Rising Interest Rates May Dent Equinix’s Q3 Profitability

Rising interest rates

Rising interest rates may subdue Equinix’s (EQIX) bottom-line results. An improving economy, a healthy job market, and rising consumer sentiment are pushing inflation rates higher.

To keep interest rates under the targeted 2.0% level, the Federal Reserve has increased interest rates three times by 25 basis points each. The Fed has hinted at one more hike by the end of 2018, three hikes in 2019, and one rate hike in 2020.

At the end of the second quarter, Equinix had total debt outstanding of $11.5 billion, which exposes it to some interest rate risk. The company is working to remain competitive and expand its global footprint. As a result, it has been acquiring and developing new projects, which are dependent on external borrowings.

Rising Interest Rates May Dent Equinix’s Q3 Profitability

For 2018, Equinix (EQIX) expects to incur non-recurring capital expenditures of $1.8 billion–$1.9 billion and recurring capex of $203.0 million–$213.0 million. Equinix’s investment plans are expected to increase its debt burden, resulting in higher interest expenses. In the second quarter, Equinix registered a 13.2% YoY jump in interest expenses.

There is another risk associated with rising interest rates that may negatively impact REITs (ICF). In a rising interest rate scenario, regular dividend-paying REITs become less attractive than risk-free higher yield bonds. This trend may suppress their prices. Among these REITs, QTS Realty (QTS), CoreSite Realty (COR), and Crown Castle International (CCI) have lost 25.4%, 8.7%, and 4.7%, respectively, year-to-date.

Recurring business model

Equinix’s (EQIX) business is based on a recurring revenue model under which the majority of its costs are fixed. So, growth in its revenues could result in lower expenses as a percentage of its total revenues. Higher revenues and lower expenses helped the company expand its profitability, which is reflected in its adjusted EBITDA performance over the past several quarters.

The trend is expected to continue, boosting Equinix’s third-quarter adjusted EBITDA. Equinix expects its adjusted EBITDA for the third quarter to reach $591.0 million–$601.0 million, indicating YoY growth of 7.4%–9.2%.