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

Okay. Good morning, everybody. My great pleasure to welcome Jacky Wu from DigitalBridge. Welcome, Jacky. Thanks for joining us.

Thank you. Thanks, Simon.

Before we get started, some important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com\research disclosures. If you have any questions, please reach out to your Morgan Stanley sales representative.

So Jacky, it might be helpful for those in the audience who haven't been following DigitalBridge as long as some to just take us back and tell us about the journey that you've been on and where you are today and where you're going structurally?

Great. Yes. So welcome, and thanks for joining us. So three years ago, Marc Ganzi and I ascended to the CEO and CFO roles at Colony Capital, Severin White joined us around the same time as well. And at the time, we were a $50 billion real estate investment trust, really diversified across health care, hotels, industrial and commercial real estate across the globe. Sitting here today, after 3 years of transformation, we are singularly focused on digital infrastructure Investment Management. We are no longer a REIT because our private equity investment management business has grown significantly quadrupled over the last 3 years in terms of fee-earning equity under management. Our assets under management is $65 billion. We touch every single continent, except for Antarctica, and we invest in fiberoptic cabling, data centers, cell towers and small cells across the globe. So we're pleased that we're done with that journey. And now we're just looking forward to just continue to fundraise and do what we do best, which is we are great operators, we're great investors, and we understand digital infrastructure.

And what was the rationale for making that pivot?

Yes, sure. So we were growing so significantly in terms of our Investment Management business, so we were fundraising at a prolific rate. If you rewind the tape our DigitalBridge partners, one on our inaugural digital infrastructure fund was a $4.1 billion fund back in 2018. Since then, we've doubled our second fund in that series, more than double. That was $8.3 billion, and that closed at the end of 2021. And that pacing of growth made us realize a couple of things. A, we were really, really good at fundraising; B, is investors, limited partners really trust us to be their stewards of their capital, certainly with respect to investing in digital infrastructure. And that's really the DNA of our business. Marc Ganzi founded a number of digital infrastructure businesses where he was CEO, founder and made a ton of money for his investors, Global Tower Partners being one of them. That was a transaction back in 2013 to American Tower. Ben Jenkins was a Senior Managing Director at Blackstone, overseeing digital infrastructure. So our DNA is really understanding these networks, how they're built, having great customer relationships. And because of that, we are able to fund raise so prolifically and deploy that capital so prolifically over the last 3 years. And because of that pacing growth and Investment Management is not a readable asset, right? We made the decision to say, we're not going to slow down what we're really good at, and we're not going to slow down the pacing of our growth just to stay as a REIT. So we made the decision to convert back to [ up-see ]. We had a ton of NOLs as a result of all the legacy assets from legacy colony. And so as a result of it, it really wasn't a material economic difference for us and for our shareholders, and it just made sense for us as we were growing this private equity business.

Great. And you still have some work to do on the last remaining stakes in the operating businesses. Can you update us on how that's likely to trend?

Sure. So we've got 2 businesses on the balance sheet. We have a digital operating segment. So it is still digital infrastructure. But because we own 13% of Vantage stabilized data centers on our balance sheet and because we own 11% of DataBank on our balance sheet, anything over 10% from an accounting perspective and the fact that we have control, that combination required us to consolidate those 2 businesses that we own 100% of it on our income statement and balance sheet. So on our books, it looks like these things are -- we are a big, big, big data center business. People look at our books, and they don't even realize we're actually really a private equity business. So just by recapitalizing and bringing in new investors into these great businesses and getting our ownership down below 10%, our goal this year is to deconsolidate these 2 businesses. We're well on track with DataBank less than a year ago. We actually owned over 22% of DataBank and so we recapitalized and brought in new investors at a mark that was 30 -- over 30x multiples, it implied an over -- almost a 2x MOIC on our investment in DataBank, and we're able to bring it down to a little under 11%. So we're well on track to deconsolidate DataBank from our books. And because of that same playbook that we just did with DataBank, one of the best-in-class edge compute data center business is out there in North America, we believe we can do it even better at Vantage, which is a -- we only own 13% of and is one of the premier hyperscale businesses out there in North America.

Great. You talked about the exceptional fundraising environment, we certainly hear today. The world has changed quite a bit in the last few quarters. How would you characterize the environment today?

