DigitalBridge (DBRG) - 2022 Q4 - Annual Report

PART I Business DigitalBridge is a global digital infrastructure investment manager with two segments that recently completed its transformation into a C-Corporation - DBRG is a leading global digital infrastructure investment manager with $53 billion of AUM as of December 31, 2022, focusing on data centers, cell towers, fiber networks, small cells, and edge infrastructure[30] - The company operates through two reportable segments: Investment Management (managing capital for institutional investors) and Operating (direct co-investment in digital infrastructure assets)[32] - In February 2022, the company completed its transformation into an investment manager focused primarily on digital infrastructure, moving away from a diversified real estate portfolio[33] - Effective for the 2022 taxable year, the company discontinued its REIT status and became a taxable C Corporation, which provides more flexibility for strategic initiatives and reinvestment of earnings[63][64] Our Business and Investment Management Platform The company's two segments are Investment Management, which earns fees, and Operating, which holds equity in digital infrastructure companies like DataBank Business Segments Overview | Segment | Description | Revenue Source | | :--- | :--- | :--- | | Investment Management | Manages capital for institutional investors in digital infrastructure funds | Management fees, incentive fees, carried interest | | Operating | Holds balance sheet equity in digital infrastructure companies (DataBank, Vantage SDC) | Rental income from digital asset space/capacity | - The Investment Management platform has expanded beyond its flagship DigitalBridge Partners (DBP) value-add funds to include core equity, credit, liquid securities, and mid-market investments via the acquisition of InfraBridge[34][39] - The acquisition of InfraBridge in February 2023 added $9 billion of AUM to the investment management platform[39] Investment Strategy and Process The investment strategy leverages deep operational expertise and proprietary deal flow to invest in resilient digital infrastructure assets with strong growth drivers - The investment strategy targets digital infrastructure assets with durable cash flow profiles and compelling growth characteristics driven by themes like 5G, AI, and cloud applications[37] - Core strengths include deep operational expertise, a differentiated M&A program leveraging industry relationships for proprietary deal flow, and dynamic balance sheet management, including asset securitization[40] - The underwriting process is comprehensive, focusing on asset quality, customer credit, and structuring for downside protection, with portfolio diversification being a key consideration to manage concentration risk[43][44][45] Fund Management and Competition The company manages third-party capital through limited partnerships, earning various fees while facing intense competition for both capital and investments Fee Structure | Fee Type | Basis | | :--- | :--- | | Management Fees | Contractual rates (0.2% to 1.5% p.a.) of committed or invested capital | | Incentive Fees | Performance-based fees from sub-advisory accounts in Liquid Strategies | | Carried Interest | Disproportionate allocation of returns after fund performance exceeds minimum hurdles | - The company competes for capital from outside investors and for investment opportunities against a wide range of financial institutions, including other private equity firms, REITs, and investment banks[55][57] Regulations and Human Capital The company operates under significant regulation, including the Investment Advisers Act, and emphasizes human capital through diversity and ESG programs - The company intends to conduct operations to avoid being deemed an investment company under the Investment Company Act of 1940, relying on various exemptions[67][69] - Subsidiaries registered as investment advisers are subject to the Investment Advisers Act of 1940, which imposes fiduciary duties and regulatory oversight by the SEC[70] - The company has a strong focus on diversity and inclusion, with 45% of 2022 hires being female and 62% from underrepresented ethnic groups[77][79] - DBRG has an established ESG program with a cross-functional committee and board oversight, guided by a Responsible Investment Policy that integrates ESG considerations throughout the investment lifecycle[83][84] Risk Factors The company faces material risks across its business, operations, financing, and regulatory environment, including capital needs and fund performance Risks Related to Our Business Business risks include the critical need for capital, adverse economic and political conditions, foreign operations exposure, and climate change impacts - The company requires significant capital to fund investments, operations, and distributions; failure to obtain this capital from public/private markets could materially harm the business[92][93] - Business performance is materially affected by global economic and political conditions, including interest rates, inflation, and geopolitical instability, which can reduce the value of investments and make fundraising more difficult[95][96] - Operations in Europe, Asia, and other foreign markets expose the company to risks such as currency fluctuations, political instability, and complex regulatory environments[100] Risks Related to our Investment Management Business The investment management business faces intense competition, fee pressure, and risks from poor fund performance and subjective valuation of illiquid assets - The investment management business is intensely competitive based on