Earnings Call Transcript
Blue Owl Capital Inc. (OWL)
Earnings Call Transcript - OWL Q1 2023
Operator, Operator
Hello. Good morning and welcome to the Blue Owl Capital's First Quarter 2023 Earnings Call. During the presentation, your lines will remain on listen-only mode. After the speakers' remarks, there will be a question-and-answer session. Please note that this conference is being recorded. I would now turn the call over to Ann Dai, Head of Investor Relations for Blue Owl.
Ann Dai, Head of Investor Relations
Thanks, operator, and good morning to everyone. Joining me today are Doug Ostrover, our Chief Executive Officer; Marc Lipschultz and Michael Rees, our Co-Presidents; 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 due to various factors, including those described 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 solicitation of an offer to purchase any interest in any Blue Owl fund. This morning, we issued our financial results for the first quarter of 2023, reporting 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 31st, 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.
Douglas Ostrover, CEO
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 amidst 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 allows us to deploy incremental capital into some of the most attractive opportunities we've seen in quite 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 three 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. When you consider the more difficult fundraising environment that we've been in for the last year, we are incredibly proud of what we've accomplished thus far. Importantly, we also continue to see a very modest redemption 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 inflows status. From a deployment perspective, a more tumultuous market can result in temporary slowdowns and 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 we offer across direct lending, GP Solutions, and triple-net lease real estate. We saw this play out during COVID and we are 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 Solutions 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. 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 six 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's significant permanent capital base is a foundational and intentional differentiator for us, creating a stable base off of which to grow. Our management fee-centric earnings position us well to deliver steady progress against various market backdrops without the substantial volatility that our peers face from carried interest. Our growth has been outsized relative to peers, other financial companies, and broader market industries, 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 Lipschultz, Co-President
Thanks, Doug. During the first quarter, we observed a continuation and acceleration of market trends from previous quarters. Capital scarcity reached new heights, with Blue Owl serving as a key liquidity provider to sponsors and companies. Over the past year, our direct lending business has originated nearly $19 billion in loans, providing vital financing to the M&A market. We are seeing significant deals entering the direct lending space, reflecting a pause in liquid credit markets and highlighting the value of private credit solutions during uncertain times. As we have mentioned in earlier quarters, this is an excellent environment for deploying capital at wider spreads and lower loan-to-values compared to last year, financing large, high-quality companies. The loans we are issuing are supported by stable, long-term capital. As anticipated, broader market M&A volumes were sluggish in the first quarter of 2023. Although our deployment activity is influenced by this trend, we are still capturing significant market share in direct lending. Credit quality remains robust; despite a challenging backdrop, we see good year-over-year revenue and EBITDA growth on average in our portfolio. Our weighted-average loan-to-values remain in the low 40s across the direct lending portfolio and in the low 30s within the tech portfolio. Out of the $75 billion in loans originated since our inception, annualized realized losses are about 6 basis points, fully offset by realized gains over this period. Regarding performance, the direct lending portfolio saw a gross appreciation of 4.6% for the first quarter and 13.2% over the past 12 months. Moving to real estate, we are experiencing strong interest in our net lease strategy, with elevated corporate borrowing costs and stalled financing markets. Our pipeline is robust, showcasing around $3.3 billion in transaction volume under letters of intent or contracts to close and a short-term pipeline of about $30.8 billion in potential volume. Including announced acquisitions, we have invested or committed nearly all equity in our fifth closed-end fund and have begun deploying capital from our sixth vintage. The stability and quality of income from our triple-net lease strategy are appealing to investors. Inflation concerns are alleviated as tenants bear all property expenses, while growth concerns are addressed by contractual rent escalators in long lease terms exceeding ten years. Our tenants are primarily large, brand-name firms with investment-grade credit profiles, and the real estate we manage in this strategy typically includes logistics properties or mission-critical retail locations essential for their operations. While we recognize there is increased investor caution regarding real estate as an asset class, we believe our real estate business is well-positioned for this environment. Our downside is protected through income generation, purchase price, contractual lease duration, and tenant credit quality, supported by a triple-net lease structure. Performance-wise, we achieved gross appreciation of 4.4% in our real estate portfolio for the first quarter and 19.1% for the past 12 months, delivering great risk-adjusted returns based on the strong underlying credit profiles of these portfolios. Referring back to my opening remarks, we continue to see a favorable environment for our direct lending and real estate businesses, with attractive opportunities to deploy capital and strong interest in our strategies. Recent market shocks have reminded people that markets can shift rapidly; therefore, being senior in the capital structure, generating substantial income, and having long-term support for investments are highly advantageous for our investors and for Blue Owl. Now, I will hand it over to Michael to discuss GP Capital Solutions.
