Q2 2023 DigitalBridge Group Inc Earnings Call
Greetings and welcome to the Digital Bridge Group, Inc. Second quarter 2023 earnings call.
Good morning, everyone and welcome to the digital bridge in second quarter 2023 earnings Conference call speaking on the call today from the company as Marc Ganzi, Our C E O and Jackie will 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.
Maybe considered forward looking and such statements involve a number of risks and uncertainties that could cause actual results to differ materially all.
All information discussed on the call is as of today August four 2023, 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 S. E C for the year ending December 31, 2022, and four a four.
10-Q, but it'll be filed with the F. T C for the quarter ending June 32023.
Great, let's start with Mark providing an update on our key objectives for 2023, Jackie will outline our financial results and turn it back over to Mark to discuss some of the early impacts we're seeing from generative AI on our ecosystem.
With that I'll turn the call over to Marc Ganzi, our CEO Mark.
Thanks Evan.
I want to start by recognizing this is the third anniversary of my first quarterly call as CEO of digital bridge.
When I took the helm over in the summer of 2020, we were facing the depths of Covid, we had a very different business profile.
Today, we're on the five yard line, but unprecedented 80 plus billion dollar rotation and transformation.
We've been very focused on three key priorities that I outlined at the beginning of the year.
Today, all of that hard work has positioned us to meet the persistence and growing demand for digital infrastructure investment.
Particularly as we see the early signs of new demand.
Driven by Jenny.
I'll talk more about that in section three today were really excited about what we're seeing and how it impacts digital bridge and more importantly, how it impacts our portfolio companies and our investments.
So, let's stay focused and touch on those top three priorities first starting with fund raising.
In the second quarter, we generated strong year over year growth in our investment management platform with.
With fee income up 47% and segment level FRE up 35%.
Higher fee M, which was driven from core credit and co investment along with a full quarter of interim bridge activated that growth.
Most importantly, new capital formation.
$2 7 billion in new capital was committed over the past three months with half of that coming to accrue to our latest flagship digital rich partner series.
And the balance between co investment and incremental core in credit commitments I'm.
I'm pleased to report we remain on track to achieve our fundraising objectives for 2023.
On simplification.
Big News here is we expect to receive sufficient panel commitments to our data bank recap to deconsolidation that business from our financial statements later this quarter.
Shortly thereafter by financial close this.
This is a tremendous milestone on simplification and it will deliver additional capital back to the balance sheet.
On the final priority portfolio performance, we demonstrated sustained growth across all four key verticals.
I also want to highlight development Capex here.
Our portfolio of companies' ability to deliver new capacity to our tech and telco customers, whether it's on towers data centers or cross fiber routes really sets digital bridge apart.
Year to date, we've successfully deployed over $4 billion to meet the next leg of demand.
Attractive build yields supported by long term customer contracts with a high concentration on investment grade counterparty risk.
So, let's detail fund raising and our simplification progress before we get into the financials.
Slide please.
New capital formation.
As I highlighted earlier in the year. This would be the seminal keep your eye for 2023 and I'm pleased to report we raised $2 7 billion since last quarter.
This brings us to $3 4 billion year to date.
About half of that 1.2 billion came from initial commitments to our flagship did your bridge partner series, which will start generating fee income once we finalize and initial close.
We've also completed 900 million dollar of co investment syndications, most notably switch, which is one of the best position data center platforms for next generation compute.
Last quarter I highlighted the structural growth, we expected to see and co investment as our platforms continues to grow and have more of that would flow into P. M. This year.
That manifests itself inside this quarter.
You should expect as demand for digital infrastructure increases with the advent of Gen AI.
So does our need for co investment capital at our digital portfolio of companies globally.
Which in turn helps us scale and drive see them FRE.
The balance of fundraising came from core credit in our liquid strategies, which continued to add AUM at a steady pace I'm very pleased with the progress on all three of those strategies. They continue to be strong contributors to where we're going.
So this puts us right on track to hit our fundraising targets for this year.
Institutional interest in allocating to digital infrastructure remains strong.
And just as we're seeing early signs of demand driven by Jenny I at our portfolio of companies, we're spending more and more time with our institutional clients, helping them understand the implications of generative AI on the investment needed to satisfy that demand.
Next slide please.
So this slide highlights the solid year over year growth that we've seen in our field and our U N.
We ended last quarter with 29 billion and see them up $10 billion over the prior year, representing a 53% annual growth rate.
Driven by an equal combination of organic capital formation and contribution from the encourage acquisition.
Similarly on the right a U M, which tracks the nap of the athletes that we manage was up to 72 billion last quarter, that's up 51% over the prior year.
So as our platforms continue to scale, we look forward to updating you on our progress here has continued as we continue to grow revenues organically and earnings over the course of the year.
Next slide please.
So deconsolidation this.
This is the number two topic behind fundraising for 2020 three so I'm pleased to report, we received $170 million and commitments to the data bank recap process.
We will close additional commitments, shortly which will provide us with sufficient capital to deconsolidation that business from our financial statements inside this quarter.
We expect that to report final numbers later during Q3.
So once completed this will reduce our pro rata ownership below 10% and generate at least $45 million of incremental proceeds to the desert ridge balance sheet.
Which we can recycle into our capital allocation framework.
I can't underscore how big of a milestone this is for us and the kudos to the capital formation team and everyone at Databank we.
