Brookfield Oaktree Holdings, LLC — Filing identity note
Entity mismatch: The supplied filing is Oaktree Capital Group, LLC’s Form 10-Q for the quarter ended September 30, 2017. It does not identify Brookfield Oaktree Holdings, LLC as the registrant; verify the intended issuer before relying on this summary.
Business context and reporting period
Oaktree is a global alternative investment manager specializing in credit, distressed debt, control investing, real estate and other strategies. Its revenue comes primarily from management fees and incentive income, supplemented by investment income. Results cover the three and nine months ended September 30, 2017, compared with the same periods in 2016. Reported consolidated figures include certain managed funds and CLOs; fund assets and liabilities are generally nonrecourse to Oaktree, and much of fund income is attributable to non-controlling investors.
Key financial and operating metrics
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $235.0 million | $290.2 million | $1,158.7 million | $827.4 million |
| Net income attributable to Oaktree | $45.8 million | $58.3 million | $218.1 million | $135.4 million |
| Net income per Class A unit | $0.71 | $0.93 | $3.41 | $2.17 |
| Management fees | $181.3 million | $191.0 million | $542.3 million | $584.5 million |
| Incentive income | $53.7 million | $99.3 million | $616.4 million | $242.9 million |
At September 30, 2017, AUM was $99.5 billion, management fee-generating AUM was $80.2 billion, incentive-creating AUM was $31.0 billion, and uncalled capital commitments were $21.2 billion. The company reported $705.1 million of cash and cash equivalents and $324.5 million of U.S. Treasury and other securities. Corporate debt was $746.6 million carrying value, or $750 million principal; no borrowings were outstanding under the $500 million revolving facility. The company reported compliance with its financial covenants.
Consolidated cash flows for the nine months included $238.3 million used in operating activities, $499.8 million provided by investing activities and $10.7 million used in financing activities. Consolidated ending cash was $1.236 billion, including cash held by consolidated funds; it should not be read as unrestricted corporate cash. No conventional operating margin is presented; fee-related earnings were $59.8 million for Q3 and $160.5 million for the nine-month period.
Material changes versus prior comparable periods
- Q3 revenue declined 19.0% and net income attributable to Oaktree fell 21.4%, primarily reflecting lower incentive income and investment income, alongside lower management fees.
- Nine-month revenue increased 40.1% and attributable net income rose 61.1%. The increase was driven chiefly by $427.8 million of incentive income from Oaktree Principal Opportunities Fund IV following the second-quarter sale of AdvancePierre Foods.
- Management fees declined year over year in both periods, mainly as closed-end funds entered liquidation; growth from newer funds partly offset the decline.
- Fee-related earnings fell 10.3% to $59.8 million in Q3 and 13.6% to $160.5 million for nine months, reflecting lower management fees. Distributable earnings were $118.6 million for Q3, down 15.6%, and $558.1 million for nine months, up 44.6%.
- AUM was broadly flat year over year but down 1.0% from December 31, 2016. Management fee-generating AUM rose 0.5% from year-end, while incentive-creating AUM declined 7.7%.
Outlook, risks, contingencies and unusual items
No formal earnings guidance is provided. Management stated that it expected liquidity sources to be sufficient for working-capital needs for at least 12 months. Of $21.2 billion in uncalled commitments, $12.4 billion was not yet generating management fees; $8.8 billion related to Opportunities Fund Xb, for which Oaktree did not expect the investment period to begin before the second half of 2018. Most remaining shadow AUM was expected to generate fees gradually as capital is drawn or investments are made.
Management highlighted the sensitivity of revenue and investment income to markets, fundraising, AUM, fund realizations and timing of incentive income. Its illustrative sensitivities included an estimated $519.6 million reduction in unrealized appreciation on consolidated-fund investments under a 10% market-value decline, of which approximately $186.1 million would affect income attributable to Oaktree; a roughly $6.2 million decrease in quarterly management fees; and a $294.4 million decline in investment income. These are estimates, not forecasts.
Other items to note include the October 17, 2017 closing of Oaktree’s $320 million cash acquisition of specified advisory-business assets related to two Fifth Street business development companies; a $17.5 million standby letter-of-credit guarantee for a managed fund, with no amount outstanding at quarter-end; and $433.1 million of undrawn Oaktree commitments to funds. Tax examinations could potentially result in release of up to approximately $6.0 million of accrued Operating Group taxes over the next four quarters, though outcomes are uncertain. Management reported no pending legal or regulatory matters expected to have a material financial-statement impact and no material change in previously disclosed risk factors. A $0.56 per Class A unit distribution related to Q3 was announced after quarter-end, payable November 10, 2017.
Most important facts for investors to verify
- Confirm the registrant: the filing is for Oaktree Capital Group, LLC, not the company named in the request metadata.
- Assess the degree to which nine-month earnings growth depends on the one-time AdvancePierre Foods realization and incentive income.
- Review the decline in management fees and fee-related earnings, fund liquidation trends, and open-end fund flows.
- Distinguish corporate liquidity and debt from balances of consolidated funds and CLOs; confirm covenant headroom and the availability of the revolver.
- Evaluate the timing and realizability of accrued fund-level incentives, which are not recognized as a company receivable and may fluctuate with fund performance.
- Review the Fifth Street acquisition’s integration, purchase-price allocation and expected contribution, along with the tax receivable agreement and fund commitments.