Equinix Inc (EQIX) is on track to convert to a REIT on January 1, 2015, after overcoming dislocations in the stock due to the IRS revisiting REIT qualification criteria, and the company should also benefit from overall sentiment improvement around the data center sector, says Todd C. Weller, Managing Director at Stifel, Nicolaus & Co., Inc.
“Equinix is our top pick. We think, from a stock perspective, it’s been under significant pressure. Prior to June quarter results, there was the announcement that the IRS had established a working group to revisit REIT qualification criteria, and that had a negative impact on Equinix, because it created some uncertainty about their efforts to convert to a REIT on January 1, 2015. So that was a company-specific factor that drove a dislocation in the stock,” Weller said.
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Weller believes that while sentiment has been negative, the fundamental trends in the space are overall healthy, and that other data center companies operating as REITs are setting a good precedent. Therefore he sees a high probability that EQIX will convert to a REIT on schedule.
“While there was a little bit of fundamental pressure in the business, we think the guidance reduction was modest, and it seems that 2H estimates are at a reasonable level, so we think a cleaner quarter in 3Q and 4Q could help as well. And then, I think if we just get overall improved sentiment around the sector — because Equinix is looking to convert to a REIT, it does tend to correlate with the data center REITs — to the degree sentiment improves around a stock like Digital Realty Trust (DLR), we think that could benefit Equinix as well,” Weller said.