DigitalBridge Group, Inc. Q2 FY2024 earnings call

• Capital formation: $14 billion in equity and credit raised so far in 2024, with ~80% earmarked for data center platform investment, including notable financings like Switch, Databank, and Vantage. - Data center footprint: Largest global private data center portfolio with 4 gigawatts of capacity across 173 data centers in 84 markets globally, aiming to expand to over 7.5 gigawatts within five years. - New investment vehicle: A data center sidecar co-investment vehicle launched to catalyze the private wealth channel, providing diversified data center exposure and new FEEUM growth. - Structured capital formation: DigitalBridge Partners 3 has closed over $4 billion in capital commitments, with participation from existing and new LPs, and geographic composition including North America, Middle East, and growing Asia-Pacific. - Vantage transaction: Extended ownership and fee stream tied to Vantage, supported capital formation by generating DPI and attracting new LPs, with strategic benefits for DigitalBridge shareholders.

Management fee revenues were up 18% over the prior year. As of June 30, fee-earning equity under management is $32.7 billion, a 12% increase from the same period last year. Second quarter non-GAAP fee revenue was $79 million, marking an 18% increase from the same period last year. Fee-related earnings in the second quarter were $26 million, with LTM fee-related earnings at $90 million. Operating margins increased from 32% to 33% compared to the second quarter of 2023 and from 24% to 31% on an LTM basis. Year-to-date, $14 billion in equity and credit has been raised, with about 80% earmarked for investment across the data center platform.

• Target to raise $7 billion in new FEEUM this year, with $3.4 billion raised year-to-date and confidence in achieving or exceeding the target in the second half. - Expect FRE to grow in the second half of 2024 as new equity commitments and investment solutions take effect. - Continue to deliver management fee revenue growth and operating margin expansion. - Maintain a strong balance sheet and liquidity position. - Evaluate strategic M&A opportunities centered around adjacent asset managers.

• Market volatility risk: Actual results may differ materially due to market conditions. - Investment portfolio risk: Uncertainties in data center construction, operation, such as power supply and customer leases. - Capital raising risk: Failure to raise capital as expected may impact business growth and financial performance.

Q: Hey, two quick ones on a very busy earnings day. On slide 22 it shows obviously the inflows, the outflows, and end-to-period balance. As we think about DPI and appreciate Vantage obviously has been a good opportunity to fulfill your commitment to the LPs on an important job of returning capital to them, but how do we think of where that the inflows, it sounds like we're headed towards $7 billion if we think of 24 column on that slide. Where are DPI's headed and where's the ending balance at year-end ‘24 do we think for that that slide as we think about year-end?

A: So you had two questions I'll answer that one and I don't know if there's a one behind it Ric, but they're all smart. We were delighted to get the vantage transaction done. You know, it was a real seminal transaction for us. We're not at liberty to describe exactly which portfolio companies might be involved in a strategic transaction. But what I would say is, you know, we feel reasonably good about our fundraising. In fact, we feel very good about it and we do feel good about perhaps returning a little more capital back to investors this year, but DPI has been exactly where we'd like it to be. But I think if you look at the beginning period balance and, you know, end of period balance, I think where we're sort of guiding you to based on the 150 target is somewhere between, you know, $34 billion to $35 billion in that range in terms of an ending balance on FEEUM rolling forward. So perhaps a little bit more outflows but certainly Ric in the back end a lot more inflows would be my sort of conservative prediction to you.

Q: Hey, two quick ones on a very busy earnings day. On slide 12 it shows obviously the inflows, the outflows, and end-to-period balance. As we think about DPI and appreciate Vantage obviously has been a good opportunity to fulfill your commitment to the LPs on an important job of returning capital to them, but how do we think of where that the inflows, it sounds like we're headed towards $7 billion if we think of 24 column on that slide. Where are DPI's headed and where's the ending balance at year-end ‘24 do we think for that that slide as we think about year-end?

A: Well, look, I would just say that, you know, our conviction call as a firm is that we believe, you know, all fiber is an important part of the ecosystem and is the connective tissue that binds it all. And if you believe that a tower or a small cell or an in-house Wi-Fi 6 node is the ultimately delivery mechanism for generative AI to the edge, on the other end of every antenna, Ric, you know is a fiber connection. So whether it's home, whether it's enterprise, whether it's what I would call metro, or what I call long haul sub oceanic cables, transport. What we're seeing is we're seeing strong growth across all of the aspects of fiber. We own all of those kinds of businesses. We own businesses that deliver fiber to the home. We have wholesale businesses that stand up, you know, cable operators and provide transport for them for their fiber to the home services. Certainly, we're quite strong in enterprise. We're really strong in transport and long haul. And data center connectivity is really important. As we highlighted earlier in the call today, we're really busy in terms of building data centers, Ric. I think you understand how many data centers we have in flight today. All of those data centers need multiple redundant paths of fiber and dark fiber. So as you can imagine, we are seeing that convergence, of course, because when you own six data center companies, you own multiple fiber companies, it really provides you with the opportunity to have multiple conversations with your customers. So this is really where Switch and Data Bank and Vantage really have a competitive advantage, because they're building so fast and at such a huge scale. We have enormous control over what fiber goes in and out of our data centers. So I mean, I think -- I can't be a little more surgical than that. I mean, certainly we can continue the conversation as the year goes on, but as much as AI data centers are growing, the connective tissue that binds all of that is also growing. So we're seeing an uptick in fiber demand, and I think that's pretty consistent with what you're hearing in this earnings season.