We placed over two plus billion dollars.
Into the permanent capital vehicle that was responsible for recapitalizing databank.
And what's even better is that our leasing pipeline has grown over three X year over year and it has seen the steepest jump across our portfolio on the back of new AI driven interests.
At the end of the day, we're thrilled to maintain a significant stake in that business and we're proud to background will and the team going forward and at the same time deconsolidation that stake and continue to press forward with our main corporate objectives.
We were we really feel excited about this so at the end of the day one down one to go.
Vantage S. D. C is up next and we're pleased with the progress we're seeing there <unk>.
Consequently, we remain committed and confident to finally finalizing the deconsolidation of vantage S. D C.
Before the end of this year, so really good progress on both of those two initiatives JD Bank will get done in this quarter and we'll finish up vantage S. D. C by the end of the year.
Next slide please.
Yeah.
So portfolio performance this.
This is the last of the three legs of the stool for my key initiatives for 2023 I want to highlight the continued growth we're seeing across our four key swim lanes.
Mmm are across the portfolio is up in all of our verticals driven by organic investment led growth.
First data centers up 22% year over year.
Towers also driving substantial growth up 21% year over year as carriers proliferate their five G networks around the world.
Fiber has seen a dramatic increase up 15% and small cells quite didn't deliver the double digit growth, we'd like but nonetheless, we are seeing sustained growth in small cells, and we believe densification and five G networks will drive those numbers higher in the back half of this year and certainly into 'twenty four and 'twenty five.
I talked last quarter about supporting our portfolio companies as they serve the world's leading tech and telcos with development Capex.
That's how this investment pays off.
<unk> itself in growth and the value of our portfolio as you see above.
So this year year to date, we've deployed $4 billion supporting the growth of our portfolio companies in a challenging macro environment I.
I believe this enforces the consistent need for new digital infrastructure by our customers. Despite some of those headwinds.
Even more importantly, we're deploying this capital at very attractive development yields that exceed last year's returns and will drive performance into 'twenty 'twenty four and beyond.
Demand for compute and connectivity continues to grow steadily and our ability to deliver for customers continues to expand along with our portfolio.
So with that I'd like to turn it over to Jacky to cover our financials Jackie.
Thank you Mark and good morning, everyone.
As a reminder, in addition to the release of our second quarter earnings We filed a supplemental financial report this morning, which is available within the shareholder section of our website.
On page 14, you can see our second quarter highlight kept trying to positively with key performance metrics all up significantly year over year.
Highlighted by new capital raised which had a strong quarter and we expect additional momentum for the rest of the year.
Turning to page 15, total company distributable earnings was $10 million or six cents per share benefiting from the growth in our asset light investment management platform and continued progress simplifying our corporate structure.
It's under management increased to $72 billion in the second quarter, which grew by 51% from the same period last year driven by strong fundraising continued deployment and informatics platform acquisition earlier this year.
The earning money under management increased to $29 billion at 53% increase from the same period last year.
We have a robust fundraising pipeline with momentum building and multiple investment products and we anticipate a very strong second half of the year for capital formation similar to prior years, which are seasonally stronger in the second half of the year.
Moving to page 16, the company saw strong year over year growth driven by the expansion of our investment management business and continued simplification of our corporate structure.
For the second quarter consolidated revenues were $425 million, which represents a 2% increase from the same period last year.
As previously noted our reported revenues now include contributions from carried interest and principal investment income, which aligns more closely with our peers and the public alternative investment management space.
Total company adjusted EBITDA was $43 million, which grew by almost 40% from the same period last year, primarily as a result of the redemption of walkers minority ownership in the company. The investment management platform in May of 2022, and following the acquisition of Infra branch in February of this year.
Moving to page 17, the company continues to grow like investment management earnings from additional fee, earning equity under management generated by new digital investment strategies and the acquisition of Infra branch.
Net income excluding incentive fees increased to $66 million and beat related earnings increased to $34 million, representing 47% and 35% increases from the same period last year respectively.
Investment management segment distributable earnings increased by 71% to $24 million from the same period last year.
As I previously mentioned, we expect our momentum to continue in our investment management business as we execute on our strong fundraising pipeline.
Turning to page 18, beginning this quarter. We have included new disclosures design helps simplify the analysis of the company's carry interest income, including realized versus unrealized carried interest allocations and associated expenses.
For the second quarter unrealized carried interest income was $79 million.
This is due to the fair value of our managed funds increasing at a rate that exceeds the preferred return hurdles and our investment vehicles, which generates carry interest to digital bridge as the manager.
We have also included additional disclosure surrounding other investment management expenses.
Other investment management expenses for the quarter were $9 million compared to over $6 million in the same period last year, mainly due to placement fees from new fundraising.
As a reminder, placement be expenses are recognized upfront.
<unk> of new capital raised which in some cases may not yet earn fee revenues.
Moving to page 19, the company share of digital operating revenues and earnings declined due to lower ownership. Following the previously announced recapitalization of our data bank investment, which reduced the company's ownership from 22% to 11%.
We continue to stay on target to deconsolidation, the operating segment from our financial statements in the second half of this year.
Turning to page 20, we achieved another quarter of strong growth in our high margin investment management business.
Since the second quarter of 2022, our annualized fee revenues increased from $148 million to $266 million and the related earnings increased from $83 million to $138 million.
