Notes to Consolidated Financial Statements
March 31, 2023
(Unaudited)
1. Business and Organization
DigitalBridge Group, Inc. ("DBRG," and together with its consolidated subsidiaries, the "Company") is a leading global digital infrastructure investment manager. The Company deploys and manages capital on behalf of its investors and shareholders across the digital infrastructure ecosystem, including data centers, cell towers, fiber networks, small cells, and edge infrastructure. The Company's investment management platform is anchored by its flagship value-add digital infrastructure equity offerings, and has expanded to include offerings in core equity, credit and liquid securities.
In February 2023, the Company further expanded its investment offerings to encompass InfraBridge, a newly-acquired mid-market global infrastructure equity platform (Note 3).
Organization
The Company operates as a taxable C Corporation commencing with the taxable year ended December 31, 2022, except for certain subsidiaries in the Operating segment that have elected to be taxed as real estate investment trusts for U.S. federal income tax purposes. The Company conducts all of its activities and holds substantially all of its assets and liabilities through its operating subsidiary, DigitalBridge Operating Company, LLC (the "Operating Company" or the "OP"). At March 31, 2023, the Company owned 93% of the OP, as its sole managing member. The remaining 7% is owned primarily by certain current and former employees of the Company as noncontrolling interests.
2. Summary of Significant Accounting Policies
The significant accounting policies of the Company are described below.
Basis of Presentation
The accompanying unaudited interim financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. These statements reflect all normal and recurring adjustments which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows of the Company for the interim periods presented. However, the results of operations for the interim period presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2023, or any other future period. These interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in, or presented as exhibits to, the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
The accompanying consolidated financial statements include the accounts of the Company and its controlled subsidiaries. All significant intercompany accounts and transactions have been eliminated. The portions of equity, net income (loss) and other comprehensive income (loss) of consolidated subsidiaries that are not attributable to the parent are presented separately as amounts attributable to noncontrolling interests in the consolidated financial statements. Noncontrolling interests represent predominantly the majority ownership held by third party investors in the Company's Operating segment, carried interest allocation to certain senior executives of the Company (Note 16), and membership interests in the OP primarily held by certain current and former employees of the Company.
To the extent the Company consolidates a subsidiary that is subject to industry-specific guidance, such as investment company accounting applied by the Company's consolidated sponsored funds, the Company retains the industry-specific guidance applied by that subsidiary in its consolidated financial statements.
Supplemental Schedules to Consolidated Balance Sheets and Consolidated Statements of Operations
Beginning in 2023, the financial position and financial results of the Company's reportable segments of Investment Management and Operating, and its remaining investment activities and corporate level activities ("Corporate and Other") are presented in supplemental schedules to the consolidated balance sheets and consolidated statements of operations. The Company's reportable segments and Corporate and Other are described below under "—Segment Reporting."
The disaggregated presentation in the supplemental schedules enhances transparency and provides meaningful information to investors in understanding the Company's consolidated financial statements, specifically:
•Segregation of the Investment Management segment allows for more clarity and visibility into the financial performance and financial position of the Company's core business; and
•The Operating segment represents the consolidation of two data center portfolio companies for which the Company has direct co-investments of 13% and 11%, respectively, at both March 31, 2023 and December 31, 2022. Although the Operating segment makes up a majority of the balances and activities on a consolidated basis, DBRG's exposure and entitlement are limited to its 13% and 11% interest in the two portfolio companies in the Operating segment. The liabilities of the Operating segment are obligations of the respective portfolio companies of the Operating segment and may only be settled using assets of these respective portfolio companies.
The supplemental schedule to the consolidated balance sheets excludes assets and liabilities held for disposition, stockholders' equity and noncontrolling interests in OP, which are not specifically attributable to reportable segments.
The supplemental schedule to the consolidated statements of operations present by reportable segment the results from continuing operations attributable to DBRG, excluding discontinued operations and results attributable to common stockholders. Additionally, fee income in the Investment Management segment is presented prior to elimination of fees earned from the Company's sponsored investment vehicles that are consolidated within the Operating segment and in Corporate and Other. The elimination of intercompany fees is presented in Corporate and Other.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates and assumptions.
Principles of Consolidation
The Company consolidates entities in which it has a controlling financial interest by first considering if an entity meets the definition of a variable interest entity ("VIE") for which the Company is deemed to be the primary beneficiary, or if the Company has the power to control an entity through a majority of voting interest or through other arrangements.
Variable Interest Entities—A VIE is an entity that either (i) lacks sufficient equity to finance its activities without additional subordinated financial support from other parties; (ii) whose equity holders lack the characteristics of a controlling financial interest; and/or (iii) is established with non-substantive voting rights. A VIE is consolidated by its primary beneficiary, which is defined as the party who has a controlling financial interest in the VIE through (a) power to direct the activities of the VIE that most significantly affect the VIE’s economic performance, and (b) obligation to absorb losses or right to receive benefits of the VIE that could be significant to the VIE. This assessment may involve subjectivity in the determination of which activities most significantly affect the VIE’s performance, and estimates about current and future fair value of the assets held by the VIE and financial performance of the VIE. In assessing its interests in the VIE, the Company also considers interests held by its related parties, including de facto agents. Additionally, the Company assesses whether it is a member of a related party group that collectively meets the power and benefits criteria and, if so, whether the Company is most closely associated with the VIE. In performing the related party analysis, the Company considers both qualitative and quantitative factors, including, but not limited to: the characteristics and size of its investment relative to the related party; the Company’s and the related party's ability to control or significantly influence key decisions of the VIE including consideration of involvement by de facto agents; the obligation or likelihood for the Company or the related party to fund operating losses of the VIE; and the similarity and significance of the VIE’s business activities to those of the Company and the related party. The determination of whether an entity is a VIE, and whether the Company is the primary beneficiary, may involve significant judgment, and depends upon facts and circumstances specific to an entity at the time of the assessment.
Voting Interest Entities—Unlike VIEs, voting interest entities have sufficient equity to finance their activities and equity investors exhibit the characteristics of a controlling financial interest through their voting rights. The Company consolidates such entities when it has the power to control these entities through ownership of a majority of the entities' voting interests or through other arrangements.
At each reporting period, the Company reassesses whether changes in facts and circumstances cause a change in the status of an entity as a VIE or voting interest entity, and/or a change in the Company's consolidation assessment. Changes in consolidation status are applied prospectively. An entity may be consolidated as a result of this reassessment, in which case, the assets, liabilities and noncontrolling interests in the entity are recorded at fair value upon initial consolidation. Any existing equity interest held by the Company in the entity prior to the Company obtaining control will be remeasured at fair value, which may result in a gain or loss recognized upon initial consolidation. However, if the consolidation represents an asset acquisition of a voting interest entity, the Company's existing interest in the acquired assets, if any, is not remeasured to fair value but continues to be carried at historical cost. The Company may also
deconsolidate a subsidiary as a result of this reassessment, which may result in a gain or loss recognized upon deconsolidation depending on the carrying values of deconsolidated assets and liabilities compared to the fair value of any interests retained.
Noncontrolling Interests
Redeemable Noncontrolling Interests—This represents noncontrolling interests in sponsored open-end funds in the liquid securities strategy that are consolidated by the Company. The limited partners of these funds have the ability to withdraw all or a portion of their interests from the funds in cash with advance notice.
Redeemable noncontrolling interests is presented outside of permanent equity. Allocation of net income or loss to redeemable noncontrolling interests is based upon their ownership percentage during the period. The carrying amount of redeemable noncontrolling interests is adjusted to its redemption value at the end of each reporting period to an amount not less than its initial carrying value, except for amounts contingently redeemable which will be adjusted to redemption value only when redemption is probable. Such adjustments will be recognized in additional paid-in capital.
The redeemable noncontrolling interests in the Company's investment management business were redeemed in May 2022 (Note 10).
Noncontrolling Interests in Investment Entities—This represents predominantly the majority ownership held by third party investors in the Company's Operating segment and carried interest allocation to certain senior executives of the Company (Note 16). Excluding carried interests, allocation of net income or loss is generally based upon relative ownership interests.
Noncontrolling Interests in Operating Company—This represents membership interests in OP held primarily by certain current and former employees of the Company. Noncontrolling interests in OP are allocated a share of net income or loss in OP based upon their weighted average ownership interest in OP during the period. Noncontrolling interests in OP have the right to require OP to redeem part or all of such member’s membership units in OP ("OP Units") for cash based on the market value of an equivalent number of shares of class A common stock at the time of redemption, or at the Company's election as managing member of OP, through issuance of shares of class A common stock (registered or unregistered) on a one-for-one basis. At the end of each reporting period, noncontrolling interests in OP is adjusted to reflect their ownership percentage in OP at the end of the period, through a reallocation between controlling and noncontrolling interests in OP, as applicable.
Segment Reporting
The Company conducts its business through two reportable segments: (i) Investment Management; and (ii) Operating, the Company's direct co-investment in digital infrastructure assets held by its portfolio companies.
•Investment Management —This segment represents the Company's global investment management platform, deploying and managing capital on behalf of a diverse base of global institutional investors. The Company's investment management platform is composed of a growing number of long-duration, private investment funds designed to provide institutional investors access to investments across different segments of the digital infrastructure ecosystem. In addition to its flagship value-add digital infrastructure equity offerings, the Company's investment offerings have expanded to include core equity, credit and liquid securities. The Company earns management fees based upon the assets or capital managed in investment vehicles, and may earn incentive fees and carried interest based upon the performance of such investment vehicles, subject to achievement of minimum return hurdles. The amount of incentive fees and carried interest recognized, a portion of which is allocated to employees, may be highly variable from period to period. Earnings from the Investment Management segment were attributed 31.5% to Wafra prior to the Company's redemption of Wafra's interest in the investment management business at the end of May 2022 (as discussed further in Note 10).
•Operating—This segment is composed of balance sheet equity interests in digital infrastructure and real estate co-investment companies, which generally earn rental income from providing use of digital asset space and/or capacity through leases, services and other agreements. The Company currently owns interests in two companies: DataBank, an edge colocation data center business (DBRG ownership of 11% at March 31, 2023 and December 31, 2022); and Vantage SDC, a stabilized hyperscale data center business (DBRG ownership of 13% at March 31, 2023 and December 31, 2022). DataBank and Vantage SDC are portfolio companies managed by the Company under its Investment Management segment with respect to equity interests owned by third party capital.
The Company's remaining investment activities and corporate level activities are presented as Corporate and Other.
•Other investment activities are composed of the Company's equity interests in: (i) digital investment vehicles, the largest of which is in the DigitalBridge Partners ("DBP") flagship funds, and seed investments in liquid securities
and other potential new strategies; and (ii) remaining non-digital investments. Outside of its general partner interests, which are presented in the Investment Management segment, the Company's other equity interests in its sponsored and/or managed digital investment vehicles are considered to be incidental to its investment management business. The primary economics to the Company are represented by fee income and carried interest allocation as general partner and/or manager, rather than economics from its equity interest in the investment vehicles as a limited partner or equivalent. With respect to seed investments, these are not intended to be a long-term deployment of capital by the Company and are expected to be warehoused temporarily on the Company's balance sheet until sufficient third party capital has been raised from sponsored funds. At this time, the remaining non-digital investments are not substantially available for immediate sale and are expected to be monetized over an extended period beyond the near term. These other investment activities generate largely principal investment income or losses and to a lesser extent, revenues in the form of interest income or dividend income from warehoused investments and consolidated investment vehicles.
•Corporate activities include corporate level cash and corresponding interest income, corporate level financing and related interest expense, corporate level transaction costs, costs in connection with unconsummated investments, income and expense related to cost reimbursement arrangements with affiliates, fixed assets for administrative use, compensation expense not directly attributable to reportable segments, corporate level administrative and overhead costs, and adjustments to eliminate intercompany fees. Costs which are directly attributable, or otherwise can be subjected to a reasonable and systematic attribution, have been attributed to each of the reportable segments.
The results of operations of the Company's reportable segments are presented in the supplemental schedule to the consolidated statements of operations and reconciled to the consolidated statements of operations as follows:
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| | Three Months Ended March 31, 2023 | | Three Months Ended March 31, 2022 |
| (In thousands) | Investment Management | | Operating | | Corporate and Other | | Total | | Investment Management | | Operating | | Corporate and Other | | Total |
| Income (Loss) from continuing operations attributable to DigitalBridge Group, Inc. | | $ | (2,198) | | | $ | (10,789) | | | $ | (171,149) | | | $ | (184,136) | | | $ | (7,602) | | | $ | (12,824) | | | $ | (144,771) | | | $ | (165,197) | |
| Income (Loss) from discontinued operations attributable to DigitalBridge Group, Inc. | | | | | | | | (13,661) | | | | | | | | | (81,360) | |
| Net income (loss) attributable to DigitalBridge Group, Inc. | | | | | | | | $ | (197,797) | | | | | | | | | $ | (246,557) | |
Business Combinations
Definition of a Business—The Company evaluates each purchase transaction to determine whether the acquired assets meet the definition of a business. If substantially all of the fair value of gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, then the set of transferred assets and activities is not a business. If not, for an acquisition to be considered a business, it would have to include an input and a substantive process that together significantly contribute to the ability to create outputs (i.e., there is a continuation of revenue before and after the transaction). A substantive process is not ancillary or minor, cannot be replaced without significant costs, effort or delay or is otherwise considered unique or scarce. To qualify as a business without outputs, the acquired assets would require an organized workforce with the necessary skills, knowledge and experience to perform a substantive process.
Asset Acquisitions—For acquisitions that are not deemed to be businesses, the assets acquired are recognized based on their cost to the Company as the acquirer and no gain or loss is recognized. The cost of assets acquired in a group is allocated to individual assets within the group based on their relative fair values and does not give rise to goodwill. Transaction costs related to acquisition of assets are included in the cost basis of the assets acquired.
Business Combinations—The Company accounts for acquisitions that qualify as business combinations by applying the acquisition method. Transaction costs related to acquisition of a business are expensed as incurred and excluded from the fair value of consideration transferred. The identifiable assets acquired, liabilities assumed and noncontrolling interests in an acquired entity are recognized and measured at their estimated fair values, except as discussed below. The excess of the consideration transferred over the values of identifiable assets acquired, liabilities assumed and noncontrolling interests in an acquired entity, net of fair value of any previously held interest in the acquired entity, is recorded as goodwill. Such valuations require management to make significant estimates and assumptions.
With respect to contract assets and contract liabilities acquired in a business combination, these are not accounted for under the fair value basis at the time of acquisition. Instead, the Company determines the value of these revenue
contracts as if it had originated the acquired contracts by evaluating the associated performance obligations, transaction price and relative stand-alone selling price at the original contract inception date or subsequent modification dates.
Contingent Consideration—Contingent consideration is classified as a liability or equity, as applicable. Contingent consideration in connection with the acquisition of a business or a VIE is measured at fair value on acquisition date, and unless classified as equity, is remeasured at fair value each reporting period thereafter until the consideration is settled, with changes in fair value included in earnings. Contingent consideration in connection with the acquisition of assets (and that is not a VIE) is generally recognized when the liability is considered both probable and reasonably estimable, as part of the basis of the acquired assets.
Discontinued Operations
If the disposition of a component, being an operating or reportable segment, business unit, subsidiary or asset group, represents a strategic shift that has or will have a major effect on the Company’s operations and financial results, the operating profits or losses of the component when classified as held for sale, and the gain or loss upon disposition of the component, are presented as discontinued operations in the statements of operations.
A business or asset group acquired in connection with a business combination that meets the criteria to be accounted for as held for sale at the date of acquisition is reported as discontinued operations, regardless of whether it meets the strategic shift criterion.
In March 2023, the Company sold the entirety of its equity method investment in BrightSpire Capital, Inc. (NYSE: BRSP) of approximately 35.0 million shares for net proceeds totaling $201.6 million. The Company's investment in BRSP qualified as held for sale in March 2023 and its disposition represents a strategic shift that has major effects on the Company’s operations and financial results, meeting the criteria as discontinued operations as of March 2023. Accordingly, for all prior periods presented, the equity method investment in BRSP is presented as assets held for disposition on the consolidated balance sheets and equity method earnings (loss) from BRSP is presented as loss from discontinued operations on the consolidated statements of operations.
