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. 56
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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. AtSeptember 30, 2022 , we have$50 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. At
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 13.5% as ofSeptember 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
•We continue to reduce higher cost corporate indebtedness through (i) 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; and (ii) repurchase of$52.6 million of preferred stock at a discount to par or a weighted average price of$23.62 per share, generating future savings in interest and preferred dividends. •Pursuant to a$200 million stock repurchase program, in addition to preferred stock repurchases, we have also repurchased$55 million of class A common stock at a weighted average price of$13.09 per share throughOctober 2022 .
•A one-for-four reverse stock split of our common stock was effectuated in
•We have reinstated quarterly common stock dividends beginning the third quarter of 2022, with the declaration of a dividend of$0.01 per share of common stock that was paid inOctober 2022 .
•Effective
Digital Business Digital IM •ThroughOctober 2022 , included in earnings is our share of realized carried interest of$22.5 million (net of allocation to employees) in connection with the DataBank recapitalization and the first liquidation of investment by DBP I. •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) 14.4 million shares (after giving effect to the Company's one-for-four reverse stock split onAugust 22, 2022 ) 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$314 million , based upon theSeptember 30, 2022 spot rate), subject to certain customary adjustments; and (ii) a contingent amount of up toA$180 million (approximately$125 million , based uponSeptember 30, 2022 spot rate), 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
•Immediately following the above transactions, our ownership in DataBank had increased from 20% to 21.8%.
DataBank Recapitalization
•The first closing inAugust 2022 of the recapitalization of DataBank, together with the second closing inOctober 2022 , collectively resulted in the sale of a portion of our equity interest to new investors for$1.7 billion in cash. Our ownership interest in DataBank decreased from 21.8% to 12.4% following the second closing. Our share of proceeds from the sale totaled$366 million , including our share of carried interest net of allocation to employees. The recapitalization implies a pre-transaction net equity value of our ownership in DataBank of$905 million , reflecting a 2.0x multiple of invested capital since our initial investment in DataBank inDecember 2019 . As the transaction involved a change in ownership of a consolidated subsidiary, it was accounted for as an equity transaction. After the August closing for$1.5 billion , the difference between the book value of our interest and our ownership based upon the current value of DataBank resulted in an increase to equity of$171 million .
•We anticipate the completion of a third closing of the recapitalization prior to the end of 2022, which will further dilute our interest in DataBank.
Other
•The first liquidation inSeptember 2022 of a DBP I investment, Wildstone, resulted in a receipt of$16.6 million in distributions (excluding carried interest). As ofSeptember 30, 2022 , we have$148.5 million invested in DBP I as general partner and limited partner. •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. 59
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Table of Contents Non-Digital Business •A$59.6 million impairment was recorded on our investment in BRSP in the third quarter of 2022. Given the continued market volatility in 2022, our anticipated hold period may not be sufficient to allow for a recovery of BRSP's stock price relative to the carrying value of our investment in BRSP.
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)
September 30, September 30,
Type Products Description 2022 December 31, 2021 2022 December 31, 2021
Third Party Managed Capital
Institutional DigitalBridge Partners Earns management fees and $ 16.5 $ 16.6 $ 10.8 $ 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, 23.1 19.3 6.3 4.2
Vehicles business service fees from
portfolio companies, and
Digital real estate and potential for carried 7.7 6.9 2.4 2.1
infrastructure held by interest
portfolio companies
48.3 43.6 20.5 18.3
Balance Sheet Capital (3)
Digital Operating 1.1 1.2 NA NA
Other 0.9 0.5 NA NA
$ 50.3 $ 45.3 $ 20.5 $ 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 $2.2 billion or 12% year-to-date 2022 to $20.5 billion at
September 30, 2022 . The increase was primarily FEEUM from co-investment
vehicles, largely resulting from the DataBank recapitalization. Within
institutional funds, there was a decrease in FEEUM following DBP I's liquidation
of Wildstone.
•Our acquisition of AMP 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.