Looking at the right side of the page our run rate be revenues were $275 million. We are on track to meet or exceed our previously provided the revenue and FRE guidance ranges.
As we continue to scale and fundraise, we expect the flow through of the company's FRE to this earnings increase.
Turning to page 21, we completed another milestone in our progress to simplify the company's capital structure in April this year by fully repaid $200 million of the company convertible notes comp.
Coupled with the deconsolidation of the operating segment expected to be completed this year, we will have almost reached our target corporate debt.
In addition to our debt reduction our balance sheet continues to maintain strong liquidity levels for accretive uses with over $500 million liquidity, including a full $300 million available from our securitization revolver.
In summary, Mark and I are very pleased with the progress we've made during the first half of this year.
Solidifying the Companys operating position as the partner of choice for investors in the digital infrastructure space.
Digital bridge's three statements financials continue to improve highlighted by our positive distributable earnings this quarter and the company remains committed to scaling our asset light investment management platform led by our powerful fundraising machine to generate long term shareholder success, we look forward to building on this growth.
With our strong near term capital raise pipeline and deconsolidation operating segment in the second half this year and with that I will turn it back to Mark.
Thanks Jackie.
This quarter in executing the digital play book I want to cover generative AI and some of the implications for digital infrastructure and ultimately how it impacts digital bridge.
This is the number one subject with the public and private investors today and it's one of the most active areas of engagement at the portfolio level with our customers, particularly in the data center vertical.
On the slides year, we've incorporated a number of examples of contracting traditional AI use cases, with the new kind of capabilities that generative AI unlocks.
So for media by example, while traditional AI Optimizes your Netflix recommendations.
With generative AI, we're seeing the actual production of short films from Tech stops.
These kind of breakthroughs will only accelerate and get better.
So lots of new exciting new capabilities, but.
How does this really ultimately translate for digital bridge and distribute shareholders.
Well, what we're seeing today is that to unlock those capabilities every enterprise software platform is being re architected to incorporate generative AI.
And that new layer of creativity translates into a lot more compute I'll walk you through the arithmetic in a second but it's pretty compelling.
Just like the time and energy it takes the human it turned and observation into a creative new idea.
<unk> AI doesn't burn calories, it burns kw and that's really important as you think about digital infrastructure generative AI is compute hungry.
So let's go for it next slide please.
Just to give you a sense of the speed adaptation around generative AI many of you've heard or seen this chart, but what it does is it gives you incredible context for the opportunity set.
Chat G. T. G. P. T opening is large language model or L. O M <unk>.
Had the fastest adaptation on record any consumer technology, hitting 100 million active users in two months.
That happened earlier this year.
To contextualize that that was four times faster than Tictoc.
It was 15 times faster than Instagram getting to 100 million users and Uber took over five and a half years to hit 100 million users.
These are really significant global platforms and chat G. P T blew them away.
So we're seeing rapid adaptation.
But what about scale, how big could this be.
It's certainly the number one question on investors' minds as they try to frame investment opportunities and while it's way too early to tell what I've been trying to do is contextualize that.
Relative to something we do we do know today and.
And that's really comparing it to where public cloud started.
So this is about a $300 billion annual business with large cloud service providers, representing about two thirds of the market.
Based on the feedback, we're getting from our Ceos and their conversations with customers.
Around ramping capacity requirements. We believe this opportunity is going to be at least as big as the public cloud market was over a decade ago.
And again to contextualize that today public cloud, which really has been building and leasing space to the datacenter marketplace over the last 10 years is at about 13 Gigawatts.
Ultimately to drive AI into get networks to where we think they will believe where we believe they can go we believe the opportunity set is close to 38 Gigawatts. So we're just literally in the first inning of a potential nine inning baseball game.
And it's always important to frame the time.
Ultimately the investment period, the amount of power consumed and the size of the wallet share that digital bridge could take.
Next slide please.
So I described G&A I workloads as compute hungry, but I want to highlight briefly why that is.
It's really a combination of two factors on the left you see chip power is exploding.
The new specialized AI chips, Gpus that Nvidia AMD and Intel are producing consumed two to three extra power of prior generations.
So to put that into context, the latest chips literally consume as much power as a toaster.
The second driver is the size of the AD models and this is really hard to get your mind wrapped around but let's give it a shot large lingual models language models like chat G. P T.
Billions of parameters.
With the latest models G P T for reaching almost a trillion.
Ultimately Consequently, the result is data center power consumption is set to rise dramatically and increasingly be the be dominated by these AI workloads.
It's estimated that 80% of the datacenter power.
Well consumed will be consumed by AI over the next 15 years.
So at the end of the day access to power is a key differentiator.
And having available space, where those workloads can be realized is also very important and this is where digital bridge believes that we have a key competitive advantage.
Great portfolio of companies around the world with available space power and cooling that meets the needs of next generation networks.
Next slide please.
So we know that Gen II as power hungry I think we all get that but how does that translate into the datacenter ecosystem.
It starts with AI model training, which will happen principally in large public and private clouds easier.
These are principally of datacenters advantage or switch or Scala some of the great portfolio companies that are building. The next generation of cloud campuses 100, 200 megawatt 400 megawatt campuses.
The key term here is power density.
Which manifests itself in two ways on the left it means higher megawatts per facility.
Instead of drawing 50 megawatts today, it'll be 200 megawatts in the future, but with the same footprint.
