Switch Inc (NYSE: SWCH), a retail colocation provider focused on the enterprise data center segment, today announced that activist hedge fund Elliott Investment Management, via its funds, has collectively become the largest Class A investor in Switch, with an 11% economic interest, and has joined the company’s Board of Directors. In addition, Switch Inc is pursuing shareholder value initiatives including the evaluation of a real estate investment trust (REIT) election, a review of the company’s operational and financial targets, governance enhancements, and an Investor Day to be held in November 2021.

Switch Inc’s goal with today’s announcement is to fully realize the value inherent in its data center operations. Indeed, Elliott Management notes that “despite best-in-class operational metrics, including renewable energy sourcing and power efficiency, Switch remains undervalued”.

As of June 30, 2021, Switch Inc had 131.1 million Class A shares outstanding. Applying Elliott Management’s 11% economic interest, implies that Elliott owns 14.4 million Class A shares. Therefore, based on Switch Inc’s closing stock price on August 5th of $20.31 per share, Elliott Management’s position would be valued at ~$293m.

Shareholder Value Initiatives – Switch Inc

Switch Inc’s shareholder value initiatives include adding a new director to its Board, forming a REIT Committee, and evaluating a REIT election.

New Director to Switch Inc’s Board of Directors

Switch Inc intends to add Jason Genrich, a Portfolio Manager at Elliott Management to its Board of Directors. In addition, to Genrich, Elliott’s Managing Partner Jesse Cohn is also pursuing shareholder value at Switch Inc, albeit not as a board member.

REIT Committee

Switch Inc via its Board of Directors’ REIT Committee is evaluating a potential REIT election, to create shareholder value. Also, this REIT Committee will assess Switch’s capital allocation plan, capital structure, and a multi-year financial plan. In turn, Switch will discuss the committee’s findings at the company’s Investor Day in November 2021.

Switch Inc’s REIT Committee will comprise four directors, including Kimberly Sheehy as Chair, Bryan Wolf, Liane Pelletier, and Jason Genrich (once added to Switch’s Board of Directors).

Switch Inc’s President, Thomas Morton, stated on the company’s Q2 2021 conference call that, regarding the REIT analysis, Elliott Management “is supportive of that consideration at the very least”.

Evaluation Process of REIT Election

Switch Inc has commenced a formal evaluation process of a REIT election with assistance from financial, legal, and tax advisors. The evaluation will review the feasibility of a REIT election, including implications on the company’s tax position and dividend requirement.

Switch Inc’s CFO, Gabe Nacht, noted on the company’s Q2 2021 conference call that the company is “not a cash taxpayer at the moment. So there is no tax advantage to becoming a REIT right now”.

Switch Inc – Data Center Portfolio – Q2 2021

As of Q2 2021, Switch operates 5 data center campuses (PRIMES) in the U.S., representing 510 megawatts of power capacity. Overall, these data centers comprise 5.1 million sqft, in the United States, supporting over 1.3k customers. In addition to this existing data center capacity, Switch has a significant development pipeline.

Active Development

Switch Inc expects to complete construction on three new data centers at the Core Campus (Las Vegas), the Citadel Campus (Tahoe Reno), and the Keep Campus (Atlanta) between Q2 2022 and Q2 2023.

Switch Inc Data Center Active Development Q2 2021

At full build-out, these three facilities will comprise 150 megawatts (8.6k cabinets) of power capacity and 1.3 million sqft.

Which Data Center Operators are REITs?

Presently, not all data center operators are data center REITs, as certain industry participants have elected to operate as corporations.

Data Center REITs

Notable data center REITs that are headquartered in the United States include: Equinix, Digital Realty, CyrusOne, CoreSite Realty, QTS Realty Trust, DigitalBridge Group (owns stakes in DataBank and Vantage SDC), and Iron Mountain (operates a data center segment).

Non-REITs

Switch Inc and Cyxtera Technologies are two publicly-traded examples of U.S.-headquartered data center providers that do not operate as REITs.

Elliott Management – Digital Infrastructure

Beyond Switch Inc and data centers, Elliott Management is an active public markets investor in the digital infrastructure sector. In mid-2020, Elliott Management took a $1bn economic interest in tower company Crown Castle, recommending significant changes.

Additionally, Elliott Management owns 20.5 million shares, equivalent to an 8.8% ownership interest, in fiber company Uniti Group. Based on Uniti Group’s most recent closing stock price, this stake was worth ~$250m overall. However, note that Elliott Management attained its position in Uniti Group indirectly, through their former credit position in Windstream.

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