Fitch Ratings has withdrawn the 'BBB+' rating assigned to proposed senior unsecured notes intended to be issued by Equinix Europe 2 Financing Corporation LLC, an indirect wholly-owned subsidiary of Equinix, Inc. (EQIX; BBB+/Stable).

Fitch has withdrawn Equinix Europe 2 Financing Corporation LLC's bond ratings as the bonds were cancelled.

Key Rating Drivers

Conservative Financial Policy: Fitch expects EQIX to sustain leverage in the low-4.0x range through the rating horizon. These metrics are strong for a U.S. data center REIT at the 'BBB+' level, but are appropriately more conservative given lower asset ownership. Owned assets represented 66% of recurring revenues as of 4Q23. Additionally, limited but improving secured mortgage access for data center assets results in weaker contingent liquidity relative to other U.S. equity REITs.

EQIX's commitment to prefunding development capex and acquisitions through balanced debt and equity issuances is positive for the rating. Fitch estimates EQIX's leverage at YE 2023 was 3.3x. EQIX has traditionally maintained leverage below 5.0x.

Stable Cash Flow Profile: EQIX's network-dense retail colocation data centers have exhibited stable same-store rental income growth. This is due to constant-currency colocation and high-margin interconnection revenues, which provide predictable and stable cash flows. The relative stability in EQIX's utilization rates (79% as of 4Q23) with low single-digit churn (2.4% as of 4Q23) is a positive. These factors highlight the stickiness of network-dense retail colocation leases and act as a balance to the relatively shorter lease tenor of one to three years on average.

Fitch views data center demand as defensive in a tougher macro environment. Deployments in EQIX data centers are typically mission-critical infrastructure that are revenue linked for companies. Additionally, volatility in energy prices reduces visibility; however, Fitch believes EQIX will balance price increases with customer relationships.

Globally Diversified Portfolio: At 4Q23, EQIX owns, leases and operates a global network of 260 data centers across 71 metros in 33 countries across the Americas (44% of FY 2023 revenues), EMEA (36%) and APAC (20%). The company continues to expand its asset ownership to 66% of recurring revenues at YE 2023 compared to 35% in 1Q17. Fitch expects asset ownership to increase over time as more than 90% of expansion project spend as of 4Q23 is on owned land or buildings with long-term ground leases.

Fitch views operating scale as an important competitive factor for data center REITs. Global portfolio depth and breadth enhances competitive positions, allowing companies to offer cross-border solutions and meet their customers' rapidly growing data needs. EQIX has a strong competitive position through its global network of colocation data centers. This should result in continued growth, given high barriers to entry and switching costs, as well as network effects. As of 4Q23, 90% of the company's customers utilize space in multiple metros, 76% are multi-regional, and 65% are in all three regions.

Focus on International Expansion: In recent years, EQIX has supplemented internal growth with strategic acquisitions to enter or expand in key non-U.S. markets. In recent years, EQIX has entered West Africa through its MainOne acquisition and expanded into India through its GPX Global Systems acquisition. EQIX has also recently expanded its presence in Chile and Peru, adding to its existing Latin America footprint of Colombia, Mexico and Brazil.

The recent acquisitions offer embedded growth opportunities because there is limited overlap between existing customers. Additionally, EQIX can drive further expansion by integrating its global interconnection platform and ecosystem with the acquired data centers. EQIX has also established multiple joint ventures (JVs) with GIC and PGIM Real Estate to expand into the hyperscale markets across APAC, EMEA and Americas. The JV structure reduces EQIX's capital requirements and enhances returns through JV management fees.

Secular Tailwinds Offset/Balanced By Long Term Risks: Secular tailwinds like internet adoption, mobile data usage, 5G deployments, cloud storage, IT outsourcing and migration away from on-premise data centers support EQIX's credit profile. Demand growth for technology has accelerated for data centers since the pandemic. Companies upgrade IT infrastructures and shift workloads to the public and private cloud in order to support remote work settings. Moreover, individual consumers are also driving aggregate demand for online content and entertainment, benefitting demand for data center space and interconnections.

However, data center competition is intense, and pricing and market share dynamics are constantly evolving. Cloud service providers such as Amazon.com Inc. (AA-/Stable), Microsoft Corporation (Not Rated) and Alphabet Inc. (Not Rated) have scaled their cloud businesses meaningfully in the past few years. They have captured market share and transformed the way enterprises and small businesses think about data center needs. This represents a long-term competitive risk even though EQIX has benefitted from this trend as cloud providers are among its tenants.

