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

Well, look, I think, first and foremost, this proliferation to the edge is probably the biggest opportunity. And sort of as networks need to be fortified and densified, I think one of the best opportunities right now in the fiber space is on that wholesale basis, Brett. So working with cable operators, working with other mobile operators, working with data center providers, edge data center providers and the ability to scale broadband connectivity into the corridor areas, into the suburbs, in the secondary and tertiary markets, that's going to be a huge opportunity. And so as we all know, most of that network infrastructure is wildly underbuilt to serve where the network traffic has gone over the last 7 months. As you think about the migration path of work from home, school from home, fitness from home, content from home. All of these trends are putting enormous pressure in the suburbs and in secondary and tertiary markets. And so there's an immediate opportunity to scale with those customers and help them build network infrastructure. So I think that's one. Two, I see no slowdown in web-scale activity. So as part and parcel to those workloads starting to move out to the edge, so as you think about historically, cloud computing in the sort of Amazon or Microsoft or Google way as being these massive hyperscale data centers in big markets where they tether fiber out and ultimately, the network proliferates in the traditional hub-and-spoke way, I think you have to rethink this network architecture a little bit. And so what I believe is happening is those web-scale logos now want smaller workloads further out in the perimeter than ever. And so instead of having 100 cabinets and building a super node somewhere. It's now a smaller edge location where they've got 4 racks, 8 racks, 12 racks that needs to be supported by not 2 strands of fiber, but 12 or 20 or 36 pairs and you start building these unique suburban relationships with the webscalers. And what we're finding is they start with a little bit of capacity and then they scale up. And so you got to get there early. You got to be there when they're making those decisions. They're changing that network architecture. And so this is about convergence, right? This is about the notion that we're starting to push workloads to the perimeter. It's where applications are meeting mobility and how do you provide that right infrastructure solution, Brett, where you're capturing both of those things at the same time, right? You have to capture the front haul portion of the network, you have to capture the workloads of the data center side, and you have to capture the mobile solutions in an Open RAN architecture. It's really fricken complex, but it's really fun. It's really interesting.

Well, let's spend a little more time then on data centers. You talked briefly about what you've done with Vantage, that's sort of your positioning in the hyperscale space. You were just talking about edge. What's Colony due to be positioned in edge computing or an edge infrastructure?

