Blue Owl Capital Inc. (NYSE:OWL) Q4 2023 Earnings Call Transcript

Blue Owl Capital Inc. (NYSE:OWL) Q4 2023 Earnings Call Transcript February 9, 2024

Blue Owl Capital Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: 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. [Operator Instructions] I will now turn the call over to Ann Dai, Head of Investor Relations. You may begin your conference.

Ann Dai: 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 from time-to-time 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.

Marc Lipschultz: 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. And exiting this year, the short-term path of interest rates, geopolitical risk levels, and economic growth trends remain heavily debating.

By design, Blue Owl’s growth has been distinctly more predictable, which is very 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, like in 2021. But importantly, to be able to offer strong and differentiated growth in much tougher environments like 2022 and 2023. I think we have certainly done that. 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. And today, we announced our annual fixed dividend for 2024 of $0.72, or $0.18 per quarter. This dividend represents 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. Well, there are a multitude of successes across the business that I’d love to highlight.

I’ll call out just a few that I think represent the advances we are making at Blue Owl. 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 deployment pipeline, resulting in an initial close of over $2 billion for our sixth GP minority equity stakes fund, earlier than originally anticipated, and despite having just held our final close for Fund V at the end of 2022.

In addition, we announced a joint venture with Luna in 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 rechannels. 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.

And we think we are just getting started as far as what’s possible in wealth over time. Finally, 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 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 booming 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 are robust at low double digits on average. 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.

And combined with LPs continuing to allocate more to alternatives broadly translates to the impressive growth we have seen in our partner managers. In addition, 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% and have consistently monetized 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, and this has resonated well with our investors looking for steady income enhanced live appreciation potential.

Our more recent real estate funds have invested heavily into the demand created by the on-shoring movement. With geopolitical tensions and supply chain issues continuing to dominate headlines, companies have elevated on-shoring to the top of their priority list. This $1 trillion opportunity represents, in our view, not 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 a number of 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’ll continue to expand our alternative credit strategy. And 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 intend to grow organically where we have institutional expertise and the conviction to grow into market leadership. And we will look to acquire, where we can benefit from immediate scale and strategic positioning. I speak to 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.

Alan Kirshenbaum: 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. And along with that, 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. And we believe the fact that we were able to generate 25-plus percent 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. This includes $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 funds 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, which brings 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 Jan 1, 2022, represents over 80% growth in our fee-paying AUM since the end of 2021. While that number is notable in it of 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.

And 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, and corresponding to roughly $200 million of incremental annual management fees once deployed. Separately, 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 and 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 or over $11 billion of capital with line of sight into over $2 billion of opportunities, which if all signs would bring us through the remaining capital available in Fund V. And performance across these funds remained 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.

And 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. With regards to 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 the long duration and contractual rent escalators on our leases shield our portfolio from the declining rent growth trends that others across the industry are seeing.

And most of our recent funds were raised and are being deployed into a capital scarce environment, which presents attractive risk-adjusted opportunities. Okay. 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 are currently expecting that rate to be in the mid-single digits, say, 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, say, 15%. For that quarter alone, before stepping down in the subsequent three quarters to approximately 2%, averaging for 2024, the roughly 5% I just noted.

And on FRE margins, I’ve spoken frequently about our 60% FRE margin, which we feel very comfortable operating in the business for the next few years and is among the best in the industry. Let’s talk a bit more about why this is the right level for us. We’re putting very valuable R&D dollars back into the business, investing in the future so that we can continue to lead the industry in revenue growth. So for every follow-on product launch that helps us scale our business, like our sixth real estate funds or GP stakes fund, we have a new product we’re launching like strategic equity or European net lease. We’re also putting those valuable R&D dollars into continuing to grow and expand our wealth and institutional fundraising efforts. All the while, we’re not sacrificing growth for FRE margin, our revenue and dividend growth is 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?