Derivation Summary

Fitch's ratings reflect Equinix's strong operating platform and competitive position in the global data center industry. The industry has experienced strong secular demand growth from a variety of enduring technology related trends. Equinix's shorter relative lease tenor of one to three years compared with DLR is balanced by the stickiness of the interconnection leases. This is demonstrated by low and stable churn rates and consistent same-store revenue growth rates, compared to lumpier hyperscale-leasing results.

Equinix's leverage is lower than peer DLR (BBB/Stable), which has typically maintained leverage in the 5x-6x range. Fitch views Equinix's leverage as appropriate due to its lower relative level of ownership of its data center real estate of around 66% of recurring revenues, compared with the 80%-90% portfolio ownership for DLR. Equinix remains committed to owning a larger portion of its real estate. This is demonstrated by the majority of development capex spent on fee-simple, wholly owned properties and purchasing ground leases, which Fitch views positively.

Fitch's rating sensitivities maintain more conservative credit metrics relative to 'BBB' category REITs with commercial tenants. This is suitable given the shallower depth of private institutional and secured mortgage debt capital access for data centers relative to major REIT property types.

Key Assumptions

Low single digit annual same-store NOI growth through 2026, driven by positive cash re-leasing spreads and annual rent escalators, offset in part by growth in operating expenses;

High single digit revenue growth due to a combination of acquisitions and an active development pipeline with a ramp up of new facilities;

EBITDA margins remain relatively flat through 2026;

Minimal additional capital deployment beyond keeping capex fairly level throughout the forecast.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Fitch's expectation of net debt to recurring operating EBITDA sustaining below 3.5x;

Increased mortgage lending activity in the data center sector, demonstrating contingent liquidity for the property type;

A substantial (i.e. 90% of total or greater) increase in percent of owned revenues/NOI that would warrant a revision in leverage sensitivities, all else equal.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Fitch's expectation of net debt to recurring operating EBITDA sustaining above 4.5x;

Fitch's expectation of REIT UA/UD sustaining below 2.0x;

Sustained declines in rental rates and same-property NOI;

A notable decline in percent of owned revenues/NOI that would lead to a negative revision in leverage sensitivities.

Liquidity and Debt Structure

Improving, Diversified Capital Access: Equinix has demonstrated strong access to equity and debt-capital markets, even during recent market turmoil. The issuer frequently issues bonds in the U.S. dollar-, euro- and other currency denominated debt capital markets and common equity through its at-the-market program. The company has access to a range of currencies under its multicurrency revolving credit facility and term loan A, including U.S. dollars, Euros, Swiss franc, British pounds and Japanese yen. As of Dec. 31, 2023, Equinix had unrestricted cash of $2.1 billion and $3.9 billion available on its revolving credit facility.

The company's multinational bonds act as a natural hedge, given its exposure to eurozone countries. Equinix also has entered into five JVs with Singaporean sovereign wealth fund GIC and one with PGIM to build and operate hyperscale data centers, which are another alternative source of financing for the company.

Limited Secured Mortgage Access: Equinix's ratings are constrained by its data center portfolio focus, which is a less-established property type with weaker liquidity elements and secured mortgage capital access. The limited availability of mortgage capital for data centers reduces sources of contingent liquidity, relative to other commercial real estate property types, during periods of potential financial stress. Fitch also believes the asset class has limited alternative uses, which further limits downside protection. To offset this potential downside, Fitch's rating sensitivities maintain more conservative credit metrics, relative to 'BBB' category REITs with commercial tenants.

Stable UA/UD Coverage: Fitch expects Equinix's unencumbered asset coverage of unsecured debt (UA/UD) to sustain in the low-2x range over the next couple of years through at-the-market equity issuance and a greater emphasis on owned versus leased assets, partially offset by incremental unsecured debt issuance. Fitch applies a 9% stressed capitalization rate on Equinix's owned NOI to calculate the value of fee simple, wholly owned unencumbered assets and a 10% capitalization rate on ground-leased properties to reflect additional risk.

Issuer Profile

Equinix, Inc. (Nasdaq: EQIX) owns and operates primarily network-dense colocation data centers, providing interconnection services to its customers located in the Americas, EMEA and APAC. EQIX's platform consists of 260 data centers across 71 metros in 33 countries on six continents.

Date of Relevant Committee

01-Nov-2023

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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