DigitalBridge Group, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context
DigitalBridge invests in and manages digital infrastructure, including data centers, towers, fiber and edge infrastructure. It reported approximately $50.3 billion of assets under management and $20.5 billion of fee-earning equity under management at quarter-end. The company completed its transition away from a REIT to a C corporation for 2022 and presents two reportable segments: Digital Investment Management and Digital Operating. Prior-period results reflect major non-digital businesses as discontinued operations.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $296.6 | $252.2 | $843.5 | $709.9 |
| Loss from continuing operations | $(94.6) | $(40.9) | $(384.2) | $(183.5) |
| Net loss attributable to common stockholders | $(63.3) | $41.0 | $(362.9) | $(365.0) |
| Basic and diluted EPS | $(0.39) | $0.33 | $(2.37) | $(3.04) |
Revenue increased 18% in the quarter and 19% year to date. Growth reflected higher property operating income, acquisitions and lease-up, and increased interest income. Q3 fee income fell to $41.3 million from $50.2 million, partly because Q3 2021 included a DBP II fee catch-up and digital liquid-strategy incentive fees. Nine-month fee income rose modestly to $128.4 million from $124.8 million.
For the nine months, operating cash flow was $194.8 million, versus $181.4 million. Investing activities used $1.929 billion, compared with $85.7 million provided in 2021; financing activities provided $741.8 million, versus $198.2 million. Cash and cash equivalents were $636.4 million at September 30, 2022, with restricted cash of $134.0 million; combined cash, cash equivalents and restricted cash were $770.4 million.
Total debt principal was $5.394 billion, compared with $4.923 billion at year-end 2021; debt carrying value, net of financing costs and other adjustments, was $5.326 billion. Weighted-average debt interest rate was 3.47%; $1.086 billion was variable-rate debt, at a 6.70% weighted-average rate. Management reported approximately $718 million of liquidity, including the full $300 million available under its revolving variable funding notes and a subsequent $22 million release of restricted distributions. The VFN was fully undrawn at quarter-end.
Preferred stock had an $827.8 million liquidation preference and a weighted-average dividend rate of 7.135%, with approximately $14.8 million of dividends per quarter. The company declared a $0.01-per-share common dividend, paid in October 2022. The filing does not present a conventional consolidated operating-margin measure; substantial depreciation, interest, compensation and investment-related items affect reported results.
Material changes and unusual items
- Digital Operating: Revenue increased with DataBank’s Houston data-center acquisition, Vantage SDC expansion and lease-up, and the June acquisition of Telenet’s Belgian tower business. The DataBank recapitalization reduced DigitalBridge’s ownership from 21.8% to 13.5% at the August closing and to 12.4% after the October closing; management reported $366 million of proceeds through October, including carried interest.
- Digital Investment Management: Q3 segment revenue declined year over year, while nine-month revenue increased. The company redeemed Wafra’s 31.5% interest in the business in May for cash, shares and contingent consideration, increasing its share of future fee-business cash flows and carried interest.
- Losses and valuation items: The company recorded a $133.2 million non-cash loss on the March exchange of exchangeable notes and a $59.6 million impairment of its BRSP investment in Q3. Other loss for the first nine months was $170.2 million, versus $31.7 million in 2021.
- Discontinued operations: Nine-month loss was $148.6 million, compared with $590.6 million in 2021. The 2022 loss included a $36.0 million impairment associated primarily with the February sale of the Wellness Infrastructure business.
- Non-GAAP measures: For Q3, management reported Distributable Earnings of $39.3 million, Adjusted EBITDA of $29.1 million and Digital IM Fee Related Earnings of $21.5 million attributable to the Operating Company. These are supplemental measures, not substitutes for GAAP results or operating cash flow.
Outlook, risks and contingencies
Management said it believes available cash, operating cash flow and financing sources are sufficient for near- and long-term needs, while continuing to assess capital-structure and liquidity options. It expected the AMP Capital infrastructure investment-management acquisition to close in Q4 2022, subject to conditions and approvals; consideration included approximately $314 million upfront and up to $125 million contingent on fundraising. This is an expectation in the filing, not a result reported for the quarter.
Key risks include interest-rate and foreign-exchange movements, asset and equity valuation volatility, the predictability and possible reversal of carried interest, fundraising and investment-transfer execution, leverage and refinancing, and the transition to C-corporation taxation. Management estimated that a 100-basis-point increase in rates would increase annualized interest expense by $8.8 million consolidated, or $1.2 million after noncontrolling interests, net of hedges. The company had no carried-interest clawback liability at quarter-end; it disclosed a possible $51.2 million clawback in the remote scenario that all relevant investments were deemed worthless.
In September 2022, the SEC’s Division of Enforcement requested information from the legacy investment adviser CCIA concerning alleged deficiencies identified in an examination, principally involving fiduciary duty and affiliate-transaction disclosures. The company said it would cooperate and could not predict the outcome; the investigation could materially adversely affect the business. The company reported no legal proceedings expected to have a material adverse effect and no material proceedings as of quarter-end.
Important facts for investors to verify
- Whether DataBank’s anticipated third recapitalization closing occurred, and the resulting ownership, proceeds and carried-interest amounts.
- Whether the AMP Capital acquisition closed, its final purchase price and contingent consideration, and the expected contribution to fee-earning assets and earnings.
- How fee income, recurring fee-related earnings and carried interest develop, including the potential for reversals or clawbacks.
- Debt maturity and refinancing plans, variable-rate exposure, covenant compliance and the availability of reported liquidity.
- The outcome and potential financial, regulatory and reputational effects of the SEC inquiry involving CCIA.
- Whether BRSP’s valuation changes lead to further impairment, and the company’s use of tax attributes following its C-corporation transition.