Operator: Greetings, and welcome to the DigitalBridge Group, Inc. Second Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Severin White, Managing Director and Head of Investor Relations.

Severin White: Good morning, everyone, and welcome to DigitalBridge’s second quarter 2023 earnings conference call. Speaking on the call today from the Company is Marc Ganzi, our CEO; and Jacky Wu, 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 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 the call is as of today, August 4, 2023, and DigitalBridge 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, 2022, and for our Form 10-Q that will be filed with the SEC for the quarter ending June 30, 2023.

Great. Let’s start with Marc providing an update on our key objectives for 2023. Jacky will outline our financial results and turn it back over to Marc 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. Marc?

Marc Ganzi: Thanks, Severin. I want to start by recognizing this as the third anniversary of my first quarterly call as CEO of DigitalBridge. When I took the helm over in the summer of 2020, we were facing the depths of COVID and we had a very different business profile. Today, we’re on the five-yard line of an unprecedented $80-plus billion rotation and transformation. We’ve been very focused on three key priorities that I outlined at the beginning of the year. Today, all that hard work has positioned us to meet the persistent and growing demand for digital infrastructure investment, particularly as we see the early signs of new demand driven by Gen AI. I’ll talk more about that in section 3 today. We’re really excited about what we’re seeing and how it impacts DigitalBridge and more importantly, how it impacts our portfolio companies and our investments.

So, let’s stay focused and touch on those top 3 priorities. First, starting with fundraising. In the second quarter, we generated strong year-over-year growth in our investment management platform with fee income up 47%, and segment level FRE up 35%. Higher FEEUM, which was driven from core, credit and co-investment along with a full quarter of InfraBridge, 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 DigitalBridge Partners Series and the balance between co-investment and incremental core and credit commitments. I’m pleased to report we remain on track to achieve our fundraising objectives for 2023.

On simplification, the big news here is we expect to receive sufficient final commitments to our DataBank recap to deconsolidate that business from our financial statements later this quarter, followed shortly thereafter by a financial close. 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 company’s ability to deliver new capacity to our tech and telco customers, whether it’s on towers, data centers or across fiber routes, really sets DigitalBridge apart. Year-to-date, we’ve successfully deployed over $4 billion to meet the next leg of demand at very attractive build yields supported by long-term customer contracts with a high concentration on investment-grade counterparty risk.

So, let’s detail fundraising and our simplification progress before we get into the financials. Next slide, please. New capital formation. As I highlighted earlier in the year, this will be the seminal KPI for 2023, and I’m pleased to report we’ve 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 DigitalBridge Partners Series, which will start generating fee income once we finalize an initial close. We’ve also completed $900 million of co-investment syndications, most notably Switch, which is one of the best positioned data center platforms for next-generation compute. Last quarter, I highlighted the structural growth we expected to see in co-investment as our platforms continue to grow and how more of that would flow into FEEUM 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 companies globally, which in turn helps us scale and drive FEEUM and FRE. The balance of fundraising came from core, credit and our liquid strategies, which continue 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 Gen AI at our portfolio 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 FEEUM and AUM. We ended last quarter with $29 billion in FEEUM, 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 InfraBridge acquisition. Similarly, on the right, AUM, which tracks the NAV of the assets 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 as continued — as we continue to grow revenues organically and earnings over the course of the year. Next slide, please. So, deconsolidation. This is the number two topic behind fundraising for 2023.

So I’m pleased to report we’ve received $170 million in commitments to the DataBank recap process. We’ll close additional commitments shortly, which will provide us with sufficient capital to deconsolidate that business from our financial statements inside this quarter. We expect us 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 DigitalBridge 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 placed over $2-plus billion into the permanent capital vehicle that was responsible for recapitalizing DataBank.

