Oaktree Capital Group, LLC (NYSE: OAK) (“Oaktree”) today
announced certain changes to its non-GAAP measures. Beginning with
the quarter ended March 31, 2018, reported management fees and
incentive income will reflect the portion of the net earnings from
management fees and performance fees, respectively, attributable to
Oaktree’s 20% ownership interest in DoubleLine Capital LP and its
affiliates (collectively, “DoubleLine”). Such net earnings were
previously reported as investment income.
Additionally, assets under management (“AUM”), management
fee-generating AUM, incentive-creating AUM and incentives created
(fund level) will reflect Oaktree’s pro-rata portion (based on our
20% ownership stake) of DoubleLine’s total AUM, management
fee-generating AUM, incentive-creating AUM and performance fees,
respectively.
The new presentation does not impact adjusted net income.
However, fee-related earnings will now include Oaktree’s pro-rata
portion of DoubleLine’s net earnings from management fees, and
distributable earnings will reflect its pro-rata share of
DoubleLine’s income instead of cash receipts.
Additionally, the impact of the recently enacted Tax Cuts and
Jobs Act (the “Tax Act”), which resulted in the remeasurement of
Oaktree’s deferred tax assets and tax receivable liability in the
fourth quarter of 2017, will no longer be included in its non-GAAP
measures. Oaktree believes that excluding the impact of the Tax Act
is meaningful as it increases comparability between periods.
Dan Levin, Chief Financial Officer, said, “Since DoubleLine is
an investment management company substantially like Oaktree, we
believe the income we receive from it is comparable to our own
income. Thus the new, more transparent presentation better reflects
the underlying nature of our economics and increases comparability
with certain other public alternative asset managers.”
In order to assist investors and analysts in understanding the
impact of the changes on first quarter 2018 financial results,
which will be released on April 26, the information for full years
2016 and 2017 reflecting (i) the amounts as presented in Oaktree’s
fourth quarter 2017 earnings press release, (ii) the adjustments,
and (iii) the resulting adjusted amounts for adjusted net income,
distributable earnings, fee-related earnings, AUM, management
fee-generating AUM, incentive-creating AUM and incentives created
(fund level) have been presented below and posted on the unitholder
section of Oaktree’s website.
Conference Call
As previously announced, Oaktree will host a conference call to
discuss its first quarter 2018 financial results on April 26, 2018
at 11:00 a.m. Eastern Time / 8:00 a.m. Pacific Time. The conference
call may be accessed by dialing (844) 824-3833 (U.S. callers)
or +1 (412) 317-5102 (non-U.S. callers), participant password
OAKTREE. Alternatively, a live webcast of the conference call can
be accessed through the Unitholders – Investor Relations section of
the Oaktree website, http://ir.oaktreecapital.com/. For those
individuals unable to listen to the live broadcast of the
conference call, a replay will be available for 30 days on
Oaktree’s website, or by dialing (877) 344-7529 (U.S. callers) or
+1 (412) 317-0088 (non-U.S. callers), access code 10118691,
beginning approximately one hour after the broadcast.
Forward-Looking Statements
This release contains forward-looking statements within the
meaning of Section 27A of the U.S. Securities Act of 1933, as
amended, and Section 21E of the U.S. Securities Exchange Act
of 1934, as amended, which reflect the current views of Oaktree,
with respect to, among other things, our future results of
operations and financial performance. In some cases, you can
identify forward-looking statements by words such as “anticipate,”
“approximately,” “believe,” “continue,” “could,” “estimate,”
“expect,” “intend,” “may,” “outlook,” “plan,” “potential,”
“predict,” “seek,” “should,” “will” and “would” or the negative
version of these words or other comparable or similar words. These
statements identify prospective information. Important factors
could cause actual results to differ, possibly materially, from
those indicated in these statements. Forward-looking statements are
based on our beliefs, assumptions and expectations of our future
performance, taking into account all information currently
available to us. Such forward-looking statements are subject to
risks and uncertainties and assumptions relating to our operations,
financial results, financial condition, business prospects, growth
strategy and liquidity, including, but not limited to, changes in
our anticipated revenue and income, which are inherently volatile;
changes in the value of our investments; the pace of our raising of
new funds; changes in assets under management; the timing and
receipt of, and impact of taxes on, carried interest; distributions
from and liquidation of our existing funds; the amount and timing
of distributions on our Class A units; changes in our operating or
other expenses; the degree to which we encounter competition; and
general political, economic and market conditions. The factors
listed in the item captioned “Risk Factors” in our Annual Report on
Form 10-K for the year ended December 31, 2017 filed with the SEC
on February 23, 2018, which is accessible on the SEC’s website at
www.sec.gov, provide examples of risks, uncertainties and events
that may cause our actual results to differ materially from the
expectations described in our forward-looking statements.
