2023-11-13 03:20:38 ET
Summary
- DigitalBridge is a digital infrastructure asset management company. This poses promising potential due to its tech spin on traditional real estate businesses.
- DBRG has recently undergone significant strategic acquisitions and pivots, including a major financial deconsolidation of DataBank.
- Yet, from a multiples-based valuation approach, I'd argue that DRBG stock is slightly expensive. I think it's a "hold" at these levels, but a good buy on dips.
- A good referential price for a good entry price on DBRG is around $11.54 per share if it occurs.
DigitalBridge Group's ( DBRG ) primary focus lies in investing in and managing a wide range of digital infrastructure assets it leases to telecom operators and technology companies, taking advantage of growing demand driven by 5G, cloud computing, and data-centric technologies. DBRG's transition from a Real Estate Investment Trust ((REIT)) to a conventional C-Corporation (C-Corp) marks a fundamental change for the company in its corporate structure and tax status. It provides greater strategic flexibility, allowing it to access capital markets more effectively. Also, after the recent deconsolidation, DBRG has unlocked some additional value for its shareholders, as evidenced by the increase in stockholders’ equity. Yet, from a valuation perspective, I think DBRG appears to be slightly expensive. Thus, I rate it a “hold” at these levels.
Business Overview
DigitalBridge is now a C-Corp focusing on the digital infrastructure sector. The company was formerly Colony Capital, Inc., and in 2021, it was rebranded to DigitalBridge Group following its transition to a cloud-powered future. DBGR has several offices in the US, in Florida, California, New York, and Colorado. Its offices worldwide are in Hong Kong, the United Kingdom, Luxembourg, Spain, and Singapore. These locations reflect DBRG's global presence.
DBRG primarily invests in and manages digital infrastructure assets for wireline and wireless telecommunications, data centers, and other critical technology-related assets. DBRG investments support AI and next-generation digital infrastructure; its portfolio of digital infrastructure assets is located in North America, Europe, and Asia. Its acquisitions include cell towers, small cells, data centers, fiber optic networks, and other assets that form the backbone of modern digital communications.
The company's strategy is to invest, acquire, and develop digital infrastructure assets. It obtains its cash flows from its investments, leasing these assets to telecommunications operators and technology companies. The digital infrastructure sector is experiencing significant growth with an increasing demand produced by implementing 5G, cloud computing, and the expansion of data-driven technologies.
Source: Q3 2023 Presentation
As of September 30 , 2023, DBRG has $75 billion in assets under management, with 47 companies in its portfolio. The company's team comprises more than 100 digital infrastructure professionals. DBRG is not only an investor in digital assets but also intervenes in managing the companies in its portfolio. This dual role has allowed DBGR to create significant value.
Strategic Pivots and Realignment
From a strategic point of view, DBRG has recently gone through several meaningful events. Firstly, DBRG moved from a REIT to a conventional C-Corp structure. This was a significant strategic change in the company's corporate organization and tax status. This transition allows DBRG greater flexibility in its business operations and easier access to the capital markets to finance its growth and acquisitions. C-Corps are more accessible to investors, including institutional ones. This structure is also easier to manage than REITs. C-Corps are subject to paying corporate income tax, unlike REITs, which do not pay income taxes. However, this can be offset by the benefits of retaining profits within the company to fund its growth.
Moreover, as a C-Corp, DBRG has more flexibility to execute various strategic initiatives, including the redemption of Wafra Inc. In May 2022, the company repurchased Wafra Inc.'s 31.5% stake. This means that Wafra's partial ownership of this business segment ended. The total value of this buyback was $862 million at closing. This amount was paid through cash, shares, and a contingent payment. After buying back Wafra's stake, the company now accrues 100% of the net cash flows from its commission business, meaning that all profits from this segment go directly to the company. Additionally, the company is entitled to 100% of the accrued interest from future investment products. This change improves the company's financial benefits derived from its investment management business.
Source: Q3 2023 Presentation
Furthermore, the company recently announced that its unit, The Abu Dhabi Investment Authority ((ADIA)), will purchase a 40% stake in Landmark Dividend LLC, a company in wireless communications, digital infrastructure, outdoor advertising, and renewable energy. Landmark Dividend is a subsidiary of DBRG, which acquired it in 2021. ADIA's investment marks a significant step in the expansion and growth of Landmark's platform in the digital infrastructure sectors. The transaction is subject to approval and is expected to close in the first half of 2024. ADIA investment in Landmark Dividend LLC, a subsidiary company of DigitalBridge, is important for DBRG for several reasons. The first is that it provides DBRG with an infusion of capital that significantly strengthens its financial resources, allowing the company to carry out new projects. Additionally, this partnership with (OTCPK:ADIA) allows DBRG to diversify its holdings and spread its risk.
As a whole, these moves show a company that has undergone significant changes in recent quarters. However, I think they’ve done so very aptly, as its financials are strengthened.
Valuation Analysis Post-Deconsolidation
Accordingly, from a valuation perspective, it’s worth remembering that the company is, in a way, essentially an investment manager. Naturally, the types of assets it manages are more real estate-related, with a digital infrastructure spin. However, given that it manages assets like a fund operating as a business after transitioning to a C-Corp, it’s very reminiscent of Warren Buffett’s Berkshire Hathaway ( BRK.A ). Accordingly, Warren Buffett often mentions the price-to-book ratio as his company's quick rule-of-thumb valuation approach. By extension, I believe we can take the same approach for DBRG.
Post-deconsolidation DBRG will see a decline in revenues, but investors shouldn't be concerned about this because it's due to accounting conventions. (Seeking Alpha.)
Moreover, in September 2023, DBRG finalized the recapitalization of DataBank . This was a company they held a controlling position on, and hence, DBRG was able to consolidate DataBank’s financials into its own. However, after reducing its stake, DBRG is no longer the controlling entity of DataBank, so it deconsolidated its financials. Today, DBRG owns just 9.87% of DataBank. As a result, we see a sharp decrease in DBRG’s assets and liabilities, as it removed DataBank’s figures that were previously reported as a whole on DBRG’s statements. In fact, after deconsolidation, DBRG’s assets declined by 36.2% from $10.76 billion in June 2023 to just $6.87 billion in September 2023. Likewise, DBRG’s liabilities declined by 41.7% from $6.60 billion in June 2023 to $3.85 billion in September 2023. Notably, DBRG’s stockholder’s equity actually increased after this financial move, rising by 17.4% from $1.44 billion to $1.69 billion. In the process, most of the company’s AOCI was also wiped out, implying that DataBank was by far its largest consolidated entity.
The $11.54 price zone was a good buy in hindsight. (TradingView.)
Interestingly, DBRG’s market cap was $2.74 billion at this writing, compared to $1.69 billion of stockholders' equity, implying a 1.62 P/B ratio. Circling back to Buffett’s rule regarding P/B ratios, he has historically signaled that anything below a 1.2 P/B ratio for Berkshire was likely undervalued. This, by definition, means that a “fair value” P/B ratio would be higher than 1.2, and given that DBRG’s current P/B ratio is 35% higher than Buffett’s rule, I’d argue it’s safe to say the company is not undervalued. Moreover, even the DBRG’s sector median P/B ratio is 1.29, which is still 25.6% higher than DBRG’s P/B ratio. This further corroborates that the company is likely not undervalued.
However, I don’t think the valuation disparity is sizeable enough to be bearish on DBRG. In fact, DBRG’s tech-related real estate interests could deserve a slight premium compared to other, more traditional real estate types. Yet, it’s also important to consider that DBRG is unprofitable at this point and has been since 2017, signaling that there are indeed caveats to DBRG’s otherwise promising fundamentals. So, as a whole, I think the valuation analysis signals a more neutral stance for now, which is why I rate it a “hold” at these levels. Yet, if we go by Buffett’s P/B rule, it’d also imply that DBRG is a great buy below a $2.03 market cap or $11.54 per share. And those levels were briefly visited earlier this year and proved to be a good buy then.
Conclusion
Overall, DBRG is an interesting company, managing real estate assets with a promising digital spin. In fact, I am very optimistic about these types of assets going forward, and by extension, I’m also bullish on DBRG’s business prospects over the long run. Moreover, its recent strategic decisions and accounting changes have proved that DBRG is currently in flux but managing it rather well so far. Yet, using the P/B ratio valuation approach, it seems that DBRG is presently on the expensive side, and thus, it reduces its appeal as an investment alternative. Accordingly, I feel it’s appropriate to rate it a “hold,” but I believe it’d be a great real estate business to buy if it pulls back.
For further details see:
DigitalBridge: A Great Buy On Dips, But Not For Now