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

Thank you, everyone, for joining us. I'm Sami Badri with Credit Suisse. I lead up research of communications, infrastructure and telecom and network equipment at Credit Suisse. Right now, we're going to hear from Marc Ganzi, the CEO of DigitalBridge. Marc, thank you very much for joining us.

Okay. Sami, thank you. Appreciate you hosting me. Nice to be here.

Absolutely. So I wanted to kick things off with the recently announced ownership structure of the company. And what investor feedback have you recently heard about becoming a C-Corp?

Yes. Look, I think the investor feedback has been incredibly positive. Our ability to not be constrained by a tax selection was really sort of forcing us to make decisions that perhaps weren't always in what I would say in the best interest of shareholders long-term, so maximizing returns. And ultimately, given the growth of our business, it was actually constraining us in terms of our ability to grow. So now that we've had a chance to get out there and explain the relevance of why we had to do what we did and the industrial logic behind what we did, I think investors that are in it for the long-term as DBRG shareholders appreciate the structure and then most importantly, they really appreciate the fast growth that we're going through right now, which is really what shareholders should want at the end of the day is growth.

Got it. Absolutely. And I wanted to kind of hit on just a little bit of an overview about the company because you guys do address the digital infrastructure industry a little bit differently than most players in this market. So could you just provide a little bit of color about the Investment Management business and how you're structured across towers, fiber, data centers and other infrastructure assets you're going after?

Yes. So look, we have 2 very simple business models. One is an investment management business where we own companies where we pair our balance sheet capital, Sami, with institutional third-party capital. We've had an incredible run in the last 2 years, raising capital and putting capital to work with fund investors. And as a consequence, our investment management platform, as you know, has grown quite rapidly and continues to grow, in fact, and we can certainly talk more about that. But the key here is that we're deploying our balance sheet as a general partner as typically one of the larger shareholders in the funds. And then our team is going out and canvassing the globe and backing what we believe are best-in-class management teams and then giving them, most importantly, Sami, the capital to grow. I think one of the things that we see sometimes in the digital infrastructure space and public companies is that sometimes that public format can constrain them in terms of how they can invest. We saw that obviously across the data center space where a lot of the public data center companies had a lot of challenges doing greenfield development because the street didn't appreciate that or given them credit for them. So what makes our platform incredibly unique in being that we have, obviously, a balance sheet, and we have an investment management platform is, we can step up and respond to opportunities on a global scale. We can back-rate management teams. We can do brownfield and of course, we do greenfield development, and we don't get punished day-to-day by going out and building great assets across the different verticals in deploying that capital. To me, this is a scale business. And as we've demonstrated, we've gone from $12 billion of digital infrastructure assets to over $60 billion in a very short period of time, placing us as one of the top 4 asset owners and managers in the world only behind a few logos, which I think you know quite well, Crown, American Tower and of course, Equinix, but pro forma for Switch and our AMP acquisition were one of the largest 4 -- top 4 in terms of total digital infrastructure assets. I think investors just have to take time and get to understand why that's relevant and why that format is a little bit different than what they're used to seeing. But I think for years and years, we've been sort of force bid on 2 business models and digital infrastructure that candidly may be obsolete. One is just staying in one swim lane and only owning one set of assets. I think a lot of my peers have recently told you in the last 18 months that they need to have more than just one specific type of infrastructure. Digital Realty Trust, for example, spoke at a conference about being invested across the ecosystem. American Tower has been saying it now for a while, Crown Castle has been saying it for a while. And our model has been to invest across the entire ecosystem. And I think that model works. The second thing is we didn't have the benefit of having a 27-year-old balance sheet like American Tower or some of the other digital REITs. We've had to grow up fast. And the only way that we can compete and scale is by having paired alongside our balance sheet, Sami, is this great investment management platform where we can go form capital very quickly and act as we did like on Switch or Zayo in a big way, and we can show up and scale. And having that asset-light model and having that balance sheet and having third-party capital and being able to move quickly is a comparative advantage for us. There's very few digital REITs in the world that can move with our agility, our speed and can show up and perform for customers and perform, of course, in big M&A situations. It's an incredibly unique and scalable platform that we built. And look, we've done it in 8 years. It's been a quick journey, but we have to compete against folks that have had balance sheets that have been 20 or 30 years old. And so this was for us the best way to compete, to have a much more agile platform, to have much more flexibility in the C-Corp structure, but most importantly, we get out there and perform at scale. And that's what we've been doing. We've been competing against our digital infrastructure peers now very effectively for the last 2 years.

