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

Okay. Good morning, everybody, and welcome to the Morgan Stanley TMT Conference 2021. We're delighted you can join us today. Sorry that it's virtual, but hopefully, next year, we will be back in San Francisco. But we've got a great conference for you this year. We have over almost 300 companies joining us and a record number of investors, and we're delighted to welcome Marc Ganzi, the CEO of Colony Capital, to kick us both this morning. Marc and Colony, one of the most interesting kind of set of assets within the communications infrastructure industry. Before we get started with Marc, just let me note for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Marc, welcome to TMT 2021. Thank you for joining us. And you had earnings on Friday. 2020 was a transformational year for the company, taking it from the traditional real estate towards the digital business.

Maybe you could just sort of review some of the key achievements of 2020 and what the priorities are for 2021?

Yes. Thanks, Simon. Good to be with you. Look, for 2020, we really felt like there was foundational work that we had to do. And one was, first, we had to reestablish our credibility with the investor community. That was really important. And so we set out a couple of key guiding principles that we wanted to accomplish in 2021. First and foremost, was make sure that we protected our capital stack. And so we made a series of transformative maneuvers on the capital stack side to shore up our liquidity, and to make sure there was no even thought of there being a going concern with the enterprise. And so we did that. We got to convert done. We recast our revolver. And we hit the high point of our guidance in terms of asset dispositions, and it really left us in a great position at the end of 2020, where we had almost close to $900 million of cash. We brought our total debt -- our debt stack down from about 12x EBITDA to about 7x. And then most importantly, our next debt maturity is about 2 years out. So extending maturities, paying down debt, recasting the revolver, rotation to liquidity, everything intended to sort of shore up our balance sheet and shore up our liquidity. And investors, in turn, responded very favorably to that. The second thing we said we would do is we would establish some new guiding principles around cost. We guided The Street to $40 million in cost reductions. We delivered $55 million. So just doing what we say we're going to do is really important. And that's a consistent theme with this management team is just putting markers out there for investors to be able to grab on to, and most importantly, delivering on those promises and exceeding expectations. And that was one of the key things that we wanted to get done. I would say in terms of asset disposition, really good year. We announced the sale of the hotel portfolio. We obviously came just a whisker under $700 million in terms of rotating out of some legacy real estate, which was great. And then last but not least, continue to rotate to high-quality digital assets on our balance sheet and in our investment management business. So we did $22 billion in digital transactions last year, 2 deals on the balance sheet, DataBank and Vantage, and then a series of other investments that we did in our investment management business. So an incredibly active year. I mean, I don't know if there was another digital REIT out there that did $22 billion in deals last year. So we were really active. And then the last thing I would say is capital formation is so important to what we do. And we had a great year in terms of raising capital. We ended the year at about $13 billion of FEEUM in terms of the total capital that generates fees for us, and that was tremendous. I mean, we had an incredible fundraising year last year. And once again, exceeded our expectations by about 90%. And under promise, over-deliver. And this is something that's really stuck with investors, Simon. It's just this mantra of, look, promises we make to investors and the promises we keep. And so we've developed, I think, a level of trust with the investor community. We've developed trust with the analyst community. We had a couple of new banks covering us in fourth quarter, 1 new one in this quarter. And so people are beginning to take notice of what we're doing. And I think it's an interesting proposition for investors now.

Great. So what do you see as the key priorities for '21?

Well, look, I think the highest priority will be to finish the mission, as we said on our call. So the mission is to obviously close the hotel portfolio here in short order, find the right home for our wellness infrastructure assets, ultimately harvest our credit REIT position and then wind down our OE&D portfolio, which had tremendous progress last year. Probably has about $700 million of positive NAV left in it from where it's marked. And so we'll continue to rotate. We have a clear path to about 65% of our assets rotated. If we ultimately make a decision around our medical infrastructure assets and our mortgage REIT, that will get us to over 85%. Just in terms of dispositions and what's on the table today. Now if we go out and we have a great year and we continue to acquire high-quality digital assets, that 85% begins to move higher, and our goal is to be north of 90% by the end of this year in terms of asset rotation. So asset rotation is really important for us. As we rotate those assets, we put cash onto the balance sheet, and we can use that cash to either continue to grow our assets on balance sheet or we can grow our investment management business. The good news is we don't have to choose, we can do both, and that's our plan for 2021. We will continue to deploy capital at our investment management platform. We have a lot of exciting initiatives happening. We had a great fourth quarter last year in terms of new deals. We're off to a great start in Q1 as we said on the earnings call, and we're very optimistic. There's a lot to do right now. So I think it's ultimately harvest, redeploy that capital; and then, of course, the last cornerstone to what we're doing is, in terms of finish the mission is, finish up with the cost reductions as we move assets off our ledger. That obviously rationalizes our cost basis. And then the fourth pillar to that is just continue to raise capital. So we've guided folks to us raising another $3.5 billion to $4 billion of FEEUM, similar to the projection we put out last year. And we're off to a really good start in terms of capital formation in 2021, and we have a high expectation that we're going to continue to be able to deploy capital this year and raise capital.

