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

Our next session. I'm Jon Atkin. I'm with RBC, and I'm pleased to lead this next fireside chat with the Chief Financial Officer of DigitalBridge, Jacky Wu. Welcome -- welcome to our Chicago conference.

I know everybody is waiting around for [indiscernible] in the next session, but thank you.

Okay. All right. So we're going to kick things off. Welcome, Jacky. And maybe just to kind of get us warmed up, give us just a brief of kind of corporate history, current structure and kind of your investment priorities.

Yes, sure. So I joined the firm, DigitalBridge, formerly Colony Capital in March 2020, previously undergone a tremendous corporate transformation over the last almost 4 years. We were $55 billion of real estate investment trust, small private equity business across all different real estate types, hospitality, hotels -- our hotels, health care, industrials, commercial real estate. Now we're 100% focused on digital infrastructure, investment management after the deconsolidation of a couple of our real estate businesses on the balance sheet. We're $72 billion of assets under management, all within digital infrastructure, $30 billion of fee-earning equity under management. We are one of the fastest-growing private equity investment management firms out there. And if you love digital infrastructure and you love private equities, you get the best of both worlds. We invest in data centers, hyperscale and edge. We invest in towers, we invest in fiber. We invest in small cells. We invest in it globally in a massive scale. So pleased to have you guys in the session today.

So in rough proportions, given the asset classes that you just mentioned of the incremental capital, what's the approximate split?

Yes, sure. We historically have been a bit longer in terms of both data centers as well as cell towers, lately a bit more in data centers, obviously, with our take private transaction with Switch recently last year, plus also some of our CEOs out there -- are out there, Sureel Choski from Vantage, but we're putting a tremendous amount of dollars around data centers both edge as well as in hyperscale because we're just seeing just tremendous opportunities, not just with AI, but also the significant growth within all the hyperscalers. We're obviously very pleased with so a little bit longer in data centers and then certainly historically a bit more longer in terms of towers. So our rough split historically have been about 40% data centers, about 35%, 40% in terms of towers, about 20%, 25% in fiber and then the rest in more esoteric structures like small cells, et cetera. So those are the 2 asset classes we love.

And as you look at your public institutional investor base, what have you noticed in terms of the incremental interest coming from those that are focused on asset management versus those that are focused traditionally on telecom and infrastructure.

I would say it's now 50-50. And the fun part about it for Severin and myself is that it hasn't been a shift away from TMT investors and just to alternative asset management -- alterative asset managers, but it's really the best of both worlds. So we're getting incremental interest from both. I think that's a testament to -- and you can see in our stock price when Severin and I both joined the firm, we were $1 stock, right? We used to sadly joke about it. Now we look back in the rearview mirror with quadrupled in terms of our stock performance over the last 3.5 years. So I think that incremental interest level from now alternative asset managers looking at us and saying, "Hey, look, their invested equity, their committed fund structures have quadrupled in 4 years." We're one of the fastest-growing private equities out there. It's not a bad stock to have.

So a lot of -- so a lot of your investments in companies, you had been a REIT, you kind of deREIT-ed. As we think about the earnings metrics, or metric, that you report, what do you think is the most important thing to focus on, particularly for maybe a lot of folks in this room that are familiar with AFFO and EBITDA, which might be a little different than how asset energy reports. So kind of can you close that on a press a little.

Yes, sure. So we all love P x Q, right price and quantity. Our quantity within private equity and investment management space is fee-earning equity under management. So it's basically all the equity that we collect and get commitments from other funds and pension funds and sovereign wealth funds out there that pay us a management fee. Our investment management fee rate percentages are priced. So those times together equal our revenues, our fee revenues. So fee-earning equity under management is one metric. Our fee revenues is our second critical metric. And then the earnings associated with it is called fee-related earnings. So it's just basically fee revenues less G&A costs. And we're asset-light in private equity world. So it's just our deal professionals out there procuring deals, asset managing these deals, running these businesses well, and that generates earnings. And the last metric is called distributable earnings. So after fee-related earnings, after we pay G&A costs, we do get carried interest. So if we perform well and we run these businesses well, which we are -- have a track record of success across all of our funds, to have gone through great exits and great returns. But if we do well with these businesses, we recognize and we get excise returns, outsized returns out there called carried interest, and that gets us distributable earnings.