Forward-looking statements speak only as of the date the statements
are made. Except as required by law, we do not undertake any
obligation to publicly update or review any forward-looking
statement, whether as a result of new information, future
developments or otherwise.
This release and its contents do not constitute and should not
be construed as (a) a recommendation to buy, (b) an offer
to buy or solicitation of an offer to buy, (c) an offer to
sell or (d) advice in relation to, any securities of Oaktree
or securities of any Oaktree investment fund.
Operating Metrics
The schedules below set forth (i) the amounts as presented in
our fourth quarter 2017 earnings press release, (ii) the
adjustments, and (iii) the resulting adjusted amounts for AUM,
management fee-generating AUM, incentive-creating AUM and
incentives created (fund level).
Assets Under Management
As of December 31, 2016 As of
December 31, 2017 Reported Adjustments
Adjusted Reported Adjustments
Adjusted (in millions) Closed-end funds
$ 60,104 $ — $ 60,104 $ 56,871 $ — $ 56,871 Open-end funds 35,105 —
35,105 35,441 — 35,441 Evergreen funds 5,295 — 5,295 7,916 — 7,916
DoubleLine (1) — 20,297 20,297 —
23,702
23,702
Total $ 100,504 $ 20,297 $ 120,801 $ 100,228 $
23,702
$
123,930
(1) DoubleLine AUM reflects our pro-rata portion
(based on our 20% ownership stake) of DoubleLine’s total AUM.
Management Fee-generating AUM
As of December 31, 2016 As of
December 31, 2017 Reported Adjustments
Adjusted Reported Adjustments
Adjusted (in millions) Closed-end funds:
Senior Loans $ 7,504 $ — $ 7,504 $ 8,066 $ — $ 8,066 Other
closed-end funds 32,990 — 32,990 30,779 — 30,779 Open-end funds
35,034 — 35,034 35,188 — 35,188 Evergreen funds 4,239 — 4,239 6,552
— 6,552 DoubleLine — 20,297 20,297 —
23,702
23,702
Total $ 79,767 $ 20,297 $ 100,064 $ 80,585 $
23,702
$
104,287
Incentive-creating AUM
As of December 31, 2016 As of
December 31, 2017 Reported Adjustments
Adjusted Reported Adjustments
Adjusted (in millions) Closed-end funds
$ 30,292 $ — $ 30,292 $ 27,322 $ — $ 27,322 Evergreen funds 3,335 —
3,335 5,383 — 5,383 DoubleLine — 601 601
— 606 606 Total $ 33,627 $ 601 $ 34,228 $
32,705 $ 606 $ 33,311
Accrued Incentives (Fund Level) and
Incentives Created (Fund Level)
As of or for the Year Ended As of or
for the Year Ended December 31, 2016 December 31,
2017 Reported Adjustments (1)
Adjusted Reported Adjustments
(1) Adjusted (in thousands) Accrued
Incentives (Fund Level): Beginning balance $ 1,585,217 $
— $ 1,585,217 $ 2,014,097 $ — $
2,014,097 Incentives created (fund level): Closed-end funds
746,349 — 746,349 588,220 — 588,220 Evergreen funds 37,683 — 37,683
49,246 — 49,246 DoubleLine — 4,726
4,726 — 4,179
4,179 Total incentives created (fund level) 784,032
4,726 788,758 637,466
4,179 641,645 Less: incentive
income recognized by us (355,152 ) (4,726 )
(359,878 ) (731,224 ) (4,179 ) (735,403 )
Ending balance $ 2,014,097 $ — $ 2,014,097 $
1,920,339 $ — $ 1,920,339 (1)
Adjustments relate to the inclusion of our pro-rata portion of
DoubleLine’s performance fees in incentives created (fund level)
and incentive income.
Non-GAAP Results
The schedules below set forth (i) the amounts as presented in
our fourth quarter 2017 earnings press release, (ii) the
adjustments, and (iii) the resulting adjusted amounts for adjusted
net income, fee-related earnings and distributable earnings.
Adjusted Net Income
Year Ended December 31, 2016 Year
Ended December 31, 2017 Reported
Adjustments (1) Adjusted
Reported Adjustments (1)
Adjusted (in thousands) Adjusted revenues: Management
fees $ 785,673 $ 61,405 $ 847,078 $ 747,261 $ 67,314 $ 814,575
Incentive income 355,152 4,726 359,878 731,224 4,179 735,403
Investment income 221,377 (66,131 ) 155,246
249,225 (71,493 ) 177,732 Total adjusted
revenues $ 1,362,202 $ — $ 1,362,202 $ 1,727,710 $ —
$ 1,727,710 (1) Adjustments relate to the
reclassification of the portion of the net earnings from management
fees and performance fees attributable to DoubleLine from
investment income to management fees and incentive income,
respectively.
