Buffett’s former Iron Mountain and Equinix, two technology companies planning to convert to real estate investment trusts, plunged after saying that the U.S. Internal Revenue Service is scrutinizing their eligibility

June 8, 2013 Leave a comment

Iron Mountain, Equinix Fall as IRS Scrutinizes REIT Plans

Iron Mountain Inc. (IRM) and Equinix Inc. (EQIX), two technology companies planning to convert to real estate investment trusts, plunged after saying that the U.S. Internal Revenue Service is scrutinizing their eligibility.

The IRS is weighing whether to revise the legal definition of real estate for the purposes of converting to a trust, the companies said in separate regulatory filings.

As more businesses from data centers to prisons make the switch to REITs — which are subject to lower taxes and pay higher dividends than other companies — the IRS is considering whether to narrow the types of enterprises that should qualify. Recent examples of REIT applications in the technology industry include Equinix, which operates data centers for companies such as AT&T Inc. and Amazon.com Inc., and Iron Mountain, which rents businesses storage and maintains paper documents as well as electronic files, medical data and e-mail.Shares of Boston-based Iron Mountain fell the most since the company’s initial public offering in 1996, and traded down 18 percent to $28.25 at 9:35 a.m. in New York. Equinix, based in Redwood City, California, fell 6.1 percent to $191.51, and earlier touched $187.83 for the biggest intraday decline since August 2011.

Lamar Advertising Co. (LAMR), the Baton Rouge, Louisiana-based owner of outdoor-advertising displays that also disclosed an IRS review of its REIT application, declined 6.5 percent to $42.59, the most since November.

Racking Structures

In the case of Iron Mountain, the IRS is questioning whether its warehouses filled with stacks of servers constitute real estate, according the company’s filing with the U.S. Securities and Exchange Commission.

“The company believes that under current legal standards the company’s racking structures are ‘real estate’ for REIT purposes; however, the company can provide no assurances that the IRS will agree,” Iron Mountain said in its filing.

Equinix, for its part, defended its data centers as eligible for REIT status “based on both existing legal precedent and the fact that other data center companies currently operate as REITs,” according to the company’s filing.

To qualify as a REIT, a company has to invest at least 75 percent of its assets in real estate and obtain 75 percent of its gross income from rents or interest on mortgages from financing property, according to the National Association of Real Estate Investment Trusts, a Washington-based trade group. REITs sell equity and debt to fuel growth, and must return at least 90 percent of their taxable earnings to shareholders in the form of dividends.

“We had the opportunity to speak with Equinix’s chief financial officer, Keith Taylor, and are not concerned by the news,” Gray Powell, an analyst at Wells Fargo Securities LLC who rates the shares outperform, wrote in a research note today. “Equinix has many precedent conversions on their side in the form of other data center REITs.”

To contact the reporter on this story: Lisa Rapaport in New York at lrapaport1@bloomberg.net

Filed under Macro Trends

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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