Oaktree Announces Second Quarter 2013 Financial Results

Oaktree Announces Second Quarter 2013 Financial Results

• Adjusted net income per Class A unit grew 97% for the second quarter, to $1.75, and 106% for the year's first two quarters, to $3.69, as compared with the corresponding prior-year periods, on gains in incentive income driven by fund realizations.

• Distributable earnings per Class A unit grew 90% for the second quarter, to $1.94, and 116% for the year's first two quarters, to $3.73, as compared with the corresponding prior-year periods, on gains in incentive income, as well as higher investment income proceeds.

• Economic net income per Class A unit grew 88% for the second quarter, to $1.13, and 63% for the year's first two quarters, to $3.16, as compared with the corresponding prior-year periods, as higher fund returns drove gains in incentives created (fund level) and investment income.

• GAAP net income attributable to Oaktree Capital Group, LLC grew 129%, to $56.6 million, and 164%, to $114.1 million, for the second quarter and first two quarters of 2013, respectively, as compared with the corresponding prior-year periods.

• Oaktree declares a quarterly distribution for the second quarter of $1.51 per Class A unit, bringing to $2.92 the aggregate distribution for the year's first two quarters, up 91% and 118%, respectively, over the prior-year amounts.

LOS ANGELES--(BUSINESS WIRE)-- Oaktree Capital Group, LLC (NYS: OAK) today reported its unaudited financial results for the quarter ended June 30, 2013.

Adjusted net income ("ANI") rose $131.5 million, to $297.0 million in the second quarter of 2013 from $165.5 million in the second quarter of 2012, on a $214.0 million increase in total segment revenues. The 63% growth in revenues, to $555.1 million from $341.1 million, reflected a 162% gain in incentive income, to $338.1 million from $129.0 million, and a 49% increase in investment income, to $34.6 million from $23.2 million. Driven by $4.7 billion of distributions to investors in closed-end funds, incentive income arose from funds in our distressed debt, real estate and control investing strategies, and included $272.5 million from OCM Opportunities Fund VIIb, L.P. ("Opps VIIb"). ANI increased to $632.7 million for the six months ended June 30, 2013 from $339.1 million for the six months ended June 30, 2012, on a 74% rise in total segment revenues, to $1.1 billion.

Distributable earnings grew to $313.2 million in the second quarter of 2013 from $176.4 million in the second quarter of 2012, on higher incentive income and investment income proceeds. For the six-month period, distributable earnings rose to $608.2 million in 2013 from $313.7 million in 2012. The 2013 results represented record highs for any quarter or six-month period in the Company's history.

Distributable earnings generated a distribution per Class A unit of $1.51 with respect to the second quarter of 2013. That quarterly distribution and the trailing two- and four-quarter distributions of $2.92 and $4.52, respectively, represent records for any such period.

Howard Marks, Chairman, said, "Our investment teams continue to deliver both exceptional cash returns and new opportunities for future growth and income. In the second quarter, our closed-end funds distributed $4.7 billion to investors, yielding record incentive income of $338.1 million. As a demonstrated leader in credit strategies, we continue to raise significant capital for our newest products to provide our clients with superior risk-adjusted investment performance across market cycles."

In addition to ANI, Oaktree calculates economic net income ("ENI") to facilitate comparability with other alternative asset managers that report a measure similar to ENI as a performance measure. Unlike ANI, ENI measures incentive income based on market values. ENI rose to $172.6 million in the second quarter of 2013 from $103.6 million in the second quarter of 2012, reflecting higher incentives created (fund level) and investment income on the quarter's stronger fund returns. For the six-month period, ENI grew to $573.2 million in 2013 from $382.0 million in 2012.

GAAP-basis results for the second quarter and first six months of 2013 included net income attributable to Oaktree Capital Group, LLC of $56.6 million and $114.1 million, respectively, which represented increases of 129% and 164% over the respective prior-year period.