Got it. Thank you for kind of hitting a lot of points there that some of my later questions were going to address. Now the market volatility is actually pretty, I would describe it as elevated at this point, maybe even extreme. When you talk to investors and you're having fundraising conversations, how are those conversations going? And which part of the DigitalBridge ecosystem are investors or people that are interested in providing capital, where are they trying to go?

So look, we cater to 2 forms of investors, right? We cater to private investors in our digital and IM business and then, of course, we cater to public investors that own our shares. I would say in this market volatility, public investors have obviously voted with their wallets and they've decided to sell our shares and we've got to make a compelling case for why they should be buyers of DigitalBridge shares. And we're going to do that and we're going to put a series of affirmative actions into place that, I think, will get shareholders to understand what we're doing is in the best interest of shareholders, best interest of the company and most importantly, get the share price back to rightfully where it should be, which is my job. Secondly, on the private capital side, we continue to form capital. We continue to raise capital. We demonstrated that in the first quarter. We'll demonstrate that again very shortly. We have a strong guide this year for capital formation. And look, I've been on the road for the last 45 days. I'm actually in Europe right now, out fundraising. And what I would tell you is investors continue to be really excited about digital infrastructure. It's one of the assets, as you know, Sami, that investors are under-allocated to. And so many big large pension funds and sovereign wealth funds are candidly over-allocated to liquid securities, whether its hedge funds over-allocated to private equity funds, some of them are allocated to real estate. But by and large, if you canvass all of the global investors, whether they're pension funds, insurance companies, sovereign wealth funds, they'll all tell you the same thing. They are under-allocated to digital infrastructure and renewable energy. Those are the 2 hottest verticals in private capital formation. And so we're going to continue to raise money. We're going to continue to do great, big transformative deals that we think can create great returns and that's what our track record is, is about creating great returns for our investors. And look, we've been able to pair that private capital alongside of our balance sheet where our public investors get to participate. And that's really the key is having strong alignment between our public investors and our private investors, which is a great signal for folks when you take a look at what we've done with the C-Corp and creating that flexibility and continuing to be unconstrained in growing the investment management platform and investing in digital infrastructure. So I think we're on the right path. Obviously, we've got some work to do on -- with public investors. We're going to be out on the road next week in Europe, seeing a lot of investors here in Europe. We're going to be back stateside seeing more investors in the U.S. And the key is just execution. Fundamentally, nothing has changed in our business. In fact, I would take it to investors. And in fact, our business has improved greatly quarter-over-quarter, and we'll demonstrate that in the second quarter. We demonstrated that from the fourth quarter to the first quarter. Ever since I've assumed management, all we've done is grown FEEUM, grown EBITDA, we've increased guidance twice and fundamentally, the business is as strong, if not stronger, than it was a quarter ago. So we just got to keep doing what we're doing. And I think what we're doing works, which is creating long-term, predictable, high-quality investment-grade earnings. And that's what's so unique about our platform, whether it's a long-term lease that sits at one of our operating companies on our balance sheet like managing DataBank or whether it's a brand-new infrastructure fund that's 12 or 13 years in duration, where we're taking money from the most -- the largest sovereign wealth funds in the world who are investment grade. The key to this is long-term investment-grade cash flows from long-term duration contracts. And that's what we provide to investors. So we'll get out there. We'll tell that story. We'll continue to put up the results. I'm very confident in terms of what we're doing right now.

Got it. Got it. Thank you for shedding light on that. I wanted to talk about dry powder in your funds. How much dry powder do you have to deploy right now?