Sure. So we bought 21% of DataBank last December. And it was a great deal for us because one of our controlled vehicles on the private investment side had about 40% of the company, so we bought a 21% stake from 2 other investors. And so from a governance perspective, we control about over 60% of the voting interest in that company. We have a 21% economic interest in that company. We love DataBank, we love what it's doing. We've got a great management team there [indiscernible] has been owning and operating and building data center infrastructure for decades and most importantly, in the '90s was building fiber infrastructure. So we have a great understanding of interconnection, fiber and most importantly, where those workloads are shifting. We bought DataBank about 4 years ago as a small, very subscale data center operator in Dallas, 6 data centers. And what we've done is through a combination of M&A in greenfield, we've added a ton of new inventory. And today, we have close to 23 data centers in 9 markets, and we're looking to grow that asset. We think that's arguably one of the most attractive assets we have in Colony today. Where can that company go? I think there's 2 directions we see edge computing going. First and foremost, we want to keep densifying those secondary and tertiary markets. We're having great success in places like Pittsburgh, Bluffdale in Utah, Kansas City, Eden Prairie, Minneapolis. I mean these aren't like -- these are big cities, but they're not exactly New York City and Los Angeles and San Francisco. And so what we're finding is our customer workloads are shifting breadth, and they want that capacity in those secondary and tertiary markets. And look, we still [indiscernible] play it's [ penalty ]. It's a copycat league. We love what Equinix has done. We have great respect for [ Charles Smith ] and their business model. And kind of what we've done is we've created an Equinix of the secondary and tertiary markets. And it's worked out incredibly well. We've got close to 10,000 cross-connects. So we have a very big interconnection business that fuels a lot of that connectivity, but ultimately leads to folks putting racks in our data centers. The other thing that I think Equinix -- I mean, I'm sorry, that DataBank is doing really well, is we're beginning to work with a lot of the OEMs on the mobility side. And so as we think about software-defined networks, and ultimately where that high-power compute needs to fit. It needs to sit on the edge of the network. And so working with some of the mobile carriers and working with some of the OEMs, that I won't name, but we've recently done 2 deals with 2 different OEMs that are serving as SDN sort of what I would call high-powered nodes that are providing that network intelligence to the mobile operators in places like Dallas and places like Kansas and Pittsburg. I think that's really exciting. I think the fact that OEMs are going into a controlled Tier 3 environment, and they're putting a significant amount of those workloads and that network intelligence there, and we have a lot of fiber where we can proliferate out to those cRAN hubs. And that cRAN hubs then fuel the intelligence out to the nodes and the towers. You're basically reverse-engineering the network. Everything used to be -- it started at the tower. We backhaul it. Now we're taking the network intelligence calling it out to the infrastructure, the complete reversal of network architecture and DataBank's on the front edge of that. So we're excited. It's doing incredibly well. It's up 6% against plan for the year. And we're really thrilled with that. I think the second growth product in edge is the small edge data centers. You've heard a lot of chatter about this, whether it's EdgePresence or EdgeMicro or Vapor IO. These are all companies, Brett, that you've met with over the last [indiscernible] years. They're interesting business models. They're nascent, right? And I think they're all in sort of the trial and error phase of where they fit in the ecosystem. And I think at DataBank, we've made a partnership with one of those providers. We've proliferated a couple of edge data centers already. We're kind of in what I would call the trial and error phase and trying to figure out what works and what doesn't work. The key to all this is can you lease the product. Everyone can drop off an edge data center anywhere they want. I mean it's a continuous. It's like, Brett, it looks like one of the shelters we were building in the lake [indiscernible] the big shelters that have the backup generators, and there was a raised container. And you walked in, and there was like a [indiscernible] and that was a [indiscernible] edge data centers now, if you think computers that are being dropped in [indiscernible] and look just like an old macro in the late '90s. So everything that's old is new again or whatever is new is old. But I think it's interesting, DataBank is pursuing those 2 strategies. Big data centers that sit on the edge in Tier 2 and Tier 3 markets, not trying to go directly at Equinix. And so thinking about this smaller micro strategy where we [indiscernible] the fiber, connect it to one of our edge data centers and use that as a tethering strategy where we can take workloads and shift them a little bit closer to the edge of the network.

Yes. That was an excellent overview. And I want to ask a follow-up question. You just sort of alluded to it at the end of that answer. You talked about we're also bringing in the fiber, right? You're a portfolio of companies. To what extent is their coordination across the Colony capital portfolio companies? And do you have any evidence yet that they're actually performing better than their stand-alone disconnected competitors because they have these affiliated businesses?

Well, look, I mean, we -- I just told you one hint right there. The ability to proliferate micro or edge data centers at the cell tower could not be enabled without the approval of the tower company. We happen to own the largest private tower company in Vertical Bridge, have a great CEO in Alex Gellman, who you know quite well. And Alex and Rahul build this edge strategy for putting these containers at the edge. There's an example of where both DataBank and Vertical Bridge will grow together. And the core FFO of both those businesses will grow because they're working together. Certainly, Zayo and ExteNet have work together. ExteNet uses Zayo Fiber as much as they can. So [indiscernible] use small cells, and we need dark fiber we need more [indiscernible]. Jim [indiscernible] gets on the phone and he calls Dan Cruso. So we try to fuel more bookings there. There's great collaboration, for example, between Vertical Bridge and Dan Cruso at Zayo. They've worked on a big contract with Walmart together to provide fiber and also build towers and provide rooftop in [indiscernible]. So there's so many different ways our portfolio conferences together. I mean, sometimes it happens with [indiscernible] and pushing it and sometimes it happens quite naturally. I found out after the fact that DataBank and Vertical Bridge are working together on a deal. So it's really good. It's -- these are 15 CEOs that know each other well. They get together at least once a year. They're on quarterly conference calls together. They're always changing ideas. For example, Sureel Choksi runs Vantage. And Rahul talk all the time. If there's a workload that's [indiscernible] 1 megawatt [indiscernible] gets on the phone and Rahul said "oh, by the way, this customer is looking for 0.75 megawatts in Salt Lake City, you need to go grab it". And they pass deals back and forth to each other all the time. So there's an immense amount of collaboration that happens with the portfolio companies. And I think there's more we can do, Brett. We haven't been able to quantify what the incremental, is it 20 bps? Is it 80 bps? What's the incremental growth coming if company is working together? But What I do know is they do work together, they do pass business to each other, and it's been a tremendous first half year. Every one of the 15 companies we operate posted positive organic growth in the first quarter and the second quarter. So it's been it's been a great view.

