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

Good morning, everyone. Welcome to day 2 of the 43rd Annual Raymond James Institutional Investor Conference. I'm Ric Prentiss, Head of Telecom Services Research, going on year 26 at RayJ. I've known Marc Ganzi, I think, 20-plus of those years too. So really excited. First, great to be back in person, great to be here in the hall with everybody, hallway conversations and getting together. Well, there's a friend coming in, good to see you. Marc's been with us at the Summer Summit in person, in Park City in person at Deer Valley in person and now we're pulling the third in-person event in a year safely, securely and together. So that's great. We're going to open up with a few prepared remarks by Marc, then we'll do a fireside chat, save some time for your questions, and we'll go down to the breakout session. So Marc, welcome. Good to have you here as DigitalBridge CEO.

Yes, thanks, Ric. Marc Ganzi is a public CEO, what you always dreamed of, Ric. So thank you. first of all, it is really good to be here live and in person. I'm going to go very quickly through a couple of slides because a lot has happened, since Ric, since we were here almost 2 years ago in the pandemic. When we were here a couple of years ago, we were presenting as we like to joke the artist formerly known as Colony Capital. The company has undergone radical transformation in a period of 24 months. This has really been our pivot from diversified to fully digital. We rotated over 80 billion of assets in a period of 24 months. Today, we sit with 45 billion of digital assets under management today. We have 23 portfolio companies, many of which most of you in the room know who those are. And we have an investment team that we think is second to none. And it's out executing what we believe is a once-in-a-decade sector thematic that we think is going to be a long duration and certainly where you want to put capital to work. One of the key things that we've been talking to investors about for the better part of the last 2 years is that perhaps there is a different way to invest in digital infrastructure. And our philosophy is that you have to be invested across the entire ecosystem. The myopic approach of simply just investing in towers, or fiber or data centers or small cells, we believe that is outdated thinking. Customers today demand more, faster, diversified, deeper, denser and out to the edge. And to do that, you simply cannot just build towers. You simply just cannot build data centers, and you simply cannot just build fiber. You have to understand how to deliver networks. That is the differentiation of what we do at DigitalBridge vis-a-vis our other digital peers. So we'll talk a little bit about that in our strategy. So I mentioned investing on a global scale. Literally, this is 23 companies going at it every day, delivering for customers, delivering converged network solutions. In our fourth quarter presentation, which we delivered last week, we showed you that in every continent, we have a shovel in the ground today, building over $6.6 billion of greenfield CapEx. It's the largest greenfield CapEx of any of the digital REITs that you look at today. Further to that, our picks and our shovels are more than just once again, one asset class. In every geography, we're building fiber, towers and data centers, which are delivering converged network solutions for our web scale customers and our mobile customers. And that's the key. By not focusing in one specific swim lane, we can deliver network solutions for web scalers and mobile operators and enterprises all at the same time. That's a shared infrastructure model that all of you in this room have known for 20 years, and it's incredibly powerful. So how do we get there? Why are we here? We believe that this is a massive global TAM. Just in the last 3 years alone, Ric, $1.2 trillion of CapEx has been spent in digital infrastructure. This year, over $400 billion will be spent in CapEx, greenfield CapEx for our customers on a global basis. And next year, that will grow by another 10% to over $440 billion. So if you think about that and you frame that opportunity, that's almost $2 trillion of CapEx in a 5-year period. This is really unprecedented in terms of digital infrastructure. And it's the thematics that we're talking about. It's more than just simply just building a tower or data center. We're transforming enterprise into the cloud, we're putting mobile infrastructure into the cloud for the first time, virtualizing the entire radio access core network in 5G. We're building IoT networks, we're building artificial intelligence, and we're doing this all in a converged environment. Once again, you simply cannot just own a tower. You simply just cannot own a data center. If you're listening closely to American Tower and Equinix, they admit this already, that if you're not selling converged solutions, you're behind. And this is what we're doing today. So our investment case is simple. Why should you own our shares? One, I think all of you believe in the secular tailwinds that are fueling digital infrastructure today. Two, we believe we've assembled a team that's second to none. We'll talk about that in a second. And then simple high-growth model. If you look at our performance last year in terms of our year-over-year performance in our Digital Operating business and our Digital IM business, both of those businesses grew over 100% CAGR. You're not going to find another digital REIT or a digital infrastructure business in the world that has our growth profile. We will simply keep growing, and we're going to simply keep delivering strong and predictable digital earnings for our investors. The next slide is really the [ Rick Pena ] slide. Look it's simple, Ric. It's better, it's faster and it's a more connected world. What we have here is you see mobile