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

We think so. And I think it's because also we already have invested in great platforms and management teams in the U.S., right? We've got a premier towers platform with Vertical Bridge and Alex Gellman and Ron Bizick and the team has been done a phenomenal job. We've got a great team in Raul Martynek in DataBank. We've got a great team with Sureel Choksi at Vantage. So, we are investing and now we're betting on them. And we're pleased with that in the U.S. and other countries, however, and we're very long in Asia. We continue to invest in Europe, but we've seen Asian -- our allocation of Asian investments actually now almost be equivalent to that of Europe is because there, we've now just started to invest in new platforms. And so in those regions, a bit more M&A. There's still a lot of greenfield opportunity there, but a little bit more M&A in the U.S., more greenfield.

I guess as you look out your investments, where do you expect the mix to kind of trend to? Do you expect Asia to become a lot bigger than Europe over time? Is there significant opportunity?

We think, certainly, right now, with the dynamics with Ukraine, but also with inflationary pressures being a little bit more prominent in Europe. Some of the geopolitical issues in Europe is a bit more pronounced than Asia. That's allowed for us to say as we're looking at new vintages of our flagship fund, we made the decision to be a little bit more long in Asia. . If you look at our Fund I, we were not in Asia at all. Fund II, we allocated about 15%. Going forward, it's 25% to 30%. And we like Asia for a couple of reasons. One is it's a huge region. Secondly, it's -- you can really build a very balanced portfolio in Asia. You've got core OECD-type countries with Japan, Korea, Australia, Singapore, Hong Kong, Taiwan, but you can also mix it with really great growth opportunities in EMs Malaysia, Indonesia, the Philippines, for example. So, that type of mix gives us that balance that we look for. When we're doing fund construction. There's a huge amount of growth opportunity with Asia. And also the underlying segment health is very strong there. You have 3 or 4 major customers well -- pretty equivalent in terms of market share and sizing that compete very well against each other. It's a pretty healthy market in Southeast Asia.

In the data center side, it seems like a lot of the growth, in general, is driven by the cloud providers wanting to land in new places, part -- that's been talked about a lot is going into South America for some of the cloud providers. It seems like they're just starting to consider Asia. Do you see more of the near-term Asia opportunity? Really is it data centers? Or are there also tower opportunities? How should we think about...?

I would say we're long on both. So, if you look at what we've done in Fund II, for example, we really launched Vantage Asia as our flagship hyperscale platform in Asia. And then, we also launched EdgePoint Infrastructure, which I happen to be on the board of them. We're very long in cell towers, and they operate in Malaysia, Indonesia, Singapore and in the Philippines. So we're long on both for sure. On the data center front, we're seeing a lot of activity with submarine cabling, across the Pacific and new investments there, which means that there's going to need to have hyperscale data centers right around where those entry points are landing in Asia. . And we're very bullish on that. The other piece of data centers that's interesting in Asia is it's almost neutral territory where you get Microsoft, Amazon coexisting with the Chinese hyperscalers, which have a significant presence, whether it's Tencent, Alibaba, Fosun, et cetera. So it's really a nice environment for us to incubate growth, and that's why we went long on the data center side in Asia. And then, on the tower side, you're seeing really good balanced market share, right, whether it's Digi, whether it's Detales launching a third carrier in the Philippines, whether it's continued growth at Globe or Telkomsel. They're well balanced. They're really launching 5G now. They still have 4G and coverage needs that need to be built out. So from a cell tower side, we see a lot of growth in those markets. The consumer ARPU in those sectors are pretty healthy. Unlike the India market, which has seen a lot of degradation in margins, these other countries that we're in, and has been very healthy. So we're long there.

I guess in mentioning India, is there any part of -- in terms of the different types of businesses you invest in that you find India at all attractive right now? Because it seems like towers is not at the forefront right now.

I'll let you ask American Tower that question, I guess. Look, I think that the data center space in India if -- and how we enter markets, is typically fall in the logos, right? And so, by building out a strategic relationship with Amazon or Microsoft, for example, and we can -- we guarantee our investors get a good return off of it and it's [indiscernible] by one of those customers. And we have a local team that we can feel like we can win there, then we'll go and do it, right? But those things need to check. So -- and India has been a tough market for a lot of folks who have entered in it. Not to say that, we won't ever, but we got to make sure we check those boxes for us to build that environment. But I think data centers is probably the more likely asset from that aspect than dealing with the consumer wireless margin degradation, as we've seen in the India market.

