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. 51
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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. AtJune 30, 2022 , we have$48 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. AtJune 30, 2022 , we owned 93% 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
substantially all 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") carryforwards..
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 DigitalBridge 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 were attributed 31.5% to Wafra through the end of
May 2022 when Wafra's investment in the Digital IM business was redeemed by the
Company (as discussed further in Note 10 to the consolidated financial
statements).
•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
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companies: DataBank, including zColo, an edge colocation data center business (DBRG ownership at 21.8% as ofJune 30, 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. Without the constraints of maintaining REIT status, we have more flexibility to execute various strategic initiatives, including the 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 carryforwards and that our Digital IM business, prior to the transition, was already taxable under a TRS.
Capitalization and Financing
•InJuly 2022 , our board of directors authorized a stock repurchase program which provides for repurchases up to$200 million of our class A common stock and/or preferred stock. The repurchases are targeted towards preferred stock, which will further reduce our leverage. •We expect to effectuate a reverse stock split in the third quarter of 2022 in which one share of class A common and class B common stock will be issued in exchange for every four shares of existing class A and class B common stock. •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, generating future interest savings.
•Effective
Digital Business Digital IM •InMay 2022 , we redeemed Wafra's 31.5% interest in our Digital IM business and Wafra sold or gave up its carried interest entitlement from future (not existing) investment management products. Consideration for the redemption was valued at$862.3 million at closing, consisting of: (i) net cash paid of$388.5 million ; (ii) 57.7 million shares of our class A common stock valued at$348.8 million at closing; and (iii) the ability to earn a contingent amount up to$125 million payable inMarch 2023 and/orMarch 2024 , with up to 50% payable in common stock at our election.
Following the redemption, all net cash flows from our fee business accrue to us at 100%, and we are entitled to 100% of carried interest net of management allocations from future investment products. The transaction is described further in Note 10 to the consolidated financial statements.
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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$128 million ), primarily based upon future fundraising for the third and fourth flagship funds under theGlobal Infrastructure Fund ("GIF") series. Closing is expected in the fourth quarter of 2022. The acquisition ofAMP Capital will further scale our Digital IM business.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, as well as co-investment vehicles, and is expected to be immediately accretive to our fee related earnings.
Digital Operating
DataBank Investments
•In
The new facilities added approximately 308,000 built square feet and 42.5 MW of installed critical IT load, and a roster of blue-chip customers. 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 had increased our ownership in DataBank from 20% to 21.8%.
DataBank Recapitalization •InJune 2022 , an affiliate ofSwiss Life Asset Management AG agreed to acquire 27% of the fully diluted equity interest in DataBank from existing investors for approximately$1.2 billion in cash. Our share of proceeds from the sale will be approximately$230 million and our ownership interest in DataBank will decrease from 21.8% to 15.5%. The valuation reflects a 1.9x multiple of the average cost basis of our four investments in DataBank sinceDecember 2019 . Closing is expected in the third quarter of 2022.
•Recapitalization efforts will continue throughout the remainder of 2022 and are expected to result in incremental sales of equity interests in DataBank by existing investors to new investors, and further dilute our interest in DataBank.
Other
•InJune 2022 , we acquired the mobile telecommunications tower business ("TowerCo") of Telenet Group Holding NV (Euronext Brussels: TNET, "Telenet") for €740 million or$791 million (including transaction costs). The acquisition was funded through$326 million of debt,$278 million of equity from the Company, and$214 million of third party equity, including funding for transaction costs, debt issuance costs and working capital. TheTowerCo investment is intended to 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 cash flows, high cash conversion, and long-term contracts. We acquired full ownership of Telenet's passive infrastructure and tower assets, includingTowerCo's nationwide footprint of approximately 3,300 sites inBelgium , of which approximately 2,200 sites are owned and the remaining sites are leased from third parties. Telenet entered into a long-termMaster Lease Agreement ("MLA") withTowerCo , which includes an initial period of 15 years and two renewal periods 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. 54
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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 June 30, 2022 December 31, 2021 June 30, 2022 December 31, 2021
Third Party Managed Capital
Institutional DigitalBridge Partners Earns management fees and $ 16.7 $ 16.6 $ 11.0 $ 11.2
Funds opportunistic strategy potential for carried
interest or incentive fees
Liquid securities strategy 1.0 0.8 0.9 0.8
Other Investment Digital co-invest vehicles Earns management fees, 20.2 19.3 4.7 4.2
Vehicles business service fees from
portfolio companies, and
Digital real estate and potential for carried 7.4 6.9 2.4 2.1
infrastructure held by interest
portfolio companies
45.3 43.6 19.0 18.3
Balance Sheet Capital (3)
Digital Operating 1.5 1.2 NA NA
Other 1.1 0.5 NA NA
$ 47.9 $ 45.3 $ 19.0 $ 18.3
__________
(1) AUM is composed of (a) third party managed capital 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) Balance sheet capital 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 generally reflects
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 increased by
•Our acquisition ofAMP Capital's global infrastructure equity platform is expected to add$5.5 billion of FEEUM when the transaction closes in the fourth quarter of 2022. 55
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The following table summarizes our consolidated results from continuing operations by reportable segments.
