Iron Mountain Soars on REIT Conversion Approval. Is it Time to Take a Second Look?

When I used to work at a bank, the "Iron Mountain people" would show up every month, collecting towers of boxes filled with paper documents. Who were these people and what exactly did they do?

For businesses that require a lot of paperwork and record keeping, Iron Mountain  (NYSE: IRM  ) is the top choice. 

Source: Company Website

The business
The company is in the storage and management solutions business. In other words, it provides record keeping services. Whether it is physical storage of paper documents or digital storage, it is a leader in the space, and more than 94% of Fortune 1000 companies use their services. It clients include banks keeping financial records, or hospitals storing medical records.

It also has a records destruction business. Shredding thousands of documents is painstakingly time-consuming and tedious. Iron Mountain provides this service to companies. If this sounds pretty boring, think again. The company also provides storage for historical and cultural artifacts too.

To store all of this "stuff," Iron Mountain has more than 1,000 storage facilities. In a lot a ways, this is basically public storage for businesses, except the company provides pickup and drop-off services as well. There are already a handful of publicly traded self-storage REITs listed, including names such as Public Storage (NYSE: PSA  ) and Extra Space Storage (NYSE: EXR  ) . Iron Mountain seems like it would a natural fit.

REIT status approved
Iron Mountain's board of directors first suggested the idea of converting to a real estate investment trust (REIT) in June, 2012. 

In the Q1 2014 earnings conference call, management stated: "we believe we fit well as a REIT due to our sizable real estate portfolio and attractive characteristics such as a high net operating income per square foot, low turnover costs and high customer quality and retention." 

On June 25, 2014, the IRS officially approved the company's REIT conversion plan. The stock soared more than 20% in after-hours trading on Wednesday. So now what?

Like all REITs, 90% of its taxable income will be distributed to shareholders. The company estimates that the quarterly dividend will be around 0.52 to 0.54 per share. This translates to a dividend yield between 5.6% and 5.9% following the after-hours spike in the stock price. 

Converting to become a REIT is tough
This is a good move for the company. Many businesses have proposed converting to REIT status over the last couple years, but the IRS is being more selective to approving conversion requests. In 2013, Equinix (NASDAQ: EQIX  ) a data storage company which owns large data centers nationwide, applied for REIT conversion. The IRS informed the company that its application will require more time for review and consideration. 

Congress is also considering a draft that would likely make it harder and more expensive for companies to convert. Congress created REITs in 1960 when President Eisenhower signed the REIT Act, but its original intentions to provide a way for small investors to invest in the commercial real estate market and helping landlords diversify their investor base has been overshadowed by companies looking for ways to manipulate the tax laws.

For tax purposes, real estate as assets other than land that have a depreciable life span of at least 27.5 years. Businesses owning billboards and cell towers would not qualify, and companies that own these businesses would not be eligible for REIT status. 

Foolish Takeaways
REITs are becoming more of an exclusive club, and Iron Mountain is the newest member to join. Even if a company can manage to get into this club, it is becoming harder and taking longer than ever before. REITs must be doing something right.

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