Iron Mountain Inc

NYSE:IRM

Earnings Call Analysis

Robust Revenue Growth and Record EBITDA

In Q4, the company achieved a revenue of $1.42 billion, marking 8.7% growth, and saw a record $525 million adjusted EBITDA, up 11%. Full-year revenue reached $5.5 billion, with adjusted EBITDA at $2 billion and AFFO at $1.2 billion. Big wins included contracts with a U.S. health system, a Hungarian industrial gas supplier, and a Swiss asset management company. Data center demand remains high, exemplified by a major bank contract. The ALM business integrated well with customer platforms, and the Regency Technologies acquisition strengthens this segment. Looking forward, the company projects 2024 revenue between $6 billion to $6.15 billion (11% growth at the midpoint), adjusted EBITDA between $2.175 billion to $2.225 billion (12% growth), and AFFO between $1.3 billion to $1.335 billion (9% growth), with AFFO per share at $4.39 to $4.51.

Record-Setting Performance across Key Financial Metrics

The company continued its trajectory of record performance, with revenue reaching $5.5 billion, marking a 7% increase on a reported basis and an 8% uplift when considering constant currency. This has been partly fueled by a pronounced 32% year-on-year revenue growth in the data center division, an area that's becoming an increasingly important growth driver for the company. The company's Adjusted EBITDA followed suit, growing by 7% to $1.96 billion, while AFFO rose over 5% to $1.2 billion or $4.12 on a per share basis.

Guidance Reflects Continued Growth

Looking forward, the company anticipates revenue for the year to be in the range of $6 billion to $6.15 billion, suggesting a robust midpoint growth of approximately 11%. Adjusted EBITDA and AFFO are expected to grow similarly, at 12% and 9% respectively at the midpoint. To break this down further, AFFO per share is projected to be between $4.39 to $4.51, denoting an 8% growth at the midpoint. These projections are inclusive of headwinds from foreign exchange rates, which are estimated to impact revenue by $25 million and both EBITDA and AFFO by approximately $10 million.

Data Center Business as a Growth Pillar

The company's data center segment showed substantial growth with a 32% increase in revenue on a reported basis and a 30% increase on a constant currency basis. Notably, data center storage revenue alone surged by 34%, propelled by the introduction of new developments. EBITDA margin improved by 80 basis points sequentially, with returns expanding by 100 to 150 basis points, which augurs well for long-term profitability. The company has also completed 4 megawatts of new and expansion leasing in the fourth quarter, exceeding expectations, and plans to lease 100 megawatts for 2024 coupled with strong pricing trends.

Robust Capital Management and Shareholder Returns

A disciplined approach to capital management has left the company with net lease adjusted leverage of 5.1x, the lowest in a decade. Keeping pace with this conservative stance, the leverage is expected to remain stable through 2024. The company declared a quarterly dividend of $0.65 per share, with a payout ratio of 62%, ideally positioned within their target range. These numbers indicate the company's ability to generate strong cash flow while supporting sustainable dividend payments.

AFFO Calculation Update and Projections

The company has revised its AFFO definition, now excluding the amortization of capitalized commissions, to better align with industry practices and enhance transparency for investors. This update preceded the announcement of AFFO being $328 million or $1.11 per share, and a first-quarter projection suggesting an AFFO of approximately $310 million and AFFO per share of approximately $1.05.

Earnings Call Transcript 2023-Q4

[Operator]

Good morning, and welcome to the Iron Mountain Fourth Quarter 2023 Earnings Conference Call.

[Operator Instructions]

Please note, today's 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, executive]

Thanks, Rocco. Good morning, and welcome to our fourth quarter 2023 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 Lee, President and Chief Executive Officer; and Barry Hytinen, 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, executive]

Thank you, Gillian, and thank you all for joining us today. We are pleased to report another outstanding year for Iron Mountain. We achieved record revenue and adjusted EBITDA in both the fourth quarter and the full year. Our record results are a testament to the devotion and hard work of our team and our resilient and growing business model.

In the fourth quarter, we achieved revenue of $1.42 billion, yielding 8.7% total organic revenue growth and record adjusted EBITDA of $525 million, up 11%. For the full year, we delivered record results across the board, revenue of $5.5 billion, adjusted EBITDA of $2 billion and AFFO of $1.2 billion.