Three Months Ended June 30, Six Months Ended June 30,
(In thousands) 2022 2021 Change 2022 2021 Change
Continuing Operations
Total revenues
Digital Investment Management $ 46,115 $ 46,873 $ (758) $ 91,008 $ 77,993 $ 13,015
Digital Operating 227,687 189,093 38,594 430,209 378,295 51,914
Corporate and Other (1) 15,607 1,221 14,386 25,651 1,480 24,171
$ 289,409 $ 237,187 52,222 $ 546,868 $ 457,768 89,100
Income (loss) from continuing
operations
Digital Investment Management $ 67,995 $ 15,786 $ 52,209 $ 58,852 $ 23,449 $ 35,403
Digital Operating (85,428) (10,850) (74,578) (159,569) (75,110) (84,459)
Corporate and Other (35,877) (1,113) (34,764) (188,879) (90,855) (98,024)
$ (53,310) $ 3,823 (57,133) $ (289,596) $ (142,516) (147,080)
Net income (loss) from
continuing operations
attributable to DigitalBridge
Group, Inc.
Digital Investment Management $ 21,269 $ 12,100 $ 9,169 $ 13,667 $ 18,979 $ (5,312)
Digital Operating (14,807) (376) (14,431) (27,631) (10,450) (17,181)
Corporate and Other (14,009) (5,798) (8,211) (147,052) (88,392) (58,660)
$ (7,547) $ 5,926 (13,473) $ (161,016) $ (79,863) (81,153)
__________
(1) Includes elimination of fee income earned by
Revenues
Total revenues increased
•Digital Investment Management-Revenues were largely consistent in the quarter-to-date comparison and increased 17% in the year-to-date comparison. 2021 had benefited from an incentive fee from our digital liquid strategy, while additional fee income in 2022 was sourced largely from new co-invest vehicles and sub-advisory accounts. Additionally, year-to-date revenues reflect higher fee income from third party capital committed toDigitalBridge Partners II, LP ("DBP II") in the second half of 2021.
Supplemental performance measures of the Digital IM segment are presented under "-Non-GAAP Measures."
•Digital Operating-2022 includes revenue from additional acquisitions, namely DataBank's four new data centers inMarch 2022 and within the Vantage SDC portfolio, an add-on acquisition inOctober 2021 and additional lease-up of expanded capacity and existing inventory throughout 2021 and 2022. The second quarter of 2022 also included a one-time fee from a lease termination at Vantage SDC. •Corporate and Other-Revenues in 2022 reflect largely income from warehoused investments, specifically interest income from credit investments which were actively acquired or originated over time and lease income from the tower business acquired inJune 2022 .
Income (loss) from continuing operations
•Digital Investment Management-Net income reflects the effect of carried interest, net of management allocations. 2022 included significant carried interest accrued in the second quarter, driven by an increase in the valuation of a portfolio company that is currently under contract for sale. On a year-to-date basis in 2022, the additional carried interest accrual was partially offset by a reversal in the first quarter. We have also continued to ramp up resources and invest in our growing Digital IM business over time.
•Digital Operating-Our Digital Operating segment generally records a net loss, reflecting the effects of real estate depreciation and intangible asset amortization. Net loss was lower in 2021 as there was a large deferred
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tax benefit resulting from a write-off of deferred tax liabilities at DataBank as it was then determined that DataBank would elect REIT status beginning with the 2021 taxable year. •Corporate and Other-The net loss generally reflects corporate level costs that have not been allocated to our reportable segments, primarily interest expense on corporate debt and compensation and administrative expenses. Also included are the effects of fair value changes on marketable equity securities held by our consolidated liquid strategy funds, warehoused loan investments and underlying portfolio companies of our digital funds which affect our share of earnings from these funds. The larger net loss in 2022 was driven by a$133.2 million non-cash loss recognized in connection with an early exchange of our 5.75% exchangeable notes inMarch 2022 (refer to Note 8 to the consolidated financial statements), and decreases in investment fair values.
Key components of revenue and income (loss) from continuing operations are discussed in more detail below.