performance, fees, and brand recognition, which could adversely affect the ability to raise capital and make successful investments[107][108] - Poor performance of managed investment vehicles can reduce management fees and carried interest, directly impacting revenue and cash flow[109] - Valuing illiquid investments in private funds involves significant management judgment and is subject to uncertainty; incorrect valuations could misstate performance and accrued fees[111][114] - Conflicts of interest may exist in allocating investment opportunities, fees, and costs among the company and its various managed funds, which could damage its reputation if not handled appropriately[116][117] Risks Related to our Digital Infrastructure Investments Digital infrastructure assets face risks from physical failures, intense competition, reliance on third-party suppliers, and technological obsolescence - Failures of physical infrastructure, such as power or cooling systems, could result in service interruptions, liability under customer leases, and damage to the company's reputation[124][125] - The business is dependent on third-party suppliers for power and network connectivity; service failures or price increases from these suppliers could adversely affect operations and profitability[131][134] - A reduction in demand for digital infrastructure assets, driven by economic slowdowns, technological changes, or industry consolidation, could harm operating results[130] - Digital infrastructure assets may become obsolete due to new technologies, requiring costly upgrades to remain competitive[136] Risks Related to Our Organizational Structure and Business Operations Operational risks include dependence on key personnel, conflicts of interest with senior executives, cybersecurity threats, and potential asset impairments - The company depends on the skills and reputations of key personnel; the loss of their services could harm the business[141][142] - Potential conflicts of interest exist between the company and its CEO and President due to their personal investments in certain portfolio companies (DataBank, Vantage SDC) made prior to the DBH acquisition[145][147] - A cybersecurity incident could disrupt operations, compromise confidential information, and result in significant financial and reputational harm[153][154] - The company's assets are subject to impairment charges, which could materially impact results; in 2022, a $60 million impairment charge was recorded on the investment in BrightSpire Capital, Inc (BRSP)[150][151] Risks Related to Financing The company's use of leverage creates substantial risk, including meeting debt service obligations, adhering to restrictive covenants, and exposure to rising interest rates - The company's ability to meet its debt service obligations depends on generating sufficient cash flow, which is subject to conditions beyond its control[165] - As of December 31, 2022, the company had significant debt, including $300 million in securitized financing, $278 million in convertible/exchangeable notes, and $4.6 billion of non-recourse investment-level debt[177] - Higher interest rates could adversely affect the value of investments, increase interest expense, and negatively impact profitability and cash available for distributions[178][181] - The transition from LIBOR to alternative reference rates like SOFR for floating-rate debt and hedging instruments creates uncertainty and could adversely affect financial results[183][184] Regulatory and Tax Risks The company faces extensive regulation, increased tax obligations after its C-Corp transition, and potential limitations on using NOL carryforwards - The business is subject to extensive regulation by the SEC and other agencies, which creates compliance costs and the potential for significant liabilities[195] - In September 2022, a legacy investment adviser subsidiary (CCIA) received an information request from the SEC's Division of Enforcement related to alleged deficiencies identified in a recent examination[198] - Effective January 1, 2022, the company no longer qualifies as a REIT and will be taxed as a C Corporation, increasing its income tax obligations as it can no longer deduct dividends paid[210] - The company's ability to use its significant capital loss and NOL carryforwards to reduce future tax payments could be limited by tax rules, including potential "ownership changes" under Section 382 of the Code[213][214] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the Securities and Exchange Commission - None[220] Properties The Operating segment consists of 84 data centers with 373 megawatts of power capacity and a 79% lease rate as of year-end 2022 Data Center Portfolio Overview (as of Dec 31, 2022) | Metric | Value | | :--- | :--- | | Total Properties | 84 | | Hyperscale | 13 | | Colocation | 71 | | Total Rentable Square Feet | 2.41 million | | Leased Percentage | 79% | | Total Power Capacity | 373 MW | | Total Annualized MRR | $774 million | - The top 10 customers account for 41.0% of the total portfolio's annualized MRR, with the largest customer, in the Software & Services industry, representing 19.2%[226] Legal Proceedings Information regarding legal proceedings is incorporated by reference from Note 19 to the consolidated financial statements - The company refers to Note 19 of its consolidated financial statements for information on legal proceedings[227] Mine Safety Disclosures This item is not applicable to the company - Not applicable[228] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock (DBRG) underwent a reverse split, reinstated dividends, and was subject to a significant repurchase program in 2022 - A one-for-four reverse