This is the power of power density and this is the power of building. The next generation of data centers that fit the customer needs of the future not in the past.
So what well inside as you can see in the middle there's going to be higher power density on a pro rata basis.
With each rack filled with power hungry Gpus, drawing 40, or more kw's compared to traditional data center racks, which draw 10 kw or less this is a fairly substantial shift in the power density that can be delivered.
On a server.
The other key factor, that's relevant or cloud trained has access to low cost power.
Training is not as location are latency sensitive applications and you've got to get your mind wrapped around that are bound ultimately training AI models can happen in one place.
But ultimately the delivery of applications, which is either consumer base machine to machine based or enterprise space.
Has to happen closer to the end user which is a low latency environment. So think about these two workloads in two different capacities.
With cloud training, it's not about uptime and latency.
It's about the ability to access and invest in large concentrated megawatt capacity I E. For example, a switch in Reno, where we've got low cost power.
That is 100% green and we have it in a large amount of capacity and then 11 million square foot footprint.
This is a competitive advantage at the end of the day gear power density and efficiency are becoming increasingly relevant to access to digital infrastructure in size and scale at the lowest cost is a key success factor.
This was one of the reasons why we bought switch next.
Next slide please.
I just described how AI training models happen in the cloud.
Which is where you're seeing a lot of activity today, but once the model is cloud trained it's ready to be utilized by consumers enterprises and machines a process called AI inference.
Has AI models are deployed and AI powered applications proliferate over the next few years in France, and the growing relevance of the entire network will become clear.
<unk> is edge delivered.
This is an important concept for all investors to get their minds wrapped around it.
So the actual applications, we use our phones.
We use our laptops and speed and latency matter.
It's not efficient to send data back and forth to Ashburn, Virginia from Boston Miami.
The trained AI models need to live close to the consumer or.
Or the device or the enterprise.
By the way they can't live on your phone either if you want battery life longer than five minutes. So it is a combination of using ultimately mobile.
Either your laptop or your desktop and ultimate at the end of the day you need a robust network.
And a robust network that includes edge data centers.
Her.
Cell towers, and small cells is going to become increasingly relevant over the next three to five years.
We're seeing it selectively already to be honest with inbound interest from things like Metro fiber capacity that are in the order of magnitude larger from cloud service providers, which is why you've seen some of our fiber revenues pick up in the growth in fiber and enterprise fiber pick up.
That is why the whole network matters.
Not just the data center.
<unk> edge delivered and to do that and to create that orchestration requires all pieces of the digital infrastructure ecosystem.
This is where digital bridge delivers.
Next page.
Let's take a step back and take a look at how we are positioned for this cloud trained edge delivered future as.
As you can see we've been buying and building data center platforms on a global basis. This.
This portfolio represents about 35 to 45, 40% of our O N E.
It operates from the core to the edge of the network and serves well defined workload profiles across an increasingly hybrid compute landscape.
We are well positioned to serve cloud trade demand from public and private cloud operators through vantage gala and switch as I mentioned earlier.
And then going to the next level our portfolio companies Databank Atlas edge names are set to capitalize on edge delivered Gen I applications. The next layer.
Across the board, we've got one of the newest fleets in the industry as we like to say so that means we're investing and we've got the facilities to serve these new workloads, it's really important to understand that our customers want state of the art Datacenters.
That have significant access to low latency.
Large amounts of fiber.
Incredible cooling and most importantly, the power density that we talked about earlier and hopefully on a renewable basis.
It's a high bar, but at the end of the day, what we've been doing for the last two to three years and setting ourselves up to meet these demands and be successful that's why you're seeing the leasing numbers that you're seeing today at our portfolio companies, we are taking outsized wallet.
Next slide please.
So I'd like to finish by talking about some of the tangible evidence we're seeing already around the impact of Gen II and our business.
It's very early innings someone recently described it to me is that we're still in batting practice I'm not sure I totally buy that but there is strong anecdotal evidence. This is set to be a very important demand driver for our ecosystem and for Digirad portfolio companies in the coming years.
So let's start with what we're seeing on the supply side and our conversations with all piece is.
As I referenced earlier. This is the number one topic that we talk to our Lps about today and while they're just getting up to speed on the implications across their investment portfolios. It's clear that they're looking to digit ridge is a key thought leader as it relates to the digital infrastructure piece of AI.
We've held a number of one one meetings and webinars with our key global Lp's covering some of the topics we've talked about today in greater detail.
There was a high level of engagement on this topic and we believe particularly as the demand materializes. This is going to represent another tailwind for us in fundraising over the next years and not just in our flagship product, but in credit and core and another products that we're involved in.
Secondly on the demand side data center lease up is where we're seeing this first TD Cowen just reported over two gigawatts of industry wide leasing over the last 90 days in the United States.
That's within a 10 gigawatt market. So we're talking about really big numbers and our portfolio companies are participating in that two gigawatts and taking outsized market share and a bigger portion of the wallet.
So when you look across the digital ecosystem that pipeline.
Where do you see the first signs that lead to bookings, which translates into revenues as new capacity comes online pipelines are up 84% across our data center portfolio year over year.
So just to contextualize that 2022 was one of the best years, we've ever seen in data center leasing, but we're on pace to eclipse 2022.
We think this year is only accelerating in terms of the demand.
