鐵山公司 (IRM) 2020 Q3 法說會逐字稿

Good morning, and welcome to the Iron Mountain Third Quarter 2020 Earnings Conference Call. (Operator Instructions) Please also note, this event is being recorded.

I would now like to turn the conference over to Greer Aviv, Senior Vice President of Investor Relations. Please go ahead.

Thank you, Rocco. Good morning, and welcome to our third quarter 2020 earnings conference call. We have provided the user-controlled slides on our Investor Relations website. We will also be providing the link to today's webcast and earnings materials. We are joined here today by Bill Meaney, President and CEO; and Barry Hytinen, our EVP and CFO.

Today, we plan to share a number of key messages to help you better understand our performance, including how we are continuing to respond and adapt to the COVID-19 pandemic; continuing to demonstrate top line resilience in our physical storage business; continuing to see strength in our data center business; progressing on our transformation program with Project Summit; and how we are remaining committed to funding innovation and new product development. After our prepared remarks, we'll open up the lines for Q&A.

Today's earnings materials will contain forward-looking statements. We have noted the impact from COVID-19 on our expectations of how that may impact our operations and financial performance in 2020. We have also noted our expectations for Project Summit as well as certain other comments on our expectations for the remainder of the year. As you know -- as you all know, 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 and other periodic SEC filings 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 as required by Reg G in our supplemental financial information.

With that, Bill, would you please begin?

Thank you, Greer, and thank you all for taking the time to join us. Let me start by saying, I hope you and your families are safe and well. The third quarter provided us with a great opportunity to demonstrate the significance of the measures we have taken over the last few months in response to the pandemic and set a marker for outperformance through top line resilience in our physical storage and growing data center businesses, adjusted EBITDA margin expansion and by maintaining our strong cash generation track record all whilst continuing our investment in innovation and new product development. I would like to thank all of our mountaineers for this remarkable performance into their steadfast focus on safety and execution.

Despite lingering uncertainty related to the global COVID-19 pandemic, we have seen improvements, albeit gradual in key U.S. and international markets as it relates to our service activity levels, while showing continued strong performance in both our physical storage business and our global data center business. I continue to be inspired by the tireless efforts of our teams as they support and care for our customers, each other in our communities, whilst accelerating progress on our strategic priorities.

From the start, we set out our priorities to deal with the situation clearly and take care of the health and safety of our people and work hard to honor the commitments we have made to our customers. In April, we had up to 1/3 of our workforce out on furlough or other temporary leaves. I'm happy to report that we have brought a significant number of these mountaineers back to work to serve our customers, and we now have over 90% of our employees working regularly.

Whilst this has been a very difficult time, we have proven to be very resilient. We are financially healthy with strong and reliable cash flow, driven in part by our brand and customer loyalty. This is evident in how we've managed the heightened uncertainty of the past 8 months. We quickly aligned on the right mix of priorities to maintain strong near-term momentum whilst continuing our investments in innovation and new products as we execute our plan for long-term value creation. This, combined with the benefits from Project Summit has allowed us to continue to invest in transforming and modernizing our company.

As demonstrated by our year-on-year constant currency year-to-date adjusted EBITDA and storage revenue growth, we can already see the evidence supporting our belief that we will emerge from this pandemic as a stronger company on all dimensions. Clearly, there are still many uncertainties around COVID in terms of the development of the pandemic and how the government's worldwide will continue to respond with varying degrees of restrictions as infections rise. However, in the third quarter, we saw signs of improvement in customer trends, and as a result, the decline of our service revenue moderated. In addition, there is clear evidence that as and when the restrictions lift customers do come back to us with needs from both a physical and digital document storage perspective. And while some elements of our business may have changed forever, our positioning with the communities we serve remain strong.

