DigitalBridge Group, Inc. Q2 FY2023 Earnings Call

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. 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 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 generative 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 a tremendous milestone on simplification, and it will deliver additional capital back to the balance sheet. On the final priority, portfolio performance. We demonstrated sustained growth across all four key verticals. I also want to highlight development CapEx here. Our portfolio company’s ability to deliver new capacity to our tech and telco customers, whether it’s on towers, data centers or across fiber routes, really sets DigitalBridge apart. Year-to-date, we’ve successfully deployed over $4 billion to meet the next leg of demand at very attractive build yields supported by long-term customer contracts with a high concentration on investment-grade counterparty risk. So, let’s detail fundraising and our simplification progress before we get into the financials. Next slide, please. New capital formation. As I highlighted earlier in the year, this will be the seminal KPI for 2023, and I’m pleased to report we’ve raised $2.7 billion since last quarter. This brings us to $3.4 billion year-to-date. About half of that, $1.2 billion came from initial commitments to our flagship DigitalBridge Partners Series, which will start generating fee income once we finalize an initial close. We’ve also completed $900 million of co-investment syndications, most notably Switch, which is one of the best positioned data center platforms for next-generation compute. Last quarter, I highlighted the structural growth we expected to see in co-investment as our platforms continue to grow and how more of that would flow into FEEUM this year. That manifests itself inside this quarter. You should expect as demand for digital infrastructure increases with the advent of generative AI, so does our need for co-investment capital at our digital portfolio companies globally, which in turn helps us scale and drive FEEUM and FRE. The balance of fundraising came from core, credit, and our liquid strategies, which continue to add AUM at a steady pace. I’m very pleased with the progress on all three of those strategies. They continue to be strong contributors to where we’re going. So, this puts us right on track to hit our fundraising targets for this year. Institutional interest in allocating to digital infrastructure remains strong. And just as we’re seeing early signs of demand driven by generative AI at our portfolio companies, we’re spending more and more time with our institutional clients, helping them understand the implications of generative AI on the investment needed to satisfy that demand. Next slide, please. So, this slide highlights the solid year-over-year growth that we’ve seen in our FEEUM and AUM. We ended last quarter with $29 billion in FEEUM, up $10 billion over the prior year, representing a 53% annual growth rate, driven by an equal combination of organic capital formation and contribution from the InfraBridge acquisition. Similarly, on the right, AUM, which tracks the NAV of the assets that we manage, was up to $72 billion last quarter. That’s up 51% over the prior year. So, as our platforms continue to scale, we look forward to updating you on our progress here as we continue to grow revenues organically and earnings over the course of the year. Next slide, please. So, deconsolidation. This is the number two topic behind fundraising for 2023. So, I’m pleased to report we’ve received $170 million in commitments to the DataBank recap process. We’ll close additional commitments shortly, which will provide us with sufficient capital to deconsolidate that business from our financial statements inside this quarter. We expect to report final numbers later during Q3. So, once completed, this will reduce our pro-rata ownership below 10% and generate at least $45 million of incremental proceeds to the DigitalBridge balance sheet, which we can recycle into our capital allocation framework. I can’t underscore how big of a milestone this is for us, and kudos to the capital formation team and everyone at DataBank. We placed over $2-plus billion into the permanent capital vehicle that was responsible for recapitalizing DataBank. And what’s even better is that our leasing pipeline has grown over 3x year-over-year and has seen the steepest jump across our portfolio on the back of new AI-driven interest. So, at the end of the day, we’re thrilled to maintain a significant stake in that business, and we’re proud to back our own team going forward and, at the same time, deconsolidate that stake and continue to press forward with our main corporate objectives. We really feel excited about this. So, at the end of the day, one down, one to go. Vantage SDC is up next, and we’re pleased with the progress we’re seeing there. Consequently, we remain committed and confident to finalize the deconsolidation of Vantage SDC before the end of this year. So, really good progress on both of those two initiatives, DataBank will get done in this quarter, and we’ll finish up Vantage SDC by the end of the year. Next slide, please. So, portfolio performance. This is the last of the three legs of the stool for my key initiatives for 2023. I want to highlight the continued growth we’re seeing across our four key swim lanes. MRR across the portfolio is up in all of our verticals, driven by organic and investment-led growth. First, data centers, up 22% year-over-year. Towers also driving substantial growth, up 21% year-over-year as carriers proliferate their 5G networks around the world. Fiber has seen a dramatic increase, up 15%. And small cells quite didn’t deliver the double-digit growth we’d like. But nonetheless, we are seeing sustained growth in small cells. And we believe densification in 5G networks will drive those numbers higher in the back half of this year and certainly into '24 and '25. I talked last quarter about supporting our portfolio companies as they serve the world’s leading tech and telcos with development CapEx. That’s how this investment pays off, manifesting itself in growth and the value of our portfolio, as you see above. So this year, year-to-date, we’ve deployed $4 billion supporting the growth of our portfolio companies in a challenging macro environment. I believe this enforces the consistent need for new digital infrastructure by our customers despite some of those headwinds. Even more importantly, we’re deploying this capital at very attractive development yields that exceed last year’s returns and will drive performance into 2024 and beyond. Demand for compute and connectivity continues to grow steadily, and our ability to deliver for customers continues to expand along with our portfolio. So, with that, I’d like to turn it over to Jacky to cover our financials. Jacky?

