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>>> Michael: Hello. My name is
Michael Stoler, host of the
Stoler Report and moderator of
the AmTrust Title webinar
series, Steven Napolitano,
senior executive vice president.
Today, we're having an
interesting topic called “data
centers.” With more people
staying at home, working at
home, data is the important
element of the world today. More
and more data centers are needed
and there are different
requirements. So, today we have
an investment banker who's
involved with the data center
and telecommunications business,
and we have a banker who's
involved with the data center
business. My guests today
include Jerry Tang, who is the
managing director of the head of
the industry group of global
financial sponsors, real estate
and hospitality for the Natixis.
We have Joe Valenti, managing
director, head of the
telecommunications group at PJ
Solomon. So, who's going to
define what a data center is? 
>>> Joseph: I'll kick it off I
suppose. And thanks, thanks,
Michael, for, for moderating
today and for AmTrust, for, for,
for having us. Look, at it, at
its most simple level, a data
center is a storage facility for
information. It's a place where
enterprises, cloud providers,
telecommunication networks can
place their equipment, their
server infrastructure, so the
data can be stored, computed and
exchanged amongst other parties.
>>> Michael: Who are the top
companies today in the world, in
the telecommunications? People
don't realize that Amazon and
Google are there, but who are
the leaders? 
>>> Joseph: But, gee, that
question probably requires a
pretty broad definition and
maybe a segmentation, if you
will, of, of, of communications,
right? So, you know, at one
level you have the, the, the
names of folks that we all know,
right? The folks that operate
our mobile phones and our fixed
line services. So, Verizons and
the At&Ts in the world and in
this country. As it relates to
this particular topic around
real estate and data centers,
there are a handful of global
players who are the, the key
leaders, the publicly traded
REITs, Equinix, Digital Realty,
CyrusOne, Coresite, folks along
those lines, you know, those are
all the folks that actually own
the infrastructure, own the
buildings themselves, and the
associated mechanical equipment
and power distribution units to
allow their customers to
co-locate servers for purposes
and the applications that
they're, that they're serving. 
>>> Michael: Jerry how Natixis
get involved with financing of
the data center world? 
>>> Jerry: Yeah, so we, we see
data center from two, I guess,
sectors. One is obviously is
real estate. It needs a place to
hold, you know, the equipments,
buildings, infrastructure for
the data centers. The other way
is really, we see the, in here,
the contractual nature of the
data centers, where it's a
infrastructure that's contracted
to many customers. So, we see
the infrastructure perspective
as well. It's a extension of our
C fiber, fiber and the tower
business. Or kind of a data, if
you would, data infrastructure
financing business. 
>>> Michael: Joe, you've been
involved with the tower
business, I think even installed
a, a company in the tower
business. What's the difference
between the tower business and
the data center business? 
>>> Joseph: Well, I think
there's a couple of key
differences, although they both
enjoy secular trends of being
part of the communications
infrastructure ecosystem. You
know, the infrastructure that
allows communication to take
place, although service
different, serve different
purposes. You know, on the tower
side, there's a specific role in
focus. It's basically to
facilitate a wireless
transmission of information. The
tower market has been largely
consolidated in this country
amongst three main public
players, American Tower, Crown
Castle, and SBA. Although there
are a number of private
companies that have grown
significantly in scale and size,
like Vertical Bridge and a
handful of others. You know, key
difference I would articulate
between a tower company's and
data center company's, one on
the tower side, in addition to
only having it really a handful
of customers that are
co-locating on your, on your
tower infrastructure, generally
speaking all, you know, all the
contracts tend to be longer in
duration and they all tend to be
with, you know, well-capitalized
credit tenants. So, you know,
your key customers are Verizon,
AT&T, T-Mobile. There are
others, but those are the, those
are the large ones. So, you have
this customer concentration
dynamic that's, that's at play.
In tower companies, rightfully
trade, you know, in the high
twenties and even low thirties
at times, which speaks to
largely the durability of that
revenue model and the durability
of the customer base and the
ubiquity and importance of
having wireless services be,
be available to the entirety of
the country. Data centers share
in a lot of regards, a, a
similar economic model in terms
of being critical
infrastructure, in terms of
having a generally long dated
contracts, but I would argue
that there is a, a broader
spectrum of, of
offerings within the data center
space. And I'm sure we'll talk
about those on this panel.
Everywhere from the, you know,
large million plus square foot
facilities that an Amazon or a
Microsoft or a Google is using,
you know, all the way down to
what we call edge or
containerized data centers that
sit at, you know, sometimes even
at the base of the tower where
computer is taking place, you
know, right at the, at the spot
where wireless transmissions
are, are occurring. You know,
the other key difference in the
data center space, I would say
is, you know, in addition to the
diversity of the customer base
is, you know, the duration of
the contracts. There are some
that are focused more on, you
know, the big public cloud
providers that have very long
dated contracts, akin to towers.
