Data Center REIT Equinix Refutes Short Seller Claims, Reports 7% Revenue Growth

Equinix, the world's largest data center REIT, is pushing back on allegations from a prominent short seller that it misled investors, pointing to an internal audit it says found no merit to claims of wrongdoing. 

After Hindenburg Research accused Equinix of using accounting tricks and other misleading practices to artificially inflate the firm’s value, Equinix announced this week that an internal investigation conducted by its board and a pair of outside firms found that the company’s financial reporting had been accurate. It said the investigation has been “substantially completed” but remains open. 

Equinix made this revelation Wednesday evening, alongside its first-quarter earnings, which beat analyst expectations with 7% year-over-year revenue growth. This led to a 6.8% jump in the REIT’s share price over the last five days. 

Equinix still faces a shareholder lawsuit and a pair of federal inquiries into its accounting practices. While Equinix’s internal audit hasn't concluded, the company’s leadership is projecting confidence that its initial findings are accurate and that the firm will be cleared of any malfeasance. 

“They came back with a level of confidence in those results and in the accuracy of those results,” Equinix CEO Charles Meyers said on the company's earnings call Thursday. “While the investigation remains open … we feel great about the outcome.”

Equinix owns 261 data centers in 71 different metro areas. It has an estimated market capitalization of nearly $72B.

In late March, Hindenburg Research published a report alleging that Equinix’s leadership has for years used an “accounting trick” to artificially inflate the firm’s adjusted funds from operations, a key profitability metric for REITs. Equinix reportedly did this by intentionally misclassifying maintenance expenses as “growth capex,” giving the impression that the company is spending less to maintain its existing assets than it actually is, Hindenburg said. 

Citing interviews with former Equinix executives and other employees, the report provided what it said were examples of Equinix leadership classifying routine maintenance costs as growth capital expenditures. This included putting new serial numbers on refurbished equipment so it could be listed as new and classifying expenses like replacing batteries and lightbulbs as capital improvements. Hindenburg insinuated that Equinix executives were boosting AFFO for personal gain, as their compensation is tied directly to that metric. 

“Equinix’s questionable AFFO accounting has contributed to an estimated $295.8 million in stock award grants to top executives who have personally benefited from these accounting games,” the report says.

The short seller also raised questions about Equinix’s operational viability, alleging that the data center giant has oversubscribed its available power capacity. That would mean that if tenants tried to use all the power they were contractually allotted, Equinix wouldn't be able to fulfill those contracts. 

While many within the data center industry have expressed skepticism about Hindenburg’s claims, shares of Equinix slumped nearly 20% in the weeks after the report was released. 

The allegations also thrust Equinix into legal peril. The firm received a subpoena from the U.S. Attorney’s Office for the Northern District of California in the days following the report’s publication, and the Securities and Exchange Commission issued another subpoena on April 30, Equinix revealed in its earnings release this week.

Last week, the company was hit with a shareholder lawsuit in the U.S. District Court for the Northern District of California stemming from the allegations of misleading investors. 

While Equinix had said little publicly in response to Hindenburg’s allegations, the firm used its earnings release to reveal that the audit it launched in response to the claims found no wrongdoing. 

The investigation, led by law firm WilmerHale and AlixPartners’ forensic accounting practice, didn't identify any accounting inconsistencies or errors that would require an adjustment to previous financial statements, according to Equinix. 

“Based on the findings of the independent investigation, the Audit Committee has concluded that Equinix's financial reporting has been accurate, and that the application of its accounting practices has resulted in an appropriate representation of its operating performance,” the company said in a written statement Wednesday. “The Audit Committee had full discretion over the scope of the investigation and was not restricted in any way.”

Although the SEC and Department of Justice inquiries are ongoing, Equinix’s leadership said on the earnings call they weren't concerned that federal investigators would uncover anything that didn’t turn up in their internal audit. The scope of Equinix’s investigation closely mirrored the two federal inquires, Meyers said.

He expressed confidence that both federal agencies would come to the same conclusion. 

“There’s not a lot of light between those,” Meyers said. “The investigation conducted by the audit committee and by the independent advisers … really represents the foundation that we believe is needed to address the matters in the DOJ and SEC subpoenas. I feel like we've got our arms around that solidly.”

In addition to refuting questions about the firm’s accounting practices, Equinix leadership also pushed back on Hindenburg's suggestion that the company was selling more power than it has access to and was at risk of failing to fulfill contracts with tenants.

Chief Financial Officer Keith Taylor touted the firm’s processes to ensure power is delivered to tenants as promised. 

“Our ops team perform thorough capacity reviews and regularly monitor both our average and peak customer power draw against the sheer facility capacity to ensure we can support our commitments to our customers,” Taylor said. “As demonstrated throughout our greater than 25-year history, we've reliably delivered against these operational commitments.” 

Shares of Equinix shot up following the firm’s earnings report. In addition to the results of the internal audit, Equinix reported better-than-expected first-quarter performance, with quarterly revenues jumping 7% year-over-year to $2.1B.

The company anticipates annual revenue to climb as much as 8% from 2023 to nearly $8.8B, growth Meyers attributed largely to corporate adoption of artificial intelligence driving rapid investment in digital infrastructure by both enterprises and hyperscale cloud providers. 

Equinix’s leadership said the company, with its portfolio skewed toward massive amounts of capacity in major metros with strong connectivity to major cloud facilities, is uniquely positioned to control a significant share of the emerging market for private and hybrid AI. Typically, this means corporations using cloud-based AI that, for security, compliance or economic reasons, will need to have more control over some of their data than cloud providers can promise. Pharmaceutical and financial services firms have been two of the earliest adopters, according to Equinix. 

Meyers said he sees that accelerating demand in the coming months.

“The rapidly evolving AI landscape continues to serve as a catalyst for economic expansion, creating immense potential for Equinix as our customers recognize the importance of digital initiatives in driving long-term revenue growth and operational efficiency,” Meyers said. “Given strong underlying demand for digital infrastructure and a long duration in delivering new capacity, we see a growing scarcity mindset, and therefore, we continue to invest broadly across our global footprint.”

Equinix has 50 major projects underway in 34 markets, including its first hyperscale-oriented development joint venture in a U.S. market, a $600M JV with PGIM Real Estate in Silicon Valley. 

While the company is expanding its footprint, Equinix is also launching a new spending category to squeeze more capacity out of some of its most profitable assets. Starting this quarter, the firm is directing millions in what it calls “redevelopment capex” to retrofit some of its connectivity-oriented data centers that are at least 20 years old. 

The first of these facility upgrades will be a $76M redevelopment of Equinix’s DC2 data center in Ashburn, Virginia, one of the company’s oldest connectivity exchanges and a central piece of the firm’s Northern Virginia ecosystem.

By updating cooling systems, electrical infrastructure and other equipment in these older data centers, Equinix estimates it can improve power efficiency enough to add significant capacity to a stabilized asset, potentially augmenting revenues on a given facility by as much as 20%. 

“You can unlock additional usable power either through power efficiency projects or this kind of redevelopment investment where you're putting entirely new equipment in,” Meyers said. “If you can unlock that power and match it to space that is unused or on hold, you get meaningful incremental capacity.”