Blue Owl Capital Inc. (OWL) Earnings Call Transcript & Summary

Good morning, and welcome to the Blue Owl Capital's First Quarter 2023 Earnings Call. [Operator Instructions] And we advise to all parties that this conference is being recorded. I would now like to turn the call over to Ann Dai, Head of Investor Relations for Blue Owl.

Thanks, operator, and good morning to everyone. Joining me today are Doug Ostrover, our Chief Executive Officer; Marc Lipschultz and Michael Rees, our Co-President; and Alan Kirshenbaum, our Chief Financial Officer. I'd like to remind our listeners that remarks made during the call may contain forward-looking statements, which are not a guarantee of future performance or results and involve a number of risks and uncertainties that are outside the company's control. Actual results may differ materially from those in forward-looking statements as a result of a number of factors, including those described from time to time in Blue Owl Capital filings with the Securities and Exchange Commission. The company assumes no obligation to update any forward-looking statements. We'd also like to remind everyone that we'll refer to non-GAAP measures on the call, which are reconciled to GAAP figures in our earnings presentation available on the Investor Resources section of our website at blueowl.com. Please note that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase and interest in any Blue Owl fund. This morning, we issued our financial results for the first quarter of 2023, recording fee-related earnings, or FRE, of $0.16 per share and distributable earnings, or DE of $0.15 per share. We declared a dividend of $0.14 per share for the first quarter, payable on May 31 to holders of record as of May 19. During the call today, we'll be referring to the earnings presentation, which we posted to our website this morning. So please have that on hand to follow along. With that, I'd like to turn the call over to Doug.

Thank you, Ann, and good morning, everyone. Today, we reported another strong quarter of results for Blue Owl, demonstrating the strength and resiliency of our business model in the midst of volatile market conditions. Over the past year, a year marked by substantial interest rate hikes, persistently high inflation and considerable swings in the public markets, we have achieved over 40% growth on the key metrics we use to evaluate our business, including management fees, FRE and DE, all while maintaining an industry-leading 60% FRE margin. And we feel like we're just getting started. The past couple of months have demonstrated the value of having durable permanent capital, which means we are never a forced seller in precarious markets, and which allows us to deploy incremental capital into some of the most attractive opportunities we've seen in some time. We believe our focus on downside protected income-generating strategies resonates more than ever against the backdrop of a more unpredictable near-term environment. And we are hearing the sentiment echoed in our conversations with existing and prospective investors. Since January 1, 2022, we have raised approximately $29 billion of fee-paying capital across equity and debt, which compares to our fee-paying AUM of $61 billion at the end of 2021, almost 50% growth. All 3 of our verticals have contributed to this growth, and we have seen roughly equal inflows from our institutional and private wealth clients. This is very strong organic growth on an absolute basis. And when you consider the more difficult fundraising environment that we've been in for the last year, we're incredibly proud of what we've accomplished thus far. Importantly, we also continue to see very modest redemption in class from the small percentage of our products, which offer a quarterly redemption feature with just $248 million requested in the first quarter or less than 1% of AUM in those products during a period marked by heightened market volatility and investor uncertainty. This compares to over $1 billion raised in those same products. So we remain solidly in net inflow status. From a deployment perspective, more tumultuous markets can result in temporary slowdowns in transaction volumes as buyers, sellers and intermediaries pause to take stock of the market landscape as we've seen on numerous occasions over the past year. We think these are exactly the types of markets that further accelerate the value proposition for and the adoption of the solutions that we offer across direct lending, GP solutions and triple net lease real estate. We saw this play out during COVID, and we're seeing it now. While sponsors have been deploying capital at a slower pace in recent quarters, they have turned to the direct lending market in greater fashion for the deals they are announcing. Our GP solution business has continued to offer valuable capital to the growing upper middle market GP community, and with our $13 billion Fund V fully raised and already 70% committed, we will be looking ahead to Fund VI in short order. And for our real estate business, the current interest rate environment has made it even more attractive for companies to consider a net lease solution for their capital needs. We are pleased with the $1.5 billion we raised in real estate in the first quarter and the over $4 billion raised in the last 6 months, particularly given the market environment. So what you're hearing from us is that our playbook remains unchanged despite the many things changing around us. We're focused on raising long duration and mostly permanent capital from institutional and private wealth clients, both of whom continue to grow their allocations to alternatives. We are putting that capital to work with the same selectivity and rigorous underwriting standards we've always utilized, and we continue to innovate through new product development while carefully evaluating the many inorganic opportunities that present themselves. We're very pleased with the growth that we've been able to deliver for shareholders thus far. Blue Owl significant permanent capital base is a foundational and intentional differentiator for us, creating a stable base off of which to grow. And our management fee-centric earnings position us well to deliver steady progress against various market backdrops, without the substantial volatility that our peers have from carried interest. Our growth has been outsized relative to peers, other financial companies and broader market indices. And with our newly fixed annual dividend of $0.56 per share for 2023, we are offering an attractive dividend yield of roughly 5% and expect to continue to grow that dividend meaningfully in the coming years. With that, I'd like to turn the call over to Marc to give you an update on our direct lending and real estate business. Marc?