And what’s even better is that our leasing pipeline has grown over 3x year-over-year and has seen the steepest jump across our portfolio on the back of new AI-driven interest. So, at the end of the day, we’re thrilled to maintain a significant stake in that business, and we’re proud to back our own team going forward and at the same time, deconsolidate that stake and continue to press forward with our main corporate objectives. We really feel excited about this. So, at the end of the day, one down, one to go. Vantage SDC is up next, and we’re pleased with the progress we’re seeing there. Consequently, we remain committed and confident to finalizing the deconsolidation of Vantage SDC before the end of this year. So, really good progress on both of those — two initiatives, DataBank will get done in this quarter, and we’ll finish up Vantage SDC by the end of the year.

Next slide, please. So, portfolio performance. 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. MRR across the portfolio is up in all of our verticals, driven by organic and 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 5G 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 in 5G networks will drive those numbers higher in the back half of this year and certainly into ‘24 and ‘25.

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, manifesting 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 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 2024 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. Jacky?

Jacky Wu: Thank you, Marc, 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 Shareholders section of our website. On Page 14, you can see our second quarter highlights have trended 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 $0.06 per share benefiting from the growth in our asset-light investment management platform and continued progress of simplifying our corporate structure.

Assets 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 deployments and the InfraBridge platform acquisition earlier this year. Fee-earning equity under management increased to $29 billion, a 53% increase from the same period last year. We have a robust fundraising pipeline with momentum building in multiple investment products and we anticipate a very strong second half of the year for capital formation similar to prior years, which has been 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 includes contributions from carried interest and principal investment income, which aligns more closely with our peers in 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 Wafra’s minority ownership in the Company’s investment management platform in May of 2022 and following the acquisition of InfraBridge in February of this year. Moving to Page 17. The Company continues to grow its investment management earnings from additional fee-earning equity under management generated by new digital investment strategies and the acquisition of InfraBridge.

Fee income, excluding incentive fees, increased to $66 million and fee-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 the 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 designed to help simplify the analysis of the Company’s carried 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 in our investment vehicles, which generates carry interest to DigitalBridge 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 fee expenses are recognized upfront at incurrence of new capital raised which in some cases, may not yet earn fee revenues. Moving to page 19. The Company’s share of digital operating revenues and earnings declined due to lower ownership following the previously announced recapitalization of our DataBank investment, which reduced the Company’s ownership from 22% to 11%.

We continue to stay on target to deconsolidate 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 fee-related earnings increased from $83 million to $138 million. Looking at the right side of the page, our run rate fee revenues were $275 million. We are on track to meet or exceed our previously provided fee revenue and FRE guidance ranges. As we continue to scale and fundraise, we expect the flow through of the Company’s FRE to distributable earnings to increase. Turning to page 21.

We completed another milestone in our progress to simplify the Company’s capital structure in April of this year by fully repaying $200 million of the Company’s convertible notes. 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 of liquidity, including the full $300 million available from our securitization revolver. In summary, Marc and I are very pleased with the progress we’ve made during the first half of this year in solidifying the Company’s operating position as a partner of choice to investors in the digital infrastructure space.

DigitalBridge’s three statement 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 deconsolidated the operating segment in the second half of this year. And with that, I will turn it back to Marc.

Marc Ganzi: Thanks, Jacky. This quarter in executing the digital playbook I want to cover generative AI and some of the implications for digital infrastructure and ultimately, how it impacts DigitalBridge. This is the number one subject with both 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 slide here, we’ve incorporated a number of examples of contrasting 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 text prompts.

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 DigitalBridge and DigitalBridge 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 a human to turn an observation into a creative new idea, Gen 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 forward. Next slide, please. Just to give you a sense of the speed adaptation around generative AI, many of you have heard or have seen this chart. But what it does is it gives you incredible context for the opportunity set. ChatGPT, OpenAI’s large language model or LLM, had the fastest adaptation on record of any consumer technology, hitting 100 million active users in two months. That happened earlier this year. So to contextualize that, that was 4 times faster than TikTok. It was 15 times faster than Instagram getting to 100 million users and Uber took over 5.5 years to hit 100 million users. These are really significant global platforms. And ChatGPT 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 know today, 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 data center marketplace over the last 10 years, is at about 13 gigawatts.

