Q4 2021 DigitalBridge Group Inc Earnings Call

Greetings and welcome to the Digital Bridge Group, Inc, fourth quarter and full year 2021 earnings call.

At this time all participants are in a listen only mode.

Question and answer session will follow the formal presentation.

Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

And please note that this conference is being recorded.

I'll now turn the conference over to sovereign White. Thank you you may begin.

Good morning, everyone and welcome to the digital bridge's fourth quarter and year end 2021 earnings conference call.

On the call today from the company as Marc Ganzi, our president and CEO and Jackie Who's our CFO I'll quickly cover the Safe Harbor and then we can get started some of the statements that we make today regarding our business operations and financial performance, including the effect of the COVID-19 pandemic on those areas.

Maybe 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. Today is as of February 24, 2022, 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 <unk>.

Risk factors discussed in our Form 10-K to be filed with the SEC for the year ending December 31 2021.

Great. So we're going to cover our standard annual agenda, Marc will start with our 2021 year in review Jacky will cover our quarterly and annual financial results as well as update our forward guidance and then Mark will look forward to the year ahead in 2022 before wrapping up with some key takeaways followed by Q&A.

We finished the quarter with some of our strongest results to date and we're incredibly excited about what lies ahead in 2022, so let's get started with that I'll turn the call over to Marc Ganzi, our president and CEO Mark.

Thanks Devin.

I'd like to start by thanking everyone for their continued interest and attention today, especially new investors that are just learning about digirad for the first time.

I'll get into more detail later.

Peter.

Average duration of your customer leases.

And then I think in U S towers, it's holding in I think in Europe .

<unk> seen towers trade off their peaks.

The days of tower deals getting done there at 28 to 29 times EBITDA I think are probably.

Maybe behind us, but I still see a lot of value there.

The opportunities are going to still traded well into the mid 20, So maybe a 10% haircuts evaluations there datacenters in Europe have traded up not down that's interesting to me. There was one transaction a smaller transaction that got done and it looks like it's going to get done at somewhere around a $3 nine to $4 one cap.

Right. So cap rates are really tight.

For Hyperscale data centers in Europe .

Fiber assets really nothing is really traded.

In the fiber to the home space a lot of these jv's are still getting done in the high Twenty's, which I don't fully understand the math behind that but we've seen no retreat in fiber to the home and then.

That's really about it I think Europe has been a bit of a checkered box you got to really understand your swim lane and dig in I think Asia is something that we see represents perhaps a little more value.

We've seen tower deals their trade at a had a pronounced discount to European and U S peers.

Multiples have moved from 12% to 16 times.

Up to 15 to 20 times, So Asia tower multiples are on the move up Jonathan.

Datacenter multiples are on the way up as well we looked at the Mubadala in Princeton.

Princeton datacenter deal in Asia, and that was that traded really tight from a from a cap rate perspective, and there really hasnt been a ton of fiber activity. I mean, we did a deal in the fiber space in the fourth quarter that we won't disclose the price, but suffice to say it was certainly cheaper than what we've seen in Europe and the U S. So we're finding good value in Asia and private market multiples.

<unk>.

But what's interesting there Jonathan is actually we see more organic growth in Asia than we do in North America and in Europe . So we continue to be really bullish about Asia and we like the markets. We're operating in and we like the fact that our hyperscale customers are taking us there and they want to grow with us there.

And Jonathan on the longer term plan look you are right. If you look at our boost and track record and frankly, our long term track record with Mark and Dan.

Those numbers do look conservative, but we try to be pragmatic with our longer term guidance. It's certainly not sandbag. If we hit these numbers. It has a great day and frankly working for Mark for two years, we're always going to try to do better than that and thats, our commitment to shareholders and trying to maximize our value and and we will try to have an amazing day bye bye bye.

Beating themselves.

That's our goal and Thats, our commitment as a management team.

We'd like to be.

Yes.

We like to do.

I think we've demonstrated a pretty good track around that.

<unk>.

I am very excited about the things we're doing I think we're doing things that are challenging we're doing things that are unique we're doing things that other management teams are not doing and that's exactly what gets I think Jackie on motivate at the end of the day is waking up and doing things. The other management teams just aren't capable of doing.

Lastly, what drove the sequential increase in share count that was larger than normal anything to call out.

And the only thing is really our convertible notes that was already in the money. So.

Some of that was tendered.

With it.

Thanks, so much.

Thanks, Jonathan see soon.

<unk>.

Our next question comes from the line of Eric <unk> with Wells Fargo. You May proceed with your question.

Hi, good morning, everyone. Thanks for taking the question. So Mark just wondering Youre operating business is just U S based assets today given.