As previously announced, assets under management were $76.4 billion as of June 30, 2013, down $2.4 billion from March 31, 2013 and $2.3 billion since June 30, 2012, reflecting the current year's high level of realizations and resulting distributions by closed-end funds. Management fee-generating assets under management were $64.6 billion as of June 30, 2013, down from $66.4 billion at March 31, 2013 and $66.3 billion as of June 30, 2012, as new capital in-flows partially offset the downward impact of asset sales by closed-end funds in their liquidation period.

As of June 30, 2013, the total fund size, including leverage, of Oaktree Enhanced Income Fund, L.P. ("EIF"), which invests in senior loan assets on a leveraged basis, reached $2.3 billion. Following its fourth interim closing in June 2013, Oaktree Real Estate Opportunities Fund VI, L.P. ("ROF VI") has received capital commitments of $1.2 billion. Oaktree Emerging Market Opportunities Fund, L.P. ("EMOF"), which will invest in distressed emerging market corporate debt, held a first closing in May, without commencing its investment period. Together with a separate account established in July, EMOF's first closing brought committed capital for this strategy to $193 million. Capital commitments to our Strategic Credit strategy, which seeks to achieve an attractive total return on an unleveraged basis by investing in stressed credits, have reached $1.5 billion.

Additionally, Oaktree is currently marketing Oaktree Principal Fund VI, L.P. ("PF VI"), Oaktree Real Estate Debt Fund, L.P. ("REDF") and Oaktree European Dislocation Fund, L.P., which will invest in European private debt.

The table below presents: (a) adjusted net income, distributable earnings, fee-related earnings and economic net income, in each case for both the Operating Group and per Class A unit; (b) adjusted net income revenues, distributable earnings revenues, fee-related earnings revenues and economic net income revenues, in each case for the Operating Group; and (c) assets under management and accrued incentives (fund level) data. Please refer to the Glossary for definitions.

Note: Oaktree discloses in this earnings release certain revenues and financial measures, including adjusted net income revenues, adjusted net income, adjusted net income per Class A unit, distributable earnings revenues, distributable earnings, distributable earnings per Class A unit, fee-related earnings revenues, fee-related earnings, fee-related earnings per Class A unit, economic net income revenues, economic net income and economic net income per Class A unit, that are calculated and presented on the basis of methodologies other than in accordance with generally accepted accounting principles in the United States ("non-GAAP"). Reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are presented at Exhibit A.

Operating Metrics

Assets under management

Assets under management ("AUM") were $76.4 billion as of June 30, 2013, as compared with $78.8 billion as of March 31, 2013 and $78.7 billion as of June 30, 2012. The $2.4 billion decrease since March 31, 2013 primarily reflected $4.7 billion in distributions to closed-end fund investors, partially offset by $0.7 billion of new capital commitments to closed-end funds, and $1.0 billion of aggregate market-value gains. The $4.7 billion of distributions by closed-end funds in their liquidation period included $1.4 billion by Opps VIIb, $1.3 billion by other distressed debt funds, $1.0 billion by real estate funds and $0.8 billion by global principal funds.

The $2.3 billion decrease in AUM since June 30, 2012 was attributable primarily to $15.3 billion of distributions to investors in closed-end funds, largely offset by market-value gains of $9.6 billion and new closed-end fund capital commitments and fee-generating leverage of $4.6 billion. The $15.3 billion of distributions by closed-end funds in their liquidation period included $5.3 billion by Opps VIIb, $4.4 billion by other distressed debt funds, $2.4 billion by global principal funds, $1.9 billion by real estate funds and $0.6 billion by European principal funds. Of the new capital commitments and fee-generating leverage, EIF and ROF VI represented $2.2 billion and $1.2 billion, respectively.

Management fee-generating assets under management

Management fee-generating assets under management ("management fee-generating AUM") were $64.6 billion as of June 30, 2013, down from $66.4 billion and $66.3 billion as of March 31, 2013 and June 30, 2012, respectively. The decline of $1.8 billion in the second quarter of 2013 represented a decrease of $2.9 billion attributable to asset sales by closed-end funds in liquidation, partially offset by an increase of $0.9 billion for closed-end and evergreen funds that generate fees based on drawn capital or NAV. Of the decline due to asset sales, Opps VIIb accounted for $0.8 billion. As of June 30, 2013, Oaktree Opportunities Fund IX, L.P. ("Opps IX") had made an aggregate 10% drawdown against its $5.0 billion of committed capital. Oaktree has not yet commenced Opps IX's investment period and, as a result, as of June 30, 2013 management fees were assessed only on Opps IX's drawn capital and management fee-generating AUM included only that portion of its committed capital.