Ultimately, to drive AI and to 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 9-inning baseball game. And it’s always important to frame the time against ultimately, the investment period, the amount of power consumed and the size of the wallet share that DigitalBridge can take. Next slide, please. So, I described Gen AI 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, consume 2 to 3x the 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 AI models and this is really hard to get your mind wrapped around, but let’s give it a shot. Large language models like ChatGPT have billions of parameters with the latest models, GPT4 reaching almost $1 trillion. So ultimately, consequently, the result is data center power consumption is set to rise dramatically and increasingly be dominated by these AI workloads. It’s estimated that 80% of the data center power will consume — 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 DigitalBridge believes that we have a key competitive advantage, having great portfolio companies throughout the world with available space, power and cooling that meets the needs of next-generation networks. Next slide, please. So, we know that Gen AI is power hungry. I think we all get that. But how does that translate into the data center ecosystem. It starts with AI model training, which will happen principally in large public and private clouds. These are principally at data centers owned by Vantage 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 will 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 of the past. So why? Well, inside, as you can see in the middle, there’s going to be higher power density on a per-rack basis with each rack filled with power-hungry GPUs, drawing 40 or more KWs compared to traditional data center racks, which draw 10 KWs or less. This is a fairly substantial shift in the power density that can be delivered on a server. The other key factor that relevant or cloud trained is access to low-cost power.

AI training is not as location or latency sensitive as applications. And you’ve got to get your mind wrapped around that around ultimately training AI models can happen in one place, but ultimately, the delivery of applications, which is either consumer-based, machine-to-machine based or enterprise-based 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 in an 11 million square foot footprint.

This is a competitive advantage at the end of the day. Your power density and efficiency are becoming increasingly relevant, so 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 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. As AI models are deployed and AI-powered applications proliferate over the next few years, inference and the growing relevance of the entire network will become clear. Gen AI is edge delivered. This is an important concept for all investors to get their minds wrapped around.

For 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 or Miami. The trained AI models need to live close to the consumer or the device or the enterprise. By the way, they can’t live on your phone either. If you want battery life longer than 5 minutes. So it is a combination of using ultimately mobile, but either your laptop or your desktop and ultimately, at the end of the day, you need a robust network. And a robust network that includes edge data centers, fiber, 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. Gen AI is edge delivered. And to do that and to create that orchestration requires all pieces of the digital infrastructure ecosystem, and this is where DigitalBridge 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 you can see, we’ve been buying and building data center platforms on a global basis. This portfolio represents about 35% to 40% of our AUM. 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 for public and private cloud operators through Vantage, Scala and Switch, as I mentioned earlier.

Then going to the next level, our portfolio companies, DataBank, AtlasEdge and AIMS are set to capitalize on edge delivered Gen AI, 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 data centers 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 2 to 3 years is 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 AI and our business. It’s very early inning. 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 DigitalBridge portfolio companies in the coming years. So, let’s start with what we’re seeing on the supply side in our conversations with LPs. 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 DigitalBridge as a key thought leader as it relates to the digital infrastructure piece of AI. We’ve held a number of one-on-one meetings and webinars with our key global LPs covering some of the topics we’ve talked about today in greater detail. There is 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 few years and not just in our flagship product, but in credit and core and in other 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 2 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 2 gigawatts and taking outsized market share and a bigger portion of the wallet. So, when you look across the DigitalBridge ecosystem, that pipeline, where 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. So, we’re on pace to eclipse 2022, and 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 jumped out at me are the first one from one of our data center CEOs. He was describing how a 24-megawatt requirement was a large opportunity just a few years ago. And now we’re seeing inbounds for 10x that size. So 100 to 250-megawatt type deals, in a campus setting. I mean these are just amazing numbers and really difficult to comprehend, but this is what’s happening down at the portfolio company level. The next quote that I’m particularly proud of is the CEO of DigitalBridge is the response to a DigitalBridge investor diligence call with one of the new specialized cloud providers that’s serving AI workloads.

