piranka
The data center industry has seen a beehive of consolidation activity due to its role in building cloud computing infrastructure and the increase in a business’s digital footprint. Back in May 2022, data center operator, Switch Inc. (SWCH) was bought by Florida-based DigitalBridge Group (NYSE:NYSE:DBRG) and IFM Investors for $11 billion including debt. The past 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 conducted its 1-for-4 reverse stock split with investors looking forward to a performance-based turnaround strategy into Q3 2022. The company hopes to augment shareholder value through co-investments into 2023 by creating opportunities that will attract partners in quality global digital infrastructural businesses. Additionally, DBRG approximates that the Switch and GD Towers transactions will take its DigitalBridge Partner II fund towards 90% of its committed capital. Another playbook is DataBank through which DigitalBridge has harnessed $1 billion from an investment of $500 million in less than 3 years of the initial investment. However, the company has been facing material delays in bringing new capacity online due to power delays, especially in Europe and North Virginia. Additionally, while the company has been able to handle construction costs, it has still been affected by high fiber prices and rising administrative expenses.
Quarterly dividend reinstatement
DigitalBridge, a global digital infrastructural company structured as a real estate investment trust (REIT) announced that it had reinstated its quarterly dividend by declaring a cash dividend of $0.01 per share payable on October 17, 2022. The quarterly dividends were suspended on May 8, 2020, and shareholders will find a reprieve in this call.
From an income perspective, the dividend is not as high as I hoped, considering the company also announced a 1-for-4 reverse stock split. DBRG intends to use the reverse stock split to strengthen its business transformation but more specifically to align its outstanding share count with companies of similar size. The number of outstanding Class A common stock was reduced to around 163.9 million while Class B common stock was reduced by 0.2 million shares.
Investors can consider the pre-reverse stock period (in 2017) when the dividend was at least $0.27 per share which would now translate to $1.08 per share in the quarter in 2022 (had it kept up with the momentum). However, over the past 5 years, the stock price has declined⁓ 75% in tandem with the decrease in dividends.
It is yet to be clarified which companies DigitalBridge is comparing itself to since it had about 655 million shares pre-reverse stock split. As of June 2022, other companies such as American Tower Corporation had 465.6 million outstanding shares, Crown Castle is at 430 million while SBA Communication is at 108 million shares.
In retrospect, the 1-for-4 reverse stock split will see investors owning 100 shares reduce their holding to 25 shares. Further, at the price of $12.59 a share, the stock is trading just 1.37% shy of the 52-week low of $12.42. I hope that the reverse stock split coincides with the improvement in operations and projected earnings made by the company. As we know, positive fundamentals will cause the stock to rise towards its 52-week high of $34 and beyond.
At this point it is vital to consider that CEO Marc Ganzi’s employment contract with DigitalBridge stated that he was entitled to a compensation of not less than $100 million if he could maintain the Class A common stock, par value $0.01 at or above the $10 trading level on the NYSE for 90 consecutive trading days during his five-year term. The management will likely work to move the stock’s market value above the 52-week high.
Structural Investments
DBRG’s sale of its fully diluted equity interest in DataBank in August 2022 has seen a double-digit increase of its pre-transaction net value since its initial investment in 2019 due to the entry of new investors. By selling 8% from its 21.8% remaining stake DigitalBridge received a sum of $318 million (representing an increase of 38.3%) in cash instead of the intended $230 million. DigitalBridge announced in its recent 8-K Sec filling that this recapitalization had reduced its DataBank holdings by 8% to 13.4%. Overall, DBRG’s fully diluted equity interests in DataBank have now raked in $1.5 billion instead of the intended $1.2 billion.
DigitalBridge has invested in various companies in the data center, fiber, tower, and small-cell sectors. The general argument is that fiber and small cells in the long run are best-positioned to support an increase in network traffic. Over time, companies that will not invest in different digital infrastructures will end up irrelevant to customers. Companies such as T-Mobile (TMUS), Verizon (VZ), and AT&T (T) are rushing to complete their mid-band 5G build-out milestones. Verizon hopes to cover about 175 million customers with its mid-band 5G network by the end of 2022, while AT is looking to cover 100 million clients with the same network by the same timeline. T-Mobile (under the same timeline) is looking at a forecast of 260 million people.