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 include 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 last year, primarily as a result of the redemption of Wafra’s minority ownership in the Company’s investment management platform in May of 2022 and following the acquisition of InfraBridge in February of this year. Moving to Page 17. The Company continues to grow its investment management earnings from additional fee-earning equity under management generated by new digital investment strategies and the acquisition of InfraBridge. Fee income, excluding incentive fees, increased to $66 million and fee-related earnings increased to $34 million, representing 47% and 35% increases from the same period last year, respectively. Investment management segment distributable earnings increased by 71% to $24 million from the same period last year. As I previously mentioned, we expect the momentum to continue in our investment management business as we execute on our strong fundraising pipeline. Turning to page 18. Beginning this quarter, we have included new disclosures designed to help simplify the analysis of the Company’s carried interest income, including realized versus unrealized carried interest allocations and associated expenses. For the second quarter, unrealized carried interest income was $79 million. This is due to the fair value of our managed funds increasing at a rate that exceeds the preferred return hurdles in our investment vehicles, which generates carry interest to DigitalBridge as the manager. We have also included additional disclosure surrounding other investment management expenses. Other investment management expenses for the quarter were $9 million, compared to over $6 million in the same period last year, mainly due to placement fees from new fundraising. As a reminder, placement fee expenses are recognized upfront at the incurrence of new capital raised which in some cases may not yet earn fee revenues. Moving to page 19. The Company’s share of digital operating revenues and earnings declined due to lower ownership following the previously announced recapitalization of our DataBank investment, which reduced the Company’s ownership from 22% to 11%. We continue to stay on target to deconsolidate the operating segment from our financial statements in the second half of this year. Turning to page 20. We achieved another quarter of strong growth in our high-margin investment management business. Since the second quarter of 2022, our annualized fee revenues increased from $148 million to $266 million, and fee-related earnings increased from $83 million to $138 million. Looking at the right side of the page, our run rate fee revenues were $275 million. We are on track to meet or exceed our previously provided fee revenue and FRE guidance ranges. As we continue to scale and fundraise, we expect the flow-through of the Company’s FRE to distributable earnings to increase. Turning to page 21. We completed another milestone in our progress to simplify the Company’s capital structure in April of this year by fully repaying $200 million of the Company’s convertible notes. Coupled with the deconsolidation of the operating segment expected to be completed this year, we will have almost reached our target corporate debt. In addition to our debt reduction, our balance sheet continues to maintain strong liquidity levels for accretive uses with over $500 million of liquidity, including the full $300 million available from our securitization revolver. In summary, Marc and I are very pleased with the progress we’ve made during the first half of this year in solidifying the Company’s operating position as a partner of choice to investors in the digital infrastructure space. DigitalBridge’s three statement financials continue to improve, highlighted by our positive distributable earnings this quarter, and the Company remains committed to scaling our asset-light investment management platform, led by our powerful fundraising machine to generate long-term shareholder success. We look forward to building on this growth with our strong near-term capital raise pipeline and deconsolidate the operating segment in the second half of this year. And with that, I will turn it back to Marc.