Throughout the pandemic, we have continued to adapt and transform our business model and solutions to changing customer needs due to challenges created by COVID-19. Our customers are evaluating their real estate needs, business processes and ways to increase digitization in a remote workplace setting. We have been focused on helping them navigate these challenges and have tasked ourselves with accelerating our response to our customers' needs. One thing is certain, the pandemic has created opportunities for us to help our customers in new and innovative ways.

The fact is we're a different company than the one most people know. The strategic journey we have been on has driven this change. And to remind folks, our focus remains on 3 pillars: first, continued growth in physical storage revenue through pricing as well as new volume growth achieved from record growth in emerging markets and are in consumer storage in developed markets; second, utilizing our global scale as well as 70 years of customer trust to deliver a differentiated data center offering; and third, new products and services that allow our customers to achieve reliable and secure information management in a more complex regulatory environment and one in which hybrid, physical and digital solutions are the norm.

Further expanding on the product and services pillar, most know us for protecting highly regulated records. But over the years, our relationships have evolved to help customers manage a broader set of assets and to help them solve a broader range of problems. As customers' needs evolve, their expectations of us evolve. For this reason it is important we continue to invest in creating solutions that unlock value for our customers.

A great example of this is a solution we just provided for a U.S. credit union who needed a faster, more efficient method for processing new members' mortgage loans after closing. Their old process was too manual and it could no longer support the volume of work, much less scale to meet the credit Union's 30% year-over-year growth projection. And it didn't satisfy increased regulations, the organization must now meet when selling their loans.

We rebuilt the customer's workflow to better integrate their mix of paper and digital loan materials. This included mailroom services, document scanning and private vault with bio-resistant safeguards in defensible, secure disposition.

We also applied machine learning to automate how the credit union access data, verified its accuracy and resolve missing or incorrect items. With these changes, the credit union can now process post-close mortgage loans much faster, more than doubling their capacity whilst reducing their costs by 25%. This example speaks to what we see as our differentiation and why customers ultimately call us when they need help. For some time, we have talked about our opportunity to enable our customers' digital transformation journeys. Initially, much of this work was going on behind the scenes, especially as Project Summit got underway, putting in place the systems and structures to support this transformation. The benefits of this work are now becoming more evident with notable improvements to our customer experience at a time when demand for our solutions has never been greater. This materialized in the third quarter and high single-digit growth in our digital solutions business.

If you look at our physical storage business, this remains a key foundation for Iron Mountain. Customers have long trusted us to secure their information and their assets that matter most to them. They needed us to service their lock, if you will. But over time, whilst their needs expanded beyond security and compliance, their jobs grew more complex as they now had to store, use and extract value from growing amounts of information that was in both physical and digital form. The hybrid nature of their data was preventing them from achieving speed, compliance, efficiency and ultimately growth. A lock was no longer enough. They now needed a key to solve for this hybrid environment.

Uniquely, Iron Mountain offers both the lock and the key that organizations need in order to realize competitive advantage from their paper and digital information. Plenty of companies offer a secure home for valued assets, when they offer technology services so customers can better use those assets, but this over specialization falls short of the needs of most customers. We hear from our customers that they want partners who can help them build singular solutions capable of solving for multiple demands of speed, cost savings, revenue opportunities and security. This is Iron Mountain's distinctive position. We serve as the lock and the key.

Now let's take a closer look at business trends during the third quarter. At a high level, we are pleased with the stabilization and early recovery we're beginning to see across our service business. Service activity levels have shown a gradual improvement from the second quarter. However, similar to what we discussed last quarter, the shape of the recovery will be dependent on macro factors. The recent increases in COVID-19 cases in many parts of the world has focused states and countries to implement new restrictions to mitigate the spread of COVID-19. Whilst these factors will make the recovery uneven, our experienced management team is prepared to confidently manage the volatility.

Turning now to our physical storage business. Total organic storage rental revenue growth accelerated modestly from last quarter, up 2.5%. This once again was driven by strong revenue management results as well as growth in our emerging markets in consumer. We continue to be very encouraged with the levels of organic storage revenue growth, underscoring the durability of the physical storage business and supporting strong cash generation. Total global organic volume increased 2 million cubic feet sequentially. Contributing to this was 3 million cubic foot increase in consumer and other and fine art storage, partly offset by a decrease in records management volume.