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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 September 30, Nine Months Ended September 30,
(In thousands) 2022 2021 Change 2022 2021 Change
Continuing Operations
Total revenues
Digital Investment Management $ 43,953 $ 53,796 $ (9,843) $ 134,961 $ 131,789 $ 3,172
Digital Operating 225,387 194,966 30,421 655,596 573,261 82,335
Corporate and Other (1) 27,283 3,412 23,871 52,934 4,892 48,042
$ 296,623 $ 252,174 44,449 $ 843,491 $ 709,942 133,549
Income (Loss) from continuing
operations
Digital Investment Management $ 46,065 $ 39,272 $ 6,793 $ 104,917 $ 62,721 $ 42,196
Digital Operating (93,772) (71,822) (21,950) (253,341) (146,932) (106,409)
Corporate and Other (46,891) (8,385) (38,506) (235,770) (99,240) (136,530)
$ (94,598) $ (40,935) (53,663) $ (384,194) $ (183,451) (200,743)
Net income (loss) from
continuing operations
attributable to DigitalBridge
Group, Inc.
Digital Investment Management $ 24,233 $ 16,870 $ 7,363 $ 37,900 $ 35,849 $ 2,051
Digital Operating (15,881) (12,142) (3,739) (43,512) (22,592) (20,920)
Corporate and Other (42,434) (11,506) (30,928) (189,486) (99,898) (89,588)
$ (34,082) $ (6,778) (27,304) $ (195,098) $ (86,641) (108,457)
__________
(1) Includes elimination of fee income earned by
Revenues
Total revenues increased
•Digital Investment Management-Revenues decreased 18% in the quarter-to-date comparison and increased 2% in the year-to-date comparison. Overall, management fees were higher in 2022, attributed to additional DBP II commitments that closed in the fourth quarter of 2021, the DataBank recapitalization inAugust 2022 , additional capital calls by portfolio companies as well as new co-invest vehicles and sub-advisory accounts. However, 2021 benefited from incentive fees from our digital liquid strategy and in the third quarter of 2021, a catch-up of inception-to-date fees forDigitalBridge Partners II, LP ("DBP II") following the closing of significant new commitments, which resulted in a decrease in revenues in the quarter-to-date comparison.
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. Additionally, 2022 included a one-time fee from a lease termination at Vantage SDC recognized in the second quarter. •Corporate and Other-Revenues in 2022 reflect primarily lease income from the warehoused tower business acquired inJune 2022 , and interest income from credit investments acquired or originated over time. Our ownership of these warehoused credit investments have largely been relinquished in the third quarter of 2022.
Income (loss) from continuing operations
•Digital Investment Management-Net income reflects the effect of carried
interest, net of management allocations. 2022 included significant realized
carried interest and allocations in connection with the DataBank
recapitalization and the first liquidation of investment by DBP I, along with
additional unrealized carried interest and allocations for in DBP I. On a
year-to-date basis in 2022, the carried interest accrual and allocations were
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.
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•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 year-to-date in 2021 as there was a large deferred 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, previously warehoused 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 impairment loss of$59.6 million on our investment in BRSP in the third quarter of 2022. This was partially offset by a significant decrease in fair value of the warrants issued to Wafra from its initial remeasurement inMay 2022 . 62
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Key components of revenue and income (loss) from continuing operations are discussed in more detail below.