I'll now discuss some ways in which we have been working with our customers, which has led to this growth. Let's begin with our records management business. A win of note was with one of the largest health systems in the U.S., awarding Iron Mountain a contract to significantly enhance its management of records across 140 hospitals and 2,600 care sites. Building on a strong long-term relationship with the customer, we are now implementing a rigorous compliance program that will reduce the cost and meet records retention requirements, leading to a more efficient service. This win is particularly representative of our focus on cross-selling through Matterhorn as this customer is utilizing a variety of our products and services across our business lines, including digital services, along with traditional records management in shredding.

Another win showing Iron Mountain's cross-selling power occurred with a Hungarian industrial gas supplier. We are helping this customer to create space at its facilities by storing and then digitizing its records. We are also exploring opportunities to deploy our digital mailroom solution as our partnerships develop thereby expanding this relationship across our product suite. The last win to highlight in our records management business is a new contract with the Swiss division of a British multinational asset management company to relocate its physical records to one site and digitize them over time. In addition to freeing up physical space, our solution will ensure our customers' records are stored safely and compliantly and enables more efficient access to the digitized information.

Moving now to some wins in our Digital Solutions business, we won a contract from a large aerospace customer to deploy our Insight platform to manage and translate invoices from 22 languages into English. The customer chose our solution ahead of competing proposals, thanks to Insight's embedded AI engine, which gives it the ability to not only store but to automatically classify a range of documents in a highly secure manner.

Another win this quarter was with a Canadian government agency. This agency which manages workplace compensation claims has been a customer of our records management services for more than 15 years. Our successful delivery of digital mailroom and imaging on-demand solutions during the COVID pandemic has led to a new master service agreement for digitizing services worth more than $10 million over the contract length.

We will preserve scan around 47,000 roles of microfilm to produce 240 million images on our Insight platform, helping the agency to process compensation claims faster than ever in delivering a solid recurring revenue stream to drive our growth. In Brazil, a major television network that has been a records management customer for almost 25 years, has asked us to manage the indexing and digitization of 50,000 boxes of records stored at its locations in Iron Mountain's facilities in the country. Our Insight platform is at the heart of our solution, enabling the customer to manage requests to digitize from all parts of the business in one place effectively and efficiently.

Finally, the Hong Kong division of a major multinational bank has chosen Iron Mountain to be its partner in a major transformation of its finance operations. This customer manages a large volume of finance documents and has outsourced this work to Iron Mountain with a goal of streamlining the process of checking and scanning these files. We see the potential to scale the solution for the bank in other locations, including Singapore, India, the U.S., the United Kingdom and the United Arab Emirates.

Now let's turn to our data center business. We continue to be pleased with the growth trajectory of our data center business, which is only accelerated with the rapid adoption of AI-enabled services. We are pleased to have signed 124 megawatts well ahead of our initial plan for the year. We continue to see tremendous opportunity in serving both hyperscale and colocation customers and significant growth potential for our footprint.

An example in the quarter, we signed a 7-year agreement to provide capacity at our New Jersey data center for an automated trading technology company that is expanding in the U.S. Our reputation for compliance and sustainability were key to winning this business, and it was important for our customer to receive 100% traceable and verifiable energy and carbon records in support of its sustainability goals. Also in the U.S., we were pleased to win a data center deal with a secure cloud storage company that is growing rapidly across North America.

Our reliability and close relationship since first doing business with this customer a year ago helped to seal this new deal as did the strategic location of our facility in Northern Virginia. Moving to India. We continue to see strong demand for capacity. We closed a data center contract with a major bank in the country in the fourth quarter. This customer chose our Mumbai facility specifically in Iron Mountain more broadly for our ability to provide a secure data center for its large domestic branch platform close to its headquarters.

Turning to our asset life cycle management business, or ALM, we secured a significant contract with a global financial services company. Our ability to integrate our secure ALM services with the customer's existing business management platform was critical and has enabled them to streamline how they order, complete and report on their IT asset disposition activities. Our solution was an excellent demonstration of how deeply we understand the needs of our customers, especially in the highly regulated world of financial services.

