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

Well, good morning. And for those joining us via the webcast, welcome back to Citi's 2023 Communications, Media & Entertainment Conference. For those of you I haven't met, I'm Mike Rollins, and I cover the communications services and infrastructure categories for Citi Research. Before we get started, I'd like to mention that we do have disclosures available at the registration desk and on the Citi Velocity page from which you're streaming the audio. We're going to work to incorporate your questions in today's discussion. So if you're in the room, you can click the button on the microphone and we'll get to you. And if you're streaming, there should be a question box for you to enter in your questions. So with all that out of the way, I'd like to welcome back Marc Ganzi, President and CEO of DigitalBridge. Marc, thank you so much for joining us.

Yes. Thanks, Michael. It's good to be back here again.

Well, to kick us off, it's kind of a tradition. Just to take a step back as we're entering the New Year, and we'd like to learn more about the strategic and operating priorities for DigitalBridge and maybe how they're different than they were a year ago.

Yes. Well, look, we're kind of 3 years into this journey of transforming the company, and I think we're now into sort of the final quarter of that transformation. So we think it's actually pretty simple '23. I think when the world gets complicated, it's always good leadership is about making things really simple. Simple for our shareholders, simple for our employees, simple for our partners. And so I'd take a step back, and I say there's 3 things that we need to do, and I think we will do well this year. First and foremost is simplification. We have -- historically, we've had 2 different businesses. We've got our operating business, and we've had our investment management platform. We made the signal over a year ago that by [indiscernible] that we were going to move towards an asset-light digital infrastructure ownership model. We're now in the final phase of that. We have 2 assets that sit in our operating side of our business that have now both moved into continuation funds. So that makes it really easy in terms of direction of travel for investors to understand where we're going with those 2 assets this year. First, with DataBank, really fantastic transaction last year, great execution for our shareholders, and most importantly, retaining that asset, but just moving it from operating to IM. Today, we have about 11% stake in that business. And we'll continue to fundraise, Michael, through the end of June. And as we fundraise, ultimately, I want to get that position between 5% to 8%, which is a natural GP stake in a fund. Now that is a single asset fund. It's a continuation fund. We did that with Swiss Life and EDF. And now we've had other investors join that fund, and it was great execution. We got to retain the asset. We have a new long-term permanent capital structure in place, which helps the company grow. And we've got long-term fee in carry, which is great for our investment management business. It really was hitting on all sort of 3 key priorities that we laid out for DataBank last year. On the Vantage side, we have about a 12% stake in Vantage SDC. It's a great business. That asset -- a set of assets is also in a continuation fund, long-term fee, permanent capital and moving quite well. And we believe ultimately, we like to rightsize that position and get it in a good place and move it permanently over to the investment management side. Now why are we doing that? Those are really the last 2 operating assets that we have. And that will complete approximately $105 billion to $110 billion asset rotation in 3 years. It was really tremendous. And we feel good about that, but there's no victory laps. We got to keep going out and executing. And as we made the decision to move asset-light, comes our second set of priorities behind simplification, which is form capital. We did a great job forming capital last year in a very tough market. I think you hear it from public LPs and private LPs like that if you're a public LP and you're hedge fund and you're not raising money, you know how hard it is, and you're facing redemptions and you know that you're only as good as the last quarter performance. On the private side, you've now heard commentary from the likes of Blackstone and Carlyle and TPG and EQT and others that are saying that capital formation is getting harder. In the face of that, we laid out some priorities last year in terms of what we wanted to raise. And we clearly went out and did a great job of executing against that plan in terms of forming capital in a tough market. And we feel good about our capital formation plan for this year and next year. Our guidance remains unchanged. And I know that may come as a surprise because I think other folks that are in the asset-light business or alternative asset management business will tell you it's going to be harder to raise capital. Now why do we have conviction around those things? We have conviction because we're in a great asset class. We have a great track record. We are the largest private owner and operator of digital infrastructure globally today. Pro forma for the Switch closing and Deutsche Telekom closing and the AMP transaction will be north of $70 billion of assets under management. And so that puts us in a pretty unique category in terms of our size and our scale. The one thing we do here on a global basis is that size and scale does matter, and I'll come to that as our third priority is the