Iron Mountain Incorporated (IRM) Q3 2017 Earnings Report, Transcript and Summary

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

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

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

Thank you, Bill, and good day everyone. We are excited to report another strong quarter of continuing growth at our core storage rental business and good progress increasing our capital flexibility through our refinancing activity. We remain steadily on track to deliver on our financial objectives and strategic goals with a disciplined investment strategy. As Bill mentioned, it is based upon this continued demonstration of growth and business durability that our board of directors increased the fourth quarter dividend by 6.8% to approximately $0.59 per share, reflecting an annualized rate of $2.35 per share, up from $2.20 per share previously. On today's call I will provide some color on the third quarter's operational and financial drivers, touch on the implications of our refinancing activity and then cover our outlook for 2017. As we have noted previously, we will issue specific 2018 guidance in connection with our fourth quarter earnings call in February, consistent with most peers. As you see on Slide 7, which shows our key financial metrics, our third quarter total revenues grew 2.4% over last year or 1.4% on a C$ basis, impacted by the disposition of our legacy Australian business as well as our businesses in Russia and Ukraine. Internal storage rental revenue growth was a strong 3.5% in the quarter, while internal service revenue declined 20%. The growth in internal storage revenue resulted from our revenue management focus and continued growth in internal global net volume. That is growth prior to acquisitions and dispositions. Our gross profit margin improved 210 basis points year-over-year, primarily driven by synergies from the Recall acquisition and the flow through of our revenue management program, partly offset by $3.5 million charge associated with the recent natural disasters. In particular, our service gross profit has improved by $10 million year-over-year to $102 million. In addition, SG&A as a percentage of total revenues decreased 20 basis points year-over-year excluding Recall costs due to the benefits of our transformation initiatives and synergies. Compared to a year ago, our adjusted EBITDA in the third quarter grew about 10% to $323 million. That’s growth of over 8% on a C$ basis and the adjusted EBITDA margin increased 230 basis points to 33.5%. AFFO was $210 million in the third quarter, an increase of $32 million or about 19% from last year. The strong growth resulted from the almost 10% increase or $29 million of growth in adjusted EBITDA and more than funds the 7% dividend increase we announced today. Touching on Slide 8 quickly. This shows the relative size of each product line and the contribution of our results split between storage and service and showing line of business. Over 80% of our adjusted gross profit is derived from storage activities with a 75% gross profit margin. We continue to innovate our new service and storage offerings for our customers focusing on value added services that deliver gross profit growth and we are pleased with the progress supporting our strategic objectives for developed and emerging markets. Turning to Slide 9 and internal growth performance. You see developed markets, which includes North America records and information management, North America data management and western Europe, as well as other international, which includes our emerging markets businesses as well as Australia. Almost half of our total revenues comes from the developed markets storage business which grew internal storage revenue by 3.2%, largely from our revenue management initiatives including programs to improve customer mix. In total, in developed markets we achieved internal volume growth of 0.2% for the third quarter on a trailing 12-month basis as illustrated on Slide 15 of the appendix. Turning to North America records and information management specifically. Whilst internal volume growth was negative 0.2%, we continue to see strong internal storage revenue growth of 3.5% in the quarter. Looking ahead, we anticipate North America internal storage revenue growth to be north of 2.5% with flat internal volume growth, plus or minus, as we work to optimize returns, balancing revenue management and capital efficiencies. Internal service revenue in developed markets was down 0.1% as growth in information governance, digital imaging projects, tread activity and other project based revenue was offset by lower activity in the data management and other businesses and slightly lower paper prices. In other international, we continue to see strong internal storage revenue growth of 5%. Service internal growth in this segment was flat as we cycle over a high level of Recall [construction] [ph] projects underway a year ago. And you can see in our supplemental reporting package, adjusted EBITDA margins expanded in all segments compared to the year ago except in North America data management where we continue to invest in new product development as Bill discussed. Adjusted EBITDA margins in this business segment though continue to be a healthy 53%. As a reminder our corporate and other segment includes overhead costs as well as adjacent businesses such as data center and fine art. Internal results are impacted by the small comparative base from a year ago as well as integration costs associated with recent acquisitions in this segment. Shifting now to our balance sheet. We opportunistically executed several meaningful debt transactions in the third quarter which together provide increased capital flexibility and term out our borrowings that you see on Slide 10. First, we amended our credit facility with improved covenants which increased flexibility and better recognized the value of our real estate holdings thereby reducing our lease adjusted leverage ratio. Second, we redeemed 200 million Canadian dollar senior notes due 2021, utilizing revolving credit capacity. Additionally, we redeemed $1 billion of senior notes due 2020 at a 6% rate and issued new senior notes at 4.875% due 2027. Lastly, we extended and increased our AR securitization program. In total, these actions extended our average maturity to 6.5 years reduced our average cost of debt by about 30 basis points, resulting in approximately $18 million in annualized interest expense savings. We incurred a charge for debt extinguishment cost of $48 million in the quarter. The attractive pricing reflects bondholders understanding the health of our business and durability of our cash flows. As of the end of the quarter, we had reduced our lease adjusted leverage ratio to 5.5 times from 5.8 times in Q2 and increased the capacity available on our capital structure remaining on track with our plan to reduce our lease adjusted leverage. Let's turn to our guidance for 2017 which is summarized on Page 11 of the results presentation. Our core guidance remains unchanged. So given where we are in the year, we are converting guidance to reported dollar or R$. Given the somewhat limited net impact of currency changes, we expect to remain within the same guidance ranges on a C$ and reported dollar basis. Given we have increased our outlook for storage internal revenue growth to be between 3% and 3.5% from 2.5% to 3%. As a result of this better growth in considering a modest benefit from exchange rate, 2017 total revenues are expected to be near the high end of the guidance range. On adjusted EBITDA, we are maintaining our guidance range despite the delayed timing of acquisitions though still incurring integration costs, the impact of the Russia Ukraine dispositions as well as charges related to natural disasters, which were partly offset by favorable exchange rates and onetime items we highlighted in the second quarter. As a reminder, our shared service implementation costs as well as innovation investments are weighted to the latter part of the year. As a result, we expect only limited adjusted EBITDA growth in the fourth quarter from the third quarter. Following on the strong margin improvement in 2017, we remain on track with our 2020 plan to deliver about 200 to 250 basis points of margin improvements from our underlying business as outlined at our investor day, implying an improvement in adjusted EBITDA margins of 50 to 75 basis points in 2018. In addition, our expectation for the 2017 structural tax rate is now 21% to 22%, driven by changes in our business mix. For 2017, the increase in taxes will only be somewhat offset by the partial year benefit of the interest expense savings. Touching on AFFO guidance. We expect to be closer to the upper end of the range of $760 million, as we expect total maintenance and non-real estate investment to be roughly $150 million for the year, benefitting from better efficiencies and discipline following the acquisition of Recall. In turn, we expect an improved dividend payout ratio relative to AFFO considering also the dividend increase we have just announced. The FORTRUST and Bonded acquisitions are not expected to have a significant financial impact this year given the partial year contribution and the integration cost associated with both transactions. Remember also that FORTRUST was partially funded by a private placement of shares to the seller, so our outlook reflects an increase of about 2 million shares outstanding, or roughly 1 million shares on a weighted average basis for 2017. Overall, we are very pleased with our performance this quarter, reflecting the hard work and discipline across the organization. We remain well positioned to deliver on our financial projections for 2017 and our performance continues to be underscored by the durability of our storage rental business which builds our cash flow growth thereby funding investment to continue growth and returns to shareholders. With that, I will turn the call over to Bill for closing remarks before we open up to Q&A.