Discontinued operations in 2023 primarily reflect a $9.7 million impairment of BRSP shares prior to its disposition, and activities associated with equity investments excluded from the December 2021 bulk sale of the Company's non-digital investment portfolio.
In addition to the above equity investments, discontinued operations in 2022 also included two months of operations of the Wellness Infrastructure business, along with other non-core assets held by a subsidiary, NRF Holdco, LLC ("NRF Holdco"), prior to the sale of all of the equity of NRF Holdco in February 2022. The sales price for 100% of the equity of NRF Holdco was $281 million, composed of $126 million cash and a $155 million unsecured promissory note. The promissory note, which is classified as held for investment and carried at fair value under the fair value option, matures five years from closing of the sale, accruing paid-in-kind ("PIK") interest at 5.35% per annum (Note 11). The disposition of NRF Holdco resulted in a write-off of unamortized deferred financing costs on the Wellness Infrastructure debt assumed by the buyer of $92.1 million and additional impairment loss based upon final carrying value of the Wellness Infrastructure net assets.
Loss from discontinued operations is summarized as follows. | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | | | | | |
| (In thousands) | | 2023 | | 2022 | | | | | | | | |
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| Revenues | | $ | 1,970 | | | $ | 80,281 | | | | | | | | | |
| Expenses | | (5,770) | | | (201,155) | | | | | | | | | |
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| Other gain (loss) | | (10,416) | | | 24,117 | | | | | | | | | |
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| Income tax benefit (expense) | | (2) | | | 2,112 | | | | | | | | | |
| Income (Loss) from discontinued operations | | (14,218) | | | (94,645) | | | | | | | | | |
| Income (Loss) from discontinued operations attributable to noncontrolling interests: | | | | | | | | | | | | |
| Investment entities | | 517 | | | (6,175) | | | | | | | | | |
| Operating Company | | (1,074) | | | (7,110) | | | | | | | | | |
| Income (Loss) from discontinued operations attributable to DigitalBridge Group, Inc. | | $ | (13,661) | | | $ | (81,360) | | | | | | | | | |
Assets and Related Liabilities Held for Disposition
At March 31, 2023 and December 31, 2022, all assets and related liabilities held for disposition relate to discontinued operations. The Company initially measures assets classified as held for disposition at the lower of their carrying amounts or fair value less disposal costs. For bulk sale transactions, the unit of account is the disposal group, with any excess of the aggregate carrying value over estimated fair value less costs to sell allocated to the individual assets within the group.
Assets held for disposition of $11.3 million at March 31, 2023 consisted primarily of miscellaneous equity investments excluded from the December 2021 bulk sale of the Company's non-digital investment portfolio. Assets held for disposition of $275.5 million at December 31, 2022 also included the Company's shares in BRSP of $218.0 million that were sold in March 2023 and an equity method investment carried under the fair value option of $44.5 million prior to a sale of its underlying assets and a return of capital to the Company in January 2023.
Reclassifications
Reclassifications have been made in connection with discontinued operations, as discussed in "—Discontinued Operations." Additionally, the Company determined that principal investment income (loss) from its equity interest as general partner and general partner affiliate in its sponsored investment vehicles, and its entitlement to carried interest allocation, represent a core component of returns in its investment management business. Accordingly, beginning in 2023, principal investment income (loss) and carried interest allocation are presented within total revenues on the consolidated statements of operations. Prior periods have been reclassified to conform to current presentation.
Accounting Standards Adopted in 2023
Contractual Sale Restriction on Equity Securities
In June 2022, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2022-03, Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions, which amends Accounting Standards Codification ("ASC") Topic 820, Fair Value Measurement, to clarify that a contractual sale restriction that is entity-specific is not part of the unit of account of an equity security and is therefore not considered in measuring the fair value of an equity security, in which case, a discount should not be applied. The amendment further prohibits recognizing the contractual sale restriction as a separate unit of account, that is, as a contra asset or liability. Sale restrictions that are characteristics of the holder of an equity security include, but are not limited to, lock-up agreements, market stand-off agreements, or specific provisions in agreements between shareholders. In contrast, a legal restriction preventing a security from being sold on a national securities exchange or an over-the-counter market is a security-specific characteristic as the restriction would similarly apply to a market participant buyer in an assumed sale of the security. This guidance also applies to issuers of equity securities that are subject to contractual sale restrictions, for example, equity securities issued as consideration in a business combination. The ASU requires additional disclosures related to equity securities that are subject to contractual sale restrictions, specifically (1) the fair value of such equity securities, (2) the nature and remaining duration of the restrictions, and (3) any circumstances that could cause a lapse in restrictions. The ASU is effective January 1, 2024, with early adoption permitted in the interim periods. Transition is prospective with any fair value adjustments resulting from adoption recognized in earnings and the amount adjusted disclosed in the period of adoption.
For subsidiaries of the Company that are investment companies as defined in ASC Topic 946, Financial Services—Investment Companies, the ASU is applied prospectively to equity securities with contractual sale restrictions entered into or modified on or after the adoption date. For equity securities with contractual sale restrictions entered into or modified before the adoption date, the existing accounting policy continues to be applied until the restrictions expire or are modified, and if the existing accounting policy differs from the amended guidance, the additional disclosure requirements under the ASU would be applicable.
The Company early adopted the ASU on January 1, 2023. At the time of adoption, the Company and its investment company subsidiaries do not have equity securities subject to contractual sale restrictions.
3. Acquisitions
Business Combination in 2023
InfraBridge
In February 2023, the Company acquired the global infrastructure equity investment management business of AMP Capital Investors International Holdings Limited, which was rebranded as InfraBridge at closing. Consideration for the acquisition consisted of a $313.2 million upfront cash consideration (net of cash assumed), subject to customary post-closing working capital adjustments, plus a contingent amount based upon achievement of future fundraising targets for InfraBridge's new global infrastructure funds. The estimated fair value of the contingent consideration is subject to remeasurement each reporting period, as discussed in Note 11.
Asset Acquisitions in 2022
Vantage SDC Hyperscale Data Centers
In connection with the Company's acquisition of Vantage SDC in July 2020 and an additional data center in September 2021, the Company and its co-investors committed to acquire the future build-out of expansion capacity, along with lease-up of the expanded capacity and existing inventory, the costs of which are borne by the previous owners of Vantage SDC. As of March 31, 2023, the remaining consideration for the incremental lease-up acquisitions is estimated to be approximately $185 million, of which $122 million is due by September 2024. Most, if not all, of the cost of the expansion capacity has been or is expected to be funded by Vantage SDC from borrowings under its credit facilities and/or cash from operations. Pursuant to this arrangement, Vantage SDC had 15 new tenant leases related to a portion of the expansion capacity that commenced during 2022 for aggregate consideration of $161.3 million. All of these payments were made to the previous owners of Vantage SDC and are treated as asset acquisitions. There were no new tenant leases that commenced in the first quarter of 2023.
DataBank
Acquisitions by DataBank in 2022 were as follows:
•Four colocation data centers in Houston, Texas in March 2022 for $678 million, funded by a combination of $262.5 million of debt and $415.5 million of equity, of which the Company's share was $88.7 million.
•A data center each in Atlanta, Georgia in May 2022 for $10.9 million, and in Denver, Colorado in February 2022 that was previously leased by its zColo subsidiary for $17.6 million.
Tower Assets
In June 2022, the Company acquired the mobile telecommunications tower business (“TowerCo”) of Telenet Group Holding NV (Euronext Brussels: TNET) for €740.1 million or $791.3 million (including transaction costs). In December 2022, our interest in the temporarily warehoused TowerCo investment was transferred to the Company's new sponsored fund (Note 16) and TowerCo was deconsolidated. The TowerCo assets acquired had included owned tower sites, tower sites subject to third party leases that gave rise to right-of-use lease assets and corresponding lease liabilities, equipment, as well as customer relationships related primarily to a master lease agreement with Telenet as lessee. The acquisition had been funded through $326.1 million of debt, $278.1 million of equity from the Company, and $213.8 million in third party equity. In addition to the purchase price, the funds had been used to finance transaction costs, debt issuance costs, working capital and as operating cash. Prior to transfer, TowerCo was presented within Corporate and Other.
Allocation of Consideration Transferred
The following table summarizes the consideration and allocation to assets acquired, liabilities assumed and noncontrolling interests at acquisition. In an asset acquisition, the cost of assets acquired, which includes capitalized transaction costs, is allocated to individual assets within the group based on their relative fair values and does not give rise to goodwill. With respect to business combinations, the estimated fair values and allocation of the consideration are subject to adjustments during the measurement period, not to exceed one year, based upon new information obtained about facts and circumstances that existed at time of acquisition.
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| | Business Combination | | Asset Acquisitions |
| | 2023 | | 2022 | | | | |
| (In thousands) | | InfraBridge | | TowerCo | | Acquisitions by DataBank | | Vantage SDC Expansion Capacity | | | | | | | | | | |
| Consideration | | | | | | | | | | | | | | | | | | |
| Cash | | $ | 364,338 | | | $ | 791,254 | | | $ | 706,514 | | | $ | 161,302 | | | | | | | | | | | |
| Estimated fair value of contingent consideration | | 10,874 | | | — | | | — | | | — | | | | | | | | | | | |
| | 375,212 | | | 791,254 | | | 706,514 | | | 161,302 | | | | | | | | | | | |
| Assets acquired and liabilities assumed | | | | | | | | | | | | | | | | | | |
| Cash | | 51,174 | | | — | | | — | | | — | | | | | | | | | | | |
| Principal investments | | 130,810 | | | — | | | — | | | — | | | | | | | | | | | |
| Real estate | | — | | | 363,121 | | | 627,474 | | | 140,140 | | | | | | | | | | | |
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| Intangible assets | | 50,800 | | | 673,218 | | | 77,885 | | | 21,162 | | | | | | | | | | | |
| Lease right-of-use ("ROU") and other assets | | 27,682 | | | 234,462 | | | 3,994 | | | — | | | | | | | | | | | |
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| Deferred tax liabilities | | (10,198) | | | (243,223) | | | — | | | — | | | | | | | | | | | |
| Intangible, lease and other liabilities | | (21,625) | | | (236,324) | | | (2,839) | | | — | | | | | | | | | | | |
| Fair value of net assets acquired | | 228,643 | | | 791,254 | | | 706,514 | | | 161,302 | | | | | | | | | | | |
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| Goodwill | | $ | 146,569 | | | $ | — | | | $ | — | | | $ | — | | | | | | | | | | | |
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•Principal investments represent acquired interests in InfraBridge funds, valued at their most recent net asset value ("NAV").
•Real estate was valued based upon (i) current replacement cost for buildings in an as-vacant state and improvements, estimated using construction cost guidelines; (ii) current replacement cost for data center infrastructure by applying an estimated cost per kilowatt based upon current capacity of each location and also considering the associated indirect costs such as design, engineering, construction and installation; (iii) current replacement cost for towers in consideration of their remaining economic life; and (iv) recent comparable sales or current listings for land. Useful lives of real estate acquired range from 35 to 50 years for buildings and improvements, 5 to 15 years for site improvements, 11 to 71 years for towers and related equipment, and 11 to 20 years for data center infrastructure.
•The investment management intangible assets of InfraBridge were composed of the following:
•Management contracts are valued based upon estimated net cash flows expected to be generated from the contracts, with remaining term of the contracts ranging between 1 and 4 years, discounted at 8.0%.
•Investor relationships represent the fair value of potential investment management fees, net of operating costs, to be generated from repeat InfraBridge investors in future sponsored vehicles, with a weighted average estimated useful life of 12 years, discounted at 14.0%.
•Lease-related intangibles for real estate acquisitions were composed of the following:
•In-place leases reflect the value of rental income forgone if the properties had been acquired vacant, and the leasing commissions, legal and marketing costs that would have been incurred to lease up the properties, discounted at rates between 4.75% and 6.8%, with remaining lease terms ranging between 1 and 15 years.
•Above- and below-market leases represent the rent differential for the remaining lease term between contractual rents of acquired leases and market rents at the time of acquisition, discounted at rates between 6.0% and 11.25% with remaining lease terms ranging between 1 and 4 years.
•Tenant relationships represent the estimated net cash flows attributable to the likelihood of lease renewal by an existing tenant relative to the cost of obtaining a new lease, taking into consideration the estimated time it would require to execute a new lease or backfill a vacant space, discounted at rates between 4.75% and 11.25%, with estimated useful lives between 5 and 15 years.
•Customer service contracts were valued based upon estimated net cash flows generated from the zColo customer service contracts that would have been forgone if such contracts were not in place, taking into consideration the time it would require to execute a new contract, with remaining term of the contracts ranging between 1 and 6 years.
•Customer relationships for towers were valued as the estimated future cash flows to be generated over the life of the tenant relationships based upon rental rates, operating costs, expected renewal terms and attrition, discounted at 6.8%, with estimated useful lives between 19 and 45 years.
•Deferred tax liabilities were recognized for the book-to-tax basis differences associated with the acquisitions of InfraBridge and TowerCo, net of deferred tax assets assumed where applicable.
•Other assets acquired and liabilities assumed include primarily lease ROU assets associated with leasehold ground space hosting tower communication sites, along with corresponding lease liabilities. Lease liabilities were measured based upon the present value of future lease payments over the lease term, discounted at the incremental borrowing rate of the respective acquiree entities. Included in the InfraBridge acquisition were also management fee receivable and compensation payable associated with the pre-acquisition period.
•Goodwill is the value of the business acquired that is not already captured in identifiable assets, largely represented by the synergies from combining the capital raising resources of DBRG and the mid-market infrastructure specialization of the InfraBridge team.
4. Investments
The Company's equity and debt investments are represented by the following:
| | | | | | | | | | | | | | |
| (In thousands) | | March 31, 2023 | | December 31, 2022 |
| Investment Management | | | | |
| Equity method investments | | | | |
| Principal investments | | $ | 54,626 | | | $ | 51,665 | |
| Carried interest allocation | | 286,517 | | | 341,749 | |
| | 341,143 | | | 393,414 | |
| Other equity investment | | 4,683 | | | 1,913 | |
| Total Investment Management | | 345,826 | | | 395,327 | |
| | | | |
| Operating | | | | |
| Debt investments—loan receivable | | 6,804 | | | 4,638 | |
| | | | |
| Corporate and Other | | | | |
| Equity method investments—Principal investments | | 512,649 | | | 358,846 | |
| Equity investments of consolidated funds | | 211,758 | | | 185,845 | |
| Other equity investments | | 98,988 | | | 113,111 | |
| Debt investments | | | | |
| CLO subordinated notes | | 50,927 | | | 50,927 | |
| Loan receivable | | — | | | 133,307 | |
| Total Corporate and Other | | 874,322 | | | 842,036 | |
| | | | |
| Total Investments | | $ | 1,226,952 | | | $ | 1,242,001 | |
Equity Method Investments
Principal Investments
Principal investments totaling $567.3 million at March 31, 2023 and $410.5 million at December 31, 2022 represent investments in the Company's sponsored investment vehicles, accounted for as equity method investments as the Company exerts significant influence in its role as general partner. The Company typically has a small percentage interest in its sponsored funds as general partner (presented in the Investment Management segment). The Company also has additional investment as general partner affiliate alongside the funds' limited partners, primarily with respect to the Company's flagship value-add funds, DigitalBridge Partners, LP ("DBP I") and DigitalBridge Partners II, LP ("DBP II"), and the InfraBridge funds (presented within Corporate and Other).
The Company's proportionate share of net income (loss) from investments in its sponsored investment vehicles, which includes unrealized gain (loss) from changes in fair value of the underlying fund investments, is recorded in principal investment income (loss) on the consolidated statements of operations.
