Okay, just didn't wanna curse while I'm on air. All right, we'll kick it off, everybody. Thanks for joining us, and particularly pleased that Jacky Wu, CFO of DigitalBridge... Sorry, CFO. You didn't hear, you didn't-
Three companies ago.
You didn't hear that?
Three companies ago.
CFO of DigitalBridge, previously at Verizon Wireless, previously at American Tower, is joining us, and Jacky, have enjoyed working with you-
Thank you
... all these years. We were reminiscing on the industry stuff. We will miss you.
Thank you.
For those that don't know, Jacky will be leaving sometime next year in the early part-
Yeah
... once you get the Vantage deal done, and the books closed on-
That's right
10-K-ing it, probably.
June 30th is the date, technically.
Okay.
Yeah.
A CFO named is coming in to start working in transition with you, I think January 8th.
January 8th, yep.
Yeah. So a lot of changes, but Jacky's specialty, beside knowing wireless at Verizon, towers at American Tower, and all digital infrastructure, really good transitional, transformational, transactional, all those things, he was just an expert. So again, have enjoyed working with you throughout the years.
Thank you.
That said, DigitalBridge is becoming kind of an alt asset manager.
Yep.
One of the reasons why Tom-
The transition, yeah.
Yeah, right. Talk a little bit about the capital raising environment. Obviously, it's been tough out there, where you guys are at. You've got some targets out there, short term, long term, and how we're looking into the that side of the business.
Yeah, sure. So what we've disclosed is that by our next reporting cycle, we should be on track to hit to the $8 billion that we had tracked for 2023. A lot of that coming from our third iteration of the flagship funds, which is DBP III. We did our first close on that $2 billion, over $2 billion on November 1st, so those fees will start coming in pretty nicely. And we should get to about $4 billion or so, you know, by the time we report, and kinda have good news hopefully to share at that point in time in February. With that said, the fundraising environment is tough, right?
Marc and I, and others, Ben, in various conferences, we've all said, and I think everybody knows, that fundraising has been more difficult this year than it was two years ago with a zero interest rate environment. But with that said, we're very proud of a couple things: One is the fact that we're in a really strong, secular, tailwinded asset class with digital infrastructure. There's more allocations, more funds wanting more exposure to digital infrastructure than ever before, so that's been helpful for us. Our track record has been good, right? If you look at the realized returns in our first fund and our second fund, they're all in, you know, close to 2x MOIC, and that's right in the sweet spot of what we should be doing.
We expect more of that to come over the course of the next couple of years. Our funds are still relatively young, but the realizations that we have had have been good, so that helps. So those things kinda help offset the tougher environment. We're still tracking to everything we said we'll do. It's taking a little longer than we would like, but, you know, when the whole industry is down about 35% in terms of fundraising, us holding on to what we said we would do and trying to track to that, I think is a nice win.
And then with Tom, what were the skill sets you were looking for in finding that replacement for the irreplaceable Jacky Wu?
Well, I'm glad it's... I am replaceable, thank goodness. But it's been a two-year journey, roughly, and what we really wanted was to find somebody that's gonna take the company to the next level. You know, when you look at his experience, his 18 years at Carlyle, COO and CFO of a fund, EJF Capital. So having had the seat, but also having that experience, the scale of major publicly traded alternative asset manager, seeing through their IPO, you know, I think those are all big checkboxes for us. And so really taking this 100% alternative asset manager now to that next level, and really competing with the big guys, that's what we're looking forward to, and we have no doubt he's gonna do a great job.
Yep. One of the areas you've been talking about is credit.
Mm-hmm.
Walk us through how big that market is, what you think your share could be, and who's the customer for that product?
Yeah, sure. So I, I think that the product and private credit in general, and you hear John Gray talk about it, you hear Mike Arougheti at Ares talk about it, but it's such a huge market, right? But within the context of digital infrastructure and what we think we can do, Marc and Ben have been very clear, we definitely think it could be at least a $10 billion idea for us. And our first fund, you know, certainly, with commitment to $1.1 billion, which we just recently disclosed that we closed on, have done very well, right? Dean Criares, that team, has really just killed it in terms of returns, in terms of what we're tracking to.
