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

All right. Good afternoon, everyone, and welcome to Cowen's 50th Annual TMT Conference. My name is Michael Elias, and I'm the data center and content delivery network analyst at Cowen, where I also cover DigitalBridge. So for this meeting, we have DigitalBridge. And from DigitalBridge, we have Ben Jenkins, who's the President and Chief Investment Officer. This session will be structured as a fireside chat. We have about 30 minutes for this session. I have a bunch of questions prepared, but I'll do my best to pause and open it up to the audience for questions at the end. So with that, Ben, thank you so much for being here today. My pleasure. Thank you.

All right. So kicking things off with one of the more notable pieces of news in the communications infrastructure world recently. DigitalBridge Investment Management alongside IFM agreed to acquire Switch in $11 billion take private. What did DigitalBridge see in the Switch platform that was particularly appealing?

Well, first of all, a brief disclaimer that it's still a pending transaction. So I'll be somewhat guarded in what I say. But we do think it's quite a unique business model and an attractive set of assets. It wasn't necessarily conducive to a public market story, given the growth that they were seeing required incremental investment and that had impact on their quarterly earnings and the cash flow generation. So we think in a private context, it can continue to grow and offer a unique integrated solution to its private cloud customers. And we think it fits very well into our data center portfolio, sort of in between Vantage on the hyperscale side and DataBank at the Edge. So we're excited about it, and we'll have more to say, hopefully, after it closes.

All right. And with that, based on that comment, it sounds like Switch will be a stand-alone entity you won't be putting into Vantage or DataBank. It would just be -- it'd be -- operated as it is...

That's correct.

Just under the DigitalBridge umbrella. So I appreciate the deal hasn't closed, but one question that I've gotten from investors is, when you pay the multiple that you're paying, it's relatively high, I think around 30x. What are some of the ways that DigitalBridge may look to, one, accelerate Switch's growth? And as part of that, bring down that multiples, functions on?

Sure. Well, they already have identified a number of expansion projects at their existing facilities. And so we would clearly look to continue that, and they've identified additional markets that they think would work in their model. So it's likely that we would expand into new markets over time. And the organic growth also contributes to bringing down that multiple over time.

Okay. Transitioning away from Switch and talking about the Digital Investment Management business. Following the DigitalBridge acquiring Wafra stake in the IM business and also your decision to D-REIT, it appears that DigitalBridge has been leaning further into the investment management business. And to that point, you also recently acquired AMP Capital's, global infrastructure equity IM business. Given these moves, how should we think about the opportunity and, as part of that, your willingness to pursue additional acquisitions on the IM side?

Sure. So very astute observations. That's, in fact, exactly what we've been doing. And we think that we are uniquely positioned now to do that. We think our investment management platform offers very strong organic growth opportunities as we increase the sizes of our funds or we raise incremental capital for specific deals in the form of co-investment, but also incubating new strategies. We've recently launched a credit platform and what we're calling a Strategic Assets Fund, which is akin to a core product. And we also believe that we can do bolt-on M&A like AMP. And there are other GPs or investment managers out there that we think would be additive to our offering and our footprint. And so we would be keen to pursue those as well. The alternative investment business is a high-growth market and the digital space is among the very highest growth within that. So we think we're very well positioned as a focused investment manager, and we'll look to continue that strategy.

And as part of that, I think it was at the beginning of this year or maybe even earlier that you talked about building a full stack investment management platform. And your adding core, you're adding credit and also ventures. Now you brought on AMP as well, as you think of the capabilities that are needed in order to achieve that full stack investment management platform, what comes to mind?

Yes. Well, it will be a combination of strategies that we incubate and develop in-house and bringing in resources, sometimes entire platforms, from the outside. So when we started Credit, for instance, we brought in a team led by Dean Criares, who I've known for over 20 years. And that was best-in-class expertise in that particular segment. With Ventures, we've brought in Alex Villela, who's a very experienced venture capitalist. We have on the SAF, as we call it Strategic Assets Fund, we have Peter Hopper and Matt, who came from AMP ironically to lead that. So we try to do a combination of grafting the relevant expertise onto our platform and DNA so that we have sort of a melding of cultures and skills. And I think that combination has served us very well and will do going forward.