traffic growing by 5x over the next 5 years. And in turn, you see a data center CapEx spend of $1.3 trillion over the next 5 years. And at the same time, you see another almost $1 trillion being spent in 5G CapEx. And remember, the network topology of 5G is completely different than 4G. You're building edge compute hub sites, you're virtualizing the radio access core network. You don't need 2 to 4 pairs of strands of fiber at the cell tower. You need 20 to 200 pairs of fiber. You don't need a $250 million switch that sits in downtown Dallas. You need 24 edge locations where you have anywhere from 20 to 40 radios that are hubbed and networked across the entire network. Once again, you have to think differently about how networks are being built. So just to summarize for a second, the other key part of our business is not only our Digital Operating business, but also our Digital Investment Management business. Some of you have followed some of the growth in the alternative asset manager space, our Digital IM business has experienced meteoric growth. We continue to raise capital and we continue to deploy capital. And that's a really important part of our business model that is differentiated from what you've historically seen from other digital REITs. The alternative space is growing, and it's growing massively. You have almost an $11 trillion TAM that has a 10% CAGR growth. At the same time, if you look at our digital investment management business, it's been growing at 64% CAGR. So we're raising capital, and we're deploying capital at a rapid pace, very similar to that business model that Blackstone, has that KKR has and Apollo has, except we're just doing it in digital infrastructure. So how do we differentiate ourselves? And why do we think our approach is different? One, as Ric knows, we've been doing this for almost 30 years. Our DNA is we're operators. It's really simple. I've been building networks since the early '90s. I will continue to build networks for the next 20 to 30 years, I hope, fingers crossed. Second, we are sector focused. All we focus on is digital infrastructure and this notion of converged network solutions for our customers on a global scale. Third, we create amazing platforms. 23 companies operating globally, we're adding platforms every year, and we think we've got a great formula for how to create value. And then last but not least, the most important thing is serving customers. Everything that we're doing today and the reason we do the things we do and the way we do it, is driven by customer-based solutions. And that's a really important differentiator for us. I won't go into our team, but our team is deep. If you look at other folks that are in the alternative asset management space, whether it's Brookfield or Blackstone or KKR, they have 2 to 3 professionals that focus on digital. Our global team of 197 people wake up every day and do one thing only, which is think about how to build better digital infrastructure businesses, how to operate more efficiently, how to raise more capital and how to deploy capital. This is a very unique model. And then ultimately, does convergence matter? We think it does. The old myopic approach of having a one-to-one relationship between the tower and the customer, we think that's old-style thinking. The opportunity in a new world where you have converged solutions, is as you're building network, you can share that network across multiple different types of secular tailwinds. So when we're building, for example, an oRAN or a CRAN network for a particular customer in Las Vegas, it's not just for that one customer. We actually can re-lease those hub sites. We can reuse that fiber, we can reuse those small cells. So when you're building for an anchor customer, let's say, in Las Vegas, where you're building an oRAN network, you can put on top of that cloud players, gaming, IoT, public safety. And so your lease-up opportunities, when you think about a network almost as a tower, Ric, is very different. And we're seeing more of those at-bats. And when you can lease to the cloud players and you can lease to mobile operators and you can lease to all those other verticals, you build NOI and cash flow faster. And this is the differentiation of where we're going. And candidly, Equinix agrees with us and so does American Tower. So we have deep relationships. We work very hard with our customers. These are relationships that have been earned over 3 decades. I've been building network for these customers for a long time. And at the end of the day, it's about providing a flexible solution to our customers, whether we show up with 1 customer with 4 of our portfolio companies, where we show up with one, our core philosophy is deliver for the customer. Last but not least is just our strategic road map and where we're going. As we call this, this is the flywheel. Our objective is to capture all of the opportunities and to be the digital operator and digital investor of choice. As we telegraphed in our fourth quarter call this year, we've expanded into new strategies, focusing on providing credit to companies that need it in the digital ecosystem and also creating long-term permanency in our core strategy as well. These are great businesses that we want to own for the next 20 to 30 years. And most importantly, raising that capital that's paired with those opportunities. Whether it's raising credit capital or raising core capital, we have a great team that goes out globally and raises money. And as you saw last year, we typically exceed our expectations in where we're raising and forming capital. So ultimately, at the end of the day, Ric, this is where we're going. It's been a heck of a 2-year journey for us transforming this business from diversified to pure digital. We're excited about '22 and happy to answer any questions and have a dialogue with you about where we're going.