Staying with ALM business. In the quarter, we won a contract with a U.S. vehicle insurance company that has been an existing customer of ours for many years. Having shifted its employees to a remote working model, our customer needed to partner with the capacity to retrieve over 37,000 devices from more than 240 locations nationwide then process, refurbish and return them for distribution. Our solution provides our customer with better visibility of its IT assets and enables them to manage this activity more efficiently. I should also highlight the synergy between our ALM and data center business when it comes to data center renewal and decommissioning.

We are now in a position to not only provide colocation and cloud migration services, but we can also securely and responsibly dispose of obsolete IT equipment. An example of such an opportunity in this quarter was a major win with one of the world's leading producers of business process management software. We managed the secure decommissioning of over 40 data centers globally, sanitized the IT assets and remarketed them to deliver a significant return and value.

Also in the quarter, we were awarded a contract by one of the oldest financial institutions in the U.S. for a similar data center decommissioning project. Both wins demonstrate that Iron Mountain is uniquely positioned to minimize risk and maximize savings as a single-source partner for these activities.

Finally, let me take a moment to highlight our acquisition of Regency Technologies. Regency's team makes a great addition to the leadership of our rapidly growing ALM business and gives us additional capabilities to serve this fast-growing sector at the heart of the circular economy.

Furthermore, this acquisition, together with the momentum we have been building in ALM through the strengthening of component pricing and cross-selling sets us up well for continued success.

To conclude, I would like to thank our team for their resilience, hard work and dedication as we continue our Matterhorn climb and continue to serve over 225,000 customers. We are thrilled to progress ahead of expectations, and it is due to the commitment of our mountaineers. As we look to 2024 and beyond, the momentum we have built will continue to drive the opportunities ahead with another year of double-digit top line growth expected.

Barry will speak in detail about our financial guidance for the year ahead. With that, I'll turn the call over to Barry.

[Barry Hytinen, executive]

Thanks, Bill, and thank you all for joining us today to discuss our fourth quarter and full year 2023 results and our outlook for 2024. Turning to our financials. In the fourth quarter, our team continued the trend of delivering record performance on all of our key financial metrics. On a reported basis, revenue of $1.42 billion grew 11% year-on-year or 10% on a constant currency basis, reflecting a new quarterly record. On an organic basis, total organic revenue grew 8.7%.

A key highlight in the quarter is our organic storage revenue, which grew 10.4% as a result of strong performance in both our records management and our data center businesses. Total service revenue increased 8% to $549 million. This was driven by global RIM at 10% on a reported basis and 9% on an organic basis. Project Matterhorn's focus on selling our entire range of products and services has driven these strong results and are a testament to our commercial team's efforts. Adjusted EBITDA was $525 million, a new record, up 11% on a reported basis and 10% year-on-year on a constant currency basis. Adjusted EBITDA margin was better than we projected at 37% and improved 100 basis points sequentially driven by strong mix and cost productivity across all of our businesses.

As we've stated in our earnings press release, effective in the fourth quarter of 2023, our AFFO definition has been updated to exclude amortization of capitalized commissions. In light of the growth of our data center business, we conducted a benchmarking analysis of other companies in the industry, and as such, have aligned our AFFO reporting accordingly, which provides investors better insight into the funds available to support the growth of our business.

AFFO was $328 million or $1.11 on a per share basis, up $29 million and $0.09, respectively, from the fourth quarter of last year. To allow for comparison to our guidance and consensus, we are reporting our prior methodology as well. On our previous calculation, AFFO was $317 million or $1.07 on a per share basis. This was $7 million better than our AFFO guidance and $0.02 better than our guidance on a per share basis.

Now let me briefly summarize the full year. Revenue of $5.5 billion increased 7% on a reported basis and 8% on a constant currency basis. Adjusted EBITDA increased 7% year-on-year to $1.96 billion, an increase of $135 million. AFFO increased over 5% to $1.2 billion or $4.12 on a per share basis. On our previous calculation, AFFO was $1.168 billion or $3.97 on a per share basis.