Great. Busy times. So one of the themes that we want to explore at this conference is life after COVID. And I think it's something that the digital infrastructure business became even more appreciated for the ability to both perform very well during pandemic, but also digital transformation becoming, if anything, accelerated. So perhaps you could just talk through how you see the landscape changing in a post-pandemic world?

Well, we really -- we look at our business almost as a microcosm of other businesses. And we had already begun to rotate our way of doing business a long time ago. And I think when the pandemic hit, we weren't terribly surprised or shocked at our ability to operate. And in fact, as I've told most people, we had the busiest year, I think I've ever had in my 27 years of doing this. It was an incredible year. So I think there's a couple of changes that we can take away from this. I think, one, as a CEO and a business leader, I think that you can still maintain culture and still have people working remotely, and it's just there's different ways to rekindle culture. And for us, we've reduced our total square footage. We've reduced our number of offices. And we're not -- it's not like we're going to go back to that, right? We think there's a new way of working that's a bit leaner and a bit more space-efficient, and digital is really that great enabler. As we think about what worked in the pandemic and what didn't, I think we all recognize that our ability to operate remotely is not in question. So I think now that leads to another key part of this, which is digital infrastructure was critical during the pandemic. If we didn't have digital infrastructure, we wouldn't have be able to keep doing the things that we're doing. And so we think that presents a really good opportunity. Because historically, Simon, when you came home, there was maybe 2 or 3 things you did digitally at home. Now you come home and there's a kaleidoscope of different digital things happening in your home. You have more connected devices. You have more services. You have IoT connections. You have entertainment connections. You have work connections, school connections, fitness connections. And so all of these connections really expose the deficiency and the total amount of infrastructure needed to make these networks work on the edge. And literally, your home and my home is the edge, right? We don't have our homes per se in the core. I'm probably 17 miles from West Palm Beach and I live in a small town. And historically, the Internet connectivity hasn't been great there. But what was exposed during that process is we had a community that didn't have fiber to our doorstep and now we do have fiber to our doorstep, which is really helping enable that. So that's happening in communities all around the U.S. That's now happening in Europe. And it's certainly going to happen in Latin America with some of the things we're doing. And certainly, it's going to happen in Asia. So there's a lot to do on the edge. We think sort of the key areas of deficiency of growth is really around fiber, edge computing and probably small cell infrastructure at the end of the day, and all of that needs to work, Simon, in a harmonious way. And so I think we see a continued acceleration in CapEx spending. Last year, we thought the total addressable market was about $386 billion in terms of the digital infrastructure spend. We see that going to just about $400 billion this year. And moving to about $412 billion to $413 billion in 2022. So CapEx is moving up, and it's no longer just about brownfield. It's not M&A. A lot of that, Simon, we see the mix last year was kind of 60-40 in favor of greenfield against brownfield, and we see that moving to 65-35 this year and then 70-30 the year after. There's less things to buy. So as there's less things to buy, you have to -- unfortunately, you've got to figure out how to put a shovel on the ground and get to work and get your entitlements and understand how to build things. So the big theme coming out of COVID is digital infrastructure was insufficient. There's going to be an acceleration in CapEx spending. And the great news for everyone at this conference is all of the sort of 4 basic food groups of digital infrastructure will grow: fiber, small cells, towers and, of course, data centers.

Right. One of the things that I think differentiates you and has done for some time is this hyper-converged view of infrastructure. And I remember you talking at the wireless show, infrastructure show, years ago talking about the data centers. And it was sort of seen as a tower show, I think, back in those days. But what is your vision here? And why are others sort of seemingly focus more on we're a macro tower company, we're a hyperscale data center company? What's the reason why others aren't moving this direction, except with sort of baby steps?