In response to the question of who are the easiest companies to work with on securing new capacity, well, the first response was DigitalBridge 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. One, on fundraising, our number one KPI, we’ve raised $3.4 billion to date, and we’re on track to hit our fundraising targets for the year. I remain fully convicted in hitting those goals. We’ve made tangible progress on simplification with our DataBank recap and the Vantage SDC 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 Gen AI or any other secular demand driver underpinning our business, we’re supplying the picks and the shovels to the next-generation leaders that are building tomorrow’s technology. We expect Gen AI to be the next growth driver of demand for digital infrastructure just like digital PCS 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’s 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. So, thank you for your support as we continue to execute on the final stage of our transition to a fast-growing alternative asset manager, levered to the powerful tailwinds 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.

Operator: [Operator Instructions] Our first question comes from the line of Michael Elias with TD Cowen.

Michael Elias: Great. Thanks for taking the questions. Two if I may. 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 LPs for exposure to data centers in recent months, particularly given what the yields on these data center projects? And then the second piece I would ask is, Marc, at Connect (X), you were talking about the rerating in power consumption associated with AI. At the same time, we’ve seen power arise as a constraint in multiple markets globally. Could you talk about your strategy to ensure that you have appropriate power and the long runway for growth as we look to pursue that AI opportunity. Thank you.

Marc Ganzi: Look, let’s start with the first. I think, that’s probably the easier question. As you saw in the quarter, we had significant co-investment intake on our data center companies, whether it’s DataBank, whether, obviously, it was Switch and Vantage with respect to our project in Europe. We’ve had three co-investment opportunities happening at the same time and all of them received commitment. So, as you could imagine, good ideas behind modern data centers that are facing AI and facing those workloads and are signing those leases. Those are the ideas that are winning. And I’ve been saying that for the last 3 or 4 quarters that when you have clean data centers in good locations with clean power, those are the ideas that LPs want to be behind.

And so it shouldn’t surprise you that Switch and Vantage and DataBank all received significant co-investment in the quarter and LPs 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 it next week in Boulder at your conference. But this is interesting because certain jurisdictions are leaning in and are being proactive and are trying to solve the problem. And certain jurisdictions are having significant constraint issues. And some jurisdictions are saying, we just don’t want data centers, much like towers in the ‘90s when we had the big NIMBY syndrome when we were adopting digital PCS. So, what’s the play? The play is you’ve got to be nimble.

And look for us, having 6 great data center businesses, AtlasEdge, DataBank, AIMS, Scala, Vantage and Switch allows us to think globally but act locally. This is a really important concept. Having 6 management teams instead of one going out and solving the problems in each specific jurisdiction, working with the Governor, working with Mark Warner, data center rally with some of our peers trying to solve the conundrum of dominion, looking at the next upgrades to Silicon Valley Power’s grid and looking what is happening in Texas with the overhaul of their grid as well. A lot of the big markets for data centers of 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. You 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 the public good, but also explaining how we’re going to 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 at Switch are matriculating out to Vantage and DataBank. So you got to have green solutions, you got to act locally. You can’t just be all in on Herndon. You can’t be all in on Loudon 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 to — for example, went to Cardiff. We went to Berlin when Offenbach was overloaded. As 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 6 CEOs, having 6 companies and being able to deploy capital more efficiently across those platforms is really working for us right now. I mean I think you saw our leasing numbers, DataBank kind of blowout quarter.

We’re winning on the field because we’ve been a little ahead of the curve, and we’ve been building inventory steadily for the last 2 to 3 years. This wasn’t like we woke up this quarter and said, “Oh my god, we got to go deliver 2 gigawatts of power to our cloud customers, this was something we’ve been working on for 2 years. So I think a lot of the hard work that we put in place in 2021 and 2022 is now manifesting itself in 2023 for our data center businesses. And we’ll talk about — certainly, Michael, looking forward to talking about this next week in Boulder with you.

Operator: The next question comes from the line of Jade Rahmani from with KBW.

Unidentified Analyst: This is Jason Sabshon [ph] on for Jade. My first question, can you speak to the competitive opportunity that DigitalBridge has as one of the only pure-play digital asset managers compared to digital REITs that generally aren’t looking to raise third-party capital and larger asset managers that are more broadly focused on infrastructure. Thank you.