Looking more specifically at records management organic volume, this was down 1.1 million cubic feet compared to the second quarter. While still a decline, this is a significant improvement from the 3.9 million cubic foot decline last quarter, again, reflecting the early signs of recovery. We continue to expect the full year organic volume to be down 1% to 1.5% and up 2.5% in terms of organic revenue based on current visibility.

Turning now to our global data center segment. We are very encouraged by another strong quarter of bookings. In Q3, we leased 12.3 megawatts, bringing the year-to-date total to just over 51 megawatts. The strong leasing this year, particularly among smaller deployments, has resulted in increase in our utilization by more than 7 points to nearly 92%. Given the need for additional capacity, we have increased our development pipeline to approximately 50 megawatts, consisting of both greenfield development and further build-out of existing facilities. Moreover, in excess of 50% of our development is pre-leased, resulting in a strong backlog.

Let me now provide a brief update on Project Summit. Our transformation program is progressing well, and we are on track to realize our permanent structural cost savings of $375 million per year exiting next year. As you saw in our press release this morning, we now expect to be able to generate greater adjusted EBITDA benefits in 2020 as we have accelerated some initiatives. Most notably, these ongoing initiatives should not only significantly reduce our cost base, but also make it easier for our mountaineers to get work done, enabling them to focus on a more customer centric approach. Some examples include: driving global standardization in IT, replacing cumbersome manual processes with reliable automation and improving the user experience whilst reducing process cycle time. We are as excited about the systems and process improvements that our Project Summit as we are about the bottom line improvement and believe the end result will be an enhanced value proposition for our customers and communities. As we shared with you last quarter, we are strongly committed to all of our stakeholders. We are focused on our culture, especially our purpose to inspire and build better lives and communities. I would also point out that we are committed at the executive level to continue on our path and accelerate improving our diversity and inclusion.

In order to be a sustainable and successful company, we need to attract the best talent to drive maximum creativity through diverse and innovative thinking. I am proud to say we achieved a perfect score of 100 on the Human Rights Campaign Foundation's 2020 Corporate Equality Index. This recognition reinforces the important work we are doing and supports our goal of building and promoting an inclusive culture that encourages our employees to bring their whole authentic cells into the workplace.

As we look at our business going forward, we see opportunities as well as risks and we are making every effort to ensure we are well placed to maximize the opportunities. We are cautious about our expectation of the pace of market recovery as we progress through 2021. In our own business, as we've shared with you in previous calls, we expect a gradual recovery in our service business to continue as economic activity recovers, leading 2021 to look similar to 2020, just in reverse in terms of quarterly progression. The work we are doing and have done to address the challenges posed by COVID-19, gives us confidence that we will come out of this position to consistently deliver long-term sustainable growth.

In summary, we are leveraging the opportunity in this rapidly changing environment to reaffirm our commitment to our strategy of growth through increased product offerings in the physical storage area as well as continued rapid growth in our data center and digitization areas. At the same time, we continue to exercise prudent cost control and drive further efficiency across the organization through our transformation activities. We are proud of the progress we have made towards our transformative shift during this crisis. We are now even more enthusiastic about the speed of our future transformation given the lessons we have learned during the pandemic. I hope you all remain well.

With that, I'll turn the call over to Barry.

Thanks, Bill, and thank you for joining us to discuss our third quarter results. We are pleased with our third quarter and year-to-date performance. In a challenging macro environment, our team delivered solid performance across each of our key financial metrics. Revenue of $1.04 billion declined 2.4% on a reported basis year-on-year, which includes a 30 basis point impact from foreign exchange. Total organic revenue declined 3.4%. Organic service revenue declined 13.5%, reflecting the continued COVID impact on our activity levels.

