Blue Owl Capital : First Quarter 2024 Transcript

Blue Owl Capital, Inc. (OWL)

1Q 2024 EARNINGS

May 2, 2024

Blue Owl Capital, Inc. (OWL)

1Q24 Earnings Call - May 2, 2024

Operator

Good morning, and welcome to the Blue Owl Capital First Quarter 2024 Earnings Call. [Operator Instructions]

I'd like to advise all parties that this conference call is being recorded.

I will now turn the call over to Ann Dai, Head of Investor Relations. Please go ahead.

Ann Dai

Head of Investor Relations

Thanks, operator, and good morning to everyone. Joining me today are Marc Lipschultz, Co-Chief Executive Officer, 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's 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 an interest in any Blue Owl fund.

This morning, we issued our financial results for the first quarter of 2024, reporting fee- related earnings, or FRE, of $0.20 per share, and distributable earnings, or DE, of $0.17 per share. We also declared a dividend of $0.18 per share for the first quarter, payable on May 30 to holders of record as of May 21. 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 Marc.

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Blue Owl Capital, Inc. (OWL)

1Q24 Earnings Call - May 2, 2024

Marc Lipschultz

Co-Chief Executive Officer

Great. Thank you very much, Ann.

We reported another strong quarter of results for Blue Owl this morning with 12 straight quarters of consecutive management fee and FRE growth since we've been a public company. We're very pleased with the predictable, consistent and robust growth we've been able to generate for our shareholders across a range of market backdrops, reflecting the benefits of our FRE-centric and permanent capital heavy business model.

Said plainly, our earnings consist almost entirely of management fees, so we're not subject to the volatility and uncertainty of revenues tied to realized gains and capital markets activity. And having long-duration capital means very little leaves our system, providing us with a resilient asset base that grows faster than our peer group for the same number of dollars raised.

We think the market is starting to understand and appreciate the value of these stabilizing attributes and how they contribute to our premium growth profile. On a 12- month year-over-year basis, we grew FRE revenue and FRE by 24% and DE by 20%. We're humbled to be among the leaders in these metrics across our whole peer group, that includes very accomplished firms in our industry, and it's something we don't take lightly as we continue to plant the seeds for future growth at Blue Owl.

Globally, demand for differentiated income-driven returns remains very strong, and we continue to see good interest in our Credit, GP Strategic Capital and Real Estate strategies across institutional and wealth investors.

During the quarter, we held the final close on our latest triple net lease fund, bringing in nearly $500 million. We raised $5.2 billion total after receiving approval to exceed our hard cap of $5 billion. This fund was the largest U.S. focused real estate fund in 2023 and more than double the size of its predecessor fund, demonstrating significant investor demand despite a very challenging backdrop for real estate fundraising in general.

In the wealth channel, gross flows into our perpetually distributed products reached $2.1 billion in the first quarter, 16% higher than the fourth quarter and almost double of what we raised in the first quarter of 2023. And in April alone, we've raised close to $1 billion in those perpetual products.

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Blue Owl Capital, Inc. (OWL)

1Q24 Earnings Call - May 2, 2024

We also closed on $1.4 billion of institutional capital in our direct lending business across separate accounts and closes for our first lien lending and strategic equity strategies, complementing the continued growth in wealth.

And our new mid-cap GP Strategic Capital strategy is off to a very good start with over $0.5 billion raised during the first quarter.

Subsequent to quarter end, we announced 2 acquisitions that further expand our suite of investment offerings and broaden the markets to which we provide capital solutions.

First, we made a preferred investment into Kuvare and announced our intention to acquire Kuvare Asset Management, reflecting a creative and accretive way to broaden Blue Owl's value proposition to the insurance space. The global life and annuity market is over $20 trillion in size, and an increasing number of insurance companies are looking to partner with specialized asset managers that can create better risk-adjusted returns through differentiated sourcing, underwriting and structuring.

By adding a set of more IG-focused credit and real estate capabilities to Blue Owl's existing and scaled origination platforms, we can bring a more comprehensive insurance asset management solution in the marketplace. We will also benefit from Kuvare's growth, as we expect they will continue to take market share in an expanding annuities market. Acquiring Kuvare Asset Management adds $20 billion of AUM to Blue Owl, not inclusive of incremental growth at Kuvare.

