DigitalBridge Group, Inc.
Q4 2021 Earnings Call Transcript

Published: 24 Feb 2022

[Operator:]

Greetings. Welcome to today's DigitalBridge Group, Inc. Fourth Quarter and Full Year 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. And please note that this conference is being recorded. I will now turn the conference over to Severin White. Thank you. You may begin.

[Severin White:]

Good morning, everyone. And welcome to DigitalBridge's fourth quarter and year-end 2021 earnings conference call. Speaking on the call today from the company is Marc Ganzi, our President and CEO; and Jacky Wu, our CFO. I will quickly cover the Safe Harbor and then we can get started. Some of the statements that we make today regarding our business operations and financial performance, including the effect of the COVID-19 pandemic on those areas may be considered forward-looking and such statements involve a number of risks and uncertainties that could cause actual results to differ materially. All information discussed on this call is as of today, February 24, 2022 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 to be filed with the SEC for the year ending December 31, 2021. Great. So we are going to cover our standard agenda; Marc will start with our 2021 year-end review. Jacky will cover our quarterly and annual financial results as well as update our forward guidance. And then Marc will look forward to the year ahead and 2022 before wrapping up with some key takeaways followed by Q&A. We’ve finished the quarter with some of our strongest results to date. And we’re incredibly excited about what lays ahead in 2022. So let’s get started. With that, I will turn the call over to Marc Ganzi, our President and CEO. Marc?

[Marc Ganzi:]

