Blue Owl Capital Inc. Q4 FY2023 Earnings Call

Good morning and welcome to the Blue Owl Q4 2023 Conference Call. Please note that today's call is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. I will now turn the call over to Ann Dai, Head of Investor Relations. You may begin your conference.

Thanks, operator and good morning 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 in Blue Owl's 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 funds. This morning, we issued our financial results for the fourth quarter and full year of 2023, reporting fee-related earnings, or FRE, of $0.20 per share for the fourth quarter and $0.70 per share for the year, and distributable earnings, or DE, of $0.18 per share for the fourth quarter and $0.65 per share for the year. We declared a dividend of $0.14 per share for the fourth quarter, payable on March 5th to holders of record as of February 23rd, and also announced an annual fixed dividend of $0.72 for 2024, or $0.18 per quarter, starting with our 2024 first quarter earnings. 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.

Great. Thank you, Ann. We finished 2023 on a strong note with another consecutive quarter of management fee and FRE growth, 11 for 11 since we've been a public company against a market backdrop that has been exceptionally volatile and uncertain. We're confident that our steady, strong, and resilient growth continues to differentiate Blue Owl and highlight the benefits of our business model. Over the past year, we've operated in an environment where the ongoing impact of higher interest rates and future rate uncertainty have constrained capital market activity and capital deployment. Exiting this year, the short-term path of interest rates, geopolitical risk levels, and economic growth trends remain heavily debated. By design, Blue Owl's growth has been distinctly more predictable, which has been part of our thesis from the beginning. Our assets are generally permanent capital, and our earnings don't include more volatile revenues such as carry and substantial capital markets fees. We strive to be market leaders in the segments in which we operate, and our growth has been supported by structural demand for our strategies and secular tailwinds for those markets. We strive to generate strong growth in periods where market conditions are favorable, but importantly, we have been able to offer strong and differentiated growth in tougher environments like 2022 and 2023. We grew FRE and DE 25% this past year following over 40% growth in both metrics in 2022. In the last two years, AUM has increased by over 75% and the over $50 billion we've added in equity and fee eligible debt over that period represents over 80% of our starting fee-paying AUM. This robust growth has allowed us to return significant capital to our shareholders. Today, we announced our annual fixed dividend for 2024 of $0.72, or $0.18 per quarter, representing a 29% step-up from 2023, which follows a 22% dividend increase from 2022. Since our listing in May of 2021, total return for our shareholders has been over 60%. These are impressive results in any market environment, and much more so given the conditions that we've observed. There are a multitude of successes across the business that I'd love to highlight. In spite of the very difficult backdrop for real estate fundraising, our latest triple net lease fund was the single largest U.S. real estate fund raised in 2023. We expect to exceed our hard cap of $5 billion, more than doubling the size of the predecessor fund. Furthermore, our overall real estate platform performed admirably on both a relative and absolute basis, returning 9% for the year. In GP stakes, we saw robust investor demand and a deployment pipeline, resulting in an initial close of over $2 billion for our sixth GP minority equity stakes fund, earlier than originally anticipated, despite having just held our final close for Fund V at the end of 2022. We announced a joint venture with Luna, an Abu Dhabi-based global alternative investment manager to provide growth capital to leading midsized private capital GPs. This will supplement our dominant position as a capital provider to large GPs, and we feel this partnership will create a powerful and differentiated proposition for mid-market managers. In private wealth, the resources we've invested into scaling the business continue to pay dividends with Blue Owl remaining a top fundraiser in both the non-traded BDC and retail channels. Gross flows from our perpetually offered products were $1.9 billion during the fourth quarter, 65% higher than the first quarter. Inflows have been six times greater than redemption requests, both in the quarter and for the last 12 months. We think we are just getting started in terms of what's possible in wealth over time. A couple of weeks ago, Blue Owl Capital Corporation III, or OBDE, successfully listed on the New York Stock Exchange, delivering liquidity to those investors as promised. OBDE is the second of our BDCs to become a publicly traded company, and this listing follows the remarkable 2023 results of our first publicly traded BDC, OBDC, which returned 40% in 2023. Our focus remains on providing our direct lending investors with flexibility and optionality through product structure, while retaining the excellent credit quality, attractive income, downside protection, and scale benefits that Blue Owl is known for. Moving on to business performance, in credit, we again saw robust trends in deployment in the fourth quarter with a constructive environment so far in 2024. Repayments were somewhat elevated, providing additional opportunities to redeploy capital. As Alan will detail, direct lending metrics remain strong, with no notable changes to the health of our portfolio companies. We remain at 6 basis points of annualized realized loss since inception, which has been more than offset by realized gains, and the underlying revenue and EBITDA growth of the portfolio is robust, averaging low double digits. We are well positioned to benefit from incremental sponsor-driven activity and growing market share. In our GP Stakes business, we continue to witness the resilience of larger cap GPs, with the market share gains of these managers accelerating during more challenging fundraising environments. This phenomenon has been consistent across asset classes. We are witnessing a rising pace of consolidation across alternatives, further substantiating the value of scale in this industry and creating incremental tailwinds for the investments in our funds. In real estate, we continue to actively deploy capital at attractive cap rates close to 8%, consistently monetizing at meaningful spreads to our entry points. The scale benefits of our triple net lease strategy allow us to offer attractive risk-return for essentially investment-grade secured credit, resonating well with our investors looking for steady income enhanced by appreciation potential. Our most recent real estate funds have invested heavily into the demand created by the on-shoring movement. Geopolitical tensions and supply chain issues continue to dominate headlines, leading companies to prioritize on-shoring. This $1 trillion opportunity represents not just a moment in time, but a transformational manufacturing renaissance in the US. The capital needs driven by this theme, combined with more constrained capital availability at large, have created a very strong pipeline into which we continue to deploy capital. We're very pleased with the outcomes we've achieved across Blue Owl in 2023. Looking ahead, there are several growth avenues we are pursuing to supplement the expansion of our existing platforms. We intend to launch a strategy focused on triple net lease in Europe, driven by deal flow we already see today. Our strategic equity strategy held a first close and committed to its first investment during the fourth quarter, and we expect that we will continue to expand our alternative credit strategy. In addition to further expanding our institutional and wealth distribution, we continue to evaluate ways to partner with other large long-duration pools of capital, such as insurance. Generally, we aim to grow organically in areas where we have institutional expertise and the conviction to achieve market leadership, while looking to acquire when we can benefit from immediate scale and strategic positioning. I speak for the entire team in saying we are very excited about what lies ahead for the business, and there's a lot to look forward to. With that, let me please turn it to Alan to discuss our financial results.

