DigitalBridge Group, Inc. (DBRG) Earnings Call Transcript & Summary

It's always a pleasure to be here at Connect(X) and to talk with all of you, and I'm looking forward to the presentation today. First and foremost, we have a couple of disclaimers and forward-looking statements that I might make. These are sort of regulatory matters that I have to get out of the way with all of you before we get started. So hopefully, you're a quick reader, and you've read the small print and we can get right into the presentation. So today, some of the things that we want to talk about, one, we want to give you an update on what's happening at Digital Colony and some of the things that we're doing as a firm today in digital infrastructure. And then I want to spend most of the time talking about some of the things that we're seeing today with the impact of COVID-19 and some of the challenges that we're all facing in the pandemic that's candidly created opportunity and an acceleration in digital infrastructure. Then last, we'll finish and just talk about some of the high-level challenges and opportunities and threats in digital infrastructure today. So a quick overview of us as a firm today. Digital Colony is Colony Capital's dedicated investment vehicle to investing in digital infrastructure. Colony Capital today is a global real estate investment management firm. It is now one of the industry's largest players, thanks to our $4.05 billion Digital Colony Partners fund. We've been in the business for 28 years. We had 400 employees globally, 21 offices and $49 billion of assets under management. We've been investing as a team together for 25 years. We have access to proprietary transactions, and we have very strong investment in advisory team with a deep, deep, deep bench in the sector. As we see today, our opportunity is a global one. We have a portfolio of digital infrastructure assets that is built to serve the world's leading technology and telecommunications companies as they deploy next-gen networks across, interestingly enough, what we believe is the converged ecosystem. In terms of the assets we manage there, we have about $20 billion of assets across the ecosystem. In our tower businesses, we have 5 tower businesses globally, operating in Mexico, Finland, Colombia, Peru, Chile, Brazil and the U.S. On the fiber side, we have 3 direct investments in the fiber space today, with over 135,000 drop miles of fiber, fueling global innovation and providing connectivity from mission-critical connectivity and services. We have 95 data centers today across 5 different platforms. If you think about that total number of data centers for a second and you compare us vis-à-vis our large public brethren, we would be the third largest data center operator in the world in terms of total number of data centers behind Digital Realty and Equinix. Last but not least, we have significant investments in small cell infrastructure, namely ExteNet Systems in the U.S. and the FreshWave Group in the U.K. that have over 35,000 nodes operating indoor and outdoor networks alike. Digital Colony today is a fully integrated investment platform. We've made 14 investments. We manage $20 billion of assets, and we've done over 300 accretive acquisitions since our formation in 2014. Post our merger with Colony Capital in July of 2019, we operate today under the name of Digital Colony. Digital Bridge and Digital Colony own or manage 14 unique platforms crossing all of the 4 core verticals: towers, data centers, small cells and fiber. We have a global reach currently operating assets into Canada, U.S., Mexico, Latin America and Europe. And most importantly, we had strong partnerships with our leading global carriers, content providers, global investors, hyperscale cloud companies, led by a team of highly experienced and dedicated operators and investors. Our team has been together for over 25 years, creating value in communications and digital infrastructure. Digital Colony has one focus. We own, operate, manage and lease assets in the mobile and Internet infrastructure sector, with strong reoccurring cash flow characteristics. The key to this entire investment program is having a framework, a framework that is created around our opportunity set being able to create incremental outlook for our investors. We seek outperformance in all of our companies through a very hands-on approach in all of our businesses. First and foremost, we believe in people. People create the alpha. We have some of the best management teams across the globe, and I have the privilege of working with 14 of the best CEOs in the sector. As a former operator and a former entrepreneur and CEO, our executives here at Digital Colony have direct operating experience. We have negotiated and closed tens of thousands of telecom leases, and we've managed networks to five-nines standards for the better part of 3 decades. We believe that innovation technology is power. We use IT systems to drive scale, margins, operating efficiencies, all through a series of workflows and