While the pace of recovery continues to be dependent on many factors, overall, we continue to see service declines moderate, reflecting an improving trajectory since the April, May time frame.

For the full quarter, service trends were generally consistent with the July levels we discussed on our last call. Despite the macro headwinds, total organic storage rental revenue grew 2.5%, driven by 3 points of revenue management and data center growth partially offset by a 30 basis point decline in global organic volume on a trailing 12-month basis. This is 30 basis point improvement as compared to the second quarter on a trailing 12-month basis. Adjusted EBITDA was $370 million. Adjusted EBITDA margin expanded 30 basis points year-on-year to 35.7%. The improvement reflects progress on our Summit transformation, revenue management and favorable mix while partially offset by fixed cost deleverage on lower service revenue and higher bonus compensation accrual. In addition, in the third quarter, we incurred incremental cost to keep our teams safe, for example, specialized cleaning of our facilities as well as purchases of personal protective equipment. We included these expenses in our adjusted EBITDA.

Adjusted EPS was $0.31, down $0.01 from last year. AFFO declined 5.4% to $213 million. As compared to adjusted EBITDA, the decline in AFFO was primarily driven by timing of cash taxes consistent with our outlook.

Turning to segment performance and starting with the global RIM organization. In the third quarter, our global RIM business experienced declines in service revenue, albeit at moderating levels compared to earlier in the year. This was partially offset by storage volume growth in our faster-growing markets and revenue management, which led to a total organic revenue decline of 3.9%. Back, together with better than planned project Summit benefits resulted in adjusted EBITDA margin expansion of 110 basis points.

In the service business, we experienced year-on-year declines of approximately 31% for new boxes inbounded and 39% for retrievals and refiles. We also continue to see a slowdown on the outgoing side as permanent withdrawals declined to 28% and destructions were down 22%. In our thread business, activity declined approximately 17%. For the third quarter, our average realized paper price was 20% higher than the prior year, which was more than offset by a decline in paper tonnage, leading to a net $3 million reduction in adjusted EBITDA. As we projected on our last call, after the temporary spike in recycled paper prices in April and May, prices have taken a step down. And by October, paper prices have now returned to the low levels experienced at the end of 2019.

Our consumer storage business has maintained momentum and continues to be a more meaningful contributor to our overall physical storage volume growth. In the third quarter, we continued cost reduction actions, including furloughs and reduced work hours, albeit at much lower levels than earlier in the year. As service revenue expectations improve, we want to ensure we are staffed to the appropriate level so we can fully support our customers. As we have discussed before, this does tend to cause incremental cost deleverage as we bring back employees ahead of demand. We think this is the right investment to service our customers.

Turning to global data center. The business delivered organic revenue growth of 12.1%, driven by prior period leasing and strong service revenue growth. This was partially offset by a moderate churn of 160 basis points, in line with our target of 1% to 2% per quarter. In the fourth quarter, we are expecting slightly elevated levels of churn compared to our normal target range. In the quarter, we booked a nonrecurring revenue adjustment of $1.8 million. Adjusted EBITDA margin of 45.8% was consistent with our first half trend. As Bill noted, our data center team continued to deliver strong bookings momentum, signing over 12 megawatts of new and expansion leases, bringing year-to-date bookings of 51 megawatts.

This commercial success resulted in us exceeding our previous full year target through the first 9 months. For the full year, we expect to deliver more than 55 megawatts of new and expansion leasing, representing bookings growth of 45%. Of course, that includes the significant hyperscale lease in Frankfurt. And excluding that, we would expect bookings growth of about 23%. This compares to our original guidance of 15 to 20 megawatts or mid-teens bookings growth. We believe we are growing considerably faster than the broader market. Going into next year, we feel good about the state of our pipeline, both from a hyperscale perspective as well as our core retail colocation business supporting rich ecosystems across our platform. We believe we can lease in excess of 20 megawatts next year, which would result in mid-teens annual bookings growth.