Comparison of Three and Nine MonthsSeptember 30, 2022 to Three and Nine MonthsSeptember 30, 2021 Three Months Ended September 30, Nine Months Ended September 30, (In thousands) 2022 2021 Change 2022 2021 Change Revenues Property operating income$ 244,336 $ 194,854 $ 49,482 $ 681,098 $ 572,841 $ 108,257 Interest income 8,725 3,086 5,639 22,390 5,259 17,131 Fee income 41,263 50,226 (8,963) 128,418 124,826 3,592 Other income 2,299 4,008 (1,709) 11,585 7,016 4,569 Total revenues 296,623 252,174 44,449 843,491 709,942 133,549 Expenses Property operating expense 105,987 80,226 25,761 287,280 237,228 50,052 Interest expense 53,032 39,895 13,137 143,450 117,613 25,837 Investment expense 9,510 7,263 2,247 26,262 20,027 6,235 Transaction-related costs 3,879 936 2,943 6,800 2,618 4,182 Depreciation and amortization 145,594 129,186 16,408 429,513 406,840 22,673 Compensation expense, including incentive fee and carried interest allocation 146,375 87,669 58,706 293,426 222,887 70,539 Administrative expenses 29,909 28,933 976 84,147 75,234 8,913 Total expenses 494,286 374,108 120,178 1,270,878 1,082,447 188,431 Other income (loss) Other gain (loss), net 25,908 4,657 21,251 (170,229) (31,734) (138,495) Equity method earnings, including carried interest 69,316 65,369 3,947 195,650 111,380 84,270 Loss before income taxes (102,439) (51,908) (50,531) (401,966) (292,859) (109,107) Income tax benefit 7,841 10,973 (3,132) 17,772 109,408 (91,636) Loss from continuing operations (94,598) (40,935) (53,663) (384,194) (183,451)
(200,743)
Loss from discontinued operations (26,389) (10,429) (15,960) (148,558) (590,595) 442,037 Net loss (120,987) (51,364) (69,623) (532,752) (774,046) 241,294 Net income (loss) attributable to noncontrolling interests: Redeemable noncontrolling interests (6,442) 7,269 (13,711) (31,989) 15,743 (47,732) Investment entities (60,623) (124,301) 63,678 (152,770) (443,547) 290,777 Operating Company (4,834) 4,311 (9,145) (30,786) (38,565) 7,779 Net income (loss) attributable to DigitalBridge Group, Inc. (49,088) 61,357 (110,445) (317,207) (307,677)
(9,530)
Preferred stock repurchases/redemptions (1,098) 2,865 (3,963) (1,098) 2,865 (3,963) Preferred stock dividends 15,283 17,456 (2,173) 46,801 54,488 (7,687) Net income (loss) attributable to common stockholders$ (63,273) $ 41,036 (104,309)$ (362,910) $ (365,030) 2,120 63
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Property Operating Income and Expense
Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2022 2021 Change 2022 2021 Change
Property operating income
Digital Operating
Lease income $ 206,141 $ 175,238
19,182 19,616 (434) 57,217 50,129 7,088
225,323 194,854 30,469 655,480 572,841 82,639
Other
Lease income 19,013 - 19,013 25,618 - 25,618
$ 244,336 $ 194,854 49,482 $ 681,098 $ 572,841 108,257
Property operating expense
Digital Operating $ 100,051 $ 80,226 $ 19,825 $ 278,798 $ 237,228 $ 41,570
Other 5,936 - 5,936 8,482 - 8,482
$ 105,987 $ 80,226 25,761 $ 287,280 $ 237,228 50,052
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$5.81 billion atSeptember 30, 2022 compared to$4.97 billion atDecember 31, 2021 following the DataBankMarch 2022 acquisition.