Right. So there aren't any outside of core Credit, Ventures, I mean, you'll do more. But there isn't any explicit vertical that you would highlight with investment management that you feel like you need to or that you'd rather want to?

Yes. I think it would be more the latter, more opportunistic. I think there's still space. A more growth equity or private equity strategy I think fits into that. There's geographic expansion. We've been primarily a developed markets fund. We could move into adjacent areas such as renewable energy, digital logistics, things like that. So there are a number of different avenues for growth that we think are logical extensions of our franchise.

That makes sense. And one question I had and I asked this to a company earlier. I think every company is based with the build versus buy decision, right? You can bring people on as you have with core as well as Credit, you can also go out there and acquire the expertise that you need. From your perspective, how do you think about that build versus buy decision?

Yes. Well, it's actually maybe an even more interesting equation than just at the DigitalBridge level, right? We're essentially doing the same thing with each of our portfolio companies where they're evaluating acquisitions versus new build. And so for us, at the portfolio company level, it's typically a relative value calculus where we're looking at M&A multiples versus what it cost to construct either greenfield or brownfield. And typically, we've done a little bit of both. And I think the same thing is true at the DigitalBridge level. There's a time to market with an internal strategy and sometimes that makes sense. Other times there might be opportunistic M&A that can accelerate that process, and that's what we found with AMP. Ventures and Credit, we've sort of taken the internal route, and we're very pleased with that. We did, as I said, bring in outside talent to help lead it, but we've incubated that ourselves. SAF is one that was more organic even still as a sort of extension of our original DigitalBridge Partners franchise.

All right. Thank you for that. Appreciate it. I just want to transition and talk a bit about the digital operating side of the house. Reaching your 2023 and 2025 guidance will require some additional on-balance sheet M&A. I believe you've put out that -- you have a target multiple around 20x for that side of the house. And I guess my first question on that is, as we think about 20x, is that a hard number? Is there any flexibility around that?

Sure. I mean none of us is so smart or precise to be able to rifle-shoot something that might happen in 2023, let alone 2025, right? And it's probably better thought of as a target and one that might well be achieved on a blended basis, right? We might buy something for less than that. Or in some cases, if we think it's really attractive, we might stretch beyond that. So taking the last 2 corporate transactions that we've been involved in, that being the AMP deal and the repurchase of Wafra's stake in our Investment Management business, that was done on a blended basis at around 16x. So I think we can be creative and opportunistic and probably meet that target, but it's not a hard and fast rule.

Okay. That's helpful. And just thinking about, appreciating that it's not a hard and fast rule, on that 20x, as you think of the operating business and deploying your capital into that side of the house, can you give us a sense for what assets you think would be the most logical to live within the operating business that sits on the balance sheet?

Sure. I think fundamentally, we're looking for stable, long-lived assets with creditworthy counterparties that generate predictable free cash flow. We'd all like eggs in our beer, too. So it's not easy to find, especially at attractive prices. But again, we have the benefit of time and flexibility. We're not constrained by a particular industry vertical or geography, so we can pick our spots. And I think we have a history of doing that. And whether it's digital operating assets or additional IM acquisitions over time, I think we can do that very effectively.

Just to that point, you mentioned the stable assets and mature assets with high credit quality counterparties. It just so happens that within your Investment Management business, you also have a lot of those types of assets. So my question for you would be, you've done stabilized asset purchases from Vantage in the past. Could it make sense for you guys to acquire additional mature assets from your portfolio companies, be there -- whether it be Vantage or another portfolio company?

Sure. It very well might. I think we would look to do that in partnership with either existing or new third-party investors and sort of create a force multiplier in effect that drives our investment management earnings. So we're looking at a number of options in that regard.

Okay. All right. Last question on this topic, and then I'll switch topics, is, as you think about essentially acquiring assets from one side of the business to the other, right? And this is a question that we'll get from investors is, questions around conflict of interest. From your perspective, how do you go about limiting any potential conflicts of interest?

Sure. Well, I might start by saying I think it would be unlikely for us to "acquire" assets from one side to the other. It would always be in partnership with third-party capital such that there's an independent valuation established. We also would do all of the appropriate fairness opinions and other measures to ensure that it was an arm's length arrangement and it's something that we are very sensitive to. Our investors on both sides are also very sensitive. So this is always fully vetted and documented and we'll be extremely careful in that regard.