Q: Hi, thank you. Just wanted to ask, I mean there's a lot of demand for data centers and you're building a lot. I think there's some concerns that maybe the demand won't last as long as some people think. How far or how long do you see the demand cycle kind of going on and are you worried that there might be a level of overbuilding going on in the next few years?

A: So I think, hey Richard, it's Marc, how are you? I think what we did see inside of this particular quarter, Richard, and what we've seen through six months of activity is, and I think we highlighted this on page 10, CapEx is up, it's not down. So a leading indicator when, whether it's a data center development, tower development, fiber development, is when CapEx starts trending down at our core customers. Instead, we've seen actually the converse of that. We've seen CapEx accelerate. I think what's different about this data center cycle versus the last time the industry was overbuilt is, I know for just, you know, I can only speak for the six platforms that we own and the 93 data centers that I have in construction. I've got leases on the end of every one of those data centers. That was not the case when we had the last data center recession, Richard, if you recall back in 2009 and 2011 when people were speculatively building data centers and they got caught with inventory that wasn't leased. Everything we're building, Richard, has a customer. That's for DigitalBridge. That's the 90 plus data centers that we're building. And that's the $35 billion of AUM that we're adding. And the incremental 3.5 half gigawatts of power we're lighting. I would say one other factor, Richard, you've got to keep your eye on is, do you actually have the power attached to those data centers. That, to me, is actually a more interesting topic of discussion that you and I can explore when we spend some time together next is every one of the 90 plus data centers I'm building has a will serve letter and has power attached to it. Whether it's direct power into the grid, whether it's renewable power through the various partnerships we have, you know, everything that we're lighting has a lease and has power and has a building permit. And if you've got those three things going for you, a will serve letter, a customer lease, and a building permit, you're in pretty good shape. So that's what we're doing. Again, I can't speak to what QTS is doing and Blackstone is doing, I can't speak to what CyrusOne is doing with KKR and GIP. All I can worry about or DLR and Equinix is what we're doing. And you know, we're doing it at a very tremendous amount of scale. I think we've demonstrated that on this call today in terms of our market leading position as the leader in global AI data centers. And I think the important thing is just learning from the lessons of the past. And having been in the sector for over 30 years, I think you see this company has taken a very disciplined approach to capital allocation, and most importantly, who we transact with and who we have counterparties with, and then the power companies that we've partnered with.

Q: Thank you very much. The cumulative catch-up fee dynamic, I think we're beginning to understand that. Hopefully the market does as well. But does that become a headwind next year or will this phenomenon persist through DBRG's earnings so long as FEEUM growth picks up?

A: I mean, catch-up fees are always going to be a part of the fundraising process. They're a little bit larger this year, given we have a large fund in the market. But there will always be typically catch-up fees when you're doing, you know, kind of fundraising. And I would also say to that, Jade, you know, one of the things that we've really been emphasizing is that this firm is not a one-trick pony anymore. We have multiple teams, multiple products, and you know as evidence this year between our data center sidecar vehicle, our expansion of our credit strategy, DigitalBridge Partners 3 and Co-Investments, we actually have multiple products in the market at the same time. And as we look around the corner to next year, give you the spoiler alert, we're going to have more products in the market focused on AI infrastructure, focused on power, and focused on the things that really matter for what we're doing to power the digital economy. We see no slowing down. We see no abatement, Jade, in the opportunities set at DigitalBridge today. In fact, we're just coming out of our strategic summit with our senior leadership team, and we have more ideas to execute, more products to launch. And when you look at the amount of CapEx that's going into AI, AI-related infrastructure, AI-related adjacent power, our swim lane Jade has never been bigger. In fact, I'll be really clear with you, our swim lane is growing and growing really fast. So this is a good quarter because it's kind of a launch point for us. It's the first time we've had more than four products in the market at the same time from a fundraising perspective. And this is really the new cadence that Tom and myself and Liam and Ben and the entire team are on now. So this is a big inflection point for DigitalBridge this quarter.