Recently, Equinix Inc. (EQIX) confirmed that its much-awaited conversion into a Real Estate Investment Trust (REIT) will be effective from Jan 1, 2015. The global interconnection and data center company revealed that the board of directors had unanimously approved the decision.
The company’s board green-lighted the conversion in 2012 and filed a request for receiving a private letter ruling (PLR) from the Internal Revenue Service (IRS). The board had studied alternative financing, capital and tax strategies, before approving the conversion plan and believes that the move will maximize shareholders value over the long run.
Management also believes that the REIT structure will help the company achieve its desired profitability along with growth in the domestic and international markets. Additionally, management believes that this restructuring will not have any impact on the service delivery or the performance of the data center.
Based on the current legal circumstances and past REIT conversions, Equinix expects to get the approval either by the end of 2014 or early 2015. Therefore, it has decided to start trading as an REIT from Jan 1.
The REIT Act, which is part of the Cigar Excise Tax Extension, was introduced in 1960 to offer small investors an equal opportunity to invest in large-scale commercial real estate through buying or selling securities. Revenues of an REIT company mostly come either from rent or mortgage payments on real estate properties. Companies have an obligation to distribute at least 90% of their taxable income to investors as dividend. The tax rate for REITs is lower.
Equinix operates across various geographical regions and is increasingly becoming popular among major players in the tech industry for data management. Thus the company is striving to project all its data centers as real estate assets, thereby increasing its tax benefit.
Although the company’s recurring revenue model, global expansion of data centers and conversion into an REIT are encouraging, we remain slightly cautious about the rising competition from other established Internet data center operators such as AT&T (T), Level 3 Communications (LVLT), COLT and Verizon (VZ).
Additionally, setting up data centers requires huge capital outlays and Equinix plans to add more data centers in the coming quarters to cater to the growing demand for co-location and interconnection services. Apart from this, the company expects more cash outlays in relation to the REIT conversion.
Moreover, the telecommunications industry is currently undergoing consolidation. As customers combine businesses, the requirement for co-location spaces will reduce thereby affecting Equinix’s overall growth prospects.
Currently, Equinix carries a Zacks Rank #3 (Hold).
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