So across DigitalBridge Partners 1 and 2, we've got about $3 billion in unused capital commitments that are callable for both of those funds across the 21 different portfolio companies. In addition to that, obviously, we believe there's no less than about 45% to 55% of leverage that we compare alongside that. That probably gives us another $3 billion of purchasing power. I will say credit markets remain open to us. We've gotten financings done in the last 30 days. We have 2 transactions that we're working on right now where the financing is holding up. And so we continue to be one of those, I think, I don't want to say a privilege, that's not the right word, I think one of the more fortunate digital infrastructure investors in the world because of our 3-decade pedigree doing this for 27 years, lenders lent money to me in '01 and '02, they lent money to me in 2008 and '09. We've proven to be a great steward of other people's capital, including when banks give us capital and when, of course, bondholders give us capital and securitizations. And we've done a great job managing our liabilities. We've got long-term debt in place that's predominantly fixed. Over 70% of our debt today, Sami, across our 21 investments is fixed. Our next debt maturity actually at one of our portfolio companies isn't until later next year, and that's actually less than 3% of our AUM comes for exploration next year. So we've done a great job battening down our balance sheets, fixed debt primarily securitized with long-term duration. If you think about transition, Sami, it's 30 years in duration, if you take it to the final legal maturity. So we were prepared for what's going on today and some of this market turmoil you talk about, but that's not accidental. We spent the last year preparing our own corporate balance sheet, which has securitized debt, as you know, and then down in our portfolio companies, Sami, it's securitized debt that's fixed. And that was locked in -- most of it locked in last year, some of that locked in a little bit earlier this year, but most of our refinancings were done last year, and we have no material, what I say, refinancings coming up inside the next 24 months. Good place to be.

Yes. I got 1 e-mail from the audience that I think I want to throw your way. It's a follow-up to something you just said. It's in regards to the credit market being receptive to more fund raises or more credit that you guys are trying to originate or raise. So maybe you could unpack the reasons why they're receptive. Is it because of the defensive cash flow profiles of the assets? So that's kind of like maybe we can address that first.

Well, look, I think private investors today, Sami, are looking for a couple of things. One, they like exposure to long-term contracts that are ultimately aided or propped up by the cash flows of digital infrastructure, which are really mobility and cloud, which are 2 thematics that despite any global economic pressures are going to continue to grow. What's interesting is if you look at our first quarter results down at the portfolio company levels, leasing and new construction, Sami, on a global basis was elevated. So if you look at, for example, fiber leasing, for example, at Zayo, was up 17% first quarter this year against first quarter last year. If you look at Vertical Bridge in terms of its domestic U.S. tower leasing, that was up over 125% year-over-year in terms of the quarter-over-quarter performance. New construction starts and towers are up across 5 out of our 6 global tower companies. We own 6 tower businesses globally, 5 out of 6 of them have had year-over-year increases in terms of new tower construction. 5 out of 6 of our tower companies have had stronger leasing demand in first quarter this year against last year. So leasing is up, new construction is up. Just look at our, for example, Vantage in terms of our hyperscale construction activities in Europe and in the United States and Asia. We're up over 156% in the U.S. in terms of new megawatts deployed. We're up over 128 megawatts in Europe, and it's a number I can't even give you because it's so high. But year-over-year, new construction activity in Asia is up significantly. We have only been in Asia for about 2 years. So that's been of a misnomer. But the key to this is our customers continue to spend. We're continuing to sign new leases down at the portfolio company level and intrinsic demand for what we're doing is strong. So investors are looking at that. They see long-term duration leases. So for example, on our balance sheet, DataBank is on average has about 5 years of weighted average customer lease duration, Vantage stabilized Data Center, Vantage YieldCo has about 12 years in duration. And so investors like knowing that they've got safety in long-term cash flows with either CPI or fixed escalators, and we're greater than 60% of our cash flows on a global basis or exposed to investment-grade counterparties. This is what investors want in an environment where you have, like you said, the volatility that we're seeing today across the markets. And look, we've been doing this a long time. I mean we were around in the dot-com crash, our management team. We were around in '08 and '09. We've obviously navigated those 2 cycles really well, and we'll navigate this cycle incredibly well. I actually think we're better positioned today to navigate this uncertainty than certainly that was in '01 and '08 when we were a relatively younger management team. So I think we've got a great team. We've got a great set of assets. We've got, as I said, about $6 billion of fire power on the fund level. We have great liquidity on our balance sheet. Our corporate debt at DigitalBridge is fixed. So we're really in a very strong position despite the market volatility and perhaps where our share price sits today I think.