Comparison of Three and Six Months EndedJune 30, 2022 to Three and Six Months EndedJune 30, 2021 Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2022 2021 Change 2022 2021 Change Revenues Property operating income$ 234,251 $ 188,985 $ 45,266 $ 436,762 $ 377,987 $ 58,775 Interest income 8,499 1,319 7,180 13,665 2,173 11,492 Fee income 44,318 45,157 (839) 87,155 74,600 12,555 Other income 2,341 1,726 615 9,286 3,008 6,278 Total revenues 289,409 237,187 52,222 546,868 457,768 89,100 Expenses Property operating expense 97,290 77,140 20,150 181,293 157,002 24,291 Interest expense 46,388 37,938 8,450 90,418 77,718 12,700 Investment expense 7,187 5,871 1,316 16,752 12,764 3,988 Transaction-related costs 2,756 64 2,692 2,921 1,682 1,239 Depreciation and amortization 155,352 138,229 17,123 283,919 277,654 6,265 Compensation expense, including incentive fee and carried interest allocation 101,861 56,465 45,396 147,051 135,218 11,833 Administrative expenses 26,353 28,505 (2,152) 54,238 46,301 7,937 Total expenses 437,187 344,212 92,975 776,592 708,339 68,253 Other income (loss) Other loss, net (46,256) (27,041) (19,215) (196,137) (36,391) (159,746) Equity method earnings, including carried interest 138,206 62,650 75,556 126,334 46,011 80,323 Loss before income taxes (55,828) (71,416) 15,588 (299,527) (240,951) (58,576) Income tax benefit 2,518 75,239 (72,721) 9,931 98,435 (88,504) Income (loss) from continuing operations (53,310) 3,823 (57,133) (289,596) (142,516)
(147,080)
Loss from discontinued operations (14,771) (98,906) 84,135 (122,169) (580,166) 457,997 Net loss (68,081) (95,083) 27,002 (411,765) (722,682) 310,917 Net income (loss) attributable to noncontrolling interests: Redeemable noncontrolling interests (14,327) 6,025 (20,352) (25,547) 8,474 (34,021) Investment entities (29,102) 36,616 (65,718) (92,147) (319,246) 227,099 Operating Company (3,090) (14,980) 11,890 (25,952) (42,876) 16,924 Net loss attributable to DigitalBridge Group, Inc. (21,562) (122,744) 101,182 (268,119) (369,034) 100,915 Preferred stock dividends 15,759 18,516 (2,757) 31,518 37,032 (5,514) Net loss attributable to common stockholders$ (37,321) $ (141,260) 103,939$ (299,637) $ (406,066) 106,429 57
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Property Operating Income and Expense
Three Months Ended June 30, Six Months Ended June 30,
(In thousands) 2022 2021 Change 2022 2021 Change
Property operating income
Digital Operating
Lease income $ 207,951 $ 173,859 $ 34,092 $ 392,122 $ 347,474 $ 44,648
Data center service revenue 19,695 15,126 4,569 38,035 30,513 7,522
227,646 188,985 38,661 430,157 377,987 52,170
Other
Lease income 6,605 - 6,605 6,605 - 6,605
$ 234,251 $ 188,985 45,266 $ 436,762 $ 377,987 58,775
Property operating expense
Digital Operating $ 94,744 $ 77,140 $ 17,604 $ 178,747 $ 157,002 $ 21,745
Other 2,546 - 2,546 2,546 - 2,546
$ 97,290 $ 77,140 20,150 $ 181,293 $ 157,002 24,291
Digital Operating
Property operating income and expense are higher in 2022, which includes
operating results from additional acquisitions. These include DataBank's
acquisition of four data centers in
Total real estate carrying value in our Digital Operating segment increased to$6.05 billion atJune 30, 2022 compared to$4.97 billion atDecember 31, 2021 following the DataBankMarch 2022 acquisition.
At
June 30, 2022 December 31, 2021
Digital Operating
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)
2,318 1,949
Leased Square Feet (2) 1,817 1,553
% Utilization Rate (% Leased) (2) 78% 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, driven by the Vantage SDC portfolio, attributable to a lease termination fee and increase in leased square footage from lease-up of expanded capacity and existing inventory. Other
This represents one month of property operating income and expense from the
tower business, acquired in
Interest Income
Interest income was$7.2 million higher in the quarter-to-date comparison and$11.5 million higher in the year-to-date comparison. 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. 58
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Fee Income
Three Months Ended June 30, Six Months Ended June 30,
(In thousands) 2022 2021 Change 2022 2021 Change
Digital Investment Management
Management fees $ 43,559 $ 39,727 $ 3,832 $ 85,750 $ 67,466 $ 18,284
Incentive fees - 4,489 (4,489) 2 5,083 (5,081)
Other fee income 759 941 (182) 1,403 2,051 (648)
$ 44,318 $ 45,157 (839) $ 87,155 $ 74,600 12,555
Fee income decreased $0.8 million in the quarter-to-date comparison and
increased $12.6 million in the year-to-date comparison. Management fees were
higher in both periods under comparison, attributed to capital calls by
portfolio companies as well as new co-invest vehicles and sub-advisory accounts.