Thanks, Severin. I’d like to start by thanking everyone for their continued interest and attention today, especially new investors that are just learning about DigitalBridge for the first time. I’ll get into more detail later on the three key areas, how we finished the mission in our rotation to digital. How DigitalBridge is emerged as the partner choice to institutional capital and now we've continued to invest in high quality digital assets in 2021. The key on the right hand of the slide is how we've successfully checked all the boxes on our key goals for 2021. Just like in 2020, we've delivered on our commitments to you, our investors. And that's the key continuing to deliver on promises for you. This is essential and critical as we continue to build trust. And most importantly, as we accelerate into the next phase of our business plan. Next slide, please. As we look back at 2021, I think the biggest takeaway for us is we really did finish the mission, rotating over $78 billion in assets under management and under three years. We call this our diversified to digital rotation. And we did it ahead of schedule by over a year and on budget, once again, delivering for you, our investors. Not only did we rotate assets, we recast our corporate balance sheet substantially reducing our corporate liabilities, as well as rotating our governance with a new Board that's diverse and steeped in digital expertise. We relaunched midyear as DigitalBridge, returning back to our heritage as the leading global digital infrastructure firm. And as we enter 2022, we're now able to focus 100% of our energy on digital, where we have long had a history of operating and investing successfully for over 25 years, building great digital infrastructure, assets and platforms. It's a really exciting place for us to be now. I want to thank my entire global team again for their incredible execution. I'm humbled at their efforts. And most importantly, I'm pretty sure no one has pulled off such a complete and wholesale transformation in such little time. These efforts have set us up for success in 2022 and beyond. And I'm excited to share our business plan for you for the coming years. Next slide, please. So before we get to the business plan going forward, let's quickly summarize where we are in legacy assets. The key focus here has been to harvest capital to fuel the next phase of our strategic roadmap. Here, we've summarized the four major legacy businesses we've divested over the past year. Our OE&D sale to Fortress generating over $650 million. We close the previously announced hospitality portfolio early in 2021. We sold our management contract back to Brightspire and wellness infrastructure will generate consideration of over $300 million when it closes later this quarter. Once again, we've successfully executed this monetization program faster than we forecasted, generating the capital we originally forecasted, and it's all been completed during an unprecedented pandemic. In 2021, we generated over $1.2 billion in net proceeds from legacy monetization, against a budget of $900 million. This brings total legacy sales to over $1.9 billion in net proceeds a major accomplishment. Next slide, please. Next, I want to talk about fundraising at DigitalBridge Partners II our second flagship fund. We closed out fundraising at $8.3 billion in the fourth quarter, after having blown through our original target of $6 billion by over 38%. We’ve raised the hard cap along the way to accommodate strong investor interest as we brought the fundraising to a close. Let me put this in context. We were the third largest infrastructure fund in the world, raised globally in 2021. And that includes all of the generalist infrastructure funds. In digital infrastructure, it wasn't even close. We were multiples ahead of anybody else that's investing in digital infrastructure. It's also worth noting that we completed this fundraise in under 18 months from start to finish. That's an incredibly fast timeframe. And it's testament to DigitalBridge’s position as being the partner of choice to institutional capital looking to build exposure to this resilient and growing asset class. Next slide, please. Not only were we busy raising capital in 2021, we were just as active deploying it. Last year, we increased our asset base to $45 billion in aum. The key factor here is our investor operator model that allows us to quickly transform and scale our portfolio companies. If you look at what we did in Vantage Asia, Atlas Edge, and EdgePoint in particular, all of these platforms are benefiting from DigitalBridge’s value add that accrues to our limited partners and to your shareholders. Our acquisition of PCCW in Hong Kong, alongside of the hyperscale assets that we've created at agile were combined to form the base for Vantage to expand into the Asia market, leveraging our global hyperscale relationships in a new territory for us. Second, Atlas Edge completed its first strategic acquisition less than six months after launching, extending our reach into 11 European markets through a key digital relationship with Colt. Lastly, EdgePoint is already hit its five year business plan in the second year of full operations, as we support its growing Southeast Asia tower strategy, eclipsing over 14,000 towers, making it the largest private TowerCo in Southeast Asia, once again, demonstrating our ability to scale quickly. At digital operating, we continue to invest and grow both of our balance sheet platforms, adding another valuable hyperscale datacenter campus at Vantage SDC in the very, very difficult to build market of Santa Clara. And the anchoring DataBank's acquisition of the Houston area data centers from CyrusOne, which brings its edge data center platform to its 27th market with a total of 70 Edge data centers on that platform. Next slide, please. The last thing I want to touch on, as I look back on 2021 is our team. Investing in our organization is probably the most important thing we do. Have long said people create alpha. So this is completely seminal to our success. In 2021, we made investments in our team and you'll hear about that later as we position ourselves to take advantage of the big opportunities we see ahead in ’22 and beyond. New digital board members, new senior executives with industry leading experience new operating partners and advisors that lead new investments for us. This is our operational CapEx. It's our investment in the future. We continue to expand our presence in Europe and Asia all told, we added 22 new digital infrastructure professionals to the firm, bringing our team to over 100 people strongly dedicated solely to this asset class, digital infrastructure. This in house expertise is what truly sets us apart. It gives us our edge as we invest in the future of digital infrastructure. With that, I'll hand it over to one of our key team members in my partner, Jacky Wu, to walk you through our financial performance in Q4 and update our near and medium term guidance. Thank you, Jackie.

[Jacky Wu:]

