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

Good afternoon. Marc Ganzi, CEO of Colony Capital and CEO of Digital Colony Partners. Delighted to be here this week to present at REITweek at Nareit. So today, we're going to take you through some of the things that are happening at Colony Capital today. We're in the midst of an exciting transformation at Colony Capital. Delighted to be here at REITweek. And I think some of the things that we want to share with you today is there are 3 very specific things that we want to talk to you about today. First is an update on our digital transformation and give you the overview of the Colony 2.0 playbook. Second is we want to lay out our investment case and why investors today want to own Colony Capital. We see a significant market opportunity. There is enormous growth in digital infrastructure today. We've got, we believe, the best management team in the sector, and we have a differentiated strategy. Last but not least, we want to share a case study with you, which is the new 2.0 in action. One of our great portfolio companies, DataBank, give you a slight glimpse into the future of edge computing and some of the really exciting things that we're doing at Colony Capital today. So as we mentioned before, Colony really is a story that's been in transition, going all the way back to July of last year when the Board of Colony Capital entered into the transaction with Digital Bridge Holdings. There was a bold proclamation that we needed to move forward into digital real estate. And today, where we are, is all about execution and moving forward. If you think about where we were a year ago, legacy Colony was a diversified REIT that managed industrial, health care, lodging as well as embedded institutional and retail investment management, 6 segments. Where we are today as we're transitioning into the strategic rationale has never been more compelling than it is today. We're aligning Colony with our key secular trends in digital. We're simplifying the business. We're delivering predictable digital earnings to our core investors, and we're delivering attractive returns on invested capital. Where are we going in the future is we're investing in the digital infrastructure that enables mobile and Internet connectivity, towers, data centers, fiber and small cells, digital equities in our digital IM business and digital credit in our digital IM business as well. Now as it relates to the transaction -- transition and where we are today, the transition is well underway. Our relocation from a diversified REIT to a digital REIT began in 2018 when we formed a joint venture with Colony Capital to launch Digital Colony Partners. Three years later, over 40% of Colony's AUM is digital. If you look back at where we were in 2018, 2% of our AUM was digital, which was our data center investment in Europe called Data 4. Today, where we are in the midst of the transformation, we have $50 billion of assets globally. 41% of those are digital, 59% is legacy, and we will continue to rotate throughout the end of this year where we believe we'll deliver somewhere between 54% to 60% rotation to digital. Where we plan to be at the beginning of 2022 is a fully diversified digital REIT, $50 billion of assets centered on towers, data centers, fiber and small cells. We believe this is the next-generation digital REIT that folks should own. The key ingredients for me has always been, as most of you who know me well, is about management and having a best-in-class management team. Colony 2.0 management team is a recross management team, very different from the management team of 3 years ago. But after a stint at the CEO's chair, July 1 of this year, and I can't do without the help of my partners and what we believe is the best management team in the industry. I've asked Ben Jenkins, my partner of over 2 decades, to be our CIO of our Digital Investment Management Platform. Ben brings multiple decades of experience where he was helping run Blackstone's communication strategy in the '90s and 2000s. Jacky Wu has come on to join us as our CFO-in-waiting, soon to be CFO, come July 1. Jacky has a rich pedigree in digital infrastructure investing and operations. [indiscernible] got a start at Verizon as the CFO of the FiOS division; moving on to American Tower, where he ran Treasury, working hand-in-hand with Tom Bartlett; and then most recently, turning around 2 private equity companies and now here at Colony Capital. Justin Chang is another key member of our team as the CIO of Digital Balance Sheet Investments. Justin spent nearly a decade at TPG running private equity for them and has spent the last 8 years at Colony running Colony's private equity platform. Today, Justin Chang sits on top of the investment committee, alongside myself and Ben and Jonathan Grunzweig at Digital Colony Partners 1 and also sits across the Databank Investment on our balance sheet. I've asked Jonathan Grunzweig, who is a multi-decade veteran at Colony, to sit on top of our non-digital investments as our CIO. Reporting up into Jonathan Grunzweig will be our OE&D business, our lodging and wellness infrastructure assets. Kevin Smithen has recently been promoted to our Global Head of Capital Formation. Kevin comes to us with a multi-decade track record of excellence in dealing in private and public market capital markets. For a brief [indiscernible] he was with Macquarie Capital and before that, was at Lazard. As you know, we asked Mike Mazzei to come in and