Iron Mountain Inc. (IRM - Analyst Report) has obtained management approval for its conversion into a real estate investment trust (REIT). The decision comes more than a year after Elliot Management Corp had proposed the plan in March 2011. However, the conversion is subject to a thorough review by the U.S. Internal Revenue Service (IRS) and other necessary approvals. Upon gaining the necessary regulatory orders, Iron Mountain would operate as an REIT from January 2014.
Notably, Elliot Management has been in talks with Iron Mountain to convert the company into an REIT for a long time, as the conversion would enable the company to lower its tax liability. Up until now, Iron Mountain has resisted the proposal, as being an REIT necessitates it to distribute approximately 90% of the profits among shareholders.
However, in light of the new development, Iron Mountain is likely to distribute between $1 billion and $1.5 billion to shareholders from its accumulated earnings and profits as per the REIT regulations. Moreover, the company has increased quarterly dividend from 25 cents to 27 cents, which would be paid on July 13, 2012 to stockholders of record as on June 22, 2012 to increase its shareholder value.
The cost of conversion to REIT would be $325 million to $425 million and analysts expect annual savings on tax of approximately $120 million to $130 million. The company rents out 64 million square feet of storage space around the world and this storage segment contributed 55.8% of revenues in 2011. Moreover, the company’s initiatives to increase its operational footprint in the core storage space and divestures of the non-core digital services unit were thought to justify the decision.
Iron Mountain has recently made accretive acquisitions in the storage space (File House Offsite Record Storage, Document Systems Inc, First National Safe Deposit and Grupo Store). We believe that the company will continue to pursue accretive acquisitions in this sector (both domestically and internationally) over the long term.
The conversion into an REIT would definitely increase shareholders’ value and reduce the tax burden on the company. On the contrary, a dismal quarter would affect the dividend payout directly. Moreover, the conversion may face regulatory issues and might not finally go through.
We expect Iron Mountain to drive significant growth through acquisitions in the rapidly growing countries like Brazil, Russia, China and India, which will boost its international revenue going forward. We believe that this diversification and expansion of its business will help the company to counter sluggish growth from the domestic and European markets over the long term.
However, tepid internal growth coupled with volatile foreign exchange rates and a decline in paper prices are expected to partially negate the company’s strong product portfolio, increasing market share and promising international business. The company also faces stiff competition from Anacomp Inc. and Cintas Corporation (CTAS - Analyst Report) .
Thus, we have a Neutral recommendation on the stock. Currently, Iron Mountain has a Zacks #3 Rank, which implies a ‘Hold’ rating in the near term.