And when you look at valuations
in the market, a lot of those
businesses will create on a
private basis that looks and
feels and smells like a smell
like a tower company. But there
are several that have much
shorter contracts, the more
retail-oriented data centers,
where people are taking smaller
square footage within a facility
and those generally are three to
five years. Both businesses,
however, have been terrific
performers from an equity
perspective over several years.
And quite frankly have, which
stood the test of time as it
relates to this pandemic that
we're all wrestling with,
because the criticality of that
infrastructure has become more
and more obvious as we all work
remotely and plan to work
remotely, frankly, for a, for an
extended period of time. 
>>> Michael: In my research, I
noted that there are different
types of data centers. There's a
co-location data center and
enterprise data center, a
managed service stage data
center and the cloud data
centers. Jerry, which ones do
you like financing or all of
them? 
>>> Jerry: I would say all of
them, and, you know, a follow
Joe's comment on these, you
know, large public companies
like, you know, Equinix, Digital
Realty. I'm a guy who grew up in
real estate. So, you know, when
I first approached a data center
secto, I was amazed at the
scale, the scale they have. You
know, look at an Equinix. It has
a, today it has 62 billion.
Market a cap. You're talking
about a 14 billion for Boston
Properties. -- --- -- is 4
billion. Bonato's 9 billion. The
shield scale is just amazing. I
mean, the tower companies are
even bigger. 
>>> Michael: You know,
traditional real estate lenders
are comfortable with bricks and
mortars. Now you're lending
maybe a thousand dollars a
square foot, you're lending on
cashflow and revenue, as opposed
to the bricks and mortar.
Correct? 
>>> Jerry: Yeah, it's both. I
mean, there's definitely still a
real estate component, you know,
you'd, you'd still need a place
to hold the data center, the
equipments, the servers, the
cooling systems. And then you
have the, you know, data center
interior infrastructure. Right?
But mostly you're right. I would
say 70, 80% of that cost
structural -- -- -- Is -- -- --
the, the real estate. And that's
why in a small suburb in
Washington DC, or Ashburn,
the data centers are being
traded at a 1,500 per square
foot. For real estate guys, it's
just amazing. It's more
expensive than a CBD Manhattan
class office. How do you grasp
that? You know? So, you have to
recognize that, you know, the
data center market is, maybe Joe
can elaborate more, it's very, I
would say concentrated in
several top markets in the US,
you have a DC, you have Dallas,
Phoenix, obviously Silicon
Valley, Chicago. These are the,
you know, large metropolitan
areas that have great
connectivity, where you have the
internet connection points, key
points, you're connected to the
internet and you have a friendly
-- trade power, which is
essential for the data centers
because they consume so much
power. That's why, you know,
when people talk about the data
centers, they don't talk about
square footage. You know, how
big is the center, and you don't
talk about a million square
feet. You're talking about it's
a hundred megawatts. One mega is
about a 10,000 square foot. 
>>> Michael: I'd say the large
locations are a million square
feet. The center in Chicago, the
center, the NSA bubble tree, are
a million square foot data
centers. These are huge. And
then if you take into
consideration in New Jersey, in
Edison, New Jersey, you have the
former New York Times
headquarters, which is a data
center, which is probably a half
a million, 600,000 square feet.
Can we take a, a retail shopping
mall that's been vacant, you
know, no longer JC Penny, no
more Kmart or anything like
that, and build that and make
that a data center? 
>>> Joseph: Yeah. I'll, let me
take it a crack at responding to
that, and maybe just by way of
framing, the, the size
conversation that you, you, you
gentlemen were having. You know,
the largest data center in the
world actually is, is about
6.3 million square feet. It's
over in, in China called the
Inner Mongolia Information Park,
China Telecom owns it. Right?
So, the scale of these things is
just absolutely, absolutely
enormous. To answer your
question, Michael, maybe I'll
take it two different ways.
First and foremost, you know,
maybe reframe it a little bit,
you know, you have other
properties for alternative uses,
you know, ever been, you know,
transformed to be data centers.