Got you. I wanted to see if you could give us some industry insight on something that's very topical and that is in regards to pricing of data center capacity, but then also rising build costs and how those 2 are interrelated. And then maybe in the context of when we think about pricing and build costs, what are the effects? And what's kind of -- where are we on the debate versus in-sourcing versus outsourcing for a lot of the wholesale and hyperscale developments just because that's been a pretty big subject year-to-date 2022 and even 2021. So we kind of just wanted to get your take on what you're seeing in the underlying businesses.

Yes. So what I would say is the following, I'd say, one, build costs are up. Domestically here in the U.S., I think build costs are generally year-over-year, up about 6% to 7% vis-a-vis where they were last year. I would say in Europe, build costs are up about a little higher than that, closer to 8%. And in Asia, we've seen no demonstrative change in our build costs, which is pretty interesting actually. And then in Latin America, we've seen about a 4% to 5% increase in our cost for construction. What I can tell you is that we don't share lease rates. That's something as -- in terms of our portfolio companies down below are private. What I would tell you is that lease rates have been incredibly strong because inventory has been shrinking. Our customers on a global basis did struggle with lighting up their own self-performed capacity in COVID, whether it was they had disruption of supply chain or disruption to their workforce or they just took less shovel risk during COVID. What we did find is that there has been this pendulum shift, Sami, where our customers are outsourcing in terms of where they're getting new capacity, they're leasing new capacity. But I also think, Sami, it is a product of particularly in a place like Europe, where you don't get a lot of building permits, you don't get a lot of will serve letters for new power. And what we've managed to do in Vantage Europe is incredibly unique and different. We're in 17 data centers across Europe. We had a tremendous leasing year last year in terms of adding over 278 megawatts plus. We're -- obviously, I told you leasing is way up at Vantage Europe. We're up over 150% year-over-year. And so we continue to light up new capacity. We're doing it at lease rates that we're really happy about. We do think that our new lease rates reflect the reality and the risk that we're taking on construction costs. But also taking into account the scarcity of the permits that we have at Vantage in great markets in Europe and North America and in addition to that getting paid for that risk, right? I think lease rates had to move to a place where not only is it recognizing our new build cost, but it's also recognizing the risk that we took in getting permits, getting land, assembling those properties early and taking on that risk. So I do like the dynamic in terms of where we're seeing lease rates. It's also been a real positive, for example, in towers and in fiber, where we are seeing lease rates move up. We've seen [indiscernible] and towers move up on a global basis. We've seen caller rates move up slightly. Amendments have held in quite fine. There hasn't been any precipitous increase or decrease in amendment pricing. And then I would say in fiber pricing, particularly in wholesale and on webscale routes and fiber-to-the-tower routes, we're seeing pricing move back in our favor a little bit after a couple of years of pricing, obviously moving away from us where pricing was degraded by over-builders and by CLEC that had overbuilt copper with fiber. So interesting marketplace. And because, of course, we're invested across the whole ecosystem and we're investing across 4 continents, I can get into this discussion with you on a very granular basis and share with you what we're seeing.

Got it. And then while you were speaking, a couple of questions came in, and you also answered 2 of them. There was one question…

I hear them coming in.

The other one, the one question is on your share price, right? Given the share price has taken a little bit of a market reaction in recent trading sessions, does this compel you to buyback or repurchase your own stock? Or do you have a different type of capital allocation strategy in mind?

