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 | | | | | | | |
|