As compared to June 30, 2012, management fee-generating AUM decreased $1.7 billion, reflecting the net effect of an $8.4 billion decline from asset sales by closed-end funds in liquidation, of which $3.5 billion arose from Opps VIIb, and increases of $2.8 billion from market-value gains in funds for which management fees are based on NAV and of $3.1 billion from closings for ROF VI and drawdowns by Opps IX, EIF and our Strategic Credit and Real Estate Debt strategies.

Incentive-creating assets under management

Incentive-creating assets under management ("incentive-creating AUM") were $32.1 billion as of June 30, 2013, down from $34.0 billion and $36.0 billion as of March 31, 2013 and June 30, 2012, respectively. The $1.9 billion decrease since March 31, 2013 primarily reflected the net effect of $4.2 billion in closed-end fund distributions, $1.1 billion in closed-end fund drawdowns and $1.1 billion in market-value gains. The $3.9 billion decrease since June 30, 2012 primarily reflected the net effect of $14.2 billion in closed-end fund distributions, $3.8 billion in closed-end fund drawdowns and $6.2 billion in market-value gains. Of the $32.1 billion in incentive-creating AUM as of June 30, 2013, $22.9 billion, or 71.3%, was generating incentives at the fund level.

Accrued incentives (fund level) and incentives created (fund level)

Accrued incentives (fund level) amounted to $2.1 billion as of June 30, 2013, as compared with $2.3 billion as of March 31, 2013 and $1.8 billion as of June 30, 2012. The $0.2 billion decrease in the second quarter of 2013 resulted from $195.2 million of incentives created (fund level) from the period's fund returns, less $338.1 million of segment incentive income recognized.

Net of incentive income compensation expense, accrued incentives (fund level) amounted to $1.2 billion, $1.3 billion and $1.1 billion as of June 30, 2013, March 31, 2013 and June 30, 2012, respectively.

Uncalled capital commitments

Uncalled capital commitments amounted to $11.0 billion as of June 30, 2013, as compared with $11.2 billion as of March 31, 2013 and $13.7 billion as of June 30, 2012.

Segment Results

Revenues

Total segment revenues increased $214.0 million, or 62.7%, to $555.1 million for the second quarter of 2013 from $341.1 million for the second quarter of 2012, as a result of growth of $209.1 million in incentive income and of $11.4 million in investment income, partially offset by a decline of $6.3 million in management fees.

Management fees

Management fees decreased $6.3 million, or 3.3%, to $182.5 million for the second quarter of 2013 from $188.8 million in the prior year's second quarter. The decline reflected a decrease of $26.0 million in fees attributable to closed-end funds in liquidation, led by Opps VIIb's decrease of $13.3 million, partially offset by increases of $5.3 million for open-end funds and $8.7 million from new commitments to ROF VI. Of the $8.7 million increase from new commitments to ROF VI, $4.4 million represented additional management fees that were earned retroactive to the start of the fund's investment period in August 2012. No such retroactive management fees fell in the prior-year period. A portion of Oaktree Mezzanine Fund III, L.P.'s management fees is dependent on the fund's cash flow, which resulted in $4.7 million and $3.4 million of such fees in the second quarters of 2013 and 2012, respectively. During the second quarter of 2013, closed-end funds represented $136.2 million, or 74.6%, of total management fees.

Incentive income

Incentive income increased $209.1 million, or 162.1%, to $338.1 million for the second quarter of 2013 from $129.0 million for the prior year's second quarter. The current quarter's $338.1 million included $272.5 million from Opps VIIb and $31.9 million from Oaktree PPIP Fund, L.P. In the second quarter of 2012, tax-related incentive distributions by Opps VIIb accounted for $42.1 million of that quarter's $129.0 million in incentive income.

