Blue Owl Capital Inc. (NYSE:OWL) Q1 2024 Earnings Call Transcript May 2, 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 Capital’s First Quarter 2024 Earnings Call. During the presentation, your lines will remain on listen-only mode. Later on we will have a question and answer session. [Operator Instructions] I’d like to advise all parties that this conference call is being recorded. I will now turn the call over to Anne Dai, Head of Investor Relations for Blue Owl. Please go ahead.
Ann Dai: Thanks, operator, and good morning to everyone. Joining me today are Marc Lipschultz, Co-Chief Executive Officer; and Alan Kirshenbaum, our Chief Financial Officer. I’d like to remind our listeners that remarks made during the call may contain forward-looking statements, which are not a guarantee of future performance or results and involve a number of risks and uncertainties that are outside the company’s control. Actual results may differ materially from those in forward-looking statements as a result of a number of factors, including those described from time to time in Blue Owl’s capital filings with the Securities and Exchange Commission. The company assumes no obligation to update any forward-looking statement.
We’d also like to remind everyone that we’ll refer to non-GAAP measures on the call, which are reconciled to GAAP figures in our earnings presentation, available on the Investor Resources section of our website at blueowl.com. Please note that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any Blue Owl fund. This morning, we issued our financial results for the first quarter of 2024, reporting fee-related earnings, or FRE of $0.20 per share; and distributable earnings, or DE, of $0.17 per share. We also declared a dividend of $0.18 per share for the first quarter payable on May 30 to holders of record as of May 21. During the call today, we’ll be referring to the earnings presentation, which we posted to our website this morning.
So please have that on hand to follow along. With that, I’d like to turn the call over to March.
Marc Lipschultz: Great. Thank you very much, Ann. We reported another strong quarter of results for Blue Owl this morning with 12 straight quarters in consecutive management fee and FRE growth since we’ve been a public company. We’re very pleased with the predictable, consistent and robust growth we’ve been able to generate for our shareholders across a range of market backdrops, reflecting the benefits of our FRE-centric and permanent capital heavy business model. Said plainly, our earnings consists almost entirely of management fees, so we’re not subject to the volatility and uncertainty of revenues tied to realized gains and capital markets activity. And having long-duration capital means that very little use of our system, providing us with a resilient asset base that grows faster than our peer group for the same number of dollars rates.
We think the market is starting to understand and appreciate the value of these stabilized attributes and how they contribute to our premium growth profile. On a 12-month year-over-year basis, we grew FRE revenue and FRE by 24% and DE by 20%. We’re humbled to be among the leaders in these metrics across our whole peer group that includes very accomplished firms in our industry and it’s something we don’t take lightly as we continue to plant the seeds for future growth at Blue Owl. Globally, demand for differentiated income-driven returns remains very strong, and we continue to see good interest in our credit, GP’s strategic capital and real estate strategies across institutional and wealth investors. During the quarter, we held the final close on our latest triple net lease fund, bringing in nearly $500 million.
We raised $5.2 billion total after receiving approval to exceed our hard cap of $5 billion. This fund was the largest U.S. focused real estate fund in 2023 and more than doubled the size of its predecessor fund, demonstrating significant investor demand despite a very challenging backdrop for real estate fun raise in general. In the wealth channel, gross flows into our perpetually distributed products reached $2.1 billion in the first quarter, 16% higher than the fourth quarter and almost double what we raised in the first quarter of 2023. And in April alone, we’ve raised close to $1 billion in those perpetual products. We also closed on $1.4 billion of institutional capital in our direct lending business, across separate accounts and closes for our first lien lending and strategic equity strategies, complementing to continued growth in wealth.
And our new mid-cap GP strategic capital strategy is off to a very good start with over $0.5 billion raised during the first quarter. Subsequent to quarter end, we announced 2 acquisitions that further expand our suite of investment offerings and broaden the markets to which we provide capital solutions. First, we made a preferred investment into Kuvare and announced our intention to acquire Kuvare Asset Management, reflecting a creative and accretive way to broaden Blue Owl’s value proposition to the insurance space. The Global Life and annuity market is over $20 trillion in size and an increase in number of insurance companies are looking to partner with specialized asset managers that can create better risk-adjusted returns through differentiated sourcing, underwriting and structuring.
By adding a set of more IG-focused credit and real estate capabilities to Blue Owl’s existing and scaled origination platforms, we can bring a more comprehensive insurance asset management solution in the marketplace. We will also benefit from Kuvare as we expect they will continue to take market share in an expanding annuities market. Acquiring Kuvare Asset Management adds $20 billion of AUM or but not inclusive of incremental growth at Kuvare. I think we approached this acquisition in a very Blue Owl way, meaning we came from a mindset of providing solutions to not competing with our clients. We had no desire to become balance sheet heavy or to become an insurance company. Instead, we plan to partner with them and allow them to continue to do what they do best, underwriting liabilities, while we focus on what we do best at managing assets.