So we'll get to that a little bit, the piece parts being a lot of that related to fundraising, monetizations, but maybe kind of hitting on 2023 modernizations that you've seen give us a little bit of a recap? And then how does that look going forward?

Sure. So we recently -- and you saw the announcement, but we completed the transaction with DataBank. So that was -- Databank is our North American edge compute facility focused on data centers around tier 2, tier 3 markets and it's done phenomenally well. It was previously sitting on the balance sheet as a real estate investment that we consolidated within our public company and our stock by selling down that stake and recapitalizing and bringing in new investors like Swiss Life at a mark that was upwards of 32x multiple, which obviously was a great return for our existing shareholders a, 2x multiple, 2x MOIC. We were able to deconsolidate that and realize a great return. Obviously, IRR is in the upper 20s and we're very pleased about that. That's been one of our landmark deals this year. Previously, earlier last year, we did 2 other exits. One was Wildstone, which is a billboard business that was growing very well. We sold that upon 10 last year, and that was, again, a great returns in the high double digits, high 20s. And then also Vantage Towers, which previously was taken private. That was the tower portfolio from Vodafone, which we had a stake and we obviously exited that at a great return as well.

Got it. And then maybe turning to the AI theme. And you mentioned Databank as well as some of your other companies. But for those that are focused on AI, which arguably has driven some of your stock performance year-to-date, what are the top investments that you see that benefit directly from that trend?

Yes, sure. So across our data center ecosystem, we're seeing phenomenal bookings across the board. So all of them are seeing just fantastic growth and we're not -- I'm not going to sit here and say this much is attributable to AI. But we do know is the common names and themes that's driving our customer base and driving our bookings and pipeline, and that's NVIDIA, that's Google. That's Microsoft, all those names out there that obviously are big players in it in terms of our data centers that are obviously continuing to do well across the board. We're seeing phenomenal activity with Switch, which we recently took private and a close to $11 billion take-private deal last year. Rob Roy and his team game, they're doing a fantastic job. We're seeing pipeline that's filling up almost our entire business case upfront in the first year alone. So that in the sell has shown great momentum in the real estate that, obviously, that business is in and the customers and attract not just purify quality data centers with great security measures within those data centers, but they've got a ton of capacity, and it's already sourced with the energy it needs to continue to fuel that growth. So Switch has been great for AI private networks. Vantage continues to do very, very nicely, globally Vantage. We've taken a business that was previously just North America. Sureel's gone ahead and built up Europe, built out Asia, and this obviously been fantastic globally, we're seeing a lot of pipeline and bookings there. And then certainly, Databank with Raul, those tier 2, tier 3 data centers, we announced in our earnings presentation a couple month half ago, that we are seeing pipeline and bookings at almost 400-plus percent of our original budgets this year. So I don't know why I'm shifting towards this way, but we're seeing just tremendous growth and opportunities in that business as well.

Rest of industry, a lot of people investing capital in data centers across all regions. Is supply keeping up with demand, trailing ahead of it and the implications that you're seeing in terms of pricing and yields.

I've been in the space for a long time and actually someone -- mentors. Steven Marshall's here. He was my boss, by the way. So if you don't like what I have to say, he taught me everything I know. So it is him. But for over 20 years, we've seen supply continue to be scarce and demand continue to outpace supply tremendously. And that's what's driven these multiples for these assets over the long run. Now we've seen the peel back, obviously, in the last year or 1.5 years because of interest rates, but the underlying sector is -- continue to see a tremendous amount of tailwind. So I don't see supply fully catching up to demand anytime soon. We continue to see more and more applications. We haven't even started seeing autonomous electric vehicles and some of the other use cases out there in terms of energy transition that -- and new sectors are being created because of 5G and because of mobile edge compute. So I do believe that demand will continue to outpace supply for the foreseeable future. And I think energy on top of that compounds the scarcity from a supply perspective.