Year Ended December 31,
2016 Year Ended December 31, 2017 Reported
Adjustments Adjusted Reported
Adjustments (1) Adjusted (in
thousands, except per unit data) Adjusted net income $ 572,374
$ — $ 572,374 $ 701,100 $ — $ 701,100 Adjusted net income
attributable to OCGH non-controlling interest (340,718 ) — (340,718
) (412,593 ) — (412,593 ) Non-Operating Group income (expense)
(1,176 ) — (1,176 ) 144,143 (145,064 ) (921 ) Income taxes-OCG
(39,756 ) — (39,756 ) (210,949 )
178,242 (32,707 ) Adjusted net income-OCG $ 190,724
$ — $ 190,724 $ 221,701 $ 33,178 $
254,879 Adjusted net income per Class A unit $ 3.05 $
3.05 $ 3.46 $ 3.97 Weighted average number of
Class A units outstanding 62,565 62,565
64,148 64,148 (1)
Adjustments are to exclude the impact of the Tax Act.
Fee-related Earnings
Year Ended December 31, 2016 Year
Ended December 31, 2017 Reported
Adjustments (1) Adjusted
Reported Adjustments (1)
Adjusted (in thousands, except per unit data)
Fee-related earnings $ 255,863 $ 61,405 $ 317,268 $ 223,857 $
67,314 $ 291,171 Fee-related earnings attributable to OCGH
non-controlling interest (152,347 ) (36,567 ) (188,914 ) (131,622 )
(39,587 ) (171,209 ) Non-Operating Group income (expense) (1,051 )
— (1,051 ) 144,005 (145,064 ) (1,059 ) Fee-related earnings-OCG
income taxes (13,518 ) (9,427 ) (22,945 )
(181,744 ) 165,350 (16,394 )
Fee-related earnings-OCG $ 88,947 $ 15,411 $ 104,358
$ 54,496 $ 48,013 $ 102,509 Fee-related
earnings per Class A unit $ 1.42 $ 1.67 $ 0.85
$ 1.60 Weighted average number of Class A units outstanding
62,565 62,565 64,148
64,148 (1) Adjustments relate to the
reclassification of the portion of the net earnings from management
fees attributable to DoubleLine from investment income to
management fees, and the resulting impact to non-controlling
interests. The 2017 column also includes adjustments to exclude the
impact of the Tax Act.
Distributable Earnings
Year Ended December 31, 2016 Year
Ended December 31, 2017 Reported
Adjustments (1) Adjusted
Reported Adjustments (1)
Adjusted Distributable Earnings: (in thousands,
except per unit data) Adjusted net income $ 572,374 $ —
$ 572,374 $ 701,100 $ — $ 701,100 Investment income (221,377 )
66,131 (155,246 ) (249,225 ) 71,493 (177,732 ) Receipts of
investment income from funds 66,390 — 66,390 128,468 — 128,468
Receipts of investment income from companies 63,700 (63,700 ) —
67,995 (67,995 ) — Equity-based compensation 50,098 — 50,098 53,639
— 53,639 Other (income) expense, net — — — 21,962 — 21,962
Operating Group income taxes (4,635 ) —
(4,635 ) (7,632 ) — (7,632 )
Distributable earnings 526,550 2,431 528,981 716,307 3,498 719,805
Distributable earnings attributable to OCGH non-controlling
interest (313,534 ) (1,465 ) (314,999 ) (421,401 ) (2,093 )
(423,494 ) Non-Operating Group expenses (1,176 ) — (1,176 ) (921 )
— (921 ) Distributable earnings-OCG income taxes (11,939 ) —
(11,939 ) (5,394 ) — (5,394 ) Tax receivable agreement
(20,469 ) — (20,469 ) (21,608 )
— (21,608 ) Distributable earnings-OCG 179,432
966 180,398 266,983
1,405 268,388 Distributable
earnings per Class A unit $ 2.87 $ 2.88 $ 4.16
$ 4.18 Weighted average number of Class A units outstanding
62,565 62,565 64,148
64,148 (1) Adjustments reflect the
inclusion in distributable earnings of our pro-rata share of
DoubleLine’s income instead of cash receipts, and the resulting
impact to non-controlling interests.
GLOSSARY
Accrued incentives (fund level) represents the incentive
income that would be paid to us if the funds were liquidated at
their reported values as of the date of the financial statements.
Incentives created (fund level) refers to the gross amount of
potential incentives generated by the funds during the period, and
includes our pro-rata portion of performance fees attributable to
our minority interest in DoubleLine earned in the period. We refer
to the amount of accrued incentives recognized as revenue by us as
incentive income. Amounts recognized by us as incentive income are
no longer included in accrued incentives (fund level), the term we
use for remaining fund-level accruals. Incentives created (fund
level), incentive income and accrued incentives (fund level) are
presented gross, without deduction for direct compensation expense
that is owed to our investment professionals associated with the
particular fund when we earn the incentive income. We call that
charge “incentive income compensation expense.” Incentive income
compensation expense varies by the investment strategy and vintage
of the particular fund, among many factors.