I would say what we're looking back on is that we probably are doing a little bit more fiber credit deals than other asset classes. I think that makes sense now, looking back, right? That's the asset class where there's been a little bit more dislocation in the capital financing space versus data centers, and especially with AI and towers, which is a little bit more asset light, lower capital intensity. They haven't had as much of an issue with capital financing. So I would say we probably would index a bit more towards fiber looking back, but you know, all the investments that we've made so far have been great, and we expect more to come as we fundraise further in future iterations.
Fiber, lots of variations of fiber: fiber to the home, enterprise fiber, dark fiber. How would you kinda look at it and say the risk profile you're looking at to get kinda the returns you want?
Yeah, sure. So on the credit side, I would say that we probably can skew a bit more on the consumer side. It still has to be well-built. It's gotta still have a strategic moat around it in terms of, you know, the demographics of that area, who they try to attract in terms of, you know, the region that it, it's built on, et cetera, HOAs, that type of stuff, that makes it a little bit more attractive. Reason why consumer probably we're more open to that on the credit side is, as long as they're well-built, and it's a pretty decently capitalized business that's got great penetration rates and returns, we feel good about our underwriting and being able to pay it back.
Obviously, you know, from an equity side, and credit, but we do like longer duration contracts, we do like wholesale dark fiber better than consumer risk. But those are the businesses that probably can get a little bit more bank debt and bank financing. So from a credit perspective, as long as we feel good about that business, that consumer side, we will definitely look at doing it. On the, on the equity side, we've been very clear, consumer fiber to the home is a very difficult asset to underwrite to. Especially at the multiples that they were trading at a couple of years back. But I think now they've kind of peeled back. We will look at them, but still a high bar for us.
Yeah. We've heard some of the fiber folks are securitizing fiber. Are you looking to do that as well, or does that fit into kind of the cost of capital you're looking for?
Yeah, no, we will definitely look at securitizing fiber and some of those, assets that we have. We think that it could be a good market for it, right? But, as we look at it, as long as we continue to push towards longer duration contracts, investment-grade, you know, hard assets, you're, you know, and, and it's fixed there, I think it's all very securitizable, and that there's an opportunity to bring down cost of debt. But, a lot of fiber business, unfortunately, out there, probably don't all fit those tenets, right? They have a bit more churn, less investment grade, maybe a lot of small business, medium-sized business sales, that type of stuff, which has de-escalator, so those are harder to underwrite to.
Yeah. So credit looking like an interesting growth area for you. $1 billion-$10 billion might be what you can grow that to. DBP III, you mentioned you've launched it. What does that scale to? How many years does it take to kinda get that one up to fully?
Sure. So, in terms of the commitments and actual fundraising, we think of, you know, if you look at our history, it takes us about a year, year and a half, a little over a year and a half, to kinda get to where we need to get to in terms of fund size. So you should look and expect something similar to that historical cadence. Now, granted, it's longer, you know, tougher fundraising environment, but I think that that still seems about right. And, you know, throughout 2024, we'll continue to, you know, fundraise the rest of DBP III. In terms of sizing, we haven't guided the street in terms of the ultimate size, but our fund two was $8.3 billion. You know, we feel good about what we can deliver and do.
Marc's talked about the fact that we have a risk-adjusted pipeline that actually exceeds that. So we'll do our best. We feel good about it.
The guidance that DigitalBridge has provided out there, short and long term, has a without M&A and with M&A. Help us understand what that market looks like as far as what M&A might mean. You've done one, obviously-
Yep
... one good-sized one. What that market looks like, who else are you competing for, and kind of the odds of going towards the with versus the without?
Yeah, sure. So our underwriting for other GPs is the following: Does it add to our platform in terms of skill set, in terms of product set, that's additive to our platform today? Two, you know, do we run into any LP concentration risk? Like, are their LPs exactly the same as ours, or are they bringing a new Rolodex of relationships that can be tacked on to our global footprint, which would be a nice add? Three, obviously, price and return for sure needs to be there as what we pay for it. So those things all have to check, right? And cultural fit, for sure, it was the fourth one. So those things all have to check.