Carried Interest Allocation
Carried interest allocation represents a disproportionate allocation of returns to the Company, as general partner, based upon the extent to which cumulative performance of a sponsored fund exceeds minimum return hurdles. Carried interest allocation generally arises when appreciation in value of the underlying investments of the fund exceeds the minimum return hurdles, after factoring in a return of invested capital and a return of certain costs of the fund pursuant to terms of the governing documents of the fund. The amount of carried interest allocation recognized is based upon the cumulative performance of the fund if it were liquidated as of the reporting date. Unrealized carried interest allocation is driven primarily by changes in fair value of the underlying investments of the fund, which may be affected by various factors, including but not limited to: the financial performance of the portfolio company, economic conditions, foreign exchange rates, comparable transactions in the market, and equity prices for publicly traded securities. For funds that have exceeded the minimum return hurdle but have not returned all capital to the limited partners, unrealized carried interest allocation may be subject to reversal over time as preferred returns continue to accrue on unreturned capital. Realization of carried interest allocation occurs upon disposition of all underlying investments of the fund, or in part with each disposition.
Generally, carried interest allocation is distributed upon profitable disposition of an investment if at the time of distribution, cumulative returns of the fund exceed minimum return hurdles. Depending on the final realized value of all investments at the end of the life of a fund (and, with respect to certain funds, periodically during the life of the fund), if it is determined that cumulative carried interest allocation distributed has exceeded the final carried interest allocation amount earned (or amount earned as of the calculation date), the Company is obligated to return the excess carried interest allocation received. Therefore, carried interest allocation distributed may be subject to clawback if decline in investment values results in cumulative performance of the fund falling below minimum return hurdles in the interim period. If it is determined that the Company has a clawback obligation, a liability would be established based upon a hypothetical liquidation of the net assets of the fund at reporting date. The actual determination and required payment of any clawback obligation would generally occur after final disposition of the investments of the fund or otherwise as set forth in the governing documents of the fund.
Carried interest allocation on the balance sheet date represents unrealized carried interest allocation in connection with sponsored funds that are currently in the early stage of their lifecycle. Carried interest allocation is presented gross of accrued carried interest compensation (Note 7).
Carried Interest Allocation Distributed
There was immaterial carried interest allocation distributed and recognized in revenues in the first quarter of 2023. No carried interest allocation was distributed in the first quarter of 2022.
Clawback Obligation
The Company did not have a liability for clawback obligations on carried interest allocation distributed as of March 31, 2023 and December 31, 2022.
With respect to funds that have distributed carried interest allocation, if in the event all of their investments are deemed to have no value, the likelihood of which is remote, carried interest allocation distributed of $75.6 million would be subject to clawback as of March 31, 2023, of which $58.9 million would be the responsibility of the employee and former employee recipients. For this purpose, a portion of the carried interest allocation is generally held back from these recipients at the time of distribution. The amount withheld resides in entities outside of the Company.
Equity Investments of Consolidated Funds
The Company consolidates sponsored funds in which it has more than an insignificant equity interest in the fund as general partner, as discussed in Note 12. Equity investments of consolidated funds are composed of predominantly marketable equity securities held by funds in the liquid securities strategy, and an equity interest held by a credit fund in a pooling entity that invests in loan assets. Equity investments of consolidated funds are carried at fair value with changes in fair value recorded in other gain (loss) on the consolidated statements of operations.
Other Equity Investments
Other equity investments totaling $103.7 million at March 31, 2023 and $115.0 million at December 31, 2022 include investments warehoused potentially for future sponsored funds, a marketable equity security and investment in a non-traded REIT (Note 11) (presented within Corporate and Other), as well as an investment in a managed account (presented in the Investment Management segment). These investments are generally carried at fair value or under the measurement alternative which is at cost, adjusted for impairment and observable price changes. Dividends or other distributions from these investments are recorded in other income while changes in the value of these investments are recorded in other gain (loss) on the consolidated statements of operations.
Debt Investments
Debt investments are composed of subordinated notes in a third party collateralized loan obligation ("CLO") and loans receivable. Interest income from debt investments are recorded in other income.
CLO Subordinated Notes
In the third quarter of 2022, bank syndicated loans that the Company previously warehoused were transferred into a third party warehouse entity at their acquisition price totaling $232.7 million, and securitized through the issuance of CLO securities. The corresponding warehouse facility of $172.5 million was concurrently repaid. The CLO is sponsored and managed by the third party. The Company acquired all of the subordinated notes of the CLO, which are classified as available-for-sale ("AFS") debt securities. The CLO has a stated legal final maturity of 2035.
The balance of the CLO subordinated notes is summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Amortized Cost without Allowance for Credit Loss | | Allowance for Credit Loss | | Gross Cumulative Unrealized | | |
| (in thousands) | | | | Gains | | Losses | | Fair Value |
| At March 31, 2023 and December 31, 2022 | | $ | 50,927 | | | $ | — | | | $ | — | | | $ | — | | | $ | 50,927 | |
| | | | | | | | | | |
In estimating fair value of the CLO subordinated notes, the Company used a benchmarking approach by looking to the implied credit spreads derived from observed prices on comparable CLO issuances in the first quarter of 2023, and also considering the current size and diversification of the CLO collateral pool and projected return on the subordinated notes. Based upon these data points, the Company determined that the issued price of the subordinated notes in September 2022 was a reasonable representation of their fair value at March 31, 2023 and December 31, 2022, classified as Level 3 of the fair value hierarchy.
Loans Receivable
The Company elected fair value option for its loans receivable, which consisted of two unsecured promissory notes, one in connection with the sale of NRF Holdco (Note 2) and one held by DataBank at March 31, 2023 and December 31, 2022. The DataBank loan receivable was fully repaid in April 2023. Changes in fair value and valuation methodology is discussed further in Note 11.
Investment Commitments
Sponsored Funds—At March 31, 2023, the Company had unfunded commitments to its sponsored funds as general partner and general partner affiliate totaling $126.5 million, including commitments to a consolidated fund. Generally, the timing for funding of these commitments is not known and the commitments are callable on demand at any time prior to their respective expirations.
5. Real Estate
The following table summarizes the Company's real estate which is held by subsidiaries in the Operating segment.
| | | | | | | | | | | | | | |
| (In thousands) | | March 31, 2023 | | December 31, 2022 |
| Land | | $ | 257,588 | | | $ | 257,588 | |
| Buildings and improvements | | 1,738,190 | | | 1,573,605 | |
| | | | |
| Data center infrastructure | | 4,510,678 | | | 4,427,150 | |
| | | | |
| | | | |
| Construction in progress | | 283,146 | | | 395,393 | |
| | 6,789,602 | | | 6,653,736 | |
| Less: Accumulated depreciation | | (824,795) | | | (732,438) | |
| Real estate assets, net | | $ | 5,964,807 | | | $ | 5,921,298 | |
Real Estate Depreciation
Depreciation of real estate held for investment was $92.4 million and $79.1 million for the three months ended March 31, 2023 and 2022, respectively.
Property Operating Income
Components of property operating income are as follows.
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| (In thousands) | | 2023 | | 2022 | | | | | | |
Lease income: | | | | | | | | | | |
Fixed lease income | | $ | 177,420 | | | $ | 160,324 | | | | | | | |
Variable lease income | | 32,982 | | | 23,847 | | | | | | | |
| | 210,402 | | | 184,171 | | | | | | | |
| Data center service revenue | | 20,525 | | | 18,340 | | | | | | | |
| | $ | 230,927 | | | $ | 202,511 | | | | | | | |
For the three months ended March 31, 2023 and 2022, property operating income from a single customer accounted for approximately 21% and 20%, respectively, of the Company's total revenues from continuing operations, or approximately 15% for both periods of the Company's share of total revenues from continuing operations, net of amounts attributable to noncontrolling interests in investment entities.
Commitment for Tenant Allowance
In connection with DataBank’s acquisition of a data center portfolio in March 2022 (Note 3), DataBank and the seller concurrently entered into a master lease agreement which provides that the seller leases from DataBank land acquired in the transaction. If the seller does not exercise its rights to early terminate the lease, the seller is obligated to develop a data center facility on a portion of the acquired land and DataBank is committed to provide the seller a tenant allowance of up to $37.5 million to finance the construction. In December 2022, the seller waived its right to terminate the lease with respect to the portion of the land subject to development. The seller will be responsible for undertaking the construction and any resulting overages. Title to the to-be constructed building, improvements and fixtures will be vested in the seller for the duration of the lease and transfers to DataBank thereafter. The timing of funding of DataBank’s commitment to the seller will be based on agreed upon milestones, with construction to be completed no later than January 1, 2026. DataBank expects to fund its commitment through future debt drawdowns. No amounts have been funded by DataBank to-date.
6. Goodwill, Deferred Leasing Costs and Other Intangibles
Goodwill
The following table presents changes in goodwill by reportable segment.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2023 | | 2022 |
| (In thousands) | | Investment Management (1) | | Operating | | Total | | Investment Management (1) | | Operating | | Total |
| Beginning balance | | $ | 298,248 | | | $ | 463,120 | | | $ | 761,368 | | | $ | 298,248 | | | $ | 463,120 | | | $ | 761,368 | |
Business combination (Note 3) | | 146,569 | | | — | | | 146,569 | | | — | | | — | | | — | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Ending balance | | $ | 444,817 | | | $ | 463,120 | | | $ | 907,937 | | | $ | 298,248 | | | $ | 463,120 | | | $ | 761,368 | |
__________
(1) Remaining goodwill deductible for income tax purposes was $119.7 million at March 31, 2023 and $122.4 million at December 31, 2022.
Deferred Leasing Costs, Other Intangible Assets and Intangible Liabilities
Deferred leasing costs and identifiable intangible assets and liabilities are as follows. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| (In thousands) | Carrying Amount (1)(2) | | Accumulated Amortization(1)(2) | | Net Carrying Amount(1) | | Carrying Amount (1) | | Accumulated Amortization(1) | | Net Carrying Amount(1) |
| Deferred Leasing Costs and Intangible Assets | | | | | | | | | | | |
Investment management intangibles (3) | $ | 208,917 | | | $ | (83,228) | | | $ | 125,689 | | | $ | 164,189 | | | $ | (82,432) | | | $ | 81,757 | |
Deferred leasing costs and lease-related intangible assets (4) | 1,242,281 | | | (432,532) | | | 809,749 | | | 1,239,477 | | | (397,975) | | | 841,502 | |
Customer relationships and service contracts (5) | 218,154 | | | (67,037) | | | 151,117 | | | 218,154 | | | (62,788) | | | 155,366 | |
| Trade names | 24,100 | | | (14,454) | | | 9,646 | | | 26,400 | | | (15,656) | | | 10,744 | |
Other (6) | 6,818 | | | (4,499) | | | 2,319 | | | 6,818 | | | (4,020) | | | 2,798 | |
| Total deferred leasing costs and intangible assets | $ | 1,700,270 | | | $ | (601,750) | | | $ | 1,098,520 | | | $ | 1,655,038 | | | $ | (562,871) | | | $ | 1,092,167 | |
| Intangible Liabilities | | | | | | | | | | | |
Lease intangible liabilities (4) | $ | 46,636 | | | $ | (18,195) | | | $ | 28,441 | | | $ | 46,636 | | | $ | (16,812) | | | $ | 29,824 | |
__________
(1) Amounts are presented net of impairments and write-offs, if any.
(2) Current period amounts exclude intangible assets and liabilities that were fully amortized in the preceding year.
(3) Composed of investment management contracts and investor relationships.
(4) Lease intangible assets are composed of in-place leases, above-market leases and tenant relationships. Lease-intangible liabilities are composed of below-market leases.
(5) In connection with data center services provided in the colocation data center business.
(6) Represents primarily the value of an acquired domain name and assembled workforce in an asset acquisition.
Amortization of Intangible Assets and Liabilities
The following table summarizes amortization of deferred leasing costs and finite-lived intangible assets and intangible liabilities:
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| (In thousands) | | 2023 | | 2022 | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Net increase (decrease) to rental income (1) | | $ | 209 | | | $ | (131) | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Amortization expense | | | | | | | | | | |
| Investment management intangibles | | $ | 6,090 | | | $ | 5,055 | | | | | | | |
| Deferred leasing costs and lease-related intangibles | | 32,843 | | | 33,707 | | | | | | | |
| Customer relationships and service contracts | | 4,249 | | | 4,914 | | | | | | | |
| Trade name | | 1,098 | | | 1,098 | | | | | | | |
| Other | | 480 | | | 477 | | | | | | | |
| | $ | 44,760 | | | $ | 45,251 | | | | | | | |
__________
(1) Represents the net effect of amortizing above- and below-market leases.
The following table presents the future amortization of deferred leasing costs and finite-lived intangible assets and intangible liabilities, excluding those related to assets and liabilities held for disposition.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ending December 31, | | |
| (In thousands) | Remaining 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | 2028 and thereafter | | Total |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Net increase (decrease) to rental income | $ | (869) | | | $ | (1,838) | | | $ | (1,740) | | | $ | (1,691) | | | $ | (1,016) | | | $ | 1,267 | | | $ | (5,887) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Amortization expense | 123,110 | | | 137,433 | | | 120,610 | | | 107,698 | | | 95,914 | | | 479,427 | | | 1,064,192 | |
7. Restricted Cash, Other Assets and Other Liabilities
Restricted Cash
Restricted cash represents principally cash reserves that are maintained pursuant to the governing agreements of the various securitized debt of the Company and subsidiaries in the Operating segment.
Other Assets
The following table summarizes the Company's other assets:
| | | | | | | | | | | | | | |
| (In thousands) | | March 31, 2023 | | December 31, 2022 |
| Straight-line rents | | $ | 46,295 | | | $ | 42,721 | |
| Investment deposits and pending deal costs | | 15,192 | | | 1,377 | |
| | | | |
| | | | |
| Derivative assets | | — | | | 11,793 | |
| Prepaid taxes and deferred tax assets, net | | 13,440 | | | 8,709 | |
| Receivables from resolution of investment | | 350 | | | 14,923 | |
Operating lease right-of-use asset—corporate offices | | 23,141 | | | 23,689 | |
Operating lease right-of-use asset—investment properties | | 307,304 | | | 305,760 | |
Finance lease right-of-use asset—investment properties | | 117,349 | | | 120,261 | |
Accounts receivable, net (1) | | 59,366 | | | 66,059 | |
| Prepaid expenses | | 27,260 | | | 28,760 | |
| Other assets | | 19,466 | | | 15,798 | |
Fixed assets, net (2) | | 13,288 | | | 14,200 | |
| Total other assets | | $ | 642,451 | | | $ | 654,050 | |
__________
(1) Includes primarily receivables from tenants in the Operating segment.
(2) Net of accumulated depreciation of $15.1 million at March 31, 2023 and $17.9 million at December 31, 2022.
Other Liabilities
The following table summarizes the Company's other liabilities:
| | | | | | | | | | | | | | |
| (In thousands) | | March 31, 2023 | | December 31, 2022 |
Deferred investment management fees (1) | | $ | 7,555 | | | $ | 6,264 | |
Other deferred income (2) | | 65,782 | | | 55,188 | |
Interest payable—corporate debt | | 5,807 | | | 4,431 | |
Interest payable—investment level debt | | 5,889 | | | 5,624 | |
| Dividends payable | | 16,444 | | | 16,491 | |
| | | | |
| | | | |
Securities sold short—consolidated funds | | 45,628 | | | 40,928 | |
Due to custodians—consolidated funds | | 29,129 | | | 35,458 | |
Current and deferred income tax liability | | 9,396 | | | 98 | |
Contingent consideration payable—InfraBridge (Note 10) | | 10,938 | | | — | |
Contingent consideration payable—Wafra (Note 10) | | 35,000 | | | 125,000 | |
Warrants issued to Wafra (Note 10) | | 22,200 | | | 17,700 | |
Operating lease liability—corporate offices | | 39,535 | | | 40,497 | |
Operating lease liability—investment properties | | 287,150 | | | 282,433 | |
Finance lease liability—investment properties | | 133,723 | | | 135,624 | |
| Accrued compensation | | 41,086 | | | 52,031 | |
| Accrued incentive fee and carried interest compensation | | 134,078 | | | 171,086 | |
| Accrued real estate and other taxes | | 15,886 | | | 21,580 | |
Payable for Vantage SDC expansion capacity (3) | | 6,889 | | | 56,889 | |
| Accounts payable and accrued expenses | | 219,414 | | | 185,900 | |
Due to affiliates (Note 16) | | 860 | | | 12,451 | |
| Other liabilities | | 1,179 | | | 6,423 | |
| Other liabilities | | $ | 1,133,568 | | | $ | 1,272,096 | |
__________
(1) Deferred investment management fees are expected to be recognized as fee income over a weighted average period of 3.8 years as of at March 31, 2023 and 2.9 years as of December 31, 2022. Deferred investment management fees recognized as income of $1.4 million and $2.4 million in the three months ended March 31, 2023 and 2022, respectively, pertain to the deferred management fee balance at the beginning of each respective period.