On the right hand side of the page, we've highlighted interesting feedback from our portfolio companies and investors alike.
The two that jump out at me are the first one from one of our datacenter seat yes.
He was describing how it 24 megawatt requirement was the large opportunity just a few years ago and now we're seeing inbounds for tenex that size.
100 to 250 megawatt type deals in a campus setting I mean these are just amazing numbers.
It really difficult to comprehend, but this is whats happening down at the portfolio company level.
The next quote that I'm, particularly proud of is the CEO of digital bridge.
As a response to a digital bridge investor diligence call with one of the new specialized cloud providers that serving AI workloads.
In response to the question of who are the easiest companies to work with unsecured new capacity well. The first response was digital rich companies.
That's why we win it's really that simple building great customer focused companies is what wins in this market.
Next slide please.
So as always let's wrap it up with a review of the CEO checklist.
On fundraising are number one K P. I, we've raised $3 4 billion to date and we're on track to hit our fund raising targets for the year.
I remained fully convicted and hitting those goals.
We've made tangible progress on simplification.
With our data make recap.
And the vantage STC process is up next and we will get this done inside this year as I promised.
Finally at the portfolio company level, we continue to support the growing compute and connectivity needs of the most powerful investment grade logos in the world.
Look whether it's <unk> or any other secular demand drivers underpinning our business.
We're supplying the picks and shovels to the next generation leaders that are building Tomorrow's technology.
We expect G&A to be the next growth driver of demand for digital infrastructure, just like digital P. C. S was 20 years ago, and just like public cloud was 10 years ago.
We're in one of those great generational opportunities and in many respects. It is just the latest opportunity for us to show up for customers. That's really the key is the ability to show up and support our key logos.
Thank you for your support as we continue to execute on the final stage of our transition to fast growing alternative asset manager levered to the powerful tailwind in digital infrastructure.
I look forward to updating you next quarter on our continued progress and with that I'll hand, it over to the operator to begin the Q&A section. Thank you.
Thank you.
Ladies and gentlemen, if you like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate your line is another question for you.
You May press Star two if you would like to remove your question from the queue.
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One moment, please while we poll for questions.
Our first question comes from the line of Michael Elias with Teton Cowen. Please proceed.
Great. Thanks for taking the questions two if I'm.
So given the magnitude of data center demand that we're seeing could you give us a sense for the directionality of Capex for data centers at the portfolio company level as part of that have you seen a shift in the appetite of a L. P. S for exposure to data centers in recent months, particularly given the rise in yields on these data center contract and then the second piece I would ask is mark at connect.
You were talking about the re rating in power consumption associated with the <unk>.
<unk> time, we've seen power arrives as a constraint in multiple markets globally could you talk about your strategy to ensure that you have appropriate power and a long runway for growth as you look to pursue that opportunity.
Yeah.
Thanks, Michael appreciate it.
Look, let's let's start with the first one.
I think that's probably the easier question as you saw in the quarter, we had significant co investment and take on our data center companies, whether it's data bank, whether obviously it was a switch and vantage with respect to our project in Europe .
We've had three co investment.
<unk> is happening at the same time and all of them received commitments. So as you can imagine you know good ideas behind modern data centers that are facing AI and facing those workloads that are and are signing those leases. Those are the ideas that are winning them and I've been saying that for the last three or four quarters that when you have you know clean data centers.
And good locations with clean power does the ideas that L. P as wanna be behind and so it shouldn't surprise you that switch advantage in Databank all receive significant co investment in the quarter and L piece will continue to support those ideas second on power. This obviously, Michael is going to be the real trick and I'm sure. We'll talk about next week in Boulder.
At your conference but.
You know this is interesting because certain jurisdictions are leaning in and or are being proactive and are trying to solve the problem and certain jurisdictions are having significant constraint issues in some jurisdictions are saying, we just don't want data centers, what's like towers in the Ninety's. When we had the big NIMBY syndrome, when we're adopting digital P. C. S. So.
What's the play the play is you've got to be nimble.
Look for us having six great datacenter businesses Atlas edge data Bank aims Scala vantage and switch allows us to think globally, but act locally.
Is a really important concept, having six management teams instead of one going out and solving the problems in each specific jurisdiction working with the governor of working with Mark Warner and datacenter rally with some of our peers trying to solve the conundrum of Dominion are looking at the next upgrades to Silicon Valley powers, our grid and looking what.
Is happening in Texas with the overhaul of their grid as well you know a lot of the big markets for Datacenters, or Virginia, Texas, California.
Certainly Atlanta is becoming a big market Goodyear, Arizona is a big market. We have to work with jurisdictions. This is not new to me. Michael This is what we've been doing for 30 years.
Got to work with the local municipalities you got to work with the utility companies.
Sometimes that means we got to be in front of.
The public and explaining that the public good but also explaining how we're gonna create resources to not be a drain on the grid and also how to put back into those local economies and how to put back into the environment. What we're taking away which is what we're doing at switch and now those applied learnings that switch are matriculating out to vantage in database.
So you got a green solutions, you got act locally.
Can't just be all in on on Herndon, you can't be all in on Loudoun County.
You can't be all in on Silicon Valley, you can't be totally laser focused on Goodyear you've got to have multiple markets I've been saying this for a long time and it's the same thing is happening in Europe . I mean, there are some markets in Europe that are now shut down but we went through you know we went to for example went to Cardiff, We went to Berlin win when Offenbach with was overloaded.
