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Iron Mountain Should Get REIT Status

Stocks in this article: IRM EQIX

NEW YORK ( TheStreet) -- Iron Mountain (IRM), a data-storage company, hopes to get approval soon from the Internal Revenue Service so that it can convert into a real estate investment trust, a potential boon to shareholders.

Last week, the IRS said it has resumed work on rulings to let Iron Mountain and Equinix (EQIX), a company that runs data centers, know if they can convert into REITs. The IRS had been studying what constitutes "real estate" for the purposes of REIT conversion.

Boston-based Iron Mountain has already obtained management approval for its conversion into a REIT, but the conversion is subject to a review by the IRS. The company has been considering unlocking its vast real estate holdings that consist of over $6.4 billion in assets for over a year.

If Iron Mountain became a REIT, it would distribute up to $1.5 billion in accumulated profits to shareholders and REIT status would mean at least 90% of taxable income would be delivered to shareholders in the form of dividends.

Iron Mountain is now taxed at the corporate level. By converting to a REIT, Iron Mountain can avoid paying taxes and instead pay out higher dividends which are paid and taxed at the individual level.

Although Iron Mountain has a sizable transportation business with more than 3,600 vehicles to transport files to and from customers' business and storage facilities, most of its business is storing documents , which is why the company is pursuing a REIT classification. REITs must either own or lease out 75% of their real estate or derive 75% of their income from real estate.

The IRS private ruling letter pertains to the definition of real estate. As more companies pursue the tax-advantaged REIT structure, the IRS has taken a closer look at the assets that constitute real estate. Back in 1960 when REITs were formed by Congress and when cell towers, data-storage centers and document-storage businesses weren't around, the definition of real estate was much simpler.

Still, as I see it, Iron Mountain's IRS private ruling letter should be a rubber stamp as the bins and storage for the self-storage REITs are considered leasehold improvements.

Iron Mountain shares closed Wednesday at $28.71 -- up about 8% after the IRS news last week. It's likely that the company with 2012 revenue of $3 billion will clear the last IRS hurdle, and the dividend income should drive the shares higher. The current dividend yield is 3.6%, and if the REIT plan unfolds, investors should expect a much higher yield.

Source: Yahoo Finance

At the time of publication, the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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