So as long as those things check, Marc and I, and Ben, and the board will gladly entertain that. And for AMP Capital, which we acquired their equity business and now called InfraBridge, it checked those boxes. We got, you know, over $32 million of FRE run rate to our business. That's actually synergized from our original underwriting of $23 million. So was able to tack on... We picked up a distribution team in Hong Kong, which allowed us to increase the size of our LP base in Asia, which is now fast becoming our third largest region for capital formation and raising, which has been great. So all those things check for AMP, but as we continue to look at the market, there's a lot of other GPs out there that don't add much of any of those four.
What we don't wanna do is just buy stuff for the sake of buying things, because, A, it's not our fiduciary responsibility, and they always end up rearing its ugly head later down the line. So, we'll continue to be selective. We think that there's more of them out there, but we're gonna just be selective about it.
How competitive is the process to buy those?
You know, surprisingly, a lot of times, they're not real full auctions, right? Because, you know, a lot of fundraising, you're out in the market, so you also don't wanna tell people, "Hey, I need your money, but I'm selling myself too," right? It's kinda odd. So you know, it's not a full auction, but they are robust, right? Because, you know, folks like us, folks like Blackstone or CVC or, you know, Bain, they're gonna get the call if somebody's trying to, you know, market themselves. TPG recently picked up Angelo Gordon, which was, I'm sure, a great trade for them. But, you know, I would say the tougher GPs that don't make any sense, they are gonna be cheap, but they're cheap for a reason.
But the really good ones probably aren't up for sale, so we just need to find that happy medium.
Okay. The digital infrastructure space, energy came up in one of the other meetings today. Ed Mills did a great job, I thought, at lunch, with our D.C. policy view. Renewables are definitely hot in Washington to try and say, "Let's reduce China exposure as we move from oil to electric." What are you all—are you interested in energy? Why would you be interested in energy, and how would you play?
Yeah, sure. So we are absolutely interested in energy, certainly sustainable, renewable energy, for a couple reasons. One is, obviously, we're huge in data centers. It's one of our largest asset classes we're invested in. And as a result, we have to solve that energy issue for our own portfolio as well, right? And getting smarter with it, I think, makes sense, and being a part of that. There's clear synergies there. And secondly, there are good returns from a, it can be, as long as it's a good company and it's underwritten well. But we think you can make money off of that, right? And so the combination of those two makes sense for us to really delve into it.
Now, we like to make sure when we go into a new product, that we have the resources, the people, the processes, the systems to win. That requires some investment. There's a couple ways to play it. Either we go and, you know, have a couple of our smartest people at the firm really do the work and underwrite and look at it, or you partner with a known, you know, GP in the space, and do kind of a joint, you know, effort to be able to do it. We're open to all those options, and I think Marc's talked about the fact that we've, you know, kinda looked at a couple of those scenarios. So I think more to come from DigitalBridge.
We definitely should have more excitement in this area to come over the course of the next year or two.
Can that fit into the current umbrella of funds, given the mandate and... Is it flexible enough, or does it need to have its own product?
I think it probably needs to have its own product, you know, candidly.
Right.
Yeah.
As you think about any other adjacencies. Well, first, how do you define digital infrastructure that's probably in the existing mandates?
Yep.
What other adjacencies might be interesting?
Yeah, sure. I mean, we've delved into other adjacencies before, whether it was billboards, those more esoteric, cell tower structures, like billboards. We've delved into, certainly, tower land, and, and that itself has now switched into switching facilities and other easements, fiber easements, et cetera. So we have platforms that focus on that with Landmark and TIP. But I think other areas that we've talked about, certainly satellite landing stations, those are areas that make sense for us because they have to interconnect with fiber. They've got to interconnect at some point, especially in the future of networking with the terrestrial network that's at play. So I think that that's certainly something that could be synergistic, and that can certainly fit the mandate of what we do with our DBP series.
It seems that spectrum is not in that definition.
