Business context and reporting period
Oaktree Capital Group, LLC’s unaudited Form 10-Q covers the quarter and nine months ended September 30, 2018. Oaktree is an alternative investment manager focused on credit, private equity, real assets and listed equities. The filing identifies the registrant as Oaktree Capital Group, LLC, not Brookfield Oaktree Holdings, LLC.
Oaktree reported $123.5 billion of AUM at quarter-end, including $100.7 billion of management fee-generating AUM and $33.6 billion of incentive-creating AUM. Consolidated results include funds in which Oaktree has minority economic interests; fund assets and debt should not be confused with the company’s own resources and obligations.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $241.2 million | $235.0 million | $791.8 million | $1,158.7 million |
| Net income | $143.1 million | $134.4 million | $346.2 million | $591.7 million |
| Net income attributable to Class A unitholders | $52.8 million | $45.8 million | $136.6 million | $218.1 million |
| GAAP net income per Class A unit | $0.74 | $0.71 | $1.95 | $3.41 |
| Adjusted net income per Class A unit (non-GAAP) | $0.78 | $0.67 | $2.20 | $3.26 |
| Distributable earnings per Class A unit (non-GAAP) | $0.88 | $0.74 | $2.74 | $3.28 |
| Fee-related earnings per Class A unit (non-GAAP) | $0.34 | $0.42 | $0.99 | $1.13 |
For Q3, management fees were $175.2 million, down 3.4%, while incentive income rose 22.9% to $66.0 million. For the first nine months, management fees were $538.7 million, down 0.7%, and incentive income fell 58.9% to $253.1 million. Nine-month GAAP investment income was $149.7 million versus $150.6 million.
At September 30, Oaktree and its operating subsidiaries held $543.2 million of cash and $469.8 million of U.S. Treasury and other securities, or approximately $1.0 billion combined. Direct debt obligations were $745.8 million, including a $150 million variable-rate term loan; the $500 million revolver was undrawn. The company reported compliance with debt covenants. Consolidated cash was $856.1 million, including $312.8 million held by consolidated funds. Nine-month consolidated cash flow was negative $138.6 million from operations, negative $263.5 million from investing, and positive $309.4 million from financing; these flows include fund activity.
Material changes versus comparable periods
- Q3 Class A net income rose 15.3%, supported by higher incentive income and other income. Q3 fee-related earnings per Class A unit declined to $0.34 from $0.42, reflecting lower management fees and higher compensation and general and administrative costs.
- Nine-month Class A net income fell 37.4%; adjusted net income declined 32.2% and distributable earnings declined 19.6%. Oaktree attributed the weakness mainly to lower incentive income, including the prior-year contribution from POF IV, and lower investment income and fee-related earnings.
- AUM increased 1.6% from June 30, 2018, but was down 0.3% from December 31, 2017. Management fee-generating AUM was down 3.5% year to date, reflecting fund liquidations and open-end fund outflows.
- Oaktree issued Series A and Series B preferred units in 2018, raising $400.6 million net. It also issued 5 million Class A units; proceeds were used to acquire business interests from certain insiders and investors, rather than retained by the company.
Outlook, risks and unusual items
- Management said it did not expect management fees to grow significantly until Oaktree Opportunities Fund Xb begins its investment period, which it currently expected in the latter half of 2019. Of $15.4 billion in shadow AUM, $8.3 billion related to that fund; timing remains uncertain.
- Management stated that available cash, operating cash flow and the revolver should fund operations and commitments for at least the next 12 months. Distributions remain discretionary; Oaktree noted it could suspend common-unit distributions if cash flow were insufficient. After quarter-end, it declared a $0.70 Class A distribution per unit and preferred-unit distributions for December 2018.
- Revenue recognition changes took effect January 1, 2018. Adoption added $48.7 million, net of tax, to opening unitholders’ capital; the new standard increased nine-month management fees by $9.5 million and reduced incentive income by $52.0 million. Prior-year results were not recast, limiting comparability.
- In May 2018, the Highstar contingent consideration terms were modified, reducing the maximum obligation from $60.0 million to $36.1 million and lowering the recorded liability to $6.6 million from $18.8 million at year-end 2017. The estimate depends on subjective performance and fundraising assumptions.
- Risk exposures include volatile incentive income, investment valuation and market risk, currency and interest-rate movements, and fund-raising and redemption trends. A hypothetical 10% fall in consolidated fund investment values was estimated to reduce unrealized investment results by $600.1 million, of which about $113.3 million would affect net income attributable to Class A unitholders. Management reported no material change in risk factors from its 2017 annual report and no pending legal or regulatory proceedings expected to have a material financial impact.
Important facts for investors to verify
- Confirm the intended issuer: the supplied filing is for Oaktree Capital Group, LLC, not Brookfield Oaktree Holdings, LLC.
- Track incentive-income recognition and fund performance, especially the timing and realization of accrued fund-level incentives, which are not company-recognized revenue until applicable criteria are met.
- Monitor management fee-generating AUM, open-end fund flows, liquidation-related fee declines, and the expected start date of Opportunities Fund Xb’s investment period.
- Distinguish Oaktree’s own cash and debt from consolidated fund balances and nonrecourse CLO obligations; assess liquidity alongside capital commitments, distributions and preferred-unit obligations.
- Review the non-GAAP reconciliations and the effect of the new revenue standard when comparing 2018 with 2017.