And now turning to segment performance for the quarter. Our global RIM business delivered revenue of $1.19 billion, an increase of $108 million from last year or 10% on a reported basis. On an organic constant currency basis, revenue increased 8.5%. Global RIM adjusted EBITDA was $534 million, an increase of $48 million year-on-year. Global RIM adjusted EBITDA margin was 44.7%, up 100 basis points sequentially, driven by strong services mix and productivity. Our data center business continues to grow and deliver strong performance. From a total revenue perspective, we delivered 32% year-on-year growth on a reported basis and 30% year-on-year growth on a constant currency basis. Our data center storage revenue grew 34% year-on-year or 32% on a constant currency basis, driven by new development coming online. Data center EBITDA was up approximately $10 million year-on-year, and EBITDA margin was up 80 basis points sequentially. Moreover, pricing trends have continued to be strong, and we have seen returns expanding 100 to 150 basis points in advance of higher interest rates.

Turning to new and expansion leasing. We completed 4 megawatts in the fourth quarter. For the full year, we leased 124 megawatts, exceeding the projection we provided on our last call. Nearly 100% of those leases resulted from cross-selling, which you know is a key initiative in our Project Matterhorn plan. Our pipeline is at record levels. We are expanding our relationships with key hyperscale clients and our team is executing well. So we are pleased to project new and expansion leasing of 100 megawatts for 2024. Incidentally that represents a 25% increase from our initial 2023 projection at this time last year.

Turning to our asset life cycle management business. In the fourth quarter, we delivered improved performance for both revenue and EBITDA, achieving the expectations we set on our last call. Our team drove strong operating productivity, and we saw component pricing beginning to trend up modestly on a sequential basis. Similar to data center, cross-selling activity has been particularly strong in our ALM business with nearly all deals coming in as a result of it.

We completed our acquisition of Regency Technologies early in January. This acquisition strengthens our ability to serve an expanding ALM customer base and broadens our capability in their category, especially in the enterprise segment. Regency brings robust remarketing and recycling capabilities to better serve our customers and help them achieve their environmental and data security goals.

We have long admired the leadership at Regency and are thrilled to welcome their entire organization to our team. Turning to capital. For the full year 2023, we invested $1.2 billion of growth and $140 million of recurring, consistent with the expectations we shared on our last call. For 2024, we are planning for capital expenditure to be approximately $1.35 billion of growth and approaching $150 million of recurring. Given our strong pre-lease activity, the vast majority of our growth capital will be dedicated to data center development.

Turning to the balance sheet. With strong adjusted EBITDA performance, we ended the quarter with net lease adjusted leverage of 5.1x and our leverage remains at its lowest level in a decade. For 2024, we expect to exit the year at similar levels to year-end 2023. Our Board of Directors declared our quarterly dividend of $0.65 per share to be paid in early April. And on a trailing 4-quarter basis, our payout ratio is now 62%, in line with our long-term target range of low to mid-60s percent.

Now let me provide an update on our progress as to the project Matterhorn growth objectives we shared at our Investor Day in September of 2022. You will recall that we introduced [ tighter ] targets for growth between the period 2021 through 2026 of approximately 10% for revenue, approximately 10% for adjusted EBITDA and approximately 8% for AFFO.

Two years into our Matterhorn journey, we are well on track, even ahead of those commitments, having achieved 13% annual revenue growth from 2021 to the end of 2023 on a constant currency basis. we have achieved 11% annual adjusted EBITDA growth and in excess of 10% annual AFFO growth. The dollar has been particularly strong over this period and despite this, we have been delivering on our commitments on a reported basis as well.

Now let me share our projections for the full year 2024. We expect total revenue to be within the range of $6 billion to $6.15 billion, which represents year-on-year growth of 11% at the midpoint. We expect adjusted EBITDA to be within the range of $2.175 billion to $2.225 billion, which represents year-on-year growth of 12% at the midpoint. We expect AFFO to be within the range of $1.3 billion to $1.335 billion, which represents year-on-year growth of 9% at the midpoint. And we expect AFFO per share for the full year to be $4.39 to $4.51 and this represents year-on-year growth of 8% at the midpoint.

In terms of foreign exchange, we are using a forecast based on those of several major financial institutions compared to 2023, this results in a full year FX headwind of $25 million of revenue and approximately $10 million to EBITDA and AFFO.

Turning to the first quarter. We expect revenue of approximately $1.45 billion, adjusted EBITDA in excess of $510 million and AFFO of approximately $310 million and AFFO per share of approximately $1.05.