I think we approached this acquisition in a very Blue Owl way, meaning we came from a mindset of providing solutions to, not competing with, our clients. We had no desire to become balance sheet heavy, or to become an insurance company. Instead, we plan to partner with them and allow them to continue to do what they do best, underwriting liabilities, while we focus on what we do best, managing assets. This solution's mentality is in keeping with what you see across the rest of our business. In direct lending, for instance, we provide financing solutions to sponsors for their portfolio companies. In GP stakes, we provide capital to the sponsors themselves. We prefer to help them grow their businesses as opposed to competing with them in those businesses.

Now turning back to M&A. The second transaction we announced recently was our intention to acquire Prima Capital, an investment manager focused on real estate lending with approximately $10 billion of assets under management. Structurally, we see an increasing need for capital to finance real estate have been interested in expanding our

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Blue Owl Capital, Inc. (OWL)

1Q24 Earnings Call - May 2, 2024

capabilities in this area. Prima struck us as a great fit for Blue Owl given its leading position, high-quality portfolio and strong historical track record through cycles, and we expect to leverage Blue Owl's scale and expertise to accelerate expansion. Pro forma for these 2 transactions, Blue Owl's AUM would exceed $200 billion crossing another meaningful milestone.

Now moving on to business performance. In credit, we saw a fairly constructive environment for deployment with elevated repayment activity. As a reminder, the return of syndicated market activity reflects greater market participant confidence, which, over time, will enable increasing M&A activity. We've proven we can deploy significant capital when syndicated markets are active, and we believe we're well positioned to do it again.

Noting the outsized market share the direct lenders have seen over the past 1.5 years, the longer-term secular trend has been one in which sponsors have increasingly gravitated towards direct lenders for the value proposition they offer, and we see this trend continuing. We see healthy sponsor appetite to deploy incremental dry powder and monetize existing investments over time, and we expect Blue Owl to play a meaningful role in new capital deployment and refinancings.

As Alan will detail, direct lending metrics remained strong. We have had just 7 basis points of annualized realized loss, which has largely been offset by realized gains. And the underlying revenue and EBITDA growth of the portfolio remains in the low double digits on average. High level, our observation is that the economy is sound and rates are likely to be higher for long. While we would have loved for spreads to stay 100 basis points wider as they were a year ago, we believe the opportunities we're seeing today offer very compelling spreads for the risks we're being asked to take.

In our GP stakes business, our partner managers continue to benefit from 2 meaningful secular trends, growing allocations to alternatives and GP consolidation. Collectively, our partner managers now manage nearly $1.8 trillion, giving us an unparalleled view over the alternative asset management industry. Over the past decade, we've observed significant diversification across the industry, including the emergence and scaling of notable asset classes, such as private credit, as well as the expansion in the universe of investable assets for private capital. We've also seen market share accrue to the most established, largest private market managers where our flagship funds have a leading market share.

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Blue Owl Capital, Inc. (OWL)

1Q24 Earnings Call - May 2, 2024

In addition, now that we've closed on some initial capital for our mid-cap strategy in partnership with Lunate, we also are able to invest in the most exceptional managers that were not the right fit for our existing mandate. We're ready to capitalize on a visible pipeline of differentiated managers who are at an earlier stage of development and we think investors are very excited about this opportunity as well.

In real estate, we continue to actively deploy capital at attractive cap rates close to 8% behind our 4 major themes: digital infrastructure, onshoring, health care real estate and essential retail. The capital needs in each of these areas is very significant and we have a good line of sight into capital deployment. In addition to the success we saw with our drawdown fundraise, which is now finished, we continue to see a meaningful step-up in private wealth flows. First quarter flows in our perpetually offered net lease product were 45% higher in the fourth quarter as a result of the stronger production from new distribution platforms.

In summary, we're pleased with the continued expansion of our existing business, and to supplement the robust growth we're already generating, we've announced some new acquisitions in areas that we find adjacent, strategic and synergistic, and which could become quite substantial in the coming years.

With that, let me turn it to Alan to discuss our financial results.

Alan Kirshenbaum

Chief Financial Officer

Thank you, Marc.

Good morning, everyone. Thank you for joining us today. To start off, we are pleased with the strong results we continue to report, with the first quarter of 2024 being our 12th consecutive quarter, every quarter since we listed, of both management fee and FRE sequential growth, the only public alternative asset manager that has demonstrated this over this period. We've been able to achieve this because of our differentiated asset base and earnings profile, with long-duration assets creating a recurring revenue profile while fundraising adds new layers to our layer cake of management fees and FRE.

