Publicly traded Iron Mountain is exploring the option of raising data center capex through a yieldco process, said three sources familiar with the matter.

The process is in the early stages, the sources said. It was not clear if Iron Mountain had hired bankers to help oversee a deal.

A decision regarding how the yieldco would be structured is expected in the coming months, one of the sources said.

The company controls over 26 data center facilities across Asia, Europe and the US, according to its website.

Iron Mountain’s global data center segment generated USD 153m in revenue in 2Q24, an increase of USD 35m YoY, along with adjusted EBITDA of USD 66m, executives said on the company’s 1 August earnings call. The company was also able to sign 66 MW in the quarter, bringing total bookings for the first half of the year to 97 MW. Iron Mountain is now projecting 130 MW will be signed by year’s end.

Data center yieldco deals have been heating up in recent months.

For instance, IPI Partners and CyrusOne have sought yieldcos, which, much like an asset-backed security financing deal on the debt side, allow executives to sell stabilized assets – or what some describe as a “drop-down” transaction – to an affiliated bankruptcy-remote vehicle that outside investors capitalize. The investors earn contractually reoccurring cash flows while the operating parent effectuates a lower cost of capital that funds capex of sometimes risky development projects.

The boom in generative AI applications is driving demand for the build-out of data centers to help power this nascent technology.

Iron Mountain has seen increased demand for its data center capacity over the last two years based on projections it provided during the company’s investor day in 2022, CFO Barry A. Hytinen said during the earnings call.

“We continue to lease more and faster than we were indicating at the time of the investor day. So over time, I think it’s possible that we may see a continued ramp in capital for data centers,” he said. “We are 96% leased in our operating portfolio and in our under-development construction portfolio, which is about 10% bigger than what we are operating, maybe even 15% bigger than we’re operating, we’re 96% leased on that as well on a pre-lease basis.

“So, I will just underscore that when we are putting capital to work to build out our data center platform, it is because we have already signed contracts with clients, and we’re very pleased with the level of returns that we have been generating on those deals.”

Iron Mountain’s data center build-out is a “fully funded plan,” CEO William L. Meaney said.

“We are happy in terms of the trajectory that we have without going out and raising equity. I think we have a plan that works,” he said.

In addition to any potential yieldco deal, the company recently raised debt.

Iron Mountain executives in April and May entered into USD 510m in loan agreements in loans to partially finance the buildout of various data centers and then amended and upsized a facility up to USD 450m a month later, executives said in regulatory filings.

Iron Mountain did not respond to requests for comment.