This solution’s mentality is in keeping with what you see across the rest of our business. In direct lending, for instance, we provide financing solutions to sponsors for their portfolio companies. In GP stakes, we provide capital to the sponsors themselves. We prefer to help them grow their businesses as opposed to competing with them in those businesses. Now turning back to M&A. The second transaction we announced recently was our intention to acquire Prima Capital, an investment manager focused on real estate lending with approximately $10 billion of assets under management. Structurally, we see an increasing need for capital to finance real estate and have been interested in expanding our capabilities in this area. Prima struck us as a great fit for Blue Owl given its leading position, high-quality portfolio and strong historical track record through cycles, and we expect to leverage Blue Owl’s scale and expertise to accelerate expansion.
Pro forma for these 2 transactions, Blue Owl AUM would exceed $200 billion, crossing another meaningful milestone. Now moving on to business performance. In credit, we saw a fairly constructive environment for deployment with elevated repayment activity. As a reminder, the return of syndicated market activity reflects greater market participant confidence, which, over time, will enable increasing M&A activity. We’ve proven we can deploy significant capital when syndicated markets are active, and we believe we’re well positioned to do it again. Knowing the outsized market share the direct lenders have seen over the past 1.5 years, the longer-term secular trend has been one in which sponsors have increasingly gravitated towards direct lenders for the value proposition they offer, and we see this trend continue.
We see healthy sponsor appetite to deploy incremental dry powder and monetize existing investments over time and we expect Blue Owl to play a meaningful role in new capital deployment and refinancings. As Alan will detail, direct lending metrics remained strong. We have had just 7 basis points annualized realized loss, which has largely been offset by realized gains. And the underlying revenue and EBITDA growth of the portfolio remains in the low double digits on average. High level, our observation is that the economy is sound and rates are likely to be higher for one. While we would have loved for spreads to stay 100 basis points wider as they were a year ago, we believe the opportunities we’re seeing today offer very compelling spreads for the risks we’re being asked to take.
In our GP stakes business, our partner managers continue to benefit from 2 meaningful secular threats, growing allocations to alternatives and GP consolidation. Collectively, our partner managers now manage nearly $1.8 trillion, giving us an unparalleled view over the alternative asset management industry. Over the past decade, we’ve observed significant diversification across the industry, including the emergence and scaling of notable asset classes such as private credit as well as the expansion in the universe of investable assets for private capital. We’ve also seen market share accrue to the most established, largest private market managers, where our flagship funds have a leading market share. In addition, now that we’ve closed on some initial capital for our mid-cap strategy in partnership with Blue Net, we also are able to invest in the most exceptional managers that were not the right fit for our existing mandate.
We’re ready to capitalize on a visible pipeline of differentiated managers who are at an earlier stage of development and we think investors are very excited about this opportunity as well. In real estate, we continue to actively deploy capital at attractive cap rates close to 8% behind our 4 major themes: digital infrastructure, onshoring, health care real estate and essential retail. The capital needs in each of these areas is very significant and we have a good line of sight into capital deployment. In addition to the success we saw with our drawdown fund raise, which is now finished, we continue to see a meaningful step-up in private wealth flows. First quarter flows in our perpetually offered net lease product were 45% higher in the fourth quarter as a result of the stronger production from new distribution platforms.
In summary, we’re pleased with the continued expansion of our existing business and to supplement the robust growth we’re already generating, we’ve announced some new acquisitions in areas that we find adjacent, strategic and synergistic and which could become quite substantial in the coming years. With that, let me turn it to Alan to discuss our financial results.
Alan Kirshenbaum: Thank you, Marc. Good morning, everyone. Thank you for joining us today. To start off, we are pleased with the strong results we continue to report with the first quarter of 2024 being our 12th consecutive quarter every quarter since we listed of both management fee and FRE sequential growth, the only public alternative asset manager that has demonstrated this over this period. We’ve been able to achieve this because of our differentiated asset base and earnings profile with long-duration assets creating a recurring revenue profile while fundraising adds new layers to our layer cake of management fees and FRE. So let’s go through some of the key highlights on an LTM year-over-year basis through March 31. Management fees are up 22% and 92% of these management fees are from permanent capital vehicles.
