Shares of Equinix Inc. (EQIX) rose 7.35% on Friday’s trade after the company announced the distribution of $416.0 million ($7.57 per share) to shareholders related to its proposed Real Estate Investment Trust (REIT) conversion. Shareholders will be paid on Nov 25, 2014. The company expects a similar distribution in 2015 as well.
Dubbed as "2014 Special Distribution," the current distribution shows the company’s resolve to register itself as an REIT. The company remains hopeful about this conversion, and is in the process of seeking a private letter ruling (PLR) from the Internal Revenue Service (IRS) for its proposed REIT conversion. The company expects the process to be completed on Jan 1, 2015.
We believe that Equinix’s decision to register itself as an REIT company will prove beneficial. The tax benefit achieved from the REIT status will allow it to distribute a significant portion of its profit as dividends, which will boost shareholder value. Thus, Equinix would be a prudent investment option for investors seeking higher dividend yield.
Also, Equinix remains positive on the growing demand for data centers attributed to the Big Data exchanges. To meet this demand, Equinix is expanding its IBX data centers globally and becoming popular among tech companies looking for data management. Thus, the company expects its total addressable market for retail data centers to increase at a CAGR of 8% from 2013 to 2017 and reach $24.0 billion. Based on this projection, the company projects a 10% revenue growth rate through 2017.
Moreover, Equinix could benefit from the favorable operating leverage as well. Its business generates a substantial portion as recurring revenues (95% of total revenue). As a majority of the cost structures are of a fixed nature, every unit growth in revenues would lower expenses as a percentage of total revenue. Higher revenues along with lower costs will expand margins and increase profitability over the long run.
Nonetheless, Equinix competes with Internet data centers operated by established communications carriers 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, they may require less co-location space, and there may be fewer networks available to choose from. In addition, increased utilization of existing co-location space could reduce the attractive expansion opportunities available to Equinix.
Currently, Equinix has a Zacks Rank #4 (Sell).
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