Yes. Well, look, ever since I became the CEO of the public company 2 years ago, I haven't changed my tone. We have 5 different things that we can do with our cash. And I've always been very clear that when our stock moves into the zone where we believe there's value, we will go out and purchase shares. So we are a big believer in our share price. We don't believe our share price is reflective of the value of the company. As I said, there'll be a series of affirmative actions that we're going to make in the coming weeks that I think will be constructive for shareholders, including looking at our press, which we think are an interesting proposition as well. So we've got cash. We've got a strong balance sheet. We're meeting with our Board to discuss our capital allocation strategy, and we're looking forward to leaning in and putting capital to work where we think ultimately, shareholders will be satisfied and happy with what we're doing. Obviously, I can't forerun anything we're doing, of course, but suffice to say, I'm sitting here today telling you that I think where our share price today is not reflective of the value of the company, and there is an opportunity there, and we'll be thoughtful and deploy capital the right way. I would say a couple of other uses of the capital, of course, is continuing to put capital to work in our digital operating business. Vantage has been a really terrific winner for us. We've been able to continue to build great data centers and move them into our YieldCo, which investors have really liked. So there's always those opportunities to continue to advance our digital operating strategy. I think you saw last quarter, we made 2 provocative moves in buying out Wafra, which was great, getting 100% control of the cash flows where IM business is good for investors. Second, AMP, post-energy is buying that thing for effectively 7x is a really great trade for us because that is a fantastic infrastructure manager and opens us up to renewable energy and digital transports and a few other verticals that we don't serve. So a great opportunistic way to deploy capital is to buy other investment managers. And yes, I think that's -- and obviously, continued to invest in new products, which we did this quarter. The launching of our credit and core funds, which we've already publicly have told folks we're doing. The closing of Telenet, the closing of the Everstream loan. These were examples of where our core strategy and our credit strategy are working. And what we did there that's interesting, Sami, that not a lot of people caught is as we brought in Cobalt Capital in both of those deals. So a significant co-invest from CPP in our credit platform, a significant co-invest in our SaaS product, which is our core fund on the Telenet acquisition, which demonstrates in this quarter that we're able to come up with really good ideas, we're able to raise capital and we're able to close transactions. And that's what investors norm is on their minds. Can we continue to raise capital? Yes. Can we continue to do the right deals? Yes. Will we deploy our cash in a thoughtful way that will benefit all shareholders? Absolutely, 100%, we will. And so stay tuned, but that is absolutely our priorities in terms of how we allocate our cash. They do change from quarter-to-quarter. And right now, the opportunity sits in front of us and to buy back our debt and certainly buy back our stock, which we think is a good opportunity, and we'll be doing that.

Got it. Got it. 2 follow-ups. The first one is, you are actively closing or in the process of closing a lot of deals. Does market volatility kind of change anything for you in those closing processes? And well, actually, we can hit down a little bit quickly, and I have another one just to kind of fit in all these questions that have come in.

Sure. I'll go faster. So we closed Telenet, we closed the Everstream loan. We're in the process of closing Switch. I remain completely unwavering in our ability to close those deals. And we will close all those deals. We just closed the 2 deals that I mentioned earlier in the quarter. We'll close Switch sometime, depending -- it's now a regulatory issue or anything else. We're hopeful to close Switch in the third quarter. It could be sooner, it could be later. But we've raised all the capital. We've raised the debt capital. We're ready to close. It's really a regulatory filing at the end of the day. So business as usual for us, and we'll continue to do what we're doing.

Got it. The other one is what is the difference between doing business today than when you were running GTP? And on the one hand, markets have gotten a lot more consolidated, you have bigger players involved. And on the other hand, just the general overall dynamic in the private market also is a lot different just because there are a lot more private and capable operators than really ever has been before. So how is doing business today look much different? Or is it different than when you were running operations prior?