last one. But capital formation remains in sharp focus. I've spent the last 90 days, I spent the entire fourth quarter traveling around the world, talking LPs. I reached out to about, pretty much of our top 100 limited partners globally, have a very good sense of what's on their mind, where their denominator has gone in the last year. How are they thinking about asset allocation? Where does infrastructure fit? Where do real assets fit? Where does digital infrastructure fit? And we feel really confident that, that remains a high priority for most global LPs. So that's sovereign wealth funds, insurance companies, pension systems and endowments. So we feel very strongly about our ability to form capital. We're now over the 90% threshold on Fund II. We continue to raise capital in our core fund in our credit fund. And we also had successful co-investment strategies that we're executing in the fourth quarter like a Switch and like a Deutsche Telecom towers, where we continue to raise third-party capital. So we feel like we're in a very good spot. And we do feel like that our business is different from others. We've developed a very natural strategic moat in digital infrastructure that others just don't have, and we're in an asset class where allocators are still confident they can put capital to work in private digital infrastructure, where we feel like we have a dominant position. The third priority for me in '23 is it's all about the 27 companies we own. Operating performance is everything. We had a very good third quarter. As you saw in our remarks, our portfolio of Fund I and Fund II actually marked up when our peers had funds that were marking down. And what's interesting is, we have great independence in how we value those assets in those portfolio companies, discounted cash flow methodology, private market multiples and public market multiples. So there's a sort of triangle effect on how you market, but what is working in our operating companies today, Mike, is leasing. Organic growth persisted in third quarter. We've now seen the early results of the fourth quarter. Organic growth remained intact. Our businesses hit their objectives for the year. Leasing was strong. New construction starts were quite strong. And so the technical fundamentals of what we're doing down in our operating businesses are working. That's really the key for our LPs and for what we do. And as a product to that, when you build really unique platforms and you build great companies, they retain their value. And we demonstrated that with the sale of Wildstone, we demonstrated that with the sale of Vantage Towers, and we demonstrated that with the exit on DataBank. 3 fantastic exits where the multiples were well in the mid- to high 20s. So that kind of defies what's happening in the public markets. But I think there is this disconnect between private and public markets. So I have to focus on private markets. I have to focus on our 27 CEOs, those 27 companies and making sure that we continue to support them, give them capital when appropriate and making sure that they maintain strong liquidity. And through sort of this turbulent macro environment, we've actually been deleveraging our portfolio. We moved net leverage from 43% to 41% on a loan-to-value basis this year through the third quarter. We'll have the statistics on the fourth quarter soon. But that's what's unique about digital infrastructure. I tell public investors this all the time, "go back and take a photograph of what the markets look like in fourth quarter '01 and fourth quarter '08. If you have the conviction to invest in digital infrastructure, take that photograph in the fourth quarter of 2003 and take that photograph in the fourth quarter of 2010, and you'll see the results." Great fund managers made a strong career in history out of betting on digital infrastructure in a time where the market was perhaps going the other way and some folks who have been shorting the thesis. And I think, from my perspective, this is one of the most resilient asset classes out there. Our customers continue to invest. Our customers continue to do business with us. And this is not new. I mean we saw that in '01, and we saw that in '08. Customers continue to put CapEx into the ground and into the facilities because they have to. One thing that we learned in '08 is people are certainly willing to turn over the keys to their car and [indiscernible] God forbid, they turn off their social media account or their home broadband. Those 2 things did not happen. So I like the resilience of our business model. The channel checks with our customers in the fourth quarter were arguably guarded. There's things happening in tech that are difficult. But these aren't any difficulties that you and I didn't see in 2002 and that we didn't see in 2009. A lot of similarities, and there are some differences too, and we can talk through some of those nuances. But I think the state of DigitalBridge today is a lot stronger than it was certainly 3 years ago when I got in the chair and certainly better than it was a year ago. I think the growth that we're delivering in our asset-light model and the investment management platform is pretty outstanding. We're forecasting 40% CAGR growth this year in our investment management business. That's pretty stunning. Any digital infrastructure business that's going to deliver 40% growth, that's the stock I think people want to pay attention to. So that's what we're focused on. We have confidence and conviction in our plan, and we've got a rich history of hitting or exceeding our numbers. So we're going to go out and do that in '23.