So let's go through some of the key highlights on an LTM year-over-year basis through March 31st. Management fees are up 22%, and 92% of these management fees are from permanent capital vehicles. FRE is up 24%, and our FRE margin is right on top of our 60%

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Blue Owl Capital, Inc. (OWL)

1Q24 Earnings Call - May 2, 2024

target. And DE is up 20%. As you can see on Slide 12, we raised $4.7 billion in the first quarter and $16.7 billion for the last 12 months. Inclusive of debt capital, new capital raised was over $28 billion over the last 12 months. I'll break down the first quarter fundraising numbers across our strategies and products.

In Credit, we raised $3 billion. $2.6 billion was raised in our diversified and first lien lending strategies, of which $1.3 billion was raised in our non-traded BDC, OCIC, up over 100% compared to the first quarter of 2023. The remainder was raised across software lending and our newly launched strategic equity strategy.

In GP Strategic Capital, we held an initial close of approximately $600 million for our new mid-cap strategy. In Real Estate, we raised approximately $1 billion with nearly $500 million for the sixth vintage drawdown fund, bringing that fund to its final close at $5.2 billion. And over $500 million in our non-traded REIT, ORENT, up more than 70% compared to the first quarter of 2023. We are seeing increased engagement on the distribution platforms that added ORENT in late 2023 and continue to see opportunities to expand distribution globally for this product. We're pleased with the increasing breadth of fundraising across strategies and products, which will continue to expand with the expected closing of our announced acquisitions of Kuvare and Prima.

In addition, we've had very few assets leaving the system, with distributions, redemptions and capital return aggregating just 4% of our average AUM over the last 12 months. We believe this number is approximately double for our peers, and could increase further for them during more active monetization environments, highlighting Blue Owl's more durable asset base.

Finally, to supplement the staying power of existing AUM and the benefit of ongoing fundraising, we have substantial embedded earnings that we will unlock over time. AUM not yet paying fees was $16.8 billion as of the first quarter, corresponding to roughly $240 million of incremental annual management fees once deployed. This equates to a fee rate of approximately 1.4%. We also have approximately $135 million of incremental management fees that would turn on upon the listing of our remaining private BDCs over time. These 2 items alone would represent an increase of over 20% from our 2023 total FRE revenues.

Moving on to our Credit platform. We had gross originations of $8.9 billion for the quarter and net funded deployment of $2.9 billion. This brings our gross originations for the last 12 months to $24.9 billion with $9.8 billion of net funded deployment. Our credit

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Blue Owl Capital, Inc. (OWL)

1Q24 Earnings Call - May 2, 2024

portfolio returned 3.7% in the first quarter and 17.4% over the last 12 months. Weighted average LTVs are in the high 30s across direct lending and in the low 30s, specifically in our software lending portfolio.

For our GP Strategic Capital platform, total invested commitments for our fifth GP stakes fund, including agreements in principle are over $11 billion of capital with line of sight into over $3 billion of opportunities, which if all signed, would bring us through the remaining capital available in Fund V. And performance across these funds remained strong with a net IRR of 23% for Fund III, 42% for Fund IV and 15% for Fund V, which compare favorably to the median returns for private equity funds of the same vintages.

And in our Real Estate platform, our pipeline of opportunities continues to grow with nearly $4 billion of transaction volume under letter of intent or contract to close. With regards to performance, we achieved gross returns across our real estate portfolio of over 6% over the last 12 months, comparing very favorably to the broader real estate market as a result of our distinctive net lease strategy and the timing of capital deployment. The net IRR across our fully realized funds has been 24%, which we think is impressive for essentially an investment grade and creditworthy tenant risk profile.

Okay. Let's wrap up with a few closing thoughts. On taxes, just a reminder that we expect to return back to a low single-digit rate, say, 2% to 3% for the remainder of 2024, which should result in a roughly 5% tax rate for the full year as I discussed on our last earnings call. In light of the recent acquisition announcements, I want to reiterate our outlook for a 60% FRE margin for the foreseeable future, investing dollars back into the business to drive long-term growth. Subsequent to quarter end, we closed a $750 million, 6.25% 10- year bond offering. We were pleased to see such strong levels of interest with the deal nearly 4x oversubscribed from both investors who have been longtime supporters of our business as well as many debt investors that are new to our name.