Investment income

Investment income rose $11.4 million, or 49.1%, to $34.6 million for the second quarter of 2013 from $23.2 million for the second quarter of 2012, as a result of generally higher returns among Oaktree funds on an average invested balance that declined 4.8% from the second quarter of 2012.

Investments in companies relate principally to our one-fifth ownership in DoubleLine Capital LP and its affiliates (collectively, "DoubleLine"), which accounted for an investment loss of $1.0 million and investment income of $4.8 million in the second quarters of 2013 and 2012, respectively. In the second quarter of 2013, DoubleLine incurred a placement fee associated with the launch of a closed-end fund and a non-cash charge related to the firm's employee ownership interests; excluding the effect of those two expenses, the quarter's investment loss of $1.0 million would have been investment income of approximately $10 million. Our share of performance fees from DoubleLine generated investment income of $1.0 million and $0.8 million in the current-year and prior-year second quarters, respectively. The DoubleLine fund primarily responsible for generating performance fees was below its high-water mark as of June 30, 2013.

Expenses

Compensation and benefits

Compensation and benefits for the second quarter of 2013 amounted to $90.2 million, an increase of $9.9 million, or 12.3%, from $80.3 million in the second quarter of 2012. The increase primarily reflected growth in headcount of 9.2% between June 30, 2012 and June 30, 2013, and secondarily reflected higher phantom equity plan expense (to $1.3 million in the current year's second quarter) tied to changes in the Class A unit trading price.

Equity-based compensation

Equity-based compensation increased to $0.9 million for the second quarter of 2013 from zero in the second quarter of 2012, reflecting non-cash amortization expense associated with vesting of restricted unit grants made to employees and directors subsequent to our initial public offering in April 2012.

Incentive income compensation

Incentive income compensation expense rose $68.0 million, or 111.5%, to $129.0 million for the second quarter of 2013 from $61.0 million for the second quarter of 2012, reflecting the 162.1% increase in incentive income over the same period. The increase in incentive income compensation expense would have been $21.2 million greater had we not acquired and expensed in 2011 a small portion of certain investment professionals' carried interest in Opps VIIb.

General and administrative

General and administrative expenses increased $5.1 million, or 20.9%, to $29.5 million for the second quarter of 2013 from $24.4 million in the second quarter of 2012. Excluding the impact of foreign currency-related items, general and administrative expenses increased $4.2 million, or 17.4%, to $28.4 million from $24.2 million. The increase reflected costs associated with corporate growth and being a public company.

Adjusted net income

Adjusted net income rose $131.5 million, or 79.5%, to $297.0 million for the second quarter of 2013 from $165.5 million in the second quarter of 2012, reflecting increases of $141.1 million in incentive income, net of incentive income compensation expense, and $11.4 million in investment income, and a decrease of $22.0 million in fee-related earnings. The portion of adjusted net income attributable to our Class A units was $57.9 million and $26.2 million for the second quarters of 2013 and 2012, respectively. Per Class A unit, adjusted net income-OCG amounted to $1.75 and $0.89 for the second quarters of 2013 and 2012, respectively.

The effective income tax rates applied to ANI for the three months ended June 30, 2013 and 2012 were 10% and 16%, respectively, resulting from estimated full-year effective rates of 11% and 18%, respectively. The effective income tax rate is a function of the mix of income and other factors, each of which often varies significantly within or between years and can have a material impact on the particular year's income tax expense. The rate used for interim fiscal periods is based on the estimated full-year effective income tax rate, which is subject to change as the year progresses.

Distributable earnings

Distributable earnings increased $136.8 million, or 77.6%, to $313.2 million for the second quarter of 2013 from $176.4 million for the second quarter of 2012, reflecting increases of $141.1 million in incentive income, net of incentive income compensation expense, and $15.7 million in receipts of investment income, partially offset by a decline of $22.0 million in fee-related earnings. For the second quarter of 2013, receipts of investment income totaled $51.7 million, including $49.5 million from fund distributions and $2.2 million from Oaktree's one-fifth equity ownership in DoubleLine, of which the latter included $1.0 million attributable to performance fees.

