Equinix, (EQIX) the colocation data center company, declared at the end of 2014 that its board of directors had voted to convert the company into a real estate investment trust (REIT) as Wall Street had long anticipated.
EQIX has a PE ratio of 81.0. Currently there are 9 analysts that rate Equinix a buy, no analysts rate it a sell, and 5 rate it a hold. It has a market cap of $11.8 billion. Shares are up 24 percent year-to-date as of the close of trading on Tuesday. Equinix shares are unchanged and trading well at $231.98.
The view of many US commentators is that interest rates will remain low for the foreseeable future. That means more challenging times ahead for investors. High-yield bonds are always an option for income, as are high dividend-yield stocks so the market is looking at stocks with the potential to raise their dividends higher with little risk.
The kids are all REIT?
“There are other options available that may provide a sudden, fat dividend payment, as well as stock price appreciation: companies that are currently in the process of converting to real estate investment trusts,” said investment advisor Peter Anderson on Forbes.
“REITs can be appealing for their income features (the company must pay out at least 90 percent of its earnings to shareholders – one of the many requirements for a company to be a REIT) but it’s tough to identify those REITS that have potential capital appreciation, too.”
However, there are problems with REITS. There is always a possibility that conversions to REITS will not go through. This is especially true this year, because the IRS stepped up its scrutiny and due diligence for conversions, viewing some REIT requests in the same negative category as Merger & Acquisition inversion deals, which divert corporate tax revenues away from the federal government.
Making money out of naked selfies
As Forbes said: “Equinix builds and operates data centers that house servers for the cloud. This business doubles every two years. In short, we have the endless need to store data of all types. And yes, for some this even includes naked selfies! Equinix is a natural business to convert to a REIT, because its revenue/rental structure appears naturally like a real estate operation.”
For the past year, the stock traded as if the board believed there was great uncertainty about the conversion prospect, despite the fact that the IRS had already set a precedent by granting conversion to two other stocks in the same industry: Digital Realty Trust (DLR) and DuPont Fabros Technology (DFT). Good public relations or just caution? No one knows.
To comply with Inland Revenue Service (IRS) rules concerning a REIT conversion on January, the company announced it will pay a special distribution of about $420 million to shareholders —about $7.60 per share — not the actions of a company worried about its transformation.
There can also be upsides
The upsides to the conversion to stock prices are twofold. It will become a member of the REIT indices, which will increase technical demand similar to when a new stock enters the Standard & Poor 500. Secondly, the valuation protocol for REITs is different from traditional stocks, but as I said earlier, Equinix’s structure is perfect for a REIT.
Investors backed down from IT security company Iron Mountain’s (IRM) stock because a long IRS review process caused uncertainty about whether the process would go ahead. In the end the IRS approved IRM’s REIT structure, but it was not easy. Lamar Advertising (LAMR) and CBS CBS -0.99% Outdoors (CBSO) also converted last year. This suggests that the IRS has become looser in interpreting eligibility for conversion.