Any thoughts on maybe adding some balance sheet exposure internationally, primarily developed economies like those in Europe towers, or datacenters or fiber.

Did go that route maybe how would you hedge out some of the FX risk.

In such a strategy and then.

The second question Mark was around just the general data center demand environment.

Believe you said vantage would do 200 megawatts last year we.

We heard about some really large deals getting executed in Q4, so maybe what's your outlook there.

This year from a data center perspective, both for Hyperscale and enterprise and.

Do you feel pretty comfortable that as you mentioned before you can kind of keep returns in line despite higher supply chain costs.

Thanks, Eric you must be dosing my E mails.

Exchanging emails that cereal last night and I asked him if he could do 400 megawatts of leasing and he sent me an emoji crying.

Seriously I think.

Hyperscale side.

We hope we hopefully will do much of the same of what we did last year. We just barely came in under 200 megawatts of total leasing advantaged globally I think it was $1 95 to 196.

We are forecasting a slight increase on that.

10% up in terms of total megawatts leased and the pipeline is robust.

Our pipeline is over 800 megawatts of opportunity between the U S Asia and Europe .

There are some big chunky deals out there you are correct and we don't see any signs of abatement and that's why we're really excited about adding more vantage campuses to our balance sheet.

Your second comment is interesting.

We've actually we've built a really sizable business in Europe .

Nine campuses now for vantage Europe .

They are now reaching a maturation point, where it does make sense. If the values are correct from a fairness perspective that we can begin adding some some European hyperscale campuses for our balance sheet. So that's something Jackie and I started working on last year with cereal and the boards of the two different boards, the <unk> board and the vantage board and we like what we see there.

And we do want to add some European exposure.

And we want to be exposed to digital infrastructure in Europe that has CPI index leases, we think thats the best way to help fight against inflation and certainly help offset some of those FX exposures, particularly where we are euro denominated against the dollar.

To that end, we've looked at a lot of tower assets, Jackie I have and we continue to look at some tower assets in the European theater to add to the balance sheet. It's something that we think makes a lot of sense, but once again, making sure we have the appropriate duration of contract and the appropriate CPI increases.

I'm not trying to telegraph, where we're going but I would tell you we.

As this management team has always told you Eric we do the work first.

So last year, we did the work we did a lot of work around.

Bringing in European assets to our balance sheet.

Uncomfortable with that underwriting and Theres, a little more work to do but.

We're getting.

A comfortable and B.

Closer to being able to take a few shots on goal.

And Eric the only thing I would add we do have a hedging program. We are I would say that we are focused at around more.

There is cash to be distributed back to the U S and will focus our efforts on that and time it appropriately.

Not going to be we try not to get too cheap or intelligence.

With hedging other than just safeguarding any cash that gets distributed back to you and make no mistake any any business that we have in Europe or in other countries are first and foremost.

Deal is that the best return is going to be reinvested back into the business, so whether it's data centers or whether its power.

Power growth in Newbuild.

First and foremost would do that and reinvest it back into the business, which will not trigger an FX issue yes.

And just want one follow up.

Jackie maybe if you could tell me about the digital operating guide kind of what is implied in there that's more organic versus some of the announced tuck ins and transactions and I think the acquisition of a small interest from a minor minority shareholder if you could maybe kind of break that down in terms of what the outlook is for 2022.

Yes, sure. So in terms of bulk data bank and vantage, we continue to see core organic growth rates in the low to mid single digits. So thats purely on the organic side, obviously, it's anchored by escalation that we've got contractual in there.

At the lease level and then the rest is already acquisitions that were already done this year, that's going to be run rate. It out for next year. So all what we've gotten our guidance is really what we've got contracted today.

The acquisition of CA, 22, which obviously we have.

Run rate benefit year over year on that that was that tuck in acquisition of vantage and then we've done some additional augmentation that data bank, specifically around Salt Lake city as well as on.

Minneapolis St. Paul Yeah, that's right I think Eric we brought on at data Bank, we have new inventory coming in.

At Lake <unk> is getting built MSP three is being finished.

We will start indeed, three Atlanta, three Las Vegas, one is about to be finished and Chicago five so.

Really great tethered expansion happening a data bank and that's really going to fuel the organic growth side. The leasing pipeline of data bank has never been bigger.

Coming into the first quarter of the year.

Over our sales pipeline over $27 million in potential.

Potential new organic bookings and this comes off the heels of core revenue growth at the data bank portfolio of about seven 8% and then EBIT growth of about six 8% that's before Z Colo and now that <unk> is fully integrated we will be reporting full full numbers for the entire company in next year. So the setup on database.