Michael Rees, Co-President
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 alternatives 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.
Alan Kirshenbaum, CFO
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've been a public company for two 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 two- to five-year view in 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 two years. We built our business with a 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 two years, our peers had, on average, 30% to 35% of the total asset management revenues come from lumpy, volatile carried interest cash flows, which is very different from us. Okay, let's step to 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%. Keep in mind, we acquired our real estate business at the end of 2021, this is obviously very considerable growth we've been able to accomplish. Compensation expense came 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 a large closing in our ORTF II BDC. Overall, we are trending in line with our expectations and guidance of G&A expenses trending a little up 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. 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, which 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, particularly considering the very challenging fundraising environment we are 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. 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 have 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, including $1.2 billion raised in our diversified lending strategy, 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. 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 non-traded 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, particularly 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 five times the level of redemptions. All in all, we've raised approximately $29 billion of fee-paying AUM since January 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, 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 two 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 a 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?
Operator, Operator
Thank you. Your first question comes from Craig Siegenthaler. Your line is now open.
Craig Siegenthaler, Analyst
Hey, good morning, everyone. 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?
Douglas Ostrover, CEO
Hey, 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. 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, really hasn’t changed. When there’s market volatility and we are 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. When I look at what we've done through '22 and the first quarter of '23, Alan referenced that 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. As we sit here today, obviously, the spectrum of outcomes is a little wider, and I'd say that for me, it's incrementally a little more difficult to predict the timing of fundraising. However, we are seeing significant demand for all of our strategies. We've invested heavily in distribution globally and we're continuing to invest in the funds. We have a great track record, so I can't tell you the exact timing, but we still feel very good about our ability to generate meaningful growth. The big fundraise we have in the market right now is on Oak Street VI; we've raised just under $3 billion, and we have a hard cap at 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. I think that’s in line with expectations, and we're excited and think we will generate great returns with that capital. We also have a number of sub-strategies which I can go through with you in the credit space, and of course, there are some SMAs as well. I do have to admit away from institutional; we have three things in the market in private wealth. While flows have slowed, we're still doing pretty well in that space as well.
Operator, Operator
Your next question comes from the line of Patrick Davitt from Autonomous Research. Your line is open.
Patrick Davitt, Analyst
I am sorry. I mean, yes, thanks. Right. Do you hear me? I am sorry if I missed this, but I think 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, or are you kind of pulling off that a bit?
Alan Kirshenbaum, CFO
Thanks, Patrick, good morning. 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, with 40% plus year-over-year growth in every key metric of our business. There are many hypotheticals we could kick around, and yes, there is 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.
Operator, Operator
Thank you. The next question comes from Bill Katz. Your line is open.
Unidentified Participant, Analyst
Hi. This is Cameron Phillips on for Bill Katz. I just wanted to get further color on the net lease pipeline—just how it's been growing quarter-over-quarter, year-over-year, as well as what you see in a typical pacing of getting that pipeline completed, given the macro environment. Thank you.
Douglas Ostrover, CEO
Sure. Look, it's a very good environment to be a private capital solutions provider, particularly in a triple-net lease scenario. I think that dynamic is very visible for us. We see it in terms of the number of companies that are engaged and interested, the number of properties, and the terms on which we can buy them. By any measure, this is a really appealing time to be offering an alternative solution when traditional functioning markets are even less functional. We do very well and have done very well for 12 years with highly functional markets, but when the markets are not functional, we tend to do even better. The pipeline is very strong and it gets down to one simple observation—that at the end of the day, what we are offering with triple net lease is a type of credit and financing solution. It's even better because you also own a strategic physical asset underneath it. With a 15- to 20-year lease with all the expenses paid by the tenants, the investors' inflation is mitigated. It’s a wonderful way to make an extremely low-volatility, predictable long-term return. For the user of capital, if you don’t have functioning markets—whether that's a bank market, bond market, or otherwise—then it’s quite appealing to say, 'Why do I need to own the real estate business? I should be able to make a much higher return in my core business.' So, they turn to us, and we’re by far the leader in this space. As you know, we’re seeing the benefits of that and, not surprisingly, seeing more attractive terms today than we did a year ago; the cap rates that we can buy at are even better. It’s a very appealing environment for us. I'd also like to note that from the investors' perspective, we have a strategy that is so distinctive from other real estate strategies out there—we don't own leasing risk, we don't own the uncertainties of the commercial market, and we don't run highly leveraged strategies. So, it's a good time for this business.