To conclude, we are pleased to have delivered a strong year in 2023. I am confident that we will build on our momentum and continue to drive strong growth in 2024. We are well on track to achieve our Project Matterhorn goals. I'd like to take this opportunity to express my thanks to our entire team for delivering a successful year and their continued dedication to serving our clients.

And with that, operator, will you please open the line for Q&A?

[Operator]

We will now begin the question-and-answer session. [Operator Instructions] And today's first question comes from George Tong with Goldman Sachs.

[Keen Fai Tong, analyst]

In the ALM business, you mentioned component prices trended up quarter-over-quarter. Can you elaborate on how ALM volumes and component prices performed on a year-over-year basis in the quarter? And what assumptions for component prices you're factoring into your 2024 guidance?

[William Meaney, executive]

Thanks for the question. The -- so let me kind of answer the kind of the higher level on the strategic where we see the trends going. And then Barry can go to the next level and give you a little bit more specifics in terms of the numbers. But on the -- to your macro point in terms of the trends on the component prices, it's very much in line with what you see in terms of the analyst reports right now, and you can see that coming through in the fourth quarter and building into Q1.

So we expect the component prices to continue to strengthen during the course of the year. And you can see that broadly in the semiconductor in memory business for the original manufacturers as well. So we're very much benefiting from the same trends you're seeing in the industry for the OEMs as well as for the reused or the recycled market.

In terms of volume, actually, throughout the year, as we -- we've been reporting in the last few quarters, is we continue to see increase in volume. Although when that turned into revenue, it was muted because of the low component prices that we started off the year and kind of worked through the rest of the year. But the trends that we saw in -- that showed up in Q4 continue. We continue to see building in Q1, and we are very much tracking what you're seeing in the broader OEM market for memory disks and CPUs, GPUs. Barry?

[Barry Hytinen, executive]

Yes. Thank you for that question. I'll give you a little bit more detail on how we're thinking about ALM in total. So in 2023, in light of those trends that Bill was mentioning, we delivered $177 million revenue from ALM. Now for our guidance at the midpoint, we're assuming about $355 million of total revenue for ALM, I'll note that Regency brings in $115 million right there. So it's sort of $240 million against the 177 million.

I think if you look at what we did in the fourth quarter, what you'll find is just at the fourth quarter run rate, we'd be in excess of $200 million, $205 million to $206 million, and that's assuming no improvement from all the enterprise bookings we've been doing over the last half, as Bill was referring to as well as and what will likely be a continued improving environment on component pricing. So whereas last year, we were faced with really significant challenges of component pricing continuing to decline earlier in the year and then staying at those trough levels. We have assumed a modest amount of pricing benefit on component pricing as we move through the year. Really, we didn't assume much of any change from the fourth quarter to the first quarter, that may prove conservative. And then we assumed a fairly slow ramp, slower than what all the industry prognostications are for component pricing.

So when I look at the incremental increase we have in the guidance for our organic ALM business, George, it's about $35 million, which we'll see how the year goes, but I feel very good about where we're positioned.

[Operator]

And our next question comes from Shlomo Rosenbaum with Stifel.

[Shlomo Rosenbaum, analyst]

Thank you very much. Can you talk a little bit about the pricing environment and how that contributed to revenue growth in the quarter? And how much you're expecting that to be a contribution to guidance in 2024. We're seeing kind of an uptake in some of the RIM organic revenue growth. And I was wondering how much of that might be directly pricing versus anything else?

[Barry Hytinen, executive]

This is Barry. Thank you for that question. So what you would see in our results, and as you're pointing to, and thank you for that, is that our global RIM storage rental revenue was up 8% -- over 8% in the quarter on an organic basis. And for the full year, it was about 8.5%. So we had a very strong storage rental revenue growth in 2023. And that's with positive volume trends and good mix and revenue management. And the way we think about revenue management, of course is, as we've talked about before, it's about value. our ability to provide our customers with value-added services such as our ability to provide digitization on demand rapidly whenever they need it, Smart Sort and a host of other value-added services.

So -- and then incidentally, our service revenue also stepped up nicely in the fourth quarter on global RIM as well. And so our expectation for the new year embedded in the guidance is about round numbers, call it, 6-ish percent growth for global RIM at the midpoint which, in light of the revenue management actions we have as an anniversary from last year as well as additional revenue management actions. This year, very good trajectory, we think, on services, inclusive of digital services continue to ramp through the year. We feel very good about that projection. And I think it does imply an opportunity for us to certainly achieve the midpoint on the global RIM number at 6.