And the simple answer is yes,
they have. There have been, as
you mentioned, the New York
Times building you, you probably
are also aware of several other
buildings globally that may have
been used for things like, you
know, semiconductor
manufacturing, et cetera., they
have all been turned into, to
data centers at this point. And
some great companies have been
spawned out of those facilities
that were overbuilt for the
original purposes. And then,
subsequently monetized by smart
folks who saw the opportunity to
turn it into a data center. That
all said, think about the
infrastructure that lives inside
a data center and how important
it is for the customers of those
data centers. Most facilities
will have at least a
five-nine SLA requirement,
five-nines being, the, the, the
data center has to be up %99.999
of the time or more. And to do
that, you have to have a few
things. One, you have to have
the right physical security for
sure. And you have to make sure
that it's, you know, staffed
appropriately and has the
appropriate fencing and, and
manpower and man traps, et
cetera. But you also have the,
have to have the right
technology redundancy. Right? So
that means having a diverse set
of fiber providers to take the
information that wants to come
into the data center and then
wants to move out of the data
center in a way that, you know,
protects the users of that
facility. So, what does that
mean? Well, that means that if
you had a property that, you
know, had a single strand of
fiber laid to it for purposes of
communication, there're very few
customers are going to look at
that and say, well, geez, I want
to put my critical IT equipment
there because you know, the day
that somebody decides they're
going to dig up the street and
fix the sewer, then they cut
that fiber all of a sudden that
data center is useless. So, one
or two things happen. Usually
the data center provider, you
know, will, will, will seek ways
to get other telecom providers,
network providers to lay fiber
into that facility. And there's
an expense associated with that.
Certain circumstances, those
network providers want to be in
the facility because there's so
much traffic and information
that they could move and become
customers of theirs. But it's
really on a case by case basis.
There's, there's no uniform,
there's no uniform response to,
can a facility be turned into a
data center? I think the
question really has to be
addressed on a bespoke basis
system, where it is, what sort
of applications might sit there?
Because remember, as we were
talking about beforehand, you
know, some of these facilities
in New York have got significant
access to, or Chicago or Dallas
or the other places that Jerry
referenced, significant access
to fiber density and
conductivity. If you go put a
facility out in the middle of
nowhere, it's very expensive to
go potentially lay that, that,
that fiber there, even though
the cost of the real estate may
be, may be less expensive. So,
you know, you have to be
thoughtful about, if you're
going to repurpose a facility,
what applications are going to
sit there? If it's something
that is more disaster recovery
oriented or not latency
sensitive things like, you know,
your, your photos on your
iPhone. At the end of the day,
it's probably not critical if
you can't get your photos for an
hour. Or if it even goes down
for a day, you might be
irritated and frustrated by
that, but it's really not a life
and death situation like
something related to telehealth
or some other critical service.
So, it really depends on what
application is going to go into
the facility and ultimately, can
you repurpose it to satisfy
those applications? 
>>> Michael: Jerry, let's talk
about specific type of
transactions. Before you were
saying to me, you have a
transaction in the Virginia
area. Tell me about the
transaction, the amount of
financing, the percentage, you
know, loan to value and loan per
square foot and so on. 
>>> Jerry: So, we, we were
looking at a new construction
data center deal, where the, the
operator, namely, the real
estate owner, they have a line
up some really large public
cloud operator, you know, along
with the Google, Amazon,
Facebook. One of the firms, for
a long-term lease. So on that,
we were able to come up with
pretty, you know, compelling,
financing proposal, you know, in
the range of 70 to 80% launch
costs, because we were more
relying on the lease. The lease
well -- -- -- versus you know,
the, the actual costs. And leave
from debt per foot basis. So
the, the rule of thumb is if
your land cost is a, you know,
quote a hundred dollars per
foot, maybe I think that might
be the going rate in Northern
Virginia right now. The
infrastructure costs, namely
the, the power distribution
units plus cooling fixtures,
those will add another $600 to
$800 per foot. So you're talking
about owing close to a thousand
per foot and the rents, the, you
know, in the data center space,
people use, Imago was I guess,
terms, but I would try to
translate that into the real
estate terms, rents when you are
net, I think between $60 to $80,
if you, you have five cap on
that, you know, getting, you
know, $1,200 to $1,400, which is
similar to one of the largest
trade that happened in the past
year, where -- 
bought a couple of data centers
in Northern Virginia for
$14,000. 
>>> Michael: Joe, since you are
an investment banker, where are
most of the financings taking
place? Are they being done by
the investment bankers or is it
being done through the Natixis
of the world, or is it being
done by private equity or the
bond market? Because, you know,
you were just talking about a
lease. You can take that lease
and you can securitize that bond
release. 