(2) Represents primarily prepaid rental income and upfront payment received for data center installation services in the Operating segment.
(3) Represents deferred purchase consideration associated with a Vantage SDC add-on acquisition in 2021 that is to be paid upon future lease-up.
Deferred Income Taxes
The Company has significant deferred tax assets, related principally to capital loss carryforwards, outside basis difference in DBRG's interest in the OP, outside basis difference in investment in partnerships and net operating losses generated by a taxable U.S. subsidiary. As of March 31, 2023 and December 31, 2022, a full valuation allowance has been established as the realizability of these deferred tax assets did not meet the more-likely-than-not threshold. As a result, income tax expense for the three months ended March 31, 2023, generally reflects the income tax effect of foreign subsidiaries.
8. Debt
Corporate debt—This is composed of a securitized financing facility and senior notes issued by DigitalBridge Group, Inc. or its OP subsidiary and are recourse to the Company, as discussed further below. Corporate debt is presented within Corporate and Other, except that a portion of the securitized financing facility is allocated to the Investment Management and Operating segments consistent with the cash flows that service the debt and the underlying collateral that resides across the Company's various lines of business.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| (In thousands) | Investment Management | | Operating | | Corporate and Other | | Total | | Investment Management | | Operating | | Corporate and Other | | Total |
| Corporate debt | | | | | | | | | | | | | | | | |
| Securitized financing facility | | $ | 199,033 | | | $ | 70,246 | | | $ | 23,416 | | | $ | 292,695 | | | $ | 198,677 | | | $ | 70,120 | | | $ | 23,374 | | | $ | 292,171 | |
| Convertible and exchangeable senior notes | | — | | | — | | | 277,076 | | | 277,076 | | | — | | | — | | | 276,741 | | | 276,741 | |
| | $ | 199,033 | | | $ | 70,246 | | | $ | 300,492 | | | $ | 569,771 | | | $ | 198,677 | | | $ | 70,120 | | | $ | 300,115 | | | $ | 568,912 | |
Investment-level debt—This represents non-recourse debt, including: (i) investment level financing in the Operating segment, and (ii) debt within consolidated funds and debt on warehoused investments, if any, in Corporate and Other.
The components that make up the carrying value of corporate and investment-level debt are as follows.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Corporate Debt | | |
| (In thousands) | | Securitized Financing Facility | | Convertible and Exchangeable Senior Notes | | Total | | Non-Recourse Investment-Level Debt |
| March 31, 2023 | | | | | | | | |
| Debt at amortized cost | | | | | | | | |
| Principal | | $ | 300,000 | | | $ | 278,422 | | | $ | 578,422 | | | $ | 4,871,528 | |
| Premium (discount), net | | — | | | (1,175) | | | (1,175) | | | (47,922) | |
| Deferred financing costs | | (7,305) | | | (171) | | | (7,476) | | | (71,556) | |
| | $ | 292,695 | | | $ | 277,076 | | | $ | 569,771 | | | $ | 4,752,050 | |
| December 31, 2022 | | | | | | | | |
| Debt at amortized cost | | | | | | | | |
| Principal | | $ | 300,000 | | | $ | 278,422 | | | $ | 578,422 | | | $ | 4,634,235 | |
| Premium (discount), net | | — | | | (1,293) | | | (1,293) | | | 10,713 | |
| Deferred financing costs | | (7,829) | | | (388) | | | (8,217) | | | (57,720) | |
| | $ | 292,171 | | | $ | 276,741 | | | $ | 568,912 | | | $ | 4,587,228 | |
The following table summarizes certain key terms of corporate and investment-level debt.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed Rate | | Variable Rate | | Total |
| ($ in thousands) | Outstanding Principal | | Weighted Average Interest Rate (Per Annum)(1) | | Weighted Average Years Remaining to Maturity(2) | | Outstanding Principal | | Weighted Average Interest Rate (Per Annum)(1) | | Weighted Average Years Remaining to Maturity(2) | | Outstanding Principal | | Weighted Average Interest Rate (Per Annum)(1) | | Weighted Average Years Remaining to Maturity(2) |
| March 31, 2023 | | | | | | | | | | | | | | | | | |
| Corporate debt | | | | | | | | | | | | | | | | |
| Recourse | | | | | | | | | | | | | | | | |
Securitized financing facility(3) | $ | 300,000 | | | 3.93 | % | | 3.5 | | $ | — | | | NA | | 3.5 | | $ | 300,000 | | | 3.93 | % | | 3.5 |
| Convertible and exchangeable senior notes | 278,422 | | | 5.21 | % | | 0.7 | | — | | | NA | | NA | | 278,422 | | | 5.21 | % | | 0.7 |
| $ | 578,422 | | | | | | | $ | — | | | | | | | $ | 578,422 | | | | | |
| | | | | | | | | | | | | | | | | |
| Investment-Level Secured Debt | | | | | | | | | | | | | | | | |
| Non-recourse | | | | | | | | | | | | | | | | | |
| Operating segment | $ | 4,508,428 | | | 3.09 | % | | 3.4 | | $ | 362,500 | | | 8.68 | % | | 0.8 | | $ | 4,870,928 | | | 3.51 | % | | 3.3 |
Corporate and Other—Consolidated fund | — | | | NA | | NA | | 600 | | | 6.40 | % | | 1.4 | | 600 | | | 6.40 | % | | 1.4 |
| $ | 4,508,428 | | | | | | | $ | 363,100 | | | | | | | $ | 4,871,528 | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed Rate | | Variable Rate | | Total |
| ($ in thousands) | Outstanding Principal | | Weighted Average Interest Rate (Per Annum)(1) | | Weighted Average Years Remaining to Maturity(2) | | Outstanding Principal | | Weighted Average Interest Rate (Per Annum)(1) | | Weighted Average Years Remaining to Maturity(2) | | Outstanding Principal | | Weighted Average Interest Rate (Per Annum)(1) | | Weighted Average Years Remaining to Maturity(2) |
| December 31, 2022 | | | | | | | | | | | | | | | | | |
| Corporate debt | | | | | | | | | | | | | | | | |
| Recourse | | | | | | | | | | | | | | | | |
Securitized financing facility(3) | $ | 300,000 | | | 3.93 | % | | 3.7 | | $ | — | | | NA | | 3.7 | | $ | 300,000 | | | 3.93 | % | | 3.7 |
| Convertible and exchangeable senior notes | 278,422 | | | 5.21 | % | | 0.9 | | — | | | NA | | NA | | 278,422 | | | 5.21 | % | | 0.9 |
| $ | 578,422 | | | | | | | $ | — | | | | | | | $ | 578,422 | | | | | |
| | | | | | | | | | | | | | | | | |
| Investment-Level Secured Debt | | | | | | | | | | | | | | | | |
| Non-recourse | | | | | | | | | | | | | | | | | |
| Operating segment | $ | 3,640,235 | | | 2.43 | % | | 3.1 | | $ | 993,500 | | | 8.41 | % | | 2.6 | | $ | 4,633,735 | | | 3.71 | % | | 3.0 |
Corporate and Other—Consolidated fund | — | | | NA | | NA | | 500 | | | 5.96 | % | | 1.6 | | 500 | | | 5.96 | % | | 1.6 |
| $ | 3,640,235 | | | | | | | $ | 994,000 | | | | | | | $ | 4,634,235 | | | | | |
__________
(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.
(3) Represent obligations of special-purpose subsidiaries of the OP as co-issuers and certain other special-purpose subsidiaries of DBRG, and secured by assets of these special-purpose subsidiaries, as further described below. DBRG and the OP are not guarantors to the debt.
Corporate Debt—Securitized Financing Facility
In July 2021, special-purpose subsidiaries of the OP (the "Co-Issuers") issued Series 2021-1 Secured Fund Fee Revenue Notes, composed of: (i) $300 million aggregate principal amount of 3.933% Secured Fund Fee Revenue Notes, Series 2021-1, Class A-2 (the “Class A-2 Notes”); and (ii) up to $300 million (following a $100 million increase in April 2022) Secured Fund Fee Revenue Variable Funding Notes, Series 2021-1, Class A-1 (the “VFN” and, together with the Class A-2 Notes, the “Series 2021-1 Notes”). The VFN allow the Co-Issuers to borrow on a revolving basis. The Series 2021-1 Notes were issued under an Indenture dated July 2021, as amended in April 2022, that allows the Co-Issuers to issue additional series of notes in the future, subject to certain conditions. The Series 2021-1 Notes replaced the Company's previous corporate credit facility.
The Series 2021-1 Notes represent obligations of the Co-Issuers and certain other special-purpose subsidiaries of DBRG, and neither DBRG, the OP nor any of its other subsidiaries are liable for the obligations of the Co-Issuers. The Series 2021-1 Notes are secured by net investment management fees earned by subsidiaries of DBRG, equity interests in portfolio companies in the Operating segment and limited partnership interests in certain sponsored funds held by subsidiaries of DBRG, as collateral.
The Class A-2 Notes bear interest at a rate of 3.933% per annum, payable quarterly. The VFN bear interest generally based upon 1-month Adjusted Term Secured Overnight Financing Rate or SOFR (prior to April 2022, 3-month LIBOR) or an alternate benchmark as set forth in the purchase agreement of the VFN plus 3%. Unused capacity under the VFN facility is subject to a commitment fee of 0.5% per annum. The final maturity date of the Class A-2 Notes is in September 2051, with an anticipated repayment date in September 2026. The anticipated repayment date of the VFN is in September 2024, subject to two one-year extensions at the option of the Co-Issuers. If the Series 2021-1 Notes are not repaid or refinanced prior to their anticipated repayment date, or such date is not extended for the VFN, interest will accrue at a higher rate and the Series 2021-1 Notes will begin to amortize quarterly.
The Series 2021-1 Notes may be optionally prepaid, in whole or in part, prior to their anticipated repayment dates. There is no prepayment penalty on the VFN. However, prepayment of the Class A-2 Notes will be subject to additional consideration based upon the difference between the present value of future payments of principal and interest and the outstanding principal of such Class A-2 Note that is being prepaid; or 1% of the outstanding principal of such Class A-2 Note that is being prepaid in connection with a disposition of collateral.
The Indenture of the Series 2021-1 Notes contains various covenants, including financial covenants that require the maintenance of minimum thresholds for debt service coverage ratio and maximum loan-to-value ratio, as defined. As of the date of this filing, the Co-Issuers are in compliance with all of the financial covenants, and the full $300 million under the VFN is available to be drawn.
Corporate Debt—Convertible and Exchangeable Senior Notes
Convertible and exchangeable senior notes (collectively, the senior notes) are composed of the following, each representing senior unsecured obligations of DigitalBridge Group, Inc. or a subsidiary as the respective issuers of the senior notes:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Description | | Issuance Date | | Due Date | | Interest Rate (per annum) | | Conversion or Exchange Price (per share of common stock) | | Conversion or Exchange Ratio (in shares)(1) | | Conversion or Exchange Shares (in thousands) | | Earliest Redemption Date | | Outstanding Principal |
| | | | | | | | March 31, 2023 | | December 31, 2022 |
| | | | | | | | |
| Issued by DigitalBridge Group, Inc. | | | | | | | | | | | | | | | | |
5.00% Convertible Senior Notes (2) | | April 2013 | | April 15, 2023 | | 5.00 | % | | $ | 63.02 | | | 15.8675 | | | 3,174 | | | April 22, 2020 | | $ | 200,000 | | | $ | 200,000 | |
| Issued by DigitalBridge Operating Company, LLC | | | | | | | | | | | | | | |
| 5.75% Exchangeable Senior Notes | | July 2020 | | July 15, 2025 | | 5.75 | % | | 9.20 | | | 108.6956 | | | 8,524 | | | July 21, 2023 | | 78,422 | | | 78,422 | |
| | | | | | | | | | | | | | | | $ | 278,422 | | | $ | 278,422 | |
__________
(1) The conversion or exchange rate for the senior notes is subject to periodic adjustments to reflect certain carried-forward adjustments relating to common stock splits, reverse stock splits, common stock adjustments in connection with spin-offs and cumulative cash dividends paid on the Company's common stock since the issuances of the respective senior notes. The conversion or exchange ratios are presented in shares of common stock per $1,000 principal of each senior note.
(2) Fully repaid in April 2023.
The senior notes mature on their respective due dates, unless earlier redeemed, repurchased, converted or exchanged, as applicable. The outstanding senior notes are convertible or exchangeable at any time by holders of such notes into shares of the Company’s common stock at the applicable conversion or exchange rate, which is subject to adjustment upon occurrence of certain events.
To the extent certain trading conditions of the Company’s common stock are met, the senior notes are redeemable by the applicable issuer thereof in whole or in part for cash at any time on or after their respective earliest redemption dates at a redemption price equal to 100% of the principal amount of such senior notes being redeemed, plus accrued and unpaid interest (if any) up to, but excluding, the redemption date.
In the event of certain change in control transactions, holders of the senior notes have the right to require the applicable issuer to purchase all or part of such holder's senior notes for cash in accordance with terms of the governing documents of the respective senior notes.
Exchange of Senior Notes For Common Stock and Cash
There were no exchange transactions in the three months ended March 31, 2023.
In March 2022, DBRG and the OP completed separate privately negotiated exchange transactions with certain noteholders of the 5.75% exchangeable notes. The Company exchanged in aggregate $60.3 million of outstanding principal of the 5.75% exchangeable notes into 6,389,366 shares of the Company's class A common stock and paid $13.9 million of cash. The exchanges resulted in a debt extinguishment loss of $133.2 million, calculated as the excess of consideration paid over the carrying value of the notes exchanged, and recorded in other loss on the consolidated statement of operations. Consideration was measured at fair value based upon the closing price of the Company's class A
common stock on the date of the respective exchanges, and cash paid, net of transaction costs. The exchanges did not qualify as debt conversion and were treated as debt extinguishment as the Company issued less than the number of shares issuable under the stated exchange ratio of 108.696 shares per $1,000 of note principal exchanged.
Non-Recourse Investment-Level Secured Debt
These are investment level financing that are non-recourse to DBRG and are primarily secured by data center portfolios held by subsidiaries in the Operating segment. At March 31, 2023, the subsidiaries in the Operating segment were in compliance with the financial covenants underlying their respective investment-level secured debt.
In 2023, subsidiaries in the Operating segment refinanced or raised additional debt through new securitization transactions, as follows. There were no securitization activities in 2022.
In February 2023, DataBank issued $715 million of securitized notes at fixed rate coupon of 5.12% per annum (7.07% per annum effective rate as the notes were issued at a discount) with a 5-year anticipated repayment date. In April 2023, DataBank secured an additional $350 million credit facility. Proceeds were applied principally to refinance the data center assets of its zColo subsidiary and to repay the outstanding balance on its variable funding notes.
In March 2023, Vantage SDC issued $370 million of securitized notes at a fixed rate coupon of 6.32% per annum with a 5-year anticipated repayment date. Proceeds were applied principally to repay previously issued securitized notes which had an anticipated repayment date in November 2023 and the outstanding balance on its variable funding notes.
These refinancing transactions resulted in a net loss from debt extinguishment totaling $9.4 million, representing prepayment penalty and accelerated amortization of deferred financing costs, debt discount and premium, recorded in interest expense.