In October, we announced the formation of our joint venture with AGC Equity partners, a greater than EUR 300 million partnership for our fully preleased data center in Frankfurt. This venture represents an important strategic step towards our goal of identifying alternative sources of capital to fund accelerating growth as we expect proceeds will be redeployed into higher return development opportunities. As we have previously disclosed, the venture will be reflected as an unconsolidated joint venture and therefore, will not flow through to revenue and EBITDA.

Turning to Project Summit. In the third quarter, we recognized $48 million of restructuring charges as well as an adjusted EBITDA benefit of $48 million. Through the first 9 months, we have delivered $113 million of benefit. This is ahead of our prior expectations as we accelerated certain initiatives in 2020 with a particular focus on the highest return activities in response to COVID 19. As Bill referred to, we now expect the program to deliver adjusted EBITDA benefits of $165 million in 2020, approximately $150 million more in 2021 with the full program generating $375 million exiting 2021. In terms of costs related to Project Summit, we now expect to spend closer to $200 million in 2020. We continue to expect the cost to implement the full program to be approximately $450 million.

Turning to cash flow and the balance sheet. We are operating from a position of significant balance sheet strength. In the third quarter, our team did a nice job delivering further cash cycle improvement, with solid performance in both payables days and days sales outstanding. On a sequential basis, cash cycle improved by a full day as a result of continued DSO improvement.

In August, the team executed another successful bond refinancing, issuing $1.1 billion to redeem our most restrictive outstanding debt and pay down a portion of the outstanding balance under our revolving credit facility. The continued strong support received from the fixed income community provided us the opportunity to upsize our transaction while printing the lowest coupon for 10-year notes in the company's history.

Taken together with our bond offerings in CIN, we issued $3.5 billion of new debt on a leverage-neutral basis, increased our weighted average maturity by over 2 years to nearly 8 years, while only modestly increasing our weighted average cost of debt. Additionally, these new bonds are more in line with our REIT peers as they include a fixed charge coverage ratio as opposed to a debt-to-EBITDA covenant. Also, I think it is worth noting that we have eliminated all of our 6.5x leverage covenant bonds, meaning our most restricted bond covenant is now 7x debt to EBITDA.

At quarter end, we had $1.7 billion of liquidity. As a reminder, at the end of the second quarter, we had elevated levels of cash on our balance sheet due to the timing of the payoff of one of our notes from the June bond offering. We paid off the notes in early July, leaving us with a cash balance at September 30 $152 million. We ended the quarter with net lease-adjusted leverage of 5.3x, which takes into account adjustments as described in our credit facility. Looking ahead, we expect to end the year with leverage of approximately 5.3x, which would represent an improvement year-on-year as we made progress toward our long-term leverage range

With our strong financial position, our Board of Directors declared our quarterly dividend of $0.62 per share to be paid in early January

Turning to capital expenditures Our full year expectation is now approximately $450 million or a decrease of $75 million, reflecting development capital for our FIFO data center that will now be a part of our venture with AGC.

Now let me share a few thoughts as to our capital allocation strategy. First, we are committed to our dividend at this sustainable level. And over time, we expect to glide into our targeted AFFO payout ratio of mid-60s percent. Second, we are committed to our target long-term leverage range of 4.5 to 5.5x on a net lease-adjusted basis. This year, the team has made good progress toward our target. As investors know, we have been allocating significant capital to our data center business for several years. (inaudible) pipeline continues to build with high-return investment opportunities, our strategic intent is to increase the amount of capital we dedicate to the business. With that, we have considered options to generate incremental funds for investment. We view capital recycling as a good means to monetize certain assets, particularly industrial real estate to increasingly invest in our development pipeline. Industrial cap rates are at historically low levels, and we have the opportunity to structure long-term leases on favorable terms that effectively allow us to have control of the facilities, whether we lease or own.