Thank you, Marc. And good morning, everyone. As a reminder, in addition to the release of our fourth quarter and full year 2021 earnings, we filed the supplemental financial report this morning, which is available within the shareholder section of our website. Starting with our fourth quarter results on Page 12, the company finished the year with a strong quarter and seen rapid growth in digital segments, driven by successful fundraising in digital investment management and by tuck-in acquisition and organic growth in digital operating. With the digital transformation complete, our financial reporting will be streamlined in 2022 following the sale of the legacy wellness infrastructure business, which is expected to close this quarter. AFFO per share has reached an inflection point this year, and we expect even more positive momentum as we march through 2022 as I will later discuss. We successfully rotated over $78 billion of AUM, everyone now at $45 billion of all digital AUM today. And we are excited to be entirely focused on our high growth digital business this year. The company is strong and healthy, driven by our asset light investment management business that generates high-quality long-term fee earnings, as well as a transformed corporate capital structure after reducing corporate debt by 80%, and significantly reducing borrowing costs. For the fourth quarter, reported total consolidated revenues were $256 million, which represents a 65% increase from the same period last year. Total company adjusted EBITDA was $21 million on a pro rata basis, which improved from $18 million last quarter, and from a $2 million loss, the same period last year. The continued adjusted EBITDA improvement was primarily driven by successful fundraising in our high margin Digital IM business including DBP II, which officially closed at $8.3 billion in December. AFFO was a $5 million loss and GAAP net loss attributable to common stockholders was $21 million or $0.04 per share. Moving on to our full year 2021 results on Page 13, 2021 total consolidated revenues were $966 million. GAAP net loss attributable to common stockholders was $386 million or $0.78 per share. Strong growth in revenue and earnings in our digital business drove significant improvement in our financial results in 2021. In addition to more than doubling revenue, EBITDA turn positive, as the business continued to scale. And we rotated our legacy asset to our digital platform. Digital AUM increased by over 50% during 2021, ending the year at $45 billion. Moving to Page 14, consolidated core digital revenues were $250 million, a 64% increase from the same period last year, driven by new DBP II fees. Looking at the right side of the page, consolidated digital FRE and adjusted EBITDA increased to $117 million during the fourth quarter, which is an 82% increase from the same period last year, also driven by new DBP II fees. Turning to Page 15, we've seen continued growth in our digital business, particularly at our IM segment. Since the beginning of 2021, our annualized digital fee revenues increased from $100 million dollars to $175 million, and digital FRE has increased from $41 million to $97 million. Investment management capital formation has been phenomenal over the last year, led by DBP II which closed at $8.3 billion in total commitments, exceeding the $6 billion fund target by 38%. We also exceeded our year-end $17 billion fee earning equity under management targets that we had outlined in the beginning of 2021, ending the year at $18.3 billion. And we expect another strong year in 2022, with a target of over $22 billion. This asset light high margin investment management business was the key driver of our consistent growth over the last year, which we see continuing in the future, which I will discuss in more detail later. The growth in our digital operating segment revenues and earnings are the result of tuck in M&A at Vantageand DataBank. We will continue to grow digital revenues and earnings through our rotation of the company's balance sheet, and the high-quality digital assets and investments that support our investment management business. Moving to Slide 16, when Marc and I started in our current role almost two years ago, we outlined our commitment to delever and lower our borrowing costs. I am proud to say that we have completely transformed our corporate debt profile, decreasing debt from $6.7 billion to $1.4 billion, which represents an 80% reduction. Our borrowing costs have been reduced by entering in the longer duration financing agreements, as well as introducing a first of its kind investment grade fund fee securitization with the triple B rating. These new lower cost financings result in over 300 basis points in savings compared to the legacy preferred stock that was redeemed with those proceeds. Moving to Slide 17, we are expecting another strong year in 2022 with normalize FRE growth of over 50% and a midpoint of $120 million of FRE in 2022. Looking at the right side of the page, we are expecting 26% adjusted EBITDA growth this year in digital operating segments, which resulting from new tuck in capital deployments and organic lease up in our existing platforms, but that excludes any contemplated M&A and new platforms. Moving to Slide 18, I will now outline our corporate guidance forecast. Starting with the digital investment management, our recent fundraising success has demonstrated that DigitalBridge is a leading global digital infrastructure investment platform and the partner choice to investors deploying capital into this resilient growing asset class. As Marc will walk through in more detail, we have expanded into key digital infrastructure adjacent verticals, including credit, core and ventures to position our platform for growth. We have a unique investor operator model with a talented and experienced team has been the key to our growth. We've continued to build our team to capitalize on the many opportunities we seek to support the growth of our customers and generate strong investment returns for our limited partners. As a result of the success, we are increasing our 2022 guidance and our 2023 and 2025 investment management framework. Our 2022 digital management fee revenues guidance target range is $190 million to $200 million. And our digital fee related earnings target range is $115 million to $125 million. Excluding onetime catch up fees, this represents an over 23% increase in fee revenue, and over a 52% increase year-over-year in FRE. We are increasing our 2023 and 2025 digital management fee revenues, and FRE target ranges as a result of our tremendous success in fundraising, underwriting and acquiring best in class digital companies and launching new products. We look forward to continuing to leverage the strong growth in our digital platform for further improvements to our capital structure, where we see meaningful improvements to corporate cash flows, including reducing our effective cost of capital. And with that, I'd like to turn it back to Marc, where he will lay out further details on our 2022 plan. Thank you.

