Yahoo Finance DigitalBridge Group, Inc. (NYSE:DBRG) Q4 2023 Earnings Call Transcript
DigitalBridge Group, Inc. (NYSE:DBRG) Q4 2023 Earnings Call Transcript February 20, 2024
DigitalBridge Group, Inc. beats earnings expectations. Reported EPS is $0.61, expectations were $0.12. DigitalBridge Group, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings. Welcome to DigitalBridge Fourth Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Severin White. Please begin.
Severin White: Good morning, everyone, and welcome to the DigitalBridge fourth quarter 2023 earnings conference call. Speaking on the call today from the company is Marc Ganzi, our CEO, and Jacky Wu, our CFO. We're also joined by Tom Mayrhofer, who will be transitioning into the CFO role during the second quarter of this year, as previously announced. 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 this call is as of today, February 20, 2024, and DigitalBridge doesn't intend and undertakes no duty to update it for future events or circumstances.
For more information, please refer to the risk factor discussed in our most recent Form 10-K to be filed with the SEC for the year ending December 31st, 2023. Great. So we're going to start with Marc summarizing the progress we've made on our key priorities in 2023. Jacky will walk us through our new simplified financial results and turn it back over to Marc to lay out our 2024 business plan. With that, I'll turn the call over to Marc Ganzi, our CEO. Marc?
Marc Ganzi: Thanks, Severin. Before we look ahead to 2024 in our third section, executing the digital playbook, I'd like to recap 2023 and summarize on how we delivered on our key priorities for the following year. As I like to say, it's the three things that matter, fundraising, simplification, and performance down at our portfolio companies. And let's put this report in a broader context, because look, at the end of 2023, we have successfully completed a multi-year transformation at DigitalBridge, taking a diversified read across five real estate verticals and refocusing that business exclusively on the digital infrastructure ecosystem where my team has been successfully investing and operating for over 25 years. Along the way, on this $80 billion transformation, we harvested real value for DigitalBridge shareholders, from the sale of legacy assets while continuing to grow, what I believe is the leading global asset management platform focused on digital infrastructure.
So let's start with fundraising, where we saw terrific growth in fourth quarter. The combination of new capital formation, contribution from the InfraBridge acquisition, and FEEUM activation drove our fee revenues up 59% year-over-year and fee related earnings in our investment management segment up over 64% year-over-year. This is really industry leading growth. Much of that growth was fueled by new capital formation, $7.7 billion in new capital formed since January of last year through today, including the closing of over $1 billion in our inaugural credit strategy, which is a key piece of the multi-strategy asset manager that we are building here today at Digital Ridge. Next up, simplify. This really was front and center in 2023. De-consolidating our operating segments successfully with DataBank and Vantage SDC both moving off the books.
We got this done. And as a part of that process, monetized a ton of value while simultaneously deleveraging our balance sheet by over $5 billion. That's a huge win-win. We realigned our financial reporting over the course of the year to match our alternative asset manager peer set, including enhancing our returns disclosure. And in fourth quarter, we moved the operating segment to discontinued operations. And I think you'll agree, the simplified financial profile is much easier to follow and to understand for you, the investor. Lastly, my third priority, performance at the portfolio company level. This is always front and center for us in terms of what drives returns, what drives LP interest in partnering with us and what drives the continued growth of our platform.
In 2023, digital infrastructure continued to perform across all of our verticals. And interestingly, we're seeing the early impacts of Generative AI demand, particularly across the data center ecosystem. Let's cover these three topics in a little more detail, and then I'll turn it over to Jacky to cover the financials. Next slide, please. So it starts right here. FEEUM and AUM are two metrics that I now track vigorously. First, with AUM, we ended the year up just over $80 billion, which represents a 52% growth rate year-over-year. And as you can see here at FEEUM, our key revenue and earnings driver, continued its strong growth in Q4, with the activation of our most recent flagship strategy. We're now up over $10 billion or 47% year-over-year to $33 billion in FEEUM, driven by a combination of organic capital formation and the contribution from the InfraBridge acquisition, which we successfully and fully integrated this year into our platform.
In fact, we're confident that the InfraBridge platform will provide a good growth vector for us in 2025, amplifying our ability to take advantage of the middle market opportunities across a broader set of digital infrastructure and adjacent industries. Next slide, please. So, here we are, new capital formation. This is the slide I know you all wanted to see. It's the fuel that allows us to meet the growing need for connectivity and compute. I'm pleased to report that despite a historically challenging fundraising environment, DigitalBridge raised close to $8 billion in new FEEUM since January of last year. That's $2.3 billion since last quarter, including $800 million year-to-date, led by strong initial commitments in our latest flagship product.
