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Equinix (EQIX) Approves Conversion to REIT

September 13, 2012 9:02 AM EDT
Equinix, Inc. (Nasdaq: EQIX) has approved a plan for Equinix to pursue conversion to a real estate investment trust (REIT). Equinix's Board reached this decision after thorough analysis of various structures, including alternative financing, capital, and tax strategies, designed to maximize long-term shareholder value. If Equinix is ultimately successful in the conversion process, Equinix expects to elect REIT status for its taxable year beginning January 1, 2015.

Peter Van Camp , Executive Chairman of Equinix , said, "We are committed to creating long-term shareholder value. The REIT structure supports this objective and positions us to achieve profitable, strategic growth domestically and internationally. We believe the conversion process, and the REIT structure itself, will have virtually no impact on the delivery of services to our customers or the performance of our global platform of high performance data centers."

"As a REIT, we will be able to provide our shareholders with regular distributions from earnings. While operating as a REIT, we will continue to fully execute on our global growth strategy of expanding in markets where demand and financial return warrant. We are executing with discipline and focus, and remain on target to generate over $3.0 billion in annual revenue by 2015 and positive adjusted free cash flow in 2013, excluding REIT conversion costs and tax liabilities," said Steve Smith , CEO of Equinix . "We have already seen several of our peers in the data center industry operate under a REIT structure, and we believe that this tax-efficient structure will enhance shareholder value and enable us to be even more competitive."

Equinix has determined that it is advisable to seek a private letter ruling ( PLR) from the Internal Revenue Service ( IRS ) in connection with its proposed REIT conversion, and anticipates filing the PLR request with the IRS by the end of 2012. Equinix expects to seek favorable rulings from the IRS on numerous technical tax issues, including classification of Equinix's data center assets as qualified real estate assets. Even after utilization of available net operating loss carryforwards, classifying Equinix assets as real estate is expected to result in a tax liability due to the reclassification to real property of certain assets that had been depreciated and amortized as personal property and the resulting recapture of depreciation and amortization expenses. The total recapture of depreciation and amortization expenses across all relevant assets is expected to result in U.S. tax liabilities of approximately $ 340 to $420 million , which have been accrued as income tax liabilities on Equinix's balance sheet. These amounts may still be payable in the four-year period starting 2012 even if Equinix abandons the conversion plan for, among other reasons, failing to receive the PLR it is seeking. As Equinix will use its net operating loss carryforwards ("NOLs") to offset a portion of these tax liabilities, it anticipates that it will utilize all of its NOLs in 2012.

In accordance with tax rules applicable to REIT conversions, Equinix expects to issue a special distribution to Equinix shareholders of undistributed accumulated earnings and profits (E&P) of approximately $700 to $1,100 million , to be paid out in a combination of up to 20% in cash and at least 80% in Equinix common stock. Equinix expects to make the E&P distribution only after receiving a favorable PLR from the IRS and anticipates making a significant portion of its E&P distribution before 2015, with the balance distributed in 2015. In addition, following the completion of the REIT conversion, Equinix intends to declare regular distributions to its shareholders.

Equinix believes it can meet the operational and technical REIT requirements by reorganizing its operations to facilitate its qualification as a REIT. As part of this reorganization, Equinix expects to structure its domestic operations and a portion of its international operations as Qualified REIT Subsidiaries (QRS). Equinix's planned timeframe for REIT election is driven by a number of factors, including: (1) the requirement to separate Equinix's domestic business into Taxable REIT Subsidiaries (TRS) and QRS; (2) the extent of Equinix's global operations and the need to separate certain of its international subsidiaries into the QRS/TRS structure; (3) the complexity of required modifications to internal accounting, information technology and real estate systems; (4) further review and development of optimal domestic and international structures; and (5) refinement of the REIT testing process.

Equinix expects, in addition to its E&P distribution and recapture of depreciation and amortization expenses, to incur approximately $50 to $80 million in costs to support the conversion process. If the conversion is ultimately successful, Equinix expects to incur additional annual compliance costs of approximately $5 to $10 million .

The company will consider the issuance of debt and/or equity to support projected conversion-related cash requirements, including shareholder distributions, tax payments and other conversion costs noted above.

In addition to other actions required in connection with the proposed REIT conversion, Equinix will be required to obtain shareholder approval to effect the necessary corporate reorganization, including the addition of a provision in Equinix's charter to establish REIT-related ownership restrictions. Should Equinix fail to complete the conversion process, it still will have incurred substantial costs in this effort.

Principal advisors to Equinix related to the proposed REIT conversion are Sullivan & Worcester LLP , J.P. Morgan Securities LLC , Green Street Advisors , and Deloitte Tax LLP .
Equinix expects to discuss its plan to convert to a REIT on its quarterly conference call for the third quarter 2012.


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