Brookfield Oaktree Holdings, LLC — 2014 Q1 Form 10-Q summary
Registrant note: The supplied filing is for Oaktree Capital Group, LLC, not Brookfield Oaktree Holdings, LLC. It covers the unaudited quarter ended March 31, 2014, compared with the quarter ended March 31, 2013. Oaktree is a global alternative-investment manager. Its statements consolidate many managed funds, so consolidated results include substantial fund activity and non-controlling interests; management also reports its investment-management segment separately.
Financial performance and position
- Consolidated results: Revenue was $40.4 million, down 4.9%. Net income was $1.540 billion, down from $2.384 billion, while net income attributable to Oaktree Capital Group, LLC was $51.8 million, down 10.1%; diluted earnings per Class A unit were $1.30 versus $1.91. Consolidated net income largely reflects fund investment results attributable to outside investors, rather than earnings retained by Oaktree.
- Investment-management segment: Segment revenue was $527.8 million versus $593.4 million, including management fees of $188.4 million (up 2.3%), incentive income of $292.9 million (down 10.5%), and investment income of $46.5 million (down 43.4%). Adjusted net income was $246.9 million, down 26.5%; distributable earnings were $233.1 million, down 21.0%. Fee-related earnings were $57.7 million versus $64.9 million, equivalent to about 30.6% of segment management fees versus 35.2% a year earlier. These are company-defined non-GAAP measures.
- Cash flow and liquidity: Consolidated operating cash flow was a use of $984.3 million, compared with $2.257 billion provided in Q1 2013; fund-level securities purchases and sales materially affect this figure. Oaktree’s segment had $563.3 million of cash and $360.6 million of Treasury and agency securities, against $610.7 million of corporate debt. Its $500 million revolving facility was undrawn, and management said available liquidity should meet working-capital needs for at least 12 months. Consolidated cash, including funds, was $2.985 billion.
- Debt and balance sheet: Corporate debt was $610.7 million, up from $579.5 million at year-end. In March, Oaktree refinanced its prior facility with a $250 million term loan and a $500 million revolver; the term loan matures in 2019. Consolidated funds also reported $3.119 billion of credit-facility borrowings and $497.6 million of CLO debt, generally nonrecourse to Oaktree. Total assets were $48.429 billion and total liabilities $6.512 billion; the large reported balance sheet includes managed-fund assets and corresponding redeemable investor interests.
- Assets under management: AUM reached $86.2 billion, up from $83.6 billion at year-end and $78.8 billion a year earlier. Management fee-generating AUM was $74.0 billion; incentive-creating AUM was $33.3 billion. Closed-end funds distributed $2.0 billion during the quarter.
- Distributions: The income statement reports $1.00 per Class A unit declared for the quarter. A subsequent May 1 declaration set a $0.98-per-unit distribution, payable May 15 to holders of record May 12.
Changes, outlook, risks, and unusual items
- Segment management fees increased with open-end and evergreen fund growth, but were partly offset by lower fees from closed-end funds in liquidation. Segment expenses rose, including higher headcount, equity compensation, professional fees, client-conference costs, and investment in operations.
- Lower investment realizations and unrealized gains, as well as lower interest and dividend income, contributed to weaker consolidated and segment comparisons. Oaktree attributed part of the investment-income decline to a market-value decline in its minority investment in China Cinda.
- Management cautioned that incentive income is volatile and that the remaining 2014 quarters could produce significantly less net incentive income—and therefore lower adjusted net income and distributable earnings—than the last three quarters of 2013. Of $1.2 billion of net accrued fund-level incentives at quarter-end, $444.9 million related to funds then paying incentives; roughly four-fifths of that currently paying amount was associated with Opps VIIb, which was in liquidation. Accrued incentives are not a recognized receivable, and realization and timing are uncertain.
- Management described generally accommodative first-quarter markets, net capital inflows, and opportunities in areas including Europe, commercial-bank loan portfolios, and shipping. It gave no formal earnings guidance in the supplied text.
- Market and valuation risks are significant: $22.8 billion of consolidated-fund investments were Level III. A 10% fall in fund investment values was estimated to reduce unrealized appreciation by $4.3 billion, primarily attributable to fund investors; management estimated a $121.5 million reduction in segment investment income from a 10% decline in relevant fair values. A 100-basis-point rate rise was estimated to increase annualized interest expense on consolidated-fund variable-rate debt by $36.2 million.
- Other matters include a stayed lawsuit seeking more than $800 million, which Oaktree said it believes is without merit and presents remote loss exposure; ongoing tax examinations, with a possible $8–$10 million reduction in previously accrued Operating Group taxes; and $335.8 million of Oaktree fund commitments plus $1.2 billion of consolidated-fund investment commitments. Oaktree reported compliance with debt covenants and effective disclosure controls, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Distinguish consolidated fund results and cash flows from earnings and liquidity attributable to Oaktree itself; review the company-defined ANI and distributable-earnings reconciliations.
- Track realized incentive distributions, especially Opps VIIb, and compare eventual incentive income with the quarter-end accrued-incentive balance and management’s 2014 caution.
- Review the assumptions, sensitivity, and concentration of Level III valuations, including real estate and private investments.
- Monitor corporate debt, revolver availability, fund-level borrowings, capital commitments, and any restrictions on moving cash between jurisdictions.
- Check developments in the Kaplan litigation, tax examinations, and tax-receivable-agreement obligations; also assess unit issuance and potential dilution from exchangeable OCGH units.