Thank you, Jacky. In this quarter, as we execute our digital strategy, I want to focus on generative AI and its implications for digital infrastructure and how it affects DigitalBridge. This topic is currently at the forefront for both public and private investors and is a significant area of engagement with our customers, particularly in the data center sector. On this slide, we’ve included various examples comparing traditional AI applications to the capabilities that generative AI offers. For instance, while traditional AI improves Netflix recommendations, generative AI is enabling the production of short films from text prompts. These advancements will continue to accelerate. So, how does this translate to DigitalBridge and its shareholders? Currently, every enterprise software platform is being restructured to integrate generative AI, which requires a lot more computing power. I’ll explain the details shortly, but the data is compelling. Just as it takes effort for a human to turn an idea into something creative, generative AI consumes power—specifically, it’s energy-intensive. This is crucial when considering digital infrastructure because generative AI demands considerable computing resources. Let’s move on to the next slide. To illustrate the speed at which generative AI is being adopted, many of you may have seen this chart. It puts into perspective the opportunities ahead. ChatGPT, OpenAI’s large language model, achieved the fastest adoption of any consumer technology, reaching 100 million active users in just two months earlier this year. This is four times quicker than TikTok and fifteen times faster than Instagram. Uber took over five and a half years to reach the same milestone. These are significant global platforms, and ChatGPT surpassed them all. We are witnessing rapid adoption. But how large could this scale be? This is undoubtedly a top concern for investors looking for investment opportunities. While it’s too early to provide definitive answers, I am trying to relate it to something familiar—public cloud growth. The public cloud market is about a $300 billion industry, with major cloud service providers holding two-thirds of it. Based on feedback from our CEOs and their discussions with clients about increasing capacity needs, we believe this opportunity might exceed what the public cloud market achieved over a decade ago. To give additional context, the public cloud has built and leased space to data center markets over the last ten years, reaching about 13 gigawatts. To support AI and optimize networks, we anticipate the potential market could expand to nearly 38 gigawatts. We are only at the beginning of what could be a long journey. It’s essential to consider the time frame concerning investment periods, power consumption, and the potential market share for DigitalBridge. What makes generative AI so power-hungry? There are two main factors. Firstly, the power of chips is increasing dramatically. The new specialized AI chips—GPUs from companies like NVIDIA, AMD, and Intel—consume two to three times more power than previous generations. For context, the latest chips consume as much power as a toaster. Secondly, the scale of AI models is massive. Large language models like ChatGPT have billions of parameters, with the latest ones, like GPT-4, nearing the trillion mark. Consequently, we can expect data center power consumption to rise significantly, with AI workloads projected to account for 80% of data center power consumption in the next 15 years. Therefore, access to power and available space for such workloads is crucial. DigitalBridge believes it has a competitive edge with a strong portfolio of companies worldwide that can provide the necessary space, power, and cooling for next-generation networks. We've established that generative AI requires substantial power, but how does that manifest in the data center ecosystem? It begins with the training of AI models, which primarily occurs in large public and private clouds, specifically in data centers owned by companies like Vantage, Switch, or Scala—our portfolio companies developing the next generation of cloud facilities with capacities reaching 100, 200, or 400 megawatts. A key term here is power density, which has two implications. It means higher megawatts per facility; for instance, instead of needing 50 megawatts today, future needs could rise to 200 megawatts without expanding the footprint. This is a significant shift in how data centers will be built to meet future demands. Additionally, within each facility, we will see a rise in power density per rack, with racks filled with GPUs requiring 40 kilowatts or more compared to traditional racks needing 10 kilowatts or less. This shift in power density is substantial. Another critical factor is the availability of low-cost power. AI training isn’t as sensitive to location or latency as other applications. Training can occur remotely, but delivering applications to end-users must happen in low-latency environments. There’s a clear distinction; cloud training focuses on accessing concentrated megawatt capacity to manage large-scale operations—like what Switch provides in Reno with abundant low-cost, green power and ample capacity. This strategic positioning is essential. As we have established, AI training takes place in the cloud, where significant