As I mentioned earlier, our credit strategy completed the successful closing of its first fund with over $1 billion in cumulative capital commitments. Before we move on to the next slide, I want to put our fundraising into context because look, our team, Kevin, Leslie, they've done an unbelievable job. New FEEUM is up over 60% in a year, when global infrastructure fundraising was down over 50%. This is testament to the strength of our team, to the power of digital infrastructures and asset class, and to the dedication and focus of our firm to meet the call of our customers, bringing the resources necessary to meet our key commitments. This is really an incredible accomplishment, and I'm really proud of our team, and I'm proud of the firm. Next slide, please.
So next up, our second priority was quite clear, simplify. Here the centerpiece was the successful deconsolidation of our operating segment. On the left, I've highlighted not only the successful deconsolidation of DataBank, but it's really important to note the significant value creation for DigitalBridge shareholders through this investment. Starting less than four years ago, we invested $466 million of DigitalBridge balance sheet capital, which doubled in value to over $900 million by the time we recapped the business in the summer of 2022. Since we made the strategic decision to rotate our business to an asset-light investment manager and deconsolidate our operating segment, we successfully monetized almost $500 million in value that's come back to the DigitalBridge balance sheet.
In fact, based on where we're set to raise the next tranche of capital to fuel DataBank's edge computing growth, the fair value has increased another 20% just in the last year. We brought that asset under a 10% threshold in September of last year and deconsolidated it, while maintaining exposure to DataBank's strong future growth profile, which as all of you know is focused on edge computing. The other crucial aspect of the operating segment deconsolidation is that there was substantial deleveraging of our balance sheet. We took consolidated debt last year from $5.5 billion down to under $400 million, with investment level debt moving off of our books. Consolidating that investment level debt was really a distortion that I believe made it unnecessarily hard for investors to understand and evaluate and appreciate DigitalBridge.
Bottom line, we've created significant value for DigitalBridge shareholders and we simplified our business profile. Next slide please. So just as you can see here, to give you a better sense of the impact of the deconsolidation on our balance sheet today compared to a year ago, we're talking about, call it around $8 billion of assets that were really relevant at the portfolio level, not at the corporate level. A few key takeaways from the simplification include the movement of the net equity value of Vantage, and DataBank assets into investment, consistent with the treatment you'd see at other asset managers. On the liability side, I mentioned earlier, over $5 billion in investment level debt has moved off the books. Net-net, the complexity of our balance sheet is significantly reduced, facilitating investor analysis in our business.
We want to make it easy for you. So I really want to thank Jacky and the whole finance team as well as our legal team and our advisors and of course our LPs. And you'll see when Jacky talks through the financials, the simplicity and clarity that comes from not having to deconsolidate and then subsequently separate two different business units is quite stark. On top of that, it's less expensive to account for. So the changes generate real savings. I cannot thank enough of everyone on our team for their hard work on this initiative. And that includes our partners at Vantage and DataBank. Next slide, please. Finally, performance. Performance at our portfolio companies matter. MRR was up in across all of our four verticals again, driven by a combination of organic and investment-led growth.
Data centers continue to be the standout this quarter, with MRR up nearly 25% and the rest of our verticals also performing extremely well. Towers up 7%, fiber up 6%, and small cells up 3%. Really good, consistent performance, and most importantly, consistent organic growth. Demand for compute and connectivity ultimately underpins this growth, and our ability to deliver for customers continues to expand along with our portfolio. So before I turn it over to Jacky to cover the financials, I want to say a few words about Jacky. As most of you know, this will be the last quarter that Jacky will be operating in his capacity as my partner and as our CFO. I first want to highlight his partnership, his friendship, and the incredible transformation that we've been able to accomplish together, Jacky, over the last four years.
It's been one heck of a ride. Jacky's tireless work ethic, his never-quit attitude, was a big part and remains a big part of the fabric that makes DigitalBridge so unique. As Jacky moves into an operating role where I know he'll flourish, he'll continue to be a part of that fabric. So Jacky, goodbye. Thank you from all of your partners and from all the employees and of course the shareholders. You've done a tremendous job and we really appreciate you. So with that, I hand the mic over to Jacky Wu.
Jacky Wu: Thank you, Marc, and good morning everyone. As a reminder, in addition to the release of our full year 2023 earnings, we filed a supplemental financial report this morning, which is available within the shareholder section of our website. Starting on Page 15, our key operating and financial metrics have increased significantly during 2023, led by our investment management segment, which continues to grow at an industry-leading rate. This quarter marks the end of our successful corporate transformation with our sector-leading investment management business at scale and our corporate structure simplified. More importantly, recurring distributable earnings and free cash flows continue to trend positively. We foresee this powerful momentum to continue in 2024 and beyond as the company continues to asset manage, realize superior returns, and fundraise off of this track record, which drives significant yield and flow through to distributable earnings and free cash flow.