Future Minimum Principal Payments
The following table summarizes future scheduled minimum principal payments of debt at March 31, 2023. Future debt principal payments are presented based upon anticipated repayment dates for notes issued under securitization financing, or based upon initial maturity dates or extended maturity dates if extension criteria are met at March 31, 2023 for extensions that are at the option of the respective borrower entities.
The $200 million outstanding principal of the 5% convertible senior notes that was due in April 2023 was fully repaid at maturity.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | Remaining 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | 2028 and thereafter | | Total |
| Corporate debt | | | | | | | | | | | | | | |
| Securitized financing facility | | $ | — | | $ | — | | $ | — | | $ | 300,000 | | $ | — | | $ | — | | $ | 300,000 |
| Convertible and exchangeable senior notes | | 200,000 | | — | | 78,422 | | — | | — | | — | | 278,422 |
| | $ | 200,000 | | $ | — | | $ | 78,422 | | $ | 300,000 | | $ | — | | $ | — | | $ | 578,422 |
| | | | | | | | | | | | | | |
| Non-recourse investment-level secured debt |
| Operating segment | | $ | 102,985 | | $ | 863,253 | | $ | 700,000 | | $ | 1,519,690 | | $ | 600,000 | | $ | 1,085,000 | | $ | 4,870,928 |
Corporate and Other—Consolidated fund | | — | | 600 | | — | | — | | — | | — | | 600 |
| | $ | 102,985 | | $ | 863,853 | | $ | 700,000 | | $ | 1,519,690 | | $ | 600,000 | | $ | 1,085,000 | | $ | 4,871,528 |
9. Stockholders' Equity
The table below summarizes the share activities of the Company's preferred stock and common stock.
| | | | | | | | | | | | | | | | | | | | |
| | Number of Shares |
| (In thousands) | | Preferred Stock | | Class A Common Stock | | Class B Common Stock |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Shares outstanding at December 31, 2021 | | 35,340 | | | 142,144 | | | 166 | |
| | | | | | |
| | | | | | |
| Exchange of notes for class A common stock | | — | | | 6,389 | | | — | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Equity awards issued, net of forfeitures | | — | | | 1,248 | | | — | |
| Shares canceled for tax withholding on vested equity awards | | — | | | (411) | | | — | |
| Shares outstanding at March 31, 2022 | | 35,340 | | | 149,370 | | | 166 | |
| | | | | | |
| Shares outstanding at December 31, 2022 | | 33,111 | | | 159,763 | | | 166 | |
| | | | | | |
| | | | | | |
| | | | | | |
| Stock repurchases | | (3) | | | — | | | — | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Equity awards issued, net of forfeitures | | — | | | 2,486 | | | — | |
| Shares canceled for tax withholding on vested equity awards | | — | | | (415) | | | — | |
| Shares outstanding at March 31, 2023 | | 33,108 | | | 161,834 | | | 166 | |
Preferred Stock
In the event of a liquidation or dissolution of the Company, preferred stockholders have priority over common stockholders for payment of dividends and distribution of net assets.
The table below summarizes the preferred stock issued and outstanding at March 31, 2023:
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| Description | | Dividend Rate Per Annum | | Initial Issuance Date | | Shares Outstanding (in thousands) | | Par Value (in thousands) | | Liquidation Preference (in thousands) | | Earliest Redemption Date |
| Series H | | 7.125 | % | | April 2015 | | 8,429 | | | $ | 84 | | | $ | 210,731 | | | Currently redeemable |
| Series I | | 7.15 | % | | June 2017 | | 12,988 | | | 130 | | | 324,710 | | | Currently redeemable |
| Series J | | 7.125 | % | | September 2017 | | 11,691 | | | 117 | | | 292,270 | | | Currently redeemable |
| | | | | | 33,108 | | | $ | 331 | | | $ | 827,711 | | | |
All series of preferred stock are at parity with respect to dividends and distributions, including distributions upon liquidation, dissolution or winding up of the Company. Dividends on Series H, I and J of preferred stock are payable quarterly in arrears in January, April, July and October.
Each series of preferred stock is redeemable on or after the earliest redemption date for that series at $25.00 per share plus accrued and unpaid dividends (whether or not declared) prorated to their redemption dates, exclusively at the Company’s option. The redemption period for each series of preferred stock is subject to the Company’s right under limited circumstances to redeem the preferred stock upon the occurrence of a change of control (as defined in the articles supplementary relating to each series of preferred stock).
Preferred stock generally does not have any voting rights, except if the Company fails to pay the preferred dividends for six or more quarterly periods (whether or not consecutive). Under such circumstances, the preferred stock will be entitled to vote, together as a single class with any other series of parity stock upon which like voting rights have been conferred and are exercisable, to elect two additional directors to the Company’s board of directors, until all unpaid dividends have been paid or declared and set aside for payment. In addition, certain changes to the terms of any series of preferred stock cannot be made without the affirmative vote of holders of at least two-thirds of the outstanding shares of each such series of preferred stock voting separately as a class for each series of preferred stock.
Common Stock
Except with respect to voting rights, class A common stock and class B common stock have the same rights and privileges and rank equally, share ratably in dividends and distributions, and are identical in all respects as to all matters. Class A common stock has one vote per share and class B common stock has thirty-six and one-half votes per share. This gives the holders of class B common stock a right to vote that reflects the aggregate outstanding non-voting economic interest in the Company (in the form of OP Units) attributable to class B common stock holders and therefore, does not provide any disproportionate voting rights. Class B common stock was issued as consideration in the Company's acquisition in April 2015 of the investment management business and operations of its former manager, which was previously controlled by the Company's former Executive Chairman. Each share of class B common stock shall convert automatically into one share of class A common stock if the former Executive Chairman or his beneficiaries directly or
indirectly transfer beneficial ownership of class B common stock or OP Units held by them, other than to certain qualified transferees, which generally includes affiliates and employees. In addition, each holder of class B common stock has the right, at the holder’s option, to convert all or a portion of such holder’s class B common stock into an equal number of shares of class A common stock.
The Company reinstated quarterly common stock dividends at $0.01 per share beginning the third quarter of 2022, having previously suspended common stock dividends from the second quarter of 2020 through the second quarter of 2022.
Dividend Reinvestment and Direct Stock Purchase Plan
The Company's Dividend Reinvestment and Direct Stock Purchase Plan (the “DRIP Plan”) provides existing common stockholders and other investors the opportunity to purchase shares (or additional shares, as applicable) of the Company's class A common stock by reinvesting some or all of the cash dividends received on their shares of the Company's class A common stock or making optional cash purchases within specified parameters. The DRIP Plan involves the acquisition of the Company's class A common stock either in the open market, directly from the Company as newly issued common stock, or in privately negotiated transactions with third parties. To date, no shares of class A common stock have been acquired under the DRIP Plan in the form of new issuances in the last three years.
Reverse Stock Split
In August 2022, the Company effectuated a one-for-four reverse stock split of its outstanding shares of class A and class B common stock. The number of authorized shares of common stock was not adjusted in connection with the reverse stock split, however, the Company intends to seek stockholder approval to make a proportional change to the number of authorized shares of class A and class B common stock at its next annual meeting of stockholders. Par value of common stock was proportionately increased from $0.01 to $0.04 per share. Common stock share and per share information, including OP Units and stock award units as well as the Company's senior note conversion or exchange ratio in common stock shares, have been revised for all periods presented in this Quarterly Report on Form 10-Q to give effect to the reverse stock split.
Stock Repurchases
Pursuant to a $200 million stock repurchase program announced in July 2022, during the three months ended March 31, 2023, the Company repurchased 2,738 shares in aggregate across Series H, I and J preferred stock for approximately $52,000, or a weighted average price of $18.89 per share. In April 2023, an additional 232,485 shares of preferred stock were repurchased for $4.7 million, or a weighted average price of $20.20 per share. In 2022, the Company repurchased (i) 2,228,805 shares in aggregate across Series H, I and J preferred stock at a discount for $52.6 million, or a weighted average price of $23.62 per share; and (ii) 4,195,020 shares of class A common stock for $54.9 million, or a weighted average price of $13.09 per share. The stock repurchase program expires on June 30, 2023 and may be extended, modified, or discontinued at any time by the Company's Board of Directors.
The excess or deficit of the repurchase price over the carrying value of the preferred stock results in a decrease or increase to net income attributable to common stockholders, respectively.
Accumulated Other Comprehensive Income (Loss)
The following tables present the changes in each component of AOCI attributable to stockholders and noncontrolling interests in investment entities, net of immaterial tax effect. AOCI attributable to noncontrolling interests in Operating Company is immaterial.
Changes in Components of AOCI—Stockholders
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Company's Share in AOCI of Equity Method Investments | | Unrealized Gain (Loss) on AFS Debt Securities | | | | Foreign Currency Translation Gain (Loss) | | Unrealized Gain (Loss) on Net Investment Hedges | | Total |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| AOCI at December 31, 2021 | | $ | 2,334 | | | $ | 5,861 | | | | | $ | 26,502 | | | $ | 7,686 | | | $ | 42,383 | |
| Other comprehensive income (loss) before reclassifications | | 217 | | | — | | | | | (3,131) | | | 25 | | | (2,889) | |
| Amounts reclassified from AOCI | | (200) | | | (5,861) | | | | | (20,680) | | | — | | | (26,741) | |
| | | | | | | | | | | | |
| AOCI at March 31, 2022 | | $ | 2,351 | | | $ | — | | | | | $ | 2,691 | | | $ | 7,711 | | | $ | 12,753 | |
| | | | | | | | | | | | |
| AOCI at December 31, 2022 | | $ | (295) | | | $ | — | | | | | $ | (1,214) | | | $ | — | | | $ | (1,509) | |
| Other comprehensive income (loss) before reclassifications | | (1) | | | — | | | | | 787 | | | — | | | 786 | |
| Amounts reclassified from AOCI | | 296 | | | — | | | | | (1,051) | | | — | | | (755) | |
| | | | | | | | | | | | |
| AOCI at March 31, 2023 | | $ | — | | | $ | — | | | | | $ | (1,478) | | | $ | — | | | $ | (1,478) | |
Changes in Components of AOCI—Noncontrolling Interests in Investment Entities
| | | | | | | | | | | | | | |
| (In thousands) | | | | Foreign Currency Translation Gain (Loss) | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| AOCI at December 31, 2021 | | | | $ | 11,057 | | | | | |
| Other comprehensive loss before reclassifications | | | | (2,184) | | | | | |
| Amounts reclassified from AOCI | | | | (9,827) | | | | | |
| | | | | | | | |
| AOCI at March 31, 2022 | | | | $ | (954) | | | | | |
| | | | | | | | |
| AOCI at December 31, 2022 | | | | $ | (3,015) | | | | | |
| Other comprehensive loss before reclassifications | | | | 503 | | | | | |
| Amounts reclassified from AOCI | | | | (468) | | | | | |
| | | | | | | | |
| AOCI at March 31, 2023 | | | | $ | (2,980) | | | | | |
Reclassifications out of AOCI—Stockholders
Information about amounts reclassified out of AOCI attributable to stockholders by component is presented below. Such amounts are included in other gain (loss) in both continuing and discontinued operations on the statements of operations, as applicable, except for amounts related to equity method investments, which are included in equity method losses in discontinued operations.
| | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Three Months Ended March 31, | | | | |
| Component of AOCI reclassified into earnings | 2023 | | 2022 | | | | | | | |
| | | | | | | | | | | | |
| Relief of basis of AFS debt securities | | $ | — | | | $ | 5,861 | | | | | | | | | |
| Release of foreign currency cumulative translation adjustments | | 1,051 | | | 20,680 | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Release of AOCI of equity method investments | | (296) | | | 200 | | | | | | | | | |
10. Noncontrolling Interests
Redeemable Noncontrolling Interests
The following table presents the activities in redeemable noncontrolling interests in the Company's investment management business prior to its redemption in May 2022 as discussed below, and in open-end funds sponsored and consolidated by the Company.
| | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| (In thousands) | | 2023 | | 2022 | | |
| Redeemable noncontrolling interests | | | | | | |
| Balance at January 1 | | $ | 100,574 | | | $ | 359,223 | | | |
| Contributions | | — | | | 10,150 | | | |
| Distributions paid and payable, including redemptions by limited partners in consolidated funds | | (104) | | | (9,414) | | | |
| Net income (loss) | | 6,943 | | | (11,220) | | | |
| Adjustment of Wafra's interest to redemption value and warrants held by Wafra to fair value | | — | | | 690,000 | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Balance at March 31 | | $ | 107,413 | | | $ | 1,038,739 | | | |
Redeemable Noncontrolling Interest in Investment Management
On May 23, 2022, the Company redeemed the 31.5% noncontrolling interest in its investment management business held by affiliates of Wafra, Inc. (collectively, "Wafra"), a private investment firm, pursuant to a purchase and sale agreement ("PSA") entered into in April 2022.
In connection with Wafra's initial investment in the Company's investment management business in July 2020, Wafra had assumed directly and also indirectly through a participation interest $124.9 million of the Company's commitments to DBP I, and has a $125.0 million commitment to DBP II that has been partially funded to-date. These are the Company's flagship value-add equity infrastructure funds. Wafra had also agreed to make commitments to the Company's future funds and investment vehicles on a pro rata basis with the Company based on Wafra's percentage interest in the investment management business, subject to certain caps.
Pursuant to the PSA, Wafra’s entitlement to carried interest in DBP II was reduced from 12.6% to 7%, and with certain limited exceptions, Wafra sold or gave up its right to invest in, or receive carried interest from, future investment management products, but except as otherwise provided, retained its investment in and its allocation of carried interest from existing investment management products.
Consideration for the redemption of Wafra's interest consisted of: (i) an upfront payment of $388.5 million in cash and 14,435,399 shares of the Company's Class A common stock valued at $348.8 million based upon the closing price of the Company's class A common stock on May 23, 2022; and (ii) Wafra's right to earn a contingent amount up to $125 million if the Company raises fee earning equity under management (as defined in the PSA) up to $6 billion during the period from December 31, 2021 to December 31, 2023, payable in March 2023 for portion earned in 2022 and March 2024 for any remaining portion earned in 2023, with up to 50% payable in shares of the Company's Class A common stock at the Company's election. The Company paid Wafra in cash $90 million of the contingent amount in March 2023.
The carrying value of Wafra's redeemable noncontrolling interest was adjusted to fair value prior to redemption, initially based upon an estimate of consideration payable at March 31, 2022 when redemption was deemed to be probable, including the maximum potential contingent amount of $125 million. This adjustment resulted in an allocation from additional paid-in capital to redeemable noncontrolling interests on the consolidated balance sheet.
The unrealized carried interest earnings allocated to Wafra that was retained and no longer subject to redemption was reclassified in May 2022 to permanent equity, included in noncontrolling interests in investment entities.
Additionally, in July 2020, the Company had also issued Wafra five warrants to purchase up to an aggregate of 5% of the Company’s class A common stock (5% at the time of the transaction, on a fully-diluted, post-transaction basis), as described further in Note 11. In connection with the redemption, the terms of the warrants were amended, among other things, to provide for net cash settlement upon exercise of the warrants, at election of either the Company or Wafra, if such exercise would result in Wafra beneficially owning in excess of 9.8% of the issued and outstanding shares of the Company's class A common stock. Inclusion of the cash settlement feature changed the classification of the warrants from equity to liability. The warrants were remeasured to fair value prior to reclassification in May 2022, with the increase in value recorded in equity to reduce additional paid-in capital. Subsequent changes in fair value of the warrant liability is recorded in earnings.
The Company's redemption of Wafra's interest in May 2022 also resulted in the assumption of $5.2 million of deferred tax asset that now accrues to the Company.
Noncontrolling Interests in Investment Entities
DataBank Additional Investment in 2022
In January 2022, a shareholder of DataBank sold its equity interest to the Company and an existing investor, resulting in an additional $32.0 million investment by the Company in DataBank. Following this transaction and additional equity funded by the shareholders of DataBank in connection with its data center acquisition in March 2022 (Note 3), the Company's interest in DataBank increased from 20% to 21.8% (prior to recapitalization as discussed below).
