What changed in this filing

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

2022-05-09 compared with 2021-11-09 · 56 added, 46 removed, 7 unchanged (94% of the section changed)

Quantitative and Qualitative Disclosures About Market Risk.

Market risk includes the exposure to loss resulting from changes in interest rates, credit curve spreads, foreign currency exchange rates, commodity prices, equity prices and credit risk in our underlying investments.

We are subject to the credit risk of the tenant/operators of our properties.

We seek to undertake a rigorous credit evaluation of each tenant and operator prior to acquiring properties.

This analysis includes an extensive due diligence investigation of the tenant/operator’s business as well as an assessment of the strategic importance of the underlying real estate to the tenant/operator’s core business operations.

Where appropriate, we may seek to augment the tenant/operator’s commitment to the facility by structuring various credit enhancement mechanisms into their management assessments, where applicable, and underlying leases.

These mechanisms could include security deposit requirements or guarantees from entities we deem creditworthy.

In addition, our investment in loans receivable is subject to a high degree of credit risk through exposure to loss from loan defaults.

Default rates are subject to a wide variety of factors, including, but not limited to, borrower financial condition, property performance, property management, supply/demand factors, construction trends, consumer behavior, regional economics, interest rates, the strength of the U.S.

economy and other factors beyond our control.

All loans are subject to a certain probability of default.

We manage credit risk through the underwriting process, acquiring our investments at the appropriate discount to face value, if any, and establishing loss assumptions.

We also carefully monitor the performance of the loans, including those held through our joint venture investments, as well as external factors that may affect their value.

Interest Rate and Credit Curve Spread Risk

Interest rate risk relates to the risk that the future cash flow of a financial instrument will fluctuate because of changes in market interest rates.

Interest rate risk is highly sensitive to many factors, including governmental, monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control.

Credit curve spread risk is highly sensitive to the dynamics of the markets for loans and securities we hold.

Excessive supply of these assets combined with reduced demand will cause the market to require a higher yield.

This demand for higher yield will cause the market to use a higher spread over the U.S.

Treasury securities yield curve, or other benchmark interest rates, to value these assets.

Treasury securities are priced to a higher yield and/or the spread to U.S.

Treasuries used to price the assets increases, the price at which we could sell some of our fixed rate financial assets may decline.

Conversely, as U.S.

Treasury securities are priced to a lower yield and/or the spread to U.S.

Treasuries used to price the assets decreases, the value of our fixed rate financial assets may increase.

Fluctuations in LIBOR and/or any alternative reference rate may affect the amount of interest income we earn on our floating rate borrowings and interest expense we incur on borrowings indexed to such reference rate, including under credit facilities and investment-level financing.

We utilize a variety of financial instruments on some of our investments, including interest rate swaps, caps, floors and other interest rate exchange contracts, in order to limit the effects of fluctuations in interest rates on our operations.

The use of these types of derivatives to hedge interest-earning assets and/or interest-bearing liabilities carries certain risks, including the risk that losses on a hedge position will reduce the funds available for distribution and that such losses may exceed the amount invested in such instruments.

A hedge may not perform its intended purpose of offsetting losses of rising interest rates.

Moreover, with respect to certain of the instruments used as hedges, we are exposed to the risk that the counterparties with which we trade may cease making markets and quoting prices in such instruments, which may render us unable to enter into an offsetting transaction with respect to an open position.

If we anticipate that the income from any such hedging transaction will not be qualifying income for REIT income purposes, we may conduct all or part of our hedging activities through a to-be-formed corporate subsidiary that is fully subject to federal corporate income taxation.

Our profitability may be adversely affected during any period as a result of changing interest rates.

We have financing arrangements with various financial institutions bearing variable rate interest indexed primarily to 1 and 3-month LIBOR and 1 and 3-month Euribor.

We limit our exposure to interest rate increases for our debt primarily through the use of interest rate caps.

The interest rate sensitivity table below illustrates the hypothetical impact of changes in the index rates in 1% increments on our interest expense in a one year period, assuming no changes in our debt principal as it stood at September 30, 2021, and taking into account the effects of interest rate caps and contractual floors on indices.

The maximum decrease in the interest rates is assumed to be the actual applicable indices at September 30, 2021, all of which were under 1% at September 30, 2021.