Thank you, Mark. Good morning, everyone. Thank you for joining us today. To start off, we are pleased with our fourth quarter and full year 2023 results. Mark mentioned this, but I'd like to reiterate that this is our 11th consecutive quarter of both management fee and FRE sequential growth, the only alternative asset manager that has demonstrated this over this period. As we show on slide 5, we've been able to grow our dividend 57% over the past two years, driven solely by recurring and growing management fees. Let's go through some of the key highlights of our 2023 results on a full year comparative basis. Management fees were up 26%, and 92% of these management fees are from permanent capital vehicles. FRE is up 25%, and our FRE margin is right on top of our 60% target, which we continue to expect to be the target for the next few years, and DE is up 25%. To double-click on this a little bit, as Mark mentioned earlier, we built our business with the intention of driving strong growth, not only during favorable market conditions but more importantly, in tougher environments, like we've seen over the past year or so. We believe the fact that we were able to generate over 25% growth across these key metrics when peers on average generated low-teens management fee growth and DE declines over the past year is a testament to how we are proving out our model. Now, I'd like to spend a moment on our fundraising efforts. As you can see on slide 12, we raised $6.2 billion in the fourth quarter and $15.8 billion for the full year. Inclusive of debt capital, we raised $25 billion in 2023. I'll break down the fourth quarter numbers across our strategies and products. In credit, we raised over $2.5 billion, including $1.9 billion raised in our diversified and first lien lending strategies with $1.2 billion raised in our non-traded BDC, OCIC, up 30% quarter-over-quarter. The remainder was raised across software lending and our newly launched strategic equity strategy. In GP Strategic Capital, we had an initial close of $2.1 billion for our sixth minority equity stakes fund as well as over $400 million in a co-investment fund for this strategy. In real estate, we raised approximately $1.1 billion, with over $650 million for the sixth vintage drawdown fund, bringing that fund to $4.7 billion and over $350 million in our non-traded REIT, ORENT, up roughly 20% quarter-over-quarter. We are starting to see early signs of production coming from the distribution platforms that added ORENT in late 2023, and look forward to expanding our presence further on each, while also adding incremental platforms in 2024. As Mark alluded to earlier, the over $50 billion of fee-paying AUM we have added since January 1, 2022, represents over 80% growth in our fee-paying AUM since the end of 2021. While that number is notable unto itself, I have to emphasize that this is also AUM that is largely permanent capital, so these assets will stay in our system and be the next layer in our layer case. During the quarter, we raised $4.6 for every dollar that was paid out as a result of distributions or redemptions. For context, last quarter, our peers on average raised $1.7 for every dollar that was paid out. In addition to 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 $14.5 billion at December 31, which corresponds to roughly $200 million of incremental annual management fees once deployed. We had also previously talked about another $200-plus million of incremental management fees that would turn on upon the listing of our private BDCs over time. And as many of you know, one of those BDCs did, in fact, list recently. OBDE's listing translates to approximately $80 million of that $200-plus million of additional annual management fees to Blue Owl. Moving on to our credit platform, we had gross originations of $8.1 billion for the quarter and net funded deployment of $3.2 billion. This brings our gross originations for 2023 to $17.6 billion with $8.2 billion of net funded deployment. Our credit portfolio returned 4% in the fourth quarter and almost 18% in 2023. The weighted average LTVs remain in the low-40s 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 $2 billion of opportunities, which will bring us through the remaining capital available in Fund V. Performance across these funds remains strong with a net IRR of 24% for Fund III, 43% for Fund IV, and 17% for Fund V, which compare favorably to the median returns for private equity funds of the same vintages. In our real estate platform, deployment activity remains robust, with over $600 million deployed during the quarter, and our pipeline of opportunities remains strong, with nearly $6 billion of transaction volume under letter of intent or contract to close. Regarding performance, we achieved gross returns across our real estate portfolio of 9% in 2023, 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 lease structure insulates our returns from the expense inflation that many are experiencing, while long-duration and contractual rent escalators on our leases shelter our portfolio from the declining rent growth trends that others across the industry are seeing. Most of our recent funds were raised and are being deployed into a capital-scarce environment, which presents attractive risk-adjusted opportunities. I’d like to end with a couple of comments on tax rates and FRE margins to set the stage for 2024 and beyond. On taxes, the headline here is we expect our effective tax rate to be lower for longer. We saw the impact of various tax benefits keeping our effective tax rate for 2023 at a low 2%. For 2024, we currently expect that rate to be in the mid-single digits, around 5%, and for 2025, we expect a high single-digit effective tax rate. We will be making our first cash TRA payment in the first quarter of 2024, which should result in an elevated rate in the mid-teens, approximately 15%. For that quarter alone, before stepping down in the subsequent three quarters to about 2%, averaging roughly 5% for 2024. As for FRE margins, I've spoken frequently about our 60% FRE margin, which we feel very comfortable operating in for the next few years, and is among the best in the industry. We plan to reinvest valuable R&D dollars back into the business to lead the industry in revenue growth. For every follow-on product launch that helps us scale, like our sixth real estate fund or GP stakes fund, we have a new product we're launching like strategic equity or European net lease. We're also putting valuable R&D dollars into continuing to grow and expand our wealth and institutional fundraising efforts, all while maintaining growth for FRE margin, as our revenue and dividend growth are among the best in the industry. 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?