run CLNC for us. Mike holds a 3-decade track record in credit, most recently as the CEO of Ladder Capital. We're delighted to have Mike on our management team, and he's doing a fantastic job at CLNC. Last but not least, Severin White, who now is our Head of Public Investor Relations. I've known Severin for 25 years. He's had a very successful track record on the buy side of public investing. Altogether this is an absolutely best-in-class management team that has a proven track record of their success from the various verticals. So where are we today? Colony Capital today is the leading owner and operator and investment manager of companies that enable next-generation mobile and Internet connectivity and infrastructure. We manage over $20 billion of assets globally. We have 5 power companies across the globe that have 350,000 telecommunications sites. We offer to the broadband world 135,000 route miles of fiber at Zayo, ExteNet and Beanfield. We have 95 data centers across 6 different platforms: Vantage Europe, Vantage, Scala, zColo, DataBank and Aptum. Put those 95 data centers together, we would be, on totality, the third largest owner of data centers in the world behind DLR and Equinix. In our small cell infrastructure space, we have excellent refresh rate, 35,000 nodes, only second to Crown Castle. Our $4.1 billion digital economy partners fund I have been in a very successful investment period. We've made 10 investments. We deployed 80% of the fund in terms of committed and deployed capital. And we leave with 20% of the fund in reserve to support our 10 investments as we continue to invest in greenfield and tuck-in M&A opportunities in the fund. So what's our playbook? And where are we going? Colony 2.0 is accelerating Colony's strategic pivot towards digital. There are 3 key levers that we're working on today: one, monetization; two, delevering our balance sheet; and three, focusing the firm on long-term organic growth. Let's talk about monetization. We're harvesting our legacy assets, currently divesting in OE&D assets. We've delivered $300 million of monetization in the first 9 months of the year, and we plan to deliver another $300 million of monetizations towards the back end of the year. Colony Credit continues to stabilize and perform well under Mike's leadership. And we continue to believe that the stock will continue to rotate back towards its intrinsic value as Mike brings stabilization and strong asset management to that portfolio. We always keep an open ear as it relates to our wellness infrastructure assets. That portfolio continues to perform well during COVID. We've been very pleased with the operational performance. And Rich Welch has done a fantastic job running that business for us. Talk about our progress to date. We sold industrial last year to Blackstone for $5.7 billion. We're working with Moelis to continue to advise us in preserving the most absolute value that we can get for our hotel portfolio. And then ultimately, we will look to monetize the hotels. And as I mentioned before, we will continue along our path of monetizing our OE&D assets. Talk about leverage for a second. And as CEO, my philosophy is I don't believe that businesses should be over-geared or over-levered. If you, once again, have followed my career know that, that is a signature Marc Ganzi move in terms of balance sheet management. Over the next 12 to 18 months, we have a clear path to liquidity as we rotate to digital. We are looking to reprofile our corporate debt and is the highest priority for Jacky Wu and myself in the midst of addressing our converts and our revolver as we speak right now. We want to lower the total leverage of CLNC. That is a key goal for us for 2020 and in 2021 and beyond. At the same time, we want to preserve and maintain our capacity to rotate and to continue to invest in digital on balance sheet assets and continue to support our digital IM business where we see new investment management progress opportunities. On our progress to date, we suspended the common dividend saving $160 million in annual savings. We've matched our digital REIT peer group as it relates to our dividend policy go forward. And we announced a bold initiative to create $40 million in savings between now and the end of the year on a December run-rate basis. Now let's talk about the fun part, the growth. Where are we going in terms of our growth? We see that there are 3 opportunities for investors to take advantage of our growth. First, we're going to continue to grow our investment management platform. We are in the process of extending our market leadership position on our equity franchise. We've launched new verticals in credit and liquid securities, but our digital investment management platform has never been stronger. In fact, we closed 2 significant co-investment transactions for the first half of the year supporting Vantage Europe, with $400 million in supporting the leverage [ buy-out of sale ] with $2.2 billion of co-invest. So throughout the course of the year, we've delivered $2.7 billion of co-invest which, of course, not only strengthens our AUM but also, in addition to that, grows our fee base. We believe that we continue to build our balance sheet through strong investments. We'll continue to stabilize the balance sheet with core digital assets that have long-term leases, predictable earnings, exposure to investment-grade counterparties and predictable leases that have escalators that give you growth. At the end of the day, we