Brookfield Oaktree Holdings, LLC — Filing Summary
Filing identity: The supplied filing is Oaktree Capital Group, LLC’s unaudited Form 10-Q for the quarter ended March 31, 2013. This differs from the company name in the request metadata.
Business context and reporting period
Oaktree is a global alternative investment manager focused on distressed debt, corporate debt, control investing, real estate, convertible securities and listed equities. It reported $78.8 billion of assets under management (AUM) at quarter-end. The results below compare the three months ended March 31, 2013 with the same period in 2012 unless otherwise noted.
Oaktree consolidates many funds in its GAAP statements despite having minority economic interests in them. Consequently, consolidated revenue, income, assets and cash flows include substantial fund activity and should not be read as wholly attributable to Oaktree. Segment measures exclude fund consolidation and are more indicative of the investment-management business.
Financial and operating results
| Metric | Q1 2013 | Q1 2012 | Change or context |
|---|---|---|---|
| Consolidated revenue | $42.5 million | $37.1 million | Up 14.8%; excludes most revenue from consolidated funds |
| Segment revenue | $593.4 million | $318.3 million | Up 86.5%, principally from incentive income |
| Net income attributable to Oaktree Capital Group, LLC | $57.6 million | $18.6 million | Up 209.7% |
| Adjusted net income (segment, non-GAAP) | $335.8 million | $173.6 million | Up 93.4% |
| Distributable earnings (non-GAAP) | $295.0 million | $137.3 million | Up 114.9% |
| Distributable earnings attributable to Class A unitholders | $1.79 per unit | $0.67 per unit | Non-GAAP measure |
| Fee-related earnings (non-GAAP) | $64.2 million | $80.3 million | Down 20.0% |
| Fee-related earnings attributable to Class A unitholders | $0.34 per unit | $0.41 per unit | Down year over year |
| Operating cash flow, consolidated | $2.26 billion | $2.03 billion | Includes consolidated-fund investment activity |
Segment management fees were $184.2 million, down 3.7%, while segment incentive income rose to $327.2 million from $62.7 million. The increase included $195.2 million from Oaktree Opportunities Fund VIIb and $113.4 million of tax-related incentive distributions. Segment investment income was $82.1 million, up 27.7%. Consolidated net income of $2.38 billion includes $2.06 billion attributable to investors in consolidated funds and is not equivalent to income attributable to Oaktree’s unitholders.
At March 31, 2013, Oaktree had $687.4 million of corporate cash and cash equivalents and $350.8 million of U.S. Treasury and government agency securities, or about $1.04 billion combined. Corporate debt obligations were $608.9 million; the company’s $500 million revolver was undrawn. Separately, consolidated funds had $834.6 million of credit-facility borrowings, generally nonrecourse to Oaktree. Oaktree reported compliance with applicable debt covenants and ability to draw the full revolver.
Total consolidated assets were $44.92 billion and total liabilities were $3.29 billion at quarter-end; these totals include consolidated funds and $40.10 billion of redeemable non-controlling interests in those funds. Oaktree’s unitholders’ capital was $1.53 billion. No standalone margin measure was clearly presented in the filing.
Material changes and management commentary
- AUM rose 2.2% from December 31, 2012 to $78.8 billion, driven by market-value gains and new commitments, partly offset by $3.2 billion of closed-end fund distributions. Management fee-generating AUM declined 0.6% to $66.4 billion, mainly reflecting asset sales by funds in liquidation.
- Management described U.S. markets as continuing their recovery in Q1, with strong equities and credit markets, while European economies remained weak and emerging-market equities underperformed. Rising prices supported investment realizations; attractive distressed investment opportunities were relatively scarce, and capital deployment in distressed debt remained slow.
- Incentives created at fund level were $459.7 million for the quarter; accrued incentives at fund level were $2.27 billion. These are performance-dependent amounts, and accrued incentives are not recognized Oaktree revenue until recognition criteria are met.
- Oaktree declared a $1.05 per Class A unit distribution in the quarter. Subsequent to quarter-end, it declared a further $1.41 per Class A unit, payable May 21, 2013, related to Q1.
Outlook, risks and contingencies
- The filing gives no specific numerical earnings or revenue guidance. Management stated that existing cash, operations and the revolver were expected to be sufficient for operations and commitments for at least the next 12 months. Distributions remain discretionary and may be suspended if cash flow is insufficient.
- Results are exposed to volatile incentive income, investment valuations, fundraising and fund distributions, market conditions, interest rates, foreign exchange, liquidity and counterparty risks. A 10% fall in investment values was estimated to reduce fund investment values by $3.8 billion and quarterly management fees by about $5.1 million; Oaktree’s investment income could decline by an estimated $116.3 million. Fund-value effects largely accrue to fund investors rather than Oaktree’s reported attributable net income.
- Level III investments totaled $19.18 billion, involving significant unobservable valuation inputs and management judgment. Actual realization values may differ materially from reported fair values.
- Oaktree reported an $800-million-plus damages claim in the Kaplan litigation. The matter was stayed pending related U.K. arbitration; management considered the case without merit and potential loss remote. The filing said other pending legal matters were not expected to have a material impact.
- Oaktree had $254.4 million of undrawn capital commitments as general partner and consolidated funds had $936.2 million of potential credit and investment commitments. The filing also disclosed a corporate-aircraft lease arrangement that could involve a shortfall payment of up to $10 million if the purchase option is not exercised.
- Management reported disclosure controls and procedures were effective at the reasonable-assurance level, with no material change in internal control over financial reporting during the quarter. No material changes to the prior annual report’s risk factors were reported.
Key facts investors should verify
- Separate Oaktree-attributable results from consolidated-fund results, and review the definitions and reconciliations of ANI, distributable earnings and fee-related earnings.
- Assess the sustainability of Q1 incentive income, including the contribution from Fund VIIb and tax-related incentive distributions, and the conversion of accrued fund-level incentives into recognized revenue and cash.
- Track the decline in fee-related earnings and management fee-generating AUM, including the effect of liquidation-period asset sales and new fund drawdowns.
- Confirm the liquidity and debt picture distinguishes Oaktree’s obligations from fund-level borrowings, commitments and assets; review covenant headroom and upcoming maturities.
- Evaluate Level III valuation sensitivity, investment concentration and the status of the Kaplan claim and related arbitration.
- Reconcile the $1.05 per-unit distribution reported for the quarter with the subsequent $1.41 per-unit declaration and confirm the applicable record and payment dates.