($ in thousands) +2.00% +1.00% Maximum Decrease in Applicable Index

Increase (decrease) in interest expense $ 75,703 $ 38,754 $ (2,550)

Amount attributable to noncontrolling interests in investment entities 33,581 17,403 (965)

Amount attributable to Operating Company $ 42,122 $ 21,351 $ (1,585)

Market risk represents the risk of financial loss from adverse movement in market prices.

The primary sources of market risk are interest rates, foreign currency exchange rates, commodity prices, and equity prices.

Our business is exposed primarily to interest rate risk on variable rate interest bearing instruments, foreign exchange risk on non U.S.

digital operating business and foreign denominated investments, the effect of market risk on our fee income and net carried interest allocation, equity price risk on marketable equity securities, and commodity price risk in connection with our digital operating business.

The following discussion excludes the effect of market risk on assets and corresponding liabilities that were held for disposition at March 31, 2022.

Interest Rate Risk

Instruments bearing variable interest rates include our debt obligations and loans receivable warehoused on the balance sheet for future sponsored investment vehicles, all of which are subject to interest rate fluctuations that will affect future cash flows, specifically interest expense and interest income, respectively.

Variable Rate Debt (Corporate and Digital Operating) —At March 31, 2022, all of our corporate debt have fixed interest rates.

There were no amounts outstanding on our corporate VFN, which is a variable rate revolver.

Similarly, investment level financing in our digital operating business are primarily fixed rate securitized notes issued by our subsidiaries, Vantage SDC and DataBank, with $833.8 million or 19% composed of variable rate debt.

Our variable rate debt are indexed to either 1-month or 3-month LIBOR.

We may utilize derivative instruments, generally interest rate caps, as economic hedges to limit the exposure to interest rate increases on our variable rate debt.

There were no interest rate derivatives utilized at March 31, 2022.

As our digital operating subsidiaries are substantially owned by third party investors, the resulting increase in interest expense from higher interest rates will be attributed predominantly to noncontrolling interests, with a minimal share of that effect attributed to our shareholders.

Based upon the outstanding principal on our variable rate debt at March 31, 2022, a hypothetical 100 basis point increase in interest rates would increase annualized interest expense by $8.3 million on a consolidated basis or $1.7 million after attribution to noncontrolling interests.

Variable Rate Loans Receivable and Corresponding Debt —We hold variable rate loans receivable totaling $346.7 million at March 31, 2022, all of which are warehoused on the balance sheet for future sponsored investment vehicles.

Our variable rate loans receivable are indexed primarily to LIBOR or SOFR, and a majority of these loans are partially funded through LIBOR-based credit facilities with $130.5 million drawn at March 31, 2022, which reduces our net exposure to interest rate fluctuations.

Additionally, our variable rate loans generally have contractual index floors, which establishes minimum index rates.

At March 31, 2022, the index rates were less than 1% and were at or marginally above the index floor for these loans.

Accordingly, a decrease in interest rates would not materially affect the amount of interest income earned on our variable rate loans.

Foreign Currency Risk

We have foreign currency rate exposures related to our foreign currency-denominated investments, in EUR and in GBP, held predominantly by our foreign subsidiaries and to a lesser extent, by U.S.

As of March 31, 2022, we have limited direct foreign currency exposure from our foreign operations in the digital operating business and foreign currency denominated investments warehoused on the balance sheet for future sponsored vehicles.

Changes in foreign currency rates can adversely affect earnings and the value of our foreign currency denominated investments, including investments in our foreign subsidiaries.

We have exposure to foreign currency risk from the operations of our foreign subsidiaries to the extent the U.S.

dollar is not the functional currency.

This applies to our subsidiaries in U.K.

and France, which collectively operate six colocation data centers.

For the substantial majority of our subsidiaries in Canada that operate our hyperscale data centers, the U.S dollar is the functional currency.

The resulting effect from translation of the balance sheets and statements of operations of these subsidiaries are recorded as a component of accumulated other comprehensive income (loss) in stockholders' equity, and reclassified into earnings only upon a sale or a complete or substantially complete liquidation of the foreign subsidiary.

These subsidiaries with non U.S.

dollar functional currencies make up a small percentage of our digital operating business.

Accordingly, our exposure to foreign currency risk from the operations of our foreign subsidiaries is limited as of March 31, 2022.