SQL databases. M&A, when done correctly, for us, can be a great weapon. We focus on proprietary deal flow, transaction tactics that avoid competitive auctions and ultimately can effectively draw down an entry price. We're very active in managing our balance sheets. We have institutional relationships with every leading international bank and bond investor that provide us with unique structure, little to no covenants, and ultimately, at the end of the day, a lower cost of capital. And most but not least, investing with an eye toward social responsibility in our environment and ensuring our governance is best-in-class, is seminal to our business. Our responsible investment policy incorporates the 6 responsible investment principles promoted by the PRI. So let's talk about what we came here to really learn about today and have the dialogue about what is this unique moment in time. COVID-19 is obviously a pandemic that has affected all of our lives. It's created market volatility. It's created uncertainty. It's created fear. But most importantly, it's entirely changed the landscape under which we communicate, how we work, how we learn, how we entertain ourselves, how we conduct commerce. And it's created an unprecedented demand for remote connectivity, cloud computing, mobility, big data, storage and interconnection. As I said before, all aspects of our personal lives, our professional lives and consumer lives have been impacted by the pandemic. Work, schools, shopping, entertainment, socializing and professional services have all migrated to digital platforms. The speed and the velocity at which this is occurring is astounding. Network traffic has increased since the global pandemic, with carriers reporting significant surges in their network traffic. Last week, AT&T reported a 25% surge in their normal baseline traffic. Vodafone, same metric, 50% growth against their baseline. This is a significant amount of growth in network capacity is needed to operate their businesses. Networks need access to capacity so their networks can operate faster and with lower latency. And as you can see, the entire digital ecosystem is impacted by these changes. So network demand is now mission-critical, and this is where the investment opportunity sits for all of us as a sector. As the pandemic puts high capacity workloads on the network and data usage requires more bandwidth, additional digital infrastructure is needed to deal with these unprecedented times as workloads begin to shape from the core to the perimeter and to the periphery. The strong rise in network traffic and application use has led to an acute demand for infrastructure investment not only in the core, but at the edge, at the edge of the network. I'd offer you today that there's no longer this notion of off-peak hours and peak hours. Rather, all day are peak hours for carriers and operators and content providers. Edge computing, small cells play a key role in ensuring that video conferencing, video streaming and other online service platform performs as needed. Infrastructure teams responsible for making sure these services stay online have been busier than ever. Our team interfered our expanding bandwidth on their networks and adding that extra compute muscle to their data centers. Carriers are facing pressure to automate, propelling deployment of networks that can deliver new levels of orchestration and agility. Enabling and deploying this digital infrastructure is an integral part of what we do today at Digital Colony. And as we think about the impact across the ecosystem, just looking at some of the key customers that we do business with today, you can see how this has impacted their operations. Take, for example, Zoom. If you take a look at the total active users in March of 2020 was 200 million users. This metric was 10 million users in December 2019. Facebook's total messaging on its platform has been up over more than 50% over last month. The company's proprietary infrastructure is on an impressive amount of usage. Verizon announced last month that they're increasing their CapEx guidance to an additional $500 million in 2020 to deal with COVID-19 implications. Microsoft Teams added 12 million daily active users in 1 single week amid the coronavirus, bringing up to 45 million total users on the Teams' network. And in the first quarter of 2020, Netflix more than doubled its expectations with 15.7 million paid new subscribers to the network. Every part of the digital ecosystem today is being tested, and tested like never before. I would also offer to that, mobility is central to our economy and digital infrastructure has a record of resilience in times of crisis. And we believe digital infrastructure will grow during this pandemic. Couple that with digital transformation, which is the trend that will march us forward as we transition to 5G, and you really have 2 core things happening at the same time. One is our transformation towards new networks of the future, and the second trend is dealing with the capacity and the impacts