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

Welcome to Blue Owl Capital Corporation III's listing conference call. Before we begin, I'd like to remind our listeners that remarks made during today's call may contain forward-looking statements which are not guarantees 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 in the company's filings with the SEC. The company assumes no obligation to update any forward-looking statements. Certain information discussed on this call and in the company's publicly available materials, including information related to portfolio companies, was derived from third-party sources and has not been independently verified. The company makes no such representation or warranties with respect to this information. Please note that the company will not take questions on this call. Further information on the company and the listing process is available on the company's website at www.blueowlcapitalcorporationIII.com. And any questions can be directed to Investor Relations at credit-ir@blueowl.com. With that, I will turn the call over to Dana Sclafani, Head of BDC Investor Relations for Blue Owl.

Thank you all for joining today's call as we announce the listing of Blue Owl Capital Corporation III. Joining me on the call today is the senior management team of OBDE, including our CEO, Craig Packer, President, Logan Nicholson; CFO, Jonathan Lamm; and COO, Bryan Cole. During our remarks today, we will be referring to specific pages in the listing presentation, which is filed publicly and is also available on the company's website. We encourage you to view this presentation as you listen to this call. I'd like to now start on Page 3 of the presentation. As you have likely seen, we filed an 8-K announcing our intention to publicly list Blue Owl Capital Corporation III, which was launched in 2020, as our third diversified direct lending fund. When we launched the fund, we committed to our private investors that we would eventually pursue a path to liquidity. And today, we are excited to announce this important milestone. We believe this listening will bring one of the largest BDCs to the public market in a streamlined approach. As noted on this page, we anticipate the company's shares will start trading on the NYSE under the ticker OBDE on January 25, 2024. On Page 4, you'll find a summary of the proposed listing. Once listed, OBDE will be the eighth largest public BDC, with $3.6 billion in assets. As of September 30, 2023, the company had a net asset value of $1.9 billion or $15.40 per share. At inception, all OBDE investors agreed to a lockup provision covering 100% of the company's shares outstanding. In connection with the listing, our Board of Directors waived the lockup for approximately 5% of each investor's position, which will be freely tradable at the time of listing. This represents 5.9 million shares or approximately $90 million of initial float. Each investor's remaining position will be released in 3 equal tranches at 180, 270 and 365 days post the effective listing date. You can find those dates in the appendix of this presentation. Our Board of Directors has also declared a first quarter regular dividend of $0.35 per share. Additionally, in conjunction with the listing, the Board declared 5 special dividends of $0.06 per share to be paid quarterly beginning in the second quarter of 2024. We believe that providing this visibility on the total dividend yield is important for our shareholders and an attractive feature for prospective investors. Our Board of Directors has also authorized a share repurchase program of up to $100 million in open market purchases from time to time. Page 5 provides a road map for the next few months. After this announcement, the management team will be available for investor meetings through January 24, ahead of the anticipated start of trading on January 25. We also plan to announce preliminary fourth quarter results by January 24 before market open, including an estimated NAV range. We will release our full fourth quarter results on February 21, after the market close, and provide a letter to our shareholders with further details on the quarter shortly thereafter. This timing aligns with the release of OBDC earnings as well. Looking forward, the first quarter dividend announced today will be paid on April 15 to shareholders of record on March 29. Please note additional investor resources, including our listing presentation and an investor FAQ, are available on the company's website listed on this page. I will now turn the call over to Craig to walk through more detail on the company and why we believe now is an attractive time to pursue a listing.

