Iron Mountain to Function as a REIT - Analyst Blog

Iron Mountain Inc. IRM recently announced that its conversion to a real estate investment trust (REIT) has been unanimously approved by its board of directors. Accordingly, it will operate as a REIT from the taxable year commencing from Jan 1, 2014.

This approval came after the receipt of favorable private letter rulings from the Internal Revenue Service IRS. Following the news, shares of Iron Mountain surged 23.2% ($6.91) in after-hours trading on Jun 25, 2014.

This decision comes more than three years after Elliot Management Corp had proposed the plan for conversion to REIT in Mar, 2011. This proposal was approved by the company's board in Jun, 2012. Since then it was awaiting a thorough review by the IRS as well as other necessary approvals for it to become operative.

However, in light of the new development, Iron Mountain is likely to distribute between $1.3 billion and $1.4 billion to shareholders from its accumulated earnings and profits as per the REIT regulations. Moreover, the company will publicly announce a record date and payment date for the 2014 Special Distribution as determined by the board of directors.

Due to its conversion to a REIT, the company provided a revised guidance for 2014. Management expects revenues to be between $3.09 billion and $3.17 billion, adjusted EPS to be between $1.37 and $1.52, annual dividend to be between $400.0 million and $420.0 million and free cash flow to range between $350.0 million and $390.0 million.

The company rents out 66 million square feet of storage space around the world and this storage segment contributed 59.0% of revenues in 2013.

To-date in 2014, the company has invested more than $60.0 million in five international storage related businesses. The international transactions include three deals in Turkey and Poland, which enhanced the company's leadership position in these emerging markets, and the acquisition of a leading provider of offsite data storage and data protection services named Tape Management Services  in Australia.

The conversion into a 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.

We believe that Iron Mountain's strong product portfolio, increasing market share and promising international business are the primary growth catalysts. Moreover, the company's entry into the data center market could act as a positive factor.

However, costs related to conversion and fluctuations in recycled paper prices are the near-term headwinds for the company. Moreover, volatile foreign exchange rates and competition from Guidance Software Inc. GUID, Pitney Bowes Inc. PBI and Cintas Corp. CTAS are the other headwinds.

Currently, Iron Mountain has a Zacks Rank # 3 (Hold).