Certainly. Your first question comes from Glenn Schorr with Evercore. Please go ahead.

Hello, there.

Hi, there. Good morning.

Good morning. So I love all the growth, and I love the outlook stuff. You're doing everything that you said you were going to do. Your confidence in Owl defending its big fee premium, you do get paid well for what you do. You are putting up good returns, but your fees are on the high side of the peer group. So can we just talk through that a little bit? Thank you.

Sure. Well, without sounding snarky at all, I mean, look, to a degree of property, you get what you pay for. I mean, we are offering an exceptional result with exceptional performance. Importantly, when you look at the average fee rate, we have always been focused on the quality of our AUM and the quality of what we take on. We really don't focus on gathering AUM because that is exactly how you drive your average fee rates down. You can define whether that’s good, bad or otherwise. But the reality is that we focus on where we can generate really high value-added returns for investors and therefore, high-value, high-fee income for Blue Owl. So at the end of the day, you can grow a lot of AUM at ever-lower fees or you can say, look, what I'm going to do is take lesser AUM, relatively speaking, and deliver really high-value results on that and get paid for it. Our pioneering different strategies is where we can add that value. People are willing to pay for that, appropriately so. Take tech, right? We were really very, very early with the idea of focusing on software lending. I remember clear as day the number of people that said, well, why would you do that? And sitting here today, I don’t say that with any arrogance or anything, but at the end of the day, today, I would say, well, of course, software loans are where you want to be. We started that years ago and pioneered that space. I think we do it by having distinctive strategies and having a direct angle on triple net lease when everybody else's real estate products are suffering this year; we have a thriving real estate product. That's a differentiated strategy. That’s really the heart and soul of it. But at the end of the day, we got to keep delivering value for our investors and delivering great results. We know that and we plan to.

And can you update us on the timing on healthcare, given Cowen? I would think that health care product is right in line with this context.