Yes, sure. So look, we're not going to sugarcoat it. It is a tougher environment today than it has been 1.5 years -- than it was 1.5 years ago. But what we are blessed about is the fact that in digital infrastructure, if you look at the underlying secular tailwinds in this sector, investors still really love the sector. So demand for 5G, demand for mobile edge compute, demands as we're seeing it from the record bookings that we're getting across all the different silos of our businesses and our portfolio companies, we're pleased to say that we are still fundraising, and we continue to fundraise at a pretty good clip. If you look at 2022, we raised almost $5 billion last year, and that was without any of our flagship type of strategies out there in the market. So this year, what we've guided the street is an $8 billion to $12 billion fundraising haul in 2023. We feel good about being able to get $8-plus billion this year. And that's because in our conversations with limited partners, they're happy with our performance. They like the fact that we actually return capital back to them last year. We had 3 amazing exits, Wildstone digital, which was digital billboards. We had DataBank and we had Vantage Towers last year. So really good exits last year that demonstrated to them our track record, demonstrated to them that we get them good returns. And as a result, they're rewarding us with a check back. Now it's a smaller check. It's definitely taking a little longer for them to give us a check, but we're getting the check. And that's what is most important.

And I think you've made the argument before that a lot of asset managers are under allocated to digital infrastructure.

Yes, that's absolutely the case. What we are seeing a lot of interest from our traditional LPs that or silos of those LPs that were previously anchored on investments like in real assets. So whether it's industrial or multifamilies or certainly more negatively commercial office where now they're saying, "I don't really like those 3 sectors as much anymore because of that environment, because of the inflationary pressures, because of the churn because people aren't going back to the office to work", but they do like digital infrastructure. And so what the -- what we're hearing is that they are now looking at allocating a portion of their dollars previously for those other segments and giving us -- giving digital infrastructure a try.

You've got a broad range of strategies now. So if you think about that $8 billion, where do you see the most interest from investors?

Yes, sure. So our bread and butter is absolutely still our DigitalBridge partner series. So that's our flagship strategy that's the principal strategy of the firm. These are typically, on average, $900 million to $1 billion on average check size that's an average, right? It does skew a little bit. But on average, it's about that type of check size -- equity check size. And it's principally in the digital infrastructure space. So that's fiber, data centers, both edge compute as well as hyperscale and now with Switch, for example, enterprise private networks to sell towers as well as small cells. Most of our allocation has historically been in the cell tower space, the fiber space and the data center space. We continue to like those 3 sectors probably the most. But it's going to be that strategy that we expect a lot of the focus to be in this year. But we do have other strategies, we take our core competencies in digital infrastructure, and we've launched now a credit fund that's steaming towards that $1 billion mark, we lunched a core plus fund, strategic asset fund, that's also steaming towards that meaningful billion plus sizing. So we're very pleased about those strategies really advancing and we've been able to take that -- our core competency in digital infrastructure and really build upon those different types of platforms.

You've grown the AUM significantly, as you mentioned, both organically and inorganically, your $65 billion, I think you said. You've got a lot of competitors, the bigger asset managers looking at digital infrastructure. How do you think about scale? You obviously are more nimble, perhaps can look at different things. But at the same time, there are benefits to being a lot larger as well. So what's the right number here for the company?

Yes, sure. So what we've laid out and Marc has laid out on a couple of earnings calls as well as publicly in speeches as well, is that we absolutely believe this type of investing could easily get to over $100 billion of assets under management. We have an aspiration to do that. We've outlined and laid out guidance for -- to the street as to our vision for 2023 this year, but also 2025. And over the course of the next 2 years, we are hopeful that we can more than double the size of our business over the course of the next 2 or 3 years. So that's our aspiration. We see a pipeline, a huge pipeline of opportunities globally. We haven't even meaningfully touched, for example, Africa or the Middle East yet in terms of deployment of assets. So there's still a lot of opportunities to grow both regionally as well as we look at sectors that continue to be digitalized like health care, like transportation, like logistics, these are additional areas of opportunity for us to not just grow into new sectors, but also have our portfolio companies service customers in these sectors as well, and that's going to continue to grow our assets.

Great. And the basic equation now is 90 basis points a year on those assets? Is that right?