It's a super helpful introduction and it gives us a lot to drill down into. Maybe one of the comments that you were describing about the difference between public and private markets. It's been a little bit of a theme for the comm infrastructure management teams that we met with over the last 1.5 days. And I think there's a little surprise on their part for the level of disconnect.

Does it surprise you, given some of the comments that you were just sharing with us that there is this disconnect and does it also encourage you to widen your lens to not just look at private investment opportunities, but public opportunities given the disconnect?

Yes, absolutely. I think some of the best ideas that we've had in the last 2 to 3 years have been taking public companies that were misunderstood and bringing them private. A great example of that was Boingo. That was a business that investors really struggled with that required incremental CapEx to grow it. There was a change in CEO, there was a change in strategy. We totally understood what Mike Finley was doing, and we knew if we could get Mike private and we could give him capital and he could focus on private enterprise 5G networks instead of worrying about airplane WiFi, we thought that was a good bet. And it turned out that was right. He's done an excellent job executing. And that's a good example of working through the public markets to create a private outcome. I'll make one comment, which is one thing that, again, this is a sort of 90-day tour, twice through Asia, twice through the Middle East, twice through Europe, a lot of travel. One consistent theme came out of that, which is still major institutional investors today, Mike, are underallocated to infrastructure. And there's a possibility -- most of that asset allocation is between 4% and 5% in infrastructure. Some asset allocators think they could go from 4% to 10%. So that's a lot of growth and a lot of asset allocators think they're overweight private equity and they're overweight liquid securities, i.e., hedge funds or long funds. So we do think our space is a space that's growing. The TAM in terms of the total addressable market is now north of $13 trillion in digital infrastructure. It's growing at sort of circa $400 billion to $500 billion a year. So there's a lot of growth left in what we're doing, and I think investors recognize that. So what does that mean? It means that folks like ourselves and other really accomplished and strong investors like Brookfield and Macquarie and EQT and Stonepeak and Blackstone and others are building large infrastructure practices. And they've made a clear decision that they want to put at least 20% to 25% of their asset allocation into digital, which is a great opportunity for us, and they're all looking for high-quality platforms. I mean we look at the transaction we did with Antin, who is a great infrastructure manager, publicly traded, out of Europe, they bought our digital media infrastructure business called Wildstone and they valued the platform. They valued the 27 years of contracted cash flows as well, which is very rare. And it's the only roll-up of digital media assets in Europe, and we put that together. We backed the management team. And that's one thing that's really interesting. People talk about, okay, so how do you play this next cycle? That's one of the questions I got from a lot of investors this morning. And I said, look, we've historically, we've allocated capital in Fund I and Fund II to brand-new businesses where we back management teams, or we go out and we buy the best set of assets that we can find where there's an existing management team where we can augment it and grow it like we're doing with Switch. And we're not afraid to do either. I'm not afraid to build a business, which I've done throughout my 28 years, and I'm not afraid to back great management teams. What's interesting about this next chapter is there's now I get to go back to '01 and '08 where we see dislocation. And so as we chart our next strategy and what we're doing with the capital that we're forming right now, I look at it as we're adding sort of a third sleeve to what we're going to do in this next strategy. So we're thinking about ways to provide capital to dislocated businesses. We're still going to go out and find the best assets we can and back the best management teams. And then we're also going to start a few new businesses as well. This is really the heart of our DNA and what makes me excited about what we're doing in '23.

You mentioned the strength of leasing that you're seeing for your portfolio. Can you unpack that a little bit more in terms of some of the businesses and the products where you're seeing that strength of leasing? And are there any businesses or parts of the portfolio that may be lagging where you want them to be?

