Chameleon of the Capstack

Q&A Highlights

Transcripts

Yeah, it seems like there's a good story there too. Like sometimes it requires a lot of different people and a lot of different pieces to work together. So like if you need a local government plus you need, the energy provider, plus you need, some property that is, you know, blighted or underutilized.

It seems like it serves a lot of purposes, you know, with a forward thinking owner and, you know, an entrepreneurial sponsor. And, yes, like, any deal, a lot of things have to come together. I think perhaps more than most deals, there's more puzzle pieces that need to come together here. But this isn't the unicorn like there are other opportunities out there.

They're probably not as beautiful as this building. I continue to say that this is the world's most beautiful, data center because it is like, literally clad in copper. The family that built this back, you know, before the financial crisis, spared no expense when they built the printing press in 2006.

And I think because of that, you know, there's another feel good element here, which is that Patmos intends to use a good chunk of the space that obviously won't be needed for data halls to build kind of a community tech, you know, AI space, right? Right. In downtown Kansas City, right in downtown Kansas City. You know, is that going to be part of the next one of these?

Probably not. But I love that. It's part of the first. So how do we get our arms around the eligibility of the case? You know, $100 million deal here. I mean, people think data center. They think energy hog. How did this become, effectively a PACE eligible measure? Good question. Energy hog doesn't necessarily mean inefficient or unsustainable, right?

Like you can use a lot of energy efficiently, or you can use a lot of energy inefficiently. And yes, this project uses a lot of energy. It's daily draw is like over 20MW. They are now the single largest power consumer in downtown Kansas City, but they are using that power efficiently. And that's because the buildout they did was a state of the art, like either direct to chip or direct to rack cooling, which is way more efficient, which is necessary for these sort of high density like AI GPU clusters.

And they also tied in to Vicinity, which is a local steam and chilled water utility provider. And so they don't even need to necessarily run their onsite chillers. They're onsite chillers, which are sufficient to cool the whole operation. Are actually the redundancy, which is another kind of amazing feature of this project and and unique to Kansas City, because not every city has cold water running around in pipes underground.

So is it safe to say that, like the the key to unlocking $100 million of C-PACE here was actually the water aspect? I don't know if that's the key to it because it would have qualified without that. That's just like another part of this. You know, they have they upgraded the chillers. So the chillers that they have are now sustainable.

And actually that those were qualifying measures. So you don't need chilled water to make this work. What you need is to build an efficient data center operation. And when we're talking about an efficient data center operation, we're comparing it to alternative data center sort of architectures, which there's a lot of different kinds of data center architectures, but direct to rack and direct to chip chilling is the most efficient.

So I think as long as we are looking at opportunities that are building kind of state of the art tech, they'll be PACE eligible. Kind of reminds me, I mean, you mentioned at the top here, but this is your second deal in Missouri, right? Your first one was on the other side of the state in St. Louis on the Gateway Production Studios.

I mean, you've sort of carved out a bit of a niche for esoteric assets? Yes. That's. Yeah. But on a large scale, I know large scale. I think those two deals alone account for over a third of Missouri's entire C-PACE production. Historically. Probably because. Yeah, I mean, there was that big, Ozarks deal that closed this year.

So I briefly lost my largest Missouri belt, but I got it back. Must be a big belt. Yeah, it's. Yeah. I mean, your project is very cool, and it seems like it's structured in a way that gives a win win to everybody. Right? The property owner got to obtain the property and upgrade it. The tenants get a very efficient property on what is, an asset that is typically an energy hog.

So they get some opex savings. So, you know, perfect and growth opportunity. Right. Like as soon as, as soon as Evergy has like they are all Patmos like. Let's be clear, they are also pursuing a path to power to increase that allocation. And I assume that once they get more power, which could be as soon as, you know, May or June, it will be offered to the existing tenants, because, you know, they're most primed to take it.

Not everything is win win. But I love deals that are. And I try to find deals that are where we're winning the borrowers, winning, the tenants are winning. And, you know, frankly, even Kansas City is winning because now they have a really valuable piece of critical infrastructure that and they saved a building that would that otherwise had no use.

Right. Like I don't know what you do with this building, this beautiful building that's just sitting vacant in downtown Kansas City. At one point, it was there going to be torn down for potential professional sports team site. Yeah, right. Which I mean, and again, from the real estate perspective, we kind of loved that fact because it you know, it helped us, you know, confirm the thesis that there was underlying value to the real estate here.

