Iron Mountain to Make REIT Conversion and Increase Quarterly Dividend by 8%
The board of Iron Mountain (NYSE: IRM) has approved plans to convert the company into a real estate investment trust. This change in the company's structure will result in an increase in returns to shareholders and would have no virtually no impact on its customers. CEO and chairman, Richard Reese, has stated that “a key element of our strategic plan is a disciplined capital allocation strategy to increase stockholder payouts and the REIT structure supports this plan” and that the conversion will cause “higher returns and new value-creating opportunities”.
Headquartered in Boston, MA, Iron Mountain has served as a corporate storage facility since 1951, providing companies storage for physical and digital corporate information. This includes records management, data backup, and information destruction services to over 120,000 customers.
Investors have long been pushing for REIT conversion given the company's considerable land holdings and the resulting tax savings of the conversion. Elliot Management, a hedge fund based in New York, lobbied for the board to review the strategy and consider the conversion to REIT as early as March 2011.
As of right now, renting out storage space makes up the largest fraction of the company's income. Because REIT's receive special tax considerations, Iron Mountain also hopes to increase dividends from reduced federal taxes.
While REIT's can yield more income, they also ought to be monitored carefully. For instance, it is imperative that SEC regulations on capital distributions be met, earn 75% of gross income from legitimate property rents, and ensure that 75% of the company's assets are in real estate, as well as other requirements.
In accordance to the federal regulations that accompany REIT conversions, 90% of the company's taxable income will be transferred to investors, meaning Iron Mountain will be expected to distribute $1 billion to $1.5 billion in accumulated earnings and profits to stockholders starting in the fourth quarter of 2012.
The company will also expect to incur anywhere from $325 million to $425 million in one-time conversion costs. As a result, Iron Mountain will contemplate a debt or equity issuance to finance the conversion. If successful, the conversion to the REIT structure can be expected by January 1, 2014.
In addition to REIT conversion, the board of Iron Mountain has also declared that it will increase its quarterly dividend by 8% to 27 cents a share. This is payable July 13 to shareholders of record as of June 22. Over the next six quarters, total cash dividends are expected to total $280 million.
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