Zurich began to shut down we started moving some of those workloads to Milan.
The ability to be nimble the ability to think ahead and look around corners is the power of the portfolio, having six Ceos, having six companies and being able to deploy capital more efficiently across those platforms is really working for US right. Now I mean, I think you start releasing numbers databank had a blowout quarter.
We're winning on the field because we you know we've been a little ahead of the curve and we've been building inventories steadily for the last two to three years. This wasn't like we woke up this quarter and said Oh My God. We Gotta go deliver two gigawatts of power to our cloud customers. This is something we've been working on for two years. So I think a lot of the hard work that we've put in place in 'twenty two.
One in 'twenty two is now manifesting itself in 'twenty three for a data center businesses and we'll talk about yeah, certainly Michael looking forward to talking about this next week in Boulder with you.
Awesome looking forward to seeing them okay.
Thank you.
Yeah.
The next question comes from the line of <unk> Rahimi from money with K VW. Please proceed.
Hi, This is Jason <unk> on for Jade.
First question.
You speak to the competitive opportunity that digital bridge has as one of the only hurt pure play digital asset managers.
Compared to the digital rights that generally aren't looking to raise third party capital and you know larger.
Asset managers that are more broadly focused on it.
Structure. Thank you.
Yeah, Thanks, Jason and thanks for tuning in.
I think the advantage for us.
And being in an asset light model like we've been talking about for the last two years, that's really starting to play out in the narrative right now.
You know I think you've seen some of the challenges other data center Reits have gone through in terms of funding future Capex. We've continued to keep pace. The fact that we've deployed $4 billion of Capex already this year, which was 75% data center, driven and most of that being public cloud and private cloud driven shows that we can still foreign capital in.
We can deploy capital when we can show up for customers. This asset light model is in our opinion.
Really the most intelligent way to play digital infrastructure, it's nothing against my friends at DLR, and Equinix, who I, both lever of great companies, but the key is deployment of Capex meeting deadlines, showing up for customers doing it in South East Asia doing it in Europe doing it in Sao Paulo, Brazil doing it in the U S. A this is really what's playing out for.
Digital which now has the ability to again go Global Act local scale have capital raised the capital in the quarter. We've deployed it we showed up for customers. The playbook that we laid out two years ago. Jade is now manifesting itself and we think we're in a really really good place.
The other alternative asset managers, they're having success to I wouldn't just limit it just to US I think certainly they have a smaller allocation strategy to digital but you saw this week, Jonathan Gray was very vocal about blackstone's future and deploying $8 billion of of our capital into data centers and that's a big ambition for Blackstone.
We recognize that there's plenty of room and a $300 billion marketplace. That's ultimately a five to six trillion dollar spend in AI and there's going to be room for Blackstone theres going to be room for digital rich theres going to be room for Equinix and DLR and this is a big big moment in time, and we can't do it all we don't expect to do at all and in fact, we'll partner with other people.
We could partner with other public companies, we could partner with other G PS and other alternative asset managers, but right now we're having a lot of success jade partnering with or Mlps.
They like going direct with us they know that we've got the 30 year track record. They also know as I said earlier with Michael We've got the inventory.
And then we've got the right location. So I think that's the model that we laid out for you guys a couple of years ago around asset light.
In this environment, it's working.
And I think the results this quarter proved that out thanks Jade.
Got it thank you.
The next question comes from the line of Dan <unk> with B Riley Securities. Please proceed.
Yeah morning, guys appreciate taking the questions. Some of the 1 billion plus you've raised for the third D. V. P Fund at this point, just any detail around existing E&P investors versus new ones.
For the existing investors that have indicated interest any detailed all around.
Increasing or decreasing check size relative to the prior funds.
Yes. Thank you I'll take this its fund raising one where we're not totally in a position yet to give you. The final details on the first close of the new strategy, but rest assured.
On the next call, we'll have a lot of detail for you I would tell you broadly speaking, though around fund raising our.
Our existing investors continue to lean in and they continue to re up with us.
And that's working really well we also have a number of new logos are coming into our products, whether it's credit whether it's core or whether it's our flagship fund.
So we're having a lot of success. This was a great quarter because it wasn't just all flagship it was co invest it was credit it was core even our liquid strategies group brought in some new capital. So all of our fund products are hitting their resonating with investors and that's really the big headlines coming out of this quarter.
I anticipate a check sizes are either staying at par or they're typically down anywhere from 10% to 30%. It just depends on that pension it depends on that sovereign it depends on that asset allocator them, but the good news is again all of our investors that were not previous products continue to do the work.
<unk> said no to us and we're seeing a really strong acceptance and renewals and we're seeing strong acceptance and our new products and I'm really happy with where we are in fundraising are and where were obviously reinforcing our guidance for the rest of the year. So we feel very good about where we are it's a that's a good question. Thank you.
Yes.
Other quick one just the $79 million in unrealized carried interest just if you can provide any detail on what's driving that you know there's there's people out there talking about the move in treasury rates and cap rates pressuring private valuations, but obviously you guys are marketing things up in excess of the hurdle rates or just any more detail on where that occurred.
What would be great. Thanks.
Yes sure.
Just kind of cashless.
