DigitalBridge Group
showed off its results as an alternative-asset manager Tuesday, as it reported a December quarter that was cleared of its roots as a real estate investment trust.
Investors weren’t impressed. The stock slid 7.1% in afternoon trading on Tuesday to $18.67, reflecting seeming disappointment in the pace of the company’s fund-raising.
“The fund-raising environment is tough,” Chief Executive Marc Ganzi told listeners on the company’s earnings call. “I’ve been out on the road the first six weeks of the year, and I would say investor interest is high, investor interest is strong, engagement is there.”
The Boca Raton, Fla.-based firm has spent the past few years shedding its legacy as a REIT to focus on managing private funds that invest in digital infrastructure, like data centers and cell towers. Barron’s profiled the firm as a stock pick last week.
December’s results were decent. DigitalBridge swung to a net profit in the quarter, as its fee revenue surged 67% and its investments appreciated. Earnings were 58 cents a share, compared with a year-earlier loss of 12 cents. Revenue in the quarter of $350.3 million rose from $271 million.
“We had a strong finish to 2023 with the best quarter in investment management fees and fee-related earnings since we assumed leadership at DigitalBridge,” Ganzi said in the earnings release.
Frenzied growth in artificial intelligence and cloud computing has focused the attention of the alternative-asset industry on the digital infrastructure that’s been a specialty for Ganzi and his team for decades. He founded Digital Bridge Holdings as a digitally oriented private-equity firm in 2013. It merged with the stumbling REIT Colony Capital in 2019. Ganzi took charge and renamed the company DigitalBridge in 2021, changing it from a REIT to an alt-asset manager.
As 2023 ended, the company had rearranged its ownership of two data center businesses. That removed $5 billion in debt from its financial statements and unmasked its results as an “asset-light” investment firm, like the much bigger alt managers
Blackstone
and
TPG.
Much of alt-asset managers’ stock valuations these days reflect a firm’s recurring fee earnings from its funds. In the December quarter, DigitalBridge earned $40 million in recurring fees, up 64% from the year-earlier quarter.
The company emphasized the fund-raising environment has been difficult. Fee-earning assets at December’s end were $33 million, up 47% from the year-earlier quarter, but up $2.3 billion sequentially, or 6%, from the September quarter.
Guidance for 2024 fund-raising may also have disappointed investors. DigitalBridge said it expects to raise $7 billion in fee-earnings assets this year. But after the expected sale of some portfolio companies, fee-earning assets might end 2024 only about $4 billion higher.
DigitalBridge has returned more than $4 billion to its private-equity fund investors in the last 18 months, as it sells companies in its portfolio. Ganzi reminded listeners that such sales generate incentive fees for DigitalBridge. Regular realizations of an alt manager’s “carried interest” in its portfolio boosts the valuation of other alt managers like Blackstone, he said.
“The big elephant in the room about our valuation…is just carried interest,” said Ganzi. “We need to get into that same cadence, where investors can trust the carried interest delivery.”
Analysts on the call were eager to pick Ganzi’s brain about demand for various digital assets. He said data centers and cell towers are seeing torrid demand. Fiber networks and small-cell wireless assets are drawing more modest bids.
The demand driver for data centers is artificial intelligence. “Last year, AI was about 20% of our pipeline,” Ganzi said. “Today it’s probably about 40% of our pipeline.”
Write to Bill Alpert at [email protected] and Angela Palumbo at [email protected]
Read the full article here