Great. Thanks, Marc. So exciting times, never dull. I'm still standing my 2 mottos. We get the question a lot from investors. We see the demand, right? Demand is unquestionable. Whatever age you are, you see the demand out there. We get the question a lot for your end customers, the people that are using the stuff that you're buying. How do they make the money? How do they get their return on capital to make sure they can keep spending as much money as is needed to keep up with this tsunami of demand? What are the revenue cases that you feel confident that the mobile network operators, the enterprise companies, can actually earn their revenue to earn their return on capital that feeds into that flywheel of what you're doing?

Well, I think you have to sort of parse that into secular winners and secular challengers, right? So in the secular winner category, it's clear to us that the cloud guys are winning. They have a voracious appetite for putting CapEx into our fiber routes and our data centers. Just this morning, as tomorrow, I leave to go to Vantage Board meetings and just thinking about Vantage for a second, which is one of our great businesses, we currently have over 1 gigawatt of leasing pipeline.

So they're in the data center business for those...

In the data center business, building large cloud campuses. And our customer set is literally the who you want to be invested with. We're not allowed to name names because then they don't do business with us, but you can imagine who they are. And if you looked at our securitizations, you can figure out who they are. But these guys are growing at a clip that I can't even understand. Our sales pipeline at Vantage 2 years ago, pre-pandemic, was 180 megawatts of leasing opportunity. Today, we're at 1 gigawatt to put that in proper perspective. So our sales pipeline has grown 5x during the pandemic. And at the same time, last year, just in Europe alone, we leased 186 megawatts. And that's just 1 theater. Keep in mind, Vantage is in Asia, it's in North America, and it's in Europe and it's now in South Africa where we're building 152 megawatts. So that business isn't slowing down. It's accelerating. Go to DataBank. If you go and turn the clocks back 5 years ago, we had $12 million of EBITDA and we have 12 data centers. Today, we have 70 data centers in 29 markets and we're over $200 million of EBITDA. That's meteoric growth, all focused on edge computing. And now we're adding the Houston locations from CyrusOne, which we had a great opportunity to build a 36-megawatt facility for a webscaler in that market, which we've integrated into that portfolio. That business's sales pipeline is 2x what it was a year ago, 2x in 1 year. And most of that is between 0.5 megawatt and 5-megawatt opportunities. So Vantage is kind of hunting 5 megawatts plus. DataBank is hunting kind of 0.5 megawatt to 5-megawatt opportunities. Currently, Revel's got 14 data centers in construction. So [ Real ] probably has 20 in construction between Seoul to Warsaw to Berlin to Santa Clara to Quebec City. There is no slowdown in this adaptation of cloud. And along with that comes a voracious appetite for bandwidth. And so at the same time, we've got Zayo building all those web-scale routes into those data centers. So now you begin to think about convergence, right? How do our portfolio companies fit? How do the puzzles work together? How do you create solutions that are seamless for the Googles and the Facebooks and the Microsofts and the Amazons and the VMwares? That's kind of our obsession at the moment, and it's not to suggest that the mobile carriers aren't exciting for us. We have a whole another team that's focused on the mobile carriers. But the cloud ecosystem is growing so fast. And now what becomes really fascinating to me, and you've been -- like me, we've been looking at network build since the '90s, is this notion of the core of the network disappearing into the cloud is like -- it was hard for me to understand that 2 years ago. And then when we started building for Dave Mayo and DISH 2 years ago, our first true de novo oRAN network, we kept going, okay, where's the switch? And there was no switch, right? And so you had to rethink and you had to reimagine how networks were built. And networks were no longer about this linear relationship between the switch and the cell site. It was more about hubbing and networking and creating multipath fiber out to the hubs that ultimately touches towers and small cells, and comes back to those hubs and moves out then