DigitalBridge Group, Inc. (NYSE:DBRG) Q1 2024 Earnings Call Transcript

DigitalBridge Group, Inc. (NYSE:DBRG) Q1 2024 Earnings Call Transcript April 30, 2024

DigitalBridge Group, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and welcome to DigitalBridge Group, Inc.’s First Quarter 2024 Earnings Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I would now like to turn the conference over to Severin White. You may begin, sir.

Severin White: Good morning, everyone, and welcome to DigitalBridge’s first quarter 2024 earnings conference call. Speaking on the call today from the company is Marc Ganzi, our CEO, and Tom Mayrhofer, our CFO. I’ll quickly cover the safe harbor. Some of the statements that we make today regarding our business operations and financial performance may be considered forward-looking. And such statements involve a number of risks and uncertainties that could cause actual results to differ materially. All information discussed on this call is as of today, April 30th, 2024, and Digital Bridge does not intend and undertakes no duty to update it for future events or circumstances. For more information, please refer to the risk factors discussed in our most recent Form 10-K filed with the SEC for the year ending December 31, 2023, and our Form 10-Q to be filed with the SEC for the quarter ending March 31, 2024.

Great. So, it’s the new year and in connection with the completion of our business transformation, we’ve advanced and further simplified the format of our earnings presentation. Going forward, we’ll start with Marc providing a business update, highlighting key takeaways from the quarter, and covering thematics that would have historically been incorporated in our third section, executing the digital playbook. Tom will cover the financial highlights in the second section, followed by Q&A. Another advance that you’ll notice is we’ve condensed our earnings presentation and supplemental financial report into one document. The goal here is to make it easier for investors to access a single doc that captures the highlights as well as some of the important detail behind the numbers.

We look forward to your feedback on this new format. I also want to highlight our second Investor Day coming in a couple of weeks on Monday, May 13th at the New York Stock Exchange. Some of you will be joining us in person, others on the webcast. Either way, we’re looking forward to outlining our simplified business profile, discussing the state of private markets, digital infrastructure and AI, and how we continue scaling our highly differentiated platform. In addition to our senior management, we’ll be joined by some of our operating partners as we give you color on what’s happening on the ground in digital infrastructure. With that, let’s get started and I’ll turn the call over to Marc Ganzi, our CEO. Marc?

Marc Ganzi: Thanks, Severin. Let’s start this call with our progress on FEEUM, which as you all know is our key revenue and earnings driver and the solid growth that we continue to see here. As you can see on the left, FEEUM grew 17% year-over-year to $32.5 billion at the end of the first quarter in 2024. Importantly, FEEUM growth was driven not only by our flagship strategy DigitalBridge Partners III and the corresponding co-invest but also via our expanding multi-strat offerings which include contributions from credit and liquid this quarter. In fact, if we hadn’t had a step-down in separately capitalized portcos, as Vantage deadco moved from our latest flagship fund, FEEUM actually would have been up over 20% year-over-year.

That transaction which we announced in January is similar to the Vertical Bridge deal we did in DigitalBridge Partners II, which created some short-term FEEUM pressure, but over the long term allows us to maintain exposure to the best growth platforms. In this case, Vantage is one of the best global hyperscale data center platforms, building large campuses at scale with what we think is the best management team in the world, led by our CEO, Sureel Choksi. In partnership with Silver Lake, we’re planning on building over 3 gigawatts of capacity to meet the growing demand for cloud and AI infrastructure. And at the same time, DigiBridge shareholders will now earn carry as we create incremental value at that platform versus just a straight historic management fee, which is what investors were getting in the original investment vehicle that we built at Vantage.

Bottom line, FEEUM growth year-over-year remain solid. And next quarter, you’ll continue to see this metric March higher as we close incremental capital across all of our strategies. Next slide please. Next up is new capital formation. This quarter we closed on $1.1 billion in new capital commitments. That’s up 47% over the prior year. So taking a step back, in summation, Q1 was good. And frankly, it could have even been better. We hold back some commitments from some of our clients that are working on a multi-strategy play with us that will play out over the next few months. We’re really starting to have these more holistic conversations with our partners and LPs as our fund strategies expand. We’ll talk a bit — a little bit more about that on investor day, but it’s great.

