Corrections Corp Of America (CXW), Iron Mountain Incorporated (IRM): Conversion to REIT Status Could Mean Big Gains for This Little Known Stock

Page 1 of 2

Real estate investment trusts (REITs) have delivered strong gains recently as investors have been attracted to income producing assets while interest rates remain pegged near zero. Furthermore, many companies have joined the rush by applying for REIT status, although the IRS has become more scrupulous of this practice. Here, we’ll review four companies that have successfully or unsuccessfully made the switch and highlight the one which appears to be the best investment now.

Corrections Corp Of America

How REITs work

In order to convert to a REIT, an applicant must satisfy two criteria: it must derive 75% of revenue from rent or real-estate investment income, and it must pay 90% of profits to shareholders as dividends. In return the company receives generous tax incentives and a lower cost of debt because REITs are considered to have lower credit risk. Thus, the converting company gets a double boost in efficiency increasing its earning power.

American Tower Corp (NYSE:AMT) is one of the largest REIT conversions in the past several years. The company converted to REIT status in December 2011 and earned a return of 16.92% in 2011 and 33.09% in 2012, substantially outperforming the S&P 500 before and after the REIT conversion was publically known. Furthermore, American Tower Corp (NYSE:AMT) already traded at a premium valuation of over 50 times trailing earnings at the end of 2011, but as profitability expanded the stock price appreciated.

One less successful attempt to convert to REIT status was undertaken by Iron Mountain Incorporated (NYSE:IRM) and its share price was pummeled as a result.  The IRS has become more scrupulous in verifying applicants to dissuade companies from taking advantage of the tax code. Boston based Iron Mountain Incorporated (NYSE:IRM) is a leader in information protection, providing shredding services, data recovery and storage for its mostly corporate client base.  In June of 2012, an application for REIT status caused significant expansion of Iron Mountain Incorporated (NYSE:IRM)’s valuation from 1.7 times trailing revenue in May 2012 to 2.3 times one year later while the share price more than doubled.  Due to the IRS inquiry the share price has fallen over 25% and interestingly the price to sales multiple has returned its valuation before the application. This demonstrates how highly the market values REIT status both from how highIron Mountain Incorporated (NYSE:IRM)’s shares flew on news of the application and how far they have fallen since.

Corrections Corp Of America (NYSE:CXW) is a compelling investment opportunity after their recent conversion to REIT status, which was completed around January. This investment isn’t going to give you a warm and fuzzy feeling; Corrections Corp Of America (NYSE:CXW). operates 67 detention and correctional facilities in over 20 states as well as the District of Columbia. However, if privatized prisons do not appeal to your sensibility, consider the durability of the business model. Given current prison overcrowding space is at a premium, furthermore, state and federal government have become more interested in utilizing the efficiency of the private sector to keep costs under control. The Geo Group, Inc. (NYSE:GEO) is also a prison operator and gives a good sense of comparison within the industry.

The table below demonstrates just how cheap CCA is relative to the average REIT.  The trailing earnings and PEG ratios for GEO and CCA show both stocks are underpriced relative to the S&P 500.  The price/sales multiple shows that they both are very cheap relative to the average REIT, although margins are somewhat lower.  Furthermore, both companies have significantly greater expected future growth and past growth compared to the average REIT, with CCA having superior margins and ROE.

Why further upside may be in store for Corrections Corp Of America (NYSE:CXW)

Further upside should be expected for CCA if the market has not yet fully discounted the increase in profitability that will accompany REIT status. While the stock has risen about 28% in the past twelve months a quick examination of CCA’s income statement reveals how significant the REIT conversion is.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Top 9 Most Popular Free iPhone Apps

Top 10 Least Expensive Private Business Schools in the US

Top 15 Most Expensive Countries in the World – 2014

Top Businesses to Invest In

Top 5 Things You Might Be Doing Wrong With Your Business

Top 5 Strategic Technology Trends in 2014

Top Rags to Riches Stories

Parenting Behavior That Promotes Future Leaders

Top 5 Mistakes Made by Small Businesses

Top 5 Most Common and Potentially Devastating Financial Blunders

Top 5 Highest Paying Jobs for Web Designers

Top 6 Most Respected Professions that Also Pay Well

Top 5 Pitfalls Investors Should Avoid

Top 6 Lawyers and Policy Makers Under 30

Top 6 New Year’s Resolutions for Entrepreneurs

Top 7 Locations to Check in on Facebook

Top 5 Mistakes made by Rookie eBay Sellers

Top 7 eBook Publishers in 2013

Top 6 Health Industry Trends in 2014

5 Lessons for Entrepreneurs from Seth Godin

Top 5 Success Tips from Jordan Belfort – the Wolf of Wall Street

Best Master’s in Finance Degree Programs

Top 6 Earning Celebrities Over 50

The most expensive sports to play

Top 7 Earning Celebrities Under 25

Best 7 Online Courses to Take: Free Finance MOOCs

Top 6 Bad Habits that Promote Failure

20 Most Valuable Soccer Teams in the World in 2013

12 Most Expensive Countries for Foreign Students

Top 30 Most Influential Women in the World

Top 20 Most Expensive New Year Eve Shows

Top 5 Best Vocational Careers

Top 10 Jobs for 2014 by Salary Gain (Predictions)

Top 5 Digital Trends for 2014

Top 6 Things You Can Do To Increase Your Productivity

Top 9 Trending Smartphones in 2013

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!