DIGITALBRIDGE GROUP, INC. The following discussion should be read in conjunction with our unaudited consolidated financial statements and accompanying notes thereto, which are included in Item 1 of this Quarterly Report, as well as information contained in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , which is accessible on theSEC's website at www.sec.gov. In this Quarterly Report, unless specifically stated otherwise or the context indicates otherwise, the terms " the "Company," "we," "our" and "us" refer toDigitalBridge Group, Inc. and its consolidated subsidiaries. References to the "Operating Partnership," our "Operating Company" and the "OP" refer toDigitalBridge Operating Company, LLC , aDelaware limited liability company and the operating company of the Company, and its consolidated subsidiaries. 46
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Table of Contents Our Organization We are a leading global-scale digital infrastructure firm that invests, directly and through our portfolio companies, across the digital ecosystem, including data centers, cell towers, fiber networks, small cells, and edge infrastructure. AtMarch 31, 2022 , we have$47 billion of assets under management, comprising digital infrastructure assets managed on behalf of our limited partners and our shareholders.
We are headquartered in
We conduct substantially all of our activities and hold substantially all of our assets and liabilities through the OP, our operating subsidiary. AtMarch 31, 2022 , we owned 92% of the OP, as its sole managing member.
We operate our business in a manner that will permit us to maintain our exemption from registration as an investment company under the 1940 Act.
Transition to C-Corporation
Prior toJanuary 1, 2022 , the Company elected to be taxed as a real estate investment trust ("REIT") forU.S. federal income tax purposes, which generally provided that the Company was not subject toU.S. federal and state income taxes on its taxable income to the extent that it annually distributed such income to stockholders. The income earned through the Company's underlying taxable REIT subsidiaries ("TRS"), primarily the investment management earnings, however, was subject toU.S. federal and state income tax.
In the first quarter of 2022, the Company completed the disposition of its
non-digital assets, as described below, and in connection with its digital
transformation, has recorded significant growth in its
Due to the pace of growth of the Company's Digital IM business and other strategic transactions that the Company may pursue, the Company's Board of Directors and management agreed to discontinue actions necessary to maintain qualification as a REIT for 2022. Commencing with the taxable year endingDecember 31, 2022 , all of the Company's taxable income, except for income generated by subsidiaries that have elected or anticipate electing REIT status, is subject toU.S. federal and state income tax at the applicable corporate tax rate. Any dividends paid to stockholders will no longer be tax deductible. The Company is also no longer subject to the REIT requirement for distributions to stockholders when the Company has taxable income. The Company anticipates that operating as a C-Corporation will provide the Company with flexibility to execute various strategic initiatives without the constraints of complying with REIT requirements. This includes the intended deployment of capital to redeem third party interest in the Company's Digital IM business, retaining and reinvesting earnings in other new initiatives in the Digital IM business, and warehousing digital infrastructure investments in the future that may be non-REIT qualified assets. The Company's transition to a C-Corporation is not expected to result in significant incremental current income tax expense in the near term due to the availability of significant capital loss and net operating loss ("NOL") carry forwards. As ofMarch 31, 2022 , there was no material net tax effect on the Company's consolidated statement of operations as a result of the Company's transition to a C-Corporation.
Our Business
At
The Company conducts its business through two reportable segments, as follows:
•Digital Investment Management ("Digital IM")-This business represents a leading
global digital infrastructure investment platform, managing capital on behalf of
a diverse base of global investors. The Company's flagship opportunistic
strategy is conducted through its Digital Bridge Partners platform ("DBP") and
separately capitalized vehicles, while other strategies, including digital
credit, ventures and public equities, are conducted through other investment
vehicles. The Company earns management fees, generally based on the amount of
assets or capital managed in investment vehicles, and has the potential to earn
incentive fees and carried interest based upon the performance of such
investment vehicles, subject to achievement of minimum return hurdles. Earnings
from our Digital IM segment are attributed 31.5% to Wafra, a significant
investor in our Digital IM business, until such time Wafra's interest is
redeemed by the Company (as discussed further in Note 10 to the consolidated
financial statements).
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•Digital Operating-This business is composed of balance sheet equity interests in digital infrastructure and real estate operating companies, which generally earn rental income from providing use of digital asset space and/or capacity through leases, services and other agreements. The Company currently owns interests in two companies: DataBank, including zColo, an edge colocation data center business (DBRG ownership at 21.8% as ofMarch 31, 2022 , 20% as ofDecember 31, 2021 ); and Vantage SDC, a stabilized hyperscale data center business (DBRG ownership at 13%). Both DataBank and Vantage are also portfolio companies managed under Digital IM for the equity interests owned by third party capital. Digital Transformation InFebruary 2022 , the Company completed its digital transformation that commenced in the second quarter of 2020. The Company's completed disposition of its hotel business (March 2021 ), Other Equity and Debt ("OED") investments and non-digital investment management ("Other IM") business (December 2021 ), and its Wellness Infrastructure business (February 2022 ) each represented a strategic shift in the Company's business that had a significant effect on the Company's operations and financial results, and accordingly, had met the criteria as discontinued operations. For all current and prior periods presented, the related assets and liabilities, to the extent they have not been disposed at the respective balance sheet dates, are presented as assets and liabilities held for disposition on the consolidated balance sheets, and the related operating results are presented as discontinued operations on the consolidated statements of operations (refer to Item 1. "Financial Statements" of this Quarterly Report).
Significant Developments
The following summarizes significant developments that affected our business and results of operations in 2022 through the date of this filing.
Transition To C-Corporation
•We have discontinued actions necessary to maintain qualification as a REIT for 2022, and will be taxed as a C-Corporation. Absent REIT constraints, we will have more flexibility to execute various strategic initiatives, including the proposed Wafra transaction, as discussed below. Incremental tax burden is not expected to be significant in the near term given the availability of significant capital loss and NOL carry forwards and that our Digital IM business was previously taxable under a TRS.