DataBank Recapitalization in 2022
DataBank was partially recapitalized in the second half of 2022 through multiple sales of equity interest to new investors totaling $2.0 billion in cash. The Company's ownership interest in DataBank decreased from 21.8% (as noted above) to 11.0%. The Company received its share of proceeds from the sale of $425.5 million in the third and fourth quarters of 2022, including its share of carried interest, net of allocation to employees.
As the transaction involved a change in ownership of a consolidated subsidiary, it was accounted for as an equity transaction. The difference between the book value of the Company's interest and its ownership based upon the current value of DataBank resulted in a reallocation from noncontrolling interests in investment entities to additional paid-in capital totaling $230.2 million in the third and fourth quarters of 2022.
The recapitalization transaction triggered an accelerated vesting of certain profits interest units that had been issued by DataBank to its employees. As a result of the accelerated vesting, $10 million of additional equity based compensation was recorded in the third quarter of 2022 based upon DataBank's original grant date fair value of these awards, of which $7.8 million was attributable to noncontrolling interests in investment entities.
Noncontrolling Interests in Operating Company
Certain current and former employees of the Company directly or indirectly own interests in OP, presented as noncontrolling interests in the Operating Company. Noncontrolling interests in OP have the right to require OP to redeem part or all of such member’s OP Units for cash based on the market value of an equivalent number of shares of class A common stock at the time of redemption, or at the Company's election as managing member of OP, through issuance of shares of class A common stock (registered or unregistered) on a one-for-one basis. At the end of each period, noncontrolling interests in OP is adjusted to reflect their ownership percentage in OP at the end of the period, through a reallocation between controlling and noncontrolling interests in OP.
Redemption of OP Units—No OP Units were redeemed in the three months ended March 31, 2023. The Company redeemed 100,220 OP Units during the year ended December 31, 2022 through the issuance of an equal number of shares of class A common stock on a one-for-one basis.
11. Fair Value
Recurring Fair Values
Financial assets and financial liabilities carried at fair value on a recurring basis include financial instruments for which the fair value option was elected, but exclude financial assets under the NAV practical expedient. Fair value is categorized into a three tier hierarchy that is prioritized based upon the level of transparency in inputs used in the valuation techniques, as follows.
Level 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2—Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in non-active markets, or valuation techniques utilizing inputs that are derived principally from or corroborated by observable data directly or indirectly for substantially the full term of the financial instrument.
Level 3—At least one assumption or input is unobservable and it is significant to the fair value measurement, requiring significant management judgment or estimate.
Marketable Equity Securities
Marketable equity securities with long positions of $166.0 million at March 31, 2023 and $155.9 million at December 31, 2022, included within equity investments of Corporate and Other (Note 4), and short positions of $45.6 million at March 31, 2023 and $40.9 million at December 31, 2022, included in other liabilities (Note 7), consist of
publicly traded equity securities held predominantly by sponsored liquid strategy funds consolidated by the Company. The equity securities of the consolidated funds comprise listed stocks primarily in the U.S. and to a lesser extent, in Europe, and primarily in the technology, media and telecommunications sectors. These marketable equity securities are valued based upon listed prices in active markets and classified as Level 1 of the fair value hierarchy.
Equity Investment of Consolidated Fund
A consolidated credit fund has equity interest in a pooling entity, invested alongside other affiliated managed funds, that holds a portfolio of loans. The fund's equity interest in the pooling entity had a fair value of $62.5 million at March 31, 2023 and $46.8 million at December 31, 2022, classified as Level 3 of the fair value hierarchy. Fair value of the fund's equity interest in the pooling entity is based upon its share of expected cash flows from the loan assets held by the pooling entity. In estimating the fair value of its underlying loans, the pooling entity considered the prevailing market yields at which a third party might expect to receive on equivalent loans with similar credit risk. Based upon the comparison to market yields, it was determined that the transacted price on the loans held by the pooling entity approximate their fair value at March 31, 2023 and at December 31, 2022.
Derivatives
The Company's derivative instruments generally consist of: (i) foreign currency put options, forward contracts and costless collars to hedge the foreign currency exposure of certain foreign-denominated investments or investments in foreign subsidiaries (in GBP and EUR), with notional amounts and termination dates based upon the anticipated return of capital from these investments; and (ii) interest rate caps and swaps to limit the exposure to changes in interest rates on various floating rate debt obligations (indexed to LIBOR or Euribor). These derivative contracts may be designated as qualifying hedge accounting relationships, specifically as net investment hedges and cash flow hedges, respectively.
The derivative instruments are subject to master netting arrangements with counterparties that allow the Company to offset the settlement of derivative assets and liabilities in the same currency by instrument type or, in the event of default by the counterparty, to offset all derivative assets and liabilities with the same counterparty. Notwithstanding the conditions for right of offset may have been met, the Company presents derivative assets and liabilities with the same counterparty on a gross basis on the consolidated balance sheets.
The Company had no outstanding derivatives at March 31, 2023. At December 31, 2022, the fair value of derivative assets was $11.8 million, included in other assets, and there were no derivatives in a liability position. All derivative positions were non-designated hedges. Derivative notional amounts for foreign exchange contracts aggregated to the equivalent of $321.1 million at December 31, 2022, and there were no outstanding interest rate contracts.
Realized and unrealized gains and losses on derivative instruments are recorded in other gain (loss) on the consolidated statement of operations as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| (In thousands) | | 2023 | | 2022 | | | | | | |
| Foreign currency contracts: | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Realized and unrealized gain in earnings on non-designated contracts (1) | | $ | 4,053 | | | $ | 1,510 | | | | | | | |
| Interest rate contracts: | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Realized and unrealized gain in earnings on non-designated contracts | | — | | | 61 | | | | | | | |
__________
(1) Amount in 2023 relates to foreign currency contract entered into on behalf of a sponsored fund, which has no net impact to the Company's earnings, as discussed in Note 16.
The Company's foreign currency and interest rate contracts are generally traded over-the-counter, and are valued using a third-party service provider. Quotations on over-the-counter derivatives are not adjusted and are generally valued using observable inputs such as contractual cash flows, yield curve, foreign currency rates and credit spreads, and are classified as Level 2 of the fair value hierarchy. Although credit valuation adjustments, such as the risk of default, rely on Level 3 inputs, these inputs are not significant to the overall valuation of the derivatives. As a result, derivative valuations in their entirety are classified as Level 2 of the fair value hierarchy.
Warrants
As discussed in Note 10, the Company had issued five warrants to Wafra in July 2020. Each warrant entitles Wafra to purchase up to 1,338,000 shares of the Company's class A common stock at staggered strike prices between $9.72 and $24.00 each, exercisable through July 17, 2026. No warrants have been exercised to-date.
The warrants are carried at fair value effective May 2022 when they were reclassified from equity to liability, with subsequent changes in fair value recorded in other gain (loss) on the consolidated statements of operations. The warrants were valued at $22.2 million at March 31, 2023 and $17.7 million at December 31, 2022 using a Black-Scholes option pricing model, applying the following inputs: (a) estimated volatility for DBRG's class A common stock of 44.4% (40.8% at December 31, 2022); (b) closing stock price of DBRG's class A common stock on the last trading day of the quarter; (c) the strike price for each warrant; (d) remaining term to expiration of the warrants; and (e) risk free rate of 3.78% per annum (4.16% per annum at December 31, 2022), derived from the daily U.S. Treasury yield curve rates to correspond to the remaining term to expiration of the warrants. Fair value of the warrant liability, classified as Level 3 fair value, increased $4.5 million during the three months ended March 31, 2023.
Contingent Consideration
In connection with the acquisition of InfraBridge, contingent consideration is payable if prescribed fundraising targets for InfraBridge's new global infrastructure funds are met. In measuring the contingent consideration, the Company applied a probability-weighted approach to the likelihood of meeting various fundraising targets and discounted the estimated future contingent consideration payment at 4.9% to derive a present value amount. The contingent consideration of $10.9 million at March 31, 2023 is classified as Level 3 of the fair value hierarchy, with changes in fair value recorded in other gain (loss).
Fair Value Option
Loans Receivable
Loans receivable are carried at fair value under the fair value option, which consisted of two unsecured promissory notes, one in connection with the 2022 sale of the Company's Wellness Infrastructure business (Note 2) and one held by DataBank, presented within Corporate and Other and in the Operating segment, respectively. Both loans receivable have a bullet repayment of principal and accrue PIK interest. Accrued interest forms part of the fair value of loans receivable and is recorded in other income. Changes in fair value of loans receivable are recorded in other gain (loss).
At March 31, 2023, fair value of loans receivable was $6.8 million ($137.9 million at December 31, 2022), with unpaid principal balance, inclusive of PIK interest, of $168.8 million ($167.8 million at December 31, 2022), classified as Level 3 in the fair value hierarchy. At March 31, 2023, the Wellness Infrastructure note was fully written down, taking into consideration an impending foreclosure of certain assets within the Wellness Infrastructure portfolio by its mezzanine lender. The DataBank note was carried at par plus accrued PIK interest as it was fully repaid in April 2023. At December 31, 2022, loan fair values were based upon a discounted cash flow projection of principal and interest expected to be collected, applying discount rates of 10.0% and 10.5%.
Changes in Level 3 Fair Value
The following table presents changes in recurring Level 3 fair value assets held for investment. Realized and unrealized gains (losses) are included in other gain (loss). | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Option | | Equity Investment of Consolidated Fund | |
| (In thousands) | | | | Loans Receivable | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Fair value at December 31, 2021 | | | | $ | 82,930 | | | | | $ | — | | |
| Originations and drawdowns | | | | 360,990 | | | | | — | | |
| Paydowns | | | | (112,500) | | | | | — | | |
| Change in accrued interest and capitalization of paid-in-kind interest | | | | (650) | | | | | — | | |
| Unrealized gain (loss) in earnings, net | | | | (2,815) | | | | | — | | |
| Fair value at March 31, 2022 | | | | $ | 327,955 | | | | | $ | — | | |
| | | | | | | | | |
| Net unrealized gain (loss) in earnings on instruments held at March 31, 2022 | | | | $ | (2,815) | | | | | $ | — | | |
| | | | | | | | | | |
| Fair value at December 31, 2022 | | | | $ | 137,945 | | | | | $ | 46,770 | | |
| Contributions | | | | — | | | | | 9,627 | | |
Change in consolidated fund's share of equity investment (1) | | | | — | | | | | 6,125 | | |
Paydowns of underlying loan assets held by equity investment of consolidated fund | | | | — | | | | | (25) | | |
| Change in accrued interest and capitalization of paid-in-kind interest | | | | 545 | | | | | — | | |
Unrealized gain (loss) in earnings, net (2) | | | | (131,686) | | | | | 11 | | |
| Fair value at March 31, 2023 | | | | $ | 6,804 | | | | | $ | 62,508 | | |
| | | | | | | | | |
| Net unrealized gain (loss) in earnings on instruments held at March 31, 2023 | | | | $ | (131,686) | | | | | $ | 11 | | |
__________ (1) Represents reallocation of investment value when relative ownership of the pooling entity across its fund owners change following additional capital contributions.
(2) With respect to equity investment of the consolidated fund, represents remeasurement of a foreign currency denominated loan asset held by the pooling entity of the consolidated fund.
Investment Carried at Fair Value Using Net Asset Value
The Company holds an investment in a non-traded healthcare REIT, valued at $34.5 million at March 31, 2023 and at December 31, 2022, presented within Corporate and Other in Note 4. The Company has no commitment for any further investment in the non-traded REIT in the future. The investment is valued based upon NAV beginning October 2021 when the investee, a healthcare real estate investor/manager, was acquired in conjunction with a merger of its co-sponsored non-traded REITs. The transaction diluted the Company's equity interest in the investee, which was previously accounted for as an equity method investment. Redemption of the Company's partnership interest in the non-traded healthcare REIT is restricted until the earliest of (1) the second anniversary of the issuance to the Company of such partnership units, (2) change in control of the general partner, and (3) initial public offering of the equity of the non-traded healthcare REIT, which may be subject to further restriction on redemption by the underwriters.
Nonrecurring Fair Values
The Company measures fair value of certain assets on a nonrecurring basis: (i) on the acquisition date for business combinations; and (ii) when events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Adjustments to fair value generally result from the application of lower of amortized cost or fair value accounting for assets held for disposition or otherwise, write-down of asset values due to impairment.
Other than the assets and liabilities acquired in the InfraBridge business combination discussed in Note 3, there were no assets held for investment carried at nonrecurring fair value at March 31, 2023 and December 31, 2022.
Fair Value of Financial Instruments Reported at Cost
Fair value of financial instruments reported at amortized cost, excluding those held for disposition, are presented below. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements | | Carrying Value |
| (In thousands) | | Level 1 | | Level 2 | | Level 3 | | Total | |
| March 31, 2023 | | | | | | | | | | |
| Liabilities | | | | | | | | | | |
| Corporate debt | | | | | | | | | | |
| Secured fund fee revenue notes | | $ | — | | | $ | 250,547 | | | $ | — | | | $ | 250,547 | | | $ | 292,695 | |
| Convertible and exchangeable senior notes | | 325,098 | | | — | | | — | | | 325,098 | | | 277,076 | |
| Non-recourse investment-level debt | | — | | | 4,134,916 | | | 363,488 | | | 4,498,404 | | | 4,752,050 | |
| | | | | | | | | | |
| | | | | | | | | | |
| December 31, 2022 | | | | | | | | | | |
| Liabilities | | | | | | | | | | |
| Corporate debt | | | | | | | | | | |
| Secured fund fee revenue notes | | $ | — | | | $ | 250,547 | | | $ | — | | | $ | 250,547 | | | $ | 292,171 | |
| Convertible and exchangeable senior notes | | 304,513 | | | — | | | — | | | 304,513 | | | 276,741 | |
| Non-recourse investment-level debt | | — | | | 3,268,508 | | | 944,984 | | | 4,213,492 | | | 4,587,228 | |
| | | | | | | | | | |
| | | | | | | | | | |
Debt—Senior notes and secured fund fee revenue notes were valued using their last traded price. Fair value of investment-level debt were estimated by either discounting expected future cash outlays at interest rates available to the respective borrower subsidiaries for similar instruments or for securitized debt, based upon indicative bond prices quoted by brokers in the secondary market.
Other—The carrying values of cash and cash equivalents, accounts receivable, due from and to affiliates, interest payable and accounts payable generally approximate fair value due to their short term nature, and credit risk, if any, is negligible.
12. Variable Interest Entities
A VIE is an entity that lacks sufficient equity to finance its activities without additional subordinated financial support from other parties, or whose equity holders lack the characteristics of a controlling financial interest. The following discusses the Company's involvement with VIEs where the Company is the primary beneficiary and consolidates the VIEs or where the Company is not the primary beneficiary and does not consolidate the VIEs.
Operating Subsidiary
The Company's operating subsidiary, OP, is a limited liability company that has governing provisions that are the functional equivalent of a limited partnership. The Company holds the majority of membership interest in OP, acts as the managing member of OP and exercises full responsibility, discretion and control over the day-to-day management of OP. The noncontrolling interests in OP do not have substantive liquidation rights, substantive kick-out rights without cause, or substantive participating rights that could be exercised by a simple majority of noncontrolling interest members (including by such a member unilaterally). The absence of such rights, which represent voting rights in a limited partnership equivalent structure, would render OP to be a VIE. The Company, as managing member, has the power to direct the core activities of OP that most significantly affect OP's performance, and through its majority interest in OP, has both the right to receive benefits from and the obligation to absorb losses of OP. Accordingly, the Company is the primary beneficiary of OP and consolidates OP. As the Company conducts its business and holds its assets and liabilities through OP, the total assets and liabilities, earnings (losses), and cash flows of OP represent substantially all of the total consolidated assets and liabilities, earnings (losses), and cash flows of the Company.