With that, in the third quarter, our team accessed the market and monetized 2 facilities for proceeds of approximately $110 million. This brings our year-to-date proceeds to nearly $120 million, ahead of our full year target of $100 million. With the highly favorable market backdrop, together with our development pipeline, we are planning to recycle relatively more going forward, albeit what will amount to a small portion of our total industrial assets. Similarly, we view selling stabilized data center assets into a joint venture as analogous to monetizing industrial real estate assets. It represents another source of capital to redeploy into development projects. Of the joint venture we just announced in Frankfurt is a good example of this strategy. The JV provides us with an opportunity to boost returns on stabilized assets and provides incremental capital to allocate to projects in the development phase.

Turning to our outlook for the remainder of the year. While we are not issuing official guidance today, I would like to provide an update as to our expectations, excluding any material and unforeseen changes. With the continued impact of COVID, we are planning for the fourth quarter to be generally in line with the third quarter for revenue and adjusted EBITDA on a dollar basis. Therefore, for the full year 2020, this would lead to a low single-digit revenue decline and flat to slightly positive adjusted EBITDA growth as compared to last year. This outlook includes a full year headwind from foreign exchange rates approaching $60 million for revenue and $20 million for adjusted EBITDA. This outlook reflects our solid year-to-date performance, benefits from revenue management, accelerated project Summit savings and incorporates a cautious view for the fourth quarter. Given our favorable results, we now expect AFFO growth to be up low single digits for the full year. Our full year expectations for tax rate and shares outstanding remain unchanged from our prior commentary. When we look ahead to 2021, as you expect, until we get COVID-19 behind us, naturally, it is difficult to provide guidance. But we are committed to providing the investment community with additional commentary on our trajectory and underlying business trends, just as what we've been doing throughout this year. While the challenges for our service business persist, we remain confident in its resiliency and the continued durability of our storage business. I'm proud of how the team has responded to these challenges and the strong results we've delivered. We look forward to sharing further progress with you on our fourth quarter earnings call.

And with that, operator, please open the line for Q&A.

(Operator Instructions) Today's first question comes from Shlomo Rosenbaum with Stifel.

I just actually wanted to ask a little bit about the Frankfurt JV. Can you talk a little bit about like how much you cash in, how much debt density will incur just trying to understand how that was structured and whether that -- how well you did on that? And is this really the kind of structure we could expect in the future for kind of build and then maybe sale with a joint venture?

Sure. Shlomo, good morning and thanks for the question. We really feel very good about the Frankfurt joint venture and what the team has done there with that fully leased up facility. We invested about $100 million at closing essentially with the deal. Over time, we'll cash out nearly all of that impact all of it. And nearly all of that at the close, we retained over 20% retained equity interest in the venture. We will earn fees for things like property management, development and construction. And we'll take those proceeds and redevelop -- redeploy it into development pipeline, which has nice higher return opportunity.

So essentially, we see it as the opportunity to monetize essentially what is a stabilized asset boost that return and then redeploy. You asked about debt, yes, of course, the entity would, as you're expecting, have debt on it. That debt will approximate the incremental development costs so that might be, over time, that could be as much as a couple of hundred million euro. We have a very attractive rate on that debt, I might add. And we feel very good about the way the development is proceeding. Bill, anything you'd like to add?

Yes. And I think we talked about it a few times that we see that as a path that we would like to continue to pause. If you think about -- you have a fully stabilized data center asset, there's a lot of pension money or funds that manage pension money that are looking for kind of mid-digit returns on an investment basis because it's a fully stabilized asset with a very long contract. And we were able to find that both on the debt and the equity side. So it just makes sense to take that money and then plow it back into higher return projects.

Our next question today comes from Nate Crossett from Berenberg.

Just following up on the JV. I was wondering if this is something that can be opened up for future projects with them specifically, what's kind of their appetite for further deals? And why did you go with them? And then just my second question is on the organic storage revenue volume growth of 2.5%, how much of that growth can be attributed to data center growth? And then just on price increases. I was wondering if you're getting any pushback from customers?