Turning to Page 16, the company's distributable earnings was $18 million, or $0.10 per share, highlighted by new fee revenues from the launch of our latest flagship fund, DigitalBridge Partners III, or DBP III, which had its first closing on November 1st. Assets under management increased to $80 billion in the fourth quarter, representing a 52% growth over the same period last year. Fee earning equity under management increased to $33 billion, which is a 47% increase from the same period last year. AUM and FEEUM growth have primarily been driven by capital raised in our new strategies and fee-paying co-invests as well as the InfraBridge acquisition which closed at the beginning of 2023. Our fundraising pipeline continues to be very strong, fueled by new commitments to our latest flagship fund, DBP III, and we anticipate making significant progress with our dynamic product offerings in 2024.
Moving to Page 17, with the substantial growth in our investment management platform further enhanced by our streamlined corporate structure, the company achieved significant year-over-year improvements. In December, we completed the deconsolidation of Vantage SDC, and results from the digital operating segment are reflected in discontinued operations. Going forward, the remaining non-controlling interest in Vantage SDC will be held as an equity method investment, similar to the treatment of our remaining interest in DataBank, which was deconsolidated in the third quarter 2023. Financial results have been recast in all prior periods presented to reflect digital operating segment results in discontinued operations. Consolidated revenues were $350 million, which were 29% higher from the same period last year.
Total company adjusted EBITDA was $32 million, up 88% from the same period last year. This growth is primarily attributable to higher fee revenues from our new products and co-investments, which we will cover in more detail on the following pages. Moving to Page 18, the company continues to grow its investment management earnings and fee-earning equity under management, generated by strong fundraising throughout our product suite led by DBP III, fee-paying co-investments, credit, liquid strategies, and the addition of the InfraBridge funds. Fee revenues excluding incentive fees was $72 million and fee related earnings was $40 million, representing 59% and 64% increases from the same period last year respectively. Investment management segment distributable earnings increased by 31% to $39 million from the same period last year, benefiting primarily from new fees associated with DBP III.
Turning to Page 19, net carried interest income, including incentive fee revenue, before non-controller interest was $58 million in 4Q 2023, compared to $84 million in the prior year period, due to the fair value increases of our managed funds at a rate that exceeds the preferred return hurdles, which generate carried interest to DigitalBridge as the manager. Turning to Page 20, fee revenues in our high margin investment management segment have continued on an upward trajectory, led by our DBP fund series and new product lines. Since the fourth quarter of 2022, our annualized fee revenues increased from $181 million to $289 million, and fee-related earnings increased from $97 million to $159 million. And looking at the right side of the page, run rate annual fee revenues are now up to $311 million.
Turning to Page 21, the company maintains strong liquidity and has significantly de-levered its balance sheet. With approximately $475 million of liquidity, including the full $300 million available from our securitization revolver, our balance sheet remains poised for accretive uses. And current corporate debt level with no near-term debt maturities allows the company to be nimble and positioning DigitalBridge for long-term shareholder success. I am pleased to report we have achieved our target corporate debt level, adjusting for our perpetual preferred equity and now more aligned to our peers in the alternative asset management space. Moving to Page 22, our 2024 guidance range shown on the page highlights the significant progress made in the company's earnings profile.
Fee-related earnings are projected to be between $150 million and $165 million at the end of 2024, and are now presented to include net corporate overhead expenses in line with our new simplified financial reporting definition going forward. We are expecting a strong fundraising year in 2024 driven by our latest flagship fund, DBP III. In summary, Marc and I are very pleased with the company's performance in 2023. We achieved many key milestones throughout the year in our journey of transforming DigitalBridge into a leading asset-light investment manager in the digital infrastructure space. The company is now much simpler and primed to generate long-term shareholder success by scaling the new products in our dynamic investment management platform.
Our newest equity fund, DBP III, is off to a great start with some promising traction despite a global slowdown across the industry in fundraising. And we are excited about the progress we are seeing in our products to start the year. As today marks my last earnings call as Executive Vice President and Chief Financial Officer of DigitalBridge, I would like to express my personal gratitude to Marc and the rest of our leadership team, the Board of Directors, all our employees, and all of our shareholders for what a truly remarkable experience these last four years have been. We have seen a tremendous change at the company, from a business where over 80% of our assets comprised of senior living facilities, medical offices, hospitality, commercial office, industrial and other legacy real estate assets made even more distressed and dislocated during the COVID-19 pandemic to now a 100% fast-growing digital infrastructure asset manager.