At
September 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)
2,350 1,949
Leased Square Feet (2) 1,852 1,553
% Utilization Rate (% Leased) (2) 79% 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 property operating income and expense from the tower business
acquired in
Interest Income Interest income was$5.6 million higher in the quarter-to-date comparison and$17.1 million higher in the year-to-date comparison. In 2022, there was additional interest income from new loans originated or acquired beginning the third quarter of 2021. All of these new loans have been transferred either to a third party sponsored CLO or to our sponsored fund in the third quarter of 2022, except for one loan for which the transfer is pending. Additionally, we also 64
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recognized paid-in-kind interest on an unsecured promissory note in connection
with the sale of our Wellness Infrastructure business in
Fee Income
Three Months Ended September
30 , Nine Months Ended September 30 ,(In thousands) 2022 2021 Change 2022 2021 ChangeDigital Investment Management Management fees$ 40,697 $ 47,719 $ (7,022) $ 126,447 $ 115,185 $ 11,262 Incentive fees - 1,313 (1,313) 2 6,396 (6,394) Other fee income 566 1,194 (628) 1,969 3,245 (1,276)$ 41,263 $ 50,226 (8,963)$ 128,418 $ 124,826 3,592 Fee income decreased$9.0 million in the quarter-to-date comparison but increased$3.6 million in the year-to-date comparison. There was an overall increase in management fees in 2022, attributed to additional DBP II commitments that closed in the fourth quarter of 2021, the DataBank recapitalization inAugust 2022 , additional capital calls by portfolio companies as well as new co-invest vehicles and sub-advisory accounts. However, management fees decreased in the quarter-to-date comparison as the third quarter of 2021 benefited from a catch-up of inception-to-date fees for DBP II following the closing of significant new commitments during that period. Additionally, there were no incentive fees earned from our digital liquid strategy in 2022 in comparison to 2021, which further contributed to the 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 decreased$1.7 million in the quarter-to-date comparison but increased$4.6 million in the year-to-date comparison. The decrease in the quarter-to-date comparison can be attributed to lower professional service fees incurred on behalf of and reimbursable by our managed investment vehicles. The increase in the year-to-date comparison is due primarily to dividend income received from our equity interest in a third party non-traded REIT and loan origination fee earned in the first quarter of 2022 in connection with a loan syndication. Interest Expense Three Months Ended September 30, Nine Months Ended September 30, (In thousands) 2022 2021 Change 2022 2021 Change Digital Investment Management$ 2,953 $ 2,250
40,770 29,839 10,931 114,187 90,243 23,944
Other investment-level debt 5,356 268 5,088 8,495 268 8,227
Corporate-level debt 3,953 7,538 (3,585) 12,528 24,852 (12,324)
$ 53,032 $ 39,895 13,137 $ 143,450 $ 117,613 25,837
Digital Investment Management-This represents interest expense from our
securitized financing facility beginning in
Digital Operating-The increase of$10.9 million in the quarter-to-date comparison and$23.9 million in the year-to-date comparison is attributed to interest expense from the following: (i) additional debt raised through securitization transactions by DataBank and Vantage SDC during 2021; (ii) new financing for DataBank's acquisition of four data centers inMarch 2022 ; and (iii) 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) our securitized financing facility beginning inJuly 2021 that is partially allocated to our digital credit and digital liquid investments on the balance sheet; and (iii) credit facilities previously financing warehoused loans which were repaid following a transfer of the loans to a third party sponsored CLO in the third quarter of 2022. 65
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Corporate-level Debt-Interest expense decreased$3.6 million in the quarter-to-date comparison and$12.3 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 .
Investment Expense
Investment expense increased$2.2 million in the quarter-to-date comparison and$6.2 million in the year-to-date comparison. The increase is 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 professional service fees incurred in the tower business in 2022. These increases were partially offset by lower costs in the third quarter of 2022 in connection with transition services for DataBank.
Transaction-Related Costs
Transaction-related costs increased
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 . 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 September
30, Nine Months Ended September 30,
(In thousands) 2022 2021 Change 2022 2021 Change
Cash compensation and benefits $ 46,868 $ 49,019
8,576 6,914 1,662 27,226 30,593 (3,367)
Incentive and carried interest
compensation 80,831 31,736 49,095 109,548 39,969 69,579
136,275 87,669 48,606 283,326 222,887 60,439
Equity-based compensation-Databank
Recapitalization 10,100 - 10,100 10,100 - 10,100
$ 146,375 $ 87,669 58,706 $ 293,426 $ 222,887 70,539
Compensation expense increased $48.6 million in the quarter-to-date comparison
and $60.4 million in the year-to-date comparison, excluding accelerated equity
awards resulting from the DataBank recapitalization as discussed below. In this
case, the increase in both periods under comparison is driven by carried
interest compensation in 2022, representing a portion of realized and unrealized
carried interest from our sponsored investment vehicles that are shared with
certain employees. 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.