believe this is how we reshape the operating REIT. Last but not least, we think there's a tremendous opportunity to rerate Colony. Simply put, we've got to make it easy for investors to understand, and we've got to establish a road map, simple narrative of the business, driving our multiple to our digital REIT peer group is essential to our transformation. Let's talk about Colony and why we think it's a good opportunity to invest in Colony. First and foremost, we're seeing tremendous secular tailwinds. As we think about what has happened during the pandemic, all aspects of our personal, professional and consumer lives, working, school, shopping, entertainment, socialization, professional services, everything is migrating to digital. And as we think about that digital connectivity, our homes have become a new hotbed and hub for that commerce and for that entertainment, for that education, for the way we work. And all of this is putting downward pressure on networks. And as we think about that, our customers need more capacity and need more bandwidth than ever. Taking a look at the acceleration of public cloud growth, you can see on the slide there on Page 12 in the upper right-hand corner, 51% total CAGR growth, 56.5% Microsoft CAGR growth and 44.9% AWS CAGR growth. These are stunning, stunning metrics in terms of the organic growth opportunity. IP traffic around the globe will continue to increase 3x from 2017 to 2022. 81% of global IP traffic now comes from non-PC devices. This is a stunning amount of growth as we think about the total amount of broadband that's being consumed and the amount of broadband infrastructure that's needed to facilitate the acceleration of these networks. And as we think about what this looks like in terms of the investment, mobility is leading the way. Without today's technology, social distancing would have meant pure isolation. COVID-19 has changed the way we work, connect, while accelerating industry trends underlying persistent demand for digital infrastructure. Those global mobile data usage is expected to increase by 4x over the next 5 years. This is obviously spurred by increased smartphone adaptation and penetration and the availability of affordable high-speed network services. Our home net surge and usage becomes global mobile CapEx. $1.1 trillion in global CapEx will be spent over the next 5 years to deploy 5G networks. 80% of that spend will be on 5G. And it's not just a North American trend. Asia, Europe, Greater China, Latin America, with other parts of the world are all part of the 5G migration path. And along the way, as we thought about this growth and we've thought about the downward pressure on networks during COVID, one of the things in one of the asset classes that held up is digital infrastructure. Power and data center companies have outperformed the broader REIT equity markets and REIT indices. As you can see, data centers over the last 5 years have been up 235%. Tower is up 151%, so the S&P 500 was up 63% and the Dow Jones up 35%. Now year-to-date, as we think about the impact on COVID, the S&P has returned negative 5%; Dow Jones, minus 50%. Tower stocks have been up 21%; and data center stocks, up 17%. Once again, in times of economic turmoil, digital infrastructure has performed time and time again. As it relates to our management team and digital infrastructure, we have a track record of great success. The team that Ben and I have assembled have worked with us over the last 3 decades, and we've been able to navigate many different market cycles up and down. Many of the members of my team were with me in the early '90s when we formed our first Tower company. Some of these individuals were with us during the financial crisis of 2008 and 2009. We have a deep edge, and we have a diverse workforce. And we're proud of that diversity. Many of the across members this bench here had worked with me over the last 25 years. Jeff Ginsberg and I go back to the formation of Apex in 1994, by example. Hayden Boucher and Scott McBride started when we started Digital Bridge over 7 years ago and now have had 2 promotions. Manjari Govada came to us from BlackRock. Tom Yanagi has been with me 13 years and has run our capital markets and debt. Mark Serwinowski, who runs our information services department supporting all of our portfolio companies, started with me over 13 years ago with TP's. Eric Etter, 15 years ago with us at GTP. Lisa Allperta, 11 years ago, starting with us at GTP. We've got a deep bench and one that understands how to execute and knows how to execute in times of market dislocation. In addition to that, we're supported by a group of industry veterans. We have a 15-person network of CEOs that operate our portfolio companies and help us think about how to navigate new investments and new ideas. Ecosystem of CEOs [indiscernible] It helps us cross-sell to different customers across our different verticals. It provides us with unique market intelligence and proprietary ideas and deal flow. They have over a hundred years of cumulative experience investing and operating in digital assets. Mike Foust chairs our data center practice, who is the founder and CEO of Digital Realty. Alex Gellman, who chairs our Tower practice has been in the tower sector for over 30 years, going back to his days at Horizon Cellular. David Pistacchio has a 3-decade track record of success, most recently building the Lightpath fiber business for the Dolan Family, which he ultimately helped them monetize to