of what's happening to the network today. Once again, Microsoft, a 382% increase in minute spent on Microsoft Teams from March 21 -- March 12 to March 31. Total video calls have grown by 1,000%. That's not a misprint, 1,000% in the month of March. Verizon not only seeing an increase in total data usage, but 115% spike in gaming, 49% for VPN, 27% for web, 39% for download, 36% for video and 25% for voice minutes of use. Charter has seen a 20% downstream traffic increase and a 32% upstream increase. Comcast, 32% up in upstream, 18% in downstream. Webex recorded 325 million users in March, doubling the total amount of user growth in the U.S. T-Mobile, very similar to Verizon and AT&T, similar spike in usage, messaging up 26%, short messaging, up 77%, time spent on calls is up 17%. Google and Apple announced a joint effort to use Bluetooth technology to help governments and health agencies reduce the spread of the coronavirus, with user privacy and security central to the design as we track where those have been impacted by the virus. Telefónica and Slack also experiencing massive surges in activity. This is, simply put, the perfect storm for digital and for digital infrastructure. Next up is our asset class. We've talked about it before in the past. Those of you that gave me back in the late '90s. We talked about it in the dotcom crash. We certainly talked about it in 2008 and 2009. Our asset class is resilient. Towers have never been put to the test like they are today. Taking a look at where public tower multiples have performed vis-à-vis the market, trailing since the beginning of January, and you can see companies like SBA, up 26.9%; Crown Castle, up 13.7%; American Tower, up 6.5%. Meanwhile, at the same time, the NASDAQ has been down 3.8% and the S&P 500 has been down 12%. This has also been the era of the public data center. Public data centers have been on an incredible tear as applications in the high [Technical Difficulty] and cloud workloads have all shifted to these mission-critical facilities. And along with that, so has shifted the share price of our public brethren, Digital Realty Trust, up over 25%; our friends at Equinix, over up 17%; and CoreSite, up over 7.7%. This truly has been the golden era of the data center. The key to all of this is publicly traded digital infrastructure stocks are performing at not only at good levels, but they continue to grow and outperform during the pandemic. So where does this take us and how should we think about the demand-driven investment that's going to happen in digital infrastructure? And with the -- with what's transpired with COVID-19, we believe there's been an acceleration. Without today's technology, social distancing would have meant simply isolation. COVID-19 has changed the way we work, connect while accelerating industry trends on the underlying persistent demand in digital infrastructure. First, in global mobile data usage. Global mobile data usage is expected to grow 4x by 2025, spurred by the increase in smartphone adaptation and the availability of affordable, high-speed network services. Going with that in lock, stock and barrel is CapEx spending. $1.1 trillion in global mobile CapEx spending is projected to be invested worldwide between 2020 and 2025. Roughly 80% of that will be spent on 5G networks, and you can see where the growth is coming from: North America, Asia Pac, Europe, Greater China, Latin America, Middle East, sub-Sahara and CIS. So as you can see, these are -- this is a macro thematic setup that has only been accelerated by COVID-19 and the coronavirus. So the data edge in 2025 will require converged neutral host operators. We believe this is the future of networks. The evolution of digital infrastructure into a converged ecosystem will be necessary to absorb the data tsunami that's coming. In terms of bandwidth delivery, the key here is the zone of market convergence. Digital infrastructure, towers, data centers, small cells and fiber are all uniquely interconnected and rely on each other to complete the mission. As the need for more capacity grows, the sector enters into the zone of market convergence, and the need for digital infrastructure neutral host operators like Digital Colony increases. So in terms of the outlook for 2020 and beyond, I would offer you today that digital infrastructure is utilitarian life, but it's complex. We have strong conviction around the compelling industry fundamentals giving -- driving long-term organic growth, but we would also offer that these assets have a higher degree of operational complexity. We work in one of the most unique asset classes because it delivers capital appreciation with downside protection, while being driven by megatrends in data and mobile traffic on a global basis, along with the growth of applications in cloud computing. However, unlike other forms of infrastructure, digital infrastructure requires a unique set of operating and technical skills to manage those businesses. Every day, our companies wake up and have to deliver 99.99% standards