The increase above was partially offset by: (i) 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, and lower bonus accrual in 2022; as well as (ii) a reversal of carried interest compensation in the first quarter of 2022.
Separately, the DataBank recapitalization transaction triggered an accelerated vesting of certain profits interest units that had been issued by DataBank to its employees. As a result,$10.1 million of additional equity based compensation was recorded for the Digital Operating segment in the third quarter of 2022, of which$7.8 million was attributed to noncontrolling interests in investment entities. 66
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Table of Contents Administrative Expenses Administrative expenses increased$1.0 million in the quarter-to-date comparison and$8.9 million in the year-to-date comparison. The increase is due to higher legal costs in 2022, which more than offset the placement fees incurred in fundraising for DBP II in the second and third quarters of 2021.
Other Gain (Loss)
Other gain increased$21.3 million from$4.7 million to$25.9 million in the quarter-to-date comparison, and other loss increased$138.5 million from$31.7 million to$170.2 million in the year-to-date comparison.
Quarter-to-date
On a quarter-to-date basis, the gain in 2022 was driven by a decrease in the liability fair value of the warrants issued to Wafra (refer to Note 13 to the consolidated financial statements) and an unrealized gain on a non-designated interest rate contract that economically hedges a floating rate debt. These gains were partially offset by fair value decreases on marketable equity securities held largely by our consolidated liquid securities funds, net of offsetting fair value changes on their short positions.
In 2021, in contrast, gains were recorded on increases in fair value of marketable equity securities.
Year-to-date
Losses in the 2022 year-to-date period were driven by fair value decreases in relation to: (i) a non-cash debt extinguishment loss of$133.2 million in the first quarter of 2022, recognized in connection with an early exchange of our 5.75% exchangeable notes (refer to Note 8 to the consolidated financial statements); (ii) marketable equity securities held largely by our consolidated liquid securities funds, net of offsetting fair value changes on short positions; and (iii) loans receivable given the rising interest rate environment (prior to transfer of warehoused loans to a third party sponsored CLO and to our sponsored fund in the third quarter of 2022). These losses were partially offset by similar gains as recorded in the quarter-to-date period. In the 2021 year-to-date period, the losses were driven by a write-off of an equity investment that was determined to be unrecoverable inJune 2021 and an increase in value of the Blackwells settlement liability prior to its settlement inJune 2021 (refer to Note 13 to the consolidated financial statements). These losses were partially offset by fair value increases on marketable equity securities. Equity Method Earnings Three Months Ended September 30, Nine Months Ended September 30, (In thousands) 2022 2021 Change 2022 2021 Change Digital Investment Management$ 122,714 $ 59,196 $ 63,518 $ 203,447 $ 70,203 $ 133,244 Other (53,398) 6,173 (59,571) (7,797) 41,177 (48,974)$ 69,316 $ 65,369 3,947$ 195,650 $ 111,380 84,270 Digital Investment Management-These amounts represent predominantly carried interest from our general partner interests in sponsored investment vehicles. In 2022, there was significant carried interest realized in connection with the DataBank recapitalization and the first liquidation of investment by DBP I, along with additional unrealized carried interest recognized for DBP I. 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-The equity method loss in 2022 was driven by$59.6 million of impairment charge in the third quarter on our equity investment in BRSP. This was partially offset by our share of net income from BRSP and earnings from our limited partnership interests in funds in theDigitalBridge Partners opportunistic strategy, representing unrealized fair value increases on the underlying investments of these funds. In 2021, the equity method gain can be attributed to earnings from our limited partner interests in the DigitalBridge Partner funds, driven by unrealized fair value changes on their underlying investments. Also, year-to-date included fair value increases on an equity method investment that had been accounted for under the fair value option. BeginningMay 2021 , the equity investment is accounted for as a marketable equity security following a merger of the investee into a special purpose acquisition company. A gain was also recorded in the third quarter of 2021 from partial sale of our BRSP shares. These gains were partially offset, year-to-date, by our share of net losses from BRSP, attributed largely to 67
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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. Income Tax Benefit
Income tax benefit decreased from
The higher deferred tax benefit in 2021 was driven, year-to-date, by 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.
