DigitalBridge Group: Green Energy Data Center Expected Outcomes (NYSE: DBRG)

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The data center industry has seen a hive of consolidation activity due to its role in building cloud computing infrastructure and increasing a company’s digital footprint. In May 2022, data center operator Switch Inc. (SWCH) was acquired by Florida-based DigitalBridge Group (NYSE: DBRG) and IFM Investors for $11 billion, including debt. Previous quarters had seen the acquisition of other data center operators such as CyrusOne for $15 billion by KKR and QTS Realty Trust for $10 billion by Blackstone.

Thesis

DigitalBridge has completed its 1-for-4 reverse stock split with investors eager to implement a performance-based turnaround strategy through Q3 2022. The company hopes to increase shareholder value through co-investments of up to in 2023 by creating opportunities that will attract quality global digital partners. infrastructure companies. Additionally, DBRG estimates that the Switch and GD Towers transactions will bring its DigitalBridge Partner II fund to 90% of its committed capital. Another playbook is DataBank through which DigitalBridge leveraged $1 billion out of a $500 million investment in less than 3 years after the initial investment. However, the company has faced significant delays in bringing new capacity online due to power delays, particularly in Europe and Northern Virginia. Additionally, while the company was able to manage construction costs, it was still impacted by high fiber prices and increased administrative expenses.

Restoration of quarterly dividend

DigitalBridge, a global digital infrastructure company structured as a real estate investment trust (REIT) announcement that it had reinstated its quarterly dividend by declaring a cash dividend of $0.01 per share payable on October 17, 2022. Quarterly dividends were suspended on May 8, 2020 and shareholders will find a stay in this appeal.

From a revenue perspective, the dividend isn’t as high as I’d hoped, given that the company also announced a 1-for-4 reverse stock split. DBRG intends to use the reverse stock split. shares to strengthen its business transformation, but more specifically to align its number of outstanding shares with companies of similar size. The number of outstanding Class A common shares was reduced to approximately 163.9 million, while Class B common shares were reduced by 0.2 million shares.

Investors can consider the period before the stock reversal (in 2017) when the dividend was at least $0.27 per share, which would now translate to $1.08 per share in the quarter of 2022 ( if he had followed the momentum). However, over the past 5 years, the share price has fallen⁓ by 75% along with the decline in dividends.

It remains to be clarified which companies DigitalBridge compares to since it held approximately 655 million shares before the reverse stock split. As of June 2022, other companies such as American Tower Corporation had 465.6 million shares outstanding, Crown Castle is at 430 million while SBA Communication is at 108 million shares.

In retrospect, the 1 for 4 stock split will see investors holding 100 shares reduce their holdings to 25 shares. Additionally, priced at $12.59 a share, the stock is trading just 1.37% lower than the 52-week low of $12.42. I expect the reverse stock split to coincide with the company’s improved operations and projected earnings. As we know, positive fundamentals will push the stock higher towards its 52-week high of $34 and beyond.

At this point, it is essential to consider that CEO Marc Ganzi Employment contract with DigitalBridge said he was entitled to compensation of at least $100 million if he could maintain the Class A common stock, with a par value of $0.01 at or above the level trading $10 on the NYSE for 90 consecutive trading days during his five-year tenure. Management will likely strive to push the stock’s market value above the 52-week high.

Structural Investments

DBRG’s sale of its fully diluted stake in DataBank in August 2022 saw a double-digit increase in its pre-trade net worth since its initial investment in 2019 due to the entry of new investors. By selling 8% of its remaining 21.8% stake, DigitalBridge received $318 million (representing an increase of 38.3%) in cash instead of the expected $230 million. DigitalBridge announced in its recent 8-K Sec filing that this recapitalization reduced its DataBank holdings from 8% to 13.4%. Overall, DBRG’s fully diluted stakes in DataBank have now returned $1.5 billion instead of the $1.2 billion expected.

DigitalBridge has invested in various companies in the data center, fiber, tower and small cell industries. The general argument is that in the long term, fiber and small cells are best positioned to support an increase in network traffic. Over time, companies that don’t invest in different digital infrastructures will end up being irrelevant to customers. Companies such as T-Mobile (TMUS), Verizon (VZ) and AT&T (T) are dash to complete their mid-band 5G development stages. Verizon hopes to cover around 175 million customers with its midrange 5G network by the end of 2022, while AT seeks to cover 100 million customers with the same network in the same time frame. T-Mobile (in the same timeframe) is looking at a forecast of 260 million people.