Company-Sponsored Private Funds
The Company sponsors private funds and other investment vehicles as general partner for the purpose of providing investment management services in exchange for management fees and carried interest. These private funds are established as limited partnerships or equivalent structures. Limited partners of the private funds do not have either substantive liquidation rights, or substantive kick-out rights without cause, or substantive participating rights that could be exercised by a simple majority of limited partners or by a single limited partner. Accordingly, the absence of such rights, which represent voting rights in a limited partnership, results in the private funds being considered VIEs. The nature of the Company's involvement with its sponsored funds comprise fee arrangements and general partner and limited partner
equity interests. The fee arrangements are commensurate with the level of management services provided by the Company, and contain terms and conditions that are customary to similar at-market fee arrangements.
Consolidated Company-Sponsored Private Funds—The Company currently consolidates sponsored private funds in which it has more than an insignificant equity interest in the fund as general partner. As a result, the Company is considered to be acting in the capacity of a principal of the sponsored private fund and is therefore the primary beneficiary of the fund. The Company’s exposure is limited to the value of its outstanding investment in the consolidated private funds of $112.6 million at March 31, 2023 and $94.7 million at December 31, 2022. The liabilities of the consolidated funds
may only be settled using assets of the consolidated funds, and the Company, as general partner, is not obligated to provide any financial support to the consolidated private funds.
The following table presents the assets and liabilities of the consolidated funds, which are presented within Corporate and Other in the supplemental schedule to the consolidated balance sheets.
| | | | | | | | | | | | | | |
| (In thousands) | | March 31, 2023 | | December 31, 2022 |
| Assets | | | | |
| Cash and cash equivalents | | $ | 82,906 | | | $ | 86,433 | |
Investments—marketable equity securities and equity interest in credit pooling entity (Note 11) | | 211,758 | | | 185,845 | |
| Other assets | | 414 | | | 1,895 | |
| | $ | 295,078 | | | $ | 274,173 | |
| Liabilities | | | | |
| Debt | | $ | 350 | | | $ | 465 | |
| Other liabilities | | | | |
| Securities sold short | | 45,629 | | | 40,928 | |
| Due to custodian | | 29,130 | | | 35,457 | |
| Other | | 1,059 | | | 2,734 | |
| | $ | 76,168 | | | $ | 79,584 | |
Unconsolidated Company-Sponsored Private Funds—The Company does not consolidate its sponsored private funds where it has insignificant direct equity interests or capital commitments to these funds as general partner. The Company may invest alongside certain of its sponsored private funds through joint ventures between the Company and these funds, or the Company may have capital commitments to its sponsored private funds that are satisfied directly through the co-investment joint ventures as an affiliate of the general partner. In these instances, the co-investment joint ventures are consolidated by the Company. As the Company's direct equity interests in its sponsored private funds as general partner absorb insignificant variability, the Company is considered to be acting in the capacity of an agent of these funds and is therefore not the primary beneficiary of these funds. The Company accounts for its equity interests in unconsolidated sponsored private funds under the equity method. The Company's maximum exposure to loss is limited to the carrying value of its investment in the unconsolidated sponsored private funds, totaling $853.8 million at March 31, 2023 and $752.3 million at December 31, 2022, included in equity investments, and $0.8 million at March 31, 2023 and $1.0 million at December 31, 2022, included within assets held for disposition.
13. Earnings per Share
The following table provides the basic and diluted earnings per common share computations.
| | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, | | |
| (In thousands, except per share data) | | 2023 | | 2022 | | | | | | |
| Net income (loss) allocated to common stockholders | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Income (Loss) from continuing operations attributable to DigitalBridge Group, Inc. | | $ | (184,136) | | | $ | (165,197) | | | | | | | |
| Income (Loss) from discontinued operations attributable to DigitalBridge Group, Inc. | | (13,661) | | | (81,360) | | | | | | | |
| Net income (loss) attributable to DigitalBridge Group, Inc. | | (197,797) | | | (246,557) | | | | | | | |
| | | | | | | | | | |
| Preferred dividends | | (14,676) | | | (15,759) | | | | | | | |
| Net income (loss) attributable to common stockholders | | (212,473) | | | (262,316) | | | | | | | |
| Net income (loss) allocated to participating securities | | (31) | | | — | | | | | | | |
| Net income (loss) allocated to common stockholders—basic | | (212,504) | | | (262,316) | | | | | | | |
Interest expense attributable to convertible and exchangeable notes (1) | | — | | | — | | | | | | | |
| Net income (loss) allocated to common stockholders—diluted | | $ | (212,504) | | | $ | (262,316) | | | | | | | |
| Weighted average common shares outstanding | | | | | | | | | | |
| Weighted average number of common shares outstanding—basic | | 158,446 | | | 142,485 | | | | | | | |
Weighted average effect of dilutive shares (1)(2)(3) | | — | | | — | | | | | | | |
| Weighted average number of common shares outstanding—diluted | | 158,446 | | | 142,485 | | | | | | | |
| Income (loss) per share—basic | | | | | | | | | | |
| Income (Loss) from continuing operations | | $ | (1.25) | | | $ | (1.27) | | | | | | | |
| (Income (Loss) from discontinued operations | | (0.09) | | | (0.57) | | | | | | | |
| Net income (loss) attributable to common stockholders per common share—basic | | $ | (1.34) | | | $ | (1.84) | | | | | | | |
| Income (loss) per share—diluted | | | | | | | | | | |
| Income (Loss) from continuing operations | | $ | (1.25) | | | $ | (1.27) | | | | | | | |
| (Income (Loss) from discontinued operations | | (0.09) | | | (0.57) | | | | | | | |
| Net income (loss) attributable to common stockholders per common share—diluted | | $ | (1.34) | | | $ | (1.84) | | | | | | | |
__________
(1) With respect to the assumed conversion or exchange of the Company's outstanding senior notes, the following are excluded from the calculation of diluted earnings per share as their inclusion would be antidilutive: (a) for the three months ended March 31, 2023 and 2022, the effect of adding back interest expense of $4.0 million and $4.8 million, respectively, and 11,697,600 and 16,580,800 of weighted average dilutive common share equivalents, respectively. Also excluded from the calculation of diluted earnings per share was $133.2 million of debt extinguishment loss (Note 8) for the three months ended March 31, 2022.
(2) The calculation of diluted earnings per share excludes the effect of the following as their inclusion would be antidilutive: (a) class A common shares that are contingently issuable in relation to performance stock units (Note 15) with weighted average shares of 32,400 and 2,164,300 for the three months ended March 31, 2023 and 2022, respectively; and (b) class A common shares that are issuable to net settle the exercise of warrants (Note 10) with weighted average shares of 362,800 and 2,937,600 for the three months ended March 31, 2023 and 2022, respectively.
(3) OP Units may be redeemed for registered or unregistered class A common stock on a one-for-one basis and are not dilutive. At March 31, 2023 and 2022, 12,628,900 and 12,728,900 of OP Units, respectively, were not included in the computation of diluted earnings per share in the respective periods presented.
14. Fee Income
The following table presents the Company's fee income by type. | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| (In thousands) | | | | | | 2023 | | 2022 | | |
Management fees | | | | | | $ | 57,158 | | | $ | 42,191 | | | |
Incentive fees | | | | | | 869 | | | — | | | |
Other fees | | | | | | 1,099 | | | 646 | | | |
| Total fee income | | | | | | $ | 59,126 | | | $ | 42,837 | | | |
Management Fees—The Company earns management fees for providing investment management services to its sponsored private funds and other investment vehicles, portfolio companies and managed accounts. Management fees are calculated generally at contractual rates ranging from 0.2% per annum to 1.5% per annum of investors' committed capital during the commitment period of the vehicle, and thereafter, contributed or invested capital; or net asset value for vehicles in the liquid securities strategy.
Incentive Fees—The Company is entitled to incentive fees from sub-advisory accounts in its liquid securities strategy. Incentive fees are determined based upon the performance of the respective accounts, subject to the achievement of specified return thresholds in accordance with the terms set out in their respective governing agreements. A portion of the incentive fees earned by the Company is allocable to senior management, investment professionals, and certain other employees of the Company, included in carried interest and incentive fee compensation expense.
Other Fee Income—Other fees include primarily service fees for information technology, facilities and operational support provided to portfolio companies, and on a non-recurring basis, loan origination fees.
15. Equity-Based Compensation
The DigitalBridge Group, Inc. 2014 Omnibus Stock Incentive Plan (the "Equity Incentive Plan") provides for the grant of restricted stock, performance stock units ("PSUs"), Long Term Incentive Plan ("LTIP") units, restricted stock units ("RSUs"), deferred stock units ("DSUs"), options, warrants or rights to purchase shares of the Company's common stock, cash incentives and other equity-based awards to the Company's officers, directors (including non-employee directors), employees, co-employees, consultants or advisors of the Company or of any parent or subsidiary who provides services to the Company, but excluding employees of portfolio companies. Shares reserved for the issuance of awards under the Equity Incentive Plan are subject to equitable adjustment upon the occurrence of certain corporate events, provided that this number automatically increases each January 1st by 2% of the outstanding number of shares of the Company’s class A common stock on the immediately preceding December 31st. At March 31, 2023, an aggregate 24.5 million shares of the Company's class A common stock were reserved for the issuance of awards under the Equity Incentive Plan.
Restricted Stock—Restricted stock awards in the Company's class A common stock are granted to senior executives, directors and certain employees, generally subject to a service condition only, with annual time-based vesting in equal tranches over a three-year period. Restricted stock is entitled to dividends declared and paid on the Company's class A common stock and such dividends are not forfeitable prior to vesting of the award. Restricted stock awards are valued based on the Company's class A common stock price on grant date and equity-based compensation expense is recognized on a straight-line basis over the requisite service period.
Restricted Stock Units—RSUs in the Company's class A common stock are subject to a performance condition. Vesting of performance-based RSUs occur upon achievement of certain Company-specific metrics over a performance measurement period that coincides with the recipients' term of service. Only vested RSUs are entitled to accrued dividends declared and paid on the Company's class A common stock during the time period the RSUs are outstanding. Fair value of RSUs are based on the Company's class A common stock price on grant date. Equity-based compensation expense is recognized when it becomes probable that the performance condition will be met.
Performance Stock Units—PSUs are granted to senior executives and certain employees, and are subject to both a service condition and a market condition. Following the end of the measurement period, the recipients of PSUs who remain employed will vest in, and be issued a number of shares of the Company's class A common stock, generally ranging from 0% to 200% of the number of PSUs granted and determined based upon the performance of the Company's class A common stock relative to that of a specified peer group over a three-year measurement period (such measurement metric the "total shareholder return"). In addition, recipients of PSUs whose employment is terminated after the first anniversary of their PSU grant are eligible to vest in a portion of the PSU award following the end of the measurement period based upon achievement of the total shareholder return metric applicable to the award. PSUs also contain dividend equivalent rights which entitle the recipients to a payment equal to the amount of dividends that would have been paid on the shares that are ultimately issued at the end of the measurement period.
Fair value of PSUs, including dividend equivalent rights, was determined using a Monte Carlo simulation under a risk-neutral premise, with the following assumptions:
| | | | | | | | | | | | | | | | | | | | |
| | 2023 PSU Grants | | 2022 PSU Grants | | 2021 PSU Grants |
Expected volatility of the Company's class A common stock (1) | | 41.3% | | 32.4% | | 35.4% |
Expected annual dividend yield (2) | | 0.3% | | —% | | —% |
Risk-free rate (per annum) (3) | | 3.8% | | 2.0% | | 0.3% |
__________
(1) Based upon the historical volatility of the Company's stock and those of a specified peer group.
(2) Based upon the Company's expected annualized dividends. Expected dividend yield was zero for the March 2022 and 2021 PSU awards as common dividends were suspended beginning the second quarter of 2020 and reinstated in the third quarter 2022.
(3) Based upon the continuously compounded zero-coupon U.S. Treasury yield for the term coinciding with the measurement period of the award as of valuation date.
Fair value of PSU awards, excluding dividend equivalent rights, is recognized on a straight-line basis over their measurement period as compensation expense, and is not subject to reversal even if the market condition is not achieved. The dividend equivalent right is accounted for as a liability-classified award. The fair value of the dividend equivalent right is recognized as compensation expense on a straight-line basis over the measurement period, and is subject to adjustment to fair value at each reporting period.
LTIP Units—LTIP units are units in the Operating Company that are designated as profits interests for federal income tax purposes. Unvested LTIP units that are subject to market conditions do not accrue distributions. Each vested LTIP unit is convertible, at the election of the holder (subject to capital account limitation), into one common OP Unit and upon conversion, subject to the redemption terms of OP Units (Note 9).
LTIP units issued have either (1) a service condition only, valued based upon the Company's class A common stock price on grant date; or (2) both a service condition and a market condition based upon the Company's class A common stock achieving a target price over a predetermined measurement period, subject to continuous employment to the time of vesting, and valued using a Monte Carlo simulation.
The following assumptions were applied in the Monte Carlo model under a risk-neutral premise:
| | | | | | | | | | | | | | |
| | 2022 LTIP Grant | | 2019 LTIP Grant (1) |
Expected volatility of the Company's class A common stock (2) | | 34.0% | | 28.3% |
Expected dividend yield (3) | | 0.0% | | 8.1% |
Risk-free rate (per annum) (4) | | 3.6% | | 1.8% |
__________
(1) Represents 2.5 million LTIP units granted to the Company's Chief Executive Officer, Marc Ganzi, in connection with the Company's acquisition of Digital Bridge Holdings, LLC in July 2019, with vesting based upon achievement of the Company's class A common stock price closing at or above $40 over any 90 consecutive trading days prior to the fifth anniversary of the grant date.
(2) Based upon historical volatility of the Company's stock and those of a specified peer group.
(3) Based upon the Company's most recently issued dividend prior to grant date and closing price of the Company's class A common stock on grant date. Expected dividend yield was zero for the June 2022 award as common dividends were suspended beginning the second quarter of 2020 and reinstated in the third quarter of 2022.
(4) Based upon the continuously compounded zero-coupon US Treasury yield for the term coinciding with the measurement period of the award as of valuation date.
Equity-based compensation cost on LTIP units is recognized on a straight-line basis either over (1) the service period for awards with a service condition only; or (2) the derived service period for awards with both a service condition and a market condition, irrespective of whether the market condition is satisfied. The derived service period is a service period that is inferred from the application of the simulation technique used in the valuation of the award, and represents the median of the terms in the simulation in which the market condition is satisfied.
Deferred Stock Units—Certain non-employee directors may elect to defer the receipt of annual base fees and/or restricted stock awards, and in lieu, receive awards of DSUs. DSUs awarded in lieu of annual base fees are fully vested on their grant date, while DSUs awarded in lieu of restricted stock awards vest one year from their grant date. DSUs are entitled to a dividend equivalent, in the form of additional DSUs based on dividends declared and paid on the Company's class A common stock, subject to the same restrictions and vesting conditions, where applicable. Upon separation of service from the Company, vested DSUs will be settled in shares of the Company’s class A common stock. Fair value of DSUs are determined based on the price of the Company's class A common stock on grant date and recognized immediately if fully vested upon grant, or on a straight-line basis over the vesting period as equity based compensation expense and equity.
Equity-based compensation cost pursuant to DBRG's Equity Incentive Plan is included in the following line items on the consolidated statement of operations.