[Operator]

And our next question comes from Nate Crossett with BNP.

[Nathan Daniel Crossett, analyst]

Maybe one related to that previous question is, I know you don't give a formal guide, but what are you expecting in terms of overall RIM volumes for Q1 and the remainder of this year? And then if I could just ask one on data center pricing and leasing, how much of that 100-megawatt guide is kind of already in the pipeline -- and I think cash mark-to-market was 5% for 2023. How do you see that playing out this year?

[William Meaney, executive]

So Nate, I'll take the pipeline question on the data center. And then Barry -- I will let Barry take the question on the pricing. So on the pipeline, as you would expect, especially with the hyperscales as you know the market extremely well is that we have a very strong pipeline going into the year. So when we set our targets, yes, I mean, you can assume that we have a pretty big pipeline that stands behind that.

And if you look at the way we set our targets is it's very consistent with what we laid out on Investor Day -- is where you think about couple of years ago, we were in the 60s. So you see that our targets are continuing to show that we are growing the business north of 20% a year. And obviously, some of these big contracts can need to put you well ahead or at the targets that we set. But we're very comfortable that we're continuing to build momentum in the business, and we're maintaining these 20%-plus growth rates on a very quickly or very rapidly growing base. So I think you can assume that, like anything else, is that we have a pretty good pipeline. In fact, across most of our businesses, we maintain a pretty strong pipeline behind our targets.

[Barry Hytinen, executive]

Nate, thanks for the question. It's Barry. A couple of responses on the physical volume, much as we have forecasted the last few years, we're planning this year the same way, which is for our physical volume to be slightly up for the year and also for the first quarter, so you asked about that. So the vast majority of the growth that I mentioned for Global RIM will be driven off of services as well as revenue management, of course.

As it relates to your question about mark to market on data center, clearly, trends have been good with respect to mark to market over the last really 5, 6 quarters. And from what we're seeing, we continue to expect that to be trending upward, and we have high cognizability on that. And frankly, in the colo space, it's trending up even higher.

[Operator]

And our next question comes from Brendan Lynch with Barclays.

[Brendan Lynch, analyst]

Maybe on Matterhorn. You highlighted some recent wins there, but I'd imagine it's a very long sales cycle for a lot of the engagements that you have. Maybe you could talk a little bit about where you see yourselves in the overall process with individual customers and how much additional benefit you expect to see stemming from the Matterhorn initiatives over the next 4 to 5 years?

[William Meaney, executive]

Thanks, Brendan. You're right. I mean, they're typically longer than our traditional sales cycles. If you think about the services that we were selling 5, 6 years ago when our service revenue was down in the 40s, right, and to obviously 10x that today just on digital, and we're not talking about digital services now that portion of the service business. Now it's more than 10x that size. It is definitely because it's much more of a solution orientation.

That being said, so we maintain much bigger pipelines to back up that growth. But as you say -- as you can see, we're continuing to grow that business in double-digit territory. So the -- but on the other side, the flip side is more and more of these services are recurring or multiyear projects. So has that build, even though the sales cycle is longer, is the also the revenue that comes in is around longer, if you will. So it's -- if we look at it right now, it's approaching 30%, 40% of the revenue that we're coming in is truly recurring and/or very long multiyear projects. So at 1 level, yes, it's a longer sales cycle. Another level, it allows us to continue to build momentum and drive growth in that business because each year, we're replacing less than we were before.

[Barry Hytinen, executive]

The only thing I'd add, Brendan, it's Barry, is that our cross-selling opportunity is very large at this business, right? We have well over 200,000 clients, most of them are measured in decades of duration. And we are seeing our cross-selling efforts continue to expand. We increased significantly year-on-year, but there's a lot more opportunity. And when I think about the services that Bill just mentioned as well as things like asset life cycle management, really, those are services that we can be offering and nearly all of our customers need.

And so we think at Matterhorn, -- we are -- as you heard me say, we reiterated our targets today, and we're, in fact, running ahead. So we feel very good about where we're at.

[Operator]

Thank you. And our next question today comes from Kevin McVeigh with UBS.

