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Iron Mountain to Pay a 11.7% Special Dividend

Iron Mountain (IRM) announced that it will give shareholders a special dividend of $700 million, or about$4.07 a share, in connection with its plan to convert to a real-estate investment trust.  This is a 11.7% dividend yield.

The dividend is an initial distribution that satisfies a requirement that Iron Mountain pay shareholders its accumulated earnings and profits of about $1 billion to $1.5 billion in connection with its potential conversion to a REIT. The conversion is expected to occur no sooner than the beginning of 2014.

The special dividend is payable on Nov. 21 to shareholders of record on Oct. 22. Shareholders can receive payment of the special dividend in stock or in cash totaling up to $140 million, or 20% of the total distribution.

“Today’s announcement marks an important milestone in our plan to convert to a REIT,” saidRichard Reese, Iron Mountain’s Chairman and Chief Executive Officer. “Iron Mountain is a great business with high returns and strong cash flow driven by consistent financial performance. This special dividend is consistent with our previous commitment to increase shareholder payouts, and our operating as a REIT will further enhance our ability to generate attractive total returns for our stockholders.”

Get In Early On This New REIT

Iron Mountain (IRM), the New Jersey-based document-storage firm, said that its board approved a plan for the company to convert to a real estate investment trust, or REIT.  Iron Mountain also boosted its dividend 8% for an annual payout of $1.08 a share. A quarterly dividend of 27 cents will be paid July 13 to stockholders of record June 22. Iron Mountain, one of several companies that have been weighing the decision to switch to REIT status, said the conversion would happen after Jan.1, 2014, pending U.S. government approvals. “The REIT structure provides stockholders with dividends from U.S. tax savings and other increases in distributable income that will enhance stockholder returns,” CEO Richard Reese said in a statement. Iron Mountain leases 64 million square feet of storage space around the world.

In accordance with tax rules applicable to REIT conversions, Iron Mountain expects to distribute accumulated earnings and profits (E&P) of approximately $1.0 billion to $1.5 billion to stockholders, to be paid out in a combination of at least 20% in cash and up to 80% in Iron Mountain common stock. The company expects it will distribute a significant portion of this E&P distribution in the fourth quarter of 2012. The company expects to distribute the balance over several years beginning in 2013 based, in part, on U.S. Internal Revenue Service (IRS) rules and the timing of the conversions of additional international operations into the REIT structure.

IRM is currently trading at $31.94, up from $28.40 prior to the REIT announcement this week.  The current target price for IRM is in the range of $36-40 following regulatory approval of the REIT conversion.

Barclays estimates Iron Mountain’s (IRM) planned conversion to a REIT could boost the records management and storage company’s value by $10/share.

William Blair Analyst Nate Brochmann believes benefits of conversion, include lower tax rate, more efficient financing, opportunity to shift capital structure toward equity, greatly outweigh costs, will enable IRM to increase returns to shareholders.  Based on simple dividend discount model, thinks there could be 40% upside to the stock due to conversion.  Given value he believes REIT conversion unlocks for shareholders, recommends investors purchase shares.

Iron Mountain (IRM) was initiated with an Overweight at Piper Jaffray with a price target at $35.

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