Financing
•We continue to reduce higher cost corporate indebtedness through early exchange of an additional$60 million of senior notes inMarch 2022 for shares of our class A common stock and cash, resulting in 74% of the original issuance exchanged to-date, which will generate future interest savings.
•Effective
Digital Business Digital IM •InApril 2022 , we agreed to redeem Wafra's 31.5% interest in our Digital IM business. With limited exceptions, Wafra will also sell or forgo its carried interest entitlement from future, but not from existing, investment management products. Consideration for the redemption consists of: (i) upfront amount of$390 million in cash (subject to certain net cash and closing adjustments) to be paid using cash on hand and issuance of 57,741,599 shares of our Class A common stock; and (ii) contingent amount between$90 million and up to$125 million based upon achievement of new capital formation targets that may become payable inMarch 2023 andMarch 2024 , with up to 50% payable in shares of our Class A common stock at our election. The transaction will be accretive to our shareholders through full ownership of our high growth and high margin Digital IM platform. All net cash flows from our fee business will immediately accrue to us at 100% and similarly, with net carried interest from new investment products in the future.
The transaction is expected to close in
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•InApril 2022 , we agreed to acquireAMP Capital's global infrastructure equity investment management business, composed of its management platform, fund sponsor investments, and retained performance fees. Consideration for the acquisition consists of: (i) an upfront amount ofA$458 million (approximately$327 million ), subject to certain customary adjustments; and (ii) a contingent amount of up toA$180 million (approximately$129 million ), primarily based upon future fundraising for the third and fourth flagship funds under theGlobal Infrastructure Fund ("GIF") series. The transaction is expected to close in the second half of 2022.AMP Capital's global infrastructure equity platform will be a strategic fit alongside our value-add equity franchise, enhancing our capabilities in the mid-market segment. The acquisition will add$5.5 billion in fee earning assets under management, comprising$3.4 billion GIF II and$1.4 billion GIF I investment funds, and co-investment vehicles, and is expected to be immediately accretive to our fee related earnings.
Digital Operating
DataBank
•In
The new facilities added approximately 308,000 built square feet and 42.5 MW of installed critical IT load, as well as a roster of blue-chip customers. Additionally, one of the facilities is the region's primary interconnection point that is strategically positioned with access to significant and redundant utility power feeds and access to fast and reliable telecommunications networks.
•In
•The above transactions increased our ownership in DataBank from 20% to 21.8%.
Other
•InMarch 2022 , we agreed to acquire the mobile telecommunications tower business ("TowerCo") of Telenet Group Holding NV (Euronext Brussels: TNET, "Telenet") for approximately €745 million (or approximately$820 million ), to be funded through a combination of debt and equity, including our €458 million (approximately$504 million ) equity commitment. TheTowerCo investment is intended to thereafter be transferred to a new sponsored investment vehicle as we continue to develop new investment strategies in our Digital IM business. Telenet's tower business is a high-quality digital infrastructure asset with stable, predictable cashflows, high cash conversion, and long-term contracts. We will acquire full ownership of Telenet's passive infrastructure and tower assets, includingTowerCo's nationwide footprint of 3,322 sites inBelgium . Telenet will enter into a long-term Master Lease Agreement ("MLA") withTowerCo , which includes an initial period of 15 years and two renewals of 10 years each. The MLA also includes a build-to-suit commitment to deploy a minimum of 475 additional new sites with Telenet acting as subcontractor toTowerCo , and provides for payment for such services to Telenet over time.
The transaction is expected to close in the second quarter of 2022.
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Assets Under Management and Fee Earning Equity Under Management ("FEEUM")
Below is a summary of our AUM and FEEUM.
AUM (1)(3) (In billions) FEEUM (2)(3) (In billions)
Type Products Description March 31, 2022 December 31, 2021 March 31, 2022 December 31, 2021
Third Party Managed Capital
Institutional Digital Bridge Partners Earns management fees and $ 16.5 $ 16.6 $ 11.0 $ 11.2
Funds opportunistic strategy potential for carried
interest or incentive fees
Liquid securities strategy 1.0 0.8 1.0 0.8
Other Investment Digital co-invest vehicles Earns management fees, 19.9 19.3 4.4 4.2
Vehicles business service fees from
portfolio companies, and
Digital real estate and potential for carried 7.1 6.9 2.4 2.1
infrastructure held by interest
portfolio companies
44.5 43.6 18.8 18.3
Balance Sheet Capital (3)
Digital Operating 1.5 1.2 NA NA
Other 0.6 0.5 NA NA
$ 46.6 $ 45.3 $ 18.8 $ 18.3
__________
(1) AUM is composed of (a) third party managed capital, which are assets for
which the Company and its affiliates provide investment management services,
including assets for which the Company may or may not charge management fees
and/or performance allocations; and (b) assets invested using the Company's own
balance sheet capital and managed on behalf of the Company's shareholders. Third
party AUM is based upon the cost basis of managed investments as reported by
each underlying vehicle as of the reporting date and may include uncalled
capital commitments. Balance sheet AUM is based upon the undepreciated carrying
value of the Company's balance sheet investments as of the reporting date. The
Company's calculation of AUM may differ from other asset managers, and as a
result, may not be comparable to similar measures presented by other asset
managers.
(2) FEEUM is equity for which the Company and its affiliates provide investment
management services and derive management fees and/or incentives. FEEUM
generally represents the basis used to derive fees, which may be based upon
invested equity, stockholders' equity, or fair value, pursuant to the terms of
each underlying investment management agreement. The Company's calculation of
FEEUM may differ from other asset managers, and as a result, may not be
comparable to similar measures presented by other asset managers.
(3) Represents the Company's investment interests on its balance sheet,
excluding the portion held by noncontrolling interests in investment entities,
that is managed by the Company on behalf of its stockholders, therefore is not
fee-bearing. Balance sheet AUM reflects generally the OP's share of net book
value of balance sheet assets, determined based upon undepreciated carrying
value of assets, and where applicable, after impairment charges that create a
new basis for the affected assets, in all instances, net of liabilities.