[Kevin McVeigh, analyst]

It looks like the total volumes increased in time to the storage, but the retention slipped a little bit. What drove the kind of acceleration there? Because it looks like a nice outcome.

[Barry Hytinen, executive]

Yes. So Kevin, I would say if you look at our retention rates, over the last 15 or so years you would see because that data is available, that it's very much in line and it can wobble a few basis points here or there quarter-to-quarter, but we are very pleased with our retention and our customer satisfaction scores and thank you for the point.

Volume has been quite good, and that speaks to our commercial team's ability to continue to win new business. And frankly, if you look at the storage revenue growth that the team is putting up, it's, I think, quite impressive including the acceleration. So thank you for the question.

[Operator]

And our next question comes from Eric Luebchow with Wells Fargo.

[Eric Luebchow, analyst]

Great I just wanted to touch on data centers and capital allocation. So you talked about pricing continuing to ramp in the data center ecosystem, and we've seen demand outstripping supply. So maybe you could touch on where your targeted development yields are for the point $1.3 billion of CapEx, the majority of which is data centers. And if you do opportunities to accelerate that 100 megawatts of leasing even further, maybe touch on some other funding sources like joint ventures that could maybe give you additional capital to attack the hyperscale opportunity.

[William Meaney, executive]

Thanks, Eric, for the question. So in terms of the returns that we're getting, and Barry touched upon in his script, is you should think about interest rates or the cost of capital have moved up but our pricing has moved up about 100, 150 basis points ahead of that. So we're actually getting higher returns even in a higher interest rate environment than we were before. So the pricing has moved up quite nicely, even more if you look at the non-hyperscale portion, but I'm talking more about the hyperscale customers in and of themselves.

And that's partly driven by the traction we're getting in the market. And then the other part of it is the scarcity. I mean, especially with the growth in AI. As you know, AI actually absorbs a lot of power, and that's what we're selling effectively is capacity or access to power. So I think we're really happy with the way that the pricing is evolving in the business.

In terms of your other question, in other words, and it kind of goes to the pipeline, we feel very comfortable about the target for this year, which is more than 20% ahead, close to 25% ahead of what we targeted last year. So the continued momentum and growth in the business.

And the -- could we do more than that? Yes, we have a fully funded plan so we don't see any shortage of capital. And remember, one of the advantages that we have, not just because of the cross-selling of Matterhorn that having the full information services suite. But the other part of it is that our records management business is a 70%-plus gross margin business that generates a lot of cash. And that gives us deeper pockets than some of the pure-play data center places -- players in terms of being able to both deliver our dividend and growth in dividend to our shareholders as well as putting capital to work in data center, as I said, and it just so happens that 225,000-plus customer base is a cross-selling opportunity for us.

[Barry Hytinen, executive]

Eric, the only thing I guess I would add there is that just building on Bill's point there is in terms of the growth in the EBITDA that we're generating, and so over $230 million at the midpoint, nearly $240 million, with our leverage target range, we have a lot of capacity. And that, together with the cash flow of the business puts us in a position where we can issue the strong guidance that we did, invest heavily in our data center development.

And of course, that's the nature of having pre-leased so much of our business. If you look at the amount of construction we have underway versus the pre-lease. It's very high. I think high 95% or so. And so we'll continue to ramp our development in data center to keep up with the contracts that we've signed and all the while maintaining our leverage year-on-year at the same level. So we feel very good about where we're at.

[Operator]

And our next question comes from Jon Atkin with RBC Capital Markets.

[Jonathan Atkin, analyst]

Just interested in Regency, any kind of early learnings now that you're a little bit into having acquired it talks about how to achieve top line synergies and other growth paths that you could see in that segment more generally?

[William Meaney, executive]

Thanks, John, for the question. As I said in my script and also Barry is that we're really excited about the Regency acquisition, not just because of the footprint that it gives us, it gets a stronger even scale within the United States but also the leadership team. So very strong leaders that we're really happy to kind of continue to build out the organizational structure under marked. So first of all, the leaders that we got with that business, we're very excited about it.