All right. So in terms of AGC, is they do have an appetite to these things. And in fact, they have a similar structure with a different customer in the United States. So -- and we ran a process. So I would expect that they would be interested in any further processes that we run down in the past.

So I wouldn't be surprised at all for us to see us do other things with AGC. But it will depend on the location and the opportunity. I think in terms of your question on storage revenue growth, is that it was about 1.7% if you just look at the physical storage and took out the data center, so it goes from 2.5% to 1.7%, but still strong positive growth based on some of the success that we've been having on the back of consumer.

So really pleased, both in terms of records management is better this quarter. And also consumer is really starting to show that it's starting to hit approve. That being said, we do expect the quarters are going to kind of go backwards and forwards a little bit because consumer is a seasonal business, but we think the trajectory is moving in the right direction for both businesses.

On the pricing side, you can see actually that we are continuing to get roughly the 3 points of price that Barry highlighted on it. We don't see any slowdown in that at all. And we have more to get in the emerging markets, which are relatively new to the game in terms of our revenue management processes. So good response from the customers, we're still considered very much an essential business or essential service to our customers. So it's a great position to be in.

And our next question today comes from Kevin McVeigh with Crédit Suisse.

Great. Not to put another question on the data center. But from an accounting perspective, will you recognize that as kind of the revenue, is that below the line? Or it -- will it be reflected in the revenue and EBITDA? Or is that below the line based on just the equity JV?

This is Barry. Thanks for the question. Yes, the JV will be an unconsolidated joint venture. And so the revenue and EBITDA will not be benefited from it. Then you'd see it below the line to your question. You will see a smaller amount for the management type fees that I mentioned that would flow through revenue and therefore EBITDA, that's for things like property management, construction development. And I think that answers the question.

Our next question today comes from Sheila McGrath with Evercore.

You mentioned capital recycling as a source of capital. I was wondering if you could give us more detail. Do you mean selling industrial facilities outright and relocating your boxes? Or are you doing sale-leaseback? And what are your capital allocation priorities for that capital besides data centers?

Sheila, this is Barry. Thanks for the question. For the most part, you'd be thinking about sale leasebacks in terms of what we're talking about. We -- the couple of opportunities we monetized in the most recent quarter were also sale leasebacks frankly, we're seeing very, very strong performance from the team as it relates to cap rates in light of where the market is. I mean I think something like sub 5, even 4 and so then with the relatively long-term leases, together with options to further renew, we have the ability to effectively control those facilities, whether we feel like whether we lease or own them. So we feel good about that monetization strategy. And then in terms of priorities, it really is into higher return IRR projects that are in the development pipeline. As you know, and you know the business really well. That's focused principally on data center, but not exclusively there. And so you should expect us to continue to recycle and likely step-up that activity some going forward.

Our next question today comes from Michael Funk with Bank of America.

A couple if I could. Going back to the digital transformation that you were talking about working with customers there. Can you help us think about comparing the revenue contribution from a customer transitioning to more of a digital solution versus a pivotal solution? And then where you see the growth opportunity there as well?

Thanks, Michael. So I think, first of all, is that the -- it's incremental. It's on top. So we don't see a lot of people saying, "Oh, we're going to go digital and then stock differs. But there's a few cases of that, but usually, people want to keep their physical records as well for proof. But where we see the digital transformation is really around the use. So if you think a couple of examples or either at use and/or further downstream processing. So the example I gave on the call about the mortgage processing is really about downstream processing. But we also have -- and we talked about that, I think, a little bit on previous calls when we changed our service level agreements and really made a push on image on demand we've seen one customer, for instance, in the U.K. that has fully embraced that. So they only take dairy trebles now through image on demand. So we -- any time they need a retrieval is we image it, and we load it up onto the system and they access it that way, which we -- which for us is longer term, a higher-margin business for us than having advance on the road and obviously, environmentally is better. So really kind of 2 bits. One is we're getting into more processes, quite frankly, where we weren't exposed before us. We're helping them with the downstream processes. And in the other cases, is people are taking advantage of our image on demand, which, for us, is a more efficient way to get them the information back.