to ultimately an interconnection data center, where literally they only have 4 racks and that goes to the cloud. And this is where Equinix is having a lot of success is that on-ramp into cloud, right? And they talk a lot about that. How are they going to play in mobile infrastructure by being the on-ramp into the cloud. Same thing that we're doing at DataBank. And that really puts the tower companies a little bit at a defensive stance because yes, you're going to always have demand for tower space. But really the network intelligence piece, you'd like to have a seat at that table, which is why I think Tom did CoreSite at the end of the day. It may have not been the asset I would have chosen for edge computing, but nonetheless, it was a tell of where American Tower is admitting where they need to go. And that's what we're doing. I think at DataBank, it's that belief that the radio access core network is going to interface into the cloud. And if you don't have a seat to that toll road and you don't understand where that junction box is, you're behind. And so customer demand is changing and adapting and having the infrastructure, having all of the infrastructure, so we don't miss something, is part of that slide up there, that flywheel. We have to capture the entire ecosystem and not only capture the entire ecosystem from a product set, but we also have to capture it from an investor set. And this is why we moved into credit and why we moved into core because, we were finding people like ARES starting to venture into digital credit, and we are finding Brookfield venturing in the digital coin. We're like, hold on a second, we're the digital experts, we should be doing that. And so we put teams together last year to go attack those opportunities. Those are big opportunities. We're talking about $500 billion to $600 billion of credit in second lien in what I would call skill capital. And if we think about that $11 trillion TAM in core, there's about a $1 trillion TAM in digital core. What your older legacy assets that maybe have a nice little cash yield, but you're prepared to underwrite a 9% to 11% IRR, lower IRRs that are outside of our flagship. So we have to have a product that matches to that so we don't miss those opportunities because what we were finding last year is there was 1 or 2 opportunities we missed because we didn't have the right capital to pair with that opportunity. And now in credit, it's interesting. The markets are turning, right? Middle market companies between $20 million and $80 million of EBITDA don't have the ability to access the securitization marketplace. Because it's a first time issuer, they're going to get punished by Kroll's and Moody's and the rating agencies. And at the same time, you've got an institutional bondholder list of 200 folks that buy CMBS digital infrastructure paper. And so if you're a smaller cap company, like -- I'm not picking on anyone, I won't say any names because people would think I'm picking on them, but we found that we could write credit, and we did 7 loans last year to middle market infrastructure companies that either couldn't get their business sold or the sponsor didn't want to layer equity on top at a valuation that was really high. So as you market the asset up, if you have to put new equity in and you're kind of almost hurting yourself there. So this idea of supplying skill capital is huge. We've got 29 loans in our pipeline. It's a book that's over $1 billion, and we're writing loans and we're writing good loans. First, 2 loans are realized. One was at about 11.8%. The other was in the high teens. We've already realized 2 of our loans well outside of what our benchmark was. So we think this is a big opportunity. And we think in a market where the world's a little difficult, macro setup is challenging. We want to be in the business of providing capital to other digital infrastructure players.

Makes sense. To paraphrase and expand upon a comment by a former CEO in the space, he used to say, all content is going to the Internet. The Internet is going mobile. We would add mobile is going into cloud. And you want to be in the room where it happens. To quote Hamilton, "you got to be there if you want to participate, you got to be in the room where it happens." What's happening in the marketplace right now is highly interest rate sensitive. Your stock is feeling some of that volatility. Help us understand why do you think your stock is tied to the interest rate phenomenon? And should it be? And what can you do about it?

