Today Equinix (NASDAQ:EQIX, news, filings) announced that its board has approved a plan to convert the company into a real estate investment trust, or REIT. They have been flirting with the idea for years now, as the REIT structure has tax advantages. But I don’t think it will surprise anyone that they decided to pull the trigger and join Digital Realty Trust, Dupont Fabros, and CoreSite amongst others. Yet it will be a bit different for Equinix, as the raw real estate development side of things is not quite as big a part for them as for the others, and it should be interesting to watch how it all plays out.
The process will take quite some time to run its course though, culminating in REIT status for the taxable year beginning in January of 2015 – two and a half years away yet. Before then they will seek a private letter ruling from the IRS this year that will help clarify various tax issues, and shareholders will have to weigh in as well. In the meantime, it will be business as usual except for the lawyers.
Somewhere along the line, they’ll be paying out a bundle of undistributed accumulated earnings and profits of $700-1100M, and then will begin declaring regular distributions to shareholders. There will also be costs aof $50-80M along the way to support the conversion and $5-10M in annual compliance costs. In other words, the analyst community is going to have to work a bit harder to earn its supper keeping track of all this stuff. Me too I guess, seeing as I’ve never really tried to make sense of REIT earnings reports thus far.
If you haven't already, please take our Reader Survey! Just 3 questions to help us better understand who is reading Telecom Ramblings so we can serve you better!
Categories: Datacenter · Financials
Join Our LinkedIn Group
At last check some time ago , I believe (3) had amassed approx. 7M sq. feet of “owned” data center real estate properties from which approx. 1/3 was earmarked for exclusive company use, i.e. NOC’s.
Certainly, there has been some expansion in addition to capital investments to improve data center capabilities and energy efficiency over the past couple of years since this was being discussed, inclusive of the fact that Dr. Storey talked about > 13,000 “ON NET” buildings now being connected to Level 3’s global backbone as of yesterday while fully notating that there are still more than 100K enterprise buildings just 500′ from his PIPES.
Robert, how plausible is it that Big (3) goes a spin off route in order to maximize the “value” of their “REAL ESTATE HOLDINGS” for their owners, at the same time making you work harder to understand a REIT based business model?
CarlK, It’s not really about how much space you have, but whether your primary business is real estate development. Level 3’s data center footprint and that of Equinix are really quite different in orientation and intent. That doesn’t mean they couldn’t do it, but it’s an entirely different equation for them.
Understood Rob, although I believe (3) has a deep enough bench on its board–bankers, real estate moguls–as well as Kiewit to implement the right managers to make it happen assuming “numbers” deem favorable for owners.
Doing so, must be inclusive of being able to finance the final build out of America’s enterprise buildings just 500′ to the rest of the globe via The Level 3 backbone.
In addition, it would seem that LLL theory for real estate is in full force, so when Crowe has said over the past couple of years that, the better metric for keeping track of “building connections” is the “aggregate sq. ft. of enterprise buildings” a company is connected to, vs. the “the # of buildings,” he was speaking directly to the location, location, location where the most important customers are domiciled.
This might be an interesting time for Level 3 to prove how much of the “INTERNET” they do indeed “OWN.”
If I could keep track of enterprise square feet lit by fiber, I’d do it – but the data just isn’t there except for a few isolated cases.
As for Level 3 proving things, one can certainly hope the time is nigh and not forever a quarter away still. We shall see how the second half unfolds. But for Equinix, the stock is up 10% today on the REIT news.
Excellent post Carl, keep posting in such a fashion and no one will make bad remarks about your style or method of saying what’s on your mind. We all love it when you use the proper Location, Location, Location of your brain to give us useful data from the center of your brilliant thinking mind.
et tu, Walter?
this is interesting news, although hard for me to draw conclusions. are they trying to match tax structure to their ultimate buyer? has EQIX given up on innovation and telecom/data services (not-reitable). Also, they have been expanding internationally – that revenue is treated differently (and, if kept off shore, isn’t subject to US taxes until repatriated). REITs are doing great today in a world of historically low cap rates, but their market is notoriously cyclical – example: in 2008 several reits (including dupont) had challenges and some reits went away (could not raise new money, had to distribute funds from operations). passing through most or all free cash flow is a tough dynamic for any business and may even be harder for tech companies. note how much cash aapl, goog, orcl and others retain.
by this “colo services = landlording” logic, why aren’t “facilities based” disney world, verizon and att reits? isn’t mcdonalds a real estate business too ?
Interesting take!