Yes. That's a great question. I think I'm going to go fast because I know you had some other stuff you wanted to cover. Look, it's back to towers again, right? I think towers has been one of the great resilient asset classes. All of our tower businesses performed really well this year. We don't have the fourth quarter data fully unpacked yet. But we telegraphed on the call the third quarter data was really strong. And tower cash flow globally across our 5 different tower businesses was up about 22% year-over-year. So that was a really strong print on the -- really on the tailwinds of 5G, which we still think there's another good year or 2 of CapEx spend that's required just to get to a 1:1 overlay on top of LTE. And then we move into '25, '26 and '27, which will be densification, which will really favor small cells. So strong growth in towers. Towers is one of the leaders. Hyperscale was by far the biggest leader. We had close to 158% year-over-year CAGR growth third quarter last year versus third quarter this year. So that's just kind of a small snapshot. We've got to wait to see the full data gets unpacked. But hyperscale leasing showed no signs of abating. So really, our businesses, Scala and Vantage really benefited from that. Vantage is in 3 different continents, Europe, the U.S. and Asia. And so we like what we're seeing there. I think on the edge side, DataBank had a really good year. They delivered the [indiscernible]. It looks like a little bit stronger than 10% organic growth for the year. So you probably saw that with Charles and Equinix. They're posting very strong organic growth. So we like edge, we like interconnection. We think those are really hard to replicate assets. So AtlasEdge and DataBank are our 2 edge strategies and both companies performed well. An underperformer was probably colo and managed services. We've got one business left over in the managed services space. It actually held serve this year. So it kind of posted no EBITDA growth, which I think in managed services, you're kind of sort of happy with in this environment. So that is one sector that we navigated out of. We've got one asset left in it. So -- and we've tried to stay clear of that sort of enterprise colo, managed services model. I know other folks are in that space. And we just think that space is really tough. And then the last thing that we like is private cloud, really highly secure, Tier 5 networks. Those are things that we're investing in. We like -- this is obviously the Switch thesis of what we're doing with Rob and the team there and fantastic fourth quarter of leasing. I know previous public shareholders would hate to hear that, but they delivered in the fourth quarter in a big way, and they're going to deliver next year. And I think big Fortune 500 enterprises have tried the public cloud, and they think there's advantages and disadvantages to it. So I think smart organizations you're seeing a hybrid IT approach where there's some of the workloads are sitting in private environments like Switch and some are sitting in public environments like Vantage. And so we own both of those 3 corners now. We've got Vantage doing large public cloud hyperscale in the U.S., and we've got Switch doing large private cloud. I think we're going to absolutely smash it with Switch. We're pretty excited about getting that company private. So that's on the data center side. On the fiber side, we don't have a lot of exposure to resi fiber. I think you know that we have 2 small investments, one in the U.K. and one in Chile. We've been pretty, I don't want to say negative on resi fiber. We like the business model. We just didn't like it at 20x to 30x. We think it's an asset class that trades in the low teens and on the cable side trades in the high single digits. So valuation is key in that business. So valuations come down in a zone where we feel comfortable, I think you'll see us step into the resi fiber space and be a material investor. I think on the commercial fiber space, we've got a good business in Asia. We've got a business in Europe. We've got a business in the U.S. Good execution here in the U.S. It was a good strong push to the end of the year that helped us get numbers to record booking levels. And that installs picked up significantly in the fourth quarter. So we had good really strong execution in the fourth quarter at Zayo, which was good. That was a story that was a transition story where we brought a new management team, took the business from being a roll-up that was heavily focused on M&A into an operating mode, which is hard. That takes some time to get there. But we feel like the work we did in the back half of this year is now starting to pay off. And we're expecting -- we're generally very positive on enterprise fiber for next year. And then small cells is kind of the last sleeve. We've got a couple of different small cell businesses in Latin America, Asia, U.S. and Europe. I'd say a good year, not a great year, sort of posting in the kind of 8% to 10% organic growth range. But I think that's part and parcel of the fact that densification is still, like another year or 2 away. So we're pretty optimistic for ExteNet and FreshWave, FreshWave in Europe and ExteNet in the U.S. as 5G begins to densify. One hotspot, I would say, in small cells this year was indoor spending. Carriers started to spend again on the indoor side. So we did see a lot of positive bookings growth, particularly in the U.K., in the U.S. on indoor networks and also beginning to roll out private enterprise 5G networks, which we're pretty excited about.

One thing that has also come up a bit over the last few months at this conference is just this notion of faster digital transformation in corporates and enterprises as it relates to data center demand, as it relates to fiber. Is this something that you're really seeing accelerate as companies are adapting to longer hybrid workforce? And is this something that's potentially insulated from the macro? Or is this something that's sensitive to whatever the macro conditions end up being for U.S. and other parts of the world?