Spectrum can be. You know, candidly, I've looked at one or, you know, or two before. But you've got to really make sure that it's leasable, et cetera. Now, people always talk about it being, you know, beachfront property. For sure, at some point you'll need it, but, you know, your audience is ultimately the major carriers, and, you know, if you're looking at mid-band, like a 3.45 position, I don't see Verizon really begging for it since they just bought a whole bunch of mid-band. So, we'll be thoughtful about it. We've thought more and more about spectrum, but we like to make money, and we're not just there to just buy it and hold it, you know?
Some of the, the fiber world, you guys have Zayo. EQT, I think, is there as well, obviously. Every time I don't mention them, I hear about it.
Yeah.
ExteNet. Update us a little bit on how those businesses are doing.
Yeah, I'll start with Zayo. Look, we're extraordinarily pleased with the team. Steve Smith and Jeff Noto and Andres Irlando, I can't be more pleased with that team. Our underwriting, in my opinion, has not really changed. It takes time. Any transformation takes time. I always like to say, "Rome wasn't built in a day," when I first became CFO at Colony. You know, people were, you know, chomping at the bit for changes right away, but it took us three years to transition out of that stuff, right? So it takes time, and we laid out a framework that was multi-year for that reason. Zayo is the same, right? So, you know, first and foremost, our, you know, our underwriting, and, and we've now seen through it, is, A, get more focus with their asset class and, and their business, right?
So zColo, for example, was carved out, and that was put in the right place with the data center business versus, you know, the rest of Zayo, which is really a fiber business. Secondly is, all right, trade out the talent, right? So yeah, we went ahead and upgraded with Steve Smith, and then with Andrés as President, and then Jeff Noto, dear friend of mine, who's now CFO of, of, of the business. Recasting the business plan, right? Was another element of it. And then hardening the network, making sure that there's improved quality, reduced churn, but also improving margin profile, which is ultimately route swaps and, and, and other things that's gonna be accretive to the existing network to harden it.
I think those are things that have already been spent and have been underway, and so I expect that, you know, 2024 and beyond is gonna be really a good couple of years for the firm. So we're excited about that business. And then with ExteNet-
It's capital-intensive still. I mean, there's a lot of capital that needs to go into it.
There is a lot of capital that needs to go into it, but I think the team has done a great job with capital efficiency. So, I think what people have seen in terms of the results over the last couple of quarters is that that pacing of CapEx has been right-sized, I think, pretty materially from the days, you know, from prior management. We did spend and go ahead and spend a fair bit on hardening and improving the network quality last year, but I think we're seeing the fruits of that now and going into 2024. The other piece is we're being much more selective about what new business we underwrite, too. So higher hurdle rates, for example, asking for those capital contributions is another example. But making sure and understanding, look, the rate environment's different, right?
It's not zero interest-percent interest rates. It's- you're looking at 4% or 5% 10-year notes, right? So, you know, based on that and the spread that we're- we need to, you know, certainly looking at a risk premium, we're asking for more, and I think that's smart because I think a lot of times in, in, especially in fiber, and having, you know, looked at the remnants of WorldCom, we bought MCI at Verizon. A lot of times you get enamored by chasing revenues, by just building and buying it. You can't do that, it's unsustainable. And I think, you know, history of Zayo was a, a, a bit of that, you know, in the past.
Chasing the deal. Yep.
Chasing the deal, exactly. And then access cost runs amok, and, you know, margin profile looks terrible, and there's no free cash flow. ExteNet, I think for us, our perspective is separate out the business from the perspective of indoor. Indoor continues to perform very nicely, great lease-up, good real estate and venues. I think Rich Coyle and the team have done a great job from really managing and growing that side of the business. I think the outdoor side continues to be... and I know everyone in the audience is probably moaning, "Hey, you know, if you, you know, it'll come, it'll come." Physically, it has to, just purely because of densification with 5G, and you can't, you know, zone and permit that many macros. But at the same time, as everyone's been talking about it.