to customers that are entrusting us with their networks. You need a stable set of experienced operators that know how to read, react and more than ever with today with COVID-19, that they keep the networks running and can supply the incremental capacity that's needed. One of the most interesting things in my dialogue with investors today over the last 90 days is they ask me what's changed. And I said, what's changed is that digital infrastructure is no longer the same as traditional infrastructure real estate. Digital infrastructure actually in the last 90 days has proven to be its own asset class. With the total amount of invested capital that's coming into the sector over the next 5 years, we believe that the subset of centers of towers, hyperscale data centers, edge data centers, long-haul fiber, metro fiber, indoor small cells, outdoor small cells, CBRS, macro towers, suboceanic cables and SAS satellites is the entire ecosystem. And that ecosystem onto itself, to be candid, now is its own asset class. And that's what I would offer to the group. Now all of this is great. COVID has created a great opportunity, but we need to see that there are signs of cautionary tales ahead. And despite the market dislocation, and that the industry continues to see new entrants in the asset class that have driven up valuation multiples, assuming outsized risks to generate core infra returns. We've seen many examples of this, and we just simply have stayed away. Here are a couple of examples of some red flags we see in the future. One, overbuilding a data center and fiber capacity in certain metro markets. Two, too much leverage is being used for volatile business models. Fiber is not like ports. Colocation data centers are not like toll roads or pipelines. Third, exposure to core credit quality counterparties is rising dramatically. Risk premiums are rising, entry multiples have risen and investors, particularly infrastructure GPs, are willing to put more debt on these businesses today. In turn, risk premiums are rising while IRRs are compressing. Finally, we've seen a shift in 2019. The total digital infrastructure spend in Europe, North America and Latin America is now favoring greenfield investments. This was the first time in the last 6 years where greenfield spending is eclipsing that of M&A spend. Brownfield M&A is 1.2 to 3x more expensive to buy than to build. M&A costs trading at a massive premium to replacement cost indicates that we have now achieved the peak of the cycle. If you look at the total valuations of our tower companies over time, this would be EV-to-EBITDA: 2016, we were 14.8%; 2018, we were at 18.6% on a 3-year basis that would blend to a multiple of 16.3x. FiberCos of recent have been surpassing TowerCos, which is hard to believe. In 2017, the average mean multiple is 15x; 2018, 20x. And I would offer you that 2019, those multiples even went higher. So today, on an average mean basis, fiber assets on a private basis have traded higher than TowerCo assets. So what do we think the future holds? The future is about partnership. Partnering with digital infrastructure specialists has never been more important. Our sector is complex, far more complex than other infrastructure segments and requires a specific set of operating skills to deliver the business plan and deliver that five-nines standards for your customers. Today, where we focus and where we're thinking about risks, we are very focused on our total debt loads. We're very focused on exit multiple assumptions, and we're very focused on higher churn and lower growth as we go forward. We see a better opportunity in greenfield, where there is a higher barrier to entry. We'll continue to stay focused on our street corner, where our customer needs drive our business and our organization. As we like to say, we follow the logos. Our investments operate under a core set of investment principles. We call them the 3Ps. First and foremost, you've got to have product, be clear on what you do and how you address the market and with which products you address the market. Second for us, people matter. People create the alpha. So in our business today at Digital Colony, we're recruiting, hiring, incentivizing and retaining the best people in digital infrastructure. Process. Our processes are driven to grow our businesses. And in this regard, we're aiming for the fewest deviations and delivering on uptime standards for our customers. Workflows and other types of mechanisms that we use IT technology to drive down cycle times and to enable our customers to get on air and get on their networks faster is a key differentiation for us in the business. That will conclude my presentation for today. I want to thank all of you for giving me your time. It's been my pleasure to talk to you again about digital infrastructure. And I hope that all of you and your families are safe in these trying times. And hopefully, we'll all be together soon. And when that does happen, I look forward to seeing all of you. Be safe. Take care, and thank you again.