stock split of common stock was completed in August 2022[233] - Quarterly common stock dividends were reinstated in Q3 2022 at $0.01 per share[235] Q4 2022 Stock Repurchases | Period | Total Shares Purchased | Weighted Avg. Price | Remaining Authorization | | :--- | :--- | :--- | :--- | | Oct 2022 | 3,250,450 | $12.71 | $92,430,000 | | Nov 2022 | — | — | $92,430,000 | | Dec 2022 | — | — | $92,430,000 | | Total | 3,250,450 | $12.71 | $92,430,000 | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2022, the company finalized its business transformation, grew FEEUM by 21%, and increased revenues, though net loss widened due to a non-cash charge Significant Developments Key 2022 developments include the C-Corp transition, redemption of Wafra's interest, the DataBank recapitalization, and the post-year-end InfraBridge acquisition - The company transitioned to a taxable C-Corporation, discontinuing its REIT status for 2022 to gain strategic flexibility[244] - In May 2022, DBRG redeemed Wafra's 31.5% interest in its investment management business for consideration valued at $862 million, giving DBRG 100% of net cash flows from its fee business going forward[247][248] - The partial recapitalization of DataBank in H2 2022 resulted in $425 million in proceeds for DBRG and reduced its ownership from 20% to 11.0%[249] - In February 2023, the company acquired InfraBridge, adding $5.6 billion in Fee Earning Equity Under Management (FEEUM)[246] Assets Under Management Fee Earning Equity Under Management (FEEUM) increased by 21% to $22.2 billion in 2022, driven by the DataBank recapitalization and a new fund launch AUM and FEEUM Growth (in billions) | Metric | Dec 31, 2022 | Dec 31, 2021 | Change | | :--- | :--- | :--- | :--- | | Assets under Management (AUM) | $51.3 | $43.6 | +17.7% | | Fee Earning Equity under Management (FEEUM) | $22.2 | $18.3 | +21.3% | - The $3.9 billion increase in FEEUM in 2022 was primarily due to capital raised in the DataBank recapitalization and the launch of a new Core Equity fund[253] Results of Operations Total revenues grew 18.5% to $1.14 billion in 2022, but net loss widened to $211.7 million due to a large non-cash loss on debt exchange Consolidated Results from Continuing Operations (Year Ended Dec 31) | (In thousands) | 2022 | 2021 | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $1,144,572 | $965,799 | +$178,773 | | Income (loss) from continuing operations | $(421,293) | $(216,823) | $(204,470) | | Net loss from continuing operations attributable to DBRG | $(211,704) | $(72,639) | $(139,065) | - The increase in net loss was primarily driven by a $133.2 million non-cash loss on the early exchange of 5.75% exchangeable notes in the Corporate and Other segment[262][287] - Investment Management net income attributable to DBRG increased by 35.6% to $69.9 million, boosted by the full attribution of income post-Wafra redemption and $63.7 million in net carried interest[262] - Compensation expense increased significantly to $447.5 million from $301.9 million in 2021, driven by $202.3 million in incentive and carried interest compensation[281] - Equity method earnings rose to $397.8 million from $226.5 million, predominantly due to $152.5 million of gross carried interest distributed from the DataBank recapitalization and other investment sales[289] Non-GAAP Supplemental Financial Measures The company uses non-GAAP metrics like Distributable Earnings (DE) and Fee Related Earnings (FRE) to evaluate core business performance Non-GAAP Measures Attributable to Operating Company (2022) | (In thousands) | Amount | | :--- | :--- | | Distributable Earnings (DE) | $37,060 | | Adjusted EBITDA | $108,278 | | Investment Management FRE | $83,474 | - Distributable Earnings (DE) is an after-tax measure that adjusts GAAP net income for items like transaction costs, unrealized gains/losses, depreciation, and equity-based compensation to reflect ongoing operating performance[306] - Fee Related Earnings (FRE) for the Investment Management segment is used to assess the profitability of the core investment management business by measuring recurring fee revenues against direct compensation and operating expenses[311] Liquidity and Capital Resources The company maintained a strong liquidity position of approximately $1 billion at year-end 2022, sufficient to meet its short-term obligations - The company's liquidity position was approximately $1 billion at year-end 2022, comprising corporate unrestricted cash and $300 million of VFN availability[315] - Significant 2022 cash inflows included $425 million from the partial monetization of DataBank and $428 million from returning capital on warehoused investments[318] - Major cash outflows included $388.5 million for the Wafra redemption and approximately $108 million for stock repurchases[319] Debt Maturities (as of Dec 31, 2022) | (In thousands) | 2023 | 2024 | 2025 | 2026 | 2027 | Total | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Corporate-level Debt | $200,000 | $— | $78,422 | $300,000 | $— | $578,422 | | Non-recourse Investment-level Debt | $228,792 | $879,503 | $1,175,250 | $1,750,690 | $600,000 | $4,634,235 | | Total | $428,792 | $879,503 | $1,253,672 | $2,050,690 | $600,000 | $5,212,657 | Critical Accounting Policies and Estimates Critical accounting policies require significant judgment, particularly for carried interest recognition, deferred tax asset valuation, and impairment testing - Recognition of carried interest is a critical estimate as it is based on the cumulative performance of investment vehicles, which is driven by the fair value of underlying, often illiquid, investments[367][368] - Determining the realizability of deferred tax