The healthcare product is certainly aligned with our strategy. To provide some context regarding the Cowen acquisition, healthcare has been an active sector for us. We have engaged in approximately $11 billion of loans and investments in healthcare, which includes an increased focus on royalties. Acquiring Cowen enhances our capabilities significantly, particularly in pharmaceuticals and science, as we have a team that includes several PhDs with expertise in drug development. This strengthens our existing focus on healthcare services and structured solutions for royalties, allowing us to offer a comprehensive suite of capabilities. We have begun discussions with investors, and we need to ensure that we create the right structure and product to deliver value. We believe we have the necessary components to make this work. Healthcare has a strong parallel to the technology story from six years ago. We are also exploring alternative credit as another area of growth.

Thanks for all that, Marc.

Thank you.

Your next question comes from Brian McKenna with JMP Securities. Please go ahead.

Thanks. Good morning, everyone. The real estate business has had terrific growth since you acquired Oak Street at the end of 2021, with AUM up about 80% in just two years. The outlook is pretty bright as well. Can you talk about the size of the investment team today? What's their capacity from an origination perspective? And ultimately, how much AUM can the business support over time?

Mark Zahr has done a spectacular job. If I could, thank you, Brian, and I'll join you in commending our partner there, who has really architected a unique business model, which durability and attributes shine through this year. The business, with our new fund, we have now raised $5 billion, which is twice the size of the last fund, the largest U.S. real estate fund raised this entire year. Deployment is already off to a strong start. We're pacing ahead of the ordinary pace of our product, and the demand is high because it's an alternative solution to capital needs for large corporate users. We have a backlogs are running at record highs in our pipeline, over $10 billion, so we have plenty to focus on. The critical real estate owned by investment-grade institutions around the world is a large opportunity that’s not transacted. We don't see that as a constraint. The onshoring trend is a huge driver for this asset class, and we are engaged in dialogues with various companies; it translates to a core institutional asset that will run for a long time with significant capital needs. We're tasked with finding the best investments, and the addressable market is sizable. We are also extending our reach into Europe.

Super helpful. Thanks, Marc, and congrats on another great quarter.

Thank you very much.

Thanks.

Your next question comes from Alex Blostein with Goldman Sachs. Please go ahead.

Hi, good morning, everybody. I wanted to talk about fundraising more broadly. You guys had nice momentum exiting the year. The flows are becoming more balanced between channels and products. Looking out into 2024, what are your aspirations for fundraising for the firm as a whole, and how should we think about the breadth of the flows you expect to see next year?

Thanks, Alex. In the fourth quarter, we saw something important about the continued evolution of the business, as we have several adjacent legs and several adjacent strategies. We have more arrows in that quiver. We had significant fundraising in credit, real estate, and GP stakes. We expect to see that in 2024. We're not managing our business quarter-to-quarter and fundraising is episodic due to mandates and the timing of product launches. We expect to continue seeing this breadth between products. Our real estate product is the only net inflow real estate product in the marketplace and we are launching on many new platforms this year. The composition should be the building block for 2024. Wealth and institutional are both strong for us. We have a lot of opportunities to convert and grow across our product lines.

Great. Thank you. For you guys, actually, a bit of a two-parter, but I promise they're related. On the balance sheet, you mentioned exploring insurance opportunities for the firm. How do you think about structuring that? Minority or majority ownership? And regarding the Luna JV, why not do the strategy out of GP Solutions?

First, with regard to insurance, look, it's an area we have been spending time trying to develop an appropriate strategy. We have two terrific channels of capital access, wealth and traditional institutional. The one we don't have that some of our peers have is insurance. We're aware of that. Our strategy is much more about how do we access asset management through the insurance channel in a balance sheet light way. Regarding the Luna JV, this is part of our GP Solutions product, and it's a way of coming to that market with a value-added solution. We're in the market for large-cap GP solutions, while Luna brings significant investment capabilities in the middle market. We are delivering our operational resources to support those growing firms with significant partnership opportunities.

Great. All right. Thanks for all that.

Thanks, Alex.

Your next question comes from Craig Siegenthaler with Bank of America. Please go ahead.

Good morning, Mark. Alan, I hope you're both doing well.

Good morning. Thanks.

We wanted to circle back on private wealth fundraising. OCIC's flows roughly doubled in the quarter, which is impressive. The rent flows improved too. Can you comment on the sales trajectory of both products into early 2024? And how many major platform shelves do both products sit on today?