Adjusted net income (“ANI”) is a measure of profitability
for our investment management business. The components of revenues
(“adjusted revenues”) and expenses (“adjusted expenses”) used in
the determination of ANI do not give effect to the consolidation of
the funds that we manage. Adjusted revenues include investment
income (loss) that is classified in other income (loss) in the GAAP
statements of operations. In addition, ANI excludes the effect of
(a) non-cash equity-based compensation expense related to unit
grants made before our initial public offering,
(b) acquisition-related items, including amortization of
intangibles and changes in the contingent consideration liability,
(c) income taxes, (d) other income or expenses applicable to
OCG or its Intermediate Holding Companies, and (e) the
adjustment for non-controlling interests. Moreover, gains and
losses resulting from foreign-currency transactions and hedging
activities under GAAP are recognized as general and administrative
expense whether realized or unrealized in the current period. For
ANI, unrealized gains and losses from foreign-currency hedging
activities are deferred until realized, at which time they are
included in the same revenue or expense line item as the underlying
exposure that was hedged, and foreign-currency transaction gains
and losses are included in other income (expense), net. Incentive
income and incentive income compensation expense are included in
ANI when the underlying fund distributions are known or knowable as
of the respective quarter end, which may be later than the time at
which the same revenue or expense is included in the GAAP
statements of operations, for which the revenue standard is
probable that significant reversal will not occur and the expense
standard is probable and reasonably estimable. CLO investments are
carried at fair value for GAAP reporting, whereas for ANI, they are
carried at amortized cost, subject to any impairment charges.
Investment income on CLO investments is recognized in ANI when cash
distributions are received. Cash distributions are allocated
between income and return of capital based on the effective yield
method. In periods prior to 2018, adjusted revenues and adjusted
expenses reflected Oaktree’s proportionate economic interest in
Highstar, whereby amounts received for contractually reimbursable
costs from a legacy Highstar fund were classified as expenses for
ANI and as other income under GAAP. The legacy Highstar fund
stopped paying management fees in 2017. As a result, we will no
longer be receiving such income. ANI is calculated at the Operating
Group level.
Beginning with the first quarter of 2018, our reported
management fees and incentive income have been adjusted to include
the portion of the net earnings from management fees and
performance fees, respectively, attributable to our minority equity
interest in DoubleLine. Such net earnings were previously reported
as investment income. All prior periods have been recast to reflect
this change.
In the second quarter of 2017, the definition of ANI was
modified with respect to third-party placement costs associated
with closed-end funds and liability-classified EVUs to conform to
the GAAP treatment. Under GAAP, placement costs are expensed as
incurred and liability-classified EVUs are remeasured as of each
reporting date. Previously for ANI, placement costs were
capitalized and amortized in proportion to the associated
management fee stream, and liability-classified EVUs were treated
as equity-classified awards. All prior periods have been recast for
to reflect these changes.
Adjusted net income–OCG, or adjusted net income per Class A
unit, a non-GAAP performance measure, is calculated to provide
Class A unitholders with a measure that shows the portion of
ANI attributable to their ownership. Adjusted net income-OCG
represents ANI including the effect of (a) the OCGH
non-controlling interest, (b) other income or expenses, such
as income tax expense, applicable to OCG or its Intermediate
Holding Companies and (c) any Operating Group income taxes
attributable to OCG. Two of our Intermediate Holding Companies
incur federal and state income taxes for their shares of Operating
Group income. Generally, those two corporate entities hold an
interest in the Operating Group’s management fee-generating assets
and a small portion of its incentive and investment
income-generating assets. As a result, historically our fee-related
earnings generally have been subject to corporate-level taxation,
and most of our incentive income and other investment income
generally has not been subject to corporate-level taxation. Thus,
the blended effective income tax rate has generally tended to be
higher to the extent that fee-related earnings represented a larger
proportion of our ANI. Myriad other factors affect income tax
expense and the effective income tax rate, and there can be no
assurance that this historical relationship will continue going
forward.
Assets under management (“AUM”) generally refers to the
assets we manage and equals the net asset value (“NAV”) of the
assets we manage, the leverage on which management fees are
charged, the undrawn capital that we are entitled to call from
investors in our funds pursuant to their capital commitments, and
our pro-rata portion of AUM managed by DoubleLine in which we hold
a minority ownership interest. For our CLOs, AUM represents the
aggregate par value of collateral assets and principal cash, for
our publicly-traded BDCs, gross assets (including assets acquired
with leverage), net of cash, and for DoubleLine funds, NAV. Our AUM
includes amounts for which we charge no management fees.
- Management fee-generating assets
under management (“management fee-generating AUM”) is a
forward-looking metric and generally reflects the beginning AUM on
which we will earn management fees in the following quarter, as
well as our pro-rata portion of the fee basis of DoubleLine’s AUM.