But to be fair, you know, it went from 3G to 4G, 4G to 5G. 5G does require even more densification, certainly with the spectrum that's being utilized for it. So it will have to occur, especially when new demand services like autonomy, logistics, come into play. But I think it is more of a 2025 event. You know, Marc and I probably have bets whether it's, you know, back half of '2024 or early '2025. Needless to say, we think we're excited about the business. ExteNet is primed, and Boingo too, but Boingo more, you know, venue, indoor, and, and military, and then, and then ExteNet, you know, indoor and, and outdoor. But on the outdoor side, it, it really is gonna happen, in our opinion.
And I think piggyback on some of what you said, obviously, Crown Castle and Elliott activism coming in, our sense has been what you just said, "I need to look at my return on capital. I need to acknowledge the cost of capital has gone up.
Mm-hmm.
The cost of deployment has probably gone up, and I need to go back to customers and go, 'Hey, I got to earn my return of capital.'
Yeah.
that there's got to be some frank discussions between the person that wants these systems built-
Yeah
... whether it's fiber or small cells, and the company that's gonna build it.
Yeah. Look, I think, you know, I've known Jay for a long time, and I know he's probably, you know, certainly going through a whole lot with everything at the firm, looking for a new CFO as well. But I would say a couple of things. You know, strategic focus is important, simplicity of the story is important. I think that, you know, his underwriting and his views strategically about convergence, fiber, small cells, towers, is not wrong. We subscribe to that view. We like the way we play it, which is in a fund context, so we can't be everything to everybody. We let, you know, Vertical Bridge be the best cell tower company. We let Boingo be the best indoor small cell Wi-Fi business. We let Zayo become the best fiber business.
We let them work together. It's all commingled within a fund construct, so we can deploy in more scale and faster. But an investment in DigitalBridge, you're getting that optionality at convergence. It's really hard to do it all on your own balance sheet because at some point, to your point, capital intensity as well as return on capital, as well as scarcity of capital, makes it difficult, right? So if you're spending money on small cells and fiber, you're inherently taking away from towers. And when, you know, Crown started this journey over 10 years ago with getting into fiber and small cells, I would say there was a lot of growth left in towers, right? And it's proven true by SBA and AMT's stock prices being really high. You know, during the...
Even 20, up until 2017, 18, 19, there was still a lot of growth in towers, and I expect that there still will be. So when you're making that capital allocation, candidly, for me, I'd choose towers over small cells any day because the unit-level economics of towers is that much more accretive, right? For not a lot of CapEx, you get a whole lot more margin and a whole lot more free cash flow. If I just say it that to you that way, you should be doing towers all day. So there's some theories of to getting some more strategic focus for that business and kind of unlocking that, but I'll let Jay and his board and, you know, his investors talk more about it.
One of the things being bandied about out there, you guys closed on your Radius transaction. I think, sorry, Landmark.
Landmark, yeah.
It's been a long-
I was like, I looked. I can't say I looked at Radius or not, but-
No, well-
... it wasn't me.
It might have been a company or Company A. But, you guys closed on Landmark.
Yep.
EQT closed on Radius.
Yes.
Big checkbooks there. How are you looking at the land business, and do tower guys need to own or control the land under their towers, or is it possibly a smart thing to look at?
Uh
... someone else being the owner of it?
Yeah, well, I mean, and it's funny that you back to back that question with Crown.
Well, pure random.
Yeah.
Pure random.
Randomly. Look, we love our Landmark business. I think the team there has done a fantastic job. I candidly think the deal team I've got on that is one of the best in our business. And I think that they should, right? Only reason why I think they should own the land underneath their own tower is security, right?
Control. Yeah.
Now, I am scared a bit from it because when I used to oversee land at American Tower, along with M&A and finance-
CFO for,
Yeah. Exactly. We, and this predated my time, but we had a smaller, I'm not gonna name the name, but a smaller, tower aggregator that started buying up our land. And, it happened before I joined, but it was my problem to deal with, which was they were, they were hostile. They wanted to steal your tower, and a lot of these towers make $100,000-$200,000 a year. I mean, and the margins is 89% gross profit margins. If they own your land and they don't renew your lease, you're losing 100% of that margin right off the bat. It's, it's a little dangerous and scary, especially when you have your capital facilities wrapped up in asset-backed securities, right? You're collateralizing that asset to borrow against, right?