•FEEUM grew 3% or
•Our acquisition ofAMP Capital's global infrastructure equity platform will add another$5.5 billion of FEEUM when the transaction closes in the second half of 2022. 50
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Table of Contents Results of Operations
The following table summarizes our consolidated results from continuing operations by reportable segments.
Three Months Ended
March 31,
(In thousands) 2022 2021 Change
Continuing Operations
Total revenues
Digital Investment Management $ 44,893 $ 31,120 $ 13,773
Digital Operating 202,522 189,202 13,320
Corporate and Other (1) 10,044 259 9,785
$ 257,459 $ 220,581 36,878
Income (loss) from continuing operations
Digital Investment Management $ (9,143) $ 7,663 $ (16,806)
Digital Operating (74,141) (64,260) (9,881)
Corporate and Other (153,002) (89,742) (63,260)
$ (236,286) $ (146,339) (89,947)
Net income (loss) from continuing operations
attributable to DigitalBridge Group, Inc.
Digital Investment Management $ (7,602) $ 6,879 $ (14,481)
Digital Operating (12,824) (10,074) (2,750)
Corporate and Other (133,043) (82,594) (50,449)
$ (153,469) $ (85,789) (67,680)
__________
(1) Includes elimination of fee income earned by
Revenues
Total revenues increased
•Digital Investment Management-Revenues from our investment management business grew 44% to$44.9 million as a result of significant growth in our FEEUM from$12.9 billion atMarch 31, 2021 to$18.8 billion atMarch 31, 2022 following the successful fundraising forDigitalBridge Partners II, LP ("DBP II") and co-invest vehicles. DBP II had its final closing inDecember 2021 at$8.3 billion of total commitments, having raised$4.1 billion subsequent to the first quarter of 2021.
•Digital Operating-2022 includes revenue from additional acquisitions, driven by
the Vantage SDC portfolio, with an add-on acquisition in
•Corporate and Other-Revenues in 2022 also reflect interest income from our growing credit investments which we started actively warehousing in 2021 for future credit products.
Income (loss) from continuing operations
•Digital Investment Management-Net loss in the first quarter of 2022 is
attributed to a reversal of some of the carried interest that accrued in the
fourth quarter of 2021 when fair value increases on most of the underlying fund
investments was initially recognized, net of reversal of associated compensation
expense (prior to attribution to noncontrolling interest). In this case, the
reversal of carried interest is a function of continuing accrual of preferred
returns over time while fair value of underlying investments remain largely
consistent. Additionally, there was an unrealized loss on our interest in a
managed sub-account as net asset value decreased due to mark-to-market of
underlying equity securities invested in the account. We have also continued to
ramp up resources and invest in our growing Digital IM business.
•Digital Operating-Our Digital Operating segment generally records a net loss,
reflecting the effects of real estate depreciation and amortization of lease
intangibles. We present our supplemental operating results measure of earnings
before interest, tax, depreciation and amortization for real estate ("EBITDAre")
for Digital Operating under "-Non-GAAP Measures."
•Corporate and Other-Net losses generally reflect corporate level costs that
have not been allocated to our reportable segments. The significantly larger net
loss in 2022 was driven by a $133.2 million non-cash loss
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recognized in connection with an early exchange of$60.3 million of our 5.75% exchangeable notes (refer to discussion in Note 8 to the consolidated financial statements).
Key components of revenue and income (loss) from continuing operations are discussed in more detail below.
Comparison of Three Months EndedMarch 31, 2022 to Three Months EndedMarch 31, 2021 Three Months Ended March 31, (In thousands) 2022 2021 Change Revenues Property operating income$ 202,511 $ 189,002 $ 13,509 Interest income 5,166 854 4,312 Fee income 42,837 29,443 13,394 Other income 6,945 1,282 5,663 Total revenues 257,459 220,581 36,878 Expenses Property operating expense 84,003 79,862 4,141 Interest expense 44,030 39,780 4,250 Investment expense 9,565 6,893 2,672 Transaction-related costs 165 1,618 (1,453) Depreciation and amortization 128,567 139,425 (10,858) Compensation expense, including carried interest 45,190 78,753 (33,563) Administrative expenses 27,885 17,796 10,089 Total expenses 339,405 364,127 (24,722) Other income (loss) Other loss, net (149,881) (9,350) (140,531) Equity method losses, including carried interest (11,872) (16,639) 4,767 Loss before income taxes (243,699) (169,535) (74,164) Income tax benefit 7,413 23,196 (15,783) Loss from continuing operations (236,286) (146,339) (89,947) Loss from discontinued operations (107,398) (481,260) 373,862 Net loss (343,684) (627,599) 283,915
Net income (loss) attributable to noncontrolling interests: Redeemable noncontrolling interests
(11,220) 2,449 (13,669)
Investment entities (63,045) (355,862) 292,817
Operating Company (22,862) (27,896) 5,034
Net loss attributable to DigitalBridge Group, Inc. (246,557) (246,290) (267)
Preferred stock dividends 15,759 18,516 (2,757)
Net loss attributable to common stockholders $ (262,316) $ (264,806) 2,490
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Property Operating Income and Expense
Three Months Ended March 31,
(In thousands) 2022 2021 Change
Property operating income
Lease income $
184,171
Data center service revenue 18,340 15,387 2,953
$
202,511
Property operating expense $
84,003
Property operating income and expense amounts are higher in 2022, which includes operating results from additional acquisitions, primarily within the Vantage SDC portfolio, with an add-on acquisition inOctober 2021 and additional lease-up of expanded capacity and existing inventory throughout 2021, as well as DataBank's acquisition of four new data centers inMarch 2022 .
Total real estate carrying value in our Digital Operating segment stood at
At
March 31, 2022 December 31, 2021
Number of data centers (1)
Owned 33 28
Leasehold 49 50
82 78(In thousands, except %) Max Critical I.T. Square Feet or Total Rentable Square Feet (2)
1,980 1,949
Leased Square Feet (2) 1,608 1,553
% Utilization Rate (% Leased) (2) 81% 80%
__________
(1) Converted a leased data center to owned in the first quarter of 2022.