The second thing is they have a lot of customers that both overlap, but they also have a lot of customers that don't. So for instance, they have a very good both federal and local government portfolio of businesses. And that's a business that we're already in deep collaboration in terms of how we can expand that using Iron Mountain's muscle with our 26,000 mountaineers around the globe and how they can actually tap into that. And then they also have some expertise especially around the end-user devices, which already were doing a lot in end-user devices as I highlighted some of the wins on -- in my opening remarks. But they have even further capabilities, which I think is going to give us a lot more to do on the back end in terms of the way we serve customers and the efficiency that we can process their equipment.

[Barry Hytinen, executive]

Yes. John, the only thing I guess I would add is that -- when we knew this as part of the deal, but just to underscore it, there's considerable capacity for processing at Regency. And as Bill mentioned, they add to our capabilities. They've got 8 facilities around the U.S., which really broadens our reach and ability to serve clients quickly. And this is a team there that has been building a business very profitably, I might add, for decades. And so they -- to underscore Bill's point, they really know what they're doing. And I think the combination is an excellent one. So thanks for that question.

[Operator]

And our next question is a follow-up from Shlomo Rosenbaum with Stifel.

[Shlomo Rosenbaum, analyst]

If you don't mind, I'm going to get a little more into the weeds. Barry, just on -- we saw some interesting gross margin changes like just on a sequential basis. So the services margin go up from 260 basis points. It seems like the costs were contained while the revenue increased but on the storage side, you have all other storage costs going up by $11.5 million, pushed the gross margin down by about 80 basis points sequentially. I know these things move around quarter-to-quarter, but maybe you can give us a little bit of insight as to what's in that other storage costs that moved up $11.5 million this quarter?

[Barry Hytinen, executive]

Yes. Sure thing, Shlomo, I'll take the services point first. As I alluded to in the prepared remarks, we had very good mix within our services. And as you know, when we're doing services, especially as we're continuing to see larger and larger deals, the mix of those can move around and the timing of them. And so we had anticipated a lower margin mix in the services portfolio.

Some of those deals pushed into the first quarter here in terms of when we win them and into the new year. But we then won some deals and we're able to provide service on some higher margins. So that's part of it. And together with the fact that candidly, our team here does a great job driving productivity across our services organization.

As it relates to the storage gross margin, I'm glad you asked that question because there's a item that I want to make sure we all understand that storage gross margin, of course, is the combination of all of our storage businesses. So when you think about the records management, physical storage business. That's a very high gross margin business and continue to perform very well.

We're very pleased with the margins in that business in light of revenue management, et cetera, and the volume trends over the last several years, it's been trending really well. The factor that can affect the actual rate, though, and also affects your all of the storage costs, which I'll come to -- is data center.

As you know, as you see from our peer companies that are public as well as some of the other companies in the data center space, the gross margins on data center, generally as an industry, are lower than our records management business. And so while our data center gross margin actually expanded both sequentially and year-on-year, the mix, in fact, because data center grew. I think the storage revenue was up 35% or so year-on-year in the quarter. That has a mix element. And so you can have a situation where our gross margins are improving on both businesses, yet the contribution creates the rate going down slightly.

As it relates to all other storage costs, that's 1 of the big drivers there, of course, is and it goes to data center is the power. And so as we're having more and more client commencements, they start drawing more power and that also has an effect on gross margin. But doesn't change our EBITDA dollars. So good questions, and I hope that clears that up. We feel very, very good about the gross margins in the company.

[Operator]

And our next question comes from George Tong with Goldman Sachs.

[Keen Fai Tong, analyst]

A quick follow-up. It looks like your dividend payout ratio has dipped below the 65% LTM target, which is where you raised the dividend earlier. Can you talk about your thoughts on raising the dividend again now that the payout ratio is below the threshold.

[William Meaney, executive]

Yes. No, thanks, George. And you're right. We're maintaining as a Board and as a company that our target payout ratio is kind of in the low 60s, so 60 to 65%, and we're kind of trending that well we are in that range now. So it's -- this is obviously a decision for the Board. But I think you could expect the way we're trending in the guidance we've given you for the year. It's a natural forcing function that the Board will be considering and I think you can just kind of see the mathematics of it, it looks like we're running into another increase in the near future and not too distant future, I should say.

[Operator]

Thank you. This concludes our question-and-answer session and the Iron Mountain Fourth Quarter 2023 Earnings Conference Call. Thank you for attending today's presentation. You may now disconnect your lines, and have a wonderful day.