Marc Ganzi: Yes. Thanks, Jade, and thanks for tuning in. I think the advantage for us 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. 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 form capital and we can deploy capital and 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 believe are great companies. But the key is deployment of CapEx, meeting deadlines, showing up for customers, doing it in Southeast Asia, doing it in Europe, doing it in Sao Paulo, Brazil, doing it in the U.S. This is really what’s playing out Digital Ridge now is the ability to, again, go global, act local, scale, have capital, we’ve raised the capital in the quarter, we’ve deployed it, we’ve 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. I think with other alternative asset managers, they’re having success, too. 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 capital into data centers.

And that’s a big ambition for Blackstone. We recognize that there’s plenty of room in a $300 billion marketplace. It’s ultimately a $5 billion to $6 trillion spend in AI, there’s going to be room for Blackstone. There’s going to be room for DigitalBridge. There’s going to be room for Equinix and DLR. This is a big, big moment in time. And we can’t do it all. We don’t expect to do it all. And in fact, we’ll partner with other people. We could partner with other public companies. We could partner with other GPs and other alternative asset managers. But right now, we’re having a lot of success, Jade, partnering with our own LPs. 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 we’ve got the right location.

So, I think this 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.

Operator: The next question comes from the line of Dan Day with B. Riley Securities.

Dan Day: Just on the $1 billion-plus you’ve raised for the third DBP fund at this point, just any detail around existing DBP investors versus new ones, for the existing investors that have indicated interest any detail at all around increasing or decreasing check size relative to the prior funds. Thanks.

Marc Ganzi: I’ll take this. It’s fundraising. One, 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 fundraising, 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 coming into our products, whether it’s credit, whether it’s core, 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. They’re resonating with investors, and that’s really the big headline coming out of this quarter. I anticipate check sizes are either staying at par or they’re typically down anywhere from 10% to 30%. It just depends on that tension. It depends on that sovereign. It depends on that asset allocator. But the good news is, again, all of our investors that were in our previous products continue to do the work, haven’t said no to us, and we’re seeing a really strong acceptance in renewals, and we’re seeing a strong acceptance in our new products. I’m really happy with where we are in fundraising. And we’re obviously reinforcing our guidance for the rest of the year. So, we feel very good about where we are.

That’s a good question though. Thank you.

Dan Day: Yes. One other quick one. Just the $79 million in unrealized carried interest. Just if you can provide any detail on what’s driving that. There’s people out there talking about the move in treasury rates and cap rates, pressure in private valuations. But obviously, you guys are marking things up in excess of the hurdle rate. So, just any more detail on where that occurred would be great. Thanks.

Marc Ganzi: It’s kind of cashless. I mean it’s the easiest answer, right, which is the direct answer. I’ll let Jacky backfill me. But the reason why our portfolio companies are working is because the leasing is working, the DCFs are up and the valuations are up. Yes, private market multiples are slightly down. Public multiples are slightly down as well. But the DCFs are way up. So, the fact that we’re growing these businesses at CAGRs north of 20% is allowing us to reassess the marks on those assets. Sorry to front run you, Jacky. Go ahead. I apologize.

Jacky Wu: No, exactly. And then some of the details behind it, right? I mean, Marc, a bit at length about Gen AI and some of the workload increases across our data center businesses globally, we’re seeing some of our pipelines in excess of 400% 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 — resilient sector to 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 those factors is driving up our valuations in excess of 5%, 6% this quarter in some of our funds.

Operator: The next question comes from the line of Ric Prentiss with Raymond James.

Unidentified Analyst: Brent on for Ric this morning. First question, capital allocation. You’re bringing in 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?

Jacky Wu: Yes, sure. We continue to look at our — we have a ton of liquidity as we just discussed. Our debt levels are low and significantly lower every single year. So, we’ve got a ton out there, firepower to deploy towards M&A. We continue to look at other GPs. We’ve talked about this. And we would like to get — continue to look at new products and get bigger. So doing that analysis in terms of 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 preps because the benefit of that is certainly — it’s a 10% return guaranteed risk-free, but then that unlocks 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 first order of business is if we can find good GPs and investment managers that we can buy, and that’s going to give us a return that’s well in exit of 20%, 30%, of course, we’ll do that. Certainly, if not, then we’ll take that liquidity and waterfall that down to other uses, which is a prep redemption.