Well, I think people are moving in that direction. I think maybe we're a little bit out ahead of it. So -- and I think it's just the notion of the physical layer of the network, Simon, and the virtualized part of the network. And that's the big change in 5G is this old notion of building networks where you have the sort of siloed approach infrastructure where you've got one switch, you've got one set of backhaul characteristics, you've got a set of macro sites. And then you've got small cell infrastructure. You've got Wi-Fi offload, you've got indoor networks. And sort of all of those, Simon, were sort of in different swim lanes. And as you start to move to a cloud radio access network, where the core of the network is virtualized, which is what is exactly is happening right now. Every carrier is virtualizing their core. And if you don't understand that, you're behind the times. And I was talking about that 2 years ago, and people looked at me like I was crazy and asked, you don't get it. The core of these networks for Ericsson and Nokia to survive, they have to become a SaaS provider because then they're on this CapEx cycle every 7 years and they're going to be bankrupt. And then the carriers are going to be bankrupt because they're buying all these radios and base stations, and it's a virtuous cycle to the bottom. But in an environment where network infrastructure is really the facilitator for that virtualized part of the core, you have to really understand the fabric of how that's built. And so how that's built is you have to have ultimately the servers, the edge servers. You have to have the fiber. You have to have the macro site. You have to have the small cell infrastructure. All of that has to work in unison together. So think about what a C-RAN hub is. The C-RAN hub is an edge data center where you've aggregated anywhere from 10 to 20 radios. You have a couple of racks that ultimately interfaces to the cloud, which is your SDN interface. And then you have your cloud ecosystem adjacent to that, which could be -- for Verizon, it could be Amazon; for AT&T, it could be Azure. And then all of a sudden, you see that infrastructure adjacent to that RAN hub, to those core radios, in the suburbs, right, not exactly in Downtown New York City or Downtown Miami, but really 30, 40, 50 miles outside of the city. And so this notion of networking is what's really changed. That's the big step function from 4G to 5G. Now to understand that, you've got to be in the business of building networks. And so to build the network today isn't just I go out and I build 500 macro sites. That's not the game anymore. The game is, how do I build a dark fiber dense network where I've got a series of RAN hubs that aggregate where my mobile network meets my applications and ultimately, having multiple pass of fiber, multi-connecting to other hubs or other "edge data centers." And what that does is that brings down the latency. And that's all the carriers care about. They want to deliver a low latency experience on our devices because ultimately, if they can deliver that experience to the home, people won't be looking at their cable box there. They won't be looking at their CLEC Internet provider or the RBOC. They'll be looking specifically for the mobile network to provide all that connectivity and all those services. So the game has changed. We know the game has changed. And people that deny the game has changed are folks that are living 20 years in the past, of how initially 1G, 2G, 2.5G, 3G and 4G. This is all changing, and it's changing very rapidly. And my bet is that we're right. My bet also isn't that Jeff Stoops is wrong or that Tom Bartlett is wrong or Bill Stein's wrong. I mean, all of these guys are right. What's happening out there is just the networks of the future are changing. And I think that the companies that are recognizing that and are building the infrastructure to support that, are going to be the winning logos. And winning, when I say, winning logos that are growing at anywhere from 5% to 10% growth. So that's where we're focused and it's no longer a science project. It's really what's happening today.

Right. You've talked about 5G a number of times. We've had the record-setting C-band auction. So perhaps you could just reflect on that and adding all this debt to the carrier balance sheet. How do you see the tower and small cell business benefiting from deployment of C-band and the carriers? Do they have the money to spend on the CapEx that they need to spend?

Well, I think we're already in the midst of a massive CapEx spend anyway aiming -- heading into 5G. So this only sort of compounds the -- as I like -- I've said a few times, the dinner bill. So desert got a little more expensive, maybe the wine got a little more expensive, but we do think that C-band is really interesting. And we've been talking a lot recently just about the use cases. And spending the last 45 days, traveling a bit, finally getting on planes and going to see customers. I think the thing that excites carriers and why they spent all this money, Simon, was just that there is an enterprise case for 5G that didn't exist in 4G. And so I think that's -- once again, this notion of understanding how to tie the network to applications and how to tie the network to different use cases, I think, is really interesting. I mean, we talked a little bit about IoT and just how much that's happening and what happens with autonomous vehicles, what happens to smart meters and homes, what happens to our smart refrigerators. The way the carriers have to make money now is they have to be thinking beyond just the consumer. And I think what excites them about C-band architecture is they finally have an entrée into the enterprise. So a lot of that C-band spectrum can be weaponized in a commercial setting where they work with customers, they deploy that spectrum, either in factory, a corporate campus or in their office space. And through that, that's a conduit on which they can provide applications, and they can provide connectivity services. They can provide other forms of mobile communication that really help and enable the enterprise. And so -- and a lot of that, of course, will be enabled by IoT. So it's a better pipe. It's a -- it offers a new sort of product offering to them to go attack a segment that, historically, they haven't been very good at attacking. And so I think this notion of wireless networks, historically, Simon, were C2C, right, or C2D, consumer-to-device, consumer-to-consumer. Now what we're talking about is sort of device-to-business or device-to-device connections. And device-to-device connections, as you know, from an IoT perspective, can really bring a lot of efficiency to the enterprise. So in talking to some of the CTOs, I think that's where the excitement is. And we share that excitement. We think there's a lot of opportunity in C-band, and we think there's a lot of opportunity for Colony Capital to provide that mission-critical CapEx to help grow their network. So while their debt may have swollen up, it really provides a window for us to come as a partner, a trusted multi-decade partner like we've been and say, "Look, how can we help you finance this infrastructure? How can we help you grow your business?" And most importantly, not just like me coming in and saying, "Hey, I want to build a tower for you." That's not very interesting. But if I can come in and sit with a customer and say, "Look, how can I help you build your network of the future because I understand all the pieces of the puzzle. How do we deploy that network in a more cost-effective way." That's a meeting that a major U.S. wireless carrier CTO will take, saying you're just going to come in and build 5 towers for them is just not that interesting anymore.

And is that an ExteNet-Zayo type opportunity to some of those enterprise applications?

Absolutely. Absolutely. And I think Zayo has been on the cutting-edge of that already because of their enterprise business. ExteNet has already been working on some C-band trials at different venues, which is very exciting. Certainly, DataBank and Vertical Bridge are obviously players in that as well, and we've already had some customers just in the last 6 months, Simon, where we've gone to them with 3 or 4 of our portfolio companies. We said, "Look, here is a menu of vendors that you can use and we'll come to as a centralized front. How can we help you deploy your 5G network faster? We have all of the -- all of the arrows are in the quiver. Use them as you wish. We can bring them to you holistically. We can bring them to you in a singular way. But the key is we understand what you're doing. We have all the pieces of the puzzle to get you there, and we have the capital to do it as well." Having capital and having the right product set is everything in this market. And I think that just became a lot more important given the cost of the C-band and the research that was put up this morning by you on the net debt that the carriers are now holding. So we're doing a lot of listening, and we're just trying to be constructive wherever we can and support our customers.

Right. You just raised over $4 billion with DCP, too. So you've made a start in deploying that capital. Can you just talk about what you're focused on in terms of going through your pipeline? What looks the most interesting because I think you and others have talked about some of the multiples we've seen here in the market recently. Do you see good opportunities out there?

Yes. So look, we're deploying capital at the company at a rapid pace. Like I said, last year, it was a great year. I don't know if we'll do $22 billion in deals this year, but it was a unique year last year. I think this year has a very unique setup as well. I think what's interesting, Simon, is coming back to what we talked about between brownfield and greenfield. And I think last year, I would say in 2019, we were kind of 80-20. I would say in 2020, we were probably sort of directionally 75-25. It feels we're kind of in that 70-30, 65-35 zone between brownfield and greenfield. And what's happening is in our 19 portfolio companies, we're seeing more greenfield opportunity than we've seen previously. And so the natural pivot for us when -- I've known you, Simon, almost 20 years. We've talked about when M&A prices go up, what's the pivot? What do you do as an operator? And for us, it's always been when we see assets trading above 2.5x replacement cost, we immediately start focusing on greenfield because that's an early indicator that assets are perhaps priced a little bit too much to perfection. And so we've seen certain M&A trades in fiber and data centers and towers trading at 3x to 4x replacement cost. And so for us, that was happening 2 years ago. So that was the kind of the early warning sign from our perspective. So we really doubled our efforts on greenfield development starting in late '19. That was a strategic initiative we took. We had a great year last year. We built thousands of towers globally across our 6 tower companies. We deployed over 100 megawatts of new capacity in terms of hyperscale. We tripled the size of our edge data center portfolio and we continue to be a build more fiber route miles. We continue to light up more small cells. We had a great year in terms of new small cell deployments in the U.K. and the U.S. across our businesses. So the company is busy. And I would say, in terms of our capital deployment plan, we have a series of strategies around greenfield and we have a series of strategies around brownfield. And then it's about geography, right? Because we operate in Asia, we operate in Europe, we operate in the U.S. and Latin America. So once again, we're offering investors the chance to take a look at those 4 different geographies, looking at different asset types, looking at different value-add strategies. And once again, it's another unique sort of opportunity for investors in investing with Colony because we do play across those 4 theaters and we do play across those 4 verticals. So it's kind of an interesting game of 3-dimensional chess right now in terms of where you deploy the capital, how do you deploy it, greenfield, brownfield, what strategy do we like in that geography, what strategy do we not like? And we certainly have certain strategies that we prefer right now in certain geographies over others, and that changes every year. We're constantly reassessing what industry verticals we like and what geographies and what management teams. A lot of this for us is backing great management teams. That's something where we have a distinct comparative advantage. We have 19 of the best CEOs globally. We have a team of 93 professionals that wake up every day and only think about investing in digital infrastructure, and that gives us a pretty big leg up.