Additionally, the increase in the year-to-date period was driven by DBP II
commitments that were closed subsequent to the second quarter of 2021. However,
there were no incentive fees earned from our digital liquid strategy in 2022 in
comparison to 2021, which contributed to an overall decrease in fee income in
the quarter-to-date period and partially offset the higher management fees in
the year-to-date period.
Other Income
Other income increased $0.6 million in the quarter-to-date comparison and $6.3
million in the year-to-date comparison. The increase is attributed primarily to
higher professional service fees incurred on behalf of and reimbursable by our
managed investment vehicles, dividend income received from our equity interest
in a third party non-traded REIT and loan origination fee earned in in the first
quarter of 2022 in connection with a loan syndication.
Interest Expense
Three Months Ended June 30, Six Months Ended June 30,
(In thousands) 2022 2021 Change 2022 2021 Change
Digital Investment Management $ 2,785 $ - $ 2,785 $ 5,287 $ - $ 5,287
Digital Operating 37,233 29,272 7,961 73,417 60,404 13,013
Other investment-level debt 2,422 - 2,422 3,139 - 3,139
Corporate-level debt 3,948 8,666 (4,718) 8,575 17,314 (8,739)
$ 46,388 $ 37,938 8,450 $ 90,418 $ 77,718 12,700
Digital Investment Management-This represents interest expense from our
securitized financing facility beginning in
Digital Operating-The increase of$8.0 million in the quarter-to-date comparison and$13.0 million in the year-to-date comparison is attributed to: (i) interest expense on additional debt raised through securitization transactions by DataBank and Vantage SDC during 2021; (ii) interest expense on new financing for DataBank's acquisition of four data centers inMarch 2022 ; and (iii) interest expense on our securitized financing facility beginningJuly 2021 which is partially allocated to the Digital Operating segment.
At
Other Investment-level Debt-This represents interest expense from: (i) debt to partially fund the acquisition of the tower assets inJune 2022 ; (ii) credit facilities financing loans warehoused for future securitization vehicles; and (iii) our securitized financing facility beginning inJuly 2021 that is partially allocated to our digital credit and digital liquid investments on the balance sheet. Corporate-level Debt-Interest expense decreased$4.7 million in the quarter-to-date comparison and$8.7 million in the year-to-date comparison as we have extinguished$221 million of higher cost corporate debt through early exchanges of our 5.75% exchangeable notes totaling$161 million in the fourth quarter of 2021 and an additional$60 million inMarch 2022 (refer to Note 8 to the consolidated financial statements). 2021 also included interest expense on our corporate credit facility that was terminated inJuly 2021 . 59
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Table of Contents Investment Expense Investment expense increased$1.3 million in the quarter-to-date comparison and$4.0 million in the year-to-date comparison, attributable largely to compensatory expense recognized in connection with equity awards granted to the management team of Vantage who performs the day-to-day operations of Vantage SDC, higher management fees paid to Vantage as a result of the add-on acquisition inOctober 2021 , and higher professional service fees incurred on behalf of and reimbursable by our managed investment vehicles.
Transaction-Related Costs
Transaction-related costs in the second quarter of 2022 are related to the
pending acquisition of
Depreciation and Amortization
Increase in depreciation and amortization can be attributed to real estate and intangible assets acquired through the Vantage SDC add-on acquisition inOctober 2021 , DataBank's four new data centers inMarch 2022 , and tower assets inJune 2022 . The second quarter of 2022 also included accelerated amortization of lease intangibles in connection with an early lease termination in the Vantage SDC portfolio. The increase was partially offset by (i) accelerated amortization recognized in the first quarter of 2021 on a trade name intangible in anticipation of the Company's name change inJune 2021 ; and (ii) a decrease in amortization expense on lease intangibles following the term expiration on short term leases in our colocation data center business in 2022. Compensation Expense Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2022 2021 Change 2022 2021 Change Cash compensation and benefits$ 43,873 $ 40,426
8,919 7,773 1,146 18,650 23,679 (5,029)
Incentive and carried
interest compensation 49,069 8,266 40,803 28,717 8,233 20,484
$ 101,861 $ 56,465 45,396 $ 147,051 $ 135,218 11,833
Total compensation expense was $45.4 million higher in the quarter-to-date
comparison and $11.8 million higher in the year-to-date comparison. The increase
in both periods under comparison is driven primarily by carried interest
compensation accrued in the second quarter of 2022, representing a portion of
unrealized carried interest from our sponsored investment vehicles that are
shared with management and certain employees. In the year-to-date comparison,
the increase was partially offset by a reversal of carried interest compensation
in the first quarter of 2022 and also a decrease in cash and equity-based
compensation as there was higher severance payments, including acceleration of
equity-based compensation, in the first quarter of 2021. 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.
