Business context and reporting period
This is Oaktree Capital Group, LLC’s unaudited Form 10-Q for the three months ended March 31, 2018, filed May 4, 2018. Oaktree is a global alternative investment manager focused on credit, private equity, real assets and listed equities. The supplied metadata names Brookfield Oaktree Holdings, LLC, but the filing identifies Oaktree Capital Group, LLC as the registrant; confirm the intended issuer.
Key financial results
Amounts below are in millions of dollars, except per-unit data and AUM.
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Management fees | $185.4 | $180.9 |
| Incentive income | $151.9 | $108.7 |
| Total GAAP revenue | $337.3 | $289.6 |
| Income before taxes | $143.8 | $174.1 |
| Net income | $137.4 | $161.8 |
| Net income attributable to Oaktree | $52.7 | $54.9 |
| Basic and diluted net income per Class A unit | $0.78 | $0.87 |
| Distributions declared per Class A unit | $0.76 | $0.63 |
Selected non-GAAP measures: adjusted net income was $160.4 million versus $161.2 million; distributable earnings were $194.0 million versus $159.2 million; and fee-related earnings were $58.5 million versus $63.8 million. Per Class A unit, adjusted net income was $0.93, distributable earnings $1.18 and fee-related earnings $0.36.
At March 31, 2018, assets under management (AUM) were $121.4 billion, management fee-generating AUM $102.0 billion, and incentive-creating AUM $33.0 billion. Cash and cash equivalents were $634.7 million at Oaktree and $229.3 million of U.S. Treasury and other securities were also held. Corporate debt obligations were $745.5 million carrying value ($750 million principal); there were no borrowings under the $500 million revolver. Oaktree reported $864 million of cash and securities on a pre-consolidation basis. Consolidated cash from operating activities was $147.7 million, compared with a use of $245.6 million a year earlier; consolidated investing activities provided $80.1 million, and financing activities used $125.8 million. Consolidated cash flows include funds whose assets and obligations are generally not Oaktree’s own and whose debt is nonrecourse to the Company.
Material changes versus prior period
- GAAP revenue rose 16.5%, but income attributable to Oaktree fell 4.0% and diluted earnings per unit fell from $0.87 to $0.78. Higher incentive income and management fees were offset by increased compensation—especially incentive compensation—and weaker investment income and unrealized fund results.
- Distributable earnings increased 21.9%, while fee-related earnings declined 8.3%. Management attributed the distributable-earnings improvement mainly to higher net incentive income and investment-income proceeds; higher G&A and compensation weighed on fee-related earnings.
- AUM decreased $2.5 billion from year-end, principally due to closed-end fund distributions and open-end fund net outflows. Management fee-generating AUM fell $2.3 billion, including declines from open-end outflows and funds in liquidation.
- Oaktree adopted a new revenue-recognition standard in Q1. It recorded a $48.7 million after-tax cumulative increase to opening unitholders’ capital. The standard reduced Q1 incentive income by $47.0 million compared with the prior recognition approach and increased management fees by $4.2 million through gross presentation of certain reimbursements. Prior-period GAAP figures were not recast, limiting comparability.
- The February public offering issued 5 million Class A units for $219.5 million net proceeds, which were used to acquire interests in the business from existing holders; the Company said it retained none of the proceeds. The March credit amendment extended the facility maturity to 2023 and raised the maximum permitted leverage ratio to 3.50-to-1.00.
Outlook, risks and unusual items
- Management reported $19.6 billion of uncalled capital commitments, including $12.4 billion of “shadow AUM” not yet generating fees. It does not expect significant management-fee growth until Oaktree Opportunities Fund Xb begins its investment period, currently expected in the latter half of 2019; most other shadow AUM is expected to generate fees gradually.
- Management said Q2 incentive income could be modest, potentially below any quarter of the prior year. Incentive income is volatile and depends on fund performance, realizations and contractual hurdles.
- The Company stated that available cash, operations and its revolver should fund operations and commitments for at least the next 12 months. The board retains discretion over distributions. A $0.96-per-unit distribution related to Q1 was announced after quarter-end, payable May 11, 2018.
- Material risks include market and valuation volatility, fundraising and AUM changes, timing of incentive income, fund realizations, interest-rate and foreign-exchange exposure, liquidity and counterparty risks, and regulatory matters. A 10% decline in fund investment values was estimated to reduce consolidated fund unrealized value by $571.8 million and quarterly NAV-based management fees by about $6.9 million; the impact on incentive income was not readily quantifiable.
- Oaktree had $360.3 million of undrawn commitments to funds and estimated $210.6 million of future tax-receivable-agreement payments. It reported no pending legal or regulatory proceeding expected to have a material financial impact, and no material change to the risk factors in its 2017 annual report. Tax examinations could result in release of up to approximately $5.3 million of accrued Operating Group taxes over the next four quarters, though final outcomes are uncertain.
Most important facts for investors to verify
- Confirm the issuer identity: the filing is for Oaktree Capital Group, LLC, not the company named in the request metadata.
- Assess GAAP versus non-GAAP comparability, including the new revenue standard’s $48.7 million opening-equity adjustment and its effect on Q1 incentive income.
- Track the sources and sustainability of distributable earnings and the quarterly distribution, given the variability of incentive income and the board’s discretion.
- Monitor AUM flows, fee-generating AUM, fund-liquidation effects and the timing of the Opportunities Fund Xb investment period.
- Distinguish Oaktree’s own $750 million principal debt and $500 million undrawn revolver from consolidated fund and CLO debt, which is generally nonrecourse to Oaktree.