Business context and reporting period
This is Oaktree Capital Group, LLC’s unaudited Form 10-Q for the three months ended March 31, 2017. The filing identifies the registrant as Oaktree Capital Group, LLC; this differs from the company name in the request metadata. Oaktree is a global alternative investment manager focused on credit, distressed debt, control investing, real estate and other strategies. Its reported results consolidate certain managed funds and CLOs, so consolidated assets, liabilities and cash flows include substantial third-party interests.
Financial and operating results
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Consolidated revenue | $289.6 million | $254.5 million; up 13.8% |
| Management fees | $180.9 million | $198.6 million; down 8.9% |
| Incentive income | $108.7 million | $55.9 million; up 94.5% |
| Net income | $161.8 million | $83.2 million |
| Net income attributable to Oaktree Capital Group, LLC | $54.9 million; $0.87 per Class A unit | $28.1 million; $0.45 per unit |
| Adjusted net income (ANI), segment measure | $162.1 million | $105.0 million; up 54.4% |
| Distributable earnings, segment measure | $157.1 million | $125.7 million; up 25.0% |
| Fee-related earnings, segment measure | $48.2 million | $62.4 million; down 22.8% |
Improved incentive income and investment income supported earnings growth; lower management fees, mainly from closed-end funds in liquidation, weighed on fee-related earnings. Consolidated operating expenses were $192.6 million versus $185.2 million. Interest expense rose to $48.8 million from $27.7 million, primarily due to consolidated funds. The filing does not present a single operating-margin measure; consolidated results include fund activity and should be interpreted alongside Oaktree’s segment measures.
At March 31, 2017, AUM was $100.3 billion, management fee-generating AUM $79.3 billion and incentive-creating AUM $32.3 billion. AUM was nearly flat from year-end 2016; management fee-generating AUM fell 0.6% and incentive-creating AUM fell 3.9%. Uncalled capital commitments were $21.8 billion, including $13.1 billion of “shadow AUM” not yet generating management fees. Gross capital raised was $3.1 billion in the quarter.
Cash flow, debt and liquidity
Consolidated operating cash flow was negative $245.6 million, versus negative $328.8 million a year earlier, principally reflecting net purchases of securities by consolidated funds. Investing cash flow was positive $228.3 million and financing cash flow negative $14.8 million. Consolidated cash and cash equivalents ended the quarter at $924.0 million, down $35.2 million from the beginning of the period. These consolidated cash flows include managed funds and are not a direct measure of cash available to the parent.
Oaktree’s segment had approximately $959.8 million of cash, U.S. Treasury and time-deposit securities and $746.1 million of debt obligations net of issuance costs. The company had no borrowings under its $500 million revolving credit facility and reported compliance with financial covenants. Separately, consolidated funds had $580.5 million of debt and CLOs had $3.06 billion of debt obligations; these obligations are nonrecourse to Oaktree. Management stated that available liquidity was expected to cover working-capital needs for at least 12 months.
Distributions declared were $0.63 per Class A unit for Q1; on April 27, 2017, the company declared a $0.71 per-unit distribution, payable May 12, 2017.
Changes, outlook, risks and unusual items
- Market conditions were generally strong in Q1; Oaktree reported a 3.3% blended gross return for its incentive-creating closed-end funds. Results remain sensitive to fund performance, realizations and the timing of incentive income.
- Management said it did not expect Oaktree Opportunities Fund Xb, representing $8.8 billion of shadow AUM, to begin its investment period and generate committed-capital fees until sometime in 2018. Most other shadow AUM was expected to generate fees gradually as capital is drawn or assets are deployed.
- In April, AdvancePierre Foods agreed to be acquired by Tyson Foods. If the transaction closes as expected, Oaktree said it could generate approximately $20 million of investment-income receipts and at least $150 million of net incentive income for POF IV. Closing remained subject to customary conditions, including tender-offer completion and regulatory approvals.
- Unrecognized compensation expense was $188.0 million under GAAP at quarter-end; the filing cited $181.9 million expected under segment reporting after additional April grants. These amounts are expected to be recognized over several years.
- Oaktree had $468.8 million of undrawn commitments to funds and an estimated $139.9 million of minimum lease payments. The Highstar acquisition contingent-consideration liability was $24.2 million, with payment dependent on performance targets; its valuation uses subjective assumptions.
- Tax authorities were examining certain returns. Oaktree said it had adequately provided for reasonably foreseeable outcomes and believed settlements would not materially affect the financial statements, while noting outcomes were not assured. Up to approximately $5.7 million of previously accrued Operating Group taxes could be released over the following four quarters.
- Market-risk disclosures estimate that a 10% decline in consolidated-fund investment values could reduce unrealized gains by $456.1 million, with approximately $172.5 million affecting income attributable to Oaktree. A 10% decline in fund investment values was estimated to reduce quarterly management fees by about $6.0 million. These are sensitivities, not forecasts.
- The filing reported no pending legal or regulatory proceedings expected to have a material financial impact and no material changes to previously disclosed risk factors. Management said disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the registrant identity: the supplied filing is for Oaktree Capital Group, LLC, not Brookfield Oaktree Holdings, LLC.
- Track fee-generating AUM, fund liquidations, open-end fund flows and conversion of shadow AUM into fee-paying assets.
- Monitor the timing and realization of incentive income, including the AdvancePierre–Tyson transaction and associated expected proceeds.
- Distinguish parent-level liquidity and debt from nonrecourse consolidated-fund and CLO balances; review capital calls, distributions and covenant compliance.
- Assess the sustainability of distributions against variable incentive income, investment realizations and distributable earnings.
- Review valuation uncertainty in Level III investments and the assumptions underlying contingent consideration, tax exposures and market-risk sensitivities.