Do you expect to do any incremental acquisitions? Should we expect any additional asset sales as a funding mechanism? And then based on the strong AFFO per share outlook, you'll be in the mid-60s from a payout ratio. At what point would you consider starting to grow the dividend again?

[Barry Hytinen, EVP & CFO]

Okay. Thanks, Eric. A few points in there. Let me answer those. We aren't embedding any additional M&A in our guidance for this year. So we shouldn't be planning for that. As we said before, we're very committed to our leverage range, and we'll get back into that leverage range and the year within it. In terms of additional things to put in the model, I would say I would be planning for something like $150 million of capital recycling. As I mentioned in the prepared remarks, the cap rates there are phenomenal. We've seen cap rates even sub-4. So it's very, very good environment out there. And as a reminder, we're generally doing sale leaseback transactions that are very favorable, in our opinion, because we essentially have ownership-like interest in the building while monetizing it at these great cap rates. And that enables us to really just be very strategic about the capital allocation plan. In terms of your question about AFFO payout ratio, you're right, in our guidance, we'd be just above the mid-60s by the end of the year. And we've said repeatedly that our target is for that to be kind of the low to mid-60s over the long term. And at that point, we'd be looking at a dividend increase. So in fact, we'd be almost approaching sort of the REIT minimum under certain scenarios under that -- at that level. And therefore, you probably would be expecting dividends through in the future to be rising with the same rate as AFFO per share.

[Operator]

This concludes our question-and-answer session and the Iron Mountain Fourth Quarter 2021 Earnings Conference Call. Thank you for attending today's presentation. You may now disconnect.