Digitalbridge Group, Inc. annual report, FY2021

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DigitalBridge Group, Inc. — 2021 Form 10-K

Reporting period: Fiscal year ended December 31, 2021; filed February 28, 2022. This is an annual report, not a standalone fourth-quarter report. The company completed its transition from Colony Capital to DigitalBridge, focusing on digital infrastructure. Its two reportable segments are Digital Investment Management and Digital Operating.

Business context and financial performance

  • Scale: Year-end assets under management (AUM) were $45.3 billion, including $43.6 billion of third-party AUM. Fee-earning equity under management (FEEUM) was $18.3 billion, up 43% from $12.8 billion.
  • Revenue: Continuing-operations revenue was $965.8 million, up 132% from $416.4 million in 2020. Fee income rose to $180.8 million from $83.4 million; property operating income rose to $762.8 million from $312.9 million. Growth reflects acquired data-center portfolios and a full year of operations, as well as fund-raising.
  • Profit and loss: The company reported a $216.8 million loss from continuing operations, versus a $591.1 million loss in 2020. Net loss attributable to DigitalBridge was $310.1 million; net loss attributable to common stockholders was $385.7 million, or $0.78 per share, compared with $2.75 billion, or $5.81 per share, in 2020. Discontinued operations contributed a $600.1 million loss in 2021.
  • Segment results: Digital IM reported $191.7 million revenue and $90.9 million income from continuing operations; Digital Operating reported $763.2 million revenue and a $230.8 million loss. Digital Operating’s $310.8 million EBITDAre was up from $134.6 million. EBITDAre is a non-GAAP measure and does not include financing costs or maintenance capital needs.
  • Cash flow: Consolidated operating cash flow was $248.2 million, compared with $89.9 million in 2020. Investing activities provided $146.6 million, versus $1.9 billion used in 2020; financing activities provided $411.3 million, versus $1.4 billion in 2020. Operating cash flow included a $102.3 million one-time BRSP management-termination payment.
  • Liquidity: Cash and cash equivalents were $1.602 billion at year-end, with another $99.1 million of restricted cash. Management cited $1.1 billion of liquidity, comprising corporate cash and the full $200 million availability under the revolving variable funding notes; this is a separate measure from consolidated cash.
  • Debt: Year-end debt principal, excluding debt classified as held for disposition, was $4.923 billion; carrying value net of discounts and financing costs was $4.860 billion. This included $4.284 billion of non-recourse investment-level secured debt, $300 million of secured fund-fee notes, and $338.7 million of convertible/exchangeable notes. A further $2.962 billion of debt was classified as related to assets held for disposition. The data-center portfolio had $4.22 billion of debt at a 2.88% weighted-average rate.
  • Common and preferred dividends: Common dividends remained suspended from the second quarter of 2020; management said it would reassess policy as conditions improve. Preferred stock outstanding was $883.5 million, with a 7.135% weighted-average dividend rate and approximately $15.8 million of quarterly dividends.

Material changes versus 2020

  • Revenue increased substantially as Digital IM expanded and Digital Operating included a full year of Vantage and zColo operations, plus acquisitions and capacity expansion.
  • The continuing-operations loss narrowed, aided by higher management fees and unrealized carried interest, improved equity-method results, and a $66.8 million DataBank deferred-tax benefit. Digital Operating remained loss-making under GAAP, in part due to depreciation and amortization.
  • Digital IM’s DBP II fund closed in December 2021 with $8.3 billion of commitments, twice the size of DBP I. FEEUM growth was partly offset by DBP I’s fee base shifting from committed to contributed capital.
  • The company reduced higher-cost corporate indebtedness by $343 million, including $150 million of preferred-stock redemptions. In July, it replaced its corporate credit facility with a securitized financing facility, extending revolving availability to 2026.
  • Common shares increased following the exchange of $161.3 million of notes for 73.4 million Class A shares in the fourth quarter.
  • Net loss attributable to common stockholders improved from 2020’s unusually large loss, which included substantial impairments, particularly in discontinued operations and BRSP.

Outlook, risks and unusual items

  • Outlook: The filing provides no quantified earnings or revenue guidance. Management said it believed liquidity was sufficient for short- and long-term requirements, while continuing to evaluate capital-structure and liquidity alternatives.
  • REIT status: DigitalBridge said it would continue evaluating whether to maintain REIT status for 2022 and later years. Leaving REIT status could increase corporate taxes and affect distributions; remaining qualified depends on complex asset, income, ownership and distribution tests.
  • Portfolio transition and impairments: The company sold its hotel business and most OED investments and Other IM in 2021, and completed the Wellness Infrastructure sale in February 2022. It recorded $625.3 million of aggregate write-downs tied to the non-digital dispositions; $265.4 million was attributable to the Operating Partnership. The Wellness sale included $126 million cash and a $155 million five-year seller note, plus approximately $35 million of pre-closing cash distributions. The buyer assumed substantial investment-level debt.
  • Fund and operating risks: Fee income depends on raising and retaining third-party capital; incentive fees and carried interest are variable and unrealized carried interest can reverse. Data-center operations face customer concentration, power and connectivity dependence, lease-renewal, technology obsolescence, cybersecurity and regulatory risks. One customer generated 16.7% of continuing-operations revenue, or 7.8% net of noncontrolling interests.
  • Financing and market risks: Risks include refinancing and debt-service capacity, covenant restrictions, rising rates, benchmark-rate transition, foreign exchange, and the possibility that asset values or fund-raising deteriorate. The company also cited inflation, economic uncertainty, COVID-19 effects, competition, and limited investment liquidity.
  • Other notable items: The BRSP management agreement termination generated $102.3 million cash. The 2021 note exchange generated $25.1 million of debt-conversion expense. A January 2022 agreement to acquire four Houston data centers for $670 million was expected to close in March, subject to conditions and approval; DigitalBridge’s expected share was about $91 million.
  • Contingencies and controls: The company reported no legal proceedings expected to materially adversely affect results, financial position or liquidity. Management and the auditor concluded internal control over financial reporting was effective; the auditor issued an unqualified opinion on the financial statements.

Important facts for investors to verify

  • Reconcile the $1.1 billion management liquidity measure with consolidated cash, restricted cash, noncontrolling interests and cash held in subsidiaries or funds.
  • Track the REIT-status decision, related tax consequences, and whether the company can meet applicable REIT tests after its asset sales and investment-management growth.
  • Assess the quality and timing of carried-interest income: $112 million of unrealized carried interest was included in sponsored-fund equity-method investments and remains subject to reversal.
  • Review debt maturities, securitization covenants and the treatment of debt associated with disposed businesses; distinguish recourse corporate obligations from non-recourse portfolio debt.
  • Monitor common-dividend reinstatement prospects and the continuing preferred-dividend burden.
  • Confirm the closing, financing and realized economics of the Houston acquisition and the value and collectability of the five-year seller note from the Wellness Infrastructure sale.
  • Consider the effect of data-center customer concentration, 80% leased portfolio utilization, power costs and continuing capital requirements on operating cash flow.