(2) Excludes data centers that were not held for the entire period; in this
case, four data centers that were acquired in
On a same store basis, property operating income and expense also increased in 2022, reflecting an increase in leased square footage, driven by the lease-up of expanded capacity and existing inventory in the Vantage SDC portfolio.
Interest Income
Interest income was$4.3 million higher. In 2022, there was additional interest income from new loans originated or acquired beginning the third quarter of 2021 that are being warehoused for future investment vehicles, as well as an unsecured promissory note in connection with the sale of our Wellness Infrastructure business. Fee Income Three Months Ended March 31, (In thousands) 2022 2021 ChangeDigital Investment Management Management fees$ 42,191 $ 27,739 $ 14,452 Incentive fees 2 594 (592) Other fee income 644 1,110 (466)$ 42,837 $ 29,443 13,394 Fee income was higher by$13.4 million . The increase was driven by the successful fundraising for DBP II which had a final close inDecember 2021 at$8.3 billion of total commitments, having raised$4.1 billion subsequent to the first quarter of 2021. 53
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Table of Contents Other Income Other income increased$5.7 million , which can be attributed primarily to higher professional service fees incurred on behalf of and reimbursable by our managed investment vehicles, and dividend income received from our equity interest in a third party non-traded REIT. Interest Expense Three Months Ended March 31, (In thousands) 2022 2021 Change Digital Investment Management$ 2,502 $ -$ 2,502 Digital Operating 36,184 31,132 5,052 Other investment-level debt 717 - 717 Corporate-level debt 4,627 8,648 (4,021)$ 44,030 $ 39,780 4,250
Digital Investment Management-This represents interest expense from our
securitized financing facility beginning in
Digital Operating-The increase of
Overall, at
Other Investment-level Debt-This represents interest expense from: (i) our securitized financing facility beginning inJuly 2021 that is partially allocated to our digital credit and digital liquid investments on the balance sheet; and (ii) interest expense on our credit facilities financing loans that are being warehoused for future securitization vehicles. Corporate-level Debt-Interest expense was$4.0 million lower in 2022 as we have extinguished$221 million of higher cost corporate debt sinceMarch 2021 through early exchanges of our 5.75% exchangeable notes totaling$161 million in the fourth quarter of 2021 and an additional$60 million in the first quarter of 2022. Additionally, the first quarter of 2021 also included interest expense on our corporate credit facility that was terminated inJuly 2021 .
Investment Expense
Investment expense increased$2.7 million , attributable largely to compensatory expense recognized in connection with equity awards granted to the management team of Vantage who performs the day-to-day operations of Vantage SDC.
Transaction-Related Costs
Transaction-related costs are generally in connection with unconsummated investments.
Depreciation and Amortization
Decrease in depreciation and amortization was primarily due to accelerated amortization recognized in the first quarter of 2021 on a trade name intangible in anticipation of the Company's name change inJune 2021 . In the Digital Operating segment, overall depreciation and amortization was largely consistent between the two periods as increases attributable to assets acquired throughout 2021 were mostly offset by a decrease in amortization expense on lease intangibles following the term expiration on short term leases in our co-location business in the first quarter of 2022. 54
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Compensation Expense
Three Months Ended
March 31,
(In thousands) 2022 2021 Change
Cash compensation and benefits $ 55,811 $ 62,880 $ (7,069)
Equity-based compensation 9,731 15,906 (6,175)
Incentive and carried interest compensation (20,352) (33) (20,319)
$ 45,190 $ 78,753 (33,563)
Total compensation expense was $33.6 million lower, driven primarily by a
reversal of carried interest compensation in the first quarter of 2022.
Unrealized carried interest and corresponding compensation amounts are subject
to adjustments each period, including reversals, until such time they are
realized, based upon the cumulative performance of the underlying investments of
the respective vehicles that are carried at fair value. Additionally, the first
quarter of 2021 included higher severance payments, including acceleration of
equity-based compensation.
Administrative Expenses
Administrative expense increased
Other Loss
Other loss was
The significant loss in 2022 was driven by a non-cash debt extinguishment loss of$133.2 million , recognized in connection with an early exchange of our 5.75% exchangeable notes inMarch 2022 , as discussed further in Note 8 to the consolidated financial statements. Other losses include decreases in fair value of marketable equity securities, held primarily by our consolidated digital liquid funds.
In 2021, the loss was driven by an increase in value of the Blackwells
settlement liability prior to its settlement in
Equity Method Earnings (Losses)
Three Months Ended
March 31,
(In thousands) 2022 2021 Change
Digital Investment Management (carried interest
reversal of $31,079 and $222 ) $ (31,062) $ (195) $ (30,867)
Other 19,190 (16,444) 35,634
$ (11,872) $ (16,639) 4,767
Digital Investment Management-These amounts represent predominantly unrealized
carried interest from our general partner interests in sponsored investment
vehicles. Carried interest is subject to adjustments each period, including
reversals, based upon the cumulative performance of the underlying investments
of these vehicles that are measured at fair value, until such time the carried
interest is realized. In the first quarter of 2022, there was a reversal of some
of the carried interest that accrued in the fourth quarter of 2021 when fair
value increases on most of the underlying fund investments was initially
recognized. In this case, the carried interest reversal is a function of
continuing accrual of preferred returns over time while fair value of underlying
investments remain largely consistent.
Other-These amounts were driven primarily by our investment in BRSP for which we
recorded earnings of $12.8 million in 2022 and losses of $27.5 million in 2021.
These amounts included basis difference adjustment (as discussed in Note 5 to
consolidated financial statements) that increased earnings in 2022 and notably
offset some of the losses in 2021. Our share of net losses in 2021 were
attributed largely to investment write-downs and BRSP's restructuring costs,
including the BRSP management contract termination fee that was paid to us.