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

[Operator Instructions] Our first question comes from Sheila McGrath with Evercore. Please go ahead.

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

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

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

It's a good question, Sheila. You can probably appreciate having watched -- having you watched this phase for a while. We have passed on more than we actioned. In other words, it's an area where you have to be disciplined in terms of your capital allocation. So our first and foremost thing is to make sure that on a stabilized basis that we get the types of returns that makes sense given our cost of capital, both on an IRR and an NPV type basis. So typically what we find is that if we are doing a Greenfield like northern Virginia, you are kind of in the 14%-15% internal rate of return. And when we do the acquisitions, it is that we are pretty disciplined if we look at something that’s north of 11%. So it is a little bit - it's fair that when you are buying something with revenue already attached to it, it is a little bit lower in terms of internal rate of return; but on the other side is, you are taking less risk, right. Because it's coming across with customers. So when we look at it, we first look at it on an NPV and IRR basis and we also look at the cost of acquiring a megawatt versus what it costs us to build it out. So we kind of look at two different lenses and that goes without saying as we only focus on high quality assets. And high quality assets is not just the physical aspect of the building, but it's also that the absorption rates we see in the markets that they operate in. So we are really excited about, for instance, the Credit Suisse, and we look forward to closing that because London and Singapore are amongst the best markets globally in terms of absorption and specifically the London operation is in the [Floyd] [ph] estate, which is a great location. And Denver is also in the top ten markets. A great question.

