Brookfield Oaktree Holdings, LLC — filing identity note
The supplied filing is Oaktree Capital Group, LLC’s Form 10-Q for the quarter ended September 30, 2014, filed November 7, 2014; it does not identify Brookfield Oaktree Holdings, LLC as the registrant. The summary below covers the filing provided. Financial statement amounts are in U.S. dollars; figures are rounded.
Business context and reporting period
Oaktree is a global alternative investment manager focused on credit, distressed debt, control investing, real estate and other strategies. Results cover the three and nine months ended September 30, 2014, compared with the same 2013 periods. GAAP consolidation includes many managed funds, so reported assets, liabilities, income and cash flows include substantial amounts economically attributable to fund investors. Oaktree’s management also reports investment-management segment results excluding fund consolidation.
Key financial metrics
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Consolidated revenue | $54.2m | $56.8m | $146.2m | $151.7m |
| Consolidated net income (loss) | ($579.0m) | $1,089.2m | $2,268.5m | $4,517.6m |
| Net income attributable to Oaktree | $18.9m | $42.9m | $101.9m | $157.1m |
| GAAP earnings per Class A unit | $0.43 | $1.12 | $2.41 | $4.64 |
| Adjusted net income (ANI), segment measure | $95.1m | $179.6m | $476.8m | $812.3m |
| Distributable earnings, segment measure | $137.2m | $154.8m | $486.5m | $763.0m |
| Fee-related earnings, segment measure | $63.5m | $60.8m | $184.8m | $186.8m |
- Segment revenue and earnings: Q3 management fees were $194.5m, up 4.8% year over year; incentive income was $86.3m, down 29.5%; and investment income was a $2.4m loss versus $53.6m income. For the first nine months, segment revenue was $1.109bn versus $1.510bn, primarily reflecting lower incentive and investment income.
- Cash flow: Consolidated operating cash flow was a $2.874bn use in the first nine months, versus $4.664bn provided in 2013. This largely reflects securities purchases and sales by consolidated funds and is not a standalone measure of Oaktree’s operating cash generation.
- Liquidity and corporate debt: At quarter end, Oaktree’s segment had approximately $596m cash and $480m in U.S. Treasury securities, or about $1.1bn combined, against $850m of corporate debt. The $500m corporate revolver was undrawn and available. Consolidated cash of $3.866bn includes fund cash and should not be treated as freely available corporate liquidity.
- Fund and CLO borrowings: Consolidated funds had $4.326bn of credit-facility borrowings and $978.5m of CLO loans payable. The filing states these obligations are nonrecourse to Oaktree and are supported by the relevant funds’ assets.
- Balance sheet: Consolidated assets were $52.647bn and total liabilities $8.333bn at September 30, 2014, versus $45.263bn and $4.720bn at December 31, 2013. The balance sheet also reported $42.463bn of redeemable fund-investor interests. Consolidated figures therefore substantially reflect managed funds rather than Oaktree’s own balance sheet.
- Assets under management: AUM was $93.2bn, up 16.8% from $79.8bn a year earlier. Management fee-generating AUM rose to $79.1bn from $66.9bn. Incentive-creating AUM was $34.7bn, while uncalled capital commitments were $12.4bn.
Material changes versus prior comparable periods
- Q3 consolidated results swung to a $579.0m net loss, mainly because of $1.639bn of unrealized depreciation on consolidated-fund investments, compared with $97.8m of unrealized appreciation in Q3 2013. The loss attributable to fund non-controlling interests was $665.4m; Oaktree itself reported $18.9m attributable net income.
- For the first nine months, consolidated net income fell to $2.268bn from $4.518bn, and Oaktree-attributable income declined 35.1% to $101.9m. Lower realized gains, unrealized gains and segment investment income contributed to the decline.
- ANI declined 47.0% in Q3 and 41.3% year to date. Distributable earnings declined 11.4% in Q3 and 36.2% year to date. Fee-related earnings increased 4.4% in Q3 but declined 1.1% year to date.
- Corporate debt increased to $850m from $579.5m at year-end, including $250m of new senior notes issued in September with coupons of 3.91%–4.21% and maturities in 2024–2029. The prior $218.8m amortizing term loan was prepaid in March and replaced with a $250m term loan.
- Oaktree acquired the Highstar investment-management team and certain entities on August 1 for $31.4m cash, 100,595 OCGH units and contingent consideration of up to $60m. Highstar added $2.3bn of AUM; the recorded contingent-consideration liability was $25.6m.
Outlook, commentary, risks and unusual items
- Near-term incentive outlook: Management expected significantly less Q4 2014 incentive income, and therefore lower ANI and distributable earnings, from accrued fund incentives than in Q4 2013. Net accrued incentives at fund level were $1.080bn after estimated compensation, but only $384.8m related to funds then paying incentives, versus $604.7m a year earlier. About three-quarters of the current paying-fund balance related to Opps VIIb, which was in liquidation and whose NAV had fallen to $2.7bn from $3.6bn a year earlier. This is management commentary, not formal earnings guidance.
- Markets and fundraising: Management cited weaker Q3 markets, asset-price declines and negative returns in certain closed-end funds, while noting that volatility and lower prices improved investment opportunities. Gross capital raised over the preceding 12 months was $16.6bn; approximately 54% was for products launched since 2011.
- Valuation risk: Consolidated-fund Level III investments were $25.5bn at quarter end, requiring material judgment and unobservable valuation inputs. Management estimated that a 10% market-value decline would reduce consolidated-fund unrealized appreciation by $4.5bn; it said this effect would be attributable to non-controlling interests and would not affect Oaktree-attributable net income directly. A similar shock was estimated to reduce segment investment income by $220.5m over the nine-month period.
- Commitments and liquidity: Oaktree had $344.9m of undrawn commitments to funds. Consolidated funds reported $1.293bn of potential credit and investment commitments. Management believed available liquidity was sufficient for operations and commitments over at least the next 12 months; distributions remain discretionary and may be suspended if cash flow is insufficient.
- Legal and tax matters: The filing said pending legal matters were not expected to have a material impact. The Kaplan case, which had sought damages exceeding $800m, was dismissed with prejudice in July 2014. Tax authorities were examining certain returns; Oaktree said it had adequately provided for reasonably foreseeable outcomes and identified no expected material adverse effect, while noting outcomes were not assured.
- Subsequent events: Jay Wintrob became CEO effective November 1, 2014; his employment terms include profit-sharing and a 2m-unit equity-value award subject to stated terms. Oaktree declared a $0.62-per-Class-A-unit distribution on October 30, payable November 13. It also extended its Los Angeles office lease through January 2030, with approximately $68.5m of minimum payments thereafter.
Important facts for investors to verify
- Confirm the registrant: the supplied filing is for Oaktree Capital Group, LLC, not Brookfield Oaktree Holdings, LLC.
- Reconcile GAAP results with segment ANI and distributable earnings, noting their non-GAAP definitions and the large effects of fund consolidation.
- Assess the timing and realizability of fund-level accrued incentives, particularly Opps VIIb, before relying on incentive income as a recurring earnings source.
- Distinguish Oaktree’s own $1.1bn of cash and Treasuries and $850m corporate debt from consolidated fund cash and nonrecourse fund borrowings.
- Review Level III valuation assumptions, fund leverage and commitments, and the sensitivity of management fees and investment income to market declines.
- Confirm distribution capacity and the implications of the CEO compensation arrangement, tax receivable agreement and extended lease obligations.