Iron Mountain Inc., which stores and manages billions of business records, electronic files, medical data, emails and more, for organizations around the world, plans to convert to a real estate investment trust (REIT).
The Boston-based company, which occupies 64 million square feet of
industrial space, said it believes the REIT structure enhances its strategy to increase stockholder payouts and has the potential to create new opportunities for value creation.
The anticipated benefits to stockholders include significant tax savings for the company and increases in income distributable to stockholders, the potential to lower its cost of financing through increased ownership of currently leased real estate and the expansion of its stockholder base.
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"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 CEO. "Given that the largest portion of our income is from renting storage space to customers in our more than 64 million square feet of real estate around the globe, we believe conversion to a REIT is the best structure under which to execute our strategy."
As of year-end 2011, Iron Mountain conducted operations through 755 leased facilities (41 million square feet) and 239 facilities that it owns (23 million square feet.) About two-thirds of its facilities are in North America. Its largest number of U.S. facilities is in California, Florida, New York, New Jersey and Texas.
As a way of comparison, ProLogis, the largest industrial REIT with international holdings, controls a portfolio of 584 million square feet.
Its leased facilities typically have initial lease terms of five to 10 years with one or more five-year options to extend. In addition, some of the leases contain either a purchase option or a right of first refusal upon the sale of the property.
Iron Mountain estimates that its leased facilities represent a potential acquisition universe of from $2.5 billion to $3 billion.
"The quality and diversity of our customers are at the center of this opportunity - supporting a very durable rental income stream, with stable, high occupancy levels, strong retention and low tenant turnover costs. These characteristics of our business are strikingly similar to those of many real estate and related service companies, and by some measures, even more attractive," Reese said.
"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 CFO. "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.
Suzanne Wingo, assistant vice president - analyst, and Matthew B. Jones, vice president - senior analyst of Moody's Investors Service, said the REIT conversion plan is credit negative to the firm.
"Once it becomes a REIT, which would happen no earlier than 1 January 2014, the company expects its long-term capital strategy to shift toward lower leverage because it will lose tax advantages related to the deductibility of interest expense. But there are a number of hurdles to clear to obtain required rulings from the US Internal Revenue Service, which will entail at least $550 million in cash costs through 2013," the two Moodys analyst reported.
"As a result of these costs, we expect the company's debt-to-EBITDA ratio to rise to about 4.7x within the next 12-18 months from 4.4x on 31 March, using our standard adjustments for operating leases," the two said.
Iron Mountain management said it will consider issuing debt or equity to support conversion-related cash requirements.
The company has begun to implement the conversion plan and hopes to complete it by January 2014.
The company currently estimates that it will incur $325 million to $425 million in one-time costs to support the conversion plan.
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