To cover its growth needs including 5G rollout and support industry consolidation, DBRG announced in mid-July 2022 that together with Brookfield Infrastructure (BIP) had reached an agreement to acquire 51% of GD Towers. This mobile telecommunication business segment of Deutsche Telekom 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 towers and communication sites (in Germany) with an additional 7,000 communication sites in Austria.
Surprisingly, this deal came just a month after DBRG teamed up with IFM Investors to acquire Switch for $11 billion, including debt. DigitalBridge has a market capitalization of $2.21 billion with its total assets valued at $11.877 billion. This transaction is valued at 30X over the next twelve months (NTM) EBITDA. Other transactions such as CyrusOne (CONE) by KKR at $15 billion took place at 24X NTM EBITDA, while CoreSite (COR) by American Tower (AMT) at $10 billion is set at 27X NTM EBITDA. Companies involved in these transactions have argued that the acquisitions are scale assets bought at full multiples representing good value.
DigitalBridge explained in its Q2 2022 earnings call that it had deployed and committed up to 90% of its DigitalBridge Fund II in its acquisition of Switch and GD Towers in the quarter. By the end of H1 2022, the company had already attained two-thirds of its fundraising goal. With CoreSite, American Tower had to seek private funding to finance the project, unlike DigitalBridge which had the necessary capital to finance the GD Towers and Switch transactions.
Investors would like to believe that DigitalBridge’s purchase was smart considering the transactions were done at optically full prices that represented good value. On the scale, partnering with Brookfield was also appropriate since it helped to stabilize the company’s core fund and long-term leases including the 30-year lease with Deutsch Telekom. In these leases, DBRG has the chance to grow its yield over time especially after it adds more towers to its inventory. Overall, DBRG will now be managing more than $70 billion worth of assets coming with the GD Towers and Switch portfolios.
According to Marc Ganzi, DigitalBridge’s CEO, vital data centers in California are highly power-constrained. Switch has massive power campuses in Reno and Las Vegas that will provide value to DBRG once the $11 billion transaction is complete later in 2022. Switch has been running on 100% solar power since 2016 and recently turned to Tesla batteries to provide storage capacity. With over 1 GW of solar capacity, Tesla energy storage capacity, and reclaimed water for cooling DBRG is presented with a favorable growth opportunity. California and other sections of the US have faced power disruptions including wildfires that will get an alternative power supply from Switch. DigitalBridge will be able to attract potential clients such as Silicon Valley not only with reliable power but also favorable pricing.
The CEO, Marc Ganzi, stated,
Pacific Gas and Electric really can’t supply any material amount of new megawatts in the Santa Clara area or San Jose. Silicon Valley Power currently is constrained in terms of what it can deliver. The next upgrade to that grid is 2025. So Santa Clara has become a very capacity-tight market. Our renewal rates are holding in very strong there.
Risks to the Downside
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 stood at $260 million. The company is conducting two notable transactions in 2022 worth about $28.5 billion with funding expected from outside sources.
Leading utility power companies have decried overhead power-line challenges that may affect power supply delivery to clients. Dominion Energy (D) warned its clients that it may not be able to meet power demands in North Virginia. New data centers were scheduled for delays until 2026 when the company could at least guarantee adequate power transmission through its overhead lines. While bringing this issue into focus, DBRG CEO Marc Ganzi assured investors that there would be no delays in power delivery as experienced by Dominion Energy clients. However, the company did agree that there would be some delays through 2023 as the company stabilizes its new transmissions especially since the Californian power grid was compromised (as earlier on stated).
Bottom Line
DigitalBridge looks forward to the positive incorporation of Switch and GD Towers into its power grid. The company wants to be associated with data centers with green energy sources and the management is steered towards developing private cloud campuses. However, DBRG is facing liquidity concerns considering it will be dependent on financial assistance from lenders to effect these two transactions. Further, the proceeds expected from the sale of its DataBank minority interest are not only minimal but uncertain indicating liquidity problems into 2023. Nonetheless, by seeking to control the energy narrative, DigitalBridge has demonstrated its success-oriented initiative going into the future. For these reasons, we recommend a hold rating for the stock.
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