Brookfield Oaktree Holdings, LLC — filing identity
The supplied filing identifies the registrant as Oaktree Capital Group, LLC, not Brookfield Oaktree Holdings, LLC. This is its unaudited Form 10-Q for the three months ended March 31, 2016; amounts below are U.S. dollars unless noted.
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 $96.9 billion of AUM and $79.9 billion of management fee-generating AUM at quarter-end.
Comparisons with Q1 2015 are significantly affected by adoption of new consolidation guidance on January 1, 2016. Oaktree deconsolidated substantially all previously consolidated funds, reducing reported assets, liabilities and fund interests without affecting retained earnings or net income attributable to Oaktree. Prior periods were not recast.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Consolidated revenue | $254.5 million | $50.8 million |
| Income before taxes | $95.8 million | $1,290.9 million |
| Net income attributable to Oaktree | $28.1 million | $38.3 million |
| Basic and diluted earnings per Class A unit | $0.45 | $0.85 |
| Adjusted net income (ANI; Operating Group, non-GAAP) | $105.0 million | $150.0 million |
| Distributable earnings (non-GAAP) | $125.7 million | $135.2 million |
| Fee-related earnings (non-GAAP) | $62.4 million | $49.8 million |
Consolidated revenue and income comparisons are not like-for-like: deconsolidation changed which fund revenues, expenses and investment results appear in the statements. Management’s segment measures, which exclude consolidation of managed funds, show management fees up 5.9% to $201.3 million, incentive income down 36.8% to $96.6 million, and investment income down 71.8% to $15.1 million. ANI fell 30%; distributable earnings fell 7%; fee-related earnings rose 25.3%.
Q1 consolidated operating cash flow was negative $328.8 million, versus negative $1.90 billion in Q1 2015, and investing activities provided $83.9 million. Consolidated cash and equivalents at quarter-end were $602.0 million; this includes consolidated fund cash and is affected by the accounting change. On a segment basis, cash and U.S. Treasury securities totaled about $1.0 billion.
Oaktree debt was $850 million principal, or $845.7 million net of issuance costs. The $500 million revolving facility was undrawn and available. Separately, consolidated CLO debt was $2.694 billion and is nonrecourse to Oaktree; fund and CLO balances should not be treated as ordinary corporate debt or liquidity.
Quarter-end total consolidated assets were $6.36 billion versus $51.76 billion at December 31, 2015, primarily reflecting deconsolidation. AUM was $96.9 billion versus $97.4 billion at year-end and $99.9 billion a year earlier; management fee-generating AUM was $79.9 billion versus $78.9 billion at year-end and $78.5 billion a year earlier. Uncalled capital commitments were $21.4 billion.
Material changes and management commentary
- Oaktree’s closed-end fund strategies generated a 2.0% blended gross return for Q1. Management described global markets as mixed and noted the quarter’s improvement in high-yield bonds, while energy and commodity prices remained challenging for many companies.
- Management attributed the $38.4 million decline in segment investment income largely to a $23 million impairment on certain CLO investments, predominantly related to energy holdings. Those CLOs had a $59.2 million carrying value after the impairment, out of $144.0 million of total Oaktree CLO investments.
- Segment incentive income was $96.6 million, including $72.7 million of tax-related incentive distributions. Fund-level incentives created were negative $46.3 million; net accrued fund-level incentives were $747.7 million after estimated related compensation. These are performance-sensitive amounts, not a recognized receivable, and realization timing is uncertain.
- Fundraising totaled $1.7 billion in Q1 and $13.4 billion over the last 12 months. Management cited near-record uncalled commitments of $21.4 billion and listed several closed-end funds being marketed. No formal earnings or AUM guidance was provided.
- Oaktree amended its credit agreement in March, extending the $250 million term loan maturity to March 2021 and raising the minimum AUM covenant to $60 billion. In April, investors committed, subject to documentation and contingencies, to purchase $100 million of 3.69% 15-year senior notes; proceeds are intended to repay part of the term loan.
- After quarter-end, Oaktree declared a $0.55 per Class A unit distribution related to Q1, payable May 13, 2016. The operations statement also reports $0.47 per unit of distributions declared in the quarter; investors should verify declaration and payment timing.
Risks, contingencies and unusual items
- Market-sensitive fee, incentive and investment income; management estimated a 10% decline in fund investment values could reduce quarterly NAV-based management fees by about $5.9 million and reduce segment investment income by about $240 million. A 10% decline in consolidated fund investment values would reduce unrealized results by about $303 million, of which approximately $143.5 million would affect Oaktree-attributable income.
- Variable-rate CLO debt exposes the funds to higher interest costs: a 100-basis-point rate increase was estimated to raise annual CLO interest expense by $25.3 million. Oaktree’s own term loan was largely fixed through January 2017 using swaps.
- Oaktree had $469.1 million of commitments to funds, a $27.9 million contingent consideration liability tied to the Highstar acquisition, and an estimated $356.9 million payable under the tax receivable agreement. Consolidated funds had $5.5 million of potential credit and investment commitments.
- Tax authorities were examining certain returns; management said a possible outcome could release up to approximately $3.8 million of accrued Operating Group taxes through March 31, 2017, but outcomes are uncertain. The filing reported no pending legal actions expected to have a material financial impact.
- Fair values of illiquid and Level III investments rely on significant management judgment and could differ materially from realized sale values. Management said there were no material changes to the risk factors in its 2015 Form 10-K.
Important facts for investors to verify
- Confirm the registrant and issuer identity: the filing itself is for Oaktree Capital Group, LLC.
- Separate the effects of the consolidation-accounting change from underlying performance when comparing reported GAAP results; review segment measures and their reconciliations.
- Track whether fundraising converts into fee-generating AUM, and monitor open-end fund flows, incentive-creating AUM and realization of accrued incentives.
- Review the energy-related CLO impairment, valuation assumptions for illiquid holdings, and the sensitivity of earnings and fund assets to markets and interest rates.
- Confirm closing of the proposed $100 million note issue, use of proceeds, covenant compliance and the actual status of the post-quarter $0.55 distribution.