So we just had a fiber panel or one of your portfolio companies was there talking about M&A and that kind of raises the -- how much available capital now do you have for further inorganic growth across your various platforms.

And what Steve Smith said.

Consolidation is yet to come in the fiber sector.

Yes, there absolutely is. I touch one of our fiber businesses in Europe. And for a while there, I would say there was a lot of new entrants into the market, but it didn't translate to supply increases. It actually was -- let's start a fiber business and hundreds of them came up and then interest rates went up, and then they're like, "Oh, no, I don't have money." So that's basically what has happened in the sector right now. So I think that there will have to be consolidation for sure, but there certainly needs to be more growth and more new builds because at the end of the day, all these edge compute, all these Tier 2, Tier 3 data centers need fiber aggregation, for example. And it needs to be in the right spots and the right places. There's still a bunch of homes obviously, the federal government is focused on it in terms of rural broadband initiatives, not just here, but abroad as well. There's a ton of homes and communities out there that continue to struggle to even get reliable broadband. So I would say that there still needs to be billed. But first, let's see some consolidation in the space, get some of these providers healthy, probably a great opportunity for [indiscernible] as we're now in private credit as well. And obviously, that's a big growth opportunity for us to fund some of these businesses. But let's see that consolidation, and let's run from there.

So any thoughts on the velocity of capital formation because some of the checks might get quite large. I'm thinking more generally about the industry. You've got existing dry powder and then there's probably some contingency arrangements where you might want to swallow something larger, but talk about the velocity and financing environment in general.

Yes, sure. I mean, obviously, the capital financing markets have been difficult, but that's why for us, it's been beneficial in the sense that we do raise third-party capital and co-investors at a pretty prolific rate. So out of our $30 billion of fee-earning equity under management, $8 billion of it come from co-invest alone. We have not guided in terms of how much we're going to deploy every single year. Obviously, it's been historically upwards of billions of dollars, but just to put it in context, we closed on our Fund II, which was an $8.3 billion fund -- flagship fund in December 31, 2021, right? So in end of 2021, we raised fully $8 billion, and we've effectively completely deployed it. So I mean, in the course of 1.5 years, we've been able to put those hard dollars at work into great businesses like Vertical Bridge, for example, our largest independent tower business in all of the U.S. And that's in our second fund, but we've been able to deploy that prolific rate. So it's upwards of billions. We've not guided the Street in terms of how much a year. But what we have guided is that we are raising another fund, flagship equities fund. And historically, we've been able to do a quantum in around the same size, if not more, than what we've done in Fund II and we will look to deploy that pretty quickly because there's no shortage of ideas across the global ecosystem for us.

So you last gave a little bit of an update on year-to-date fundraising. We've got 3 months and a couple of days left in the year. Any kind of update you can share on.

We're committed to what we said before. So we're standard of consistency we said $8 billion plus for the year, we're sticking to it. Typically, in fundraising, it is more towards the end of the year. I don't mean to be a sales guide that says that the sales all come in the last 3 days of the quarter, but sometimes, and it really does. We have and what we have acknowledged as the fundraising environment is more difficult now than it was 2 years ago, naturally, it does take a little bit longer for people to make a decision. But what we are seeing is the phenomenal take-up and re-upgrade from our existing fund investors into our new funds. So clearly, people like our cooking, and we're going to disclose more of the fund performance this quarter across our funds, and they're doing really well. But that's the nature of the industry that we're in. They got phenomenal bond-like qualities with 10-year non-camp leases and great escalation rates and great growth in terms of 5G and mobile edge compute. So it's a safe haven for a lot of pension funds and sovereign wealth funds, but then you've got that nice call optionality and a nice growth rate from all these new services and demand services out there like private networks and AI. So I would say the funded performance is going to continue to be strong, and that's fueling a lot more check sizes for us maybe smaller tracks, but we're getting checks and we're getting more checks globally. Asia has been a great opportunity for us to fundraise. We acquired AMP Capital's equity business called InfraBridge, and that came with a sales and distribution team in Hong Kong. And that's allowed us to increase the rolodex of limited partners and investors in the Asia region, both in Australia as well as in Japan and Korea and China. So we're seeing more checks and more checks coming out of that region. So that's been helpful for us.