Okay. Just taking a step back and looking at the broader market for communications infrastructure, I mean we had seen since the beginning of the year a pullback in public market valuations as interest rates have moved higher and changes in the macro backdrop. But given your purview into the market, how do you characterize the changes, if any, in private market valuations for the assets that you're looking to acquire?

Yes. Look, I think, honestly, it's too early to tell. Private market values typically lag the public values at least 6 months and sometimes 12 months or more. There's just sort of inertia almost that takes time to play out. And we're still in the relatively early stages of that. But I think it's not unreasonable to expect that over a quarter or 2 that they will follow. I would say though, in our space, specifically the demand side remains robust. And so I think the performance, the earnings of digital infrastructure companies are likely to be stronger on a relative basis than maybe other sectors. And so that will obviously play into valuation as well.

There's a lot of capital looking to deploy in this sector. And one thing it sounds like what you're saying is, this aligns with conversations I've had as, if we think about interest rates and the impact that, that has, it needs to be higher for longer. You need to see that sustain over a period of time before we see the -- what the private investors are willing to pay to see that pull back. And it sounds like that's what you're saying. I know we talk about communications infrastructure. It's like one thing. But in reality, they are data centers, they are towers, you have fiber, small cells and so on. As you think about it, are there any areas where you see, I think, Marc called that hairline cracks? Are there any areas where you see -- you do see some cracks emerging?

Sure. I'll give you maybe 2 sides of the same coin just for contrast. I would say we're probably seeing the strongest demand and most growth in hyperscale data centers. One of our companies had truly a record leasing activity. Just within the span of a week, they effectively leased the equivalent of a year or more of capacity. So the demand pull there is very robust. On the other hand, particularly in Europe, you've had surging electricity prices. And data centers are huge consumers of energy. So there was one operator, Sungard, that saw its power prices spike to, I think it was $7,000 a kilowatt hour and without the ability to pass that through to the underlying customer. They went bankrupt. Now they had other issues, too. But that's an example of where the sort of theoretical of inflation or energy price spikes meets the practical reality of broken business models. And so we're being very discerning about the underlying health of our customers, right? So signing a 25-year lease with Amazon is very different than signing one with Sungard or someone who's business model is not as resilient. So those are maybe that 2 sides of the same coin.

Yes. I appreciate that color. Although when I asked about hairline cracks, what I was asking was, with respect to valuations of assets. Anything you're seeing there?

Well, look, I mean you and the people in this room would be more familiar with the public market values than I am. But clearly, certain companies and sectors have pulled back more than others. And usually, in the early stages of that type of correction, it's somewhat indiscriminate, right? And so maybe there are some companies that are being unfairly kind of thrown in with others and maybe that creates some interesting relative value plays. I personally think while no one necessarily wants to see a big pullback in the market, I think a more discriminating market is actually healthy in the long run because it differentiates between good companies and less high quality. And I think in our case, certainly, we believe we've built a very good portfolio that will outperform. And we'd like to think that over time, the market will recognize that.

You gave some really great color on what you're seeing on the hyperscale demand side. And what I'd like to do is -- I think this is a question that is a favorite question for Marc. But let's see how you approach this. As you think about the different verticals of communications infrastructure, you think of the outlook for them and you also think of the prices that you could acquire things at. How do you rank order the attractiveness of your current interest in each of your verticals?

So let me maybe modify slightly what I just said, which is, while I think there are some interesting relative value plays. Ours is not a pure relative value game, right? Because we're trying to build a diversified portfolio across the sectors of digital infrastructure as well as geographically, right? So it isn't -- if we had conviction on a particular segment that we would put the whole fund into it, that's not prudent. It's not the way we approach it. I think, again, based on the demand, the hyperscale segment is still quite robust and we're seeing that demand really across the world. The leasing I referred to was North America, but Europe is really strong in spite of the energy price challenges. Latin America and other emerging markets as well, we operate there as well as now in Asia, and we're seeing strong demand really everywhere. I think in fiber, there's a lot of new investment going into both fiber-to-the-home and related infrastructure as well as continued investment on enterprise and dark fiber. I think towers in the U.S. are seeing growth, in particular from the build-out by DISH. I think small cells continue to be a critical element in MNO network architecture. So it's pretty broad-based, to be honest, and we're really looking for the best way to play each of these sectors so that we end up with a well-diversified, well-constructed portfolio.