The portion of distributable earnings attributable to our Class A units was $1.94 and $1.02 per unit for the second quarters of 2013 and 2012, respectively, reflecting distributable earnings per Operating Group unit of $2.07 and $1.17, respectively, less costs borne by Class A unitholders for professional fees and other expenses, cash taxes attributable to the Intermediate Holding Companies and amounts payable pursuant to the tax receivable agreement.

Fee-related earnings

Fee-related earnings decreased $22.0 million, or 26.8%, to $60.2 million for the second quarter of 2013 from $82.2 million for the second quarter of 2012, reflecting the $6.3 million decline in management fees and increases of $9.9 million in compensation and benefits and $5.1 million in general and administrative expenses. The portion of FRE attributable to our Class A units was $0.35 and $0.41 per unit for the second quarters of 2013 and 2012, respectively.

The effective income tax rates applied to FRE for the three months ended June 30, 2013 and 2012 were 9% and 19%, respectively, resulting from estimated full-year effective rates of 13% and 20%, respectively. The effective income tax rate used for interim fiscal periods is based on the estimated full-year income tax rate, which is a function of various factors and is subject to change as the year progresses.

GAAP-Basis Results

Net income attributable to Oaktree Capital Group, LLC was $56.6 million for the second quarter of 2013, an increase of 129% from $24.7 million for the second quarter of 2012.

Capital and Liquidity

As of June 30, 2013, Oaktree had cash and investments in U.S. Treasury and government agency securities of $1.1 billion and $592.0 million in outstanding debt. Oaktree had then and currently has no borrowings outstanding against its $500 million revolving credit facility. Oaktree's investments in funds and companies had a carrying value of $1.1 billion as of June 30, 2013. While all of these investments in funds and companies follow the equity method of accounting, whereby original cost is adjusted for Oaktree's share of income/loss and distributions, investments in funds reflect each fund's holdings at fair value, whereas investments in DoubleLine and other companies are not adjusted to reflect the fair value of the underlying companies.

Distribution

Oaktree Capital Group, LLC has declared a distribution attributable to the second quarter of 2013 of $1.51 per Class A unit. This distribution will be paid on August 20, 2013 to Class A unitholders of record at the close of business on August 16, 2013.

Conference Call

Oaktree will host a conference call to discuss second quarter 2013 results today at 11:00 a.m. Eastern Time / 8:00 a.m. Pacific Time. The conference call may be accessed by dialing (888) 769-9724 (U.S. callers) or +1 (415) 228-4639 (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 (800) 839-8796 (U.S. callers) or +1 (402) 998-0578 (non-U.S. callers), beginning approximately one hour after the broadcast.

About Oaktree

Oaktree is a leading global investment management firm focused on alternative markets, with $76.4 billion in assets under management as of June 30, 2013. The firm emphasizes an opportunistic, value-oriented and risk-controlled approach to investments in distressed debt, corporate debt (including high yield debt and senior loans), control investing, convertible securities, real estate and listed equities. Headquartered in Los Angeles, the firm has over 750 employees and offices in 13 cities worldwide. For additional information, please visit Oaktree's website at www.oaktreecapital.com.

Forward-Looking Statements

This release contains forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of 1933 (the "Securities Act") and Section 21E of the U.S. Securities Exchange Act of 1934, each as amended, which reflect the current views of Oaktree Capital Group, LLC ("OCG"), with respect to, among other things, its 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 OCG's beliefs, assumptions and expectations of its future performance, taking into account all information currently available to OCG. Such forward-looking statements are subject to risks and uncertainties and assumptions relating to OCG's 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; the timing and receipt of and impact of taxes on carried interest; distributions from and liquidation of our existing funds; changes in our operating or other expenses; the degree to which we encounter competition; and general economic and market conditions. The factors listed in the item captioned "Risk Factors" in OCG's Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC on March 14, 2013 ("Annual Report"), which is accessible on the SEC's website at www.sec.gov, provide examples of risks, uncertainties and events that may cause OCG's actual results to differ materially from the expectations described in its forward-looking statements.

Forward-looking statements speak only as of the date the statements are made. Except as required by law, OCG does 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 OCG or securities of any Oaktree investment fund.

Consolidated Statements of Operations Data (GAAP basis)