Yahoo Finance DigitalBridge Group, Inc. (NYSE:DBRG) Q1 2024 Earnings Call Transcript
DigitalBridge Group, Inc. (NYSE:DBRG) Q1 2024 Earnings Call Transcript April 30, 2024
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: Good day and welcome to DigitalBridge Group, Inc.'s First Quarter 2024 Earnings Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I would now like to turn the conference over to Severin White. You may begin, sir.
Severin White: Good morning, everyone, and welcome to DigitalBridge’s first quarter 2024 earnings conference call. Speaking on the call today from the company is Marc Ganzi, our CEO, and Tom Mayrhofer, our CFO. I'll quickly cover the safe harbor. 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, April 30th, 2024, and Digital Bridge does not intend and undertakes no duty to update it for future events or circumstances. For more information, please refer to the risk factors discussed in our most recent Form 10-K filed with the SEC for the year ending December 31, 2023, and our Form 10-Q to be filed with the SEC for the quarter ending March 31, 2024.
Great. So, it's the new year and in connection with the completion of our business transformation, we've advanced and further simplified the format of our earnings presentation. Going forward, we'll start with Marc providing a business update, highlighting key takeaways from the quarter, and covering thematics that would have historically been incorporated in our third section, executing the digital playbook. Tom will cover the financial highlights in the second section, followed by Q&A. Another advance that you'll notice is we've condensed our earnings presentation and supplemental financial report into one document. The goal here is to make it easier for investors to access a single doc that captures the highlights as well as some of the important detail behind the numbers.
We look forward to your feedback on this new format. I also want to highlight our second Investor Day coming in a couple of weeks on Monday, May 13th at the New York Stock Exchange. Some of you will be joining us in person, others on the webcast. Either way, we're looking forward to outlining our simplified business profile, discussing the state of private markets, digital infrastructure and AI, and how we continue scaling our highly differentiated platform. In addition to our senior management, we'll be joined by some of our operating partners as we give you color on what's happening on the ground in digital infrastructure. With that, let's get started and I'll turn the call over to Marc Ganzi, our CEO. Marc?
Marc Ganzi: Thanks, Severin. Let's start this call with our progress on FEEUM, which as you all know is our key revenue and earnings driver and the solid growth that we continue to see here. As you can see on the left, FEEUM grew 17% year-over-year to $32.5 billion at the end of the first quarter in 2024. Importantly, FEEUM growth was driven not only by our flagship strategy DigitalBridge Partners III and the corresponding co-invest but also via our expanding multi-strat offerings which include contributions from credit and liquid this quarter. In fact, if we hadn't had a step-down in separately capitalized portcos, as Vantage deadco moved from our latest flagship fund, FEEUM actually would have been up over 20% year-over-year.
That transaction which we announced in January is similar to the Vertical Bridge deal we did in DigitalBridge Partners II, which created some short-term FEEUM pressure, but over the long term allows us to maintain exposure to the best growth platforms. In this case, Vantage is one of the best global hyperscale data center platforms, building large campuses at scale with what we think is the best management team in the world, led by our CEO, Sureel Choksi. In partnership with Silver Lake, we're planning on building over 3 gigawatts of capacity to meet the growing demand for cloud and AI infrastructure. And at the same time, DigiBridge shareholders will now earn carry as we create incremental value at that platform versus just a straight historic management fee, which is what investors were getting in the original investment vehicle that we built at Vantage.
Bottom line, FEEUM growth year-over-year remain solid. And next quarter, you'll continue to see this metric March higher as we close incremental capital across all of our strategies. Next slide please. Next up is new capital formation. This quarter we closed on $1.1 billion in new capital commitments. That's up 47% over the prior year. So taking a step back, in summation, Q1 was good. And frankly, it could have even been better. We hold back some commitments from some of our clients that are working on a multi-strategy play with us that will play out over the next few months. We're really starting to have these more holistic conversations with our partners and LPs as our fund strategies expand. We'll talk a bit -- a little bit more about that on investor day, but it's great.
I would say it's a great strategic development for the firm. We have multiple products in the digital infrastructure space that are meeting our clients' objectives. Whether it's credit, core, liquid securities, late stage venture growth, our flagship funds, co-inventing vehicles, and continuation funds, we're really building out that multi-strategy platform where we take advantage of that digital infrastructure flywheel that we maintain here at DigitalBridge. In Q1, we received continuing commitments of over $600 million to DigitalBridge Partners III. Subsequent to our 4Q 23 report in February, we also brought in commitments to our second credit strategy and had also contributions from liquid and co-investments as well. The key here again is multi-strategy, which will increasingly even out fundraising over time.