Administrative Expenses
Administrative expense decreased$2.2 million in the quarter-to-date comparison and increased$7.9 million in the year-to-date comparison. The second quarter of 2021 had included placement fees incurred in fundraising for DBP II which resulted in a decrease in administrative expense in the quarter-to-date comparison. However, this was more than offset by higher professional fees incurred in 2022 which resulted in an increase in administrative expense in the year-to-date comparison. Other Loss Other loss increased$19.2 million from$27.0 million to$46.3 million in the quarter-to-date comparison, and increased$159.7 million from$36.4 million to$196.1 million in the year-to-date comparison. The losses in 2022 were driven by fair value decreases in relation to: (i) marketable equity securities held largely by our consolidated liquid securities funds, net of offsetting fair value changes on short positions; and (ii) loans receivable in the second quarter of 2022 given the rising interest rate environment. Additionally, the first quarter of 2022 included a non-cash debt extinguishment loss of$133.2 million , recognized in connection with an early exchange of our 5.75% exchangeable notes (refer to Note 8 to the consolidated financial statements). Losses in the second quarter of 60
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2022 were partially offset by a decrease in the liability fair value of the warrants issued to Wafra (refer to Note 13 to the consolidated financial statements).
In 2021, the losses were driven by a write-off of an equity investment that was determined to be unrecoverable inJune 2021 and an increase in value of the Blackwells settlement liability prior to its settlement inJune 2021 (refer to Note 13 to the consolidated financial statements). In contrast, there were fair value increases on marketable equity securities in 2021 that partially offset these losses. Equity Method Earnings Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2022 2021 Change 2022 2021 ChangeDigital Investment Management (carried interest earnings of$110,779 ,$11,169 ,$79,700 and$10,947 )$ 111,795 $ 11,202 $ 100,593 $ 80,733 $ 11,007 $ 69,726 Other 26,411 51,448 (25,037) 45,601 35,004 10,597$ 138,206 $ 62,650 75,556$ 126,334 $ 46,011 80,323 Digital Investment Management-These amounts represent predominantly unrealized carried interest from our general partner interests in sponsored investment vehicles. In 2022, there was significant carried interest accrued in the second quarter, driven by an increase in the valuation of a portfolio company that is currently under contract for sale. On a year-to-date basis in 2022, this increase was partially offset by a reversal of carried interest in the first quarter. 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 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$11.0 million and$23.8 million for the three and six months endedJune 30, 2022 , respectively, and$42.2 million and$14.8 million for the three and six months endedJune 30, 2021 , respectively. These amounts included basis difference adjustment (as discussed in Note 5 to consolidated financial statements) that increased earnings in 2022 and quarter-to-date 2021, while offsetting year-to-date net loss in 2021. Our share of year-to-date net loss in 2021 was attributed largely to investment write-downs and BRSP's restructuring costs in the first quarter of 2021, including the BRSP management contract termination fee that was paid to us.
Also included in all periods are earnings from our limited partnership interests
in funds in the
Additionally, 2021 included earnings related to fair value increases on an
equity method investment that had been accounted for under the fair value
option. Beginning
Income Tax Benefit
Income tax benefit was
The large deferred tax benefit in 2021 resulted primarily from a write-off of deferred tax liabilities at DataBank when it was determined in the second quarter of 2021 that DataBank would elect REIT status beginning with the 2021 taxable year. 2021 also included higher deferred tax benefit recognized in connection with significant severance costs.
The net income tax benefit recorded in 2022 reflects the tax effect of activities in the Company's previously designated TRS in the normal course of business, which continues to be driven primarily by deferred tax benefit on equity-based compensation.
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Loss from Discontinued Operations
Three Months Ended June 30, Six Months Ended June 30,
(In thousands) 2022 2021 Change 2022 2021 Change
Revenues
Revenues $ 2,002 $ 209,953 $ (207,951) $ 82,283 $ 476,730 $ (394,447)
Expenses (36,480) (460,568) 424,088 (237,635) (963,144) 725,509
Other gain (loss) 15,711 175,614 (159,903) 27,075 (73,565) 100,640
Income tax benefit (expense) 3,996 (23,905) 27,901 6,108 (20,187) 26,295
Loss from discontinued
operations (14,771) (98,906) 84,135 (122,169) (580,166) 457,997
Income (Loss) from
discontinued operations
attributable to noncontrolling
interests:
Investment entities 386 43,387 (43,001) (5,789) (260,464) 254,675
Operating Company (1,142) (13,623) 12,481 (9,277) (30,531) 21,254
Loss from discontinued
operations attributable to
DigitalBridge Group, Inc. $ (14,015) $ (128,670) 114,655 $ (107,103) $ (289,171) 182,068
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 .
The net loss in 2022 is attributed largely to the disposition of NRF Holdco in
February 2022 , specifically, a write-off of unamortized deferred financing costs
on the Wellness Infrastructure debt assumed by the buyer and impairment loss
recognized based upon the final carrying value of net assets of the Wellness
Infrastructure business upon disposition.
