Brookfield Oaktree Holdings, LLC — 2015 Q2 Form 10-Q
Filing identity: The supplied filing identifies the registrant as Oaktree Capital Group, LLC, not Brookfield Oaktree Holdings, LLC. This summary follows the registrant named in the filing. The unaudited quarter and six-month periods ended June 30, 2015; comparisons are to the corresponding 2014 periods unless noted. Dollar amounts are U.S. dollars.
Business context
Oaktree is a global alternative investment manager focused on distressed and corporate debt, control investing, convertibles, real estate and listed equities. It reported $103.1 billion of AUM at June 30, 2015. Because GAAP consolidation includes many funds in which Oaktree has only a minority economic interest, consolidated results include large fund investment balances and gains or losses attributable mainly to outside investors. Segment measures exclude fund consolidation and are often more informative about the management business.
Financial and operating highlights
| Metric | Q2 2015 | Six months 2015 | Comparable-period change |
|---|---|---|---|
| Consolidated revenue | $51.5 million | $102.3 million | Q2 down 0.1%; six months up 11.2% |
| Net income attributable to Oaktree | $19.8 million | $58.1 million | Down 36.5% and 30.0% |
| Net income per Class A unit | $0.41 | $1.24 | Down from $0.72 and $1.99 |
| Adjusted net income (ANI), segment | $85.3 million | $240.7 million | Down 36.7% and 36.9% |
| Distributable earnings, segment | $111.2 million | $251.7 million | Down 4.3% and 27.9% |
| Fee-related earnings, segment | $53.7 million | $109.7 million | Down 15.4% and 9.6% |
| Distributable earnings per Class A unit | $0.59 | $1.39 | Down from $0.64 and $2.01 |
- Consolidated net loss was $316.6 million in Q2, versus net income of $1.307 billion a year earlier. The principal driver was a $1.418 billion unrealized depreciation on consolidated fund investments, compared with $699.9 million of unrealized appreciation in Q2 2014. For the six-month period, consolidated net income was $966.4 million, down from $2.847 billion, with unrealized depreciation of $910.9 million versus appreciation of $1.470 billion.
- Q2 consolidated realized investment gains rose to $857.5 million from $514.2 million; six-month gains were $1.332 billion versus $1.168 billion. Higher interest and dividend income also reflected distressed-debt and senior-loan funds and special dividends. These fund-level amounts should not be read as Oaktree-attributable operating earnings.
- Segment management fees were $185.6 million in Q2 and $373.6 million for six months. The six-month consolidated management-fee line was $101.7 million because fees from consolidated funds are eliminated. Segment incentive income fell 39.2% to $214.0 million for six months, while segment investment income declined 23.7% to $76.8 million.
- Q2 segment fee-related earnings fell as compensation costs rose with headcount and the Highstar acquisition; lower general and administrative costs partly offset the increase. Six-month ANI was pressured by lower net incentive income, investment income and fee-related earnings.
- AUM increased 13.5% from year-end to $103.1 billion; gross fundraising was $6.3 billion in Q2 and a record $24.0 billion for the trailing twelve months. Management fee-generating AUM was $78.6 billion, up 0.6% from year-end, while incentive-creating AUM was $33.9 billion, flat from year-end. Uncalled capital commitments were $20.1 billion, versus $11.0 billion a year earlier.
Cash flow, debt and liquidity
- Consolidated cash and cash equivalents were $2.734 billion at June 30, including $2.424 billion held by consolidated funds. Oaktree’s segment-level cash and U.S. Treasury securities totaled approximately $989 million; corporate debt was $850 million. The company also had an undrawn $500 million revolving facility and stated it could draw the full amount without breaching maintenance covenants.
- Consolidated operating cash flow was negative $1.274 billion for the six months, compared with negative $2.425 billion in 2014, primarily reflecting investment purchases and other fund activity. Investing cash flow was negative $39.3 million; financing cash flow was positive $724.3 million. These consolidated cash flows include funds and are not equivalent to cash generated or available to the parent.
- Corporate debt principal remained $850 million; no amount was outstanding on the corporate revolver. Oaktree reported compliance with applicable financial covenants. Consolidated funds separately had $5.668 billion of credit-facility borrowings and $1.918 billion of CLO debt; these fund obligations are generally nonrecourse to Oaktree.
- Oaktree stated that available cash, operating sources and its revolving facility were expected to fund operations and commitments for at least the next twelve months. It reported $444.8 million of its own undrawn fund commitments and $1.467 billion of potential credit and investment commitments at consolidated funds.
Outlook, risks and unusual items
- No numerical earnings or AUM guidance was provided. Management cited mixed markets, record fundraising and capital inflows, while noting that weaker markets can reduce fee bases, realizations and investment values but may create distressed-investment opportunities.
- Management declared a $0.50-per-Class-A-unit distribution after quarter-end, payable August 13, 2015. The financial statements report $0.64 per unit of distributions declared for Q2; investors should distinguish the reported declaration from the subsequent distribution announcement.
- Market-sensitive fund valuations are material: $28.0 billion of consolidated fund investments were Level III at quarter-end. The filing cautions that unobservable-input valuations involve significant judgment and may differ materially from realizable sale values. A 10% decline in fund investment values was estimated to reduce consolidated fund unrealized appreciation by $4.9 billion, primarily affecting non-controlling interests; estimated quarterly management fees would decline about $6.8 million.
- Interest-rate sensitivity includes an estimated $74.4 million annualized increase in consolidated-fund interest expense for a 100-basis-point rate increase on variable-rate debt. Oaktree estimated no material near-term impact to its own interest expense from that rate move because most term-loan exposure was swapped.
- Highstar acquisition contingent consideration had a $28.7 million fair value and could reach $60.0 million, depending on performance over up to seven years. The company also reported $370.9 million due to affiliates under the tax receivable agreement; future payments depend on tax savings and other conditions.
- Management said no pending legal action was expected to have a material effect and reported no material change to the risk factors in its 2014 annual report. It also said disclosure controls were effective and there were no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the intended issuer: the filing is for Oaktree Capital Group, LLC, notwithstanding the request metadata naming Brookfield Oaktree Holdings, LLC.
- Assess underlying segment performance using ANI, distributable earnings and fee-related earnings, and review their definitions and reconciliations to GAAP results.
- Track incentive income, fund-level accrued incentives, fund performance and the share of incentive-creating AUM currently generating incentives; these amounts are volatile and timing-sensitive.
- Review Level III valuation exposure, fund-level leverage and liquidity, and distinguish nonrecourse fund obligations from corporate debt and cash.
- Verify the declared distribution, the effect of the March 2015 unit issuance and potential dilution from exchangeable OCGH units, and the obligations and assumptions under the tax receivable agreement.