I would say it’s a great strategic development for the firm. We have multiple products in the digital infrastructure space that are meeting our clients’ objectives. Whether it’s credit, core, liquid securities, late stage venture growth, our flagship funds, co-inventing vehicles, and continuation funds, we’re really building out that multi-strategy platform where we take advantage of that digital infrastructure flywheel that we maintain here at DigitalBridge. In Q1, we received continuing commitments of over $600 million to DigitalBridge Partners III. Subsequent to our 4Q 23 report in February, we also brought in commitments to our second credit strategy and had also contributions from liquid and co-investments as well. The key here again is multi-strategy, which will increasingly even out fundraising over time.

As you know, we hold periodic closings for our strategies over the course of the year. And I’d say today with Q1 closed and good line of sight on capital formation over the course of the year, we feel very good about our ability to meet or exceed our fundraising targets we laid out for 2024 last quarter. Next slide, please. As Severin mentioned earlier, we’ve made some changes to the format of the presentation, bringing what used to be the third section up front to address some of the top of mind issues and strategic initiatives that we’re executing on to build our business going forward. Today, data centers and AI are front and center, not just in digital infrastructure, but across an increasingly digital global economy. And in this sector, the number one topic today is power.

This is why you’re seeing tech CEOs like Sam Altman, Mark Zuckerberg, Satya Nadella, all out there publicly talking about how to access power in order to meet the demand coming down from Generative AI workloads. I’d like to bring some perspective from our end as an owner, operator, and manager of some of the largest data center platforms globally to understand the challenge and some of the ways that we’re trying to address it as a firm. I’ll start by highlighting that it’s actually power generation that’s not the issue. It’s power transmission and distribution that are constrained. Transmission grids are capacity challenged. And imagine, if you think it’s hard to get a new cell tower permitted, think about building new transmission towers or substations.

There’s a lot of friction in the system around this right now. In fact, growing contribution from renewables, which is an important development, introduces additional complexities to the grid, especially as it relates to data centers. Next slide, please. For those of you that know us well, we don’t spend much time complaining about problems. We pivot pretty quickly, and our goal as a management team is to figure out solutions. So to solve the bottlenecks the grid is presenting, we’re helping our portcos get creative and find ways to execute on a different kind of colo, bringing power generation and data centers closer together. On one side, it’s building data centers closer to new or existing power generation. We’re doing that at a number of our platforms, whether it’s hydro, solar, natural gas, or wind.

This actually fits AI training models quite well, since these workloads are less latency sensitive. They can be located further away from enterprises or consumers during the AI model training phase. On the flip side, we’re also figuring out how to bring power closer to where you need data centers. You can see we’re doing that at our DataBank and Switch platforms today. This will be increasingly important as we move to the AI inference phase, where trained AI models are deployed at scale by enterprises and in apps used by consumers. Here, you need compute closer to the end user, not only in hyperscale but also in edge. Frankly, both of these approaches are going to be necessary to meet the demand that we’re seeing across the portfolio for new power capacity.

We believe it’s not going to one technology or one strategy that’s going to be the silver bullet to solve the problem. So we’re increasingly focused on this today, and you’ll hear us talk more about this as the year progresses. Next slide, please. A big piece of the power puzzle centers around renewables. This is an area of intense interest from our portfolio of company customers. Again, it’s a customer-driven opportunity and solution who’ve all have aggressive net-zero targets for their compute and connectivity footprints, and from our institutional LPs as well. They want to see green electrons increasingly power their data center investments, not just through — directly through PPAs, but actually bringing that power directly behind the meter into the data center.