As you know, we hold periodic closings for our strategies over the course of the year. And I'd say today with Q1 closed and good line of sight on capital formation over the course of the year, we feel very good about our ability to meet or exceed our fundraising targets we laid out for 2024 last quarter. Next slide, please. As Severin mentioned earlier, we've made some changes to the format of the presentation, bringing what used to be the third section up front to address some of the top of mind issues and strategic initiatives that we're executing on to build our business going forward. Today, data centers and AI are front and center, not just in digital infrastructure, but across an increasingly digital global economy. And in this sector, the number one topic today is power.
This is why you're seeing tech CEOs like Sam Altman, Mark Zuckerberg, Satya Nadella, all out there publicly talking about how to access power in order to meet the demand coming down from Generative AI workloads. I'd like to bring some perspective from our end as an owner, operator, and manager of some of the largest data center platforms globally to understand the challenge and some of the ways that we're trying to address it as a firm. I'll start by highlighting that it's actually power generation that's not the issue. It's power transmission and distribution that are constrained. Transmission grids are capacity challenged. And imagine, if you think it's hard to get a new cell tower permitted, think about building new transmission towers or substations.
There's a lot of friction in the system around this right now. In fact, growing contribution from renewables, which is an important development, introduces additional complexities to the grid, especially as it relates to data centers. Next slide, please. For those of you that know us well, we don't spend much time complaining about problems. We pivot pretty quickly, and our goal as a management team is to figure out solutions. So to solve the bottlenecks the grid is presenting, we're helping our portcos get creative and find ways to execute on a different kind of colo, bringing power generation and data centers closer together. On one side, it's building data centers closer to new or existing power generation. We're doing that at a number of our platforms, whether it's hydro, solar, natural gas, or wind.
This actually fits AI training models quite well, since these workloads are less latency sensitive. They can be located further away from enterprises or consumers during the AI model training phase. On the flip side, we're also figuring out how to bring power closer to where you need data centers. You can see we're doing that at our DataBank and Switch platforms today. This will be increasingly important as we move to the AI inference phase, where trained AI models are deployed at scale by enterprises and in apps used by consumers. Here, you need compute closer to the end user, not only in hyperscale but also in edge. Frankly, both of these approaches are going to be necessary to meet the demand that we're seeing across the portfolio for new power capacity.
We believe it's not going to one technology or one strategy that's going to be the silver bullet to solve the problem. So we're increasingly focused on this today, and you'll hear us talk more about this as the year progresses. Next slide, please. A big piece of the power puzzle centers around renewables. This is an area of intense interest from our portfolio of company customers. Again, it's a customer-driven opportunity and solution who've all have aggressive net-zero targets for their compute and connectivity footprints, and from our institutional LPs as well. They want to see green electrons increasingly power their data center investments, not just through -- directly through PPAs, but actually bringing that power directly behind the meter into the data center.
As you can see here, we're making a lot of progress with two of our six data center portfolios already 100% renewable with Switch powered here in the US principally by wind and solar, and Scala which is powered by hydro in Brazil. DataBank and Vantage are making very good progress as well, increasingly building or procuring renewable energy, as you saw in the prior slide. On the last pane here, another component of solving the power challenge is building and operating data centers that operate more efficiently, which is measured by PUE, or power usage effectiveness. This means the ratio of power into facility relative to the amount [used] (ph) to run the servers directly. Here, lower PUE values are desirable because they significantly use less energy, they're more energy efficient.
Also here, AI is actually part of the solution. A number of our platforms are experimenting with new technology powered by AI that operates data centers more efficiently. We don't just build in for AI, we're also investing in AI for our infrastructure and for our customers. Next page, please. So let's step back and understand why we're so focused on power and see how that aligns with one of the foundations of the DigitalBridge roadmap, invest. Last quarter, I highlighted our portfolio companies are budgeted to invest over $11 billion in data center CapEx globally in 2024 based on the bookings that came in last year and also in this year. Just yesterday, one of our portfolio companies signed a 100 plus megawatt lease. That'll be roughly another $1 billion in incremental CapEx. Today, with over 2 gigawatts under construction at $10 million a megawatt, that's over $20 billion over the next few years in new CapEx commitments.
Those are big blocks and we've already got the power lined up for that 2.2 gigawatts of under-construction capacity. But here's the issue. Looking ahead, looking around corners, our pipeline is over 5 gigawatts today and growing, and I would say growing quite fast. To turn that pipeline into bookings, you've got to be able to deliver the power, power density at scale. This is a key differentiator into the foreseeable future, and while you hear us -- you'll hear from us continuing to cover this topic, including more insights at our Investor Day around data centers and renewable power, and the convergence of those two topics together. So with that, I'll wrap up our business and strategic update and turn it over to Tom to cover the financials.