<unk> is really strong organic bookings and most importantly, as we bring on new inventory inside of core markets.

Fuel's leasing activity for 2022, we're pretty excited about that.

Alright, Thank you guys.

Thanks, Eric.

Our next question comes from the line of Richard Choe with Jpmorgan. You May proceed with your question.

Hi, I just wanted to follow up a little bit on the environment for digital investment management.

The growth numbers are strong for 'twenty, two 'twenty, three 'twenty, five, but with higher rates and a little pullback in liquidity what gives you that confidence.

The amount of funds going into the business will continue given the volatility that we're seeing.

Thank you.

Yes, Thanks, it's a very thoughtful question Richard.

Look I've spent the last 60 days traveling around talking.

Talking to LP as part of our theme of getting back out there and connecting with our Lps.

A couple of themes have popped up to the surface and these discussions one.

Our investors, which is over 200 private investors globally pension funds endowments insurance companies.

They are looking to reallocate their portfolio.

Irrespective of inflation or interest rates rising these.

These professional organizations Richard manage billions of dollars of capital their job is to be an asset allocator.

And every.

Endowment or pension or insurance company, we see they all say the same thing we're under allocated to digital infrastructure.

We're overweight private equity we're overweight real estate, we're overweight liquid securities, but we're always underway digital infrastructure.

So when we launch new products like credit and core and we think about turning the page next year and looking at our next fund.

These are the areas, where we see huge opportunity and they see opportunity.

So they come to us and say where should we be allocating capital in 2022.

And we say look in this environment you want to be a defensible, which is our SaaS fund our core fund and be you want to be in credit while you want to be in credit the credit cycle is changing.

And I mentioned, a couple of processes, where.

Sponsors went out Richard to go sell a company they didn't get the result, and they need growth capital.

Originated seven loans all of those seven loans are to digital infrastructure companies that seek growth capital we have.

Already realized two of those loans in excess of 11% and that Tam is growing and we're the only firm in the globe that's focused exclusively on digital credit.

So for what we do once again I can only speak Richard to what we do a digital bridge.

Capital inflows are coming into us and theyre coming in at a record pace because our approach is differentiated and it's very unique.

This may not be the same for other asset management firms that perhaps invest in other asset classes, where investors are potentially over allocated.

But we are in the one swim lane.

For asset managers right now globally that is under allocated.

And this is where we really have been able to differentiate ourselves it's not an accident that we've continued to outpace our forecast.

And we've got great teams great products.

I would just say we were a little bit Lucky right, we're moving into an uncertain environment, where al global Lps really want to risk off or.

SaaS fund exactly achieves that being in core allows them to risk off being in credit allows them to be opportunistic.

So once again, our swim lane is growing.

<unk> is growing our ability to raise capital is growing and so we've made enhancements to our team. We've expanded products. This is why we have come to you with a significant beat and raise in that category, we have high conviction high confidence and exactly what we're doing right now is a great moment for us once again I can't speak to what other people are doing I don't.

Worried about that I worry about what we're doing and I know what we're doing is working with Lps.

Great.

Given the cash on the balance sheet and our liquidity available and then also the funds in the investment management business. It seems like you're in a better position.

With maybe some disruptions going forward versus competitors or deals that you're in can you talk to us a little bit.

You think you are a net winner here or.

You have exposure in terms of overall market risk.

Yes. Thanks, So look we're sitting on a little over 900 million of cash today.

Wellness will close in literally a couple of days.

And then plus <unk> it kind of pulls us to $1 billion $2 1 billion three of liquidity and we have our bright spot our position. So we.

We've been very careful Richard about harvesting cash right now because we do think things have turned.

And we looked at a lot of balance sheet opportunities a lot of balance sheet assets last year I was pretty vocal that they were passes for us.

Worked for other people, we understand why it worked for other people to buy the assets they bought but it didn't work for us.

Didn't work for the return profile that I think investors why they buy <unk> shares is because they know our track record of 20 plus years and what our returns are.

Now we're in a position where we do see.

Airlines fractures and valuations we do see.

Public multiples retreating in some of these different data center businesses or fiber businesses or ground lease businesses.

There's been a pretty contracted pretty sizable contraction and the windows is beginning to open where we see opportunity.

And I think by being once again by being.

Ultimately a good steward of the balance sheet and being prudent in how we deploy that balance sheet last year, we've taken our shops, where we have good ball control and we've taken our shots that are candidly going to be accretive I mean, California 22, the Houston acquisition and data banks all of those are accretive to where where we trade and so I think we're telegraphing to you where we're going.