activity is ongoing. Once these models are trained, they are ready for use by consumers, businesses, and machines through a process known as AI inference. As AI applications expand over the next few years, the importance of inference and the entire network will become apparent. Generative AI is delivered at the edge, which is crucial for investors to grasp. The applications we use daily—on our phones, laptops—need speed and low latency. It’s inefficient to transfer data from one coast to another. Trained AI models must be located near the end-users or devices. They can’t rely on your phone’s battery for sustained performance. Ultimately, a robust network includes edge data centers, fiber, cell towers, and small cells, which will become increasingly relevant in the next few years. We are already seeing heightened demand for metro fiber capacity from cloud providers, explaining the growth in our fiber revenue streams. Let’s take a step back and assess our positioning for this cloud-trained, edge-delivered future. We have been actively acquiring and establishing data center platforms globally, which represent about 35% to 40% of our assets under management. Our strategy spans the core to the edge of the network, addressing clearly defined workload profiles in an increasingly hybrid computing environment. We’re well-equipped to meet the cloud demand from both public and private operators through our companies, Vantage, Scala, and Switch. Furthermore, our portfolio companies, DataBank, AtlasEdge, and AIMS, are primed to leverage edge-delivered generative AI. We possess a modern fleet in the industry, meaning we are investing in facilities that serve these new workloads. It’s critical to recognize that our clients demand top-of-the-line data centers with rapid access to low-latency fiber, exceptional cooling, and necessary power density—ideally with renewable sources. It’s a high standard, but our preparations over the last couple of years are paving the way for our success, reflected in our portfolio's leasing figures. Finally, I’d like to highlight tangible signs of generative AI's impact on our business. Although we are still in the early stages, there is strong anecdotal evidence that it will be a significant demand driver for our ecosystem and DigitalBridge portfolio companies. On the supply side, our discussions with LPs indicate this is the primary topic at present. While they are beginning to understand its wide-ranging implications, it’s evident they view DigitalBridge as a leading authority on digital infrastructure in relation to AI. We’ve conducted several individual meetings and webinars with key global LPs, engaging them on topics explored today. The interest level is high, and we foresee this demand serving as a catalyst for our fundraising efforts over the next few years across various products. On the demand side, we are witnessing significant leasing activity in data centers. Recently, TD Cowen reported over 2 gigawatts in industry-wide leasing in the U.S. within a 10-gigawatt market. Our portfolio companies are participating in this growth, capturing substantial market share. We have seen a remarkable 84% year-over-year increase in pipelines across our data center portfolio. Simply put, we are on track to surpass data center leasing figures from last year, which were already among the best we’ve experienced. Feedback from our portfolio companies and investors reinforces this trend, notably with one of our data center CEOs, who mentioned that a 24-megawatt request was previously considered large, but now we’re receiving requests for 100 to 250-megawatt deals in a campus setting—incredible figures indeed. Additionally, I take pride in the feedback from DigitalBridge's CEO during an investor review call, noting that among cloud providers catering to AI workloads, the easiest companies to collaborate with—and thus succeed—are our DigitalBridge companies. This is the essence of our success—building customer-centric companies is what drives results in this marketplace. In conclusion, let’s recap our CEO checklist. Regarding fundraising, our primary measure, we have raised $3.4 billion so far this year and are on schedule to meet our fundraising objectives. I'm optimistic we will achieve these targets. We have made notable progress on strategic simplifications through our DataBank recap, and we’re set to advance the Vantage SDC process this year as promised. At the company level, we continue to meet the increasing needs for computing and connectivity for the world's leading investment-grade clients. Whether through generative AI or other foundational demand drivers, we are equipping the next-generation leaders who are developing tomorrow’s technology. We anticipate that generative AI will become a significant driver of demand for digital infrastructure, similar to past trends with digital PCS and public cloud markets. We find ourselves in an exceptional generational opportunity, further demonstrating our commitment to supporting our valued clients. Thank you for your support as we move forward with our transition to a rapidly growing alternative asset manager, poised to take advantage of prevailing trends in digital infrastructure. I look forward to sharing more about our progress in the next quarter, and now, I will hand it over to the operator to begin the Q&A. Thank you.