Thanks, Dana, and thank you to everyone joining us on the call today. To start, I'm excited to be speaking with you all today as this is an important milestone for OBDE and our credit platform as a whole. Looking at Page 6, I want to talk about the importance of the Blue Owl platform, which we believe is a significant competitive advantage for OBDE. This page highlights the breadth and depth of our credit platform, which manages $79.5 billion in assets and is supported by a team of over 110 investment professionals focused on originating, underwriting and actively managing each investment. We believe our investment team is one of the largest amongst our peers, with our entire team focused solely on direct lending. We have one team reviewing all of our deals. We have one pipeline that all new origination opportunities come through. And we have one meeting with all of our investment committee members, where we assess each new opportunity as a team, regardless of which funds it may ultimately sit in. We believe that this approach provides seamless coordination and alignment across the platform, which benefits each of our funds and their investors. In addition, our BDCs have access to the broader infrastructure of Blue Owl's Corporate Solutions team, which includes deep expertise across accounting, operations and financing. Next, I'd like to provide more color on why we are excited to achieve this important milestone. Page 7 provides more detail on all of our BDCs, which account for 70% of assets under management in our credit business. You may recall that at our Investor Day last May, we noted that we continuously assess the merits of different alternatives for each of our BDCs to deliver on the objectives set out at inception. After careful consideration, we concluded that listing OBDE was the most efficient way to deliver liquidity to OBDE shareholders over time. Starting on Page 8, I'm pleased to have this opportunity to talk about OBDE and the success we have delivered since inception. We launched OBDE in 2020 as the institutional successor to our first fund OBDC. Both funds employ the same investment strategy, investing in upper middle market companies with significant operating history, while emphasizing diversification by borrower and sector. Further, both funds seek to deliver stable and consistent returns to investors and have an established track record of doing so. From inception, OBDE's fundraising efforts were focused on institutional investors which comprise 80% of the shareholder base, as the fund raised a total of $1.8 billion. These capital commitments were drawn down as investment opportunities arose, with a final capital call in June of 2022, roughly 2.5 years after its launch. We have been highly focused on credit quality across the portfolio, which has been quite strong since inception. We have very low nonaccruals, accounting for only 0.3% of the portfolio, and have had an inception to date net loss rate of only 6 basis points. Turning to Page 9. I wanted to spend a minute on why we believe now is the right time to bring OBDE to the public market. First, the public BDC market environment is particularly attractive today. Broadly speaking, BDCs have held up well during the recent market volatility and improved the durability of their portfolios. Coming into 2023, many were cautious on how BDC portfolios would fare at a higher rate and potentially lower growth environment. But over the last year, we have seen portfolio companies deliver consistently strong results, allowing them to absorb higher interest payments. Further, private equity sponsors continue to provide operational and financial support to their portfolio companies when needed. As supply chain constraints have eased and inflation is moderating, we believe our portfolio companies are well positioned going into this year. While BDCs have shown significant price appreciation over the last year, producing a total return in excess of 25%, the average large BDC still trades at approximately 1x book value today. We believe that as the rate environment normalizes, further growing the credit quality of these portfolios, BDC should continue to be positioned for consistent dividend distributions, further NAV growth and the possibility of price appreciation. And lastly, but perhaps most importantly, we're bringing OBDE to the public market now because we believe it is well positioned for success, given its scaled portfolio and demonstrable track record of excellent credit quality. As you can see on Page 10, OBDE will be a top 10 publicly traded BDC upon its listing. We continue to believe scale is a competitive advantage for direct lenders. Further, our well-diversified portfolio is comprised predominantly of first lien investments in companies which serve noncyclical and recession-resistant end markets. We believe this offers a differentiated portfolio for investors who are seeking consistent and attractive risk-adjusted returns. The portfolio also benefits from a track record of excellent credit quality. Given it was launched in 2020, the fund has been fully deployed in the post-COVID environment, and as a result, has no legacy troubled investments. As with OBDC, we proactively issued unsecured bonds as a private BDC, which has helped us build a well-diversified financing structure. Today, unsecured debt accounts for roughly 50% of funded debt. Because the company has an established track record with substantial undistributed earnings, we're able to provide visibility into near-term dividend profile, having declared an attractive regular