The net loss in 2021 was driven by significant impairment expense and decreases
in asset fair values based upon the selling price of our Wellness Infrastructure
and OED portfolios.
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, a supplemental non-GAAP measure commonly
used by equity REITs.
Resulting from the significant growth in our digital investment management
business, effective the second quarter of 2022, we report Distributable
Earnings, Adjusted Earnings before Interest, Taxes, Depreciation and
Amortization ("Adjusted EBITDA") and, specific to our Digital IM segment, Fee
Related Earnings ("FRE") as non-GAAP financial measures attributable to the
Operating Company , which more closely align the key performance metrics of our
core business to the alternative investment management industry.
We use these non-GAAP financial measures in evaluating the Company's business
performance and in making operating decisions. As we evaluate profitability
based upon continuing operations, these non-GAAP measures exclude results from
discontinued operations.
These non-GAAP financial measures should not be considered alternatives to GAAP
net income or loss as indicators of operating performance, or to cash flows from
operating activities as measures of liquidity, nor as indicators of the
availability of funds for our cash needs, including funds available to make
distributions. Our calculation of these non-GAAP measures may differ from
methodologies utilized by other companies for similarly titled performance
measures and, as a result, may not be directly comparable to those calculated by
other companies in similar lines of business.
Results of our non-GAAP measures attributable to
(In thousands) Three Months Ended June 30, 2022 Attributable toOperating Company : Distributable Earnings $ 7,585 Adjusted EBITDA 30,928 Digital IM FRE 20,759 Distributable Earnings ("DE") Distributable Earnings is an after-tax measure that differs from GAAP net income or loss from continuing operations as a result of the following adjustments, including adjustment for our share of similar items recognized by our equity method investments: transaction-related costs; restructuring charges (primarily severance and retention costs); realized and unrealized gains and losses, except realized gains and losses related to digital assets in Corporate and Other; depreciation, amortization and impairment charges; debt prepayment penalties and amortization of deferred financing costs, debt premiums and debt discounts; our share of unrealized carried interest, net of associated compensation expense; equity-based compensation expense; equity method earnings to reflect only cash dividends declared by BRSP; effect of straight-line lease income and expense; impairment of equity investments directly attributable to decrease in value of depreciable real estate held by the investee; non-revenue enhancing capital expenditures necessary to maintain operating real estate; and income tax effect on certain of the foregoing adjustments. Income taxes included in DE reflect the benefit of deductions arising from certain expenses that are excluded from the calculation of DE, such as equity-based compensation, as these deductions do decrease actual income tax paid or payable by the Company in any one period. We believe that DE is a meaningful supplemental measure as it reflects the ongoing operating performance of our core business by generally excluding items that are non-core in nature, and allows for better comparability of operating results period-over-period and to other companies in similar lines of business.
Adjusted EBITDA
Adjusted EBITDA represents DE adjusted to exclude: interest expense as included
in DE, income tax expense or benefit as included in DE, preferred stock
dividends, equity method earnings as included in DE, placement fee expense, our
share of realized carried interest and incentive fees net of associated
compensation expense, certain investment costs for capital raising that are not
reimbursable by our sponsored funds, and capital expenditures as deducted in DE.
We believe that Adjusted EBITDA is a meaningful supplemental measure of
performance because it presents the Company's operating performance independent
of its capital structure, leverage and non-cash items, which allows for better
comparability against entities with different capital structures and income tax
rates. However, because Adjusted EBITDA is calculated before recurring cash
charges including interest expense and taxes and does not deduct capital
expenditures or other recurring cash requirements, its usefulness as a
performance measure may be limited.
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Distributable Earnings and Adjusted EBITDA reconciliation
Three Months
Ended June 30,
(In thousands) 2022
Net loss attributable to common stockholders $ (37,321) Net loss attributable to noncontrolling interests in
(3,090) Net loss attributable toOperating Company (40,411) Transaction-related and restructuring charges 29,300
Other (gains) losses, excluding realized gains or losses related to digital assets in Corporate and Other
13,433
Unrealized carried interest, net of associated compensation expense
(58,775)
Equity-based compensation expense 9,344
Depreciation and amortization 155,909
Straight-line rent (revenue) and expense, net (2,956)
Amortization of acquired above- and below-market lease values, net
(10)
Impairment loss 12,184
Non-revenue enhancing capital expenditures (13,377)
Debt prepayment penalties and amortization of deferred financing costs, debt premiums and debt discounts
5,238
Adjustment to equity method earnings to reflect BRSP cash dividend declared
(4,660)
Adjustments attributable to noncontrolling interests in investment entities (1)
(91,676)
DE of discontinued operations (5,958)
Distributable Earnings (after tax)-attributable to
7,585 Adjustments attributable toOperating Company : Interest expense included in DE 14,142 Income tax benefit included in DE (2,662) Preferred stock dividends 15,759 Equity method earnings included in DE (6,982)
Non-revenue enhancing capital expenditures deducted from DE and investment costs
3,086
Adjusted EBITDA-attributable to Operating Company $ 30,928
__________
(1) Noncontrolling interests' share of adjustments pertain largely to depreciation and amortization and unrealized carried interest, net of associated compensation expense.