Our closed-end funds typically pay management fees based on
committed capital, drawn capital or cost basis during the
investment period, without regard to changes in NAV, and during the
liquidation period on the lesser of (a) total funded capital
or (b) the cost basis of assets remaining in the fund. The
annual management fee rate generally remains unchanged from the
investment period through the liquidation period. Our open-end and
evergreen funds typically pay management fees based on their NAV,
our CLOs pay management fees based on the aggregate par value of
collateral assets and principal cash, as defined in the applicable
CLO indentures, our publicly-traded BDCs pay management fees based
on gross assets (including assets acquired with leverage), net of
cash, and DoubleLine funds typically pay management fees based on
NAV. As compared with AUM, management fee-generating AUM generally
excludes the following:
- Differences between AUM and either
committed capital or cost basis for most closed-end funds, other
than for closed-end funds that pay management fees based on NAV and
leverage, as applicable;
- Undrawn capital commitments to
closed-end funds that have not yet commenced their investment
periods;
- Undrawn capital commitments to funds
for which management fees are based on drawn capital, NAV or cost
basis;
- Oaktree’s general partner investments
in management fee-generating funds;
- Funds that are no longer paying
management fees and co-investments that pay no management fees;
and
- Differences between AUM and fee basis
for DoubleLine funds.
- Incentive-creating assets under
management (“incentive-creating AUM”) refers to the AUM that
may eventually produce incentive income. It generally represents
the NAV of our funds for which we are entitled to receive an
incentive allocation, excluding CLOs and investments made by us and
our employees and directors (which are not subject to an incentive
allocation), gross assets (including assets acquired with
leverage), net of cash, for our publicly-traded BDCs, and our
pro-rata portion of DoubleLine’s incentive-creating AUM. All funds
for which we are entitled to receive an incentive allocation are
included in incentive-creating AUM, regardless of whether or not
they are currently above their preferred return or high-water mark
and therefore generating incentives. Incentive-creating AUM does
not include undrawn capital commitments.
Distributable earnings is a non-GAAP performance measure
derived from our non-GAAP results that we use to measure our
earnings at the Operating Group level without the effects of the
consolidated funds for the purpose of, among other things,
assisting in the determination of equity distributions from the
Operating Group. However, the declaration, payment and
determination of the amount of equity distributions, if any, is at
the sole discretion of our board of directors, which may change our
distribution policy at any time.
Distributable earnings and distributable earnings revenues
differ from ANI in that they exclude investment income or loss and
include the receipt of investment income or loss from distributions
by our investments in funds. Additionally, any impairment charges
on our CLO investments included in ANI are, for distributable
earnings purposes, amortized over the remaining investment period
of the respective CLO, in order to align with the timing of
expected cash flows. In addition, distributable earnings differs
from ANI in that make-whole premium charges related to the
repayment of debt are included in ANI, but for distributable
earnings purposes are amortized through the original maturity date
of the repaid debt. Finally, distributable earnings differs from
ANI in that it is net of Operating Group income taxes and excludes
non-cash equity-based compensation expense.
Distributable earnings–OCG, or distributable earnings per
Class A unit, a non-GAAP performance measure, is calculated to
provide Class A unitholders with a measure that shows the
portion of distributable earnings attributable to their ownership.
Distributable earnings-OCG represents distributable earnings,
including the effect of (a) the OCGH non-controlling interest,
(b) expenses, such as current income tax expense, applicable
to OCG or its Intermediate Holding Companies and (c) amounts
payable under a tax receivable agreement. The income tax expense
included in distributable earnings-OCG represents the implied
current provision for income taxes calculated using an approach
similar to that which is used in calculating the income tax
provision for adjusted net income-OCG.
Economic net income (“ENI”) is a non-GAAP performance
measure that we use to evaluate the financial performance of our
business by applying the mark-to-market approach instead of the
GAAP revenue recognition approach for incentive income. ANI follows
GAAP, except incentive income is recognized when the underlying
fund distributions are known or knowable as of the respective
quarter end, as opposed to the probable that significant reversal
will not occur criteria under GAAP. The mark-to-market approach
followed by ENI recognizes incentive income as if the funds were
liquidated at their reported values as of the date of the financial
statements. ENI is computed by adjusting ANI for the change in
accrued incentives (fund level), net of associated incentive income
compensation expense, during the period.
Economic net income revenues is a non-GAAP measure applying the
mark-to-market approach, instead of the GAAP revenue recognition
approach, for incentive income, and reflects the adjustments
described above and under the definition of ANI.
Economic net income–OCG, or economic net income per Class A
unit, a non-GAAP performance measure, is calculated to provide
Class A unitholders with a measure that shows the portion of
ENI attributable to their ownership. Economic net income-OCG
represents ENI, including the effect of (a) the OCGH
non-controlling interest, (b) other income or expenses, such
as income tax expense, applicable to OCG or its Intermediate
Holding Companies and (c) any Operating Group income taxes
attributable to OCG. The income tax expense included in economic
net income-OCG represents the implied provision for income taxes
calculated using an approach similar to that which is used in
calculating the income tax provision for adjusted net
income-OCG.