>>> Joseph: And this is not an
effort to avoid the question,
but the reality is, is happening
all over the place. And I'll
again, maybe segment it because
it's tough to paint it with a
single brush. So, if you look at
the public reads and I use
Digital and Equinix and CyrusOne
as examples of those, you know,
those are all investment grade
rated, you know, entities that
have ready access to both the
public debt and public equity
capital markets. So, more often
than not, when any of those
parties have, have capital
needs, you know, they're
generally using both the equity
and the debt markets to
facilitate those needs and the
demand for those offerings has
been significant, you know,
Equinix just raised a
substantial amount of equity
capital to facilitate its
acquisition of some properties
from BCE. Digital Realty did a
transaction with a, with
Interaction, which had a stock
component to it. So effectively
issued equity in that, in that
fashion. So, the public rates
have again very stable and
steady access to the, to the
public markets. On the private
side, there has been a massive
influx of infrastructure and
pension funds and sovereign
wealth money that has looked to
deploy their capital across a
communications infrastructure
broadly, but specifically in
data centers, right? Because
it's viewed as long-term
protected and enable to
withstand cycles, including the
most recent one that we're in,
given the, given the pandemic.
So, you know, when you think
about the infrastructure
capital, I'll just use it as an
example. You know, there's been
probably 175 to $200 billion
worth infrastructure oriented
equity raised in the last few
years. Roughly 20 to 25% of that
is probably pointed towards
digital infrastructure and
that's on an unlevered basis,
right? So, you're talking about,
you know, something to the tune
of $50 billion of capital,
looking to find a home in
communications infrastructure
broadly defined -- that'll
include towers and fiber
networks and data centers. But
you look across the, the number
of companies that have, you
know, portfolio assets,
Stonepeak, Digital Colony, KKR
just announced a billion Euro
backing of a, of a program in
Europe to go build data centers.
you know, and there are several
others that have, have similar
investments across the spectrum
from the Canadian pension funds,
all the way through the, through
the sovereign wealth funds. So,
you know, capital has not been
really a, I would say a problem
for folks in the, in, in the
business. Now, you know, the,
where the, where the problem
exists is the person that looks
at this space and they say,
well, geez, you know, the, the
cash flows here traded 25 to 30
times multiples, and I see the
secular tailwinds going on in
the space, I see the growth. I'm
going to go, try to go do a de
novo build on a, on a data
center. You know, people forget
that not only is there a high
level of expertise required in
constructing and building a data
center, but you know, the
clients that they ultimately
want to serve generally are,
have much more affinity that
people who have -- to use a
football phrase bend in the end
zone before, right? I mean,
you're going to turn over your
keys on your critical
infrastructure and put your,
your most important assets in
somebody else's house. You want
to make sure they know how to
run the house. And, and that's
where I think some of the
challenges related to new
upstarts in the, in the sector
have come about. Now, folks that
have been operators or worked at
big operators beforehand and
have a credible track record
generally find it pretty easy to
find that financing. But for
folks that decide they're going
to go de novo, you know, the,
the opportunities aren't quite
as robust.
>>> Michael: Jerry, you're
competing with all this other
money. Why are people going to
Natixis as opposed to a private
equity or a sovereign wealth
fund? 
>>> Jerry: We got a cheap money.
[laughter] 
>>> Michael: Speaking of cheap
money, so let's talk about a
structure -- 
>>> Joseph: Well, Michael, just
before you go there, just to
make sure that I clarify, my
reference was primarily around
the equity portion of the
balance sheet. Obviously that
equity, that the infrastructure
sovereign wealth pension fund is
providing is being leveraged
significantly by folks like
Jerry and, and his -- who
are able to do that pretty
efficiently. 
>>> Michael: Jerry, back to you.
>>> Jerry: Generally, we, we
haven't seen like a, a loss of a
termination, I guess,
provisions. I mean, we, we, we,
there are several types, you
know, depending on what kind of
a facilities you're talking
about, be it a cloud co-location
or retail or edge, you'll have a
different type of a contract,
underlying contracts. So, the
leverage will vary between these
most of these different
facilities. For cloud, if you
have a loan lease, I think we're
comfortable, you know, having a
much higher leverage than you
would otherwise, you know, we
can probably lend out to you a
thousand dollars per foot, which
sounds crazy for real estate
guys to even grasp. For the
retail quotation, for example,
if you have more turnovers, I
think we generally want to be,
you know, at a 65% or lower. So,
it really depends on types of
facilities and locations,
connectivities, various sectors.
>>> Michael: So, I think in
summation, we know that the data
center world is growing. We have
investment bankers who
understand the business rather
well, especially the guys who
run telecommunications for PJ
Solomon. We have bankers who
understand the financing of the
world of data centers, Jerry
Tang and Natixis. And I'm Mike
Stoler. And I'd like to thank
you for being here today at this
webinar brought to you by
AmTrust Title, Steven Napolitano
executive vice president. See
you next week. 
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