2022 also included higher earnings from our limited partnership interests in DBP
I and DBP II, representing unrealized fair value increases on the underlying
investments of these funds.
In 2021, the BRSP losses were partially offset by fair value increases on an equity method investment that had been accounted for under the fair value option.
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Table of Contents Income Tax Benefit Income tax benefit decreased$15.8 million . The first quarter of 2021 had included deferred tax benefit recognized on NOL from our DataBank subsidiary and in connection with significant severance costs. In the second quarter of 2021, it was determined that DataBank would elect REIT status beginning with the 2021 taxable year and thereafter, only NOL on DataBank TRS is subject to a deferred tax benefit, for which a full valuation allowance was recorded in the first quarter of 2022. The net income tax benefit recorded in the first quarter of 2022 otherwise reflects the tax effect of activities in the Company's TRS in the normal course of business, which continues to be driven primarily by deferred tax benefit on equity-based compensation.
Loss from Discontinued Operations
Three Months Ended
March 31,
(In thousands) 2022 2021 Change
Revenues
Revenues $ 80,281 $ 266,777 $ (186,496)
Expenses (201,155) (502,576) 301,421
Other gain (loss) 11,364 (249,179) 260,543
Income tax benefit 2,112 3,718 (1,606)
Loss from discontinued operations (107,398) (481,260) 373,862
Loss from discontinued operations attributable to
noncontrolling interests:
Investment entities (6,175) (303,851) 297,676
Operating Company (8,135) (16,908) 8,773
Loss from discontinued operations attributable to
DigitalBridge Group, Inc. $ (93,088) $ (160,501) 67,413
Discontinued operations represent primarily the operations of the following
businesses: (1) Wellness Infrastructure prior to its disposition in February
2022 ; (2) opportunistic investments in our OED portfolio and credit investment
management business in Other IM prior to disposition of our equity interest and
deconsolidation in December 2021 ; and (3) the Company's hotel business prior to
its disposition in March 2021 , with the remaining hotel portfolio that was in
receivership sold by the lender in September 2021 .
Losses in 2022 can be attributed primarily to write-off of unamortized deferred
financing costs related to the Wellness Infrastructure debt, which was assumed
by the buyer in February 2022 .
Losses in 2021 were driven by significant impairment expense and decreases in asset fair values based upon the selling price of our OED and Other IM portfolio.
A detailed income statement on discontinued operations is included in Note 12 to the consolidated financial statements.
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Non-GAAP Supplemental Financial Measures
Following our decision not to maintain qualification as a REIT for 2022, we no longer present Funds From Operations, which is a non-GAAP supplemental financial measure that is widely used by the equity REIT industry.
EBITDAre
For the Digital Operating segment in which our DataBank and Vantage SDC
subsidiaries operate as REITs, we report earnings before interest, tax,
depreciation and amortization for real estate ("EBITDAre"), which is a non-GAAP
supplemental financial measure widely used by the equity REIT industry. This
non-GAAP measure should not be considered an alternative to GAAP net income
(loss) as an indication of operating performance, or to cash flows from
operating activities as a measure of liquidity, nor as an indication of the
availability of funds for our cash needs, including funds available to make
distributions, in our Digital Operating segment. Our calculation of EBITDAre may
differ from methodologies utilized by other REITs for similar performance
measurements, and, accordingly, may not be comparable to those of other REITs.
We calculate EBITDAre for our Digital Operating segment in accordance with
standards established by NAREIT, which defines EBITDAre as net income or loss
calculated in accordance with GAAP, excluding (i) interest expense; (ii) income
tax benefit or expense; (iii) depreciation and amortization; (iv) impairment of
depreciable real estate and impairment of investments in unconsolidated ventures
directly attributable to decrease in value of depreciable real estate held by
the venture; (v) gain on disposition of depreciated real estate; (vi) gain or
loss from a change in control in connection with interests in depreciable real
estate or in-substance real estate; and (vii) adjustments to reflect the
Company's share of EBITDAre from investments in unconsolidated ventures.
EBITDAre represents a widely known supplemental measure of performance, EBITDA,
but for real estate entities, which we believe is particularly helpful for
generalist investors in REITs. EBITDAre depicts the operating performance of a
real estate business independent of its capital structure, leverage and noncash
items, which allows for comparability across real estate entities with different
capital structure, tax rates and depreciation or amortization policies.
Additionally, exclusion of gains on disposition and impairment of depreciated
real estate also provides a reflection of ongoing operating performance and
allows for period-over-period comparability.
As with other non-GAAP measures, the usefulness of EBITDAre may be limited. For
example, EBITDAre focuses on profitability from operations, and does not take
into account financing costs, and capital expenditures needed to maintain
operating real estate.
Three Months Ended
March 31,
(In thousands) 2022 2021 Change
Digital Operating
Total revenues $ 202,522 $ 189,202 $ 13,320
Property operating expenses (84,003) (79,862) (4,141)
Transaction-related costs and investment expense (8,016) (6,565) (1,451)
Compensation and administrative expense (26,855) (25,947) (908)
Other gain (loss), net 956 (3) 959
EBITDAre $ 84,604 $ 76,825 7,779
The following table presents a reconciliation of net loss to EBITDAre for the
Digital Operating segment.
Three Months Ended March 31,
(In thousands) 2022 2021
Digital Operating
Net loss $ (74,141) $ (64,260)
Adjustments:
Interest expense 36,184 31,132
Depreciation and amortization 122,891 122,221
Income tax benefit (330) (12,268)
EBITDAre $ 84,604 $ 76,825
The higher 2022 EBITDAre reflects an increase in rentable square footage, driven
by the Vantage SDC portfolio, with an add-on acquisition in October 2021 and
additional lease-up of expanded capacity and existing inventory throughout 2021,
as well as DataBank's acquisition of four new data centers in March 2022 .