This company and all of our stakeholders should be proud of the significant transformation. The stock was at low single-digits. Our leverage was challenged while the top line and bottom line metrics were in rapid decline. But we endured and we persevered and we are now strong and healthy. I would also like to welcome Tom Mayrhofer, who has joined the executive team as the incoming Chief Financial Officer. Tom is an industry veteran with a proven successful track record in the investment management space, and he has already proven to be a great addition to the leadership team here at DigitalBridge. The company is set to accomplish some incredible achievements this year and in the future, especially with Marc at the helm. And with that, I will turn it back to Marc for his final remarks.
Thank you.
Marc Ganzi: Thanks, Jacky. Well, look, here we are today, and the thing that most excites us about finishing up our transformation is really the bandwidth that frees up for all of us to focus exclusively on scaling the DigitalBridge platform. That's what our 2024 business plan is all about, taking the strong momentum we've already built up and accelerating the DigitalBridge flywheel. And Look, as I said earlier today, it starts with fundraising, architecting investment solutions that are tailored to our clients' needs. This is what allows us to form capital sufficient to fuel the AI revolution. The second priority for 2024 centers on our portfolio companies, where our budgets today call for over $15 billion of success-based mission-critical greenfield construction.
This is CapEx that's being deployed at increasingly attractive development yields as rents have risen and our growth rates have risen across our data center businesses and the other three verticals. I'm also excited about a significant pipeline of new opportunities to back great management teams and the launch of the next generation of investment platforms at DigitalBridge. The third cog in our flywheel is all about scaling DigitalBridge at the corporate level. That starts with driving corporate operating leverage, improving our earnings and cash flows and ultimately redeploying that capital into the highest return opportunities for DigitalBridge shareholders. I haven't been shy about this. Whether it's developing new investment management products or going out and buying great investment management platforms, we know how to buy and build, and we will execute that strategy in 2024.
So look, I'm incredibly excited about what lies ahead for this year. It's a real opportunity for us to finally go on offense. So let's cover some of those priorities in a little more detail. Next slide, please. Let's start with fundraising. New capital formation remains a key driver for our business. To meet the growing demand that we're seeing for AI powered investment in digital infrastructure, we're targeting over $7 billion in fresh capital across our multi-strategy platform. We expect at least 50% of that to come from our flagship strategy alongside a significant co-invest raise to support the growth of our existing portfolio companies, which we have demonstrated for the last three years. Our newer strategies, credit in particular, will drive the balance of our capital formation in 2024.
We believe these targets are both achievable and attractive, representing over 20% year-over-year growth, again, in a difficult fundraising environment. One of the ways we're achieving this is through expanding our LP base. As you can see on the right, in just a couple of years, we've grown our primary LP base from 100 LPs to over 250 LPs across DigitalBridge. We think there's a lot of room to grow here, particularly as our flagship enters its third vintage and investors are increasingly familiar with both the resilience of digital infrastructure as an asset class, strong secular tailwinds that underpin its growth and the track record of the DigitalBridge investment management team over the last decade. In fact, we're spending a lot more time now with our existing LPs and new LPs, walking them through the opportunities that we're seeing that are emerging from the demand that's being created by Generative AI.
And that's a long, long tail education process and one that we think is going to drive strong growth over the next couple of years in fundraising, particularly as the demand manifests itself in new leasing. And that's the key, the conversion into organic growth and new leases and ultimately new construction where we're showing up for our customers. I'm excited to work with the capital formation team this year as we expand our partnerships with new LPs, some of whom I've highlighted here. These are really thoughtful investors with long term investment horizons and we're excited to call them our partners. Next slide please. So let's cover the AI powered demand for digital infrastructure that backs our underwriting on new investments, particularly across the data center ecosystem.
We believe AI is going to take a decade or more to build, and with 50 gigawatts of global data center capacity today, over the next six to 10 years, we will double that capacity to 100 gigawatts. As we see it, data centers are becoming AI factories, with data as the input and intelligence and insights as the output. Just look at some of the leading logos in the space, Microsoft, Nvidia, Amazon, Meta, all of these companies are substantially increasing their investments and capacity to meet the current and projected demands for AI. These customers of our portfolio companies were already trying to stay ahead of cloud demand and cloud to the edge. And now, AI has pushed that into a whole new gear. I'll just take one example that I find pretty incredible.