And it wasn't a, you know, a cornfield in Kansas. It was like a CBD. You know, there was real value of the whole thing. So, you know, I walked there from my hotel in like five minutes. It is downtown. Can't say that about most data centers are going to visit. No, I actually the opposite.

Right. Like most data center deals that you're reading about now are truly in the middle of nowhere. Which is which is great because they serve a different purpose. My personal belief is that there is more long term value in centrally located data centers than these, like massive kind of learning and trading complexes that are isolated. But we need both, right?

We we also, we've gotten questions over the past few weeks about like why? Why was PACE the answer to this problem? Like data centers are so popular, they're so financeable in the secondary market and the securitized market. Like, why do they come to PLG? I have some ideas by curious, but both of you guys, his thoughts are on why this was a PACE deal or not.

A, you know, a investment grade rated bond deal, that is a fair question. First and foremost, most data center deals are ground up projects, and they have kind of credit tenants that are in place, and that makes them easily financeable. This didn't fit that mold. This is a conversion. So it immediately is on kind of a different track.

Also, we had prior to this deal a pretty green sponsor. And so we were able to take the time to get to know them to kind of that their abilities and literally observe how they operated this over the course of the eight months that we were working on this transaction and kind of get the conviction that, you know, they could do it even though they hadn't done this before.

Most people aren't going to take that kind of time. Also, their tenants, well, you know, very legitimate publicly traded companies are not credit tenants. And so PACE was probably the most attractive financing available to this specific opportunity because we're able to offer closer to credit pricing given the nature of our security. Then, you know, would otherwise have been available to them.

I think some of the folks who are investing in data centers have a very small box. Right. And so, this is out of that box for a number of reasons. If they're looking at data centers in cities or if they're looking at investing in cities, Kansas City isn't, at the top of that list.

I think they're looking at other cities first. And if they're if they're only looking at that bucket, then they're completely shut to to the city that's outside of that bucket. Yeah. The other aspect also is the term and the lack of recourse. Right. And so C-PACE non-recourse financing, which is a huge, perk, especially for sort of a greener sponsor.

And then the term a lot of these, you know, large, credit tenant deals as you get done, are shorter term paper. You know, typically they're structure to effectively have five year terms, whereas our deal here is a 20 year term which is more akin to a C-PACE deal. So structurally, there's a lot to like about being able to lock in 20 year fixed rate money on an asset that you think actually has upside in the future, and you kind of get the optionality to be able to keep it in place paid off, depending on which way the wind blows.

And that was definitely a unique that we could offer that others others couldn't. Yeah. Also nifty that here we could do a 20 year term. But when you're doing a deal in another state, you can probably do a 30 year term, which would make economics even better. Yeah. I mean, Missouri is currently limited to 20 years. So the 20 years was not because that was the useful life of the equipment.

It was because that was the program limitation. I don't know if we could get to 30. I'm trying to remember that energy audit now. I think if we were in another state that didn't have a statutory term max, we could have definitely done 25. Yeah. That's us feels about right now. Also, just anecdotally, I feel like Kansas City is known as being like an interesting transportation hub.

I mean, there is a major rail network in KC that runs right through it. It's like great in the middle of the country. And I've known about that for a long time, invested in Kansas City, done deals in Kansas City. It's actually it's a great market to be in, but I've never thought about it in the context of also being sort of a major infrastructure hub.

But it is the is internet, if it is anything which is like, you know, a series of cables like that, it literally probably runs right along the rail, right through KC. So I mean, it really it is. It is a major hub for both infrastructure, for transportation. I mean, it's there's a lot going on in Kansas City and it's cool to be a big part of that.

I will say that data centers in my, you know, I don't I'm not an expert, although I know a lot more than I did 12 months ago. Are complicated. And one of the things that gave me confidence about Patmos was that their Chief Operating Officer, like, really understands. Yeah. Super impressive and how to operate. And he, you know, he's been in data centers for quite some time.

Not yet at this scale, but. Knowing that he is on site gives me and I know PLG a lot of comfort. And to your credit, Robbie, you gave me and Bali a masterclass in data centers and really helped me personally understand the shift away from conventional real estate thinking and like what is the per foot rent in the tier?

Like what everything in megawatts? And I have a much better appreciation for that. And I'm just significantly smarter than I was eight months ago. And so we did a really great job of really shepherding this deal through and making sure that everyone really understood how it works and why this was a great deal. And so, so kudos to you for doing that.

I like to share what I learned. I think I told you your credit committee presentation was like a college course in data centers. It was a joy. Well, hopefully my next one is also good. We'll see.