assets requires significant judgment regarding future taxable income; a valuation allowance is established if it is more likely than not that some portion will not be realized[370][372] - The company performs periodic impairment tests on long-lived assets like real estate, equity method investments (e.g., BRSP), and goodwill, which involve estimating future cash flows and fair values[375] - Fair value measurement for Level 3 assets, such as certain loans receivable and CLO subordinated notes, requires unobservable inputs and significant management judgment[395][396] - Consolidation decisions, particularly for Variable Interest Entities (VIEs), require significant judgment to determine if the company is the primary beneficiary[403] Quantitative and Qualitative Disclosures About Market Risk The company is primarily exposed to market risks from interest rates, foreign currency, and equity prices affecting its debt, operations, and investments - The company's primary market risks are interest rate, foreign currency, and equity price risk[406] - A hypothetical 100 basis point increase in interest rates would increase annualized interest expense by $9.9 million on a consolidated basis, or $1.1 million after attribution to noncontrolling interests, due to its $1 billion of investment-level variable rate debt[410] - Foreign currency risk is limited, stemming from data center operations in the U.K. and France and a single AUD-denominated equity investment held on the balance sheet[411][413] - Equity price risk exists from $156 million in long positions and $41 million in short positions in marketable equity securities, held mainly by consolidated liquid funds[416] Financial Statements and Supplementary Data This section indicates that the required financial statements are provided in Item 15 of the Annual Report - The financial statements required by this item are located in Item 15, "Exhibits and Financial Statement Schedules"[418] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[419] Controls and Procedures Management and its independent auditor concluded that the company's disclosure controls and internal control over financial reporting were effective as of year-end 2022 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[421] - Management concluded that internal control over financial reporting was effective as of December 31, 2022, based on the COSO framework[424] - The independent registered public accounting firm, Ernst & Young LLP, audited and issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting[426][429] PART III Directors, Executive Officers and Corporate Governance The information required for this item is incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference from the forthcoming definitive proxy statement[441] Executive Compensation The information required for this item is incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference from the forthcoming definitive proxy statement[442] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required for this item is incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference from the forthcoming definitive proxy statement[443] Certain Relationships and Related Transactions, and Director Independence The information required for this item is incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference from the forthcoming definitive proxy statement[444] Principal Accountant Fees and Services The information required for this item is incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference from the forthcoming definitive proxy statement[445] PART IV Exhibits and Financial Statement Schedules This section contains the company's audited consolidated financial statements, the independent auditor's report, and related schedules and exhibits Notes to Consolidated Financial Statements The notes detail key financial activities including the C-Corp transition, acquisitions, debt structure, the Wafra transaction, and discontinued operations - Note 3 (Acquisitions): Details asset acquisitions including Vantage SDC, DataBank's purchase of zColo, and the temporary warehousing of TowerCo assets; in February 2023, the company acquired InfraBridge for $316 million plus contingent consideration[632][635][642] - Note 5 (Equity and Debt Investments): The company's investment in BRSP was determined to be other-than-temporarily impaired in 2022, resulting in a $60.4 million impairment charge; the company also recognized $152.5 million of distributed carried interest in 2022[657][661] - Note 8 (Debt): As of Dec 31, 2022, total debt was $5.2 billion, consisting of $578 million in corporate-level recourse debt and $4.6 billion in non-recourse investment-level debt; in March 2022, the company exchanged $60.3 million of its 5.75% exchangeable notes, resulting in a debt extinguishment loss of $133.2 million[683][697] - Note 10 (Noncontrolling Interests): In May 2022, the company redeemed Wafra's 31.5% interest in its investment management business; in H2 2022, a recapitalization of DataBank reduced the company's ownership to 11.0% and generated $425.5 million in proceeds[730][737] - Note 17 (Income Taxes): Following the transition to a C-Corp, the company recognized significant deferred tax assets related to capital loss carryforwards and its interest in the OP, but established a full valuation allowance against them as their realizability did not meet the more-likely-than-not threshold[826] - Note 22 (Discontinued Operations): The company presents the operations of its former Wellness Infrastructure, OED, Other IM, and Hotel businesses as discontinued operations following their disposition as part of its strategic transformation[866][867]