For Howard Marks, chairman of Oaktree Capital Group, the investment strategies where the firm is most active and that have been the most profitable are one and the same.
“Continuing with the theme from early last year, two of the areas where we’re busiest investing, real estate and Europe, featured the highest returns,” Marks said during the firm’s fourth-quarter and full-year 2014 earnings call yesterday. During the fourth quarter, Oaktree’s real estate business generated a gross return of eight percent, which boosted its full-year return to 28 percent, while its European principal investments platform yielded a gross return of five percent during the fourth quarter and 20 percent for the full year.
The US, one of two primary real estate markets for Oaktree, has seen significant price appreciation and a corresponding decline in potential opportunities, Marks noted. “But we think the opportunity in commercial nonprime cities and non A buildings is still superior,” he said. “It’s an area where, for the most part, we think prices are not back to pre-crisis highs in the US. So we continue to be quite active in the US.” The firm also remains active in real estate in Western Europe, primarily Germany and the UK.
Meanwhile, Oaktree’s real estate team, headed by John Brady, has made so-called zombie real estate – assets that are worth less than the face value of their debt – one of their investment focuses in the asset class. The volume of such opportunities “continues to be ample,” said Jay Wintrob, Oaktree’s new chief executive. He noted that a lot of debt that is due to mature over the next several years is backed by real estate has become similarly devalued. “John and his team have made that an important part of their real estate efforts. I know they continue to track that like a hawk.”
Marks said that Oaktree is anticipated to hold a first close on Oaktree Real Estate Opportunities Fund VII – its third real estate fund in four years – in the early part of the fourth quarter. The firm launched the fund last year. Additionally, it raised a total of $1 billion for Oaktree Real Estate Debt Fund in 2014, according to its earnings results.
Marks added that of the $15 billion that Oaktree’s closed-end funds deployed over the past two years, about $8 billion was allocated to property investments. “Prime among these have been commercial and hospitality properties, as well as NPL pools bought from eager sellers in the US and Europe,” he said.
Oaktree’s economic net income plunged to $18.7 million in the fourth quarter of 2014 from $303.2 million in the same year-ago period. Its assets under management as of December 31 was $90.8 billion, up nine percent from year-end 2013.