Iron Mountain Drops as Barclays Says REIT Conversion Unlikely

Shares of Iron Mountain (IRM) have dropped today after Barclays said the company’s conversion into a real-estate-investment trust is unlikely to succeed.

The downgrade comes following yesterday’s announcement that that Iron Mountain’s CFO, Brian McKeon, would exit that position leave the company at the end of the month. He will remain at the company until the end of the year to help with the transition. Barclays’ analyst Manav Patnaik believes that’s a sign that a REIT conversion won’t happen. He writes:

It has been 4-6 months since IRM received the "tentatively adverse" ruling from the IRS and the REIT working group was formed. We viewed our 30% conversion probability as cautious, and the announced CFO departure gives us a catalyst to lower it to 10%, which is at the low end of the market's estimated range of10-20%…

Our lower-than-historical average applied multiples are based on our view that increasing enterprise mobility, along with improvements in cloud security, will precipitate a secular decline (albeit a 'slow bleed' for now) of physical storage in favor of cloud storage. Assuming a 5-7 year statute of limitations, an inflection point that makes this "bleed" accelerate is our concern – and hence a lower multiple. We estimate that fundamental downside, assuming IRM is unsuccessful in converting to a REIT, is $21 – based on FY14E.

With that, Patnaik cut Iron Mountain to Underweight from Equal Weight with a price target of $23.

Shares of Iron Mountain have fallen 2.3% to $25.72 today, while comparable have been mixed. Leidos Holdings (LDOS) has ticked up 0.6% to $46.28 and Amdocs (DOX) has risen 0.8% to $37.20. Maximus (MMS), on the other hand, has fallen 1.2% to $46.22 and Xerox (XRX) is off 0.3% to $10.62.

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UPDATE:

Analyst Manav Patnaik reached out to me after the close on Oct. 11 to clarify that the downgrade is not solely based on the CFO’s exit. This is what he said:

As you write in the second paragraph, I am not solely basing Mckeon's departure as a sign that a REIT conversion won't happen. I have other reasons for my revised conversion probability. The news of McKeon's departure simply gave me a timely reason to publish them; that's what I meant in my report when I say: "…gives us a catalyst…"