Our foreign currency denominated investments, which are temporarily warehoused on the balance sheet, are held by our U.S.

subsidiaries.

Changes in foreign currency rates can adversely affect the fair values and earnings of our non-U.S.

We generally mitigate this foreign currency risk by utilizing currency instruments to hedge our net investments in our foreign subsidiaries, using primarily foreign currency put options, forward contracts and costless collars.

The maturity dates of these instruments approximate the projected dates of related cash flows for specific investments.

We expect our foreign currency exposure to be reduced significantly in the near future as we are currently pursuing a monetization of the remaining investments in our OED portfolio in the Other segment, which holds a substantial portion of our foreign currency denominated investments.

We generally mitigate foreign currency risk on our foreign currency denominated investments by utilizing currency instruments as economic hedges, such as foreign currency put options, forward contracts and costless collars.

The maturity date of these instruments approximate the projected dates of related cash flows from the respective investments.

At March 31, 2022, our foreign currency exposure consisted primarily of a GBP investment (£35 million) and a purchase commitment in EUR (€458 million equity commitment) for which we have entered into foreign exchange forward contracts to mitigate our exposure, with the exception of a bridge financing in AUD (A$30 million) that was not economically hedged due to its short term nature.

Market Risk Effect on Fee Income and Net Carried Interest Allocation

Management Fees —To the extent management fees are based upon fair value of the underlying investments of our managed investment vehicles, an increase or decrease in fair value will directly affect our management fee income.

Generally, our management fee income is calculated based upon investors' committed capital during the commitment period of the vehicle, and thereafter, contributed or invested capital during the investing and liquidating periods.

To a lesser extent, management fees are based upon the net asset value of vehicles in our digital liquid securities strategy, measured at fair value.

At March 31, 2022, our digital liquid securities strategy make up 5% of our $18.8 billion FEEUM.

Accordingly, most of our management fee income will not be directly affected by changes in investment fair values.

Incentive Fees and Carried Interest —Incentive fees and carried interest, net of management allocations, are earned based upon the financial performance of a vehicle above a specified return threshold, which is largely driven by appreciation in value of underlying investments.

Carried interest is subject to reversal until such time it is realized, which generally occurs upon disposition of all underlying investments of an investment vehicle, or in part with each disposition.

The extent of the effect of fair value changes to the amount of incentive fees and carried interest earned will depend upon the cumulative performance of an investment vehicle relative to its return threshold, the performance measurement period used to calculate incentives and carried interest, and the stage of the vehicle's lifecycle.

Investment fair values in turn could 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.

Therefore, fair value changes are unpredictable and the effect on incentive fee and carried interest varies across different investment vehicles.

Equity Price Risk

At March 31, 2022, we have $197.7 million of investments in marketable equity securities, held largely by our sponsored liquid funds that are consolidated.

Realized and unrealized gains and losses from marketable equity securities are recorded in other gain (loss) on the consolidated statement of operations.

Market prices for publicly traded equity securities may be volatile and fluctuate due to a myriad of factors, including but not limited to, financial performance of the investee, industry conditions, economic and political environment, level of trades in a security, and general sentiments in the equity markets.

Therefore the level of volatility and price fluctuations are unpredictable.

Our funds constantly rebalance their investment portfolio to take advantage of market opportunities and to manage risk.

Additionally, one of our funds employ a long/short equity strategy, taking long positions that serve as collateral for short positions, which in combination, reduces its market risk exposure.

The effect of equity price decreases to earnings attributable to our shareholders is further reduced as our consolidated liquid funds are substantially owned by third party capital or noncontrolling interests.

Commodity Price Risk

1 unchanged sentence

We closely monitor the cost of electricity at all of our locations and may enter into power utility contracts to purchase electricity at fixed prices in certain locations in the U.S., with such contracts generally representing less than our forecasted usage.

Our building of new data centers and

expansion of existing data centers will also subject us to commodity price risk with respect to building materials such as steel and copper.

Our building of new data centers and expansion of existing data centers will also subject us to commodity price risk with respect to building materials such as

steel and copper.

Additionally, the lead time to procure data center equipment is substantial and procurement delays could increase construction cost and delay revenue generation.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 3. Quantitative and Qualitative Disclosures About Market Risk