Great. And then the -- I think one of the things that's different when you look at the company is you have this split between owned-operating assets on balance sheet and then the investment management, the fee-earning equity. How do you decide what asset goes in what bucket?

Yes, it's a great question. From our perspective, it's about the profile of the investment at the end of the day. And so what we're trying to do in our investment management business is we're targeting, in our private funds group, on an equity basis where we're deploying equity. We're targeting high teens. And so to get to high teens, that has a certain profile. When you look at what we've done on the balance sheet, particularly with DataBank and zColo and Vantage YieldCo, those are assets that we think ultimately should have a yield component to them. So a great example of that playbook was Vantage YieldCo. We bought 12 of the best data centers. We did that in partnership with Cb Richard Ellis, Caledon, and a series different pension funds globally. And that was a great deal because, look, it checked a lot of boxes for us. It had a 6% current cash yield, which helps fuel our reemergence of a dividend if we choose to go back to that this year. And it gave stability in those long-term leases, weighted average lease durations of 13 years, over 96% investment-grade counterparty risk. And then ultimately, that return, that IRR was somewhere between 10.5% and 11%, which just doesn't fit our mandate for what we're doing in our private funds group. So what I'm trying to do on the balance sheet is create permanency, is create assets that are going to live for, not only this decade, but the next decade, that are going to produce -- most importantly, we've been so consistent about this is, we have to have predictable earnings. That has to be a hallmark of what the New Colony Capital is because that is exactly why you like American Tower and why you like Digital Realty and SBA and Crown and all of our friends, is there's a great predictability to what digital REITs offer investors. And so by building up that balance sheet, those balance sheet revenues and cash flows with long-term investment-grade leases, that's going to give us a base, a fundamental base. Now on the other side of the ledger, on the investment management side, we have a series of products and funds that typically last 10 to 13 years, where some of our vehicles are what we call permanent capital vehicles. And so what we're also trying to do there is provide you with predictable earnings. And so long-term fee streams and long-lived funds give investors what they're looking for. Having that consistency of those cash flows for 10 years or 11 or 12 years, by the way, it starts to feel like a tower lease, right? And so giving investors both -- the best of both worlds and giving them, most importantly, predictability in earnings is where we're going. So we've been -- historically, people have been confused with Colony, they're like I got -- we've taken -- we took investor calls for the last 1.5 years with people saying, "Well, help me drive to the sum of the parts valuation of your business." We're like, that's nice, but that's where we were. Where we're going is an earnings base model now. You now have consistent earnings. You have a fundamental base of assets and you have a fundamental base of investment management piece. It really is an elegant mousetrap for investors.

Great. And maybe in the last couple of minutes here, you can just provide a little bit of color into your 2023 initial guidance and how you see the mix between the operating and the investment management contributions over time?

Well, look, I think we've given some guidance that we believe we can rotate to about $1.3 billion to $1.4 billion of cash. And that's important because what we can do with that is, it allows us the ability to go out on the balance sheet side, Simon. And on a 60-40 loan-to-value ratio basis, you can begin to assemble $3 billion of assets, right? And we've sort of guided that we believe we can buy high-quality assets in the high teens. And on that basis, we can build some really nice EBITDA and some consistent EBITDA on that side of the ledger. On the other side of ledger, we've guided that we'll raise another $3.5 billion to $4 billion of FEEUM. I think investors have extrapolated our -- what our average fees are, so you can begin to see what our revenue looks like in '21 and '22. And if we continue to do that, if we continue to raise that same quantum of capital between now and '23, once again, you can sort of back into that. But we think the guidance we're giving is incredibly conservative, just given our history of raising capital and our history of doing unique and proprietary deals on the balance sheet. And we have a bunch of unique and proprietary ideas for the balance sheet. And as I stated on our call, we'll do at least one more balance sheet investment this year, in 2021, we'll continue to raise capital, and we'll continue to harvest the legacy assets.

Great. Well, Marc, thank you so much for joining us this morning. Appreciate the update. Best of luck.

Thank you, Simon. Great to see you.

Thanks.