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Q&A Session

Operator: Certainly. [Operator Instructions] Your first question comes from Glenn Schorr with Evercore. Please go ahead.

Glenn Schorr: Hello, there.

Mark Lipschultz: Hi, there. Good morning.

Glenn Schorr: 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. I know we’ve talked about this before, but I like hearing it continue. 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 towards the high side of the peer group. So can we just talk through that a little bit? Thank you.

Marc Lipschultz: 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. And we have, very importantly, when you look at the average fee rate, and you know this, we have always been focused on the quality of our AUM, the quality of what we take on. And so as we’ve talked about before, we really don’t focus on gathering AUM because that is exactly how you drive your average fee rates down. You can depend 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 I’m going to take lesser AUM, relatively speaking, and I’m going to deliver really high-value results on that and get paid for it. So I think we also look at the end of the day, our pioneering different strategies where we can add that value. And again, 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. And I can remember Clear’s Day and the number of people that said, well, why would you do that? And sitting here today, again, I don’t say that with any arrogance or anything. But I think at the end of the day, today, I was like, well, of course, software loans are where you want to be.

Well, we started that years ago and have pioneered that space. And so I think that’s really the way we do it by having distinctive strategies, having really 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 is a differentiated strategy. So 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, delivering great results. We know that and we plan to.

Glenn Schorr: And can you update us on timing on healthcare, given Cowen and this conversation I would think that health care product is right in line with this congo?

Marc Lipschultz: Well, the healthcare product certainly is in line and — or put it another way, let me contextualize the Cowen acquisition. Healthcare has been another very active sector for us. And we have done, I think, about $11 billion actually of loans and investments in healthcare including an ever expanded level of activity in royalties, which, again, you saw this year. And adding Cowen brings us yet another set of adjacent capabilities extremely deep on better the earlier part of that cycle and in particular, more of the pharma side, the science side. We have a series of PhDs that are part of that team that really understand the science on drug development, and that’s additive to where we’ve been more in healthcare services and in things like structured solutions for, as I said, royalties and the like.

And so now we have a full suite, full life cycle of capabilities. And by the way, as you’ve seen, the Cowen team has outstanding results, and they’re really in a very, very interesting innovative area where they’ve dramatically outperformed their peers. So we now have all those pieces together. We see two big areas for growth. Healthcare is absolutely one of them. We’ve been starting to talk to investors. Again, we have to make sure we can come up with exactly the right structure, exactly the right product to your good first question. We have to do it in a way that’s distinctive in a way that really adds value. We think we’ve got the pieces of that puzzle and now we’ve got to finish assembling that. So healthcare certainly has a meaningful analog to that tech story of six years ago.

And then alternative credits, the other area, which I just Jason, while we’re talking about it, this area outside of the traditional sponsor credit, we’ve really been developing a lot of capabilities in-house on things like ABL and airplane leasing, and that’s another rich area that we’re focused on. We think about credit opportunities for healthcare and alternative credit.

Brian McKenna: Thanks for all that, Marc.

Marc Lipschultz: Thank you.

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

Brian McKenna: Thanks. Good morning, everyone. So the real estate business has had some terrific growth – growth since you acquired Oak Street at the end of 2021, with AUM up about 80% in just two years. And then the outlook is pretty bright as well. Mark and the team have done a terrific job here. But one thing that stands out to me is their ability to source transactions and just the absolute level of deal flow. So — 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?

Marc Lipschultz: Well, Mark Zahr has done a spectacular job. So if I could — thank you, Brian, and I’ll join you in commending our partner there, really has architected a unique business model, which durability and attributes, of course, shine through this year. The business, as you know, with our new fund, we have now raised $5 billion, that’s twice the size of the last fund, the largest fund, real estate fund in the US this entire year. And I will tell you that deployment is already off to a strong start. We already have hundreds of millions of dollars in LOIs and over 1 billion — I’m sorry, in transactions and over $1 billion in LOIs — so right at this moment, I would say we’re probably 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 and much like private credit, there’s this element of adaptation, people finding the product and ultimately using it in more disruptive markets like people have experienced over the last year, you get more people thinking about innovative ways to finance. And so we have, right, at this point, our overall backlogs are really running at record highs in terms of all the things in our pipeline, over $10 billion. So we have plenty to focus on. And of course, also as we continue to extend that reach into Europe. So I don’t want to say there’s no constraint. I mean if you think about the massive amount of critical real estate owned by investment-grade institutions around the world.

