Data center operator Switch (SWCH) officially announced its plans to convert to a real estate investment trust (REIT) last month. It's making a move to unlock value because it trades at a discount to data center REITs.
However, that switch to a REIT is only part of the story here. The data center operator boasts significant expansion potential, which could power big-time total returns in the coming years. Here's a closer look at what Switch sees ahead.
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Switch 101
Switch recently held its Investor Day. Management provided investors with an overview of the company's current operations and its future growth potential.
Currently, Switch operates five data center campuses in the U.S. These include:
- The Core in Las Vegas: 2.34 million square feet and 315 megawatts (MW) of power capacity. It can expand that to 3.94 million square feet and 495 MW in the future.
- The Citadel in Reno-Tahoe, Nevada: More than 1.3 million square feet and 130 MW of power capacity, with expansion potential to more than 7 million square feet and 650 MW of power capacity.
- The Pyramid in Grand Rapids, Michigan: 650,000 square feet and 10 to 30 MW of power capacity, with expansion potential to more than 1.59 million square feet and 110 MW of power capacity.
- The Keep in Atlanta: 310,000 square feet and 35 MW of power capacity that Switch could expand to 1.1 million square feet and 150 MW of power capacity.
- The Rock in Austin, Texas: More than 430,000 square feet and 20 to 40 MW of power capacity, with the potential to expand up to 1.98 million square feet and 185 MW of power capacity.
The current bedrock of the company is The Core. It's one of the largest data center campuses in the U.S. and currently supplies 63% of its revenue. However, that's down from 82% in 2017. That's due to the growth of Citadel and Pyramid, the development of Keep, and this year's acquisition of Data Foundry, which launched The Rock campus.
These campuses provide the company with a strong foundation from which to grow in the coming years. It has enough room to build out 16.2 million square feet of capacity, up from its current size of 5.1 million square feet.
A powerful growth platform
Switch currently has 1.3 million square feet of space under construction across the Core, Citadel, and Keep campuses that should come online through 2023. In addition, within the 2024 to 2026 time frame, it plans to add 2.2 million square feet across the Core, Citadel, Keep, and Rock campuses. It expects to invest between $400 million and $500 million per year on this build-out.
The company estimates that this expansion will grow its revenue from $592.5 million this year to more than $950 million by 2026, or at a 10% to 12% compound annual rate. Meanwhile, it sees its growing scale improving its profit margin from 52.4% to 55% by 2026. Those two factors should enable Switch to grow its adjusted funds from operations (FFO) at a more than 12% compound annual rate over this period. That implies continued industry-leading growth, given that its peers have grown their AFFO per share at an average of 4.6% over the last few years.
Meanwhile, the company expects to continue expanding those campuses in phases in future years, with the potential to grow its square footage to more than 11.5 million square feet by 2030. Switch could grow its revenue at an 11% compound annual rate over the next decade if it can deliver on that target. Meanwhile, it would still have plenty of room to continue expanding its campuses, which could allow it to accelerate its growth over the coming decade or keep growing at a high rate beyond 2030.
It's important to point out that this forecast doesn't assume any additional acquisitions. Switch made its first major deal this year, buying Data Foundry for $420 million to launch its Rock campus. The company could make more deals in the future if it finds the right fit for its portfolio, which could bolster its long-term growth rate. That could include potentially expanding globally by acquiring a data center platform in a key global hub.
Flipping the switch to keep growing
Switch is converting to a REIT to support the next phase of its growth. That structure should boost its valuation, making it cheaper to raise capital to expand its data center platform. These investments would enable the company to grow its FFO at a double-digit annual clip for years to come. And that sets investors up to potentially earn high returns, making Switch look like a compelling opportunity.