Altice. Once again, this is the deepest bench in the industry. So what's our strategy? How do we differentiate ourselves? One, we operate across the entire digital ecosystem. We don't believe you, as a public investor, need to choose between towers or data centers. Digital infrastructure is changed. We believe that networks are converging. And our approach is a customer-centric approach. We have the flexibility to evolve as the opportunity set evolves and as networks evolve. Our exclusive focus is on digital. We underwrite based on asset selection, and not all assets are alike. Many of you have heard me say this before. Most of our ideas are proprietary. If you look at Fund I on our fund platform companies, 80% of our deal flow in our platforms were produced through a proprietary opportunity and idea. We have operating expertise in-house, which allows us to build. We could not only engage in greenfield activities, but we have the ability to deploy in a market, show up, get the right building permits and execute a build strategy. Our investment horizon as a public REIT is long term. We have a global perspective, and we believe there's a huge market opportunity across the globe to invest in digital infrastructure. So as I said before, I would encourage investors to begin to think about converging digital ecosystem. No longer is it just owning towers and one swim lane, owning a co-location data center in another swim lane and owning dark fiber in another swim lane. We believe that networks are converging. Data is changing. The way data travels is changing. The way applications are moving is changing. All of this is putting more pressure on the periphery of the network than ever. Cloud data centers, core network infrastructure, regional hubs like edge data centers, edge compute nodes and of course, IoT infrastructure that sits on the perimeter of the network, whether it's autonomous driving vehicles, whether it's drones, whether it's telemedicine, mobile phones or smart city, all of this is now highly interrelated more than ever. How do we underwrite? Our 4 corners of underwriting is simple. We focus on good markets that offer us a strategic mode, high barrier entry and gives us great downside protection as we think about the future. We underwrite the assets, value engineering. We focus on unique, hard to replicate assets that give us the ability to put incremental customers into those facilities and create a strategic moat where switching costs are high. We look for long-term contracts with investment-grade counterparties. And we look to build in flexibility so that our customers could add additional equipment and that we can add additional tenants to those facilities. The last but not least, we want to own great platforms. We emphasize buy-and-build strategies with initial investments into the platform to drive long-term growth through organic and through M&A. And then how do we think about building businesses? We are great builders of business. Our framework for Alpha creation at Colony Capital is we want to outperform our peer group through hands-on participation in all of the businesses we own. Human Capital is, first and foremost, our most important asset. Our people create wealth and not the assets. We believe you've got to have direct operating experience. For us, it's a 3-decade track record of owning and operating networks with bottom line standards for global brands. A differentiated M&A approach focused on proprietary deal flow, and we try to get ourselves involved in transactions where we could disintermediate brokers in elongated auction processes. Dynamic balance sheet management, we have deep institutional relationships with not only leading banks but bond investors and most importantly, the support of our rating agencies. We provide unique structures and hopefully, that leads to a lower cost of capital where we have deep participation from institutional investors. And last but not least, I'm pleased to say that we're the leader in ESG as it relates to digital infrastructure. We incorporate the 6 responsible investment principles promoted by the PRI brought not only during the diligence, but ultimately in the acquisition and execution of the business plan. In fact, today, one of our portfolio companies announced that it is the first tower company in the world for the zero carbon footprint. We're dead serious about ESG. ESG, for me, started 10 years ago when I was operating a tower REIT here in the United States, and we instituted on behalf of Dutch pension fund PGGM, an ESG policy. Since then, we've continued to take those principles forward, investing responsibly and making sure that the footprints that we leave behind are better than the footprints under which we found those assets that we own and operate on behalf of our customers. Last but not least, in terms of investing across the digital ecosystem, we're trying to target investments across the risk spectrum. And this really gives investors that invest in Colony Capital the opportunity to create that unique balance between core and opportunistic. By owning the entire infrastructure ecosystem, we allow our investors to participate in core assets like towers from hyperscale data centers and more opportunistic assets like enterprise data centers and enterprise fiber. At the end of the day, building a balanced portfolio is what matters. We operate across all of these assets, delivering stabilized returns, long-term contracts and at the same time, being more opportunistic