Yes. The only thing I would add real quickly, Stuart, is that if you look at it on a replacement cost basis, which Bill touched on, FORTRUST, we paid about $13 million per megawatt. And you need to remember, this 85% lease. So that in itself is good and then the cost to build out the future capacity is actually -- that’s $6 million a megawatt. So you sort of think about where the replacement cost is, we feel really good about this investment as well for instance.

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

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

Shlomo, this is Stuart. I will take that one. Since I have just joined a year ago when we issued guidance at the third quarter. So what you are seeing is that -- and you see sort of some of the things have changed even now in terms of how the business changes from February to March. And the end of the day, we have given 2020 outlook out there at our investor day. So you have got a little bit of a roadmap to work from already. And we would be able to give the most appropriate guidance, it's really better for us to get 2017 closed out to what final results are, tax rates, things like that. So in February we will be able to give a better quality guidance in the sense of number of business decisions that have been made. So this is something we talked about really back in the first quarter already. I think actually in the fourth quarter last year we had mentioned this.

So did you say anything -- I missed something about adjusted EBITDA set up for, I thought you said for '18. Did you make any comments about the EBITDA for '18 or I just misheard that.

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

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

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

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

Yes, sure. Shlomo, this is Bill. So I think the best way to think about it, if you look at North America and western Europe, right. Both very similar markets in terms of level of maturity. If we look at this quarter in North America rim, we had 3.5% internal revenue storage growth and in western Europe we had 2.3%. And then if you look at the volume that’s made up that, is that in, as you pointed out, North America was negative 0.2% and western Europe was, internal volume growth of positive 2%. So this tells you where we are -- we are obviously a little bit ahead in North America than we are in Europe in terms of rolling out the revenue management system. We started rolling it out about a year ago in Europe. And what we are doing with the revenue management is optimizing it. For sure, when you adjust price it does at some point affect the speed of incoming volume from customers and you can see that a little bit happening in the divergence between North America and western Europe. But at the end of the day what we are interested in is what you eat is cash. And so we are really happy with the North American results that we had 3.5% internal storage revenue growth. And that allows us to even further optimize the CapEx because we are getting more value for stakes on the shelf, if you will. So western Europe at 2.3%, I am not saying it's bad, we are actually -- we are happy with the 2.3% internal storage revenue growth but we think there is more to come. But there is some elasticity as you try to optimize that and you can see that in the North American and western European numbers this quarter.

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

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

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

Yes. So the first question was specifically on developed markets?

I was just looking at total company -- I mean the days that I am getting were 73 days versus 69 days for the last two quarters and if I look year-over-year it looks like it was 67 days last turn 3Q '16.

Yes. So on the -- going right to the first question. On the receivables, the receivables is up mostly in North America where AR is up and that’s really driven by fewer collection days that we actually had in September in the U.S. And it was up a little bit in India as well. It was the other market where receivables are up. We had a tax law change there and so what you are seeing in India is little bit of a lag in terms of getting billing out and collections done as over a pretty short period of time. You have got an entire system in India changing to new tax regulations. So that’s what's going on in the receivables. If you look at the developed markets and other international volumes which is in the appendix to the presentation, the net internal growth number there is about 0.2%.

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

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

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

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

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

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

Andy, you have been watching us long enough -- it's opportunistic and you can't time these things. When the opportunity arrives, it arrives. So there is always a little bit of movement up and down in that number because it's market driven.

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

Yes, it's a great question. So the nature of the Credit Suisse acquisitions because they were running these for their own [books] [ph], is think of 2018 as the year when we have to move some of their operations out, which was not data center related, and then prepare the data halls for lease. So in '18 you will see the thing slightly dilutive, and then in '19 it's flat and by 2021 it's fully stabilized. So that’s kind of the -- so already by 2019 you will see that it's flat to slightly accretive and that’s really the first year that we are able to start leasing out part of that 10 megawatt that I talked about. So 2018 is effectively creating the 10 megawatts.

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

Yes. The most important is, is that if it was definitional, there was a change in the definition and calculation. But what that does is it improves the overall capacity in terms of where our leverage is today and where the covenants are to build real capacity and your ability to fund future growth if we needed again to be opportunistic. Our overall goal is to continue to reduce our lease adjusted leverage ratio. But the way the mechanics work or the key mechanics on the lease adjusted leverage ratio is that to adjust for rent expense and capitalize that in the lease adjusted number. The old credit facility was eight times rent, the new facility is six times rent. So we have got annual rent of around $300 million, right. That’s reduced your overall leverage about $600 million. And the way -- the reason that that was done is essentially it was a backend way to give us credit for the value of the $28 million square feet that we actually own on balance sheet. The value of the real estate that we own is gone up since we lasted the credit facilities. We had to work out mechanism to give us credit for that and this is a way to do that.