It's it's the easiest answer right, which is the direct answer I'll, let Jackie back fill me, but the reason why our portfolio companies are working is because the leasing is working the dcs are up and the valuations are up yes, private market multiples are slightly down public more multiples are slightly down as well, but the Dcs are way up so the fact that we're in.
Growing these businesses at CAGR as you know north of 20% is allowing us to reassess the marks on those assets sorry to front run your Jackie go ahead, I apologize no exactly and then some of the details behind it right Mark spoke at length about AI and some of the work load increases across our data center businesses globally.
We're seeing some of our pipelines in access of 4% to 500% of our original plan, so bookings and pipeline are tremendous across our sectors and we always have talked about the fact that digital infrastructure is a ridiculously sector.
<unk> resilient sector too bad times, and it's an amazing sector in good times and we're just seeing all that come together so.
The combination of all of those factors is driving up our our our our valuations in access of five 6% this quarter and in some of our funds.
Alright, great answers as always guys I'll turn it over.
The next question comes from the line of Ric Prentiss with Raymond James. Please proceed.
Hey, Thanks, everyone Brent on for Rick This morning first question.
Capital allocation, you're bringing in some some funds from the recaps and got a lot of liquidity.
I saw you bought a little bit of preferred back this quarter. So how should we think about preferred versus common versus other opportunities out there like M&A.
Yes, sure we continue to look at our we have all kind of liquidity as we just discussed our debt levels are low and significantly lower every single year. So we've got a kind of out there bit of firepower to deploy towards M&A. We continue to work at other G piece, we've talked about that Ah.
And we would like to get continue to look at new products and get bigger so doing that in Dallas and sometimes a buy versus build is important for us.
And we continue to look at those opportunities to the degree that there is excess cash that we are not going to deploy towards M&A. We will continue to look at redeeming some of those perhaps because of the benefit of that is certainly at the you know 10% return guaranteed with Fray, but then that unlock.
Additional firepower for potential upsizing of common dividend because of the recurring cash flows that we're just generating from the business and the scale. So our first order of business and if we can find good G. P. Then and investment managers that we can buy and that's going to give us a return that's well in excess of 20, 30% of course, we will do.
Certainly it if not then we'll take that liquidity in NN waterfall that down to other uses which is as you.
Prop redemption.
Great and then the other question would be on the deconsolidation. Appreciate all the color on database can you give us any info on where you are in the process on vantage is D C.
And then once you get below 10% could could there be additional sales there as well you I think originally talked about 8% ownership and possibly even lower.
So what's a pretty yeah, let me, let me sort of take Thailand, and Jack can give you the numbers, but I think first and foremost we're really happy with the performance of Databank.
And Jackie and I were talking about it yesterday. Yeah. These are guys that are beating their leasing plan by almost 400% this year.
It's staggering the growth that they produced an EBIT tests like 50% EBIT growth year over year. So.
Once we get down to a minimum and Jackie will walk you through that math, we're not really an active seller to the bank at the moment at these levels.
We we'd want to see a significant premium to selling more of our shares. So once we deconsolidation that's gonna be it on data bank vantage FCC same thing performing really well Kashi, but ahead of plan our dividends were on target. This quarter. So we're very happy with those two assets our goal is to.
Get them do you consolidated this year, which we're doing and then you know as time dictates, we'll figure out what we're going to do with those two assets, but we're we're pretty satisfied Jackson could give you the math on the deconsolidation piece at vantage S. D C but.
And then it gets once we get to those levels.
Jackie I agree we should stop I don't know Jack if you want to give more color or not.
That's correct, yes, Mark I mean, one our perspective and what we've said to you guys is that that 10% of our cig is.
Is what we deem as a material economic ownership alongside the control that we continue to have and these business is no different than all the other businesses, we have and our funds. So once we get below that percentage that economic ownership. We bought we will work through and deconsolidation from a public accounting perspective, but that's just the public accounting.
The work that we were required to consolidate these businesses on a public accounting perspective, we will continue to receive dividends from these businesses.
And Theyre doing fantastically, well as Mark talked about AI huge tailwind here. So we love our own cooking. We love. These businesses will continue to have material ownership in these businesses, but we just know it won't have the headache of of basically having these businesses the publicly traded alongside our our public vehicle.
Got it thanks guys.
The next question comes from the line of Richard Choe with Jpmorgan. Please proceed.
Hi, I wanted to follow up a little bit on the a potential investments I assume near term most of it is coming from your existing strategies and two existing companies, but do you see a need potentially for an AI dedicated fund for.
Maybe different investments outside of your kind of normal portfolio of companies.
I think right now Richard we're pretty happy with what we're doing in the current strategies I think the ability to show up for customers.
You know backing there a ideas, whether it's you know ventures or credit core flagship fund or co investments, we have the ability to go anywhere.
And our funds don't prohibit us from investing in these ideas I think right now we see the biggest ideas or an infrastructure and that's obviously going to be in public cloud and private cloud data centers and then.
The bandwidth connectivity to support that.
Two to three years down the road as we edge out.
And it starts to impact the mobile infrastructure I think there'll be other ideas.
Like you saw on cloud two to three years in a public cloud you began to see an ecosystem that developed off of that.
But again our funds can go attack any of those ideas and their current construct we don't need to go out and raise dedicated capital specifically.
For AI ideas, because our purview and our mandate is already encompassed in these funds so again.
The depth of the products and the breadth of the products.
