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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