Great. Thanks, Doug. During the first quarter, the market trends that we observed in the last few quarters continued and accelerated. Capital scarcity seemed to reach new heights and Blue Owl continue to act as an integral liquidity provider to sponsors and companies. Over the last 12 months, Blue Owl's direct lending business has originated nearly $19 billion of loans, providing crucial financing to the M&A market. We continue to see sizable deals come to the direct lending market, a reflection of the pause seen in liquid credit markets and an acknowledgment of the value of private credit solutions during more uncertain times. As we've highlighted in the past quarters, this remains an excellent environment in which to deploy capital, at wider spreads and lower loan-to-values than a year ago, financing large and very high-quality companies. And the loans we are making are backed by sticky, stable permanent capital. As expected, broader market M&A volumes remained slow in the first quarter of 2023. And while our deployment activity is certainly not immune to that trend, we continue to see direct lenders capture significant market share. Credit quality remains strong. Despite a more challenging backdrop, we continue to see good revenue and EBITDA growth year-over-year on average in the portfolio. Weighted average loan to values remain in the low 40s across our direct lending portfolio and in the low 30s across our tech portfolio. Across the $75 billion of loans we've originated since inception, annualized, realized losses have been approximately 6 basis points, and those have been fully offset by realized gains over that period. And with regards to performance, the direct lending portfolio achieved gross appreciation of 4.6% for the first quarter and 13.2% for the last 12 months. Now moving on to real estate. We continue to see high levels of interest in our net lease strategy with corporate borrowing costs elevated and financing markets stall. Our pipeline of opportunities remains robust with roughly $3.3 billion of transaction volume under letter of intent or contract to close and a near-term pipeline of about $30.8 billion of potential volume. Inclusive of announced acquisition activity, we have invested or committed nearly all of the equity in our fifth [ full end ] fund and have started deploying capital out of our sixth vintage. The stability and quality of the income generated by our triple net lease strategy continues to resonate strongly with investors. Inflation concerns are minimized as all property expenses are borne by the tenant, while growth concerns are mitigated by contractual rent escalators over a very long 10-year-plus duration lease terms. Our tenants are primarily large brand-name firms with investment-grade credit profiles, and the real estate that we own in this strategy is generally in logistics properties or what we call mission-critical retail, physical footprint that these businesses need to conduct their everyday operations. While we understand there is more investor caution around real estate as an asset class these days, we think our real estate business sits exactly where you'd want to be positioned for this environment. downside protected through income generation, purchase price, contractual lease duration and the credit quality of our tenants and the triple net lease structure. With regards to performance, we achieved gross appreciation across our real estate portfolio of 4.4% for the first quarter and 19.1% for the last 12 months, in our view, great risk-adjusted returns for the strong underlying credit profile of these portfolios. Referencing back to my opening comments today, we continue to see a very constructive environment for our direct lending and real estate businesses with attractive opportunities to put capital to work and strong interest in the strategies that we offer. The market shocks of the past couple of quarters have reminded people that when market shift, they can shift very rapidly, being senior in the capital structure, generating meaningful returns through income, and having your investments supported by permanent and long duration capital are all very good things for our investors and very good things for Blue Owl. With that, let me turn it to Michael to discuss GP Capital Solutions.

Thank you, Marc. Our GP Capital Solutions business was active in the first quarter of 2023, moving dialogue forward on potential investments and working with many partner managers as they continue to expand and diversify their businesses. Despite what has broadly been characterized as a more challenging fundraising environment, our focus on the largest firms within the alternative universe has positioned our platform well to capture the ongoing secular tailwinds towards alternatives. We continue to see the market share of the largest managers expand, and this phenomenon seems to accelerate during times of market volatility. In the past couple of years, mega funds of $1 billion or more in the private capital industry have accounted for 65% of the capital raised. Looking at 2022, this concentration is more like 70% to 75%, a clear indicator of the value of having scale and a strong brand. We think our partner managers have certainly benefited from this dynamic with most achieving or exceeding their fundraising targets despite greater near-term headwinds. Total invested commitments for Dyal V, including agreements and principles remain around $9 billion of capital committed or roughly 70% of the funds. The forward pipeline is robust, and we continue to evaluate numerous opportunities that are quite attractive. Performance across Dyal Funds remained strong with a net IRR of 23.1% for Fund III, 50.2% for Fund IV and 31.9% for Fund V, all of which compare favorably to the median returns for private equity funds of the same vintages. We held a close for our professional sports minority investment strategy during the first quarter, bringing commitments for that strategy to over $500 million. Looking ahead, we're excited about what the next year holds for the GP Capital Solutions business. We continue to expand the breadth of our potential investor base institutionally and in the wealth channel and still anticipate launching conversations for Fund VI later this year. With that, I will turn things over to Alan to discuss our financial results.