And 'twenty two and once again this is a management team that has a lot of confidence in what we're doing and we feel very well.

We feel very strongly that we're going to be able to execute our plan this year and on the pricing and terms, we want to do that that's important.

Great. Thank you.

Thanks Richard.

Our next question comes from the line of Dan Day with B. Riley you May proceed with your question.

Yeah. Good morning, guys. Thanks for taking my questions just one for me on the IL side.

Nice to see the raise the guidance and the discussion around the new fund types its really exciting.

Just with all that in mind.

I wanted to ask about the blended.

Management fee, how that is expected to evolve over time, a little shy of 1% in the fourth quarter I'd imagine some of these products might have a lower management fee. So I might have a little bit higher than your kind of flagship private equity fund. So just any commentary around that and longer term, where the FRE margin can go.

65% overtime, and how you're thinking about that thanks.

Thanks, Yes, youre right, so new products coming online credit and SaaS do you have a lower fee.

Fee sort of profile those strategies typically are kind of in the 90 to 100 basis point range and Thats I think what you should expect.

We do have other strategies that are in flight and we anticipate bringing in more capital into our liquid portfolio. We have some co investments we're doing right now that will generate some new <unk>.

And obviously ventures will get launched later in the year that has a higher fee profile.

But by and large youre thinking about it the right way I think the real key here is profitability.

So if you listen carefully in our prepared remarks, we talked about.

Building the right teams to go out and.

Capitalized on these new opportunities. So we spent that G&A last year to put the right teams in place to go out on the field to compete and win so what we do anticipate is while we build out these new strategies, we anticipate EBIT margins moving up overtime, because we've hired the key the key to these new strategy is hiring the senior people.

Guys like Matt Evans, and Peter Hopper, and Alex Leola, and Dean they don't come cheaply and so getting the right product heads around these strategies and then filling out the teams a lot easier, but I feel good about our ability to increase margins.

In the back half of this year and certainly Jackie in 'twenty, three and 'twenty four as we bring on other new strategies and products, we see the EBIT margins improving.

Our iron business greatly I don't know Jack if you have additional power that's right Dan So in our guidance, we've assumed and if you look at our historical IMF rate averaged 95, DSL, we're maintaining that.

Throughout the forecast and the guidance period and as Mark said 90 to 100 bps is where we're seeing these products at so we're maintaining that IMF right and with respect to margins. If you look at our 2020 to guide the conversion rate, excluding our catch up fees.

Mostly incurred in 2021, we're converting EBITDA at a 90 plus percent range. So that's going to drive margins continue to drive margins higher and certainly as the new products.

Come online as Marc discussed that's going on.

Flow straight down to EBITDA.

Awesome I appreciate the commentary there I wanted to.

Ask one other one I think it's a common question I get what I'm, what I'm talking to people.

What's the value of the combination of the investment management side with the digital operating side I guess people that I've talked to have seen the devaluation that some of these independent investment managers have gotten in the public markets have asked me like wouldn't it make more sense for this thing to sort of just trade on a standalone basis or split the two up so I think I know the.

Answer to this but if you could just talk about the platform approach between and the synergies between the digital operating side on the <unk> side.

What you see as the value of combining these two together.

Yeah look I think that the.

Great part about having the digital operating business is as we build assets and we develop assets in the investment management side of the business, where you can be perhaps a little more forgiving and greenfield as those assets mature, we bring them onto balance sheet.

When they're prepared to harvest and it really creates.

A great pipeline of opportunity, where you can bring.

<unk> long duration contracted assets that have fixed escalators or CPI escalators and still have a little bit of growth left where you can bring them on the balance sheet, where theyre truly appreciated by our investor base, none of that happens.

Without the <unk> platform Theres the symbiotic relationship between the two they worked together it is one global investment team by the way.

All the new opportunities come into the Iam business and as we work our way through our investment allocation strategy ultimately at the end of the balance sheet has the opportunity to look at everything if it has gone through that asset allocation strategy. So we feel pretty lucky to have arguably the best farm club in the world right using a baseball analogy.

That we can go out and curate over $7 8 billion of new projects. This year on a global basis that is just something once again that other management teams can't do.

Our global reach our access to capital allows us to harvest those ideas and then ultimately bring them back home to balance sheet, where we get to create those long term predictable earnings that I think investors really appreciate about digital rich.

Great. Thanks, and then last one for me just a quick one on the bright spire stake I think.

They reported I think they said they might be interested in purchasing some of their shares back taking up in quarter holds of your ownership of it just curious how you think about how price sensitive you are in selling that stake could you sort of prioritize the liquidity of one big big chunk there.

