2023-12-24 01:14:37 ET
Summary
- DigitalBridge is building an alternative asset management company focused on digital infrastructure.
- The company saw its fee-earning equity under management reach nearly $30 billion at the end of its recent third quarter, 46% year-over-year growth.
- This is set to grow to reach nearly $50 billion by the end of 2025, with annualized fee revenue set to grow to reach $455 million.
DigitalBridge Group ( DBRG ) at a nearly $3 billion market cap is a small alternative asset manager focused solely on investing, building, and operating digital infrastructure assets and businesses. DBRG has a storied history, previously known as Colony Capital before a rebrand , the firm would switch from being elected as a REIT for tax purposes to a traditional C-Corp in 2022. DBRG's pivot has meant the creation of an asset-light digital infrastructure alternative asset manager with $29.9 billion in fee-earning equity under management ("FEEUM") at the end of its fiscal 2023 third quarter. The company has raised $5.4 billion in new fee-earning equity year-to-date with its third quarter FEEUM up a substantial 46% over its year-ago comp. DBRG at the midpoint of its 2023 guidance should raise a further $2.6 billion of fee-earning equity for what could be $8 billion in fee-earning equity raised in 2023.
Asset managers are typically highly profitable and cash-generative businesses and DBRG's focus on digital infrastructure as an asset class is attractive with growth for its verticals from data centers, small cell networks, edge infrastructure, macro cell towers, and fiber solution set to be driven by multi-decade trends. An aggregate of stable, predictable yields, investment-grade customers, and long-term contracted cash flows has made DBRG's digital infrastructure funds appeal to sovereign wealth funds, insurance companies, pension funds, and family offices amongst other institutional investors. The asset manager recently closed a $1.1 billion fee-earning equity raise for its digital infrastructure credit fund.
DBRG common shares are not an income play with the asset manager last declaring a quarterly peppercorn cash dividend of $0.01 per share , kept unchanged sequentially for a 0.23% annualized forward dividend yield. However, there are three outstanding preferreds; Series H ( DBRG.PR.H ), Series I ( DBRG.PR.I ), and Series J ( DBRG.PR.J ) which all currently offer healthy yields of around 7.74% to 7.83%. I flagged these when I last covered DBRG and the yield for Series I was at 9.2%. The preferreds have experienced significant capital uplift in response to DBRG's preferred buyback program.
Preferred Series | Yield On Cost | Current Discount ($25 Redemption Value) |
Series H | 7.74% | 8% at $23 per share |
Series I | 7.76% | 7.8% at $23.05 per share |
Series J | 7.83% | 9% at $22.75 per share |
Growth, Debt Reduction, And Guidance
DBRG's management did flag during their third-quarter earnings call that at some point they intend to buy back their common stock "when it makes sense" and against a cash, cash equivalents, and restricted cash position that came in at roughly $540 million at the end of the third quarter. There is another $794.7 million in outstanding preferred stock, non-recourse investment-level debt of $2.79 billion, and corporate debt of $371 million.
The drop in debt versus the end of 2022 came as DBRG deconsolidated its DataBank data center business. The asset manager also has a 13% ownership stake in Vantage SDC, another data center operator. Management was upbeat on their third-quarter earnings call being able to close the deconsolidation of Vantage SDC before they report their fourth-quarter earnings in late February next year.
The DataBank deconsolidation from DBRG's financial statements led to $2.3 billion of consolidated debt coming off its book, a reduction of 42% with Vantage SDC set to see this debt balance fall further as well as an overall reduction in real estate assets that will render DBRG more simplified and asset lights to align with its peers.
DBRG generated $477 million in total revenue during its third quarter, up 11% versus its year-ago comp. The company's fee revenue run rate stood at $276 million at the end of the third quarter, up 52% over its year-ago comp. This describes highly attractive recurring revenue on extremely long-dated funds. It's why growing asset managers are attractive investments because they're able to build their quarterly earnings from a stable and growing baseline that they top up through consecutive fee-earning equity raises.
DBRG should be able to raise more funds next year on the back of the Fed cutting interest rates to disperse liquidity away from money market funds which currently have a staggering $6 trillion in capital. As the Fed cuts rates, this should rotate institutional capital away in the perpetual search for yield. DBRG is guiding for FEEUM to be $49 billion by the end of 2025 with $455 million in annualized fee revenue. The future growth is attractive but investors might be put off by the stock compensation expense. This was $74.7 million during the third quarter, 16% of revenue. I still rate DBRG as a buy on annualized fee revenue growth and intend to build a position as interest rate cuts next year set the asset manager up for continued growth.
For further details see:
DigitalBridge Group: I'm Buying This Digital Infrastructure Alternative Asset Manager