Thank you, Michael. Good morning, everyone. I'm going to start off by walking through the numbers for this quarter and the last 12 months, and then I'll touch on a few other items I want to cover today. I'll be making references to pages in our earnings presentation, so please feel free to have that available to follow along. To start off, we are pleased to report that since we have been a public company for 2 years, this is the first quarter we can report LTM comparisons, which are reflected in our earnings presentation. As you know, we report quarterly, but we really run our business with a 2- to 5-year view and LTM info and not just quarterly results, provides a more fulsome picture of the progress we've made across our business. So some key highlights of our results through March 31 include total revenues up 44%, FRE up 40%, DE up 41% and our dividend is up 35%, all on an LTM basis versus a year ago. So in the midst of this market turbulence, we continue to post solid results, which supports what we have been saying for the past 2 years. We built our business with the foundation of permanent capital and steady, predictable management fee cash flows. We don't have lumpy, volatile carried interest revenues flowing through our P&L. So our business model and growth profile look different than our peers, and this will continue to differentiate us in the diversified [ alt ] industry. To put some numbers to this, for the past 2 years, our peers had, on average, 30% to 35% of their total asset management revenues come from lumpy volatile carried interest cash flows, again, just very different models than us. Okay, to step through our results through March 31 in more detail, management fees are up $483 million or 55% for the LTM period versus a year ago. Broken down by strategy, direct lending management fees are up $242 million or 51%. GP Capital Solutions management fees were up $169 million or 44%, and real estate management fees are up $72 million or over 400%. But keep in mind, we acquired our real estate business at the end of 2021. This is obviously a very considerable growth that we've been able to accomplish. Compensation expense came in, in line with our expectations at approximately 27% comp to revenue. G&A expense came in also in line with our expectations at $48 million for the quarter. Placement costs were a little elevated due to large closing in our ORTF II BDC. Overall, we are trending in line with our expectations and guidance of G&A expense trending up a little in 2023 from last year. FRE is up $246 million or 40% for the LTM period versus a year ago, and we continue to be right on track with our 60% FRE margin guidance for 2023. And we announced a dividend of $0.14 per share for the first quarter. For the LTM period, we have paid $0.50 in dividends versus $0.37 for a year ago period. That results in a 35% increase in our dividend for the LTM period. Now I'd like to spend a moment on our fundraising efforts. We were pleased with our results for the quarter, in particular, considering the very challenging fundraising environment we're in. As a reminder, as you can see on Slide 12, in the first quarter of 2022, we raised $3.9 billion. And now in the first quarter of 2023, we raised $3.8 billion. And on an LTM comparative basis, we raised $24.7 billion through March 31 versus $11.3 billion for the prior year, an increase of approximately 120%. In one of the toughest fundraising environments that we've seen in some time, we more than doubled our fundraise levels. I'll break down the 1Q '23 numbers across our strategies and products. In direct lending, we raised $1.9 billion. $1.2 billion raised in our diversified lending strategy, including almost $600 million raised in our retail distributed core income BDC, ORCIC. And over $700 million raised in our tech lending strategies, including almost $200 million raised in our retail distributed tech lending BDC, ORCIC. In GP Capital Solutions, we raised over $300 million. And in real estate, we raised over $1.5 billion, $1.2 billion in our Real Estate Fund VI, which we remain on track with our Investor Day goals of raising $5 billion for this product and $300 million for our net lease trust product, our new nontraded REIT. We continue to see strong institutional interest in our products and the wealth channel rebounded in March from our lows in February, although we expect in certain areas, continued pressure on the wealth channel. As we discussed on last quarter's call, as we progress through 2023 we continue to expect fundraising to tilt institutional, although timing is always challenging to predict, in particular, in times of market disruption and dislocation. Turning to some of our wealth products. We continue to be very encouraged by the net fundraising levels we continue to see from our products that have quarterly redemption features. As Doug pointed out, we are still seeing strong net positive inflows with these products with gross inflows running at about 5x the level of redemptions. All in all, we've raised approximately $29 billion of fee-paying AUM since Jan 1, 2022. As it relates to our AUM metrics, on Slide 11, AUM grew $42.4 billion to $144.4 billion, a 42% increase from the first quarter a year ago. Fee-paying AUM grew $26 billion to $91.6 billion, a 40% increase from the first quarter a year ago. Both metrics driven primarily by capital raised and deployment in direct lending, capital raised in GP Capital Solutions Fund V, capital raised in Real Estate Fund VI, NLP and NLT and the addition of our CLO business. Permanent capital grew $28.7 billion to $114.3 billion, a 34% increase from the first quarter a year ago. As a reminder, 93% of our management fees are from these permanent capital vehicles. AUM not-yet-paying fees was $11.7 billion, including $7.6 billion in direct lending, $1.2 billion in GP Capital Solutions and $2.9 billion in real estate. This AUM corresponds to an expected increase in annual management fees totaling over $155 million once deployed, which equates to a fee rate of over 1.3%, which speaks to the quality of the capital raised. In direct lending, we had gross originations of $1.6 billion for the quarter and net funded deployment of $1.3 billion. This brings our gross originations for the last 12 months to $18.8 billion, with $12.2 billion of net funded deployment. So as it relates to the $7.6 billion of AUM not yet paying fees in direct lending, it would take us a little over 2 quarters to fully deploy this based on our average net funded deployment pace over the last 12 months, although our current deployment pace is a little slower than that. Turning to our balance sheet. We continue to be in a strong capital position. As you can see on Slide 17, we currently have a significant amount of liquidity with an average 13-year maturity and low 2.9% cost of borrowing. So summing it all up, another great quarter. Although it is a challenging fundraising environment, we continue to make good progress and grow at industry-leading levels. We have always talked about the importance of our permanent capital in our business model, and this is exactly why. Our fee-paying AUM grows more meaningfully versus our peers. As I noted at the beginning of my remarks, this is all a testament to our business model of strong predictable high-margin growth. We are very pleased with our results. We delivered strong growth in all of our key metrics, AUM, fee paying AUM, management fees, FRE and DE with each of these metrics up 40% or more year-over-year. Thank you again to everyone who has joined us on the call today. With that, operator, will we please open the line for questions.