As you can see here, we’re making a lot of progress with two of our six data center portfolios already 100% renewable with Switch powered here in the US principally by wind and solar, and Scala which is powered by hydro in Brazil. DataBank and Vantage are making very good progress as well, increasingly building or procuring renewable energy, as you saw in the prior slide. On the last pane here, another component of solving the power challenge is building and operating data centers that operate more efficiently, which is measured by PUE, or power usage effectiveness. This means the ratio of power into facility relative to the amount [used] (ph) to run the servers directly. Here, lower PUE values are desirable because they significantly use less energy, they’re more energy efficient.

Also here, AI is actually part of the solution. A number of our platforms are experimenting with new technology powered by AI that operates data centers more efficiently. We don’t just build in for AI, we’re also investing in AI for our infrastructure and for our customers. Next page, please. So let’s step back and understand why we’re so focused on power and see how that aligns with one of the foundations of the DigitalBridge roadmap, invest. Last quarter, I highlighted our portfolio companies are budgeted to invest over $11 billion in data center CapEx globally in 2024 based on the bookings that came in last year and also in this year. Just yesterday, one of our portfolio companies signed a 100 plus megawatt lease. That’ll be roughly another $1 billion in incremental CapEx. Today, with over 2 gigawatts under construction at $10 million a megawatt, that’s over $20 billion over the next few years in new CapEx commitments.

Those are big blocks and we’ve already got the power lined up for that 2.2 gigawatts of under-construction capacity. But here’s the issue. Looking ahead, looking around corners, our pipeline is over 5 gigawatts today and growing, and I would say growing quite fast. To turn that pipeline into bookings, you’ve got to be able to deliver the power, power density at scale. This is a key differentiator into the foreseeable future, and while you hear us — you’ll hear from us continuing to cover this topic, including more insights at our Investor Day around data centers and renewable power, and the convergence of those two topics together. So with that, I’ll wrap up our business and strategic update and turn it over to Tom to cover the financials.

Tom Mayrhofer: Thank you, Marc, and good afternoon, everyone. As a reminder, this earnings presentation is available within the shareholders section of our website, and this quarter, we’ve combined the previously separate [Technical Difficulty] financial report with the earnings presentation for your convenience. Starting on Page 15, our key operating and financial metrics have seen significant year-over-year growth. Fee revenues, fee-related earnings and distributable earnings have continued to demonstrate positive trends year-over-year, and we expect this growth trajectory to continue as we progress through 2024. In the first quarter, we also generated year-over-year growth in new capital formation as Marc discussed. As the year progresses, we expect momentum to build and full year results to align with our guidance targets.

Our fee earning equity under management is $32.5 billion as of March 31st, a 17% increase from the same period last year, driven by organic capital formation in the DBP series, co-investments and credit strategies. This increase was partially offset by an anticipated fee-based reduction as Vantage data centers transitioned from our prior separately capitalized vehicle structure into our latest flagship fund, DigitalBridge Partners III, or DBP III, which extends our exposure to Vantage through its next phase of growth. Moving to Page 16, the company continues to simplify its financial reporting to align with our alternative asset management peers, specifically in our presentation of fee-related earnings and distributable earnings. Beginning in the first quarter, the company introduced fee-related earnings on a company-wide basis, which now incorporates corporate expenses and is not equivalent to the metric reported prior to 2024 investment management fee-related earnings.

FRE metrics discussed in this earnings presentation for prior periods have been updated to reflect company-wide fee-related earnings and are suitable for period-over-period comparison. Starting with fee revenues, the company reported $72.8 million in the first quarter, marking a 21% increase from the same period last year. As we progress through 2024, we continue to anticipate additional fee revenue growth, including catch-up fees driven by fundraising for DBP III, which had its initial close on November 1st of last year. Fee-related earnings were $19.6 million in the first quarter, up 28% year-over-year. While cash compensation was up due to the inclusion of a full quarter of the InfraBridge acquisition and continued investments in the platform, general and administrative costs were flat year-over-year, allowing us to improve operating leverage and expand FRE margins.