[Marc Ganzi:]

Thanks, Jacky. So as we look forward to 2022 in the year ahead, I wanted to set the table by addressing some of the key variables affecting a pretty dynamic macro business environment today. It's important to note, by the way that we're always monitoring these factors and planning ahead. This management team has been through many cycles. And that experience informs our preparation, how we invest in our management of our digital businesses. Inflation is the first variable that everyone is talking about. There was bound to be an impact from all the excess capital into the global financial system. That's shown up for us primarily in two areas. One, higher raw material construction cost, and two, higher labor costs to build or install fiber towers and datacenters. On balance, we've maintained our development yields by passing through these increased costs, via our contracts with customers so it has not materially impacted our expected returns. The silver lining on this is as owners of digital real estate, we benefit to some degree from higher inflation as the value of our underlying assets increases nominally. Secondly, supply chain, where it's quite common to hear about bottlenecks in the system for certain specialty parts that are disrupting entire supply chains. We've seen that backup, for example, in power generators. We've weathered this headwind by leveraging our scale, committing to for purchasing contracts that have kept us largely on schedule. And we're also expecting this to dissipate as an issue as the worst of COVID begins to subside. We all hope. Next is geopolitics. Look, with Eastern European in the news, in terms of our impact our businesses are power and utility costs in Europe, are 100% pass throughs to our customers. So any flare ups in prices do not materially impact our businesses. More broadly though, it's important to note it's not an accident. We don't have exposure to either those geographies. Analyzing and factoring in geopolitical risk is a key part of our investment process. And while we've generally steered clear and investing -- and not investing in non-OECD economies. Finally, interest rates, which have been trending higher back towards normalized levels where they were before COVID. This is another area where we have a lot of experience and we're planning ahead pays dividends. For the last year, we've been locking in low rates at the corporate level, where 100% of our debt is fixed rate. Down at the portfolio companies, which are 73% fixed rate at our digital operating businesses. We expect rates to settle in to more normalized levels, but not trend substantially higher. If they create disruption and values for digital infrastructure assets, we certainly believe that'll create a window for us to take advantage. Now, before I wrap up, it's worth noting how shielding digital infrastructure is from the broader macroeconomic and setup. The demand for connectivity is always trending higher. And we find ourselves in one of the strongest CapEx cycles in a generation protected from cyclical forces and positioned to succeed as we support the growth of our customers. Next slide. Okay, well, let's have some fun. Let's get into DigitalBridge and what we're most excited about as we look ahead to 2022 and the opportunity finally to focus 100% on digital. With the transition complete and as we accelerate, the key thematic for this year is time to build. Working with our 14-digit rich constituents, this is going to drive new proprietary deals, and continued strong capital formation as we extend our global reach. First, the organization. We've been incredibly effective with work from home for the last couple of years, but as we get back in person, it's clear there are tangible benefits to in-person collaboration from front end new idea generation to sharing best practices and asset management this is an apprenticeship business in many ways. And as we develop the next generation of talent, we're benefiting from connecting live again. Next up is capital. We've already proven we're the partner of choice to institutional investors that want to focus on digital infrastructure. But when people are committing hundreds of millions of dollars to long-term vehicles, they want to connect in person. We've done some of that during the pandemic, but we are poised to get much more active. And we're excited about how we can drive fundraising in 2022, especially with our new strategies in credit, core and ventures. Third, customers. Following the logos has long been my guiding principle and we believe that getting back out there is going to drive more proprietary deals, and more opportunities to help our customers unlock value for their existing infrastructure and trust to