Well, I don't think our stock should be tried, should be measured on -- it shouldn't be as correlated in interest rate sensitivity because I think at the topco at DigitalBridge, we have 2 powerful earnings streams that are not slowing down. So in digital operating, DataBank's weighted average lease term is 5 years, Vantage's is 13 years. We have escalators, greater than 60% investment-grade exposure. And we have organically, we're growing at 68%. That's a good business. And both of those businesses now have 30-year securitizations in place with fixed debt. So we don't take...

At a low rate.

At very low rates, actually, well below 3.5%. So we've got ourselves and we did those financings last year knowing that the market was turning. And so I told everyone on the investment team go out and lock down your balance sheets because the storm is coming. It's exactly what I said last summer at our all hands. And our asset management team did a great job of going out and getting those 2 assets locked down and secure. Then Jacky, my partner, Jacky Wu, right there, has done an incredible job on the DigitalBridge corporate balance sheet. Look, we inherited a 14x levered REIT that was going nowhere. It was going the wrong direction. We quickly fixed that, we delevered the company, we got our leverage below 7x. And then we've done a couple of things that I think are interesting to note, which is -- we've replaced bank debt with securitized debt. We're the first organization to take investment management fees and securitize them. Just like I securitized cell tower leases in 2004, and I've done small cells, and I've been in data centers. I've done every type of securitization possible, and Jacky comes to me and says, hey, boss, why don't we securitize our fee stream? I'm like, what are you talking about? He's like, no, no, this is -- our fees are 11 years in duration. It's like a cell tower lease. I'm like, go call the bankers and see what you come back with. He came back 3 months later with the securitization priced inside of 3.9%, so inside of 4%. And meanwhile, we're paying preps at like 7%, 8%, which is ridiculous. So now what we're doing is we're recycling through those preps with securitized debt sub 4%. And as we continue to raise funds, guess what, our securitization has an accordion feature. And we can keep according up as we raise more funds, and we raise more fees. We cycle out the preps and we put in the securitized debt. So we pick up 300 to 400 basis points off of a debt stack that's $700 million. You can do the math on that. That all flows straight to AFFO. So we're in the process of finishing that this year. Investors will get the benefit of that. We intend to have a very positive AFFO year this year. Earnings are growing really fast. We issued our second beat and raise in just in 2 quarters. And we're really optimistic about what we think we can do in the future here.

So it does seem like there's an opportunity in the marketplace on the disconnect between the fundamental business, the financing of the business versus the interest rate volatility and the stock.

Well, that's my job and Jacky's job. We got to get out. We have to talk to investors. We have to explain the security of our balance sheet in that none of our debt floats, which is great, and that we're replacing 7%, 8% debt with sub-4% debt.

Let's see if there's some questions from the audience, Eric?

I've got one. Marc, you did mention to us, I think in August, you were both worried about [indiscernible] growth. If you can comment maybe on the other side of what you're describing in your asset [ pipe ] and the product that like you guys are targeting, some of these capital budgets, which I believe are very long term and maybe give us a sense of where you are with that and how that fits in the macro.

