After a couple of recently announced acquisitions close, there will only be two pure-play data center REITs in the market -- massive companies Digital Realty (DLR 2.68%) and Equinix (EQIX 1.67%). However, we recently learned that data center operator Switch (SWCH) plans to convert itself into a REIT in the not-too-distant future. In this Fool Live video clip, recorded on Nov. 16, Fool.com contributor Matt DiLallo, and editors Deidre Woollard and Kayla Schorr, discuss Switch and why it might be worth a closer look for investors.
Deidre Woollard: I just want to take us through Switch because, Matt, you've mentioned it a couple of times, and when we're talking about data centers -- like you said, it's not a REIT yet, it's not going to be REIT yet for another two years, but it's the new kid on the block, and they had a pretty strong third quarter.
Matt DiLallo: Yeah. Switch, they're really small data center REIT. They only have about, I think it's five campuses right now, but really great growth. They are an organic growth story. They actually just made their first acquisition earlier this year, but they're growing double-digits for revenue and earnings just by developing very specific, very, very high-quality data centers. Their CEO, Rob Roy, has, I think like 750 patents around data centers, and it's all about sustainability and speed. He has really built high-quality data centers, and it's attracting more and more tenants because they want this.
Some of the things that data centers need to do is provide 100% uptime -- that's where they have power all the time, they have the right water, they have the right amount of heat sources. They have put in these redundant systems so they're always up. They also use a lot of renewable energy so that there's sustainability; they're really good at water usage. We talk so much about net-zero for energy. Data centers are starting to talk about how can we get net-zero on water uses, because they use a ton of water, and they put a lot of these in dry areas like Phoenix, and so water is a huge issue for them. So they're really focused on that and just doing a great business. They know the data center business well. They are really focused on even where they are locating their data center REITs where it's more sustainable -- where it's in Reno, Nevada, instead of Phoenix because it's cheaper and it's not tied so much to the heat. They're just so focused on how they can be the most sustainable data center REIT out there.
Woollard: Well, I think the one in Reno is interesting -- and let's see if I have the map. By the way, I love the names of their data centers -- they all have names, which I think is awesome. The Citadel, which is the Reno one. I was listening to their earnings call, and I guess they have this agreement with the city that they are basically going to be able to recycle all of the water within that facility. I think that's really powerful. Like you said, this is a really big issue for data centers going forward, and it's something I think investors are asking more and more, is they're asking these kinds of questions because they know these systems take up a lot of power. They get really hot, they have to be water-cooled, there are a lot of concerns. But you can see here on this map, they've got those centers in the different zones, and they are really planning to expand all of those individual data centers, like they talked about The Rock in Austin, The Citadel in Tahoe. I can't wait to see what the next name is, because I think they're pretty interesting.
DiLallo: This slide I think is a great slide, because it just points out where they are different. Real estate is always about location, but they're specifically targeting locations with low tax rates, for example. That would benefit their tenants because they can pass that onto their tenants. They're looking for places that have great sources of low-cost renewable energy because the data center business passes through a lot of these costs onto those tenants. They are very smart on where they are locating things, looking for low humidity because that's less of an issue for heat. Very smart business plan, and they have a lot of space in these places to expand. It's just going to be a really great organic growth story.
Woollard: Just one more thing here: This is their revenue by vertical. I think this is interesting too, because we tend to think of data centers as being only used by a couple of core businesses. We might think of e-commerce, or we might think of social media, or things like that. Data centers are increasingly a part of just about every business that you can think of, and as we wrap up this hour and thinking about data centers in general, it's important I think of them as a key component -- almost like a commodity -- for just about every other business that we invest in.
DiLallo: Yeah. A lot of times, companies would have an on-site data center, and because we've become such a mobile-first, cloud-based world, that just doesn't work anymore. That's where these colocation data centers are playing that role. They can do it better, they can do it cheaper, faster -- everything you want for in a partner, and that just fits that mold of today's cloud-based system.