where we see businesses that have higher operational complexity, service components, higher market correlation, shorter lease durations and mixed tenant credits. At the end of the day, delivering a balanced portfolio allows our investors to take advantage of the Alpha opportunity, the Alpha creation that we create on behalf of our LPs. Last but not least, I want to deliver a quick [indiscernible] on DataBank. This is one of the assets that sits on Colony's balance sheet today. We found DataBank in 2015. We made the investment in 2016. It's a retail colocation data center business headquartered in Dallas, Texas. Since then, we've gone through a massive transformation business plan in the last 4 years, transitioning the company into a hedge compute business. When we started the company, we had 5 data centers, and we serve 3 markets. Today, we have 20 data centers, 9 markets, $181 million of revenues, $64 million of annualized EBITDA, and we're rapidly growing through an accretive M&A program and new build strategy. Our focus is primarily secondary geographic areas. First, it's critical to infrastructure as the cloud edge continues to emerge and demand continues to grow and we believe the supply-and-demand in balance creates a favorable, competitive dynamic for DataBank. We control premium interconnection hubs where traffic is exchanged. We have more than 3,500 cross-connects in the platform today, and we have a blue chip customer base that has over 1,700 logos. Our top 10 customers represent 27% of our total monthly recurring revenue. Our average churn rate of 7 bps, which is 55% lower than our peer group across the REIT ecosystem which, today, averages 1.4%. Here are some of the key logos that do business with DataBank and obviously, some of the markets we serve today. Since the acquisition in 2016, DataBank has been transformed from a regional midwest business to a scaled national edge data center operator, benefiting from our Alpha creation strategy. First, we augmented management. We transformed the management team, bringing Raul Martynek into the team in 2017. We put Mike Faust in as the Chairman, who we believe is really the godfather of the data center space, and he's been a fantastic Chairman working hand in hand with Raul Martynek. Our executive team has been augmented and upgraded with key executives from our network, including our EVP of Corporate Development, SVP of Sales, SVP of Marketing, our VP of Finance and VP of Network Engineering. With this strategic development and financing, Digital Colony has attracted over $485 million of equity commitments from leading institutions to support DataBank's business plans, like CBRE Caledon, Allstate Insurance, [ Levine ] have all supported us in growing DataBank's business. That way, we helped arrange and refinance several debt facilities now totaling $886 million. And last but not the least, the Digital Colony investment team facilitated expansion into the Atlanta market, with the Georgia Institute of Technology as the anchor tenant for a brand new stunning 5-story, 94,000 square foot state-of-the-art 12-megawatt data center adjacent to Georgia Tech Campus. On the M&A execution side, our senior investment team at Digital Colony have sourced and executed 5 add-on acquisitions, which have driven consistent accretive growth from the investors. We bought 365 data centers in Cleveland and Pittsburgh. We acquired a business called C7 in Salt Lake, which has 3 data centers in Salt Lake, which we've now gone on to build 2 more data centers, and we'll build SLC 6 very shortly. Edge Hosting, 2 data centers in Baltimore along with the strong managed services business and a hybrid IT platform. We acquired the PNC data center in Pittsburgh, along with over 20 acres of land to grow and build Pittsburgh 3, 4 and 5. And then we acquired LightBound, 2 data centers in Indianapolis, one of them being the [ NAP ] of Indianapolis. So since the 2016 platform acquisition, the company has tripled run rate EBITDA. We have reduced the invested capital to EBITDA multiple in the business. And in 2019, Colony Capital acquired a 20% stake in DataBank from some of our early investors. So in closing, the key takeaway is you have a great opportunity to build exposure to powerful digital infrastructure thematics with top industry management and value levels today where our share price trades. As legacy assets are monetized at Colony, liquidity path to digital becomes clear and digital AUM continues to grow. Colony has the opportunity to re-rate higher. Our investment space is supported by attractive, sound industry fundamentals. Exposure to long-term secular tailwinds around mobile and digital connectivity is a unique combo of resiliency and growth. Our new management team, we believe, is second to none and has a 3-decade track record of success. Last but not least, our differentiated strategy focuses at investing and giving you the opportunity to participate across the digital ecosystem. Our focus is clear path to digital, fueling savings, investing in people and continue to grow digitally. Thank you for your time. There's a lot more to come. We look forward to delivering our investment roadmaps to all of you from simplifying the investment model and increasing transparency and communication with our investor base. Thank you, and I hope that all of you and your families are doing well during the pandemic. And I look forward to seeing all of you soon and continuing to share our path at Colony. Have a great day.