Brookfield Oaktree Holdings, LLC — 2019 Q3 filing summary
Filing identity: The supplied filing is Oaktree Capital Group, LLC’s Form 10-Q for the quarter ended September 30, 2019, not a filing under the company name in the request. It covers the three and nine months ended September 30, 2019; financial statements are unaudited.
Business context and reporting period
Oaktree manages alternative-investment funds and accounts across credit, private equity, real assets and listed equities. At quarter-end it reported $121.9 billion of AUM and $102.1 billion of management fee-generating AUM. GAAP results consolidate certain investment funds and CLOs, so consolidated assets, liabilities and cash flows include substantial third-party fund activity and are not directly equivalent to Oaktree’s own resources.
Brookfield completed its acquisition of 61.2% of Oaktree’s business on September 30, 2019. Oaktree Class A units were delisted at closing. OCGH retained the remaining 38.8%. A related restructuring took effect October 1, 2019 and changed which operating entities Oaktree consolidates going forward.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| GAAP revenue | $205.2m | $241.2m | $785.1m | $791.8m |
| GAAP net income (loss) | $(20.9)m | $143.1m | $285.0m | $346.2m |
| Net income (loss) attributable to Class A unitholders | $(16.6)m | $52.8m | $73.1m | $136.6m |
| GAAP earnings (loss) per Class A unit | $(0.22) | $0.74 | $0.99 | $1.95 |
| Distributable earnings (non-GAAP) | $86.2m | $143.9m | $458.5m | $452.2m |
| Distributable earnings per Class A unit (non-GAAP) | $0.57 | $0.88 | $2.88 | $2.74 |
| Fee-related earnings (non-GAAP) | $57.4m | $56.3m | $141.3m | $165.6m |
| Fee-related earnings per Class A unit (non-GAAP) | $0.35 | $0.34 | $0.86 | $0.99 |
For Q3, management fees rose 2.6% to $179.8 million, while incentive income fell 61.5% to $25.4 million. Nine-month management fees declined 2.6% to $524.8 million and incentive income increased 2.8% to $260.3 million. No standalone operating margin is provided as a key measure; consolidated expenses exceeded revenue in Q3, with results also affected by investment marks and consolidated-fund activity.
Cash flow and liquidity: Consolidated operating activities used $2.80 billion in the first nine months, chiefly reflecting net purchases of securities by consolidated funds; this is not a measure of Oaktree-only operating cash generation. Consolidated investing activities provided $635.4 million and financing activities provided $2.42 billion. At September 30, Oaktree and operating subsidiaries had $356.4 million cash and $24.0 million in Treasury and other securities, or $380.5 million combined; total reported cash of $972.0 million also included $615.6 million held by consolidated funds.
Debt: Oaktree’s own debt obligations were $746.3 million, with $750 million principal outstanding, including a $150 million variable-rate term loan. No borrowings were outstanding on its $500 million revolving facility. Consolidated funds also reported $971.9 million of credit-facility borrowings and $5.55 billion of CLO debt; these fund obligations are nonrecourse to Oaktree. The company reported compliance with debt covenants.
Material changes versus comparable periods
- Q3 Class A attributable results moved from $52.8 million income to a $16.6 million loss; management attributed the decline primarily to Brookfield transaction costs and weaker consolidated-fund investment marks.
- Q3 general and administrative expense rose to $86.9 million from $38.1 million, primarily due to transaction costs. The nine-month increase was also principally merger-related.
- Nine-month distributable earnings increased modestly, but fee-related earnings fell 14.7%, reflecting higher compensation and lower management fees. Distributable earnings exclude certain items, including non-cash equity compensation and Brookfield transaction costs, and are non-GAAP.
- AUM was up 2.5% from year-end 2018, supported by closed-end fund commitments, DoubleLine growth and market-value gains, partly offset by distributions and open-end fund net outflows. Management fee-generating AUM rose 4.0% over that period.
- Consolidated CLO debt increased from $4.13 billion at year-end 2018 to $5.55 billion at September 30, 2019, while the related consolidated investment balances also increased.
Outlook, risks, contingencies and unusual items
- No numerical earnings or revenue guidance is provided. Management stated that existing cash, operations and the revolving facility should be sufficient to meet working-capital needs for at least the next 12 months.
- Management highlighted market volatility, changes in investment values, fundraising and AUM, timing of incentive income, fund distributions, competition, and merger-related disruption, personnel retention, financing availability and business relationships as risks.
- Illustrative market sensitivities: a 10% decline in consolidated-fund investment values was estimated to reduce Class A attributable net income by about $198.1 million; a 10% decline in fund investment values was estimated to reduce quarterly management fees by about $6.3 million. These are estimates, not forecasts.
- Unrecognized fund-level accrued incentives were $1.35 billion gross, or $642.2 million net of associated compensation expense; realization and timing are uncertain. The filing notes that these amounts are not recognized as company revenue until recognition criteria are met.
- The merger increased deferred tax assets by $212.0 million. The company also disclosed estimated future payments of $178.0 million under the pre-existing tax receivable agreement, subject to sufficient taxable income and other assumptions.
- Oaktree had $365.1 million of undrawn commitments to funds and a contingent-consideration obligation with a fair value of $4.5 million. Management reported no pending legal or regulatory matter expected to materially affect the financial statements.
- The filing reports a subsequent $0.03-per-unit Class A distribution payable November 12, 2019, and preferred-unit distributions payable December 16, 2019. It also reports a $3.13-per-Class A-unit distribution declared during Q3; interpret this in the context of the merger and unit conversion.
Important facts for investors to verify
- Confirm the correct registrant and post-merger reporting entity, including the October 1 restructuring’s effect on consolidation and comparability.
- Review the reconciliation of GAAP earnings to distributable earnings and fee-related earnings, especially merger-related adjustments and incentive income.
- Distinguish Oaktree’s $380.5 million of cash and securities from consolidated-fund cash and from nonrecourse fund and CLO debt.
- Assess the quality and timing of incentive income and fund-level accrued incentives, including the portion dependent on future performance and realizations.
- Check the merger-related tax basis increase, future tax receivable payments, exchange rights and any changes to cash flows or ownership economics.
- Verify distribution amounts and eligibility after the Class A unit delisting, and assess fund outflows, commitments, fee-generating AUM and debt covenant headroom.