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Liquidity and Capital Resources
Overview
We believe we have sufficient cash on hand, and anticipated cash generated from operating activities and external financing sources, to meet our short term and long term capital requirements. In addition to our cash balance atMarch 31, 2022 , our expected liquidity position is$1.0 billion , including the full$300 million availability under our VFN. In the normal course of business, we continue to seek and capitalize on opportunities to syndicate our investments to third party co-investors. We also have access to the capital markets to raise additional funds, namely through issuance of additional series of notes under our securitized financing facility. We regularly evaluate our liquidity position, debt obligations, and anticipated cash needs to fund our operating and investing activities, based upon our projected financial and operating performance, and investment opportunities. Our evaluation of future liquidity requirements is regularly reviewed and updated for changes in internal projections, economic conditions, competitive landscape and other factors. At this time, while we are in compliance with all of our corporate debt covenants and have sufficient liquidity to meet our operational needs, we continue to evaluate alternatives to manage our capital structure and market opportunities to strengthen our liquidity and provide further operational and strategic flexibility.
Significant Liquidity and Capital Activities
•We continue to reduce higher cost corporate indebtedness through early exchange of an additional$60 million of senior notes inMarch 2022 , which will generate future interest savings.
•Effective
•We monetized our Wellness Infrastructure business in
Liquidity Needs and Sources of Liquidity
Our primary liquidity needs are to fund:
•acquisitions of target digital assets for our balance sheet and related ongoing commitments;
•our general partner and co-investment commitments to our investment vehicles;
•warehouse investments pending the raising of third party capital for future investment vehicles;
•principal and interest payments on our debt;
•our operations, including compensation, administrative and overhead costs;
•obligation for lease payments, principally leasehold data centers and corporate offices;
•our liability for corporate and other taxes;
•development, construction and capital expenditures on our operating real estate; and
•distributions to our common and preferred stockholders (to the extent distributions have not been suspended).
Our primary sources of liquidity are:
•cash on hand;
•fees received from our investment management business, including the Company's share of realized net incentive or carried interest, if any;
•cash flow generated from our investments, both from operations and return of capital;
•availability under our VFN;
•issuance of additional term notes under our corporate securitization;
•third party co-investors in our consolidated investments and/or businesses;
•proceeds from full or partial realization of investments;
•investment-level financing; and
•proceeds from public or private equity and debt offerings.
Investment Commitments
Fund Commitments-As of
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Wafra Redemption-We agreed to redeem Wafra's 31.5% interest in our Digital IM business for$390 million in cash and 57.7 million in shares of our Class A common stock. The transaction is expected to close inMay 2022 . Additional contingent consideration between$90 million and up to$125 million based upon achievement of new capital formation targets may become payable inMarch 2023 andMarch 2024 , with up to 50% payable in shares of our Class A common stock at our election. Acquisition of Tower Assets-We have committed to acquire a mobile telecommunications tower business for approximately €745 million (or approximately$820 million ), to be funded through a combination of debt and equity, including a €458 million (approximately$504 million ) equity commitment. The acquisition is expected to close in the second quarter of 2022. We expect to temporarily warehouse the investment, which is intended to be transferred thereafter to a new sponsored investment vehicle. Acquisition of Infrastructure Investment Management Platform-We have committed to acquireAMP Capital's global infrastructure equity investment management platform forA$458 million (approximately$327 million ) in cash. The transaction is expected to close in the fourth quarter of 2022. Additional contingent consideration of up toA$180 million (approximately$129 million ) may become payable based upon achievement of future fundraising targets.
Lease Obligations
AtMarch 31, 2022 , we have$141.0 million and$293.8 million of finance and operating lease obligations, respectively, that were assumed through acquisitions, principally leasehold data centers, and$41.1 million of operating lease obligations on our corporate offices. These amounts represent fixed lease payments, excluding any contingent or other variable lease payments, and factor in lease renewal or termination options only if it is reasonably certain that such options would be exercised. These lease obligations will be funded through operating cash generated by the investment properties and corporate operating cash, respectively. Dividends
Preferred Stock-AtMarch 31, 2022 , we have outstanding preferred stock totaling$884 million , bearing a weighted average dividend rate of 7.135% per annum, with aggregate dividend payments of$15.8 million per quarter.
Cash From Operations
Our investments generate cash, either from operations or as a return of our invested capital. We primarily generate revenue from net operating income of our digital infrastructure business, which is partially offset by interest expense associated with non-recourse borrowings on our digital portfolio. We also receive periodic distributions from our equity investments, including our GP co-investments. Additionally, we generate fee related earnings from our digital investment management business. Following the expected conversion of Wafra's 31.5% interest in our Digital IM business into DBRG corporate level ownership, 100% of fee related earnings will be attributable to us. Management fee income is generally a predictable and stable revenue stream, while carried interest and incentive fees are by nature less predictable in amount and timing. Our ability to establish new investment vehicles and raise investor capital depends on general market conditions and availability of attractive investment opportunities as well as availability of debt capital.
Asset Monetization
We periodically monetize our investments through opportunistic asset sales or to recycle capital from non-core assets. As noted above, in completing our digital transformation, we monetized our Wellness Infrastructure assets inFebruary 2022 for$161 million in cash, including cash distributions received fromNRF Holdco prior to closing of the sale, and$155 million in note receivable.
Debt
Description of our debt is included in Note 8 to the consolidated financial statements.
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Our indebtedness at
Weighted Average Weighted Average
Outstanding Interest Rate (1) Years Remaining
($ in thousands) Principal (Per Annum) to Maturity (2)
Secured fund fee revenue notes $ 300,000 3.93 % 4.5
Convertible and exchangeable senior notes 278,422 5.21 % 1.7
Non-recourse investment level secured debt
Fixed rate 3,644,908 2.44 %
Variable rate 964,267 4.36 %
4,609,175 2.84 % 3.6
Total debt $ 5,187,597
__________
(1) Calculated based upon outstanding debt principal at balance sheet date. For
variable rate debt, weighted average interest rate is calculated based upon the
applicable index plus spread at balance sheet date.