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

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

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

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

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

I think, Michael, you can fill on this -- I think the year where we see the most relevance in the ATM quite frankly is the data center space. We feel really good at the results we have been able to build on over the last three years in the data center. We are really pleased in terms of the pre-lease commitment that we had in the Northern Virginia. So we are really seeing the proof points in the markets that one plus one equals three. So the ATM at this point is mainly focused on making sure if we see other opportunities like the FORTRUST and the Credit Suisse come down to pipe, that we have a mechanism or a tool and a tool kit that allows us to do that efficiently. So again we don’t guide to acquisitions in the data center because as I pointed to out to Karen, or Sheila rather, is that we have passed on more than we executed on because we are pretty disciplined but at the same we are very pleased in terms of the traction that we are getting in that segment.

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

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

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

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

Yes. Consistent with what -- the answer is, yes, that’s what I said. And that the main reasons for that are higher integration cost that we will be incurring and will flow through adjusted EBITDA in the fourth quarter as well as then the fact that the shared service cost of some of the innovation spend is backend weighted. So those are two main causes. The timing of acquisitions, right. Original guidance and assumed acquisitions would be earlier in the year, so you would have picked up the EBITDA and would have incurred the integration cost by now. Obviously, you get delayed EBITDA. The other thing is you also have gotten, from a year over year standpoint, we have disposed of Russia and Ukraine. It isn't sequentially but year-over-year basis.

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

That is in corporate and other from a -- it's sitting in CFG. Sitting in sort of the corporate overhead costs. I am sorry, in cost of sales.

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

It's a great question. We think the level that we are talking about -- if you look at 3.5% for the North America, we think that we can continue to maintain kind of north of 2.5% going forward. So there is a little bit of catch up but for the most part we feel really good that customers understand the value equation that we provide and they understand that that’s kind of an appropriate level of price increase for them. Which will just naturally over time increase our margins as well. So we feel pretty good that we can continue to push that through. I think where we still have probably the most wood to chop, as I said is Europe and developed markets. I mean we already have started chopping that year, year and half ago but it just takes longer to because visible.

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

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

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

Yes. Just to be clear, Kevin on that is, it's very [consistent] [ph] dividend per share. So we are very focused on growing dividend per share and we only increase dividend per share when we know we can maintain that as we said we are able to do that and at the same time improve our payout ratios as a percentage of AFFO.

That’s helpful. And then just going back to the pricing a little bit. Bill, so if we get to kind of 2.5, if you would, is there kind of a certain level we should think about where the unit volume growth settles. So if there is kind of a tradeoff, does that get to kind of 50 basis points of decline so it's a net two, or any thought around the sensitivity because as you price the price right it looks like the new volume growth has slowed a little bit. Does that -- is there an acceptable range? Is it 50 basis points of decline or anyway to think about the sensitivity of price to volume.

Kevin, just to be clear, what we are talking about is internal revenue volume of storage growth. So that’s net of any pluses or minuses. So when we said we did 3.5% in North America, that’s assets are tracking out to 0.2% volume. So when Stuart guided that next year when you feel really good that we are going to be north of 2.5%, that’s 2.5% net of any up or down in terms of volume. So that’s including that. So at the end of the day which we guide on and focus on is internal revenue storage growth because that’s what you eat. Right. That’s what drives the dividend per share growth.

I get that. I guess I am just trying to figure out is it, hypothetically would it be three percentage points of price that gets offset by 50 basis points of volume decline that gets you in that 2.5% or.

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

[Operator Instructions] Our next question is a follow up from Shlomo Rosenbaum with Stifel. Please go ahead.

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

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

And what you talked about [adjacent] [ph], I mean I am just trying to think about what are you looking for because there are newer things that you are rolling out and clearly when there is a go to market and something like that, there is an investment that’s going to show up on the numbers. When you are looking for a return on something like that, like what's the time that you expect to see like a material return on something like that.

These things are pretty quick, right, because of just the nature and the size of the investment. And then if you look at pure market investment is that you are definitely getting a payback within two years and in some cases it's within a year. To be honest with it, the thing that we are looking at more on things like Iron Cloud because the market interest, and we have been getting a lot of positive feedback from some of the technical analysts on these things is it's more like the question is, is it something we can build and also do we need to use partners to really execute -- to take advantage of the opportunity. So those are kind of decisions we are going through. But on the go to market side you generally see fairly quick payback. It's definitely within two years and lots of times within the year that you make them.

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

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