That's correct. Yes. So we charge on average about 90 basis points on our fee-earning equity under management on average. Now our flagship or principal strategies skew higher, closer to that 1.2% investment management fee, but then we're also bringing a fair bit of co-investment dollars that typically size in that 40 to 50 basis point average.

And how do you think about performance fees and ability for -- you talked about some of the really nice exits. I guess they're kind of common equity holder.

Yes, sure. So no different than a standard private equity business, but we have an 8% prep anything higher than that, we recognize carried interest. The balance sheet, or corporation or public shareholders, absolutely are aligned with our limited partners in this in the sense that the balance sheet, the public shareholders get a share of that carried interest. So to the degree we perform really, really well. The balance sheet is a general partner and has a general partner commitment, a sponsor commitment and equity check into the same funds. So to add to the degree carried interest is recognized and pleased to say all 3 of those exits last year, which were great exits, recognize that. Our shareholders were absolutely beneficial to some of those exits. And that's where we create this really nice dynamic and alignment between our limited partners, management who are incentivized to certainly maximize limited partners' profits and the returns of these portfolio companies and then the public shareholders who are also alongside the management as well as limited partners also get a share of that upside.

Right. I think Marc was talking the other day about how the rise in interest rates was something you've been preparing for, for a long time, and you've made sure to term out our maturities and so forth. So here we are today, talk about what higher interest rates means for the company, where you are? Where you want to be on leverage and then how it affects your investment in your businesses?

Sure. So I'll segment it into really 2 parts. One is on the corporation side for the public shareholders, it's going to be minimal impact. And the reason why I say that is if you look at the corporation absent our portfolio companies, just really the corporation, our capitalization and our debt on our books is really just a 200 -- we have a $300 million whole business securitization that is on our fee streams at the corporation. We have a $200 million of our convertible note that we are already teed up to pay off with cash on hand. We've got plenty of firepower liquidity on hand to be able to just retire that convertible note without taking on any additional liabilities or debt. So it's really just this $300 million fixed -- coupon fixed rate whole business securitization in our corporation. So minimal impact from that perspective. On the portfolio company side, a couple of things. As Marc -- as you mentioned, Marc, was maniacal about making sure that we were disciplined. In our last earnings presentation, we shared some statistics across our funds, only about 40% of loan-to-value ratio on average across our funds. So that's pretty low. Certainly, when you look at some other private equity firms and what they publicly disclosed associated with their funds or their investments for example, some as high as 50%, 60%, 70%, frankly, and that's difficult. We are, on average, 40%. On average, we have 7 years remaining in terms of our debt across the portfolio companies. And what we've also disclosed is that over 70% of our -- of the debt at our portfolio companies are fixed or hedged. So it's pretty certain, and we've got downside protection associated with higher interest rates. With that said, though, when we underwrite deals at the portfolio companies and the funds, we want to make sure that we are baking in those higher incremental costs and also potential more incremental costs as we heard from Powell yesterday in his testimony that there may be -- there most likely will be more rate increases. So what we've done is we've made sure a couple of things. One is, as we underwrite new deals, we certainly make sure that there's enough of a risk premium baked into our hurdle rates for purposes of a rate increase and to make sure that we are securing our LP dollars, precious LP dollars and those returns. The second is that as we look at greenfield CapEx at the portfolio companies, we've also asked all the CFOs and all the portfolio companies, and they've been really good. Our operating partners and our CEOs and CFOs are -- we're right on target with this is to relook at all the in-flight CapEx that was planned for at the portfolio companies and really asking for either higher rates from customers, higher lease rates and/or certainly really questioning some of those new builds that may have been done a couple of years back.

Great. So you talked about new deals, new acquisition and how you underwrite those. Maybe pull back just a little bit. You've done a lot of deals, but you have some very strict criteria around what is a good deal. So just help us understand how you evaluate. There's an edge data center over here. There's a small cell portfolio here. There's different regions of the world. So what are the common elements that makes a deal across your threshold?