That makes sense. Two other areas of potential interest that I'd like to touch on really quickly. One question that we've gotten from investors is whether or not DigitalBridge would be interested in acquiring companies that do ground lease aggregation. While I appreciate it's not pure play communications infrastructure, is that something that you'll be able to do?

Well, actually, yes, and we have, in fact. We acquired the Landmark Dividend platform and completed the take private of their public vehicle. So that's absolutely something that we're looking at. And while you're right, it isn't maybe a pure play on the physical infrastructure in the sense of the equipment itself. It is absolutely fundamental to the operation and sort of continued existence of the infrastructure. Maybe you could think of it as a first derivative or something. But we think it absolutely has the attributes of infrastructure.

Right. And it's great that you mentioned Landmark Dividend because I believe one of the types of assets that Landmark Dividend owned was Digital Billboards. With these billboards, I appreciate there's an opportunity for you to further digitize them. You can add small cells to them. But as you think about building that leading communications infrastructure platform, would increasing your exposure to, say, Digital Billboards make sense in your view?

Yes. And again, we have done that. We own a platform in the U.K. called Wildstone and that's exactly what they do. They own an estate of billboards and are in the process of digitizing them where possible. And it's more of a wholesale-type model that, again, we think is consistent with the attributes of infrastructure. So we would own the billboard and lease it on a long-term basis to an advertiser like JCDecaux or Ocean Outdoor. And that insulates us from sort of the vagaries of the spot ad market, which can be more volatile, and the sort of upgrade opportunity as well as potentially things like small cell provide incremental return potential.

All right. I just want to transition, talk about fundraising while we have few minutes left. On the last earnings call, I believe the comment was that the fundraising environment remains robust. Has that stayed consistent? Are you still seeing that robust environment? And as part of that, what are some of the themes that you've seen behind your recent fundraising success?

Yes. Well, again, I think it speaks to the resiliency of the sector. And we would like to thank our own performance. We are almost constantly in the market raising capital either for specific capital vehicles or often for particular companies on a co-investment basis. So we've got 3 or 4 things like that in the market right now and we are seeing strong interest. We've gotten meaningful commitments on committed capital vehicles as well as company-specific opportunities within the last week. So we are still seeing strong demand.

That's great to hear. Following the Switch acquisition, which is going to be done through DCP II, I believe. That fund, I think, will be close to fully committed, if I'm not mistaken. I believe in that typically an investment management around 65% committed around there will start working on the next one. I appreciate there are limits on what you can say. But just given the deployment level, would it be fair to -- for us to think that their -- you'd probably needed to shore up some capital so that you can continue to deploy?

Yes. Well, one of the company-specific activities that I referenced is in regard to Switch. So through that, we will bring down the fund's overall commitment and that will free up capital that we can invest in other platforms. So I don't think we're prepared to discuss a particular timetable yet for subsequent fundraisings but, of course, we're thinking about that and we'll plan accordingly.

All right. With the time we have left, I'd love to see if there are any questions from the audience. Please.

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Yes. We are. To be honest, we've taken a pretty cautious approach. And there are 2 reasons for that. One, we pride ourselves, as I mentioned earlier, on trying to identify stable, long-term customers and to limit the amount of turnover that we have. And sort of by definition, many of the, I'll just use the term, crypto miners, have been quite volatile. I think there are certain elements of blockchain which are much more akin to infrastructure than the coins themselves and so that distinction is certainly relevant. The other thing that's very important to us, and we talk a lot about this publicly and with our private investors, is ESG. And as I said earlier, data centers are big consumers of electricity. Bitcoin mining is massive consumer of electricity. And so for us to be involved, it would have to be with some sort of sustainable energy. And we've looked at a few projects, and it's something that we'll continue to evaluate, but we haven't done anything yet.

All right. With that, we are out of time. Ben, thank you so much for being here.

My pleasure. Thank you.

All right.