So there will be time for questions, make yourself visible if you have any at the moment, and I'll call on you. And so maybe talk about Fund I and other earlier investments. You talked the first couple of minutes about some returns that you were able to realize. But any other update on Fund I and anything the way of valuation marks that you can share.

Well, a couple of highlights in terms of one, obviously, we talked a bit about Wildstone, some other notable investments have been growing just tremendously, Scala or hyperscale data center business in Brazil, and that's been growing tremendously. Obviously, our anchor customers there are the same names that you've heard in hyperscale in terms of the Amazons of the world and that's growing well. It's all sourced from renewable energy sources in Brazil with hydropower as well. So that's been a benefit, but that's been growing very, very well and steady. Other businesses in South America in Fund I ATP and in telecom partners. That's our fiber and towers business in Colombia and Chile and Peru, and that's also growing very well. [ Dan Seiner ] has done a great job with that business. And of course, Vantage Europe, our flagship business, hyperscale business in Europe that Sureel runs, that's been doubling down significantly. So I would say there's going to be even more opportunities for us to continue to grow those campuses across Europe.

Maybe pivoting a little bit, but it's probably going to come up in some of the future panels, but a lot of what's needed is energy to kind of fuel the development pipelines of some of the data center operators that want to accommodate that demand. What is your interest level or kind of capabilities around investing in energy infrastructure.

So we are looking because it is so congruent to what we invest in within data centers, but we are looking at segues into our funds where we invest in energy transition type of infrastructure, certainly transmission lines. We actually own the transmission business in Asia, but there are going to be opportunities for more of that type of energy transition infrastructure that we would want to invest in. That's synergistic with our data center businesses to the degree that the pricing and the returns make sense. So that's an aspiration for us as we grow into future funds going forward. And data center is what we typically do in terms of growth and new -- building the campuses as we make sure that our energy is already sourced, and we know what's going out there. We obviously prefer renewable sources and sustainable renewable sources where we can. And we certainly looked at investing in regions where there is more access to renewable sources and cooling sources like the Nordics for example. So we continue to idea generate there. Nobody has a solve. But what we're trying to do is do it more responsibly. So what we have not done is just gone ahead and built data centers and luckily we have and to bitcoin mining, for example, specifically bespoke to that a couple of years back because for us, it was just a, we were questioning, wanted to make sure that we understood the sustainability of it; and b, because of the power needs associated with that at the time, it didn't make sense for us at the time.

Audience questions. Alex?

You obviously alluded to -- Now that you've got your deconsolidating off the balance sheet, but really the priorities on the balance sheet still appear to be some corporate cash. The leverage now looks a little bit cleaner. I just kind of wondered what your priorities are from, capital allocation, from a corporate perspective.

Yes. Certainly, a lot better now when I joined...

So the question was around balance sheet priorities given recent deconsolidation, leverage, capital allocation.