Loss from Discontinued Operations
Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2022 2021 Change 2022 2021 Change
Revenues
Revenues $ 6,375 $ 218,456 $ (212,081) $ 88,658 $ 695,186 $ (606,528)
Expenses (7,601) (199,369) 191,768 (245,236) (1,162,513) 917,277
Other gain (loss) (16,631) (26,765) 10,134 10,444 (100,330) 110,774
Income tax benefit (expense) (8,532) (2,751) (5,781) (2,424) (22,938) 20,514
Loss from discontinued
operations (26,389) (10,429) (15,960) (148,558) (590,595) 442,037
Income (Loss) from
discontinued operations
attributable to noncontrolling
interests:
Investment entities (10,227) (85,741) 75,514 (16,016) (346,205) 330,189
Operating Company (1,156) 7,177 (8,333) (10,433) (23,354) 12,921
Income (Loss) from
discontinued operations
attributable to DigitalBridge
Group, Inc. $ (15,006) $ 68,135 (83,141) $ (122,109) $ (221,036) 98,927
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 year-to-date in 2022 is attributed 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. In the quarter-to-date period
in 2022, losses were incurred in connection with investment dispositions and
fair value decreases.
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. Impairment of our investment assets in the third quarter of
2021 were largely offset by various gains recognized during the period,
including a gain on extinguishment of debt on our hotel portfolio that was sold
in September 2021 . Such gains were attributed predominantly to DBRG while
impairment loss was largely attributable to noncontrolling interests in
investment entities, resulting in a net income attributed to DBRG in the third
quarter of 2021.
A detailed income statement on discontinued operations is included in Note 12 to the consolidated financial statements.
Preferred Stock Repurchases/Redemptions
In the third quarter of 2022, net loss attributable to common stockholders was reduced by$1.1 million , reflecting the discount on the repurchases of preferred stock. 68
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In connection with the redemption of Series G preferred stock in
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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
("DE"), 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 the Operating Company were as
follows:
(In thousands) Three Months Ended September 30, 2022
Attributable to Operating Company :
Distributable Earnings $ 39,317
Adjusted EBITDA 29,097
Digital IM FRE 21,498
Distributable Earnings
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
(In thousands) September 30, 2022
Net loss attributable to common stockholders $ (63,273) Net loss attributable to noncontrolling interests in
(4,834) Net loss attributable toOperating Company (68,107) Transaction-related and restructuring charges 23,249
Other (gains) losses, excluding realized gains or losses related to digital assets in Corporate and Other
51,162
Unrealized carried interest, net of associated compensation expense
(1,228)
Equity-based compensation expense 18,619
Depreciation and amortization 149,131
Straight-line rent (revenue) and expense, net (8,895)
Amortization of acquired above- and below-market lease values, net
80
Non-revenue enhancing capital expenditures (10,992)
Debt prepayment penalties and amortization of deferred financing costs, debt premiums and debt discounts
5,627
Adjustment to equity method earnings to reflect BRSP cash dividend declared
10,201
Adjustments attributable to noncontrolling interests in investment entities (1)
(136,338)
DE of discontinued operations 6,808
Distributable Earnings (after tax)-attributable to
39,317 Adjustments attributable toOperating Company : Interest expense included in DE 16,348 Income tax benefit included in DE (7,839) Preferred stock dividends 15,283 Equity method earnings included in DE (16,285)
Realized carried interest, net of associated compensation expense
(20,258)
Non-revenue enhancing capital expenditures deducted from DE 2,531
Adjusted EBITDA-attributable to Operating Company $ 29,097
__________
(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. 71
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Table of Contents DigitalIM FRE reconciliation Three Months Ended (In thousands) September 30, 2022Digital Investment Management Net income$ 46,065 Interest expense, net of interest income 2,906 Investment expense and reimbursement (income), net 230 Depreciation and amortization 5,369 Equity-based compensation 2,654 Incentive fee and carried interest compensation expense 80,831 Straight-line rent expense 68 Transaction-related and restructuring charges 2,317 Incentive fee and carried interest (121,698) Equity method earnings (1,016) Other loss, net 110 Income tax expense 1,263 Digital IM Adjusted EBITDA 19,099 Start-up FRE 2,399 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. In addition to corporate-level cash atSeptember 30, 2022 , our liquidity position is approximately$718 million , including the full$300 million availability under our VFN and the subsequent release of$22 million of distributions received from DBP II out of restricted cash. 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 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
•Through
•We continue to reduce higher cost corporate indebtedness through early exchange of an additional$60 million of senior notes inMarch 2022 , and repurchase of$52.6 million of preferred stock at a discount to par, which will generate future savings in interest and preferred dividends.