Unidentified Analyst: Great. And then the other question would be on the deconsolidation. I appreciate all the color on DataBank. Can you give us any info on where you are in the process on Vantage SDC? And then once you get below 10%, could there be additional sales there as well? You, I think, originally talked about 8% ownership and possibly even lower.

Marc Ganzi: Yes. Let me sort of take highline then Jacky can give you the numbers. But I think first and foremost, we’re really happy with the performance of DataBank. And Jacky and I were talking about it yesterday. These are guys that are beating their leasing plan by almost 400% this year. It’s staggering the growth that they produced in EBITDA. It’s like 50% EBITDA growth year-over-year. So, once we get down to our minimums, and Jacky will walk you through that math, we’re not really an active seller of DataBank at the moment at these levels. We’d want to see a significant premium to selling more of our shares. So once we deconsolidate, that’s going to be it on DataBank. Vantage SDC, same thing performing really well, cash EBITDA ahead of plan, dividends were on target this quarter.

So we’re very happy with those two assets. Our goal is to, again, get them deconsolidated this year, which we’re doing, and then as time dictates, we’ll figure out what we’re going to do with those two assets, but we’re pretty satisfied. Jacky can give you the math on the deconsolidation piece at Vantage SDC but I think once we get to those levels, both Jacky and I agree, we should stop. I don’t know, Jacky, if you want to give more color or not.

Jacky Wu: That’s correct. Yes, Marc. I mean, one — our perspective and what we’ve said to you guys is that the 10% is what we deem as a material economic ownership alongside the control that we continue to have in these businesses, no different than all the other businesses we have in our funds. So once we get below that percentage, that economic ownership, we will work through and deconsolidate that from a public accounting perspective. But that’s just the public accounting, the work that we require to consolidate these businesses on a public accounting perspective. We will continue to receive dividends from these businesses, and they’re doing fantastically well, as Marc talked about AI, huge tailwinds here. So, we love our own cooking. We love these businesses. We’ll continue to have material ownership in these businesses. But we just now won’t have the headache of basically having these businesses be publicly traded alongside our public vehicle.

Operator: The next question comes from the line of Richard Choe with JP Morgan.

Richard Choe: I wanted to follow up a little bit on the AI potential investments. I assume near term, most of it is coming from your existing strategies and to 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 companies?

Marc Ganzi: 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 backing their AI ideas, whether it’s 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 are in infrastructure. And that’s obviously going to be in public cloud and private cloud data centers and then the bandwidth connectivity to support that. 2 to 3 years down the road as we edge out and it starts to impact mobile infrastructure, I think there’ll be other ideas, much like you saw in cloud, 2 to 3 years in a public cloud, you begin to see an ecosystem that developed off of that.

But again, our funds can go attack any of those ideas in 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, the amount of capital that we’re forming makes us really comfortable and confident that we’re going to be able to deploy capital and the best ideas that support AI infrastructure, which is really our focus.

Richard Choe: And then one on, I guess, the FRE margin. It bounces around a lot. It’s volatile. Just — and there’s a lot going on in terms of capital raising. Kind of where should we end 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, expenses or costs are you aiming for kind of on a run rate basis over the next few quarters?

Jacky Wu: Yes. So Richard, I’ll just kind of point you to really looking at our IM business in conjunction with our corporate and other segments. So if you add those two together, our margin profit has increased double quarter-over-quarter, so from 20% to about 40% from an EBITDA margin basis. The reason why there’s a little bit more volatility this quarter is really because the allocatable expenses associated with corporate to IM, so that’s just geography and accounting. As we’re fundraising, as Marc talked about DBP III, we have not turned on those fees 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 time sheets to the IM sector.