So if you don't have the security on that underlying, you know, easement, it's a real, real issue. And if you start losing towers, the carriers don't come back to you either, you know. So that's putting not just at that individual site at risk, you're risking your franchise. And so I do think that it's a balance. Now, you know, some people... There's a lot of literature right now about commercial real estate, my old side of with Colony, unlocking, you know, selling off the easement, so that way you're playing the arbitrage between the differential of renting versus owning property, right? Because interest rates are so high, that theoretically there's a little bit of an arb right now with renting over owning.
But I don't view it purely as financial engineering in this case, because there's a strategic value with really owning your own ground. So, I'm a little cautious and nervous about stuff like that, but I certainly love the space in general because it's... Regardless, a lot of those leases have revenue shares. If they get leased up, it's no different than a tower. The rooftops are just like a tower. You can lease that up. You know, as long as you're originating these easements at a good price and entry multiple-
Uh.
You can make a whole lot of money. And a lot of times when you trade it back out, you're trading at almost like a tower multiple. So the arb, you know, pre and post is a great return. So I feel really good about our two land platforms out there, Landmark and TIP, Telecom Infrastructure Partners. I'm sure, you know, good luck to EQT with Radius, but I feel good with the ones that we have in the space.
The changing interest rate environment, hopefully stabilizing, came up at the lunch today, too. Exact timing of... Feel there will be rate cuts in 2024. Is it middle of the year? Is it second half of the year? But that improving rate environment or financial engineering type mechanism, like land lease, is really a financial engineering.
It is purely a financial engineering play, and that's why, you know, we were a little slower with originations the last year and a half. As rates continued to go up, we were demanding a whole lot more in terms of the spread-
Yeah
... and that allowed for us to be much more frugal with our capital programs. But now, you know, we brought Ardea in because we do think, you know, rates have stabilized. I'm not gonna go out there and say it's, you know, definitely gonna be a rate cut in first quarter. I think Jerome Powell was very clear that that's not the case, although I think he has an incentive to say that, to make sure that marginal expectations of inflation are still there to reduce the aggregate demand in the economy. But I think that it is, the rate increases are over and, you know, maybe we're primed for a rate cut in, by middle of next year.
Yeah.
You know?
That was kind of consensus at the lunch, too. Kind of middle of the year, maybe it slips into the third quarter, but we'll see it then. I want to close on an easy one for you.
Yeah, sure.
So, well-
Thank you. I like those.
Yeah, yeah, yeah. The Vantage data centers, reducing it down to where you can deconsolidate it.
Yep.
The opinion question is, should be some carried interest then you would expect, and just carried interest in general at DigitalBridge.
Sure. So, I like carried interest because I get paid that way, and we all do. And then that's what we get—we do, right? Get an outsized profit for our LPs, and we get a share of that, and that's an alignment. That's the perfect alignment in my opinion. DataBank, we obviously booked a really nice carried interest, and we booked over $230 million in gains in the quarter, last quarter because of it. DataBank, though, is a different business than Vantage SDC. It was a high-growth business because of tier two, tier three data centers, the AI proliferation. The occupancy utilization at DataBank is about 71%.
Mm.
There's a lot of growth there. Vantage SDC is at over 95% now. From that perspective, the whole point of stabilized is that there shouldn't be that much, you know, excess, outsized profit beyond the regular way, you know, return that we're guaranteeing our investors or, or, you know, committing to our investors. In my expectations, I would tame down the, the level of carried interest that we set with DataBank onto Vantage SDC. We still like that investment because Vantage is a great global brand. But, you know, the deconsolidation, I'm working hard on it. That's my swansong retirement. You know, that will be the last vestiges of anything on balance sheet or REIT, that Colony and now DigitalBridge has, during my four years at the firm.
Once we deconsolidate, we'll be 100% private equity alternative asset manager, very simple, single segment business. I expect that to be done over the course of the next, you know, soon.
Yeah.
Hopefully, we'll have good announcements then. In terms of return and carried interest for Vantage, I'd tame that down-
Good
... a little bit more.
Cool.
Yeah.
We've hit the zero mark. Appreciate the time.
Thank you.
Thanks for coming.
Thank you.