Yes. So it's certainly a lot easier now. 3.5 years ago, we were $10-plus billion of debt on the balance sheet and 90% LTVs and some of those assets, and we sold those and execute ourselves of those assets and we've delevered significantly. With the deconsolidation of the last remaining balance sheet assets, we will continue to delever our leverage profile, even with the preferred equity would be in the mid-single digits on the balance sheet. We think that, that could go a little lower. If you look at other alternative asset managers, they're typically in the 2 to 3x range. And so with cash generation of funds on hand to the degree that there's no accretive M&A opportunities out there to expand our franchise within -- from a general partner and a private equity perspective. We will look to continue to optimize that capital structure and pay down some of those press. But that will then naturally unlock ultimately common yields in the intermediate and long run, that's going to be commensurate to the Blackstones and the KKRs and the ARES yields that are in the 3% to 4% range. So that's kind of the math that we kind of look at. That's last remaining thing left from a balance sheet perspective. So one, look at M&A that makes sense that expands our franchise that adds value, adds LPs, adds deals, add products, if there's nothing out there optimize our target capital structure and upsize the dividend.

Other questions.

[indiscernible] So in an out-setting and how are you driving this in your portfolio for this final part and that...

I apologize. I kind of got half of that question.

I think the question was around project delays at various strides. I think focused on data centers? And how do you consider -- how do you achieve consistency and execution around commissioning and delivery.

I will say this. I am not the guy to answer that question. You should ask Sureel, who I know is in the audience and he is the man in the back right there. The fun part for me is I can hide behind my CEOs as a private equity firm, I try not to go into the details associated with our businesses, principally because they're privately owned for a reason. But Sureel's probably the best to answer that. I mean he's got processes and a world-class team in place I mean, what we -- we don't build things be spoken ad hoc, right? So I mean, that's the best part of a comparative advantages. We try not to be everything to everybody. Sureel is the master at building data centers for hyperscale customers to a spec level and a security level and quality level that they need, and he does it consistently every single time, which is why we're a preferred vendor. So I'll let him answer it. Raul can answer from a tier 2, tier 3 edge platform perspective. That's a bit different in terms of spec and scope to what, obviously, Sureel does. But that's why for us, we think our structure is actually the best because we're not trying to build everything. We let our portfolio companies, Alex Gellman is a king of domestic North American towers, for example, right? He does it better than anybody. He's not going to go and try to go and build stadiums in Incheon Korea, for example, like it's just not our company. So we'll let them really focus on it, and I'll let you ask them that question.

Yes, Richard?

Imagine all the transformation [indiscernible] would be curious of the business, we sort of take a little bit more further is the plan to still retain these minority interest or the agent that we will be completely right. Does that makes sense? [ Or you guys are type kind of met ].

I will say it this way. In every private equity firm there is actually some level of ownership in the funds, no matter what. It's the GP commitment, right, general partner commitment. And the reason why it's important to do that is we want to be asset light for sure. But what we want to be able to prove to limited partners is I like my own cooking, too, right? I'm not going to just -- and frankly, candidly, GPs that don't put any of their money, I think you need to raise an eyebrow and say, why? Right? So we're willing to eat our own cooking because we believe in our asset management capabilities, we believe in our underwriting capabilities. We believe in how we capital finance and optimize their capital structures of our portfolio companies. And we believe in the teams that are running these businesses and the CEOs that are running these businesses. So we're happy to retain our minority interest into these businesses. Now your question is valid, is it 8%, 9%, 10%, 5%, 2%, some level is important to prove. And I think some level that is seen as substantive, not a $1, not 1%. Probably 2%, 3%, 4% is optimal, and you kind of can see that in our fund structures. It's typically 2% to 4% range in terms of a GP commitment. So there are -- there is room to further monetize or optimize that structure down a bit. But at the same time, though, as you know what data center businesses are growing like hot case right now. We just talked about AI and all the benefits that, thank God, we bought Switch when we did because I'm pretty sure that multiple in that public stock would be through the roof right now, given what we've seen in terms of demand, but also what has come out with AI. So I think timing is everything. And right now, we're happy to own the 9% in Databank that we are retaining.

That was the last question. So I appreciate you taking the time.

Awesome. Thank you.