Brookfield/Oaktree Holdings: Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2023. The supplied filing identifies the registrant as Oaktree Capital Group, LLC, not Brookfield Oaktree Holdings, LLC. Amounts below are U.S. dollars; financial statement amounts are generally in thousands unless stated otherwise.
Business context and reporting period
Oaktree is an alternative investment manager focused on credit, real assets, private equity and listed equities. Results are heavily affected by fund investment performance and the timing of incentive income. Comparisons with 2022 are significantly affected by the November 2022 restructuring: the Company deconsolidated OCM Cayman and CLOs, stopped recording management and sub-advisory fees, and no longer records several related expenses and taxes.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $2.1 million | $116.6 million | $61.5 million | $179.6 million |
| Net income (loss), consolidated | $47.1 million | $(59.8) million | $140.3 million | $53.9 million |
| Net income (loss) attributable to Class A unitholders | $(6.3) million | $(21.4) million | $32.6 million | $(10.5) million |
| Basic and diluted earnings (loss) per Class A unit | $(0.06) | $(0.21) | $0.31 | $(0.10) |
| Distributions declared per Class A unit | $0.72 | $0.16 | $0.83 | $1.13 |
- Revenue and drivers: Management and sub-advisory fees were zero after the restructuring. Incentive income was $2.1 million in Q2 and $61.5 million for the half-year. The half-year increase from 2022 reflected higher first-quarter distributions from certain private equity and credit funds; Q2 incentive income fell sharply, partly because 2022 included a SPAC deconsolidation.
- Investment results: Half-year realized gains on consolidated-fund investments were $62.4 million, versus a $73.1 million loss in 2022. Half-year unrealized depreciation was $38.0 million. Investment income was $9.9 million for the half-year, compared with a loss of $18.9 million in 2022; Q2 investment income was a loss of $41.8 million, primarily reflecting declines in real asset investments.
- Operating costs and margins: Reported expenses and income include consolidated fund activity and restructuring effects, so conventional operating margin comparisons may be misleading. The filing does not provide a comparable adjusted operating margin.
- Cash flow: Consolidated operating activities used $369.9 million in the first half, compared with $957.3 million used in the prior-year period. Investing activities used $330.0 million, including substantial corporate investments. Financing activities provided $785.5 million. Consolidated cash ended at $264.0 million, of which $246.0 million was held by funds and generally unavailable for the Company’s general liquidity needs.
- Liquidity and debt: The Company reported $18.0 million of corporate cash and $216.5 million of debt obligations, net, at June 30. It had no borrowings under the $650 million revolving facility and stated that available liquidity sources should meet requirements for at least the next 12 months. Consolidated funds had $310.5 million drawn under credit facilities; fund obligations are nonrecourse to the Company. Oaktree Capital I was also jointly and severally liable for approximately $1.05 billion of other Operating Group senior notes that are not recorded as Company debt absent specified events.
- Capital and distributions: Total unitholders’ capital was $2.39 billion, up from $1.91 billion at year-end 2022. The Company declared $136.8 million of distributions during the first half, including preferred-unit distributions. A $0.09 Class A distribution was paid August 10, 2023.
Material changes and outlook
- Incentive-creating AUM increased 13.3% from year-end 2022 to $52.8 billion at June 30, reflecting $4.9 billion of net contributions and $1.3 billion of market appreciation.
- Fund-level accrued incentives were $1.73 billion at June 30, but are contingent, off-balance-sheet amounts and are not equivalent to recognized revenue. Only $10.9 million of net accrued incentives was associated with funds currently paying incentives; realization timing and amounts remain uncertain.
- The Company committed $750 million to Opps XII in May 2023 and had funded $637.5 million of its $750 million Opps XI commitment by June 30. The filing describes capital contributions from the sole Class A unitholder or an affiliate to fund these investments; related distributions are intended for that unitholder and should not be relied on for preferred-unit payments.
- In June, the Company completed an indirect acquisition of Brookfield Real Estate Income Trust-related entities for $307.0 million, funded through a contribution from its sole Class A unitholder. A further $13.9 million true-up was paid in July. The sole Class A unitholder may contribute up to an additional $200 million for REIT-related or other specified purposes.
- Management cited market volatility, investment valuations, fundraising and incentive-income timing, financing access, counterparty and bank-deposit exposure, and geopolitical and economic uncertainty as risks. The Company disclosed no direct exposure to the failed U.S. banks cited, but noted that deposits may exceed FDIC insurance limits. It reported no material change to previously disclosed risk factors and no pending legal or regulatory proceeding expected to materially affect its financial statements.
- Management provided no specific earnings or revenue guidance. It stated that liquidity should be adequate for at least the next 12 months and expects distributions in accordance with preferred-unit terms and its Class A distribution policy.
Important facts for investors to verify
- Confirm the correct registrant and security being analyzed: this filing is for Oaktree Capital Group, LLC.
- Separate the effects of the 2022 restructuring from underlying business performance; reported revenue and expenses are not directly comparable with 2022.
- Review the timing, realization risk and compensation burden associated with the $1.73 billion of fund-level accrued incentives.
- Track funding and returns from the Opps XI/XII commitments, the Brookfield REIT-related acquisition, and any additional capital contributions from Brookfield affiliates.
- Distinguish the Company’s $18.0 million corporate cash from consolidated-fund cash, and assess guarantees, facility availability, covenants and the substantial Operating Group debt for which Oaktree Capital I is a co-obligor.
- Assess investment valuation sensitivity: management estimated that a 10% decline in consolidated-fund investment values would reduce Class A-attributable income by $78.4 million; a similar decline in fund and other holdings would reduce investment income by $263.5 million, before other potentially offsetting effects.