Yes, sure. So I'll start, and I'll break it down in terms of our funds and also deals on the corporations -- on the corporate side and the public company side. On the fund side, as we look at new regions or new countries to enter and new assets to enter, we like a couple of things. One is certainly the political landscape associated with that target country. What are the risks associated with it? Do we understand the laws? Do we have local partners? And can we check that box? The second is, certainly, is the counterparty associated with that anchor deal, one that's not just creditworthy but one that we can build that strategic relationship with and have a long runway to build that strategic relationship.

You mean the tenants.

The tenant exactly over the course of a long period of time. And then also the economic dynamics associated with that region or there 3 or 4 really critical players that's creating this balanced competition that we like to see to have a burgeoning industry kind of grow. So those are the things that we typically like to look at when we enter into, let's say, Malaysia data centers or the Philippines cell tower market, for example, those types of tenants we need to check those boxes. In terms of just pure greenfields, what we look at in conjunction with management is because we have a DNA operations and understanding how customers build their networks is really understanding what type of content or what type of workloads are being put on to those data centers, is it sticky enough or could be replaced ? So how inelastic is that workload? The second piece of it is, what's around that area as well? Is it really servicing any sort of a wide space or need -- and where are the thematics going over the course of the next 5 or 10 years. So for example, when we look at enterprise private networks, on a recent data center transaction, over $10 billion transaction we did last year public to private. We really love the thematic of building these private networks, enterprise private networks as we see logistics, autonomous electric vehicles, et cetera, continue to build out as we see a demand for banks, health care, government, type of workloads and content not being able to be replicated in the public cloud, there's still that need. And so we really like to understand the underlying customer needs as well as the overall secular thematics and before we make that investment. So that's on the fund side. And then on the M&A side and corporate, as we looked at AMP Capital, for example, buying the equity infrastructure business, Investment Management business, for us, the underwriting typically is, is it augmentive to our platform? Do we have -- are we buying skill sets with people that we otherwise wouldn't have been able to replicate or have been difficult to by hiring our own people? And is it creating any sort of LP concentration risks with our customer set with limited partners. So that's the underwriting that we look at typically on the corporate side.

Great. Great. On M&A multiples, I think, Marc, in the past has said that he felt like maybe some of the deal multiples were less interesting to you and that would be better to grow organically, build-to-suit or new data center greenfield. Have we got to equilibrium yet?

I think we're getting there. Certainly, I think public side, there was a little bit more irrationality in terms of the short run as to where we saw some of these multiples kind of land certainly good companies and like Equinix or American Tower or SBA at their lows during the crisis, I would say, of the significant rising interest rates, we've seen their multiples kind of rebound a little bit. They're trading a little bit more healthier than where they were as low as 6 months ago, but there's probably still a little bit more room to grow is because we're still seeing that deviation between private markets and public markets. I actually still think that the private markets in general, because it's more patient, I think, have it a little bit more right. But what we are seeing is a flight to quality. So really good cell tower business, really good data center businesses, continue to command a really good multiple, high 20s, for example, still in the wireless tower side even as low -- still in the low 30s for some really good cell tower portfolios. And then on the data center side, we have seen that compress a little bit more. But the good ones are still and should still trade in that mid-20s range. So we're still seeing some really good, healthy multiples. We're seeing better buying opportunities now. Certainly, when cell towers are trading in the forward to some -- were trading in the high 30s that was where we were like, "All right, like that's a little aggressive, right?" But -- so we have seen some of that compress a bit, and we like where that's going as we now are looking at deploying more of our capital.

Marc started off in towers, but it was early in sort of talking about convergence and looking at data centers. And with the portfolio that you have now, how do the portfolio companies work together to kind of get the value because we're all -- we have this future of data centers at the base of towers, but it seems like it's taken a while.

Yes, sure. So they work together because we have -- we leverage comparative advantage. At the end of the day, we are financial economists at heart, and we believe in comparative advantages. And we have companies within our funds, within the DigitalBridge family and umbrella that's specialized in building and managing customer relationships within their segments. So Zayo being in fiber, Vertical Bridge being towers, DataBank being in edge compute and Vantage being in hyperscale, the collective 4 can go up to a Verizon or go up to an Amazon and really provide -- certainly provide more holistic arrangements to the degree they need it, certainly as they build out their network or what they need to satisfy. Certainly, as you hear Verizon talk about enterprise 5G or private networks or T-Mobile talking about 5G, the combination of 4 are also needed to be able to create that type of solution for their B2E type of segments, right? So that's beneficial. And why I think it's a better model, we believe, than trying to do it all yourself and own it all yourself and put it all on the balance sheet is it requires a lot of capital. And so there's not enough capital out there for one individual company to try to do it all on their own. There's also not enough skill sets to be hired by 1 company to do it all on their own. So I think leveraging partnerships, but all within that family makes the most sense. And we're pleased that we've been able to do that on a number of occasions like, for example, with DISH, a couple of years back, Marc talks about that quite a bit, but we're able to be a solutions provider.

Great. You referenced strong bookings earlier. As macro is a big question at the conference, there's concerns about cloud optimization. What's your read on overall demand right now?

It's funny because Vertical Bridge -- I think one is we didn't suffer from any of the T-Mobile, Sprint churn that maybe some of the other more notable publics have been announcing or talking about or having to report on our core organic growth rates have been consistent and steady in that high single digits on a core organic basis, absent built-to-suit absent buying new towers, just pure leasing activity, new leasing, core organic leasing activity has been very strong. So we've seen that consistency. And it's been tried and true in the cell tower space for us at least in our experience that even though maybe 1 year AT&T or DISH may be a little bit more down, we are seeing demand pick up from T-Mobile and Verizon, for example, this year alone, the pipeline from those 2 carriers have been very, very good. So look, it's going to need to be there. You've got Verizon and AT&T especially Verizon spent a lot of money on mid-band spectrum. They have to deploy it. We believe we are a partner of choice. We build towers more prolifically than any other large publics. And so we're there to support it, and we're seeing that demand.

Great. And how do you think about -- I think investors see these long-duration assets, inflation is 6% and change. How do you think about pricing power in domestic towers and...

Yes. Look, on the tower side, we have seen some prop-ups in pricing, but certainly not to the degree of what reported inflation is because in the U.S. markets, those -- the inflation is somewhat capped with the fixed escalators. But at the same time, though, is if you look at towers, it's not a very capital-intensive sector at all. A lot of times, you don't even mow the lawn, right, frankly, at the base of the tower. So the gross profit margins continue to be -- especially for 2-tenant tower, it's upwards close to 85%, 90%. So in terms of the risk associated inflationary pressures, it's not a lot. It's not a labor-intensive business. Data centers, what we've seen is actually, we have been able to command some increases in pricing, right? I think Equinix and some of the big publics talk about it themselves. They've talked about being able to have pricing power to raise cost per megawattage upwards of 8%, 9%, right? I think they've talked about that. We're certainly seeing that not even at just 8%, 9%. We're in some instances seeing some double-digit type of pricing as well. So because the reality is supply is relatively inelastic, it does require us to do a fair bit of work to do it. Customers absolutely still need it. It is mission-critical type of workloads for them to be able to get that. And so because demand is certainly hot and supply is still somewhat limited, we're able to have pricing to the degree that it makes sense for us to service them.

On the supply, can you just talk about supply chain issues? What are the critical factors there? And I know there's been a lot of talk about the energy getting the utilities to deliver.

Yes, sure. So Obviously, on the data center side, energy continues to be and sourcing power continues to be the difficult part associated with that. We try to get ahead of it, certainly with wholesale arrangements and/or other arrangements with not just local utilities, but also finding backup power that makes sense. And energy cost certainly has been passed -- is passed through to customers. So that's really the only risk that we've seen on the data center or supply chain side, and we try to get ahead of it with multiple providers. Switch, for example, leverages a lot of renewable energy as well, right? So that's also been helpful where their locations are at, and we like that ESG thematic as well and doing our part with the environment. But other than that, in terms of supply chain, I would say that was a story from a couple of years back during COVID. We haven't seen really material impacts associated with supply chain or building or steel or anything like that to be able to get our data centers or cell towers up and running. And we kind of rode the storm during COVID by having some pre-buys actually before COVID really hit. And we're lucky enough. We had that days of supply to be able to satisfy the demands of our customers. So we kind of rode that pretty well. So energy will continue to be the thematic, but I think we've done enough on our sourcing to be able to mitigate that.

Right. Well, Jacky, unfortunately, we're out of time. Thank you so much for coming here today.

Thank you.