Brookfield Oaktree Holdings, LLC — 2016 Third-Quarter Filing Summary
Filing identity: The supplied 10-Q is for Oaktree Capital Group, LLC, not Brookfield Oaktree Holdings, LLC. It covers the quarter and nine months ended September 30, 2016; financial statements are unaudited. Amounts below are U.S. dollars.
Business context and reporting period
Oaktree is a global alternative investment manager specializing in credit, distressed debt, control investing, real estate, convertibles and listed equities. It reported approximately $99.8 billion of AUM at quarter-end and operated as one investment-management segment. The company’s 2016 GAAP results are not directly comparable with 2015 because a new consolidation standard led to deconsolidation of substantially all previously consolidated investment funds effective January 1, 2016. Prior periods were not recast.
Financial results and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| GAAP revenue | $290.2 million | $50.5 million | $827.4 million | $152.8 million |
| Net income attributable to Oaktree | $58.3 million | $1.9 million | $135.4 million | $60.0 million |
| GAAP earnings per Class A unit | $0.93 | $0.04 | $2.17 | $1.27 |
| Adjusted net income (ANI; non-GAAP) | $162.1 million | $27.0 million | $409.8 million | $262.3 million |
| Distributable earnings (non-GAAP) | $141.5 million | $97.0 million | $394.7 million | $343.3 million |
| Fee-related earnings (non-GAAP) | $67.6 million | $55.1 million | $194.6 million | $157.9 million |
- Segment management fees were $194.3 million in Q3 and $593.1 million for the first nine months, up 4.6% and 4.8%, respectively, year over year. Segment incentive income was $99.7 million and $284.0 million; the nine-month figure included $72.7 million of tax-related incentive distributions.
- At September 30, corporate cash and cash equivalents were $461.4 million and U.S. Treasury/time-deposit securities were $676.2 million. Corporate debt, net of issuance costs, was $795.7 million. The $500 million revolving facility was undrawn, and the company said it could access the full amount without breaching maintenance covenants.
- Consolidated operating cash flow was negative $204.3 million for the nine months, versus negative $2.2 billion in 2015. These cash-flow figures include consolidated funds and are substantially affected by fund investment activity; they are not a standalone measure of corporate cash generation.
- Class A distributions declared were $0.58 per unit for Q3. On October 28, the company declared a subsequent $0.65 per-unit distribution, payable November 14, 2016.
Material changes and operating trends
- Underlying segment performance improved: Q3 ANI rose to $162.1 million from $27.0 million, and nine-month ANI increased 56.2% to $409.8 million. Management attributed the nine-month increase to higher investment income, net incentive income and fee-related earnings.
- GAAP revenue and profit comparisons were heavily affected by fund deconsolidation. The change reduced opening consolidated assets by $45.7 billion and liabilities by $7.6 billion; management reported no effect on retained earnings or net income attributable to Oaktree from adoption itself.
- Quarter-end AUM was $99.8 billion, up 1.7% from June 30 but slightly below $100.2 billion a year earlier. Management fee-generating AUM was $78.7 billion, down 1.0% from June, while incentive-creating AUM was $32.4 billion, up 6.6% from June.
- Quarterly AUM gains reflected market appreciation and closed-end fund inflows, partly offset by distributions and open-end fund outflows. Management fee-generating AUM also faced runoff from funds in liquidation and open-end redemptions.
Outlook, risks and unusual items
- Oaktree reported $22.7 billion of uncalled capital commitments, including $13.3 billion of “Shadow AUM” not yet generating management fees. It expected the largest portion, nearly $8 billion in Opportunities Fund Xb, to begin its investment period and generate committed-capital fees in late 2017; it expected the remaining Shadow AUM to begin generating fees gradually. These are management expectations, not formal earnings guidance.
- Management said liquidity sources should fund working-capital needs for at least 12 months. It noted that incentive income is volatile and that distributions may be suspended if operating cash flow is insufficient.
- Oaktree’s $100 million issuance of 3.69% senior notes due 2031 was used to repay $100 million of its term loan. The remaining term-loan principal was $150 million, with maturity in 2021. The company reported covenant compliance at quarter-end.
- Oaktree recorded a $4.4 million impairment on its existing corporate aircraft and had contracted for a replacement aircraft expected in 2017. Nine-month segment investment income also reflected a $23 million first-quarter impairment on certain CLO investments, mainly related to energy holdings.
- Commitments included $532.8 million of Oaktree capital commitments to funds. The tax receivable agreement liability was $356.9 million; future estimated payments are contingent on tax savings and other assumptions. Highstar acquisition contingent consideration had a $23.7 million fair value and a maximum obligation of $60 million.
- The company disclosed no pending legal or regulatory proceedings expected to have a material financial impact, no material changes to previously disclosed risk factors, and no material changes in internal control over financial reporting. Its market-risk disclosures highlight sensitivity of investment income and fund valuations to market prices, interest rates, foreign exchange and counterparty risks.
Most important facts for investors to verify
- Reconcile the large reported year-over-year GAAP changes with the January 2016 fund deconsolidation; distinguish GAAP results from ANI, distributable earnings and fee-related earnings.
- Track management fee-generating AUM, open-end fund flows, liquidation-related fee runoff and the timing of fee conversion for Shadow AUM, especially Opportunities Fund Xb.
- Assess the durability and timing of incentive income and fund-level accrued incentives; these amounts are performance-dependent and may fluctuate or not be realized.
- Review corporate liquidity and the $532.8 million of fund commitments alongside debt maturities, covenant requirements and potential tax receivable agreement payments.
- Consider the valuation uncertainty in less-liquid investments and CLO exposure, including disclosed sensitivity to market declines and higher rates.