Will Iron Mountain Incorporated Become a Magnet for High-Yield REIT Investors?

Imagine waking up and discovering that one of the companies in your portfolio has announced it plans on doubling its dividend payout. Too good to be true? Not if you owned Iron Mountain (NYSE: IRM  ) shares on June 25, 2014.

Most folks have heard of Iron Mountain, the document shredding and storage company with all of those trucks.

What many people may not realize is that this company operates over 1,100 facilities worldwide totaling over 67 million square feet. Back in 2012, the company began a process intended to result in conversion from a C-Corporation to a real estate investment trust, or REIT.

The REIT advantage for stockholders
Companies that are organized as REITs no longer pay out taxes at the corporate level, as long as they pay out at least 90% of their taxable income as dividends to shareholders.

That also results in more cash to pay out larger dividends. REITs must also derive at least 75% of earnings from real estate activities approved by the IRS. 

The long and excruciating wait for Iron Mountain to receive permission from the IRS to convert to REIT status finally came to an end on June 25th as the company received a positive Private Letter Ruling, or PLR. There was an immediate after-hours surge in the stock price, and the next day Iron Mountain was trading up ~20%.

The best of both worlds?
There really is no comparable company to Iron Mountain in the known REIT universe.

During the past few decades, Iron Mountain has expanded from New England to across the U.S., and now has facilities located in 36 countries on five continents. Iron Mountain employs over 17,000 people, and operates a fleet of over 3,600 trucks.

This company's unique business model does not fit into any traditional REIT sector. It is a hybrid between business storage and services, and data storage and services, along with a significant logistics component.

Avoiding disasters with electronic data
Back in the early 1950's, an abandoned iron mine served as the location for the original vaults which housed important documents for the legacy customers of Iron Mountain Atomic Storage,

The current Iron Mountain's National Data Center is located in Boyers, Pennsylvania within an ultra-secure environment 200 feet below the surface inside a former limestone mine where armed guards and three-ton iron gates secure the entry to what is a veritable underground city. More than 2,700 workers are employed at this self-sufficient site which also contains a restaurant, water treatment plant, fire trucks, and a week of back-up power.

Located within this 145 acre facility and campus are enterprise and government data centers, including a 12,500 SF Marriott International disaster recovery data center built in 2008.

Recent data center initiatives
In April, 2013 Iron Mountain launched Retail Colocation Solution: a shared environment with scalable space, power and cooling. This foray into the multi-tenant data center business was underscored by an announcement of the first Iron Mountain regional data center facility to be built near its Boston corporate headquarters.

Iron Mountain partnered with Compass Datacenters to construct three 10,000 SF/1.2 MW Tier III "data halls" with cooling for up to 20 kW/rack. The resiliency of the designs combined with a focus on security and compliance allow Iron Mountain to target highly regulated industries like: health care, biotech, and financial services as customers.

Iron Mountain is also looking to expand into other key markets utilizing company owned land adjacent to existing facilities. This combined with the 10,000 SF modular data center design allows for rapid expansion into other regions.

Built-in expansion opportunities as leases expire

Because Iron Mountain has not been operating as a REIT, there are far more leased facilities globally and in the U.S. than you would expect. This will provide an ongoing source of potential acquisitions for many years to come.

Investor takeaway
Iron Mountain currently contracts with over 150,000 organizations, including 95% of Fortune 1000 companies. The document storage business has proven to be extremely sticky when it comes to customer retention. The ability to cross-sell between document services and electronic data solutions should be a significant engine for growth moving forward.

Based upon the closing stock price on July 7, 2014 the Iron Mountain mid-range estimate for dividend payments to stockholders would generate a yield of 6% based upon taxation as a REIT for 2014.

That is certainly a competitive yield when compared to other REITs in the storage, industrial, and data center sectors.

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