deliver more converged solutions. This is really exciting. And finally, down in our portfolio companies supporting their growth is ultimately how we generate value for investors. So manifesting their strategic plans gets easier live, we're planning on deploying over $7 billion in growth CapEx on a global basis in 2022. We'll talk more about that later. Bottom line, ‘22 is about accelerating and scaling our high performance platform. It's time to build and I couldn't be more enthusiastic about the year ahead. Next slide. So to accomplish our goals in 2022, the first place we're building is our digital investment platform. We've already had a lot of success scaling this business, raising $5 billion to $6 billion a year in the past two years. We think we can continue to deliver and are targeting to reach at least $22 billion in TAM in 2022. We achieved these objectives by forming capital around three new strategies we've developed a DigitalBridge in credit, core and ventures. Before I get into each of those, I want to give you some perspective for how we've assessed those opportunities, and how we're following the DigitalBridge playbook as we execute. On the right side, you can see, we look for what we look for in the new strategy. There are four core requirements that I need to develop a new product in our investment management platform. First, I've got to be able to leverage our existing relationships, and have the right people driving the product and deploying the capital. Second, we need to see strong investor interest from our LP base. Third, it's got to be a big market, a big TAM that can move the needle for us overtime. And lastly, we need to be able to leverage our proprietary deal flow that comes from our position at the center of a converging digital infrastructure landscape. All of the strategies meet those criteria as we assess those opportunities in each vertical once we assess the opportunity, we move to the next stage in our playbook. We build the team. We've done that for all three of these strategies, finding talented executives, help us develop and craft the strategies that positioned us to form capital and ultimately deployed. This is where we are today. Next slide. The goal is to establish DigitalBridge as a full stack digital infrastructure investment manager with the ability to invest and most importantly, operate and capitalize on a $400 billion annual global CapEx spend across our industry. We believe this positions us uniquely at the intersection of supply and demand with the capability to pair capital with the right opportunity to generate attractive, risk adjusted returns for you, our investors. Our ability to go anywhere globally, to show up for customers and corporates is truly unique in our sector. There isn't an opportunity and digital infrastructure that we can execute and deploy capital against. The chart here lays this out graphically, giving you some perspective on what we are building and where each of these opportunities fits in the risk return spectrum. Next slide, please. So let's start with credit where we believe institutional investors are underexposed to growth in the new economy. As you can see on the left, while the S&P 500 is about two thirds levered to grow sectors, credit markets are only at about 40%. How do they change that? Building exposure to digital infrastructure, the backbone of our growth economy. It embeds several levels of downside protection, while generating attractive risk adjusted returns. More broadly, if you look at the history of alternative asset managers, it's interesting to note that many of these firms built originally around their flagship equity strategies have gone to build credit businesses that rival or in some cases actually exceed the size of their equity franchise. Look, our goals here are much more modest today. But we do believe there's a huge credit opportunity overtime, and we're going to continue to talk to you about it. We've assembled and incubated a credit team for last two years led by Dean Criares, and it's a team that's worked together for a long time. We're excited to see how they scale this opportunity. We've developed a broad strategy with a focus on identifying and providing skill capital, to value added opportunities, where we can bring the same business building expertise that we leverage in our flagship funds to support growing businesses that have credit needs. This is a very unique and differentiated approach. We're already incredibly active as you would suspect we would be, we've closed six loans. And shortly we're about to close our seventh loan. We have a deep pipeline of 28 new opportunities, totaling some $1.6 billion across all the verticals of digital infrastructure. We warehoused