Brookfield Oaktree Holdings, LLC — Filing summary
Entity and period: The supplied filing is Oaktree Capital Group, LLC’s unaudited Form 10-Q for the quarter ended June 30, 2018, filed August 1, 2018. This differs from the company name in the request metadata. Oaktree is an alternative investment manager focused on credit, private equity, real assets and listed equities; it reported $121.6 billion of AUM.
Financial results and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Management fees | $178.1 million | $180.0 million | $363.5 million | $361.0 million |
| Incentive income | $35.2 million | $454.0 million | $187.1 million | $562.7 million |
| Total GAAP revenue | $213.3 million | $634.1 million | $550.6 million | $923.6 million |
| Net income attributable to Class A unitholders | $31.1 million | $117.3 million | $83.9 million | $172.2 million |
| GAAP diluted earnings per Class A unit | $0.44 | $1.83 | $1.21 | $2.71 |
| Adjusted net income per Class A unit | $0.51 | $1.73 | $1.42 | $2.59 |
| Distributable earnings per Class A unit | $0.69 | $1.65 | $1.86 | $2.54 |
| Fee-related earnings per Class A unit | $0.30 | $0.37 | $0.66 | $0.72 |
At June 30, 2018, total assets were $9.05 billion and total liabilities were $6.11 billion, including consolidated fund assets and obligations. Oaktree and operating subsidiaries, excluding consolidated funds, held $559.4 million in cash and $272.5 million in U.S. Treasury and other securities, against $745.7 million of debt obligations. The company had no borrowings against its $500 million revolving facility and reported compliance with debt covenants. Consolidated-fund borrowings and CLO debt are generally nonrecourse to Oaktree.
For the six months, consolidated operating cash flow was negative $28.9 million and investing cash flow was negative $26.0 million; these figures include consolidated funds and their investment activity. Financing cash flow was negative $45.1 million. The company said it expected available cash, operations and the revolver to cover operations and commitments for at least 12 months.
Material changes and management commentary
- Q2 GAAP revenue fell 66% and Class A net income fell 74% year over year, primarily because the prior-year quarter included $427.8 million of incentive income from Oaktree Principal Opportunities Fund IV (POF IV). Six-month Class A net income declined 51%.
- Management fees were broadly flat for the first half: growth from the BDC acquisition, European Principal Fund IV and other fee bases was offset largely by closed-end funds in liquidation. Open-end fund outflows also weighed on fee-generating AUM.
- At June 30, AUM was $121.6 billion, management fee-generating AUM $100.5 billion, incentive-creating AUM $33.3 billion and uncalled investor commitments $20.3 billion. Fee-generating AUM declined 3.6% from year-end 2017.
- Management said it did not expect significant management-fee growth until Oaktree Opportunities Fund Xb begins its investment period, currently expected in the latter half of 2019. Of $14.1 billion of shadow AUM not yet generating fees, $8.5 billion related to that fund.
- Oaktree reported blended gross returns of 4.3% for incentive-creating closed-end funds in Q2 and 13.1% over the preceding 12 months, excluding Highstar Capital IV. Including Highstar, returns were 2.3% and 11.0%, respectively. Management said Highstar IV had performed below expectations, particularly recently, but cited a $1.1 billion first close for its Transportation Infrastructure Fund as progress for the infrastructure business.
Outlook, risks and unusual items
- Oaktree adopted the new revenue standard in 2018. It recorded a $48.7 million after-tax cumulative-effect increase to unitholders’ capital; the standard changes incentive-income recognition and reduced reported first-half incentive income by $47.0 million compared with the prior accounting treatment. Prior periods were not recast.
- Investment performance and incentive income are volatile and depend on market values, realizations, fund distribution waterfalls and other factors. Fund-level accrued incentives were $1.86 billion gross and $898.6 million net of estimated related incentive compensation, but are not recognized revenue and realization timing is uncertain.
- Management estimated that a 10% decline in fund investment values could reduce quarterly management fees by about $6.8 million; the effect on incentive income was not readily quantifiable. A 10% decline in relevant investment values was estimated to reduce investment income by $330 million, before other potential offsets.
- Key exposures include market and valuation risk, foreign exchange, interest rates, financing availability, liquidity and counterparty risk. A 100-basis-point rate increase was estimated to add $1.5 million to annualized corporate interest expense and $37.9 million to consolidated-fund variable-rate interest expense, while increasing annualized interest income on corporate cash and securities by $8.3 million.
- Oaktree issued $173.7 million of 6.625% Series A preferred units in May 2018. Preferred distributions are discretionary and non-cumulative; the first was announced after quarter-end. A $0.55 per Class A unit Q2 distribution was also announced after quarter-end.
- Other obligations include $410.5 million of Oaktree commitments to funds and estimated future tax-receivable-agreement payments of $210.6 million. The filing reported no pending legal or regulatory matters expected to have a material financial impact and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Confirm the entity: the filing registrant is Oaktree Capital Group, LLC, not Brookfield Oaktree Holdings, LLC.
- Track fee-generating AUM, fundraising, redemptions and the timing of Opps Xb’s investment period; distinguish headline AUM from assets that currently generate fees.
- Assess recurring fee-related earnings separately from volatile incentive income, investment returns and non-GAAP measures; review how the new revenue standard affects period comparisons.
- Review fund performance and valuation assumptions, particularly Highstar IV, Level III holdings and the substantial accrued incentives that remain contingent.
- Distinguish Oaktree corporate debt and liquidity from consolidated-fund and CLO obligations, and evaluate fund commitments, preferred distributions and tax-receivable-agreement payments.