Awesome. Thank you. [Operator Instructions] Your first question comes from Craig Siegenthaler.

Hope you're all doing well. I wanted to dig a little deeper into Alan's comments on the institutional channel effort. Which institutional funds are you currently marketing in the credit business? And can you comment on if the fee levels are really any different than your retail offering as we think about mix?

Craig, it's Doug. Let me make a couple of comments on fundraising in general, and then I'll get into the funds in the market. So first of all, you've heard from a lot of people, it's definitely a difficult fundraising environment. But from what we're seeing, the secular tailwinds for all is just -- it really hasn't changed. And I think you'd agree with this, when there's market volatility when we're having bank failures, it certainly makes fundraising more difficult. Our products, and I'll get into those in a moment, have high current income, inflation protection and obviously downside protection. And when I look at what we've done through '22 and the first quarter of '23, Alan referenced this, we've grown our assets by 40%. And this will start to get to your question, not only have we grown assets, but these are assets that have really attractive fees and very attractive margins. It's not insurance money, it's not CLOs, it's not 10 to 30 basis point money. This is good fees and good carry. So look, as we sit here today, obviously, the spectrum of outcomes a little wider. And I'd say for me, it's a little incrementally. It's a little more difficult to predict the timing of fundraising, but we are seeing significant demand for all of our strategies. We've invested heavily in distribution globally, and we're continuing to invest. The funds have a great track record. And so I can't tell you the exact timing, but we still feel really good about our ability to generate meaningful growth. The big fundraise we have in the market right now is on Oak Street VI, we have raised just under $3 billion. We have a hard cap of 5. We feel really good about hitting that cap. We're still in the market with our Tech BDC, Tech II, I think we just surpassed $4 billion, Alan, and we'll wrap that up. And I think that's kind of in line with expectations. And we're excited and I think we'll generate great returns with that capital. And then we have a number of substrategies, which I can go through with you in the credit space. And of course, there's some SMAs as well. And then I do have to admit away from institutional, we have 3 things in the market in private wealth. And while flows have slowed, we're still doing pretty well in that space as well.

Your next question comes from the line of Patrick Davitt.

So sorry if I missed this, but I think I heard you're sticking with the 60% margin, but you still expect you can do $25 billion of gross fundraise and $1 billion of FRE this year. Are you kind of pulling off that a bit?

Thanks, Patrick. It's Alan. We still feel good about being in and around our targets. But let me add a couple of thoughts to that. Since we posted these targets a year ago, the world has changed quite a bit, right? This has been one of the most challenging fundraising environments we've seen in a very long time, yet our fundraise is up 120% year-over-year. So we're still really confident in our outsized growth trajectory. Our retail flows have held up extremely well despite the environment, and we're really pleased with our results, 40-plus percent year-over-year growth in every key metric of our business. There's a lot of hypotheticals that we could kick around. And yes, there's more volatility. And yes, the range of outcomes is wider as Doug just mentioned than before, but we feel good about being in and around our targets.