On the capital that we're forming.
It makes us really comfortable and confident that we're going to be able to deploy capital and the best ideas that support.
The infrastructure, which is really our focus.
Yeah.
And then one on I guess that far he margin you know it bounces around a lot less volatile just and there's a lot going on in terms of capital raising.
Or should we ended up at maybe by the end of the year or into next year in terms of a margin there and what level of corporate I guess.
Okay.
This is of course are you aiming for kind of on a run rate basis over the next few quarters.
Yeah, So Richard I'll, just kind of point you to really looking at our I am business in conjunction with our corporate and other segment. So if you add those two together our margin profile. She has increased doubled quarter over quarter ourself from 20% to about 40% are from an EBITDA margin basis. The reason why there's a little bit.
Volatility this quarter is really because of allocable expenses associate with corporate to I am. So that's just geography and accounting as were fund raising as Mark talked about D. V. P. Three we have not turned on those speeds yet so there's no revenues coming in there, but there's certainly activity, which means that folks are working hard and they're allocating their.
Sheets to the I M sect ourselves really looking at it.
In combination of those two sector segments is the right approach and if you look at that 40% that's pretty in line with some of the other publicly traded investment managers out there problematic portal a margin profile perspective, which includes corporate expenses. So that's kind of how a guy can collect and we believe that that margin.
Is much more a sustainable and where we expect to be certainly if on a run rate basis.
Ending this year.
Great. Thank you.
And your next question comes from the line of Eric Wold Chow with Wells Fargo. Please proceed.
Oh, great. Thanks for the question.
I wanted to touch on the vantage STC process you talked about later this year. So we've seen a few larger stabilized data center asset sales or jv's.
Recently kind of in the six to six 5% cap rate range. So maybe you can talk about today, what do you think the market looks like.
What makes vantage STC, maybe somewhat different from some of the other comps that we've seen in the market.
Yeah sure one is it pays a dividend yields too is that it's got fantastic customer stats and it's at over 90, plus percentage occupancy rates already so it's truly stabilized and cash generative.
And thirdly, you've got some of the best logos out there in terms of the customer sat so they're all <unk>.
Not only investment grade, but probably some of the best logos in the world. So the combination of those three you know certainly attractive both from a debt capital markets perspective, as well as equity and we believe that that's a differentiator are well in excess of some of the cap rates that you just mentioned, which we believe is as is not as attractive.
That's what we've got.
Okay, great. Thanks for that and then I just wanted to touch on your tower portfolio as well it looks like your MRO hours were up over 20%, but there's been some concern around pretty material pull back in the U S carrier activity levels. During the second quarter. So I wonder if you're seeing that and whether you think it's just kind of timing related headwind or.
Any kind of structural longer term concerns you have on the tower business. Thank you.
Yes.
We don't just don't get that check you go ahead here about tower Guy.
Sure look our vertical bridge platform continues to outperform our we and and the good part about it is that it's younger towers and certainly continues our core organic growth rates well in excess of some of the public out there, but keep in mind, that's not our only tower portfolio company, where global for a reason.
We're seeing double digit in.
In excess of 20% growth rates across Asia, South America are in those regions. So that's why we are global that's why we look at it on a global basis, and and and the combination of all of those portfolio companies and it's driving our our our fantastic growth rates and returns in the power sector.
Alright, thank you.
The next question comes from the line of John Atkin with RBC capital markets. Please proceed.
Thanks.
On the <unk> demand I wonder how much.
Youre seeing from traditional Hyperscale.
Versus some of the more emerging AI focused startups.
Right now, Jonathan it's about 90% traditional hyperscale or isn't about 10%.
Chip guys have guys and new players in the marketplace, but it is heavily heavily hyperscale or some other jonathan.
So what is Hyperscale focus how do you how do you know, it's AI versus cloud versus social networking versus.
The other applications.
That color you have pieced Iraq density or what what what are some of the whereas.
Or is it the location of their choosing how do you figure that out.
We're not at Liberty to give those details unfortunately, but suffice to say, we do know the difference between the northwest and the teams that are working on it. That's all I can really tell you im sorry.
And then lastly on the just kind of keeping on data centers.
Maybe give us a sense of the targeted development yields in any any change you've seen since.
Since last quarter, and then pricing trends renewal spreads.
Anything to call out and any regional differences.
What I would tell you is that development yields are are up.
I'm not at Liberty to give those two because those are those are.
Private investments and private companies I don't want to give away their store secrets, but what I would tell you is rents continue to rise.
Yes inventory is limited.
And pricing does differ from Europe to Asia to the U S of course.
Do the yields but by and large it's in a pretty tight band.
Yes.
What I would tell us if that's more attractive than ever.
Okay.
Thank you.
Thank you.
Ladies and gentlemen, this concludes the question and answer session.
Like to turn the call back to Marc Ganzi for any closing remarks.
So I want to thank everyone for participating today, it's been an incredibly busy.
Busy quarter for us and I'll leave you with a similar for frame that I've told you before which is you know promises made promises kept.
We continue to deliver on our fundraising goals, we continue to deliver and deconsolidation and our portfolio of companies continue to perform.
Kate everyone's interest in the firm will continue to keep working hard for you got an exciting back half of the year.
Look forward to having a dialogue with all of our investors in the coming weeks at various investor conferences. Thank you all have a great weekend take care.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
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