I mean that is a very, very large — and it’s mostly a white space. It’s just not an area that’s transacted. So I’m not suggesting that every company is going to do it with every asset or even close — but if you kind of take a step back and contextualize what amounts to, of course, the biggest fund in this market are versus that marketplace. We’re a fragment. So I don’t think addressable market is in any manner a constraint. But we’ve got to keep going out there and finding the best product and developing the partnerships and proving that, that’s a really innovative and effective way for these companies to finance. But clearly, people like Amazon have made that choice, and there’s plenty of others that we have worked with that are likewise doing it.

And last point, I guess I’d add is this new onshoring move, onshoring trend, which, of course, everyone is well aware of is going to be a potentially huge driver for this asset class. The amount of money that’s being spent just right now on developing semiconductor production in the US. These are gigantic fab plants, for example. And the capital intensity, I think I was just reading that Sam Altman wants to raise some number of trillions of dollars to develop chip capacity, every one of those things is a giant new facility. And in a world of — not going to be so easy to find trillions of dollars of capital, you certainly don’t have to own the real estate. So we’ve been very active in dialogues with chip companies, for example, and what a great asset for us, a core institutional asset that’s going to run for a very long time, big dollars with many, many wonderful credit counterparties.

So I — we appreciate every day we have to work hard to find the best investments, but addressable market is sizable, pipeline is very active right now. And then as I mentioned, a Europe as a whole another rich vein that we’re continuing and working on how to mine best, because the companies we work with are global and they have real estate in Europe and they ask us about their real estate in Europe. So that’s another leg of growth from our point of view.

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

Marc Lipschultz: Thank you very much.

Alan Kirshenbaum: Thanks.

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

Alex Blostein: Hi. Good morning, everybody. I wanted to — maybe zooming out a little bit. I just want to talk about fundraising a little bit more broadly. You guys had a really nice momentum exiting the year. And it’s important to note, I think, that the flows are becoming a little bit more balanced between both channels and products. So, as you’re looking out into 2024, what is sort of the aspirations for fundraising for the firm as a whole and more importantly, how should we think about the breadth of the flows that you’re expecting to see next year?

Marc Lipschultz: Thanks, Alex. And in the insightful phrasing of your question is on aspirations, I just want to start with, which is fourth quarter did indeed reflect, I think something important about the continuing evolution of the business, both in having the several adjacent legs and having several adjacent strategies, staying very much in our northbound highway. So to be clear, we have a strategy that is not all things all people back to the beginning of this conversation. But we do have more arrows in that quiver. And so what we saw, well, set in the fourth quarter was all of that starting to kind of show up in 1Q. Now I’m very cautious about focus in each quarter. We don’t manage our business quarter-to-quarter. Fundraising, as you obviously know, is very episodic quarter-to-quarter just based on mandates and flagships and exact timing of product launches.

So try to manage that way or sort of guess that way, but what you did see in the fourth quarter, which I think we will see repeat itself more is this breadth between products. We have significant fundraising in credit. We have significant fundraising in real estate, and we have significant fundraising in GP Stakes, and we will continue to — we expect to see that in 2024. Again, we now have more multiple product points of access at multiple products. And then between wealth and institutional, likewise, we’ve got both very much developing plenty of room to run. There’s our — real estate continues to offer a product, which is the only net inflow real estate product in the marketplace, is still only on a very few number of platforms, and we’re just have and are launching on many new platforms this year to offer that product.