Our first question comes from 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.

Let's start with the first question, which is probably the easier one. As you noticed this quarter, we had significant co-investment in our data center companies, including DataBank, Switch, and Vantage related to our project in Europe. We had three co-investment opportunities happening simultaneously, and all received commitments. It’s evident that strong ideas around modern data centers addressing AI workloads and signing leases are thriving. I've been mentioning for the past few quarters that clean data centers located in good areas with renewable energy are what limited partners want to support. Therefore, it's no surprise that Switch, Vantage, and DataBank all secured considerable co-investments this quarter, and limited partners will continue backing these concepts. On the power issue, this is going to be challenging, and I'm certain we’ll discuss it more next week in Boulder at your conference. It’s interesting because some regions are being proactive about addressing these issues, while others are experiencing significant constraints and resisting data centers, similar to the NIMBY syndrome we faced with towers in the ‘90s during the digital PCS adoption phase. The strategy is to remain agile. With our six strong data center businesses—AtlasEdge, DataBank, AIMS, Scala, Vantage, and Switch—we can think globally while acting locally, which is crucial. Each of our management teams can tackle challenges in their specific areas, collaborating with local politicians and peers to find solutions. This approach is not new to me; we've been doing this for 30 years. It’s essential to engage with local governments and utilities. Sometimes, it involves going to the public to demonstrate the benefits while also explaining how we’ll ensure our operations won’t burden the grid and how we can reinvest in local economies and the environment. We’re applying what we’ve learned at Switch to Vantage and DataBank. It's crucial to implement green solutions and maintain a local focus rather than concentrating solely on one area like Herndon, Loudon County, or Silicon Valley. You need to be present in multiple markets. The same dynamics are occurring in Europe. Certain markets there are now closed, but we adapted by exploring options in Cardiff and Berlin when Offenbach was at capacity. As demand exceeded supply in Zurich, we started reallocating some workloads to Milan. The ability to pivot and foresee changes is a significant advantage of our portfolio. With our six CEOs and companies, we can deploy capital more effectively across these platforms, which is proving beneficial. Our leasing numbers this quarter reflect that success, particularly for DataBank. I believe we’ve been ahead of the curve, steadily building our inventory over the past two to three years. This wasn’t a sudden realization this quarter that we needed to deliver significant power to our cloud customers; it’s been a long-term effort. The groundwork laid in 2021 and 2022 is now paying off for our data center businesses. I'm looking forward to discussing this further with you next week in Boulder.

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

This is Jason Sabshon 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, and doing it in the U.S. This is really what’s playing out at DigitalBridge 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, and 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 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 or 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 are people out there talking about the move in treasury rates and cap rate 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 generative 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 resilient sector in 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?

We have significant liquidity as mentioned earlier. Our debt levels are low and decrease every year, providing us with considerable capacity for mergers and acquisitions. We are actively exploring potential partnerships with other general partners and are interested in new products to expand our growth. Evaluating whether to acquire or develop is crucial for us. As for excess cash that isn't designated for M&A, we will consider redeeming some preferred shares. This approach offers a guaranteed 10% risk-free return and could facilitate increasing common dividends due to the steady cash flows generated from our operations and growth. Our priority is to identify strong GPs and investment managers for acquisition that can yield returns above 20% or 30%. If suitable opportunities do not arise, we will redirect that liquidity towards redeeming preferred shares.

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 the highline, and then Jacky can give you the numbers. But I think first and foremost, we’re really happy with the performance of DataBank. 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 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 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, 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. Two to three 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. Two to three years in public cloud, you begin to see an ecosystem that develops 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 into the best ideas that support AI infrastructure, which is really our focus.

Regarding the FRE margin, it tends to fluctuate significantly. It's quite variable, especially with all the ongoing capital raising activities. Could you provide some insight on where we might expect to be by the end of this year or into next year regarding that margin? Additionally, what target do you have for corporate expenses or costs on a run rate basis over the next few quarters?

Yes, Richard, I’d like to highlight our IM business alongside our corporate and other segments. When you combine these two, our margin profit has doubled from about 20% to roughly 40% on an EBITDA margin basis quarter-over-quarter. The increase in volatility this quarter is largely due to the allocatable expenses related to corporate and IM, which involves geography and accounting factors. As we engage in fundraising, as Marc mentioned regarding DBP III, we haven't activated those fees yet, so there are no revenues from that source at the moment. However, there’s significant activity occurring, with team members dedicating their time to the IM sector. Therefore, examining these two segments together is the right way to approach this. That 40% margin aligns well with what other publicly traded investment managers report in terms of total margin profiles that include corporate expenses. We believe this margin is sustainable and we expect to maintain it on a run rate basis as we conclude 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 maybe 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 are 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 drive 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 growth rates in excess of 20% 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 startups? Thanks.

Right now, Jonathan, it’s about traditional hyperscalers and about 10% chip guys, app developers and new players in the marketplace, but it’s heavily hyperscalers at the moment, Jonathan.

So, when it’s focused on hyperscalers, how can you distinguish between AI, cloud, social networking, and other applications? Is your insight based on rack density, or are there specific locations they are selecting? How do you determine that?

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 finally, regarding data centers, could you provide an update on the targeted development yields and any changes you've observed since the last quarter? Additionally, what are the pricing trends, renewal spreads, and any notable 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 a 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.