The novel coronavirus epidemic has been tough on real estate investment trust (REIT) stocks. Retail and mall REITs have suffered as consumers stay home and self-quarantine. Office REITs have sold off as investors fret about a potential recession. Mortgage REITs have been sold on prepayment fears.
But one REIT sector has held up reasonably well: the data REITs, especially Equinix (NASDAQ:EQIX), which is down about 5% year-to-date compared to the broader bloodbath in the market. Why has this company been relatively bulletproof?
The long-term growth story
Equinix takes its name from the phrase "Equality, Neutrality Internet Exchange." The idea was to create a vendor-neutral platform for data exchange. Today, the increasing demand for data and cloud infrastructure has put Equinix at the center of a growing market. Streaming video and home entertainment have increased bandwidth demands as well.
Data REITs own and manage facilities that allow companies to securely store and distribute data. The company currently operates in 55 metropolitan areas across 26 countries. Equinix is the dominant player in the space, having delivered over 363,000 connections, which is more than the rest of the top 10 competitors combined.
Equinix conducted a study which forecast that private interconnection capacity will grow 51% between 2018 and 2022 as providers strive to bring digital services closer to the user in order to improve performance. The company's biggest customers include Oracle, Verizon, Zoom Video Communications, and Salesforce.
The test of remote working is upon us
The coronavirus epidemic is providing a global test of remote work for many companies that would have never really considered the idea. If we see little to no drop-off in productivity, remote working could end up going mainstream, depending on how long the crisis lasts. Mass acceptance of remote working would probably require a cultural change; however, there are numerous benefits, including environmental and social.
In addition, telemedicine will only grow in popularity as a way to cut costs. Universities will be going through a massive crash course in online education. All of these secular shifts benefit data REITs like Equinix.
Strong growth, a safe dividend, and a premium valuation
During the fiscal year ending Dec. 31, 2019, revenue increased 10% to $5.6 billion and net income came in at $507 million. Fully diluted earnings per share for the year were $5.99, and the company paid a dividend of $9.84 per share. Since Equinix is a REIT, net income doesn't really tell the whole story. Adjusted funds from operations (AFFO) were $1.9 billion in 2019 or $22.81 per share. So while it appears that Equinix is paying a higher dividend than net income, in reality, the dividend is about 43% of AFFO per share, so the dividend is well-covered.
Equinix is not a cheap stock, but some companies that so dominate their space trade at premium multiples. Equinix is valued more like a tech stock than the typical real estate and rental REIT which trades on its dividend yield. At $621.09 a share, Equinix trades at 104 times 2019 earnings. The company trades for 79 times estimated 2020 earnings, which is still a hefty premium to pay for 31% earnings-per-share growth. Equinix recently hiked its quarterly dividend by 8% to $2.66 a share. That works out to a 1.7% dividend yield, which is pretty miserly for a REIT, but not many REITs own their respective spaces the way Equinix does.
Despite all of the pain in the stock market, Equinix has held its value quite well. Coronavirus issues may end up helping the stock by boosting its visibility and accelerating a move toward more remote work. The stock is pricey, but the company dominates its space the way an Alphabet or Amazon does. It could be the antidote to the nausea caused by coronavirus volatility.