When Nvidia reported their most recent quarter, chip sales to their data center segment were $14 billion. Up 3.8x over the prior year. That's just simply amazing. And it's important to note those chips ultimately need a home in a data center. It'll be interesting to see what numbers they post tomorrow. So bring that back to DigitalBridge. Today, we've got a pipeline of over 5 gigawatts looking out over the next five years. That's building on top of what's already one of the leading global data center footprints with over 190 data centers across 80 markets on a global basis. This is a big opportunity, and it's going to take investors who understand power, infrastructure, land acquisition, permitting, renewables, proximity and connectivity to terrestrial and sub-oceanic fiber routes, the latest advances in cooling technology, data sovereignty, and increasingly software-defined networks to meet this demand.
We've got that expertise. We've got that experience. DigitalBridge is ready for the cloud-trained, edge-delivered future of AI. Next slide. So what does building the AI revolution look like? Well, today data centers are dominating CapEx with $11 billion of the $15 billion that's budgeted at the portfolio companies in 2024 and we're really focused on these data center investments. This is where we're leading in mission critical greenfield CapEx. And make no mistake, that's not a typo, $11 billion of committed CapEx. Just to data centers alone, North American and Europe are our most active markets today, but the rest of the world is accelerating. And I've said, AI is cloud trained and ultimately edge delivered. This is really a global opportunity at scale.
What you see here are images from active construction happening today across our portfolio. This is not science fiction. We're building new data centers, we're putting up new towers, laying new fiber optic networks. These are all critical aspects of next generation digital infrastructure networks. This is actually just a small sampling. There's so many other places, we've got shovels in the ground. But we wanted to at least give you a sense for what the AI revolution looks like in the real world today. Next page. So, the final priority for me in 2024 is scaling DigitalBridge, focusing particularly on profitability and operating leverage. One of the side benefits of deconsolidating is the ability to look at a clear picture of the progress we've already made growing our alternative asset management platform over the past couple of years.
As you can see here, we've generated not only attractive revenue growth, but increasing earnings and substantially expanding our margins from the low 30s to the mid-40s in 2024. This happened literally in the last 24 months. I'm really proud of that progress we've made, scaling a high margin, asset-light investment platform. And so I'm really excited about 2024 and beyond as we continue that momentum with solid revenue and earnings growth. Next page, please. So finally, before I wrap it up, I wanted to highlight our corporate capital allocation priorities, giving you a sense of where we ultimately plan to deploy those earnings from scale in the future. In the past few years, the biggest investments we've made alongside of our LPs, compounding value like we showed you earlier with the data bank example.
We think that's a great use of capital and allows legitimate shareholders to get direct exposure to the value creation we drive at the portfolio company level. Capital structure optimization has been another big priority for us. We've highlighted this in previous earnings calls. I'm not just talking about deconsolidation. We've made significant investments in de-levering our corporate balance sheet over the past few years. This will continue to be a priority, even as we scale the business. Next up, accretive digital M&A is another significant focus, particularly today. We think there are attractive high return opportunities to expand our platform, And we have an active pipeline of opportunities. We were pleased with the Wafra transaction we executed a couple of years ago, buying back 100% of our investment management business.
And of course, the AMP InfraBridge acquisition has now been successfully integrated with better-than-expected cost synergies and a value-add expansion in our investment mandate into middle market digital plus investing. Finally, on share repurchases and dividends, we've committed to a low but grow dividend policy and expect opportunistic share repurchases to become more prominent as we finalize the capital structure over the next few years. Next slide, please. So that covers my top three priorities for 2024. As you can see here on the CEO checklist, let's have a quick recap. One, fundraising. Get out there. Secure the $7 billion in fresh capital to meet the early stages of AI-powered demand we're seeing across the DigitalBridge infrastructure ecosystem.
Number two, continue to keep investing in our portfolio. This year alone, we'll deploy over $15 billion in success-based Greenfield CapEx, building out all those megawatts and, well, gigawatts to meet customer demand. This also means capitalizing on a growing pipeline of new opportunities fueled by our latest flagship strategy. Finally, what we just talked about, scaling DigitalBridge, delivering operating leverage with higher margins and reinvesting those earnings effectively into the best high return investments at the corporate level. I look forward to updating you throughout the year, including an Investor Day that we're scheduling for May after the Q1 earnings. So stay tuned. And look, thank you again for your continued support and interest in DigitalBridge.
With that, I'll hand it over to the operator and we can begin the Q&A section. Thank you.
See also 25 Most Popular Email Newsletters in the US in 2024 and 12 Best Gold Mining Companies to Invest In According to Analysts.
To continue reading the Q&A session, please click here.