Look, operationally, it's no different. And maybe that's a fundamentally basic way to answer the question, but my attitude on this hasn't changed in 27 years, which is you got to wake up every day and you got to perform. I think with a lot of big infrastructure investors or big private equity funds, sometimes overlook, Sami, in our sector is we not only have to step up and perform for customers, but their network has to stay on. And in this increasingly complex environment where networks are more integrated than they've ever been and now adding the software-defined layer to the network, you've got to be ready and you've got to perform at Five9 standards. And that's something that myself and my partners have been doing for 3 decades. And because of that, customers trust us. They entrust us with their networks, they entrust us with their data centers, they entrust us with their mobile networks, and that trust was earned over a long period of time and something we don't plan to relinquish any time soon. We have a heavy emphasis on operations. We take that incredibly seriously. And that's why having 21 great CEOs running these companies every day gives me an advantage because I can wake up every day and I've got people that are geographically focused, they're vertically focused, but most importantly, Sami, we're customer focused. And that's why we're winning more than our fair share of leasing. That's why we're winning more of our fair share of new data center builds, new tower builds. We mentioned that in our last quarterly call, there's no one building more towers in the planet than us, and there's nobody lighting up more megawatts than us, more so than American Tower or Digital Realty or Equinix or Crown Castle, we are the fastest growing digital infrastructure investment in the world, and nobody has more greenfield opportunities than we have, which is why we're succeeding with customers on a global scale because we're reliable, we show up for them and we do what we say we're going to do. That environment hasn't changed. You got to wake up every day and you got to operate. Maybe the format is a little bigger instead of being a $4 billion or $5 billion private REIT. Today, we're a $60 billion-plus global asset manager and digital infrastructure own and an operator. So maybe the theater has gotten a little bigger, maybe the scale has gotten bigger, but the discipline in, the desire, the heart, the passion for what we do, that hasn't changed. And it never will change. I actually feel really fortunate. I love what I do and I love working with our customers. It's really a privilege for me.

Got it. I'm going to connect 2 questions that came in together into one. And on one hand, you have all this dry powder that you need to deploy, right? On the other hand, private market valuations have either moved up or have remained the same since 2021. Maybe you can tell us a little bit differently. But how are you navigating this, right? So we've heard you speak before about trying to do deals at the right price. And now you have a lot of dry powder. There are not that many publicly traded targets remaining and the private market is very expensive. So how are you thinking about navigating this?

Yes. Well, look, I think we don't have to deploy a single dollar actually. Under both of our funds, we've got a long runway to deploy the capital. And we're now into Fund I, we're into our -- what we call our capital reserves, which is a little less than 10% of the fund, which is to be allocated across the 10 portfolio companies to do greenfield and brownfield bolt-ons. So that capital is quite precious, and we'll continue to deploy that capital in a very wise in what I would say, a very conservative way because we've actually turned up our risk premiums. And in turn, we've turned up our IRR premiums. Interest rate spreads have moved up, exit multiples have moved down. We have recalibrated all our models. So we're actually being pretty prudent about how we put that capital out in terms of putting capital into existing companies and platforms. We have got another 11 companies in Fund II. We are roughly about 78% allocated on that fund. We're always syndicating and doing a little co-invest. So some of that will come down maybe into the mid-70s, but a lot of firepower there, maybe we do 1 or 2 new investments. But once again, the investment period for that fund is barely reached through here. Remember, we closed that fund in December of last year, and that investment period of that fund has a 3-year investment period with 2 1-year extension. So we've got a lot of time to invest the rest of Fund II. I'm not in a rush. I'm kind of enjoying watching how this theater sort of plays out and how we can go to bolt-ons and how we can do more greenfield inside of our existing ecosystem and portfolio companies. Whether we make any new investments, those come through investment day every week. All I can tell you is our standards for underwriting have moved up in the last 45 days. We've made certain changes to our models. We've made certain changes to how we view risk and we want to be rewarded for when we put that capital, Sami, and we take that risk. There has to be the appropriate risk reward and the right returns. That's how we look at it. Balance sheet capital is same scrutiny, same thing. We've got to make sure that we're deploying that capital in a thoughtful way. And so when you ask us about that hierarchy of objectives of buying shares, buying back debt, investing more in digital operating, investing in new fund products, we're actually going out and buying other investment managers. Look, that capital is super precious and everyone and our team has to compete for that capital. So that's the process we're going through. We are thinking through it carefully. All 5 of those are actually really good ideas. There's just only -- there's a finite amount of capital on our balance sheet that we can use to put to work, and we want to make sure we have adequate reserves as well.

Got it. Well, Marc and everyone else, thank you guys all for joining us today. And if there are any follow-ups, you can send it to the team or you can send it to the DigitalBridge IR team. So Marc, thank you very much for joining us.

Thanks, Sami. Great to see you. Appreciate it. It's fun to spend time with you.

Absolutely.