Fee-related earnings (“FRE”) is a non-GAAP performance
measure that we use to monitor the baseline earnings of our
business. FRE is derived from our non-GAAP results and is comprised
of management fees (“fee-related earnings revenues”) less operating
expenses other than incentive income compensation expense and
non-cash equity-based compensation expense. FRE is considered
baseline because it excludes all non-management fee revenue sources
and applies all cash compensation and benefits other than incentive
income compensation expense, as well as all general and
administrative expenses, to management fees, even though those
expenses also support the generation of incentive and investment
income. FRE is presented before income taxes.
Fee-related earnings–OCG, or fee-related earnings per Class A
unit, is a non-GAAP performance measure calculated to provide
Class A unitholders with a measure that shows the portion of
FRE attributable to their ownership. Fee-related earnings–OCG
represents FRE including the effect of (a) the OCGH
non-controlling interest, (b) other income or expenses, such
as income tax expense, applicable to OCG or its Intermediate
Holding Companies and (c) any Operating Group income taxes
attributable to OCG. Fee-related earnings–OCG income taxes is
calculated excluding any incentive income or investment income
(loss).
Incentive income is generally recognized for our
closed-end funds only after the fund has distributed all
contributed capital plus an annual preferred return (commonly
referred to as the European-style waterfall) and, for our evergreen
funds, on an annual basis up to 20% of the year’s profits, subject
to a high-water mark or hurdle rate. Incentive income also includes
the portion of the performance fees attributable to our minority
equity interest in DoubleLine earned in the period.
Management fees are recognized over the period in which
our investment advisory services are performed and includes the
portion of the net earnings from management fees attributable to
our minority equity interest in DoubleLine.
EXHIBIT
A
Use of Non-GAAP Financial Information
Oaktree discloses certain non-GAAP financial measures in this
earnings release. Reconciliations of these non-GAAP financial
measures to the most directly comparable financial measures
calculated and presented in accordance with GAAP are presented
below. Management makes operating decisions and assesses the
performance of Oaktree’s business based on these non-GAAP financial
measures. These non-GAAP financial measures should be considered in
addition to, and not as a substitute for or superior to, net
income, net income per Class A unit or other financial measures
presented in accordance with GAAP.
Reconciliation of GAAP to Non-GAAP Results
The following table reconciles net income attributable to
Oaktree Capital Group, LLC to adjusted net income, fee-related
earnings and distributable earnings.
Year Ended December 31, 2016 Year Ended
December 31, 2017 Reported Adjustments
Adjusted Reported Adjustments
Adjusted (in thousands) Net income
attributable to Oaktree Capital Group, LLC $ 194,705 $ — $ 194,705
$ 231,494 $ — $ 231,494 Incentive income (1) 1,407 — 1,407 (13,653
) — (13,653 ) Incentive income compensation (1) (1,407 ) — (1,407 )
13,653 — 13,653 Investment income (2) (21,814 ) — (21,814 ) (30,613
) — (30,613 ) Equity-based compensation (3) 13,626 — 13,626 5,698 —
5,698 Foreign-currency hedging (4) 1,496 — 1,496 1,453 — 1,453
Acquisition-related items (5) (924 ) — (924 ) 1,838 — 1,838 Income
taxes (6) 42,519 — 42,519 215,442 — 215,442 Non-Operating Group
(income) expenses (7) 1,176 — 1,176 (144,143 ) — (144,143 )
Non-controlling interests (7) 341,590 —
341,590 419,931 —
419,931 Adjusted net income 572,374 — 572,374 701,100 —
701,100 Incentive income (355,152 ) (4,726 ) (359,878 ) (731,224 )
(4,179 ) (735,403 ) Incentive income compensation 169,683 — 169,683
402,828 — 402,828 Investment income (221,377 ) 66,131 (155,246 )
(249,225 ) 71,493 (177,732 ) Equity-based compensation (8) 50,098 —
50,098 53,639 — 53,639 Interest expense, net of interest income
31,845 — 31,845 26,375 — 26,375 Other (income) expense, net
8,392 — 8,392 20,364
— 20,364 Fee-related earnings
255,863 61,405 317,268 223,857 67,314 291,171 Incentive income
355,152 4,726 359,878 731,224 4,179 735,403 Incentive income
compensation (169,683 ) — (169,683 ) (402,828 ) — (402,828 )
Receipts of investment income from funds (9) 66,390 — 66,390
128,468 — 128,468 Receipts of investment income from companies
63,700 (63,700 ) — 67,995 (67,995 ) — Interest expense, net of
interest income (31,845 ) — (31,845 ) (26,375 ) — (26,375 ) Other
(income) expense, net (8,392 ) — (8,392 ) 1,598 — 1,598 Operating
Group income taxes (4,635 ) — (4,635 )
(7,632 ) — (7,632 ) Distributable
earnings $ 526,550 $ 2,431 $ 528,981 $ 716,307
