Brookfield Oaktree Holdings, LLC — 10-Q Summary
Registrant identification: The supplied filing is for Oaktree Capital Group, LLC (OCG), not an entity named Brookfield Oaktree Holdings, LLC. It covers the quarter and six months ended June 30, 2019; financial statements are unaudited.
Business context and reporting period
Oaktree is a global alternative investment manager focused on credit, private equity, real assets and listed equities. At June 30, 2019, AUM was $120.4 billion, including Oaktree’s pro-rata interest in DoubleLine. Management reports one investment-management segment. Consolidated statements include certain managed funds and CLOs, so their assets, liabilities and cash flows should not be confused with Oaktree’s own resources.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $313.5 million | $213.3 million | $579.9 million | $550.6 million |
| Management fees | $175.1 million | $178.1 million | $345.0 million | $363.5 million |
| Incentive income | $138.4 million | $35.2 million | $234.9 million | $187.1 million |
| Net income | $121.5 million | $65.8 million | $305.9 million | $203.2 million |
| Net income attributable to Class A unitholders | $42.4 million | $31.1 million | $89.7 million | $83.9 million |
| Basic and diluted earnings per Class A unit | $0.57 | $0.44 | $1.23 | $1.21 |
| Distributable earnings per Class A unit (non-GAAP) | $0.88 | $0.69 | $2.33 | $1.86 |
| Fee-related earnings per Class A unit (non-GAAP) | $0.28 | $0.30 | $0.51 | $0.66 |
Q2 incentive income included $118.7 million from Oaktree Opportunities Fund VIII. First-half 2019 incentive income included $301.8 million of tax-related incentive income, compared with $103.7 million in the prior-year period. Distributable earnings and fee-related earnings are non-GAAP measures; the company cautions they are not substitutes for GAAP results.
- Liquidity: Oaktree and operating subsidiaries had $699.4 million cash and $387.6 million in U.S. Treasury and other securities at June 30. The company reported $1.1 billion of combined cash and securities, no borrowings on its $500 million revolver, and $746.2 million of corporate debt obligations. It said liquidity sources were expected to cover working capital needs for at least 12 months.
- Debt and leases: Corporate debt principal was $750 million, mostly fixed-rate notes, plus a $150 million variable-rate term loan due in 2023. Operating lease liabilities were $135.1 million. Consolidated-fund debt is largely nonrecourse to Oaktree: $909.7 million of fund credit-facility borrowings and $4.312 billion of CLO debt obligations were reported.
- Cash flow: Consolidated operating activities used $986.1 million in the first half, versus $28.9 million used in 2018, principally reflecting purchases of securities by consolidated funds. Investing activities provided $206.7 million; financing activities provided $1.133 billion, including CLO issuance and fund financing. These consolidated cash-flow figures include fund activity and are not a direct measure of corporate free cash flow.
- Capital and distributions: Total unitholders’ capital was $2.424 billion at June 30, versus $2.488 billion at year-end 2018. Class A distributions declared were $1.05 per unit for Q2 and $1.80 for the first half. Preferred-unit distributions are discretionary and non-cumulative.
Material changes versus prior comparable periods
- Q2 revenue rose 47.0%, led by a sharp increase in incentive income; management fees declined 1.7%. Class A GAAP net income increased 36.3%.
- First-half revenue increased 5.3% and Class A GAAP net income increased 6.9%. Higher incentive income and unrealized investment gains contributed to reported results, while management fees declined 5.1%.
- Fee-related earnings fell 12.8% in Q2 and 23.2% in the first half. Management cited higher compensation and general and administrative costs, as well as lower first-half management fees.
- At June 30, AUM was up 1.5% from March 31 but down 1.0% year over year. Management fee-generating AUM was $101.4 billion, up 1.1% from March. Open-end funds experienced net outflows; DoubleLine and new closed-end fund commitments supported AUM growth.
- Accrued incentives at the fund level were $1.295 billion, down from $1.722 billion at December 31, 2018. This is a fund-level, off-balance-sheet indicator of potential future incentives, not recognized revenue or a receivable.
Outlook, management commentary, risks and unusual items
- Brookfield transaction: Under the March 2019 merger agreement, Brookfield was to acquire approximately 62% of Oaktree’s business. Class A unitholders could elect $49.00 cash or 1.0770 Brookfield Class A shares per Oaktree unit, subject to pro-ration limiting either form of consideration to 50% of aggregate consideration. OCGH consented to the merger on June 25; closing was anticipated in Q3 2019, subject to customary conditions and regulatory approvals. The filing notes potential closing, integration, personnel, business-disruption and market-value risks. Brookfield transaction costs contributed to higher G&A expense.
- Management described financial markets as broadly higher in Q2 and reported blended gross returns for incentive-creating closed-end funds of 1.6% for the quarter and 6.4% for the trailing 12 months, excluding Highstar Capital IV. Returns including that fund were 1.5% and 5.7%, respectively.
- Gross capital raised was $4.3 billion in Q2 and $13.4 billion over the trailing 12 months; uncalled capital commitments were $18.0 billion, including $13.2 billion not yet generating management fees. Management expects cash flows, existing balances and the revolver to support operations and commitments, but distributions may be suspended if cash flow is insufficient.
- Results are exposed to volatile incentive income, investment valuations, fundraising and AUM changes, fund realizations and distributions, market conditions, currency and interest-rate movements, and competition. A 10% decline in consolidated-fund investment values was estimated to reduce unrealized appreciation by $694.0 million, including an estimated $108.3 million impact on net income attributable to Class A unitholders. A 10% decline in fund investment values was also estimated to reduce quarterly management fees by about $6.3 million.
- Fair values for Level III investments depend on management estimates and unobservable inputs; actual realizations may differ materially. The filing reported no pending legal or regulatory actions expected to have a material financial impact, no material change to previously disclosed risk factors, and effective disclosure controls.
- Lease accounting adoption in Q1 2019 added operating lease assets of $105.8 million and liabilities of $135.1 million to the balance sheet; the company said the change did not affect the income statement.
Most important facts for investors to verify
- Confirm the registrant and security being analyzed: this filing names Oaktree Capital Group, LLC (OAK), with Class A and Series A/B preferred units listed on the NYSE.
- Check the subsequent status and final terms of the Brookfield merger, including closing conditions, consideration elections and any later amendments.
- Assess whether incentive income—particularly Fund VIII and tax-related distributions—is repeatable, and distinguish recognized incentive income from fund-level accrued incentives.
- Review open-end fund flows, management fee-generating AUM, fundraising and fee declines from funds in liquidation alongside the growth in total AUM.
- Separate Oaktree’s corporate cash and debt from consolidated-fund cash, borrowings and CLO obligations; review the nature of the $986.1 million consolidated operating cash outflow.
- Track the decline in fee-related earnings, growth in compensation and transaction/fundraising costs, and the sustainability of common-unit distributions.