To meet its growth needs, including the deployment of 5G and support industry consolidation, DBRG announcement in mid-July 2022, which together with Brookfield Infrastructure (BIP) had reached an agreement to acquire 51% of GD Towers. This segment of Deutsche Telekom’s mobile telecommunications business was valued at $17.5 billion by this transaction and is expected to close by the end of 2022. As the largest tower company in Germany, GD Towers operates 33,000 communication towers and sites (in Germany) with 7,000 communication sites in Austria.

Amazingly, this deal came just a month after DBRG partnered with IFM Investors to acquire To change for $11 billion including debt. DigitalBridge has a market capitalization of $2.21 billion with total assets valued at $11.877 billion. This transaction is valued at 30X on EBITDA for the next twelve months (NTM). Other deals such as CyrusOne (CONE) by KKR at $15B took place at 24X NTM EBITDA, while CoreSite (COR) by American Tower (AMT) at $10B is pegged at 27X NTM EBITDA. The companies involved in these transactions have argued that the acquisitions are large-scale assets purchased at full multiples representing good value.

DigitalBridge explained in its Q2 2022 earnings call that it deployed and committed up to 90% of its DigitalBridge Fund II to its acquisition of Switch and GD Towers during the quarter. By the end of the first half of 2022, the company had already reached two-thirds of its fundraising target. With CoreSite, American Tower had to seek private funding to fund the project, unlike DigitalBridge which had the capital to fund the GD Towers and Switch transactions.

Investors would like to believe that buying DigitalBridge was smart given that the trades were made at optically complete prices that represented good value. On a large scale, the partnership with Brookfield was also appropriate as it helped stabilize the company’s base fund and long-term leases, including the 30-year lease with Deutsch Telekom. In these leases, DBRG has the opportunity to increase its yield over time, especially after adding more towers to its inventory. Overall, DBRG will now manage over $70 billion in assets from the GD Towers and Switch portfolios.

According to Marc Ganzi, CEO of DigitalBridge, vital data centers in California are severely constrained in power. Switch has massive electric campuses in Reno and Las Vegas that will bring value to DBRG once the $11 billion transaction closes later in 2022. Switch has been 100% solar-powered since 2016 and has recently turned to You’re here batteries to provide storage capacity. With over 1 GW of solar capacity, Tesla and reclaimed energy storage capability the water for cooling DBRG is facing a favorable growth opportunity. California and other sections of the United States have faced power outages, including wildfires that will get alternate power from Switch. DigitalBridge will be able to attract potential customers such as Silicon Valley not only with reliable power, but also with favorable prices.

CEO, Marc Ganzi, said:

Pacific Gas and Electric really can’t deliver a significant amount of new megawatts to the Santa Clara or San Jose area. Silicon Valley Power is currently limited in terms of what it can deliver. The next upgrade to this network is 2025, so Santa Clara has become a very capacity-constrained market. Our renewal rates are holding up very well there.

Downside risks

In my opinion, DigitalBridge’s liquidity status is lower than its planned acquisitions, even though it plans to secure its funding from lenders. As of June 30, 2022; DigitalBridge’s cash balance was $260 million. The company is conducting two notable transactions in 2022 worth approximately $28.5 billion with funding expected from outside sources.

The main electricity companies have denounced problems with overhead power lines which can affect the supply of electricity to customers. Dominion Energy (D) warned its customers that it may not be able to meet electrical demands in Northern Virginia. New data centers were planned for delays until 2026, when the company could at least guarantee adequate power transmission through its overhead lines. While drawing attention to the issue, DBRG CEO Marc Ganzi assured investors that there would be no delays in power delivery, as is the case for Dominion customers. Energy. However, the company agreed that there would be delays through 2023 as the company stabilizes its new transmissions, especially since the California power grid has been compromised (as previously reported).

Conclusion

DigitalBridge is pleased with the positive integration of the Switch and GD towers into its power grid. The company wants to be associated with data centers with green energy sources and the direction is geared towards the development of private cloud campuses. However, DBRG faces liquidity issues as it will depend on financial assistance from lenders to complete these two transactions. Additionally, the expected proceeds from the sale of its minority stake in DataBank are not only minimal but uncertain, indicating liquidity issues through 2023. Nonetheless, by seeking to control the energy narrative, DigitalBridge has demonstrated its energy-focused initiative. success for the future. For these reasons, we recommend a holding rating for the title.

Ramon J. Espinoza