$ 3,498 $ 719,805 (1) This
adjustment adds back the effect of timing differences associated
with the recognition of incentive income and incentive income
compensation expense between adjusted net income and net income
attributable to OCG. (2) This adjustment adds back the effect of
differences in the recognition of investment income related to
corporate investments in CLOs which under GAAP are marked-to-market
but for ANI are accounted for at amortized cost, subject to
impairment. (3) This adjustment adds back the effect of
equity-based compensation expense related to unit grants made
before our initial public offering, which is excluded from adjusted
net income and fee-related earnings because it is a non-cash charge
that does not affect our financial position. (4) This adjustment
adds back the effect of timing differences associated with the
recognition of unrealized gains and losses related to
foreign-currency hedging between adjusted net income and net income
attributable to OCG. (5) This adjustment adds back the effect of
acquisition-related items associated with the amortization of
intangibles and changes in the contingent consideration liability,
which are excluded from adjusted net income. (6) Because adjusted
net income and fee-related earnings are pre-tax measures, this
adjustment adds back the effect of income tax expense. (7) Because
adjusted net income and fee-related earnings are calculated at the
Operating Group level, this adjustment adds back the effect of
items applicable to OCG, its Intermediate Holding Companies or
non-controlling interests. (8) This adjustment adds back the effect
of equity-based compensation expense related to unit grants made
after our initial public offering, which is excluded from
fee-related earnings because it is non-cash in nature and does not
impact our ability to fund our operations. (9) This adjustment
reflects the portion of distributions received from funds
characterized as receipts of investment income or loss. In general,
the income or loss component of a distribution from a fund is
calculated by multiplying the amount of the distribution by the
ratio of our investment’s undistributed income or loss to our
remaining investment balance. In addition, if the distribution is
made during the investment period, it is generally not reflected in
distributable earnings until after the investment period ends.
The following table reconciles net income attributable to
Oaktree Capital Group, LLC to adjusted net income-OCG, fee-related
earnings-OCG and distributable earnings-OCG.
Year Ended December 31, 2016 Year Ended
December 31, 2017 Reported Adjustments
Adjusted Reported Adjustments
Adjusted (in thousands) Net income
attributable to Oaktree Capital Group, LLC $ 194,705 $ — $ 194,705
$ 231,494 $ — $ 231,494 Impact of the Tax Act — — — — 33,178 33,178
Incentive income attributable to OCG (1) 407 — 407 (6,004 ) —
(6,004 ) Incentive income compensation attributable to OCG (1) (407
) — (407 ) 6,004 — 6,004 Investment income attributable to OCG (2)
(8,807 ) — (8,807 ) (12,608 ) — (12,608 ) Equity-based compensation
attributable to OCG (3) 5,512 — 5,512 2,341 — 2,341
Foreign-currency hedging attributable to OCG (4) 572 — 572 618 —
618 Acquisition-related items attributable to OCG (5) (372 ) — (372
) 759 — 759 Non-controlling interests attributable to OCG (5)
(886 ) — (886 ) (903 ) —
(903 ) Adjusted net income-OCG (6) 190,724 — 190,724
221,701 33,178 254,879 Impact of the Tax Act — — — — (2,127 )
(2,127 ) Incentive income attributable to OCG (143,595 ) (1,912 )
(145,507 ) (300,718 ) (1,723 ) (302,441 ) Incentive income
compensation attributable to OCG 68,609 — 68,609 165,669 — 165,669
Investment income attributable to OCG (89,698 ) 26,750 (62,948 )
(102,644 ) 29,450 (73,194 ) Equity-based compensation attributable
to OCG (7) 20,267 — 20,267 22,089 — 22,089 Interest expense, net of
interest income attributable to OCG 13,002 — 13,002 10,720 — 10,720
Other (income) expense attributable to OCG 3,400 — 3,400 8,474 —
8,474 Non-fee-related earnings income taxes attributable to OCG (8)
26,238 (9,427 ) 16,811
29,205 (10,765 ) 18,440 Fee-related
earnings-OCG (6) 88,947 15,411 104,358 54,496 48,013 102,509
Incentive income attributable to OCG 143,595 1,912 145,507 300,718
1,722 302,440 Incentive income compensation attributable to OCG
(68,609 ) — (68,609 ) (165,669 ) — (165,669 ) Receipts of
investment income from funds attributable to OCG 26,879 — 26,879
52,923 — 52,923 Receipts of investment income from companies
attributable to OCG 25,784 (25,784 ) — 28,041 (28,041 ) — Interest
expense, net of interest income attributable to OCG (13,002 ) —
(13,002 ) (10,720 ) — (10,720 ) Other (income) expense attributable
to OCG (3,400 ) — (3,400 ) (144,409 ) 145,063 654 Non-fee-related
earnings income taxes attributable to OCG (8) (26,238 ) 9,427
(16,811 ) (29,205 ) 10,765 (18,440 ) Distributable earnings-OCG
income taxes (11,939 ) — (11,939 ) (5,394 ) — (5,394 ) Tax
receivable agreement (20,469 ) — (20,469 ) (21,608 ) — (21,608 )
Income taxes of Intermediate Holding Companies 37,884
— 37,884 207,810
(176,117 ) 31,693 Distributable earnings-OCG (6) $
179,432 $ 966 $ 180,398 $ 266,983 $
1,405 $ 268,388 (1) This adjustment
adds back the effect of timing differences associated with the
recognition of incentive income and incentive income compensation
expense between adjusted net income-OCG and net income attributable
to OCG. (2) This adjustment adds back the effect of differences in
the recognition of investment income related to corporate
investments in CLOs which under GAAP are marked-to-market but for
ANI are accounted for at amortized cost, subject to impairment. (3)
This adjustment adds back the effect of equity-based compensation
expense attributable to OCG related to unit grants made before our
initial public offering, which is excluded from adjusted net
income-OCG and fee-related earnings-OCG because it is a non-cash
charge that does not affect our financial position. (4) This
adjustment adds back the effect of timing differences associated
with the recognition of unrealized gains and losses related to
foreign-currency hedging between adjusted net income-OCG and net
income attributable to OCG. (5) This adjustment adds back the
effect of (a) acquisition-related items associated with the
amortization of intangibles and changes in the contingent
consideration liability and (b) non-controlling interests, which
are both excluded from ANI. (6) Adjusted net income-OCG,
fee-related earnings-OCG and distributable earnings-OCG are
calculated to evaluate the portion of adjusted net income,
fee-related earnings and distributable earnings attributable to
Class A unitholders. These measures are net of income taxes and
other income or expenses applicable to OCG or its Intermediate
Holding Companies. (7) This adjustment adds back the effect of
equity-based compensation expense attributable to OCG related to
unit grants made after our initial public offering, which is
excluded from fee-related earnings-OCG, because it is non-cash in
nature and does not impact our ability to fund our operations. (8)
This adjustment adds back income taxes associated with incentive
income, incentive income compensation expense or investment income
or loss, which are not included in the calculation of fee-related
earnings-OCG.
The following table reconciles GAAP revenues to adjusted
revenues, fee-related earnings revenues and distributable earnings
revenues.
Year Ended December 31, 2016 Year Ended
December 31, 2017 Reported Adjustments
Adjusted Reported Adjustments
Adjusted (in thousands) GAAP revenues $
1,125,746 $ — $ 1,125,746 $ 1,469,767 $ — $ 1,469,767 Consolidated
funds (1) 57,737 — 57,737 100,920 — 100,920 Incentive income (2)
1,407 — 1,407 (13,653 ) — (13,653 ) Investment income (3)
177,312 — 177,312 170,676
— 170,676 Adjusted revenues
1,362,202 — 1,362,202 1,727,710 — 1,727,710 Incentive income
(355,152 ) (4,726 ) (359,878 ) (731,224 ) (4,179 ) (735,403 )
Investment income (221,377 ) 66,131
(155,246 ) (249,225 ) 71,493 (177,732 )
Fee-related earnings revenues 785,673 61,405 847,078 747,261 67,314
814,575 Incentive income 355,152 4,726 359,878 731,224 4,179
735,403 Receipts of investment income from funds 66,390 — 66,390
128,468 — 128,468 Receipts of investment income from companies
63,700 (63,700 ) — 67,995
(67,995 ) — Distributable earnings
revenues $ 1,270,915 $ 2,431 $ 1,273,346 $
1,674,948 $ 3,498 $ 1,678,446 (1)
This adjustment adds back the amounts attributable to the
consolidated funds that were eliminated in consolidation, the
reclassification of gains and losses related to foreign-currency
hedging activities from general and administrative expense to
revenues, and the elimination of non-controlling interests from
adjusted revenues. (2) This adjustment adds back the effect of
timing differences associated with the recognition of incentive
income between adjusted revenues and GAAP revenues. (3) This
adjustment reclassifies consolidated investment income from other
income (loss) to revenues and adds back the effect of differences
in the recognition of investment income related to corporate
investments in CLOs between adjusted revenues and GAAP revenues.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20180416005475/en/
Investor Relations:Oaktree Capital Group, LLCAndrea D.
Williams(213)
830-6483investorrelations@oaktreecapital.comorPress
Relations:Sard Verbinnen & CoJohn Christiansen(415)
618-8750jchristiansen@sardverb.comorSard Verbinnen
& CoAlyssa Linn(310)
201-2040alinn@sardverb.com
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