We expect this trend to continue over the course of the year, with growth in revenue exceeding the growth in compensation and G&A expenses. Distributable earnings were $2.2 million in the first quarter, with the progress we were making at the corporate level de-levering on display with continued reduction of interest expense. The LTM figures on the right, I think, give you a good sense of the operating leverage that is starting to materialize in our operating margin, which has expanded from under 20% to just over 30% on an LTM basis. Turning to Page 17, we reported a reversal of $2.7 million in carried interest income for the first quarter. The company accrues carried interest based on quarterly changes in the fair value of our fund investments.

The reversal in the first quarter stemmed mainly from net increases in fair value during the quarter, which came in below the preferred return hurdle on certain funds, resulting in a reduction on a mark-to-market basis at a small amount of accrued carried interest. Notably, carried interest compensation expense tracks these changes, and there was a commensurate reversal of a small amount of unrealized carried interest compensation. Principal investment income, which is accrued and/or realized income primarily earned on the company’s GP investments in our various funds, was $2.8 million in the quarter, with $2.3 million in realized distributions from our funds. Turning to Page 18, you’ll see that the company continues to maintain ample liquidity and has continued to de-lever its balance sheet, including the completion of the full exchange and redemption of its $78 million of 2025 exchangeable notes in April, reducing corporate level debt that will result in approximately $4.5 million of annual interest savings.

With that, I’ll wrap up the financial results section of our presentation. It’s shorter and I hope easier to follow given our simplified business profile. Before handing it over to Marc, I want to express my gratitude to everyone on the finance team and across the firm, especially Jacky Wu for welcoming me to DigitalBridge and helping my transition over the last few months. I’m really excited to be here and look forward to connecting with our shareholders at Investor Day and over the course of the rest of the year. With that, I’ll turn it back to Marc for his final remarks.

Marc Ganzi: Thank you, Tom. And again, thank you to Jacky Wu and our entire finance team for making your transition so seamless. Well, look, we’re going to wrap it up. I want to thank everyone for their time and attention today. I think we’ve continued to lay out the foundations for how we’re building we believe one of the most powerful alternative asset managers tied to some of the most exciting secular themes on the planet today. We’re looking forward to welcoming all of you to our Investor Day. And with that, I’m going to turn it over to the operator for Q&A. Thank you.

Operator: [Operator Instructions] Our first question comes from Michael Elias of Cowen & Company. Please go ahead.

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Q&A Session

Michael Elias: Great, thanks for taking the questions. Marc, I just want to double click on your comments related to [power, which] (ph) — I appreciate the framework you laid out. One of the things that you talked about is that data centers in part need to move to where the power is. To that point, I’m seeing a lot of activity in the Midwest of the United States. Curious how you’re thinking about or how your view of markets has evolved, particularly, are you looking at places where historically there haven’t been data center opportunities? That’s my first question. And then second question as part of that is, as I think of the locations where there is power, but there aren’t data centers currently, one of the things that I think is missing is network.

You’ve talked about convergence in the past. What I’m curious about is how you think about the interplay between a data center platform like Vantage and Switch, and Zayo, a fiber company, in terms of delivering a holistic solution to the hyperscaler as we look to bring data centers to new markets where there is power? I know that’s a lot, but I hope that makes sense.

Marc Ganzi: No, you always make sense. And I think you’re skating to where the puck is going, not to where the puck is. I want to sort of break your question down into two pieces, Michael. One is just to talk about the direction of travel on power. And then the second, I do want to talk about connectivity because you’ve nailed it, right? Connectivity is really critical. The capillaries that connect, obviously, interconnection to data centers, and then how this correlates to AI and where are those big language-based models being built and ultimately when we move from you know from training into inference, those locations become more latency sensitive, so we can we can explore that for a second. And I’ll be mindful that there’s other people in the queue that have questions.

This is a topic you and I could talk a lot about. Remember, data centers have sort of, there’s kind of two screens to this. The first is, do our customers trust us to build their data centers and to continue to lease capacity from us? And what kind of workloads are they leasing from us? Coming out of this quarter, we had contributions from all six of our major data center platforms globally. So we spent a lot of time this last week aggregating that data and understanding what our customers are doing. And so what’s really interesting to me is that there’s such segmentation now between cloud and AI in those workloads and ultimately workloads that are latency sensitive and workloads that actually are very location sensitive from an AZ perspective.