Our next question today comes from George Tong with Goldman Sachs.

I wanted to dive deeper into service activity trends during and exiting the quarter. Can you provide the rate of year-over-year decline in service activity by month during 3Q? And how the decline looks like in October?

Sure, George, this is Barry. Thanks for the question. For the -- if you recall, in July, we mentioned that total service activities were down kind of mid- to high 20s. For the quarter. If you look at new boxes inbounded, they averaged about 31%. October is slightly below that level, and September was, as you might expect, the best performance of the quarter in light of the trajectory we've been mentioning. And that really is the case for all of the other service activities that are generally following the same trajectory. I would say that we look at -- going forward, we would use the October September kind of levels as being indicative of what we're expecting. And that's embedded in the kind of forward outlook that we mentioned as it relates to sort of third quarter and fourth quarter looking similar in terms of revenue and EBITDA.

Our next question from comes from Eric Luebchow with Wells Fargo.

Two questions, if I could. The first one on the data center business. Wondering if you could kind of let us know of what you're leasing this quarter, what the split was between more hyperscale logos versus enterprise. And typically, we know hyperscale is lower return. So could you update us on whether your approach has changed at all, whether you're actively looking for more hyperscale business or if that's just more reflective of the market this year? And then what the targeted yields you're looking at are in the data center business and how that supports out between those 2 customer segments? And then, Barry, just quickly on the guidance. I know you said kind of flat revenue and EBITDA for Q4. I'm wondering if that implies how you split that out between service and storage. Should we expect service to maybe be flat to slightly down and storage up or if there's anything to call out in Q4?

Thanks, Eric, for the question. So I wouldn't say that we're gone -- we're going more for hyperscale than we've always spot another. I think we've always said for large campuses, we'd have -- we'd expect somewhere between 40% and 60% of the campus to be hyperscale and the rest would be (inaudible) retail. And this year, but this year, it may be a little bit more noticeable. This is because the gestation period in terms of that marketing takes a while.

And our relationship as we went into data centers, for sure, it was stronger in the enterprise side or during -- setting up private cloud for large enterprise customers than it was on the hyperscale. So this year, we're actually really pleased with the progress we've made in terms of building our reputation and exposure with the hyperscalers. So if you look at year-to-date, we're about 50-50. So about 50%, of that 51 megawatts that we've signed up year-to-date is hyperscale, including obviously the Frankfurt site, and about 50% is retail. So we're really happy with the mix. But you're for sure, you're right is that the cash and cash returns on hyperscale deployments are lower, but they're longer-term contracts. And it allows you to build out the facilities or the campus is faster. So it still is the right mix, we think, in terms of maximizing returns.

And Eric, it's Barry. Thanks for the question. As it relates to the fourth quarter, I would say that we're working with a modeling of service revenue decline being similar in nature, Q3, Q4 versus prior year. And that's what's essentially embedded in that outlook, and that should work through, you'll be able to work through the storage number. And I would note that that's aligned with my answer to George earlier about where we see activity levels. As being fairly consistent to slightly better. Thanks for the question.

(Operator Instructions) Today's next question is a follow-up from Shlomo Rosenbaum with Stifel.

Can you just comment a little bit about the step-up in fine arts volumes? That's something that we really haven't seen for a while. I'm wondering what's driving it?

Yes. Thanks, Shlomo. It's actually in our entertainment services. And the real improvement in physical, I think, on a sustainable basis in the consumer side. So that was more of a true-up in terms of some private vaults that we had with our entertainment services. So if you look overall, if you think about the overall records management was down about 1.1 million cubic feet, consumer was up 2.5%. And then I would say that was kind of a one-off true-up of a little over 0.5 million cubic with entertainment services.

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