That makes sense. I guess in terms of Latin America, what opportunities do you see there? Because it seems like we mentioned data centers. There's been some fiber plays, it looks like towers are picking back up again. How is DigitalBridge approaching Latin America or South America?

I think cautiously optimistic. We were pretty long on South America in our Fund I. So we are -- our 3 major platforms in South America. One, Scala, which is a hyperscale data center business, fantastic business, grown tremendously, top-tier customers in Amazon, et cetera, in that market in Brazil. And then, our towers businesses have been Highline, which is a towers business in Brazil. We've got a towers business -- tower fiber business in Andean Telecom Partners in Chile, Peru, Colombia. And then, we've got Mundo Pacifico, which is a fiber business in Chile. So we've done a fair bit in South America. I would say there's still a lot of growth opportunity. The contracts and the growth opportunity to build-to-suits have been fantastic there, and they're all growing in the like double-digit consistently on an organic basis. So we're very pleased with it. Where we're cautious is we continue to monitor the geopolitical issues in the region. Obviously, the risk and FX issues there have been -- has been tough to, but we've been very pleased with the 4 investments we've had there.

Something that impacts data centers and towers in emerging markets is power and solutions for power, obviously, very different needs. But in your portfolio companies, are you -- do you see an opportunity in providing power solutions for towers where there isn't a reliable electrical grid? Is that a business you can export kind of through multiple regions?

Yes. I mean, I think it's a challenge for every single data center operator in the business out there. We don't enter a market unless we know that we can operate there, and there's some access to power. So -- and for us, we are very bullish on clean power and making sure that we can get there. So for example, with Scala, when we went into Brazil, their power is sourced by hydroelectric and there's plentiful associated with it. So, we do monitor it. We do not go in the market, so we don't believe we can get it. And that's just part of our underwriting for sure.

Can you talk a little bit more about where the greenfield CapEx is being deployed in the different regions outside the U.S.? How much of it is, I guess, being done for towers, build-to-suits versus data centers versus fiber opportunities, kind of what that mix looks like?

Yes. I would say most of the mix has been towards towers and data centers. Obviously, that's just purely because we've got more of those platforms and those businesses across the globe. We've got almost 8 towers businesses across the globe. And so, a lot of that build-to-suit activity, I would say, is coming from the tower side. On the data center side in the emerging markets, we are continuing to build opportunities. But, I would say what we're looking at a bit more is on the tuck-in acquisition side on the data center front.

And in terms of the build-to-suits, do you see this at steady level? Do you think there's more to come? Or how long can this build-to-suit business last in the different markets?

I think on the emerging market side, certainly in Asia and in South America, I think the build-to-suit activity is going to stay pretty high, over the course of the next 3 to 5 years. In Europe, I would say it's probably going to slow down at some point just purely because of density and zoning and permitting, and there will need to be need for small cells, at some point for Europe as well as certainly in North America. So -- but I would say in Asia and South America, we're seeing that activity. I don't see it stopping anytime soon.

Got it. And then, you've talked about M&A for the core Investment Management business. At this point, it seems like a lot of the strategies are filled out. And in terms of, I guess, other M&A, what would you be looking for to acquire something in the Investment Management business? Is it strategy related? Is it region related, maybe different expertise or people that you feel like add to the overall team.

Yes, sure. So our underwriting on the Investment Management side is a couple of things. One is, we got to make sure that it adds to our LP base, right? So it's not going to create concentration issues with existing LPs that's important for us because then that's just value destructive. The second piece is we will not skew too far away from what we know we can win and which is digital infrastructure. So when we did AMP and now the InfraBridge platform, over 60% of their funds was actually in digital infrastructure. And other sectors that they were in were sectors that were actually going to be digitized, whether it's energy transition, et cetera, transport hubs, for example. Those are interesting for us because of the digitization in those sectors. So, if we are going to go into a new sector, it's got to be something that we believe is synergistic with digital infrastructure. And we can -- we have that knowledge base, and we can win in that. And thirdly, obviously, the price. The price has got to be right. So, if we can check those boxes, and we believe it's additive, then we'll go and do it. We've got about $500 million of liquidity on our balance sheet to go and deploy that. But the bar is going to be high because we compare it -- always compare to what would we do with that cash otherwise, whether it's share buybacks or whether it's preferred redemptions, but it's got to clear those hurdles.