Tom Mayrhofer: Thank you, Marc, and good afternoon, everyone. As a reminder, this earnings presentation is available within the shareholders section of our website, and this quarter, we've combined the previously separate [Technical Difficulty] financial report with the earnings presentation for your convenience. Starting on Page 15, our key operating and financial metrics have seen significant year-over-year growth. Fee revenues, fee-related earnings and distributable earnings have continued to demonstrate positive trends year-over-year, and we expect this growth trajectory to continue as we progress through 2024. In the first quarter, we also generated year-over-year growth in new capital formation as Marc discussed. As the year progresses, we expect momentum to build and full year results to align with our guidance targets.
Our fee earning equity under management is $32.5 billion as of March 31st, a 17% increase from the same period last year, driven by organic capital formation in the DBP series, co-investments and credit strategies. This increase was partially offset by an anticipated fee-based reduction as Vantage data centers transitioned from our prior separately capitalized vehicle structure into our latest flagship fund, DigitalBridge Partners III, or DBP III, which extends our exposure to Vantage through its next phase of growth. Moving to Page 16, the company continues to simplify its financial reporting to align with our alternative asset management peers, specifically in our presentation of fee-related earnings and distributable earnings. Beginning in the first quarter, the company introduced fee-related earnings on a company-wide basis, which now incorporates corporate expenses and is not equivalent to the metric reported prior to 2024 investment management fee-related earnings.
FRE metrics discussed in this earnings presentation for prior periods have been updated to reflect company-wide fee-related earnings and are suitable for period-over-period comparison. Starting with fee revenues, the company reported $72.8 million in the first quarter, marking a 21% increase from the same period last year. As we progress through 2024, we continue to anticipate additional fee revenue growth, including catch-up fees driven by fundraising for DBP III, which had its initial close on November 1st of last year. Fee-related earnings were $19.6 million in the first quarter, up 28% year-over-year. While cash compensation was up due to the inclusion of a full quarter of the InfraBridge acquisition and continued investments in the platform, general and administrative costs were flat year-over-year, allowing us to improve operating leverage and expand FRE margins.
We expect this trend to continue over the course of the year, with growth in revenue exceeding the growth in compensation and G&A expenses. Distributable earnings were $2.2 million in the first quarter, with the progress we were making at the corporate level de-levering on display with continued reduction of interest expense. The LTM figures on the right, I think, give you a good sense of the operating leverage that is starting to materialize in our operating margin, which has expanded from under 20% to just over 30% on an LTM basis. Turning to Page 17, we reported a reversal of $2.7 million in carried interest income for the first quarter. The company accrues carried interest based on quarterly changes in the fair value of our fund investments.
The reversal in the first quarter stemmed mainly from net increases in fair value during the quarter, which came in below the preferred return hurdle on certain funds, resulting in a reduction on a mark-to-market basis at a small amount of accrued carried interest. Notably, carried interest compensation expense tracks these changes, and there was a commensurate reversal of a small amount of unrealized carried interest compensation. Principal investment income, which is accrued and/or realized income primarily earned on the company's GP investments in our various funds, was $2.8 million in the quarter, with $2.3 million in realized distributions from our funds. Turning to Page 18, you'll see that the company continues to maintain ample liquidity and has continued to de-lever its balance sheet, including the completion of the full exchange and redemption of its $78 million of 2025 exchangeable notes in April, reducing corporate level debt that will result in approximately $4.5 million of annual interest savings.
With that, I'll wrap up the financial results section of our presentation. It's shorter and I hope easier to follow given our simplified business profile. Before handing it over to Marc, I want to express my gratitude to everyone on the finance team and across the firm, especially Jacky Wu for welcoming me to DigitalBridge and helping my transition over the last few months. I'm really excited to be here and look forward to connecting with our shareholders at Investor Day and over the course of the rest of the year. With that, I'll turn it back to Marc for his final remarks.
Marc Ganzi: Thank you, Tom. And again, thank you to Jacky Wu and our entire finance team for making your transition so seamless. Well, look, we're going to wrap it up. I want to thank everyone for their time and attention today. I think we've continued to lay out the foundations for how we're building we believe one of the most powerful alternative asset managers tied to some of the most exciting secular themes on the planet today. We're looking forward to welcoming all of you to our Investor Day. And with that, I'm going to turn it over to the operator for Q&A. Thank you.
Operator: [Operator Instructions] Our first question comes from Michael Elias of Cowen & Company. Please go ahead.
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