How’s this for an ugly chart?
That’s a 52-week chart of Iron Mountain (IRM), and that big decline–and gap–you see is what happens when investors have their hearts set on seeing a company convert into a REIT only to have their hearts broken by the IRS.
Whether a company can convert into a REIT is dependent on the definition of “real assets,” and when the IRS announced in June that it had put together a working group to figure define just what a real asset is, investors freaked. In case you’re wondering, that’s a 35% drop from peak to trough.
But there may be hope yet, say Piper Jaffray analysts George Tong and Peter Appert. First, they note that the IRS’s decision to convene a working group does not mean that it’s eager to change the definition, but rather to formalize it. They also believe there’s a good chance that Iron Mountain’s storage racks will be deemed “real assets.” For instance, Iron Mountain’s assets are likely to meet the IRS’s definition of “permanence.” Tong and Appert write:
IRM’s racks consist of beams permanently affixed to the foundation of the building capable of withstanding significant weight over many decades. They are not modular in nature, such as grocery aisle shelves (which do not qualify as real assets) that can be taken apart and pieced back together. The racks are never meant to be moved nor have they ever been moved. Removing the racks at IRM will immediately turn them into scrap metal since they cannot be reused. This is because the racks are custom built for each unique building and blueprint, taking into account structural and physical idiosyncrasies, and because of warping that occurs with time.
They also do not believe that the racks will be determined to be deemed “[accessories] to the operation of a business,” because they “do not produce a product” and “are not equipment or machinery,” among other reasons. As a result, they believe that Iron Mountain’s racks will be “treated as qualifying real assets in a REIT conversion,” and they reiterated their $37 dollar price target for the stock.
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The biggest downside might be time. Tong and Appert say that a “resolution may take over a year,” but should be issued by the end of next year.
Iron Mountain has gained 2.6% to $26.55 at 3:05 p.m., making it the fourth-best performer in the S&P 500, ahead of WPX Energy (WPX), which has gained 2.4% to $19.94, Pinnacle West Capital (PNW), which has gained 2.3% to $53.55 and Dominion Resources (D), which has risen 2.1% to $59.85.
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