•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;
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•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 fees 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$314 million in cash. The acquisition is expected to close in the fourth quarter of 2022. Additional contingent consideration of up to$125 million may become payable based upon achievement of future fundraising targets.
Lease Obligations
AtSeptember 30, 2022 , we have$137.5 million and$477 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$36 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. DividendsCommon Stock-The Company reinstated quarterly common stock dividends beginning the third quarter of 2022, with the declaration of a dividend of$0.01 per share of common stock that was paid inOctober 2022 .
Preferred Stock-At
Stock Repurchase
ThroughOctober 2022 , we have repurchased$107.6 million in aggregate of preferred and common stock pursuant to a stock repurchase program. Approximately$92 million remains available out of the$200 million repurchase program, which may be extended, modified, or discontinued at any time by our Board of Directors.
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
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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 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.
Carried Interest Distributed
Through
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.
In the third quarter of 2022, we received a return of
AtSeptember 30, 2022 , our largest warehoused investment isTowerCo that was acquired inJune 2022 , for which we funded$278 million at acquisition. Other warehoused investments include$55 million of equity investments and one remaining loan of$38 million for which the transfer to our digital credit fund is expected to be completed in the fourth quarter of 2022.
Asset Monetization
We periodically monetize our investments through opportunistic asset sales or to recycle capital from non-core assets.
DataBank-ThroughOctober 2022 , we have partially monetized our interest in DataBank and received total proceeds of$366 million , including our share of carried interest net of allocation to employees. We anticipate the completion of another closing of the recapitalization of DataBank prior to the end of 2022, which will result in further monetization of our interest in DataBank. Wellness Infrastructure-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$155 million in note receivable.
Debt
Description of our debt obligations is included in Note 8 to the consolidated financial statements. Our indebtedness atSeptember 30, 2022 is summarized as follows: Weighted Average Weighted Average Outstanding Interest Rate (1) Years Remaining ($ in thousands) Principal (Per Annum) to Maturity (2) Corporate-level debt: Secured fund fee revenue notes$ 300,000 3.93 % 4.0 Convertible and exchangeable senior notes 278,422 5.21 % 1.2 Non-recourse investment level secured debt: Fixed rate 3,729,979 2.53 % Variable rate 1,085,733 6.70 % 4,815,712 3.47 % 3.4 Total debt$ 5,394,134 __________ (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. 74
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Scheduled principal payments on our debt obligations atSeptember 30, 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 1,558 228,792 879,003 1,146,517 1,649,690 600,000 4,505,560 Other - - 11,300 - - 298,852 310,152 Total$ 1,558 $ 428,792 $ 890,303 $ 1,224,939 $ 1,949,690 $ 898,852 $ 5,394,134 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 atSeptember 30, 2022 for extensions that are at the Company's option.