It's been a channel we've pursued since the beginning. The wealth channel interest in these products is substantial due to performance. Since inception, our OTIC product delivered about a 12% return. Our OCIC product delivered about a 10% return. We continue to add platforms, and we have opportunities within our existing platforms as well. We are deep into credit and real estate, which can fill out our growth potential. Real estate has been our fastest-growing business, and we remain focused on expansion, especially given the current environment.

We are also seeing strong numbers on the institutional side. We had a very strong quarter in 4Q for institutional fundraising, and we're off to a strong start in 1Q this year as well. We have multiple products in credit, GP stakes, and real estate that we believe will attract institutional clients.

Just for my follow-up on Dyal VI, I recall the fundraising for this fund being very bar bellied, some big raises at the beginning and some at the end, a little hold out in the middle. Do you expect Dyal VI as raises to be more consistent? And I know you launched a new middle-markets fund; should there be a first close for that over the near-term?

We've got our first close with Luna and will start raising that product. We expect there to be excitement and interest. For Fund VI, we do not expect it to be barbelled like we saw with Fund V, due to our ongoing relationships and not duplicating private banks. Fundraising will ebb and flow between institutional and wealth depending on timing, but it should be smoother overall.

We still have the natural interfaces and lumpiness of the different timings on closing. But you should anticipate that we will complete many more closings in a much shorter time frame through 2024.

Thank you very much for taking the questions. Just coming back to direct lending, wondering if you could comment a little bit on volume as well as pricing outlook for the direct lending platform, particularly as competition picks up?

It's certainly been a really good environment for direct lending. We can all have different views about where we'll be in six to twelve months. I will tell you that the performance of our portfolio has been strong. We have seen our revenue and EBITDA growth higher than the prior quarter averaging 15%. We have a very healthy portfolio. The return of some functioning liquid market is positive. We continue to have strong demand, with $2.5 trillion of private equity dry powder that hasn't been deployed. Therefore, we do anticipate an active year ahead for direct lending. The outlook is positive but spreads have come down from their peaks, which still provide attractive risk-return proposals as we originate today.

Any thoughts on the transaction line? Wondering if you could flesh out what drove it this quarter?

4Q was our second biggest gross origination quarter, driving a strong transaction fee quarter. We foresee it generally following the trend of gross originations, but the two do not follow lockstep.

Thanks. Kind of a bigger picture question. You mentioned 60% margin, which is strong, but your peers seem to signal they're on the other side of that investment spend cycle. Can you unpack a bit about what's behind the elevated spending for Blue Owl?

We're putting valuable dollars back into fundraising to continue to grow our institutional and wealth efforts. We're launching new products, of which additional spends can impact margins. We anticipate continued growth, especially given the strong performance and revenue growth we've achieved.

I wanted to ask on the Cowen Health care acquisition. It gives you a great foothold in the healthcare life sciences space. Can you scale the strategy? Should we think about it following a similar trajectory to your tech-focused funds?

We see a meaningful opportunity in healthcare; these things take time to develop. Tech has been extraordinary, but I wouldn't categorize healthcare in the same way. There are many elements to build across this sector. We’ve seen strong results across our existing activities, including over $11 billion of investments in this area. We will keep our stakeholders posted of our developments.

Hi, good morning everyone. There's a view that middle-market lending is less exposed to bank disintermediation and deal activity than larger markets. What are you seeing in terms of the volume and refinancing outflows from larger borrowers?

The flow lines have been away from traditional syndicate markets toward us, not the other way. Overall, our direct lenders perform well, and we are not looking to steer into smaller transactions. We're doing significant business and value proposition with our private solutions. Many companies have decided to use private solutions long-term. We've had a healthy portfolio despite any macroeconomic challenges.

I know it’s only been three months since OBDE’s listing, but how has that reception been? Has it changed your outlook on a possible merger between some of the listed BDCs?

The listing has been well-received, as we told investors that we would create an orderly amount of time for liquidity. Investors now have access to their capital at an NAV happening at the right time. The attention is on the liquidity option, and as we broaden our opportunities, there is room for potential mergers to improve shareholder value through greater scale.

Real estate returns were negative in the quarter, but triple net lease has held up well. What drove the negative returns this quarter?

This has been a strong durable strategy. There was a small negative this quarter due to portfolio marks on debt, but the portfolio is performing very well overall. We have seen impressive resilience in the strategy, and the fundamentals remain strong despite the temporary fluctuations. Thank you all for your time. We appreciate your patience here this morning, and we look forward to continuing to drive hard. We have a lot of work ahead, but we are excited about the starting point for this year and the opportunities to keep driving forward in our mission and goal to achieve that $1 a share in 2025. Have a good day.

Thank you, everyone.

This concludes today's conference. You may now disconnect.