DigitalBridge Group, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. DigitalBridge is a digital infrastructure investor and manager, with Digital Investment Management and Digital Operating as its reportable segments. The company reported $47.9 billion of assets under management (AUM) and $19.0 billion of fee-earning equity under management (FEEUM) at quarter-end.
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $289.4 million | $237.2 million | $546.9 million | $457.8 million |
| Income (loss) from continuing operations | $(53.3) million | $3.8 million | $(289.6) million | $(142.5) million |
| Net loss attributable to common stockholders | $(37.3) million | $(141.3) million | $(299.6) million | $(406.1) million |
| Basic and diluted loss per share | $(0.06) | $(0.29) | $(0.51) | $(0.85) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $67.3 million | $104.9 million |
- For the six months, investing activities used $2.15 billion and financing activities provided $760.3 million. Cash, cash equivalents and restricted cash totaled $445.8 million at June 30, versus $1.77 billion at year-end 2021; cash and cash equivalents alone were $337.2 million.
- Balance-sheet debt was $5.54 billion net of financing costs and discounts; outstanding principal was $5.61 billion. Weighted-average interest rate was 3.16% on investment-level secured debt and 5.21% on convertible and exchangeable senior notes. Of total principal, $1.30 billion was variable-rate debt.
- Reported liquidity was $260 million, comprising corporate-level cash and $230 million available under the variable funding note (VFN). The filing states the company was in compliance with the VFN financial covenants.
- At June 30, real estate, net was $6.05 billion and total assets were $11.88 billion. Total liabilities were $7.21 billion. Preferred stock liquidation preference was $883.5 million, with quarterly dividends of approximately $15.8 million.
Material changes versus prior periods
- Revenue rose 22% year over year in Q2 and 19% for the first half. Property operating income and interest income increased, chiefly reflecting acquisitions and loan activity; first-half fee income also grew, while Q2 fee income was slightly lower due to the absence of prior-year incentive fees.
- Q2 continuing operations shifted from $3.8 million income to a $53.3 million loss. For the first half, the continuing-operations loss widened by $147.1 million. Drivers included higher operating and financing costs, fair-value losses, and a $133.2 million noncash loss on the March exchange of exchangeable notes. The 2021 comparison included much larger tax benefits.
- Digital IM reported Q2 segment income of $68.0 million, including significant carried interest from a portfolio company under contract for sale. Digital Operating reported an $85.4 million Q2 loss, reflecting depreciation, amortization, interest and operating costs. Carried interest and related compensation are unrealized and can reverse.
- AUM increased from $45.3 billion at December 31, 2021 to $47.9 billion; FEEUM increased from $18.3 billion to $19.0 billion. Real estate, net increased from $4.97 billion to $6.05 billion, in part from acquisitions.
- DigitalBridge completed its transition away from substantially all non-digital businesses: the Wellness Infrastructure business was sold in February 2022, following earlier hotel and other non-digital dispositions. These operations are presented as discontinued operations, complicating comparisons with prior periods.
Outlook, management commentary and risks
- The company stopped maintaining REIT status for 2022 and will generally be taxed as a C corporation. Management cited added strategic flexibility and does not expect significant near-term incremental tax expense given tax attributes; the deferred tax asset remains subject to a full valuation allowance.
- Management expected the AMP Capital infrastructure investment-management acquisition to close in Q4 2022, subject to customary conditions and regulatory approvals. The stated purchase consideration was approximately $327 million upfront and up to $128 million contingent; management expected the deal to add $5.5 billion of FEEUM and be immediately accretive to fee-related earnings. Closing and benefits were not assured.
- A DataBank transaction was expected to generate approximately $230 million of proceeds and close in Q3 2022, subject to conditions. The company also expected further DataBank investor transactions to monetize and dilute its stake. These were expectations, not completed transactions as of the report.
- The company redeemed Wafra’s 31.5% Digital IM interest in May for $388.5 million cash, 57.7 million shares valued at $348.8 million, and contingent consideration of up to $125 million. Management stated that future Digital IM fee-business cash flows would accrue fully to DigitalBridge after the redemption, subject to carried-interest and compensation arrangements.
- Management expected to reinstate quarterly common dividends beginning in Q3 2022, subject to board approval. In July, the board authorized up to $200 million of common and/or preferred stock repurchases, targeted primarily at preferred stock, and the company announced a planned one-for-four reverse stock split.
- Key exposures include rising rates and refinancing needs, valuation and reversal risk in unrealized carried interest and investments, fundraising and asset-sale execution, foreign-exchange and market-price movements, and acquisition integration and regulatory approvals. A hypothetical 100-basis-point rate increase was estimated to raise annualized interest expense by $9.0 million on a consolidated basis, or $2.4 million after noncontrolling interests, excluding credit-facility debt financing warehoused loans.
- The company reported no material legal proceedings and no material changes to previously disclosed risk factors. Management concluded disclosure controls were effective at June 30, 2022.
Most important facts for investors to verify
- Whether AMP Capital and the DataBank transaction closed on the expected terms and dates, and whether projected FEEUM growth and proceeds were realized.
- How much of the reported Q2 carried interest converts to realized cash, and the potential for reversals or associated compensation costs.
- Cash and liquidity after acquisitions, Wafra redemption payments, debt service and any planned repurchases or dividends.
- Debt maturity and rate exposure, covenant headroom, and the effect of additional rate increases on cash flow.
- The effect of the C-corporation transition on taxes and the usability of tax-loss and capital-loss carryforwards.
- Common-dividend reinstatement, the repurchase program’s actual use, and the impact of the announced reverse split.