FRE is up 24%, and our FRE margin is right on top of our 60% target and DE is up 20%. As you can see on Slide 12, we raised $4.7 billion in the first quarter and $16.7 billion for the last 12 months. Inclusive of debt capital, new capital raised was over $28 billion over the last 12 months. I’ll break down the first quarter fundraising numbers across our strategies and products. In credit, we raised $3 billion, $2.6 billion was raised in our diversified and first lien lending strategies, of which $1.3 billion was raised in our non-traded BDC, OCIC, up over 100% compared to the first quarter of 2023. The remainder was raised across software lending and our newly launched strategic equity, strategy. In GP Strategic Capital, we held an initial close of approximately $600 million for our new mid-cap strategy.
In real estate, we raised approximately $1 billion with nearly $500 million for the sixth vintage drawdown fund, bringing that fund to its final close at $5.2 billion; and over $500 million in our non-traded REIT rent, up more than 70% compared to the first quarter of 2023. We are seeing increased engagement on the distribution platforms that added our rent in late 2023 and continue to see opportunities to expand distribution globally for this product. We’re pleased with the increasing breadth of fundraising across strategies and products, which will continue to expand with the expected closing of our announced acquisitions of Kuvare and Prima. In addition, we’ve had very few assets leaving the system with distributions, redemptions and capital return aggregating just 4% of our average AUM over the last 12 months.
We believe this number is approximately double for our peers and could increase further for them during more active monetization environments, highlighting Blue Owl’s more durable asset base. Finally, to supplement the staying power of existing AUM and the benefit of ongoing fundraising, we have substantial embedded earnings that we will unlock over time. AUM not yet paying fees was $16.8 billion as of the first quarter corresponding to roughly $240 million of incremental annual management fees once deployed. This equates to a fee rate of approximately 1.4%. We also have approximately $135 million of incremental management fees that would turn on upon the listing of our remaining private BDCs over time. These 2 items alone would represent an increase of over 20% from our 2023 total FRE revenues.
Moving on to our credit platform. We had gross originations of $8.9 billion for the quarter and net funded deployment of $2.9 billion. This brings our gross originations for the last 12 months to $24.9 billion with $9.8 billion of net funded deployment. Our credit portfolio returned 3.7% in the first quarter and 17.4% over the last 12 months. Weighted average LTVs are in the high 30s across Direct Lending and in the low 30s, specifically in our software lending portfolio. For our GP Strategic Capital platform, total invested commitments for our fifth GP stakes fund, including agreements in principle are over $11 billion of capital with line of sight into over $3 billion of opportunities, which if all signs would bring us through the remaining capital available in Fund V.
And performance across these funds remained strong with a net IRR of 23% for Fund III, 42% for Fund IV and 15% for Fund V, which compare favorably to the median returns for private equity funds of the same vintages. And in our real estate platform, our pipeline of opportunities continues to grow, with nearly $4 billion of transaction volume under letter of intent or contract to close. With regards to performance, we achieved gross returns across our real estate portfolio of over 6% over the last 12 months, comparing very favorably to the broader real estate market as a result of our distinctive net lease strategy and the timing of capital deployment. The net IRR across our fully realized funds has been 24%, which we think is impressive for essentially an investment grade and creditworthy tenant risk profile.
Okay. Let’s wrap up with a few closing thoughts. On taxes, just a reminder that we expect to return back to a low single-digit rate, say, 2% to 3% for the remainder of 2024, which should result in a roughly 5% tax rate for the full year, as I discussed on our last earnings call. In light of the recent acquisition announcements, I want to reiterate our outlook for a 60% FRE margin for the foreseeable future, investing dollars back into the business to drive long-term growth. Subsequent to quarter end, we closed a $750 million, 6.25% 10-year bond offering. We were pleased to see such strong levels of interest with the deal nearly 4 times oversubscribed from both investors who have been longtime supporters of our business as well as many debt investors that are new to our need.
Finally, I’d like to touch on the significant shareholder transition that we’ve achieved since Blue Owl went public. In May of 2021, about 10% of our shares were held in the hands of public investors. Our float was about $1.5 billion. The other 90% of our shares were owned primarily by Neuberger Berman, management and private phase investors. Over the past 3 years, we have largely replaced our legacy private phase investors with long-term oriented public shareholders and we’ve also seen strong demand from public shareholders for the occasional sales by Neuberger Berman over the same period. Today, we have more than a thid of our total shares in the hands of public investors, increasing our float to more than $9 billion, 6 times greater than where we started.
As for management, our lockup expired about a year ago, and there has been essentially no selling outside of charitable donations and estate planning. We’re very pleased with the progress we’ve made in working through the technical overhang in Blue Owl stock and think that the shifting demand supply balance is a factor in how the stock has traded recently. With that, I’d like to thank everyone who has joined us on the call today. Operator, can we please open the line for questions?
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