DigitalIM FRE DigitalIM FRE is calculated as recurring fee income and other income inclusive of cost reimbursements associated with administrative expenses, and net of compensation expense (excluding equity-based compensation, carried interest and incentive compensation) and administrative expense (excluding placement fees and straight-line rent expense). DigitalIM FRE is used to assess the extent to which direct base compensation and operating expenses are covered by recurring fee revenues in the digital investment management business. We believe that DigitalIM FRE is a useful supplemental performance measure because it may provide additional insight into the profitability of the overall digital investment management business. DigitalIM FRE is measured as Adjusted EBITDA for the Digital IM segment, adjusted to reflect the Company's Digital IM segment as a stabilized business by excluding FRE associated with new investment strategies that have 1) not yet held a first close raising FEEUM; or 2) not yet achieved break-even Adjusted EBITDA only for investment products that may be terminated solely at the Company's discretion, collectively referred to as "Start-up FRE." The Company evaluates new investment strategies on a regular basis and excludes Start-Up FRE from DigitalIM FRE until such time a new strategy is determined to form part of the Company's core investment management business. 64
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Table of Contents DigitalIM FRE reconciliation Three Months Ended June 30, (In thousands) 2022Digital Investment Management Net income$ 67,995 Interest expense, net of interest income 2,771 Investment expense and reimbursement (income), net (200) Depreciation and amortization 5,375 Equity-based compensation 3,361 Incentive fee and carried interest compensation expense 49,069 Straight-line rent expense 76 Transaction-related and restructuring charges 4,042 Incentive fee and carried interest (110,779) Equity method earnings (1,016) Other loss, net 424 Income tax expense 2,006 Digital IM Adjusted EBITDA 23,124 Start-up FRE 2,335 Digital IM FRE 25,459 Attributable to redeemable noncontrolling interests (4,700) DigitalIM FRE -attributable toOperating Company
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. AtJune 30, 2022 , our liquidity position was$260 million , including corporate-level cash and$230 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. In the third quarter of 2022, we anticipate cash inflows from partial monetization of our interest in DataBank of approximately$230 million and additionally, a return of funds from our warehoused loans that will be transferred to our new credit fund, as discussed below. 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 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 in 2022
•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;
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•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
Wafra Redemption-In connection with theMay 2022 redemption of Wafra's interest in our Digital IM business, additional contingent consideration of up to$125 million may be payable inMarch 2023 and/orMarch 2024 , with up to 50% payable in shares of our class A common stock at our election. Acquisition of Infrastructure Investment Management Platform-We have committed to acquireAMP Capital's global infrastructure equity investment management platform for$327 million in cash. The acquisition is expected to close in the fourth quarter of 2022. Additional contingent consideration of up to$128 million may become payable based upon achievement of future fundraising targets.
Lease Obligations
AtJune 30, 2022 , we have$139.3 million and$488.1 million of finance and operating lease obligations, respectively, that were assumed through acquisitions, principally in connection with leasehold data centers and ground space hosting tower communication sites, and$39.1 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-AtJune 30, 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.
Stock Repurchase
We currently have a
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.
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Additionally, we generate fee related earnings from our digital investment management business. Following the redemption of Wafra's 31.5% interest in our Digital IM business inMay 2022 , 100% of fee related earnings are 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.
Warehoused Investments
We temporarily warehouse investments on behalf of prospective sponsored investment vehicles that are actively fundraising. The warehoused investments are transferred to the investment vehicle when sufficient third party capital, including debt, is raised. AtJune 30, 2022 , our warehoused investments include$57 million of equity investments and$381 million of outstanding loan principal, of which$151 million is expected to be transferred to a new credit vehicle in the third quarter of 2022. The remaining loan balance is partially funded by$168 million of debt. The largest warehoused investment is currentlyTowerCo that was acquired inJune 2022 , for which we funded$278 million at acquisition.
Asset Monetization
We periodically monetize our investments through opportunistic asset sales or to recycle capital from non-core assets.
Wellness Infrastructure-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. DataBank-We expect to partially monetize our interest in DataBank in the third quarter of 2022 for approximately$230 million in proceeds. Efforts to recapitalize DataBank will continue throughout the remainder of 2022, with incremental sales of equity interests in DataBank by existing investors to new investors, which will result in further monetization of our interest in DataBank.