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 , with the full amount available to be drawn as ofSeptember 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-Investment-level debt of$2.86 billion held byNRF Holdco (previously classified as held for disposition) was assumed by the acquirer upon sale ofNRF Holdco inFebruary 2022 . InAugust 2022 ,$173 million of debt previously financing warehoused loans was repaid following a transfer of the loans into a third party sponsored CLO. These transactions resulted in further deleveraging of our balance sheet. •Acquisition-Additional$313 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.
Nine Months Ended September 30,
(In thousands) 2022 2021
Net cash provided by (used in):
Operating activities $ 194,773 $ 181,412
Investing activities (1,929,361) 85,698
Financing activities 741,772 198,221
Operating Activities
Cash inflows from operating activities are generated primarily through fee
income, including incentive fees, and distributions of our share of net carried
interest 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, 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. These are partially offset by repayments, sales and transfers of warehoused 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$1.8 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 outflows of
•Debt investments-Our debt investments generated net cash inflows in both years.
Net cash inflows in 2022 was relatively immaterial at$4.6 million as we have largely transferred our acquired or originated warehoused loans to a sponsored fund and a third party sponsored CLO. In 2021, net cash inflows of$390.8 million can be attributed to loan repayments, in particular a$305.0 million repayment received on two loans in our Irish loan portfolio, partially offset by acquisition or origination of warehoused loans, and acquisition of additional N-Star CDOs at a discount by our Wellness Infrastructure segment.
•Equity investments-Our equity investments generated net cash inflows in 2022 and net cash outflows in 2021.
In 2022, our equity investments recorded net cash inflows of$97.4 million , largely representing the trading activities in marketable equity securities by our consolidated liquid funds, and a return of capital from the first sale of investment by DBP I, partially offset by additional contributions to our digital funds. 2021 saw net cash outflows of$56.2 million in connection with our equity investments. This can be attributed largely to funding of our digital fund commitments and draws on acquisition, development and construction ("ADC") loans that were accounted for as equity method investments, partially offset by net proceeds of approximately$81.8 million from sales of 9.5 million BRSP shares, as well as trading activities in marketable equity securities by our consolidated funds in the digital liquid strategy.
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 were reinstated beginning the third 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$741.8 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 . Additionally, cash inflows included our share of proceeds recorded in equity of$302.8 million from sale of a portion of our interest in our DataBank subsidiary in connection with the DataBank recapitalization inAugust 2022 that was treated as an equity transaction (Note 10). These inflows were partially offset by$388.5 million of cash paid to redeem Wafra's interest in our digital investment management business inMay 2022 . Financing cash outflows also included repayment of our warehouse credit facility of$172.5 million with proceeds from a transfer of 76
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the warehoused loans to a third party CLO, and paydowns on amortizing debt in our Digital Operating business. Other notable cash outflows included preferred and common stock repurchases totaling$60.8 million and distributions to various noncontrolling interests. Dividend payments were$47.6 million in 2022, which is lower than 2021 following preferred stock redemptions during 2021 and repurchases during 2022. •The financing net cash inflows of$198.2 million in 2021 were driven by$285.9 million of borrowings exceeding debt repayments. Investment-level financing activities included primarily borrowings by Vantage SDC to finance an add-on acquisition and expansion capacity, issuance of securitized notes by DataBank that was largely used to refinance its existing debt, and repayment of debt financing real estate inEurope that were sold during the year. We replaced our corporate credit facility with a securitized financing facility, from which we received$285.1 million of net proceeds in July through issuance of Class A-2 Notes, some of which were applied to redeem preferred stock in August for$86.8 million . Additionally, there was$73.3 million of net contributions from noncontrolling interests. Such contributions were composed largely of a syndication of our interest to a new third party investor in our zColo investment vehicle, assumption of a portion of our commitments to DCP I by Wafra, and additional consideration paid by Wafra for its investment in our digital investment management business. Dividend payments were$56.1 million in 2021. 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.
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Table of Contents 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 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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