So really looking at in combination with those two 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 from a total margin profile perspective, which includes corporate expenses. So that’s kind of how I’d guide you to it. And we believe that that margin is much — is sustainable and where we expect to be certainly on a run rate basis ending this year.

Operator: The next question comes from the line of Eric Luebchow with Wells Fargo.

Eric Luebchow: Great. Thanks for the question. I wanted to touch on the Vantage SDC process you talked about later this year. So, we’ve seen a few larger stabilized data center asset sales or JVs recently kind of in the 6% to 6.5% cap rate range. So, maybe you could talk about today what you think the market looks like and what makes Vantage SDC may be somewhat different from some of the other comps that we’ve seen in the market?

Jacky Wu: Yes, sure. One is it pays a dividend and yields, too, is that it’s got fantastic customer sets, and it’s 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 good customer set. So they’re all not only investment-grade but probably some of the best logos in the world. So the combination of those three certainly attractive both from a debt capital markets perspective as well as equity, and we believe that’s a differentiator well in excess of some of the cap rates that you just mentioned, which we believe is not as attractive as what we’ve got.

Eric Luebchow: Okay, great. Thanks for that. And then, I just wanted to touch on your tower portfolio as well. It looks like your MRRs were up over 20%, but there’s been some concern around pretty material pullback 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.

Marc Ganzi: Yes, Jacky go ahead. You are my tower guy.

Jacky Wu: Sure. Look, our Vertical Bridge platform continues to outperform. And the good part about it is that it’s younger towers and certainly continues to 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. We’re global for a reason, and we’re seeing double-digit in excess of 20% growth rate across Asia, South America within those regions. So that’s why we are global. That’s why we look at it on a global basis. And the combination of all those portfolio companies is driving our fantastic growth rates and returns in the tower sector.

Operator: The next question comes from the line of Jon Atkin with RBC Capital Markets.

Jon Atkin: Thanks. On the Gen AI demand, I wonder how much you’re seeing from traditional hyperscalers versus some of the more emerging AI-focused start-ups? Thanks.

Marc Ganzi: Right now, Jonathan, it’s about traditional hyperscalers and about 10% chip guys, app [ph] guys and new players in the marketplace, but it’s heavily hyperscalers at the moment, Jonathan.

Jon Atkin: So, when it’s hyperscaler focused, how do you know it’s AI versus cloud versus social networking versus other applications? Is that color you have based on rack density, or what are some of the — was it the locations they’re choosing? How do you figure that out?

Marc Ganzi: We’re not at liberty to give those details, unfortunately. But suffice it to say, we do know the difference between the workloads and the teams that are working on. And that’s all I can really tell you. Sorry.

Jon Atkin: And then lastly, on the — just kind of keeping on data centers, maybe give us a sense of the targeted development yields and any change you’ve seen since last quarter? And then pricing trends, renewal spreads, anything to call out and any regional differences?

Marc Ganzi: What I would tell you is that development yields are up. I’m not at liberty to give those, too, because those are private investments in private companies. I don’t want to give away their store secrets. But what I would tell you is rents continue to rise as inventory is limited, and pricing does differ from Europe to Asia to the U.S., of course, as do the yields. But by and large, it’s in a pretty tight band. And I would tell you, it’s more attractive than ever.

Operator: Thank you. Ladies and gentlemen, this concludes the question-and-answer session. I’d like to turn the call back to Marc Ganzi for any closing remarks.

Marc Ganzi: Well, I do want to thank everyone for participating today. It’s been an incredibly busy quarter for us. And I’ll leave you with similar refrain that I’ve told you before, which is promises made, promises kept. We’ve continued to deliver on our fundraising goals, we’ve continued to deliver on deconsolidation and our portfolio companies continue to perform. I appreciate everyone’s interest in the firm. We’ll continue to keep working hard for you. We’ve got an exciting back half of the year. And we look forward to having a dialogue with all of our investors in the coming weeks at various investor conferences. So, thank you all. Have a great weekend. Take care.

Operator: This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.

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DIGITALBRIDGE GROUP INC

Q2 2023

Earnings Transcript

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