(2) Calculated based upon anticipated repayment dates for notes issued under
securitization financing; otherwise based upon initial maturity dates, or
extended maturity dates if extension criteria are met for extensions that are at
the Company's option.
Scheduled principal payments on our debt obligations at March 31, 2022 were as
follows.
2027 and
(In thousands) Remaining 2022 2023 2024 2025 2026 thereafter Total
Secured fund fee revenue $ - $ - $ - $ -
notes $ 300,000 $ - $ 300,000
Convertible and
exchangeable senior notes - 200,000 - 78,422 - - 278,422
Investment-level secured debt Digital Operating 4,673 491,292 616,503 1,146,517 1,619,690 600,000 4,478,675 Other - 119,000 11,500 - - - 130,500 Total$ 4,673 $ 810,292 $ 628,003 $ 1,224,939 $ 1,919,690 $ 600,000 $ 5,187,597
Debt maturities and future debt principal payments are presented based upon
anticipated repayment dates for notes issued under securitization financing,
otherwise based upon initial maturity dates or extended maturity dates if
extension criteria are met at
Securitized Financing Facility
As noted above, our VFN availability was increased
Non-Recourse Investment-Level Secured Debt
Investment level financing is non-recourse to us and secured by the respective underlying real estate.
Significant Developments •Dispositions-Consolidated investment-level debt of$2.86 billion held byNRF Holdco (previously classified as held for disposition) have been assumed by the acquirer upon sale ofNRF Holdco inFebruary 2022 , which resulted in further deleveraging of our balance sheet.
Public Offerings
We may offer and sell various types of securities under our shelf registration
statement. These securities may be issued from time to time at our discretion
based on our needs and depending upon market conditions and available pricing.
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Cash Flows
The following table summarizes the activities from our statements of cash flows.
Three Months Ended March 31,
(In thousands) 2022 2021
Net cash provided by (used in):
Operating activities $ 1,257 $ (23,937)
Investing activities (1,102,149) (7,901)
Financing activities 559,318 99,171
Operating Activities
Cash inflows from operating activities are generated primarily through fee
income from our investment management business, property operating income from
our real estate investments, interest received from our loan portfolio, and
distributions of earnings received from equity investments. This is partially
offset by payment of operating expenses, including property management and
operations, loan servicing, investment transaction costs, as well as
compensation and general administrative costs.
Our operating activities generated net cash inflows of
Investing Activities
Investing activities include primarily cash outlays for acquisition of real estate, disbursements on new and/or existing loans, and contributions to unconsolidated ventures, which are partially offset by repayments and sales of loans receivable, distributions of capital received from unconsolidated ventures, and proceeds from sale of real estate and equity investments.
Our investing activities generated net cash outflows of
•Real estate investments-Real estate investing activities generated net cash outflows in both years.
Outflows were significantly higher in 2022 totaling$0.9 billion , attributed to DataBank's acquisition of five data centers, capital expenditures in our data center portfolio and payments for build-out of expansion capacity and lease-up within the Vantage SDC portfolio. Also contributing to the cash outflows was cash assumed by the buyer in the sale of real estate investment holding entities in our Wellness Infrastructure business. All of these outflows were partially offset by proceeds received from our Wellness Infrastructure sale. 2021 saw net cash outflows of$9.2 million , as proceeds from sales of various European properties and sales of real estate investment holding entities in our hotel business, net of cash assumed by the buyer, were more than offset by capital expenditures.
•Debt investments-Our debt investments generated net cash outflows of
Cash outflows in 2022 were driven by origination and acquisition of loans that are warehoused for future investment vehicles, including securitization vehicles; and were partially offset by a loan syndication.
In 2021, there was a$9.7 million acquisition of additional N-Star CDOs by our Wellness Infrastructure segment at a discount (subsequently sold as part of the disposition ofNRF Holdco inFebruary 2022 ), which was partially offset by repayments exceeding disbursements on our loan portfolio. •Equity investments-In 2022, our equity investments recorded net cash inflows of$8.7 million , largely representing the net activity from the marketable equity securities portfolio of our consolidated liquid funds. In 2021, we recorded net cash outflows of$25.0 million from equity investments, largely from draws on acquisition, development and construction ("ADC") loans that were accounted for as equity method investments. These ADC loans have since been disposed in conjunction with the sale of investment holding entities in our OED portfolio inDecember 2021 . Purchases and sales of equity investments in 2021 also included the trading activities in marketable equity securities by our consolidated liquid funds. 61
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Table of Contents Financing Activities We finance our investing activities largely through investment-level secured debt and capital from co-investors. We also draw upon our securitized financing facility to finance our investing and operating activities, as well as have the ability to raise capital in the public markets through issuances of preferred stock, common stock and private placement notes. Accordingly, we incur cash outlays for payments on our investment-level and corporate debt, dividends to our preferred stockholders and common stockholders (common dividends are temporarily suspended), as well as distributions to noncontrolling interests in our various investments.
Financing activities generated net cash inflows of
•In 2022, the large cash inflows reflect the financing for DataBank's data center acquisition inMarch 2022 through a term loan and capital contribution from noncontrolling interests. Other investment-level financing included additional amounts drawn on credit facilities to finance loans acquired for future securitization vehicles. •The financing net cash inflows in 2021 were driven by$91.0 million of net contributions from noncontrolling interests. This was composed largely of a syndication of our interest to a new third party investor in our zColo investment vehicle and assumption by Wafra of a portion of our commitments to DBP I. While there were net borrowings from our secured mortgage debt during the period, the cash inflow was offset by a$31.5 million repayment of our remaining convertible senior notes at maturity.
•Dividend payments were
Guarantees and Off-Balance Sheet Arrangements
In connection with financing arrangements for certain unconsolidated ventures, we provided customary non-recourse carve-out guarantees. We believe that the likelihood of making any payments under the guarantees is remote.