Debt
Description of our debt is included in Note 8 to the consolidated financial statements.
Our indebtedness at
Weighted Average Weighted Average
Outstanding Interest Rate (1) Years Remaining
($ in thousands) Principal (Per Annum) to Maturity (2)
Corporate-level debt:
Secured fund fee revenue notes $ 370,000 4.10 % 4.2
Convertible and exchangeable senior notes 278,422 5.21 % 1.4
Non-recourse investment level secured debt:
Fixed rate 3,737,404 2.54 %
Variable rate 1,226,448 5.07 %
4,963,852 3.16 % 3.6
Total debt $ 5,612,274
__________
(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.
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Scheduled principal payments on our debt obligations atJune 30, 2022 were as follows. 2027 and (In thousands) Remaining 2022 2023 2024 2025 2026 thereafter Total Secured fund fee revenue $ - $ - $ - $ - notes$ 370,000 $ -$ 370,000 Convertible and exchangeable senior notes - 200,000 - 78,422 - -
278,422
Investment-level secured debt Digital Operating 3,116 228,792 879,003 1,146,517 1,619,690 600,000 4,477,118 Other - 136,500 31,500 - - 318,734 486,734 Total$ 3,116 $ 565,292 $ 910,503 $ 1,224,939 $ 1,989,690 $ 918,734 $ 5,612,274
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 of the date of this filing, we are in compliance with all of the financial covenants under the securitized financing facility.
As noted above, our VFN availability was increased$100 million to$300 million inApril 2022 , of which$230 million is available to be drawn as ofJune 30, 2022 .
Non-Recourse Investment-Level Secured Debt
Investment level financing is non-recourse to us and secured by the respective underlying real estate or loans receivable.
Significant Developments in 2022
•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. •Acquisition-Additional$319 million of debt was undertaken to partially fund the acquisition ofTowerCo inJune 2022 . The debt is expected to be assumed by our new sponsored investment vehicle, along with theTowerCo assets, when sufficient third party capital has been raised.
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.
Cash Flows
The following table summarizes the activities from our statements of cash flows.
Six Months Ended June 30,
(In thousands) 2022 2021
Net cash provided by (used in):
Operating activities $ 67,303 $ 104,896
Investing activities (2,145,642) 408,596
Financing activities 760,345 (308,682)
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 warehoused loans, 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-related costs, as well as
compensation and general administrative costs.
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Our operating activities generated net cash inflows of
Investing Activities Investing activities include primarily cash outlays for acquisition of real estate, origination or acquisition of warehoused loans and disbursement on subsequent drawdowns, and new equity investments and subsequent contributions, which are partially offset by repayments and sales of loans receivable, distributions of capital received from equity investments, 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$1.6 billion , attributed primarily to the acquisition ofTowerCo , and to a lesser extent, 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 inflows of$176.8 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, more than offset capital expenditures.
•Debt investments-Our debt investments generated net cash outflows in 2022 and net cash inflows in 2021.
Cash outflows of
In 2021, net cash inflows of$320.9 million can be attributed to loan repayments, in particular a$305.0 million repayment on two loans in our Irish loan portfolio, partially offset by a loan acquired and warehoused for a future digital credit vehicle, other loan disbursements and acquisition of additional N-Star CDOs at a discount by our Wellness Infrastructure segment.The N-Star CDOs were subsequently sold as part of the disposition ofNRF Holdco inFebruary 2022 .
•Equity investments-Our equity investments generated net cash outflows in both years.
In 2022, our equity investments recorded net cash outflows of$33.3 million , largely representing the trading activities in marketable equity securities by our consolidated liquid funds, in addition to funding our digital fund commitments. In 2021, net cash outflows of$120.7 million can be attributed to funding our digital fund commitments and 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.
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 of the second quarter of 2022), as well as distributions to noncontrolling interests in our various investments.
Financing activities generated net cash inflows of
•In 2022, the large net cash inflow of$760.3 million was driven by financing for the acquisitions ofTowerCo and the DataBank data center acquisition through term loans and capital contributions from noncontrolling interests totaling$1.1 billion . This was partially offset by$388.5 million of cash paid to redeem Wafra's interest in our digital investment management business. Financing cash inflows also included draws on our corporate VFN revolver and 69
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on credit facilities to finance bank-syndicated warehoused loans. Other notable cash outflows included acquisition of noncontrolling interest in DataBank and distributions to various noncontrolling interests. •The financing net cash outflows of$308.7 million in 2021 were driven by$360.9 million of debt repayments exceeding borrowings, primarily repayment of debt financing real estate and loans that were sold or resolved during the year. The net cash outflow from debt financing was partially offset by$106.2 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, assumption by Wafra of a portion of our commitments to DCP I, and additional consideration paid by Wafra for its investment in our digital investment management business.
•Dividend payments were
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 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
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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 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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