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.

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?

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…

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…

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…

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

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.

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…

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

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.

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.

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

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.

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.

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.

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.

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.

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

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?

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.

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.

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.

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.

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

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?

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.

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?

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.

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

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?

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.

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.

Yes, Jacky go ahead. You are my tower guy.

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.

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

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.

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.

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?

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.

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?

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.

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.

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.

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