Can it get sort of closer to book value.

Great.

Once again this is a boring answer pragmatic is the right word I think Jack and I have taken.

What Michael is doing bright spot is performing exceptionally well.

We think they've got a lot of runway ahead of them.

When the Windows exist, where we think we're getting fair value.

Entertain selling the stake right now Jackie I don't need the cash today, so we're enjoying as dividend.

It helps fuel some of the things that we're doing so once again, we're going to be active listeners and when we when we do need the liquidity. The good thing is we've got a great partner, Michael who is performing really well for us and if we can get fair value for our stake, which we continue to have a sizable stake.

Then we will look to continue to in an orderly fashion unwind our stake in bright spot, but make no mistake, we're really happy with Michael and the team and.

Andy and everybody there, they're doing a great job and we want them to continue to keep doing what they're doing.

Austin will congrats again on the guidance raise and best of luck moving forward.

Thank you. Thank you really appreciate the support.

Our final question comes from Jade Rahmani with <unk> you May proceed with your question.

Thank you very much so a follow up on investment management.

CBRE, which is a very large commercial real estate services firm mentioned on their call that infrastructure is a priority now they didn't parse it between broader infrastructure and digital infrastructure, but wondering if you see them are firms like them as a potential partner.

That could generate revenue.

Revenue generating services, given digital bridge's overall expertise and operational knowhow.

And these services would extend beyond investment management fees and balance sheet investment so a way to broaden.

The digital bitch platform and provide yet further value.

Thanks, Jade Great question, and Bob <unk> is a good friend and a partner of ours.

Jackie and are sitting here smiling, because they're great such a great firm and and we have a lot of connectivity them first of all.

We're their partner and digital infrastructure investing so all of the <unk>.

Investment work that CBRE does <unk>, which is their investment manager out of Toronto.

We brought them into the digital infrastructure space and.

And I just can only say they've been a fantastic partner in a bunch of deals with us. So we will continue to work very closely with CBRE.

We find that there are value add partner and we've really enjoyed the partnership so we will continue to.

Bring new ideas to them and we will continue to grow our assets under management with them.

Second Jackie we also have a partnership with CB you want to talk about that in terms of what youre doing in the back office side, Yes, sure CBRE is our partner on a lot of the fund accounting fund reporting across the board our funds. So as we continue to grow and scale CBRE has been growing and scaling with on the vendor side. So.

We're very pleased with the partnership there and as Mark said there.

A good friend and a good stakeholder.

Thanks, very much secondly, and I'm not sure. If it was asked earlier, but how much equity capital are you targeting for deployment from the balance sheet into digital operating in 2022.

Okay.

We are not guiding that at this point, which is why our guidance for 2022 excludes on new M&A platforms.

And as Mark said, we will continue to do what makes sense for our shareholders at the prices right the opportunities right. When we get the best returns that.

That yield good cash flow then we're good but otherwise we're not guiding that at this point.

Okay, but the right side of the balance sheet do you believe is.

Where you want it to be.

You mean in terms of in total indebtedness and where we where we have net leverage right now, yes, yes, do prioritize new investments from the balance sheet over any.

Debt repayment or things of that nature.

Thank you. That's helpful. Go ahead, Jack Yes, we will always compare the two obviously, we love digital infrastructure and to the degree we find the right price and we will prioritize that but if not then we'll be opportunistic with continuing to offer.

Okay.

Look towards our target capital structure, and we pay some higher priced cost of debt.

Thank you very much.

Thanks Jade.

This time, we have reached the end of the question and answer session I will now turn the call back over to Mark for any closing remarks.

Yes. Thank you well first of all thanks to the analyst community. We appreciate your thoughtful questions and your continued interest in coverage in the company.

We're very very excited and I think thats, an overused word for todays call, but theres a lot going on here.

In conclusion, I want to just say a couple of closing comments.

We have worked really hard to get to this place and we appreciate the trust that you've given Jackie myself in seven and we're looking forward to launching here in 'twenty, two and moving forward in this pure digital model and the simplicity of what we built is I think what should really make investors excited.

Two businesses that are scaling to businesses that are performing and most importantly, our ability to form capital and execute ideas quickly. This.

This is really the hallmark of the investment thesis of digital bridge and why we're excited to accelerate and to build.

So we appreciate the thoughtfulness, it's a dialogue we welcome all of you down here to South Florida.

This time of the year to come visit us, we encourage investors and analysts alike.

Spend more time with us there's a lot going on here, we're happy to be transparent, but we're excited about the simplicity and the go forward growth strategy of what we're doing here a digit British thanks, everyone for your support have a great day.

This does conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation.

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