Iron Mountain Rips Higher On REIT Conversion Plan

Article from Forbes by Steve Schaefer, Forbes Staff

MARKETS | 6/06/2012 @ 11:43AM

Iron Mountain Rips Higher On REIT Conversion Plan

It is no secret that in a world with 10-year U.S. Treasury rates well below 2%, investors are desperate for yield. But it isn’t only money managers and everyday investors who are aware of this fact. Companies are too and the latest example comes from Iron Mountain.

The document storage firm said Tuesday that its board has approved a plan to convert into a real estate investment trust. Such a conversion would result in the distribution of up to $1.5 billion in accumulated profits to shareholders and REIT status would mean 90% of taxable income moving forward would be delivered to shareholders.

Chairman and Chief Executive Richard Reese said converting to a REIT will have little to no impact on customers, while enhancing capital return to shareholders. “The REIT structure provides stockholders with dividends from U.S. tax savings and other increases in distributable income that will enhance stockholder returns,” he said. The company estimates the cost of converting at between $325 million and $425 million. (Read: Iron Mountain’s investor presentation on the plan.)

Since the largest portion of Iron Mountain’s income stems from renting storage space to customers around the world for storing and protecting everything from historical artifacts to business documents to medical records, the transition seems like a home run at a time when investors are starved for yield.

The company is no stranger to sharing its spoils with shareholders previous to the REIT decision. It upped its dividend 8% Tuesday and already yields 3.2%, hardly a frontrunner but above the 2.7% average among S&P 500 dividend payers.

REITs, like master limited partnerships in the energy space, can be a rich income-producing portion of a portfolio, but must be carefully monitored for valuation purposes. While all REITs have certain essential characteristics in common – they must pass muster with SEC regulations on distributions of capital, maintain at least 75% of assets in real estate and derive at least 75% of gross income from real property rents, among other requirements – they fall into a number of different sub-categories.

Some of those categories carry far higher dividend yields. Mortgage firms, or mREITs, like Annaly Capital Management, can yield in the teens but also be more volatile, while apartment REITs that rent residential space like AvalonBay Communities have been in favor as total return plays. Still others are involved in the retail space, like mall owners Simon Property Group and General Growth Properties, or technology plays like Digital Realty Trust.

Because REITs are required to pay out so much of their income to shareholders, a disappointing quarter can be doubly painful, hitting both share price and dividends, the two components of the total return story.

Iron Mountain, which stressed that its plan to become a REIT by Jan. 1, 2014 is not assured of regulatory approval, was the best performer in the S&P 500 Wednesday, gaining $2.92, or 10.3%, to $31.32.