That's great to hear. And you referenced towers. I want to see if we can pivot and talk about that a little bit. We're basically right at the front end of the 5G cycle. And as you know, the 3G cycle and the 4G cycle were pretty positive cycles for tower operators. And so the question we get now is that will the 5G cycle yield the same uplift in tower demand that we saw with 3G and 4G, what's different and what hasn't changed?

Well, I think first and foremost, it really depends on the company. You've heard me say this now for the last 3 or 4 years, we've now finally begun to see separation between SBA, Crown, American and Cellnex. It actually is hard-core operational differentiation between 4. They are 4 very different companies with 4 very different management teams. The ability to profit from 5G is largely based on these holistic [indiscernible]. And so it's a question of what have you done? What have you given away, what didn't you give away? And how should people think about those holistic agreements? And I would just say categorically that all 4 of those companies are world-class. They're all between Tobias and Jeff and Tom and of course, Jay, they're all friends, and I think they're excellent CEOs. They have 4 very different approaches. So I mean, for example, if you pull an 8-K and you go look at the master service agreement that Cellnex has recently done with some of their big sale-leasebacks, they've given away a significant amount of loading. And the way that they think about it is in [indiscernible] square meters in [indiscernible], and so what you have is you've got things like [ ping ] sharing, you've got loading and ton of those opportunities, perhaps some of those economics [indiscernible] if you ultimately do a sale-leaseback deal where you give away a lot of those entitlements to the anchor, you got to be careful. And when you're valuing these companies as a public investor, you should go read those master lease agreements and understand what was given away. I mean, yesterday, was a good example. We saw the deal that Tom did with our friends in [indiscernible] and actually, we spent the entire morning picking apart that agreement and trying to understand who is the winner? And I can honestly say we're friends of both guys on the trade, it actually is both parties won, it was kind of interesting from our perspective, which means that you can still do major wholesale agreements where both parties walk win and feel good about that. I think T-Mobile walked away and felt pretty good. They got to decom the sites that they wanted to decom with respect to the legacy sprint stuff. I think from Tom and Steve Vondran perspective, they got what they want. They got a long-term agreement that ultimately goes from $1.2 billion to $1.7 billion. They've got embedded growth over a 15-year period. They've got quality of earnings, predictability of earnings, which is quite, candidly, you love about Tower. And so I think there's still a lot of good growth activity in 5G. And there's certainly room for win. And I think yesterday's announcement demonstrated that both T-Mobile and American Tower wanted to win and I think the ultimate winner will be the consumer. Now what can happen is T-Mobile can deploy their gear across the system a lot faster, good for T-Mobile and their customers at the end of the day. I think with SBA and Crown, it's going to be on a case-by-case basis. I think Jeff has always had this great philosophy that every tower has an intrinsic value. You know this. You spend so much time with depth. He believes that every tower is a unique piece of real estate. And that that piece of real estate has value. And look at the share price performance of SBA over the last 5 years from $100 to $320, you can't argue with Jeff's strategy about being sort of very focused on the singular strength of a tower location. And then last but not least, what Jay is doing, and I think Jay is thinking more holistically about customer relationships. They've done these big amend and extend [indiscernible]. Jay's got a massive small cell portfolio that [indiscernible] into 5G. I'm very bullish on what Crown is doing, that is a long ramp for expansion. And probably, if you think about organic growth than the one tower company around the globe that has the most adds to get the most organic growth in 5G, it should be Crown given their physical plan of where their fiber is, where their small cell infrastructure is and where their domestic towers are, they should be able to profit from that, but I always want to tell folks, the tower business has changed. It radically changed in 10 years. And all these guys used to be a herd, and they would move together. This is since not the case anymore. These are 4 very, very different stories with 4 different management teams and 4 different value propositions and investors more than ever today, [indiscernible] that will do the work.

All right. Well, I want to follow with you on that. I want to ask you about something that seems like it's a little different. Historically, when carriers have been adding sites to their network, they were usually doing it because they had a coverage hole and the network told them, we have a problem over here. So you would go there, and they'd usually be one tower and that tower operator would get that business or there would be a capacity hole. So you'd go there, and you'd probably be 1 tower operator and that tower operator would get that business. And it was really a great cycle for tower operators. T-Mobile currently has more sites than it currently needs. Its challenge right now is to get rid of some and DISH, which has a requirement to build a significant number of sites has none, so it's starting with a blank sheet of paper. And as you know, there's a generation of tower companies that have come up recently that have a different perspective on what lease terms should look like. So I'm just curious from your standpoint, do you think that those are examples of situations where those sites, those developers, those network builders actually have more ability to weigh cost versus location because they have some flexibility about where they put their sites?

Well, look, it's a cost of capital issue. I mean, if you think about some of these smaller independent tower companies that are backed by, whether it's private infrastructure capital or private capital in general, there's more capital sitting on the sidelines than there are opportunities. And so what you're seeing is some of these management teams that kind of -- they've been around for 10, 15 years, as our new management team. They've just managed to build and flip, build and flip, build and flip. I think in this cycle, the build and flip strategy is going to be hard. Why is it going to be harder? You're generally building on your single-tenant economics to a low single-digit yield, some of these guys are building to a negative yield. So they're banking on that first amendment or they're banking on that colo. And when you're doing build to [indiscernible] and you're building a tower right next to American or Crown or SBA, and you're hoping to get that second and third tenant. Well, you know what's going to happen if American Tower or Crown loses one of those tenants to a brand-new tower that's half a mile down the street, they're going to dig in to save and retain the [indiscernible] their third tenant. So this notion that there's going to be a limited lease-up like there was 10 years ago. [indiscernible] And so we've seen some of these models, right? We've seen some of these new independent builders that are out building for AT&T and Verizon and T-Mobile, and we understand that their model is to grow, and they've got private capital and they want to grow, but on the flip side of that, the carriers want to use them. The carriers are using them as a wedge to create leverage so that they can get the big public guys back to the table and negotiate these holistic agreements where they have the right to decom sites because right at the end of the day, Neville's job is he's got to deliver the network synergies. And Mike's going to hold him to that number. And so what the guys at T-Mobile are doing is incredibly clear, they're going to decom 25,000 to 35,000 sites over the next 5 years. They have more sites than they know what to do it. And look, if some of those sites can go to Dave -- over to David Charlie [indiscernible] at DISH or probably from [indiscernible], there's a great relationship between the senior leadership at T-Mobile and Dave Mayo. Dave Mayo built [indiscernible]. I think that relationship is pretty tight. And if Dave can leverage some of that existing hole sprint infrastructure, he will. But at the same time, Dave, it is super pragmatic, and he can come up with a lower-cost solution. Make no mistake, Dave Mayo will go with a low-cost solution, provided it meets his coverage objectives. And so I think there'll be a little bit of mixture here at the end of the day, Brett. I think you're going to see some of those decom T-Mobile sites will end up over at DISH. Some of them will be passed on. Nonetheless, you will still see, as we've talked about before, when 2 carriers get together, you have an immediate rush, there's some short term demand. Then you see in kind of the 12- to 18-month frame, you see the decoms, right, like you saw with [indiscernible] like you saw with Metro, you can measure that churn. And I think for Jeff and Jay and Tom, they're going to be transparent with the [indiscernible] development. And look, if you think about the low end of that guide point, 25,000 macro being decom, 10,000 of those go to DISH, and you end up with 15,000 decoms against 380,000 cell sites [indiscernible] right, small. I mean, we have to keep this in proper perspective at the end of the day, which is a very small churn event for the industry. Now it will be short-term on a cash basis, short-term pain for the 3 public companies but ultimately, as they renegotiate these MLAs with T-Mobile over the long-term on a holistic basis and on a GAAP basis, investors really won't feel that thing.

All right. Well, Marc, like always these conversations always seem to end so quickly. This was an awesome catch up like usual. Thanks so much for being here with us virtually, and I certainly look forward to doing this in real-life next year.

Likewise, Brett, thank you for having me. I appreciate it. And really enjoying the conference. Thank you so much.

Great. Great to see you, Marc.

Take care. Be well.