Risk Management
Risk management is a significant component of our strategy to deliver consistent risk-adjusted returns to our stockholders. The audit committee of our board of directors, in consultation with our chief risk officer, internal auditor and management, maintains oversight of risk management matters, and periodically reviews our policies with respect to risk assessment and risk management, including key risks to which we are subject, including credit risk, liquidity risk, financing risk, foreign currency risk and market risk, and the steps that management has taken to monitor and control such risks.
Underwriting and Investment Process
In connection with executing any new investment in digital assets for our balance sheet or a managed investment vehicle, our underwriting team undertakes a comprehensive due diligence process to ensure that we understand all of the material risks involved with making such investment, in addition to related accounting, legal, financial and business issues. If the risks can be sufficiently mitigated in relation to the potential return, we will pursue the investment on behalf of our balance sheet and/or investment vehicles, subject to approval from the applicable investment committee, composed of senior executives of the Company. Specifically, as part of our underwriting process, we evaluate and review the following data, including, but not limited to: financial data including historical and budgeted financial statements, tenant or customer quality, lease terms and structure, renewal probability, capital expenditure plans, sales pipeline, technical/energy requirements and supply, local and macroeconomic market conditions, leverage and comparable transactions, environmental, social and governance considerations, as applicable. For debt investments, we also analyze metrics such as loan-to-collateral value ratios, debt service coverage ratios, debt yields, sponsor credit ratings and performance history. In addition to evaluating the merits of any particular proposed investment, we evaluate the diversification of our or a particular managed investment vehicle's portfolio of assets, as the case may be. Prior to making a final investment decision, we determine whether a target asset will cause the portfolio of assets to be too heavily concentrated with, or cause too much risk exposure to, any one digital real estate sector, geographic region, source of cash flow such as tenants or borrowers, or other geopolitical issues. If we determine that a proposed investment presents excessive concentration risk, we may decide not to pursue an otherwise attractive investment.
Allocation Procedures
We currently manage, and may in the future manage, private funds, REITs and other entities that have investment and/or rate of return objectives similar to our own or to other investment vehicles that we manage. In order to address the
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risk of potential conflicts of interest among us and our managed investment vehicles, we have implemented an investment allocation policy consistent with our duty as a registered investment adviser to treat our managed investment vehicles fairly and equitably over time. Pursuant to this policy, and subject to certain priority rights in our DBP funds, investment allocation decisions are based on a suitability assessment involving a review of numerous factors, including the particular source of capital's investment objectives, available cash, diversification/concentration, leverage policy, the size of the investment, tax, anticipated pipeline of suitable investments and fund life.
Portfolio Management
The comprehensive portfolio management process generally includes day-to-day oversight by the Company's portfolio management team, regular management meetings and quarterly asset review process. These processes are designed to enable management to evaluate and proactively identify investment-specific issues and trends on a portfolio-wide basis for both assets on our balance sheet and assets of the companies within our investment management business. Nevertheless, we cannot be certain that such review will identify all issues within our portfolio due to, among other things, adverse economic conditions or events adversely affecting specific assets; therefore, potential future losses may also stem from investments that are not identified during these reviews. We use many methods to actively manage our risk to preserve our income and capital, including, but not limited to, maintaining dialogue with tenants, operators, partners and/or borrowers and performing regular inspections of our collateral and owned properties. With respect to our wellness infrastructure properties, we consider the impact of regulatory changes on operator performance and property values. During a quarterly review, or more frequently as necessary, investments are monitored and identified for possible asset impairment or loan loss reserves, as applicable, based upon several factors, including missed or late contractual payments, significant declines in property operating performance and other data which may indicate a potential issue in our ability to recover our invested capital from an investment. In addition, we may utilize services of certain strategic partnerships and joint ventures with third parties with relevant expertise to assist our portfolio management. In order to maintain our exemption from registration under the 1940 Act, and maximize returns and manage portfolio risk, we may dispose of an asset earlier than anticipated or hold an asset longer than anticipated if we determine it to be appropriate depending upon prevailing market conditions or factors regarding a particular asset. We can provide no assurances, however, that we will be successful in identifying or managing all of the risks associated with acquiring, holding or disposing of a particular asset or that we will not realize losses on certain assets.
Interest Rate and Foreign Currency Hedging
Subject to maintaining our exemption from registration under the 1940 Act, we may mitigate the risk of interest rate volatility through the use of hedging instruments, such as interest rate swap agreements and interest rate cap agreements. The goal of our interest rate management strategy is to minimize or eliminate the effects of interest rate changes on the value of our assets, to improve risk-adjusted returns and, where possible, to lock in, on a long-term basis, a favorable spread between the yield on our assets and the cost of financing such assets. In addition, because we are exposed to foreign currency exchange rate fluctuations, we employ foreign currency risk management strategies, including the use of, among others, currency hedges, and matched currency financing. We can provide no assurances, however, that our efforts to manage interest rate and foreign currency exchange rate volatility will successfully mitigate the risks of such volatility on our portfolio.
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with GAAP, which requires the use of estimates and assumptions that involve the exercise of judgment and that affect the reported amounts of assets, liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our critical accounting policies and estimates are integral to understanding and evaluating our reported financial results as they require subjective or complex management judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain and unpredictable. There have been no changes to our critical accounting policies or those of our unconsolidated joint ventures since the filing of our Annual Report on Form 10-K for the year endedDecember 31, 2021 . With respect to all critical estimates, we have established policies and control procedures which seek to ensure that estimates and assumptions are appropriately governed and applied consistently from period to period. We believe that all of the decisions and assessments applied were reasonable at the time made, based upon information available to us at that time. Due to the inherently judgmental nature of the various projections and assumptions used, and unpredictability of 63
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economic and market conditions, actual results may differ from estimates, and changes in estimates and assumptions could have a material effect on our financial statements in the future.
Recent Accounting Updates
The effects of accounting standards adopted in 2022 and the potential effects of accounting standards to be adopted in the future are described in Note 2 to our consolidated financial statements in Item 1 of this Quarterly Report.
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