On Tuesday Iron Mountain (IRM) announced that its Board of Directors has unanimously approved a plan for the company to pursue conversion to a Real Estate investment Trust (REIT). The decision follows pressure from investors, which last year led the document storage company to sell its digital business to Autonomy PLC. The divestiture made it simpler for Iron Mountain to consider a REIT structure for the remainder of its business.
The stock market seemed to agree with Iron Mountain's plans, with the stock jumping over 10 percent since the announcement. Last February colocation provider Equinix announced it was seriously examining whether it made sense to convert to a REIT as well. Cincinnati Bell is in the process of spinning off its CyrusOne unit through an IPO, most likely using a REIT structure.
Conversion aligns with Operating Strategy
A REIT is a corporation or trust that uses the pooled capital of many investors to purchase and manage income property. Income comes from the rent and leasing of the properties, and REITs are legally required to distribute 90 percent of their taxable income to investors. Three of the largest data center developers – Digital Realty (DLR),DuPont Fabros (DFT) and CoreSite Realty (COR) – are organized as REITs.
Iron Mountain plans to seek REIT status by January 1, 2014. The company said its decision follows "a thorough analysis and careful consideration of ways to maximize value through alternative financing, capital and tax strategies." Iron Mountain expects to distribute $1 billion to$1.5 billion to shareholders in accumulated earnings and profits.
“Our Board and management team believe that electing REIT status will maximize value as we advance our operating strategy,” said Richard Reese, Iron Mountain’s Chairman and Chief Executive Officer. “A key element of our strategic plan is a disciplined capital allocation strategy to increase stockholder payouts and the REIT structure supports this plan. Additionally, a REIT conversion will have virtually no impact on our customers. They will experience no change in the people, procedures or industry-leading chain-of-custody they have come to trust with Iron Mountain.”
Iron Mountain operates a huge underground facility in western Pennsylvania. Iron Mountain bought the former limestone mine, which houses 1.7 million square feet of space, from the National Underground in 1998. It has developed a section of the mine into an energy-efficient data center known as Room 48.
New Value-creating opportunities
Separately, the company announced an 8% increase in its next six regular quarterly dividend payments, accelerating distributions to stockholders with total cash dividends over that period of approximately $280 million, based on the company’s currently outstanding shares of common stock. In addition to payments to stockholders, Iron Mountain expects to incur approximately $325 million to $425 million in one-time costs to support the conversion process, including related income tax liabilities.
“As a REIT, we will evaluate opportunities to increase our capital allocation toward ownership of currently leased real estate,” said Brian McKeon, Iron Mountain’s Chief Financial Officer. “Increased ownership of real estate can provide high return investment opportunities. Owning more of our facilities supports our valuation, helps ensure we meet the REIT asset test requirements going forward and can reduce our costs as we substitute more efficient capital funding for higher-cost lease financing.
“We have done the work necessary to feel comfortable that we can operate as a REIT; however, there are a number of hurdles yet to be cleared that are out of our control and there can be no assurances we will be successful in our planned conversion,” said Reese. “Our team charged with providing support to the Board throughout this process has done an outstanding job getting us to this point.”