And so private cloud, public cloud, edge workloads, enterprise workloads, all of those workloads, Michael, are evolving in real time. And data centers are evolving too. And so I think that some of these locations that are less latency sensitive are some of these locations that can be 200, 400, 800 megawatts. And those are those training models in AI. And provided you have good fiber connectivity, those locations can be a little less, shall we say, latency sensitive. Then there are, as you move in a Generative AI and you get into active workloads and active applications, it starts to follow the same model that the cloud followed, which is, you and I both know we’re in the 11th to 12th year of the cloud. And so we’re seeing a lot of those locations in those AZs are now really important in places like Goodyear, Arizona, in Atlanta, Georgia, in Columbus, Ohio.

And certainly like Reno, Nevada is an alternative to Santa Clara. And so there’s this whole next generation of cloud workloads that are showing up big in its scale, but they’re not traditionally in Virginia, they’re not traditionally in Santa Clara. And you see that the customers are navigating to different places. And then obviously you see what’s happening at DataBank on the edge side. DataBank had a fantastic quarter, one of the best quarters in history, and that company continues to deliver what we call hyper-edge workloads, that half megawatt to 10 megawatt workloads, where the cloud is obviously moving to secondary and tertiary markets. We see AI following a similar footprint, but the challenge against how you build AI is very much correlated to where you can get power.

And then of course, there’s the self-perform where our customers are going to perform their own work, and ultimately the work that we’re going to perform. This is a very complex matrix, because it’s a decision tree at the end of the day, Michael, the way I think about it. And the first decision is, are customers going to trust us to build the workload, are they going to self-perform? Check. Second screen is, is this really for their cloud products, or is this for their AI product? And then of course the engineering standards, and ultimately the GPU standards, and the design standards, and the cooling standards change and deviate a little bit. And then ultimately do people really value sort of having a Tier 5 experience where those workloads need to be highly secure and perhaps even in private cloud, aka what Switch is doing.

Switch has had a phenomenal first quarter and the second quarter is even lining up to be better. The good news is, in our world, we don’t have to choose. When we own powerful platforms like Vantage, AtlasEdge, DataBank, Scala in Brazil, which had a great quarter, we’re seeing all of these workloads manifest itself all across the globe. As you saw in our slide, you see photographs of data centers from all around the world. I don’t see that the customer is the constraining factor, Michael. I see that power is really the constraining factor. And that’s going to become more evident to you and to the rest of the investor community over the next two years. It’s not obviously, from my perspective, Michael, it’s not new news. We started talking about this over two years ago at the Berlin Infrastructure Conference when I told the investor world, we’re running out of power in five years.

Well, I was wrong about that. We’re kind of running out of power in the next 18 to 24 months. So we started two years ago working on this power problem. So it’s not new information to us. And as I said on our call today, the 2 point plus gigawatts that we’re building today, shovels in the ground, all of those commitments with our customers have power. Power in place will serve letters. Those aren’t hope data centers. Those are actually data centers that are committed, being constructed, and customers are moving into it. I do look around the corner and I look at that next 5 plus gigawatts of opportunity and we’re going to have to get more creative. And the way we get more creative is one, we try to locate certain of those big AI data centers and locations that maybe are less latency sensitive.

We try to co-locate those opportunities closer to renewable energy and we try to create energy independence or grid independence. And those are the things that we’re thinking about. So the next generation of data centers are perhaps going to be in different locations. Now, how do we create that customer experience? We create those customer experiences with low latency, big, big, big pipes in terms of the dark fiber that we’re bringing to those data centers. And I’m not talking about four pairs, 12 pairs. We’re talking about hundreds of pairs of fiber with redundant routes. And this is where, as you’ve highlighted, Zayo comes into the mix, and what gives us a lot of confidence to sit with some of our key customers and say, look, we’ll deliver you the data center.