And I guess, let's follow up on that. You've done some share buybacks and, I guess, with the deconsolidation and having some liquidity, how should investors view, where the stock is valued today versus where you think it should be? And, how much of that is maybe dependent on when rates settle out. And you end up assuming that a flagship raises happens again at some point in the future?

Yes, sure. I mean our primary focus is just to continue to execute on fundraising and operating our assets well. Our capital allocation strategy will continue to be a balance of all 3 to optimize our -- certainly to opportunistically buy our common shares back to redeem preferreds where appropriate. And to the degree, M&A is accretive above and beyond that, we'll do M&A. That's added to our platform. So, we'll continue to do all 3 in a balanced way. So our perspective is that we will use excess liquidity for all 3 of those purposes, and we'll just continue to just keep grinding it out.

And something that, I guess, is -- will be coming up in the next few years and you've had a few exits. But as, I guess, more exits come to fruition or funds concern, the carried interest value that DigitalBridge should see, how should investors kind of value that piece? Or what should they be considering when looking at that potential?

Yes. I mean, if we do a good job, and we believe we do, do a good job because the 3 exits that we had last year, all generated carry and they all generate returns well in excess of 20% to 30%. So our track record is built out there, and we've proven that we've been able to do that, and we'll continue to do that. So as we do that, we'll continue to raise more funds, and that in itself will generate more carried interest associated with those future funds. So, we actually recently laid out a framework which is published on our website is how we look at the business. And as a result of that, we believe there's opportunities with our company and with the stock. And that's what we're all here and that -- we're so passionate about what we do. So, as long as we just continue to asset manage and get good returns for LPs and fund raise, that carried interest should have material value, and we've laid it out in that valuation frame.

And I probably should have hit on this earlier near the start, but I guess with rates rising and debt ceiling issues, like there's been a lot of concerns about how fundraising would be in an uncertain rate environment. Are we starting to hopefully post debt ceiling drama -- seeing any kind of stabilization or as you talk to potential investors, are there concerns kind of fading in terms of the rate environment? Or is it still top of mind and...?

I think it has faded a bit because this time last year, people were worried about how much it's going to be. I think now folks are starting to see the light at the end of the tunnel on it. So I think the fear factor of the unknown of how much more has dissipated. But at the same time, as we've been very blessed to be in digital infrastructure because our asset class in our sector has a tremendous amount of tailwind. So it's certainly -- if you're looking at a private LP deciding on where to allocate your dollars, is it to commercial office? No. Is it multifamily or health care? Absolutely not. Our sector ends up being a secular winner. So that's been positive from that perspective. Fundraising is definitely harder today than it was 2 years ago, for sure. But we are continuing to see really good re-up rates. We are seeing some check sizes be a little smaller than historical in the past, and it has taken a little longer. But I would say that fear factor is not what we're hearing and people have been very happy with the exits that we've had, and what we've been able to deliver.

The other concern that we get a lot of is that how, I guess, our companies will do in a recession, and there's that fear that the rates have gone too far and will create one. But I guess a lot of our companies that we deal with like are not maybe a recession proof but recession-resistant. Are you seeing more interest because of the defensibility of your investments?

I would say the beta aspect is real. Especially in our sector. So especially what we do, right? We're not exposed to consumer risks. We are -- have long-term duration of our contracts in our portfolio companies. They're all creditworthy customers. All those things are positives. And oh, by the way, they don't just -- they're not just stable and they just stay. We continue to grow, right? There's continued bookings at a prolific rate because of the underlying factors with demand applications and new services coming down the pipe. So, we've continued to see marks go up in our businesses, and that's been very positive. And that's where LPs are liking what we invest in and allocating dollars to us.

Great. I think I'll leave it at that. Thank you for coming. .

Awesome. Thank you.