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
(In thousands) | | 2023 | | 2022 | | | | | | |
| | | | | | | | | | |
Compensation expense (including $0 and $37 expense related to dividend equivalent rights) | | $ | 10,770 | | | $ | 8,979 | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Administrative expense | | 228 | | | 88 | | | | | | | |
| | $ | 10,998 | | | $ | 9,067 | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Changes in unvested equity awards pursuant to DBRG's Equity Incentive Plan are summarized below. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Weighted Average Grant Date Fair Value |
| | Restricted Stock | | LTIP Units (1) | | DSUs | | RSUs (2) | | PSUs (3) | | Total | | PSUs | | All Other Awards |
Unvested shares and units at December 31, 2022 | | 1,706,674 | | | 2,625,000 | | | 20,058 | | | 2,397,391 | | | 1,889,587 | | | 8,638,710 | | | $ | 17.84 | | | $ | 10.84 | |
| Granted | | 1,865,483 | | | — | | | 6,457 | | | — | | | 397,262 | | | 2,269,202 | | | 13.36 | | | 11.75 | |
| Vested | | (532,399) | | | — | | | (6,439) | | | (599,348) | | | (635,926) | | | (1,774,112) | | | 29.84 | | | 15.72 | |
| Forfeited | | (822) | | | — | | | — | | | — | | | (424,065) | | | (424,887) | | | 29.84 | | | 27.29 | |
Unvested shares and units at March 31, 2023 | | 3,038,936 | | | 2,625,000 | | | 20,076 | | | 1,798,043 | | | 1,226,858 | | | 8,708,913 | | | 6.02 | | | 10.33 | |
__________
(1) Represents the number of LTIP units granted subject to vesting upon achievement of market condition. LTIP units that do not meet the market condition within the measurement period will be forfeited.
(2) Represents the number of RSUs granted subject to vesting upon achievement of performance condition. RSUs that do not meet the performance condition at the end of the measurement period will be forfeited.
(3) Number of PSUs granted does not reflect potential increases or decreases that could result from the final outcome of the total shareholder return measured at the end of the performance period. PSUs for which the total shareholder return was not met at the end of the performance period are forfeited.
Fair value of equity awards that vested, as shown above, determined based upon their respective fair values at vesting date, was $20.9 million and $33.4 million for the three months ended March 31, 2023 and 2022, respectively.
At March 31, 2023, aggregate unrecognized compensation cost for all unvested equity awards pursuant to DBRG's Equity Incentive Plan was $55.5 million, which is expected to be recognized over a weighted average period of 2.2 years. This excludes $18.8 million of unvested RSUs that are not currently probable of achieving their performance conditions and have a remaining performance measurement period of 1.1 years.
16. Transactions with Affiliates
Affiliates include (i) private funds and other investment vehicles that the Company manages or sponsors, and in which the Company may have an equity interest or co-invests with; (ii) the Company's investments in unconsolidated ventures; and (iii) directors, senior executives and employees of the Company (collectively, "employees").
Amounts due from and due to affiliates consist of the following:
| | | | | | | | | | | | | | |
| (In thousands) | | March 31, 2023 | | December 31, 2022 |
| Due from Affiliates | | | | |
| Investment vehicles, portfolio companies and unconsolidated ventures | | | | |
| Fee income | | $ | 58,076 | | | $ | 35,010 | |
| Cost reimbursements and recoverable expenses | | 7,111 | | | 7,031 | |
| Other | | 964 | | | — | |
| Employees and other affiliates | | 1,134 | | | 3,319 | |
| | $ | 67,285 | | | $ | 45,360 | |
Due to Affiliates (Note 7) | | | | |
| Investment vehicles—Derivative obligation | | $ | — | | | $ | 11,793 | |
| Investment vehicles, employees and other affiliates | | 860 | | | 658 | |
| | $ | 860 | | | $ | 12,451 | |
Significant transactions with affiliates include the following:
Fee Income—Fee income earned from investment vehicles that the Company manages and/or sponsors, and may have an equity interest or co-investment, are presented in Note 14. Substantially all fee income are from affiliates, except for management fees and incentive fee from sub-advisory accounts and generally, other fee income.
Cost Reimbursements and Recoverable Expenses—The Company receives reimbursements and recovers certain costs paid on behalf of investment vehicles sponsored by the Company, which include: (i) organization and offering costs related to the formation and capital raising of the investment vehicles up to specified thresholds; (ii) costs incurred in performing investment due diligence; and (iii) direct and indirect operating costs for managing the operations of certain investment vehicles.
Such cost reimbursements and recoverable expenses, included in other income, totaled $1.3 million and $3.4 million for the three months ended March 31, 2023 and 2022, respectively.
Warehoused Investments—The Company may acquire and 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. The Company is generally paid a fee by the investment vehicle, akin to an interest charge, typically calculated as a percentage of the acquisition price of the investment, to compensate the Company for its cost of holding the investment during the warehouse period. The terms of such arrangements may differ for each sponsored investment vehicle or by investment.
Derivative Obligations of Sponsored Fund—In the third quarter of 2022, the Company, in its capacity as general partner and for the benefit of its sponsored fund, entered into foreign currency forward contracts to economically hedge the foreign currency exposure of an investment commitment of its sponsored fund (Note 11). The investment committee of the sponsored fund has ratified the fund's responsibility and obligation to assume all resulting liabilities and benefits from the foreign currency contracts effective from trade date through the novation of the contracts to the fund. The Company recorded a payable in due to affiliates to reflect the fund's obligation to assume the resulting asset from the foreign currency contracts; accordingly, there was no net effect to the Company's earnings resulting from these foreign currency contracts. Upon the novation of the contracts to the fund in January 2023, the Company de-recognized the derivative asset and the corresponding payable in due to affiliate.
Digital Real Estate Acquisitions—Marc Ganzi, Chief Executive Officer of the Company, and Ben Jenkins, President and Chief Investment Officer of the Company, were former owners of Digital Bridge Holdings, LLC ("DBH") prior to its merger into the Company in July 2019. Messrs. Ganzi and Jenkins had retained their equity investments and general partner interests in the portfolio companies of DBH, which include DataBank and Vantage.
As a result of the personal investments made by Messrs. Ganzi and Jenkins in DataBank and Vantage SDC prior to the Company’s acquisition of DBH, additional investments made by the Company in DataBank and Vantage SDC subsequent to their initial acquisitions may trigger future carried interest payments to Messrs. Ganzi and Jenkins upon the occurrence of future realization events. Such investments made by the Company include ongoing payments for the build-out of expansion capacity, including lease-up of the expanded capacity and existing inventory, in Vantage SDC (Note 3) and the acquisition of additional interest in DataBank from an existing investor in January 2022 (Note 10).
Carried Interest Allocation from Sponsored Investment Vehicles—With respect to investment vehicles sponsored by the Company for which Messrs. Ganzi and Jenkins are invested in their capacity as former owners of DBH, and not in their capacity as employees of the Company, any carried interest entitlement attributed to such investments by Messrs. Ganzi and Jenkins as general partner are not subject to continuing vesting provisions and do not represent compensatory arrangements to the Company. Such carried interest allocation to Messrs. Ganzi and Jenkins that are unrealized or realized but unpaid are included in noncontrolling interests on the balance sheet, in the amount of $71.8 million at March 31, 2023 and $70.4 million at December 31, 2022. Carried interest allocated is recorded as net income attributable to noncontrolling interests totaling $2.2 million and $0.8 million for the three months ended March 31, 2023 and 2022, respectively. Additionally, in connection with the DataBank recapitalization (Note 10) in the second half of 2022, Messrs. Ganzi and Jenkins received realized carried interest in the form of equity interest in vehicles that invest in DataBank, of which $86.1 million in aggregate is not deemed a compensatory arrangement. Such equity interest represent noncontrolling interests in DataBank. A portion of such equity interest was sold by Messrs. Ganzi and Jenkins in connection with the recapitalization transaction.
Investment in Managed Investment Vehicles—Subject to the Company's related party policies and procedures, senior management, investment professionals and certain other employees may invest on a discretionary basis in investment vehicles sponsored by the Company, either directly in the vehicle or indirectly through the general partner entity. These investments are generally not subject to management fees, but otherwise bear their proportionate share of other operating expenses of the investment vehicles. Such investments in consolidated investment vehicles and general partner entities totaled $18.3 million at March 31, 2023 and $17.7 million at December 31, 2022, reflected in redeemable noncontrolling interests and noncontrolling interests on the balance sheet. Their share of net income (loss) was $0.6 million for the three months ended March 31, 2023 and immaterial for the three months ended March 31, 2022. Such amounts are reflected in net income (loss) attributable to noncontrolling interests and exclude their share of carried interest allocation, which is reflected in compensation expense (reversal)—carried interest.
Aircraft—Pursuant to Mr. Ganzi’s employment agreement, as amended, the Company has agreed to reimburse Mr. Ganzi for certain variable operational costs of business travel on a chartered or private jet (including any aircraft that Mr. Ganzi may partially or fully own), provided that the Company will not reimburse the allocable share (based on the number of passengers) of variable operational costs for any passenger on such flight who is not traveling on Company business. Additionally, the Company has also agreed to reimburse Mr. Ganzi for certain defined fixed costs of any aircraft owned by
Mr. Ganzi. The fixed cost reimbursements will be made based on an allocable portion of an aircraft’s annual budgeted fixed cash operating costs, based on the number of hours the aircraft will be used for business purposes. At least once a year, the Company will reconcile the budgeted fixed operating costs with the actual fixed operating costs of the aircraft, and the Company or Mr. Ganzi, as applicable, will make a payment for any difference. The Company reimbursed Mr. Ganzi $1.8 million and $0.2 million for the three months ended March 31, 2023 and 2022, respectively.
Advancement of Expenses—Effective April 1, 2021, Thomas J. Barrack stepped down as Executive Chairman of the Company and in July 2021, resigned as a member of the Company's Board of Directors. In October 2021, the Company entered into an Agreement Regarding Advancement of Certain Expenses ("Advancement Agreement") with Mr. Barrack, which is generally consistent with the Company’s obligations and Mr. Barrack’s rights regarding advancement of expenses under the terms of a January 2017 Indemnification Agreement between the Company and Mr. Barrack, and under the Company’s Bylaws. The Advancement Agreement (a) memorializes the parties’ disagreement as to the Company’s obligations and Mr. Barrack’s rights under the earlier Indemnification Agreement and the Company's Bylaws, and (b) obligates Mr. Barrack to reimburse the Company for such advanced expenses under certain circumstances. Pursuant to the Advancement Agreement, the Company expensed $0.3 million and $5.6 million in the three months ended March 31, 2023 and 2022, respectively, and $33.5 million since inception of the arrangement in 2021.
17. Commitments and Contingencies
Litigation
The Company may be involved in litigation in the ordinary course of business. As of March 31, 2023, the Company was not involved in any legal proceedings that are expected to have a material adverse effect on the Company’s results of operations, financial position or liquidity.
18. Supplemental Disclosure of Cash Flow Information
| | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | |
| (In thousands) | | 2023 | | 2022 | | | |
| Supplemental Disclosure of Cash Flow Information | | | | | | | |
Cash paid for interest, net of amounts capitalized of $595 and $78 | | $ | 53,375 | | | $ | 70,065 | | | | |
| Cash received (paid) for income taxes | | 1,463 | | | (328) | | | | |
| Operating lease payments | | 15,246 | | | 15,650 | | | | |
| Finance lease payments | | 3,961 | | | 3,916 | | | | |
| Supplemental Disclosure of Cash Flows from Discontinued Operations | | | | | | | |
| Net cash provided by (used in) operating activities of discontinued operations | | $ | 95 | | | $ | (5,488) | | | | |
| Net cash provided by (used in) investing activities of discontinued operations | | 253,875 | | | (86,387) | | | | |
| Net cash provided by (used in) financing activities of discontinued operations | | (28,956) | | | (12,653) | | | | |
| Supplemental Disclosure of Noncash Investing and Financing Activities | | | | | | | |
| Dividends and distributions payable | | $ | 16,444 | | | $ | 15,759 | | | | |
| Improvements in operating real estate included in other liabilities | | 39,351 | | | 9,910 | | | | |
| Receivables from asset sales | | 2,282 | | | 14,009 | | | | |
| Operating lease right-of-use assets and lease liabilities established | | 11,693 | | | 1,498 | | | | |
| | | | | | | |
| | | | | | | |
| Contingent consideration for acquisition of InfraBridge | | 10,874 | | | — | | | | |
| | | | | | | |
| Preferred stock repurchase payable | | 52 | | | — | | | | |
| Exchange of notes into shares of Class A common stock | | — | | | 60,317 | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Seller Note received in sale of NRF Holdco equity | | — | | | 154,992 | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Redemption of OP Units for common stock | | — | | | 2 | | | | |
| | | | | | | |
Assets disposed in sale of equity of investment entities | | — | | | 3,420,783 | | | | |
Liabilities disposed in sale of equity of investment entities | | — | | | 3,144,700 | | | | |
| | | | | | | |
| | | | | | | |
Noncontrolling interests of investment entities sold or deconsolidated (1) | | — | | | 215,777 | | | | |
| | | | | | | |
| | | | | | | |
__________
(1) Represents deconsolidation of noncontrolling interests upon sale of the Company's equity interests in investment entities (Note 2).
19. Subsequent Events
Other than as disclosed elsewhere, no subsequent events have occurred that would require recognition in the consolidated financial statements or disclosure in the accompanying notes.
FORWARD-LOOKING STATEMENTS
Some of the statements contained in this Quarterly Report on Form 10-Q (this "Quarterly Report") constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and we intend such statements to be covered by the safe harbor provisions contained therein. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by the use of forward-looking terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” or “potential” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions.
The forward-looking statements contained in this Quarterly Report reflect our current views about future events and are subject to numerous known and unknown risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ significantly from those expressed in any forward-looking statement. The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:
•our ability to grow our business by raising capital for our funds and the companies that we manage;
•our position as an investor and investment manager of digital infrastructure and our ability to manage any related conflicts of interest;
•adverse changes in general economic and political conditions, including those resulting from supply chain difficulties, inflation, interest rate increases, a potential economic slowdown or a recession;
•our exposure to business risks in Europe, Asia and other foreign markets;
•our ability to obtain and maintain financing arrangements, including securitizations, on favorable or comparable terms or at all;
•the ability of our managed companies to attract and retain key customers and to provide reliable services without disruption;
•the reliance of our managed companies on third-party suppliers for power, network connectivity and certain other services;
•our ability to increase assets under management ("AUM") and expand our existing and new investment strategies;
•our ability to integrate and maintain consistent standards and controls, including our ability to manage our acquisitions in the digital infrastructure and investment management industries effectively;
•our business and investment strategy, including the ability of the businesses in which we have significant investments to execute their business strategies;
•performance of our investments relative to our expectations and the impact on our actual return on invested equity, as well as the cash provided by these investments and available for distribution;
•our ability to deploy capital into new investments consistent with our investment management strategies;
•the availability of, and competition for, attractive investment opportunities and the earnings profile of such new investments;
•our ability to achieve any of the anticipated benefits of certain joint ventures, including any ability for such ventures to create and/or distribute new investment products;
•our expected hold period for our assets and the impact of any changes in our expectations on the carrying value of such assets;
•the general volatility of the securities markets in which we participate;
•the market value of our assets;
•interest rate mismatches between our assets and any borrowings used to fund such assets;
•effects of hedging instruments on our assets;
•the impact of economic conditions on third parties on which we rely;
•the impact of any security incident or deficiency affecting our systems or network or the system and network of any of our managed companies or service providers;
•any litigation and contractual claims against us and our affiliates, including potential settlement and litigation of such claims;
•our levels of leverage;
•the impact of legislative, regulatory and competitive changes, including those related to privacy and data protection;
•the impact of our transition from a real estate investment trust ("REIT") to a taxable C corporation for tax purposes, and the related liability for corporate and other taxes;
•whether we will be able to utilize existing tax attributes to offset taxable income to the extent contemplated;
•our ability to maintain our exemption from registration as an investment company under the Investment Company Act of 1940, as amended (the “1940 Act”);
•changes in our board of directors or management team, and availability of qualified personnel;
•our ability to make or maintain distributions to our stockholders; and
•our understanding of and ability to successfully navigate the competitive landscape in which we and our managed companies operate.
While forward-looking statements reflect our good faith beliefs, assumptions and expectations, they are not guarantees of future performance. Furthermore, we disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes. Moreover, because we operate in a very competitive and rapidly changing environment, new risk factors are likely to emerge from time to time. We caution investors not to place undue reliance on these forward-looking statements and urge you to carefully review the disclosures we make concerning risks in Part I, Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 and in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report. Readers of this Quarterly Report should also read our other periodic filings made with the Securities and Exchange Commission (the "SEC") and other publicly filed documents for further discussion regarding such factors.