We can deliver the fiber, and then the next sort of key is can we deliver the power. Now if I can wrap that all up in one bow, we actually have InfraBridge, which as you know is an infrastructure provider. We actually engage in renewable energy already as a firm. And so our opportunity set is fusing the hard work that we did at InfraBridge, some of the hard work that we’ve done at Zayo, the hard work we’ve done across all of our hyperscale and private cloud data center operators to bring a holistic solution to customers. And now that’s finally manifesting itself. Now, the real key is at the asset manager level, we got to make that manifest itself in the capital we form, the fees that we generate and the carried interest that comes commiserate with creating these great ideas and bringing it all together.

I am very happy with what’s going on at Zayo. We’ve seen a significant uptick in the bookings there, particularly with the hyperscalers and some of the web scale routes. There’s great opportunity there, and they’re going to need us. And it’s not just for Zayo, it’s the whole fiber industry in general is going to need more new routes, low latency routes, and of course heavy strand count. And that’s the way you bridge the gap in terms of creating low latency environments for AI workloads. So it’s a combination of a lot of things. This is — this situation Michael, and I’m sorry this is a long-winded answer but you asked a complicated question and we’re going to dig into this in our Investor Day. It’s more complicated to build a data center today than it was two, three years ago and it’s going to get increasingly more complicated.

And I’ve been saying that for the last couple of years, but now finally everyone’s paying attention. And it won’t get easier. I can share with you that it’ll get harder. But I like it when things get harder. When it was harder to build towers 20 years ago, we were up for that challenge. When it was harder to build small cells 15 years ago, we were up for that challenge. When it was harder to build small cells, you know, 15 years ago we were up for that challenge. So we got a management team that understands how to work through challenges and the key was identifying those challenges over two years ago, which we did. So stay tuned and I think we’ve got a great story on how we solve problems for our customers.

Michael Elias: Awesome, really appreciate that color. We can talk about this forever, but I’ll pass it on to the next person.

Marc Ganzi: Thank you, Michael, I appreciate it as well.

Operator: Our next question comes from Jade Rahmani of KBW. Please go ahead.

Jade Rahmani: Thank you very much. I appreciate the comment around the carried interest reversal. Do you have any estimate of what distributable earnings would have been excluding that item?

Tom Mayrhofer: The carrier reversal is a mark to market, so that doesn’t impact distributed earnings.

Jade Rahmani: Okay. How do you feel about the outlook to achieve full year FEEUM in your prior outlook of $36 billion to $38 billion from the $33 billion at year-end ‘23?

Marc Ganzi: Yeah, I think Tom and I remain completely convicted in the numbers. We have no changes to our guidance at all. We’re seeing exactly, we feel like we are where we want to be through the first quarter. And again, want to reiterate, no change to our guidance that Tom and I reiterated in the previous quarterly call. Thanks, Jade.

Jade Rahmani: Thank you.

Operator: Our next question comes from Ric Prentiss of Raymond James. Please go ahead.

Ric Prentiss: Thanks. Good afternoon, everybody. A couple of questions. I want to follow along with Jay’s question there, too. So obviously the outlook confirmed on the capital formation, $36 billion to $38 billion for ending TUM. Help us understand the pacing. Obviously, it’s still pretty tough out there. And what’s kind of like the gross funding versus net funding and the pacing for those returns as well? First. I have a follow-up question.

Tom Mayrhofer: So let me take the first one on capital information. Hi, Ric, how are you? So look, it certainly — one could extrapolate it’s tough out there, but honestly, Q1 in our line of work is always tough, Ric. LPs are defining their allocation strategy for the year. Not a lot of allocations are historically made in the first quarter. This is not germane to DigitalBridge. You look across the alternative, the alt space, and you’ll see that fundraising historically is pretty tepid in the first quarter but we outperformed last year we outperformed 2022 and our outlook actually remains optimistic. We are in middle of closing multiple clients across multiple strategies. I think that was something I was trying to infer in our call this quarter is that the multi-strat approach to what we’re doing is working, Ric, which is that people understand our proposition, not just in our flagship fund, not only in co-investments, but they understand what we’re doing in core, in credit, in liquid, in continuation vehicles.