Finally, I'd like to touch on the significant shareholder transition that we've achieved since Blue Owl went public. In May of 2021, about 10% of our shares were held in the hands of public investors. Our float was about $1.5 billion. The other 90% of our shares were owned primarily by Neuberger Berman, management and private phase investors. Over the past 3 years, we have largely replaced our legacy private phase investors with long-term oriented public shareholders and we've also seen strong demand from public shareholders for the occasional sales by Neuberger Berman over the same period. Today, we have more than a third of our total shares in the hands of public investors, increasing our float to more than $9 billion, 6x greater than where we started. As for

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Blue Owl Capital, Inc. (OWL)

1Q24 Earnings Call - May 2, 2024

management, our lockup expired about a year ago, and there has been essentially no selling outside of charitable donations and estate planning. We're very pleased with the progress we've made in working through the technical overhang in Blue Owl stock and think that the shifting demand supply balance is a factor in how the stock has traded recently.

With that, I'd like to thank everyone who has joined us on the call today. Operator, can we please open the line for questions?

Operator

[Operator Instructions]

Our first question comes from Alex Blostein from Goldman Sachs.

Ann Dai

Head of Investor Relations

Alex, we can't hear you.

Alex Blostein

Goldman Sachs

Really nicely. You highlighted that, I think, in your prepared remarks as well. Can you pull back the layers a little bit and talk through sort of sources of increased sales? Is it same platforms, addition of new platforms? To what extent is it also including some broadening of the existing FA base within the platforms that you're already on? So just to kind of help us frame how to run rate the current pace of sales on a go-forward basis.

Alan Kirshenbaum

Chief Financial Officer

Alex, the very beginning of that, we didn't hear. Can you just repeat the very beginning, please? Apologies.

Alex Blostein

Goldman Sachs

Sorry. Yes. So I was just asking about the wealth channel trends you guys are seeing so far in the second quarter. It looks like April 1 subscriptions were really strong. So I was hoping to get a little bit more detail around the sources of strength in terms of new product, or new platforms rather, or sort of expanding footprint within the existing platforms, and how to think about the run rate on a forward basis.

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Blue Owl Capital, Inc. (OWL)

1Q24 Earnings Call - May 2, 2024

Marc Lipschultz

Co-Chief Executive Officer

Absolutely. Thank you, Alex. So wealth has been and continues to be strong. You obviously know our position, which, of course, is now coming up on taking nearly a decade to build to this sort of platform, we really have a great embedded position with some products which are growing, as you say, sort of by expansion of usage in a platform. And then we have products that we have introduced that are growing by expansion of platforms. So actually, we see both when you look at our results in wealth.

So in credit, in our Core Income and our Tech Income products, what you will really see there is increased adoption - that is more FAs and more clients using the product. So this is the virtuous circle of we're on a lot of platforms and we've delivered great results for those investors, and so we have more FAs understanding how this is a really effective part of essentially a core allocation, and our product works really well for them.

And so, in the case of credit, I think you're seeing primarily the growth of user increases, more FAs, more customers. And of course, the beauty of that is this is still so limited in its penetration. When you really dive into the details, which obviously, we do, on what's really being sold in the platform, how many people are using it, how many clients does each FA that uses it have involved, you get very excited about the forward look in this opportunity set, which you can also see from the macro numbers when we just look at penetration of alts in general versus this very, very large world, call it retail, call it private wealth or whatever you want to slice it.

So we're seeing the virtuous circle of being a market leader in that credit platform as a very early participant and having, frankly, really, really great results. Real estate is a bit more of a study in the benefits; in this case, you get twofold benefits. Ultimately, become what we have in credit, which is you become more about deeper and deeper penetration. Today, we're still even in the early stages of this increased platforms. So we -- this year, we'll be adding quite a number of platforms in real estate and we're seeing the benefits of that as we bring this product onto new platforms, it's given us whole new audiences. Remember, this is a product where we're delivering a 7% tax-advantaged return, current plus appreciation with triple net leases on generally investment-grade, creditworthy counterparties. It's a really special product and consider this as a time when in real estate, most people are delivering negative returns and are having negative flows, we're growing and adding.

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