Brookfield Oaktree Holdings, LLC — filing identity note
The supplied filing is for Oaktree Capital Group, LLC, not Brookfield Oaktree Holdings, LLC. The summary below reflects the filing’s registrant, Oaktree Capital Group, LLC, and its unaudited quarter ended March 31, 2015, compared with the quarter ended March 31, 2014 unless noted. Dollar figures are U.S. dollars.
Business context and reporting period
Oaktree is a global alternative investment manager focused on distressed debt, corporate debt, control investing, convertible securities, real estate and listed equities. It reported approximately $99.9 billion of AUM at March 31, 2015. The company consolidates many funds it manages, so GAAP statements include substantial fund assets, liabilities and investment results attributable to outside investors. Consolidated results should not be read as the manager’s standalone operating performance.
Financial and operating performance
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| GAAP management-fee revenue | $50.8 million | $40.4 million; up 25.7% |
| Segment management fees | $188.1 million | $188.4 million; down 0.2% |
| Segment incentive income | $152.9 million | $292.9 million; down 47.8% |
| Segment adjusted net income (ANI) | $155.3 million | $246.9 million; down 37.1% |
| ANI attributable to Class A units | $38.3 million; $0.85 per unit | $57.9 million; $1.46 per unit |
| Distributable earnings | $140.5 million | $233.1 million; down 39.7% |
| Distributable earnings attributable to Class A units | $36.3 million; $0.81 per unit | $55.8 million; $1.41 per unit |
| Fee-related earnings | $56.0 million | $57.7 million; down 2.9% |
| Fee-related earnings attributable to Class A units | $14.6 million; $0.32 per unit | $12.9 million; $0.33 per unit |
| GAAP net income attributable to Oaktree Capital Group, LLC | $38.3 million | $51.8 million; down 26.1% |
| GAAP diluted net income per Class A unit | $0.85 | $1.30 |
Segment management fees were broadly flat as growth in open-end and evergreen fees was offset by lower closed-end fund fees, including declines from funds in liquidation. Segment incentive income fell, largely reflecting lower tax-related incentive distributions and no Q1 contribution from Opps VIIb, which contributed $57.8 million in the prior-year quarter. Oaktree said near-term incentive income was not expected to increase from its 2014 level.
GAAP consolidated net income was $1.283 billion, versus $1.540 billion. The consolidated totals include fund investment results largely attributable to non-controlling investors: $1.137 billion of Q1 2015 net income was attributed to non-controlling interests in consolidated funds and $108.1 million to non-controlling interests in consolidated subsidiaries. Consolidated statements therefore do not represent Oaktree’s attributable earnings alone.
Consolidated fund investment results included $474.8 million of realized gains and $507.5 million of unrealized appreciation, both below the prior-year quarter ($654.2 million and $770.5 million, respectively). Interest and dividend income rose to $522.9 million from $362.1 million, primarily due to special dividends received by Distressed Debt funds. These figures are substantially fund-level results, not equivalent to fee revenue.
Cash flow, debt and liquidity
- Cash flow: Consolidated operating activities used $1.898 billion, compared with $984.3 million used in Q1 2014, primarily reflecting net purchases of consolidated-fund securities. Investing activities provided $88.8 million; financing activities provided $901.1 million. Consolidated cash and cash equivalents ended at $2.418 billion, including fund cash. These consolidated cash-flow figures are not a measure of cash freely available to the manager.
- Manager liquidity: On a segment basis, Oaktree reported $434.2 million of cash and $570.7 million of U.S. Treasury securities, approximately $1.0 billion combined, against $850 million of corporate debt. Its $500 million revolving credit facility was undrawn, and the company said it could draw the full amount while complying with maintenance covenants.
- Debt: Corporate debt principal was unchanged at $850 million. Scheduled principal payments included $100 million in 2016, $500 million in 2019 and $250 million thereafter. Oaktree reported compliance with financial maintenance covenants. Consolidated funds separately had $5.261 billion of credit-facility borrowings and $1.776 billion of CLO loans payable; those obligations are generally nonrecourse to Oaktree and supported by fund assets.
- Distributions: The income statement reported $0.56 per Class A unit of distributions declared for the quarter. On April 30, 2015, the company declared a separate $0.64-per-unit distribution relating to Q1, payable May 14 to holders of record May 11.
Material changes, outlook and risks
- AUM increased 10.0% from December 31, 2014, to $99.9 billion, reflecting $9.4 billion of closed-end fund capital inflows and $2.2 billion of market-value gains, partly offset by distributions and adverse currency translation. Management fee-generating AUM rose 0.5% to $78.5 billion. Uncalled capital commitments were $17.2 billion, up from $10.3 billion at year-end.
- Gross capital raised was a record $11.4 billion for Q1 and $23.1 billion for the trailing 12 months. Oaktree cited elevated asset prices and relatively scarce bargain-priced opportunities, while noting that pockets of weakness and market turmoil still created investment opportunities. Closed-end funds returned 4% gross overall in Q1; strategy returns varied.
- Net accrued incentives at the fund level were approximately $1.1 billion after estimated related compensation. Only $419.8 million was associated with funds then paying incentives; the remainder was generally not yet at the relevant distribution-waterfall stage. Accrued incentives are an off-balance-sheet, performance-sensitive measure and are not assured revenue.
- Valuation is a significant risk: consolidated funds held $28.0 billion of Level III investments at quarter-end, about 57% of their $48.7 billion investment portfolio. Valuations use significant judgment and unobservable inputs and may differ materially from realizable sale values. Management estimated a 10% decline in fund investment market values would reduce consolidated unrealized appreciation by $4.9 billion, largely affecting non-controlling interests.
- Market sensitivities disclosed include an estimated $363.2 million decrease in segment investment income from a 10% decline in relevant investment fair values for the quarter, and an annualized $69.1 million increase in variable-rate interest expense for consolidated funds from a 100-basis-point rate rise. A similar rate rise was not expected to have a material effect on Oaktree’s own interest expense, given its fixed-rate debt and interest-rate swaps.
- Oaktree had $402.5 million of its own undrawn fund commitments and consolidated funds had $1.639 billion of potential credit and investment commitments. The Highstar acquisition carried contingent consideration of up to $60 million; its reported fair-value liability was $28.1 million. Fund commitments and contingent payments may affect liquidity.
- Management stated that available cash, operations and credit facilities were expected to cover working-capital needs for at least 12 months. Distributions remain discretionary and could be suspended if operating cash flow were insufficient. The filing gives no quantitative earnings or distribution guidance beyond these statements.
- Other disclosed matters include a $12.5 million purchase of the company airplane in March 2015; tax examinations that management did not expect to have a material adverse effect, though outcomes are not assured; and no pending legal actions expected to have a material impact. The filing reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Confirm the issuer identity: the supplied 10-Q is for Oaktree Capital Group, LLC, not Brookfield Oaktree Holdings, LLC.
- Separate Oaktree’s manager-level measures (ANI, distributable earnings and fee-related earnings) from consolidated fund results and non-controlling interests.
- Assess the sustainability and timing of incentive income, including the gap between accrued fund-level incentives and amounts currently payable to Oaktree.
- Review the quality and sensitivity of Level III valuations, fund leverage, fund commitments and the distinction between fund debt and corporate debt.
- Verify the declared $0.64-per-unit Q1 distribution, its payment, and the company’s ability to fund future distributions from available cash and distributable earnings.