So I'll sort of take the 50,000 foot and then I'll drill down on where it impacts our investing and where we go. I think at a 50,000-foot view, we have a belief that this theater, North America, should be pretty safe. We have a pretty pessimistic view of Europe. Unfortunately, we think Europe will move into a recession if it's not there already, by the math, you can sort of suggest maybe Europe is in a recession. But I think Europe has a tougher climb out. I think Asia is doing pretty good. We've been very happy with what we've been able to build in Asia in the last 2 years. So the macro setup from a geo perspective is a little bit different in each theater. And so we take a bit of a guarded view on Europe, we're very optimistic about North America, and we're super optimistic about what we're doing in Asia. From a secular perspective, moving down into the sort of 5 swim lanes of digital infrastructure, I would say where we started in the data center land, we continue to be very optimistic about edge and hyperscale. We're probably a little less optimistic about retail colo and managed services. We think those are businesses that are, I don't want to say, melting ice cubes, but they have a profile that doesn't fit for where we're going. So we've invested -- we've gone left, and I think some of the sector's gone right. I think in fiber, we divide fiber up into sort of 3 different verticals, one being resi fiber, enterprise fiber and wholesale. We love wholesale. They're just -- it's harder to find really good wholesale opportunities. We were generally pessimistic on resi fiber overbuilders, but now prices have come down and we're able to now get in at the right entry price. Instead of paying 28x, we're paying 12x to 14x. And so we feel like that market has moved in our direction. So we're starting to do some work there. And I think Enterprise Fiber has a pretty uphill battle unless you're focused on the software-defined layer of the network and you're selling SD-WAN and building more virtualized enterprise fiber. So net-net, I think, we're -- we have varying different views in fiber. I think towers, look, you never argue with towers, right? It's always good. It works. We are investing in towers across 4 different geographies right now. We do think this 5G upgrade cycle is a little bit longer than historical cycles. So if you look at the 3G macro overbuild and the 4G macro overbuild, 5G will take probably about another 12 to 18 months longer than what we saw from 3G to 4G.

So we're talking 5 years, 8 years?

I think probably -- last year was our first really good year in North America for 5G overbuild. Alex is telling me '22 looks better than '21. And I think '23 will be pretty good. It will look like '21, and then '24 it starts to tail off. And then you see densification in small cells, which will be a '23, '24, '25, '26 event. And I think towers in Asia is -- we've been very happy with what we've done in Asia. Edgepoint has been one of our bright stars. It's a great business. We're in Southeast Asia, which is a fast-growing market where you don't even have wireline replacement, everything's just going straight to 5G. So it's a very sophisticated environment, very sophisticated consumers with great devices and great product setup. And then in Europe, I think you're going to see a bunch of tower assets come to market and it will just be priced -- it will be priced to perfection is my sense. Whether it's [ Totem ], whether it's [ DT ], whether it's TDF or whether it's something happens with Vodafone, there's going to be a lot happening in the European theater with towers. This will be one of the most active M&A environments for towers. And then in small cells, I think the market has been pretty disappointed with what's happened with Crown just from a performance perspective. I would tell investors to be patient. I would personally own Crown. I think if you're looking at the future of where networking is going, Crown has the right pieces. They have to put it together, they have to put the pieces with the strategy, with the customers. I think they can do that. I'm long-term optimistic about what Jay is doing. And we're optimistic about what we're doing at ExteNet and Boingo. Both of those businesses are performing really well. And what's incredible about what's happening at Boingo is this movement to 5G enterprise. So a lot of the networks that we own at Boingo are airports, port authorities, convention hotels, convention centers. And we've taken that old WiFi, we've replaced it with WiFi 6. And in addition to that, we have the infrastructure to deploy CBRS throughout all of our systems so that if a mobile carrier wants to come to us, they don't have to build any infrastructure. We can literally overlay 3 carriers day 1, and they have to put in 0 CapEx, and they're just roaming on our 5G enterprise network. And 2 carriers have already validated our network. So imagine how fast we can grow revenues for a mobile operator because remember, Boingo has like, for example, all the airports in New York City. So if you're T-Mobile and you want to have 5G coverage at JFK, LaGuardia and Newark immediately, you just call Boingo and it's done. And through the cloud radio access network and using software-defined network solutions, we can host T-Mobile across all those airports, and they don't have to put 1 dime of infrastructure into those airports. That's a game changer. That changes it for the carrier. They save CapEx. And if we can save a customer CapEx, we've created real value for our customers. See they're running out to go buy our stock right now.

We've hit our allotted time. I appreciate it. We're going to continue this conversation down in the breakout. So Marc, I appreciate it.

Thanks, Ric.

So let's get into the breakout, and get in deeper. Thanks, everybody.

Thanks, everybody.