Yes. I think the corporate wallet share for IT spend and telco spend is emerging, right? So I think -- I know, for example, in our company, we've put all of the telecom and IT spend under one person. So they're now responsible for that part of the P&L. I think other corporates have done the same as part of their digital transformation strategy. I don't think I'm reinventing the wheel there. I think products like SD-WAN are working because it's nimble and it's diverse and people like that flexibility. I think also corporates really want to dial up their capacity and dial it down when they want it, and that's the flexibility that SD-WAN gives you. I think we talked about private cloud earlier. We've seen a bigger wallet size in the Fortune 500 logos move to private cloud or a hybrid private public cloud model, and I think that's a bit of the future. Look, there are certain workloads that all corporates want to control and then there are certain workloads they're prepared to put in the cloud. So you're going to see more of that. Again, that was the thesis we had on Switch, and I think it'll -- we'll see how that plays out this year, but it's so far looking quite positive. The last thing I would say is just private 5G networks. So you have to think about 5G networks, private 5G networks in kind of 3 different environments. One is a corporate environment. Like for example, we now have our own private 5G network at DigitalBridge. So when you come into our campus, you can jump on to our network and -- as a guest or you can jump in as a registered user. But that toggle now happens effortlessly. So if I park my car, the minute I enter sort of our headquarters parking lot, my phone immediately trips onto our network. And that handoff is seamless. Remember, we talked a lot about handoff, right, 3, 4 years ago, would that work? Would it be seamless? Well, it is seamless. And so once we're on my network, then all my network resources sit on my phone. And I'm highly secure at that point. And so there's a lot of comfort as an employee, as an executive, but when I'm on that network, I can do what I want to do. We're seeing more of that. We're seeing that at Boingo. We're seeing that at ExteNet. We're seeing that at FreshWave. And we're also seeing commercial landlords willing to pay for private 5G network. So a lot of what we did with the big MGM signing between ExteNet and MGM is we're building and administrating their private 5G network. We're also running their new WiFi 6 network. So anyone that was previously on their old WiFi network, that's being shut down. So all the customers now know that the old mobility network is shut down. And if you're on that network, it's dead. So if you're not on the new WiFi 6 network, you're going to have no coverage in any of MGM's hotels or properties starting first -- second quarter next year. So -- and there's a lot of advantage for a corporate user to control that infrastructure, to control that wireless environment from a private perspective, but also from a public perspective. I think the apps, the exciting things that MGM is doing with their private network is pretty cool. We're learning a lot as we go down that road with their CIO and their senior leadership. And that was a huge, huge win for ExteNet. And we've almost got all the carriers now signed up on that network, and we're seeing more of those opportunities. You can see those in convention centers, football stadiums. You can see them in casinos. So there's this commercial applications, there's the private business applications, and then there's going to be this public aspect of private 5G networks when we start seeing municipalities and counties and federal agencies get involved in that. So there's a long runway on private 5G networks. I think that's one of the great, massively misunderstood segment of digital infrastructure right now is private 5G networks. And we're at the front edge of it with Boingo and FreshWave and ExteNet. So We're seeing a lot of that activity and in infrastructure, we're seeing digital logistics, how it's impacting airports and ports. We have a major project going with LaGuardia Airport, where we're overlaying private 5G networks. We're now looking to put those private 5G networks into the airports that AMP Capital loans. So AMP Capital. We're closing on that next week. So that takes us more in a little bit into core infrastructure. But we think we can take our digital toolkit and we can overlay that on to traditional infrastructure assets, which is pretty exciting. So you talk about digital transformation. Digital transformation can really impact an airport. So for example, you take an airport like Luton in London, big airport, kind of a tertiary airport. But if you can change the way a cycle time of when a plane lands or when it's turned and gets back up in the air, or you can change the cycle time of how somebody checks in or how bag gets routed or how fast somebody orders a coffee from [indiscernible] cafe or something, these are things that real examples of digital transformation, where you're creating more transactions, you're creating more revenue. And with the digital overlay, it changes the investment thesis. This was some of the thinking behind the AMP Capital acquisition that we're closing on.

And are these activities in your mind sensitive to the macro backdrop? So if we go into recession, do companies say, okay, I can live with what I have for a year or 2 longer? Or are there real issues and urgency to fix these connectivity solutions for their customers or employees?

At Southwest Airlines?