Brookfield Oaktree Holdings, LLC — Q1 2024 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2024. Oaktree is an alternative investment manager focused on credit, real assets, private equity and listed equities. BOH’s reported revenue consists primarily of incentive income; investment returns are also reported in other income. Consolidated fund balances include substantial third-party assets and liabilities and should not be read as wholly available to BOH.
Key financial metrics
| Metric | Q1 2024 | Q1 2023 / prior date |
|---|---|---|
| Incentive income | $115.3 million | $59.4 million |
| Income before taxes / net income | $248.0 million | $93.2 million |
| Net income attributable to BOH Class A unitholders | $76.8 million | $38.9 million |
| Net income per Class A unit | $0.70 | $0.39 |
| Class A distributions declared per unit | $0.14 | $0.11 |
| Interest and dividend income | $121.4 million | $66.8 million |
| Investment income | $18.2 million | $51.7 million |
| Operating cash flow, consolidated | $(236.9) million | $(156.6) million |
| Total assets | $8.25 billion | $7.56 billion at December 31, 2023 |
| BOH cash and cash equivalents | $58.1 million | $28.5 million at December 31, 2023 |
| BOH debt, net | $217.0 million | $219.7 million at December 31, 2023 |
BOH also held $250.0 million of U.S. Treasury and other securities, on deposit with a Brookfield affiliate. Management reported $308.1 million of cash and such securities on an unconsolidated basis. Consolidated cash was $442.0 million, including $383.8 million held by funds and generally unavailable for BOH’s general liquidity needs. Consolidated fund debt was $1.06 billion and CLO debt was $381.7 million; these obligations are nonrecourse to BOH. Conventional operating-margin comparison is not meaningful given the company’s incentive-income and investment-income profile.
Changes versus the prior comparable period
- Class A-attributable net income nearly doubled, primarily reflecting higher incentive income and other income.
- Incentive income rose $55.9 million, largely from larger tax-related distributions from Credit and Private Equity closed-end funds.
- Interest and dividend income increased $54.6 million, primarily from Opps XI, Opps XII and a new CLO equity fund. Consolidated-fund unrealized investment appreciation was $117.5 million versus depreciation of $25.2 million a year earlier, while realized results shifted to a $51.8 million loss from a $31.7 million gain.
- Investment income fell $33.5 million, mainly due to lower SPAC share appreciation and a loss related to the non-traded REIT. Incentive compensation expense declined $32.2 million, mainly due to SPAC incentive compensation being fully amortized in 2023 and a liability write-off for liquidated funds.
- Incentive-creating AUM was $55.4 billion, up 1.1% from year-end 2023 and above $51.0 billion at March 31, 2023. The quarterly increase reflected $1.2 billion of market appreciation, partly offset by $0.6 billion of net distributions.
Outlook, risks and unusual items
- The filing provides no numerical earnings or revenue guidance. Management said available liquidity sources are expected to meet working-capital needs for at least the next 12 months. A 2024 internal reorganization was expected in Q2 2024.
- Accrued incentives were $1.91 billion gross and an estimated $1.14 billion net of related incentive compensation. This is an off-balance-sheet operating metric, not a receivable; realization and timing are uncertain and depend on fund performance, distribution waterfalls and other conditions.
- BOH had $1.05 billion of outstanding affiliate-issued senior notes for which Oaktree Capital I is jointly and severally liable; these are not recorded as BOH debt unless specified default conditions occur. The $650 million revolving facility and $250 million subordinated facility had no borrowings outstanding. The company reported covenant compliance.
- As of March 31, BOH had $862.5 million of limited-partner fund commitments, including $112.5 million remaining on Opps XI and $750 million committed to Opps XII, plus $386.5 million of general-partner commitments. The filing says the Class A unitholder or an affiliate is to contribute cash as needed for the Opps XI and XII investments; distributions from those investments are intended for the Class A unitholder, not a source preferred unitholders should rely on.
- BOH pledged its indirect Opps XI interest, carried at $157 million, as collateral for an affiliate’s nonrecourse credit facility. BOH’s stated exposure is limited to that pledged interest, although the SPV is a co-borrower with joint and several liability in a default.
- Key risks include volatile and unpredictable incentive income, investment valuation and market risks, counterparty and financing access risks, and cash balances at financial institutions above FDIC insurance limits. A 10% decline in consolidated fund investment values was estimated to reduce BOH Class A-attributable net income by about $80.3 million; a 100-basis-point rate increase was estimated to raise annualized interest expense on variable-rate fund debt by $14.4 million.
- Consolidated fund Level III investments totaled $3.68 billion and rely on significant unobservable valuation inputs. Management reported no pending legal or regulatory proceedings expected to have a material financial impact, no material changes to previously disclosed risk factors and no subsequent events.
Most important facts for investors to verify
- Whether Q1 incentive income was driven by tax-related distributions that may not recur, and how much accrued incentive income is ultimately realized in cash.
- The performance and valuation assumptions behind Opps XI, Opps XII, the non-traded REIT and the $3.68 billion Level III fund portfolio.
- Funding timing and support arrangements for the $1.25 billion of fund commitments, alongside BOH’s distributions and preferred-unit obligations.
- The scope of joint and several affiliate debt guarantees, pledged collateral exposure and the distinction between BOH cash and fund cash.
- Whether the expected Q2 2024 internal reorganization or market and financing conditions materially change the company’s structure, liquidity or reported results.