dividend further supported by 5 special dividends declared in conjunction with the listing. On Page 11, I want to highlight a few unique characteristics of the portfolio and what has driven our strong credit performance. One key benefit of the vintage of this fund is that it was deployed during a time when companies choosing direct lending solutions were increasing in both size and quality. The largest financing executed in the direct lending market grew from $750 million in 2018, where, today, we commonly see $2 billion to $3 billion financing and have seen up to $5 billion for the largest deals. As a result, OBDE's portfolio has a borrower weighted average EBITDA of over $200 million. In addition, roughly 85% of our portfolio companies have greater than $1 billion of enterprise value, and the average company size is $3.5 billion in enterprise value. This post-COVID vintage provided a unique opportunity to invest in large, high-quality companies that have proven they could weather the challenging economic conditions of 2020. We were also able to deploy capital into an attractive market opportunity set, which skewed more to first lien and unitranche investments, with nearly 80% of the portfolio in first lien loans, generating an attractive 11.6% asset yield. The fund is also well diversified across sectors, with the top sectors representing durable, recession-resistant areas of the market, including software, insurance and health care. In addition, our investments are supported by conservative LTV ratios of less than 40% on average. These companies have proven to be resilient across economic conditions. And as a result, our nonaccrual and loss rates have been very low. On Page 12, we want to put our credit performance in perspective relative to the broader BDC sector. Our nonaccrual rate at 0.3% is low on an absolute basis and well below the median of the top 10 BDCs at 2.2%. We experienced one loss since inception, resulting in a low annualized loss rate of only 6 basis points. Moving to Page 13. Our results wouldn't have been possible without the well-diversified financing structure and flexible balance sheet that we proactively built since the company's inception. As we noted before, we have broad access to the capital markets, with financings across unsecured notes, SPVs, CLOs and our revolving credit facility. We also benefit from staggered maturities, with a weighted average maturity of over 4.7 years on committed debt. On Page 14, you'll see how this performance and our results have translated to an attractive total return for our shareholders. Since inception, OBDE has achieved a total return of over 30% and a net IRR of 12.2%. Moving now to Page 15, I want to spend a minute on the dividend profile for OBDE as a public company. Our Board approved a regular dividend for the first quarter of $0.35 per share, which translates into a 9% dividend yield based on NAV. Additionally, in conjunction with the listing, our Board declared 5 special dividends of $0.06 each to be paid quarterly beginning in the second quarter of 2024. In aggregate, these special dividends provide an additional $0.30 per share in distributions to our shareholders funded entirely with spillover income. Reflecting the regular and special dividends starting in Q2 of 2024, shareholders would earn $0.41 of total dividends, which equates to a 10.6% estimated dividend yield based on current NAV. We believe this is not only competitive with other public BDCs in the market today, but also provides OBDE shareholders with good visibility into its expected distributions through the second quarter of 2025, a unique advantage in what could be a potentially declining rate environment. On Page 16, we illustrate a path to further upside relative to the current return profile. Obviously, the rate outlook is uncertain, but for comparative purposes, using today's rates,and assuming a target leverage level and more normalized repayment activity, we believe ROE could increase to 11.5%, roughly 100 basis points from current levels. Most actionable lever here is to increase leverage to the upper end of our target leverage range over the coming quarters. As noted before, we have the financing in place to allow us to achieve this target and currently see an attractive opportunity set for new investments as we start 2024. To close, on Page 17, I want to note that our first publicly listed fund, OBDC, has had great success to date. OBDC now trades very close to book value, has had terrific credit performance and delivered over a 40% total return last year. We are confident that OBDE will find itself on a similar path. OBDE was deliberately and thoughtfully deployed over several years, seeking attractive risk-adjusted returns, and it was intentionally designed with a diversified and durable liability structure from its inception. OBDE also benefits from the same deep pool of talent across both the investment professionals, who underwrite and monitor all investments; and the corporate solutions team, which supports its financing and operations. From the beginning, we focused on delivering long-term shareholder value at OBDC, both in how we invested and how we manage the fund, and we will continue to follow the same playbook here for OBDE. On behalf of the Blue Owl team, thank you for your continued support. As Dana mentioned at the beginning of the call, additional resources are available on our website, and we look forward to speaking with many of you in the coming weeks. Thank you again for your time today

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