Operator, Operator
Perfect. Our next question comes from Ken Worthington. Your line is open.
Alexander Bernstein, Analyst
Hi. This is Alex Bernstein stepping in for Ken Worthington. Thanks so much for taking my question. We wanted to double-click on the banking crisis that's been holding in the US. Do you see a longer-term opportunity for the alternative credit business to supply lending capacity here? Do you see an opportunity for OWL, and what would that look like? As a second part of that question, if you see such an opportunity, is there any incremental investment or build-out that you think would be required to take advantage of it, or do you already have everything more or less in place? Thank you.
Douglas Ostrover, CEO
Sure. Look, this ongoing banking transition—whatever term we apply to it—certainly presents some opportunities for Blue Owl. It presents opportunities for direct lending and private capital solutions in general. I want to be clear; none of us like to see these things happen, and it’s not helpful to the markets in aggregate when there’s this kind of capital disruption. But for our purposes on this call, yes, it’s positive for us. The reality is, when you take a lot of capital out of the system, the regional banks, which are some of the only banks left, are still lending money to companies. The large money center banks have largely migrated out of the balance sheet business into the securities business—they are focusing more on storage business versus actually lending. The regional banks still show up to provide capital, and while we frequently overlapped in the same companies, there was certainly some presence. So qualitatively, it’s clear this will mean more demand for capital and fewer suppliers of it. The suppliers that remain, the regional banks that stay in place, are also apparent that they are going to have a higher cost of capital. All of this means more opportunity for us. It’s too early to quantify the quantitative effects, but the potential outcomes are positive. It also amplifies the power of our model, which is having permanent capital, long-dated capital to meet long-dated needs. It is good for the economy and private capital markets through times like these. So, yes, the direct lending business has proven to be a stabilizing force for the market. This creates incremental capital opportunities for us, and importantly, we don’t need to build infrastructure; this is what we do. We evaluate many loans to determine the hundreds we pursue. We are fully equipped to capitalize on this opportunity.
Operator, Operator
Our next question comes from Patrick Davitt.
Patrick Davitt, Analyst
Sorry, guys. Hard to engage with me today. Thanks. On the retail products, is the triple-net lease still on only one distributor? If so, could you update us on the timeline for more coming online? Are there still a lot of big platforms coming online with ORCIC and ORTIC this year? Thank you.
Douglas Ostrover, CEO
Yes. So, let me start on the net lease trust. We are on one platform, and we’ve had a lot of success. We thought we'd be on a few more by this time. It's just taking a little longer given everything that’s going on in the markets. I think by the next six months, we should be on another three to four wirehouses. I feel pretty good that hopefully we can triple or quadruple the amount of monthly, quarterly fundraising in that product. There is definitely a lot of interest; it's just taking a bit longer. As for the other products, we are continuing to add wirehouses. I think those platforms and syndicates are largely built for us. I would predict that the net lease trust by the end of the year will be our single largest syndicate.
Operator, Operator
Thank you. I do not see any further questions at this time. So, I'll turn it back over to the Blue Owl team.
Douglas Ostrover, CEO
Thank you, everyone. We are really proud of our results this quarter, especially in light of what’s been going on in the markets, and we’re grateful for the support and partnership. I have to add, though, on a personal note, I don't understand how our stock is trading at $10.60. You've heard from the team; our income streams are very predictable, our margins are consistent, we've got permanent capital, and I’d say our revenue is probably the most predictable of any alternative asset manager. Most importantly, our dividend yield is now 5%, and we've signaled that our dividend will be materially higher next year and the year after. So, it feels to me and the team that this is going to be a very good entry point for investors. Again, I want to thank everyone for their time and look forward to following up in the days ahead. Thank you.
Operator, Operator
Thank you. This does conclude today's conference. Have a great day.