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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2024-02-23 compared with 2023-02-27 · 29 added, 42 removed, 12 unchanged (86% of the section changed)

1 unchanged sentence

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 rates, commodity prices, and equity prices.

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

business in the Operating segment and foreign denominated warehoused 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 the Operating segment.

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

Interest Rate Risk

Instruments bearing variable interest rates include our debt obligations, which are subject to interest rate fluctuations that will affect future cash flows, specifically interest expense.

Variable Rate Debt —Our corporate debt exposure to variable interest rates is limited to our VFN revolver, which had no outstanding amounts as of December 31, 2022.

Our investment level financing, which totals $4.6 billion, consists primarily of fixed rate securitized notes issued by subsidiaries in our Operating segment, Vantage SDC and DataBank.

Of this amount, $1 billion or 21% is composed of variable rate debt at December 31, 2022.

Our investment level variable rate debt is indexed to either 1-month LIBOR or Term SOFR.

As the subsidiaries in our Operating segment 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 DBRG.

Based upon the outstanding principal on our investment level variable rate debt at December 31, 2022, a hypothetical 100 basis point increase in interest rates would increase annualized interest expense by $9.9 million on a consolidated basis or $1.1 million after attribution to noncontrolling interests.

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

Our business is exposed primarily to the effect of market risk on our fee revenue and net carried interest allocation, foreign currency risk on non-U.S.

investment management business and foreign denominated warehoused investments (if any), interest rate risk on our VFN and other variable rate debt financing warehoused investments (if any), and, equity price risk on marketable equity securities of consolidated investment vehicles.

Market Risk Effect on Fee Revenue 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 revenue.

Generally, our management fee revenue 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, or invested capital from inception for Credit and co-investment vehicles.

To a lesser extent, management fees are based upon the NAV of vehicles in our Liquid Strategies or GAV for certain InfraBridge vehicles, measured at fair value.

At December 31, 2023, vehicles with NAV or GAV fee basis make up 5% of our $33 billion FEEUM.

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

Principal Investment Income (Loss) —This is our share of income (loss) from equity interests in our sponsored funds, which in turn is largely driven by fair value changes in the underlying investments of the funds.

A hypothetical 10% decline in the fair value of fund investments at December 31, 2023 would decrease the OP's share of principal investment income by approximately $110 million.

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.

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.

Carried interest is subject to reversal until such time it is distributed.

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.

A hypothetical 10% decline in the fair value of fund investments at December 31, 2023 would decrease carried interest by approximately $74 million, representing OP share of carried interest net of allocations to employees, former employees and Wafra.

In the same scenario, generally no incentive fees would be realized.

Foreign Currency Risk

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

As of December 31, 2023, we have limited direct foreign currency exposure from our foreign operations 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 these subsidiaries do not transact in U.S.

This applies to our foreign subsidiaries that operate six colocation data centers in the U.K.

For the substantial majority of our subsidiaries in Canada that operate our hyperscale data centers, the U.S dollar is largely used as the transactional currency, in which case, there is generally very limited foreign currency exposure.

The remaining foreign subsidiaries in our colocation data center business that do not transact in U.S.

dollars make up only a small percentage of our overall Operating segment, which in turn is substantially owned by third party investors.

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

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

subsidiaries.

At December 31, 2022 , our foreign currency exposure is limited to only one AUD equity investment (A$35 million).

Market Risk Effect on Fee Income and Net Carried Interest Allocation

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 Liquid Strategies, measured at fair value.

At December 31, 2022, our Liquid Strategies make up 5.0% of our $22 billion FEEUM.

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

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.

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.

Generally, this is limited to our recently acquired InfraBridge advisor subsidiary which receives fee revenue predominantly in U.S.

dollars but incur operating costs in Pound Sterling ("GBP").

We may have foreign currency denominated investments held by our U.S.

subsidiaries that are temporarily warehoused on the balance sheet.

At December 31, 2023, our foreign currency exposure is limited to only one AUD equity investment (cost of investment at AUD 35 million).

Based upon book value of the investment (which is lower than cost), a hypothetical 100 basis point decline in the AUD/USD rate at December 31, 2023 would have an immaterial effect on earnings.

Interest Rate Risk

Instruments bearing variable interest rates include debt obligations, which are subject to interest rate fluctuations that will affect future cash flows, specifically interest expense.

Our corporate debt exposure to variable interest rates is limited to our VFN revolver, which had no outstanding amount as of December 31, 2023.

Equity Price Risk

5 unchanged sentences

Additionally, one of our funds employs 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, which represent noncontrolling interests.

Commodity Price Risk

Certain operating costs in our data center portfolio are subject to price fluctuations caused by volatility of underlying commodity prices, primarily electricity used in our data center operations.

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.

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

Financial Statements.

The financial statements required by this item appear in Item 15.

"Exhibits and Financial Statement Schedules" of this Annual Report.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

The effect of equity price decreases to earnings attributable to our stockholders is further reduced as our consolidated liquid funds are largely owned by third party capital, which represent noncontrolling interests.

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-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk