Blue Owl Capital Inc. Q1 2023 Earnings Call

Hello, Good morning, and welcome to the Blue Al Capital first quarter of 2023 earnings call. During the presentation. Your minds were made on a listen only mode. After the speaker's remarks, there will be a question and answer session.

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To all parties at this conference is being recorded.

Now turn the call over to Andi head of Investor relations for blew out.

Thanks, operator, and good morning to everyone. Joining me today are guys are sugar or chief Executive Oscar Margaret Cho can Michael V. R Co President Alan Kirshenbaum, our Chief Financial Officer.

I'd like to remind our listeners that remark 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 are outside the complete control.

Actual results may differ materially from those and forward looking statements as a result of a number of factors, including those described from time to time capsule filings with the Securities and Exchange Commission.

It seems no obligation to update any forward looking statements.

Also like to remind everyone that will refer to non-GAAP measures on the call would you reconcile the gap figures in our earnings presentation available on the Investor resources section of our website at <unk> Dot com.

Note that nothing on this call constitutes an offer or solicitation of an offer to purchase an interest in any <unk>.

This morning, we issued our financial results for the first quarter of 2023, According fee related earnings or FRE, a 16 cents per share and distributable earnings or D. E. A 15 cents per share we declared the dividend 14 cents per share for the first quarter payable on may 31st the holders of record as of May 19.

During the call today will 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.

Thank you and good morning, everyone.

Today, we reported another strong quarter of results for Blue L. <unk>.

Demonstrating the strength and resiliency of our business model in the midst of volatile market conditions.

Over the past year or year, Mark by substantial interest rate hikes persistently high inflation and considerable swings in the public markets. We have achieved over 40 per cent growth on the key metrics, we use to evaluate our business, including management fees FRE <unk>.

G E all while maintaining an industry, leading 60% FRE margin.

And we feel like we're just getting started.

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 which allows us to deploy incremental capital into some of the most attractive opportunities we've seen in some time.

We believe our focus on downside projected income generating strategies resonates more than ever against the backdrop of a more unpredictable near term environment.

And we are hearing this sentiment echoed in our conversations with existing and prospective investors.

Since January 1st 2022, we have raised approximately 29 billion of fee paying capital across equity and debt, which compares to our fee paying a U M. A 61 billion at the end of 2021, almost 50 per cent 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 and when you consider the more difficult fund raising environment that we've been in for the last year, we're incredibly proud of what we've accomplished thus far.

Importantly, we also continue to see very modest redemption low 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 a U M and 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 more tumultuous markets can result in temporary slow downs and transaction volume says buyers and 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 that we offer across direct lending G. P solutions and Triple net lease real estate, we solve this play out during Covid and we're 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 R. G. P solution business has continued to offer valuable capital to the growing upper middle market G P community and with.

Our 13 billion dollar fund five fully Reyes and already 70% committed we will be looking ahead to fund sex in short order in for a real estate business. The current interest rate environment has made it even more attractive for companies to consider a net lease solution for their cap.

On days we.

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 two 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 three 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 L. Significant permanent capital base is a foundational an intentional differentiator for us.

Getting a stable base off of which to grow.

And our management fee centric earnings position us well to deliver steady progress against various market backdrops without the substantial volatility.

Peers have from carried interest.

Our growth has been an outsized relative to peers other financial companies and broader market indices and with our newly fixed annual dividend of 56 cents per share for 2023, we are offering an attractive dividend yield of roughly 5% and expect to <unk>.

I need to grow that dividend meaningfully in the coming years with.

With that I'd like to turn the call over to March to give you an update on our direct lending in real estate business.

Mark.

Great. Thanks, Doug.

During the first quarter the market tragically, we observed in the last few quarters continued an accelerated capital scarcity seemed to reach new Heights and blew all continued to act as an integral liquidity provider to sponsors and complex over the last 12 months blouse direct London business has originated in nearly $19 billion of loans.

Providing crucial for Nancy M&A market.

We continue to see sizeable deals come to the direct London market reflection of the pause seeing liquid credit markets and an acknowledgement of the value of private credit solutions during more uncertain times.

As we've highlighted in the past quarters. This remains an excellent environment in which to deploy capital and wider spreads at lower loan to values than a year ago financing large and very high quality complex and the loans were making are backed by sticky stable permanent capital.

As expected broader market M&A volumes remained slow in the first 2023.

All of our deployment activity is certainly not immune to that trend, we continue to see direct lenders capture significant market share.

Credit quality remains straw despite a more challenging backdrop, we continued to see good revenue and EBITDA growth year over year on average in the portfolio.

Weighted average loan to values remain in the low forties across our direct lending portfolio and in the low thirties across our textbook fall.

Across the $75 billion of the walls, we have originated since inception annualized realize losses have been approximately six basis points and those have been fully offset by realized games over that period.

And with regards to performance the direct lending portfolio achieved gross appreciation of 4.6% for the first quarter at 13.2% for the last 12 months.

Now moving on to real estate continued to see high levels of interest in our net lease strategy with corporate borrowing costs elevated and financing market solve our.

Pipeline of opportunities remains robust with roughly $3.3 billion, a transaction volume under letter of intent or contracted clothes and a near term pipeline of about $38 billion in potential volumes.

Inclusive of announced acquisition activity, we have invested or committed nearly all of the equity in our fifth posed edaphon and I've started deploying capital out of our sixth vintage.

Stability and quality of the income generated by our Triple net lease strategy continues to resonate strongly with investors inflation's concerns or minimize at all property expenses are borne by the tennis while growth concerns are mitigated by contractual rat escalators over very long 10 year class duration. These trips are.

Tenants are primarily large brand name firms with investment grade credit profiles and the real estate that we all in this strategy is generally and logistics properties or what we call mission critical retail physical footprint these businesses need to conduct their everyday operations.

Well, we understand there is more investor kosher around real estate as an asset class. These days, we think our real estate businesses, exactly where you'd want to be physician physician bar downside protected your income generation purchase price contractual least duration and the credit quality of our tenants in the triple net lease structure.

With regards to performance, we achieved gross appreciation across our real estate portfolio of 4.4% for the first quarter and 19.1% in the last 12 months in our view great risk adjusted returns for the strong underlying credit profile of these portfolios.

Referencing back to my opening comments today.

We continue to see a very constructive environment for our direct lemon and real estate businesses with attractive opportunities to put capital to work at a strong interest in the strategies that we offer the.

Market shocks of the past couple of quarters of reminded people that when market shift that can shift very rapidly.

Senior in the capital structure generate a meaningful returns her income and having your investments supported by permanent and long duration capital are all very good things for our investors and very good thanks for <unk>.

With that let me turn it to Michael to discuss G. P capital solutions.

Thank you Mark R. G P. A capital solutions business with active in the first quarter of 2023, moving dialogue forward on potential investments and working with many Parker managers as they continued to expand and diversify their businesses. Despite.

Despite what has probably been characterized as a more challenging fundraising environment, our focus on the largest firms within the alternative universe is positioned our platform well to capture the ongoing secular tailwinds towards alternatives.

Continue to see the market share of the largest managers expand and this phenomenon seems to accelerate during times of market volatility and.

In the past Coupla years, megaphones of $1 billion or more in the private capital industry have accounted for 65 per cent 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 are exceeding their fundraising targets, despite greater near term headwinds.

Total invested commitments for dial five including agreements in principle remain around $9 billion of capital committee or roughly 70 per cent of the fun the.

Forward pipeline is robust and we continue to evaluate numerous opportunities that are quite attractive.

Performance across dial phones remain strong with a net IRR of 23.1% for fun 352 per cent for fun, four and 31.9 per cent per phone five all of which compare favorably to the media and returns for private equity funds of the same vintages.

We held it closed for our professional sports minority investment strategy during the first quarter, bringing commitments for that strategy to over $500 million looking.

Looking ahead, we're excited about what the next year holds for the G. P capital solutions business, we continue to expand the breath of our potential investor based institutionally and and wealth channel and still anticipate launching conversations for fun. Six later this year with that I will turn things over to our to discuss our financial results.

Thank you Michael Good morning, everyone I'm going to start off by walking through the numbers for this quarter in the last 12 months and then I'll touch on a few other items I want to cover today I'll be making references the pages an hour earnings presentation. So please feel free to have that available to follow along.

To start off we are pleased to report that since we have 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 and L. T M 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 31st include total revenues up 44% FRE up 40% D E up 41% and I were dividend ended up 35% all on an LPN basis versus a year ago.

So in the midst of this market turbulence, we continue to post solid results, which support throw away I've 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 and the diversified Alton district.

So put some numbers to this for the past few years, our peers had on average 30% to 35% of their total asset management revenues come from lumpy volatile carried interest cash flows again, just very different model within us.

Okay. This after our results through March 31st in more detail management fees are up $483 million or 55% for the LPN period hurts a year ago.

And down by strategy direct lending management fees are up $242 million or 51% J.

G P. A capital solutions management fees are up $169 million or 44% in real estate management fees are up $72 million or over 400 per cent, but keep in mind, we acquired a real estate business at the end of 2021.

This is obviously very considerable growth that we've been able to accomplish.

Compensation expense came in line with our expectations at approximately 27 per cent concert <unk> DNA 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 our T F to BBC.

Overall, we are trending in line with our expectations and guidance of G&A expense trending up a little in 2023 from last year.

F R <unk> 246 million or 40 per cent for the L. T M period versus a year ago, and we continue to be right on track with our 60 per cent FRE margin guidance for 2023.

Henry announced the dividend of 14 cents per share for the first quarter for the L. T. N period, we have paid 50 cents and dividends versus 37 cents for a year ago period that results in a 35 per cent increase in our dividend for the L. T M period.

Now I'd like to spend a moment on our fundraising efforts.

We were pleased with our results for the quarter in particular, considering the very challenging fundraising environment. We're 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 and on an L. T M. Comparative basis, we raised $24.7 billion through March 31st versus 11.3 billion.

For the prior year, an increase of approximately 120%.

One of the toughest fundraising environments that we've seen in some time, we more than doubled our fundraised levels breakthrough.

Breakdown to once you're twenty-three numbers across our strategies and products.

Indirect lending, we raised $1.9 billion 1.2 billion raised in our diversified lending strategy, including almost $600 million raised an hour retail distributed core income B B C. O R. C I C.

And over 700 million raised and our tech lending strategies, including almost $200 million raised an hour retail distributed check lending B D. C O R T I N.

G P capital solutions, we raised over $300 million.

And in real estate, we raised over $1.5 billion 1.2 billion in our real estate fun, six which we remain on track with our investor dig holes of raising 5 billion for this product and.

$300 million per hour, Natalie's trust product or new Nontraded re.

We continue to see strong institutional interest in our products and the wealth channel rebounded in March from our Loews in February although we expect in certain areas continued pressure on the wealth channel as we discussed in last quarter's call as we progress through 2023, we continue to expect Fundraisings itself institutional although timing is.

Always challenging to predict in particular in times of market disruption and dislocation.

Perfect for 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.

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 a fee paying a U M. Since Jan one 2022.

As it relates to our a U M metrics on slide 11, AUN grew $42.4 billion to $144.4 billion, a 42 per cent increase from the first quarter a year ago.

Paying a U M grew $26 billion to 91.6 billion, a 40% increase from the first quarter a year ago.

Matrix driven primarily by capital raised an appointment indirect lending capital raised in G. P capital solutions fun five capital raised in real estate fund six N L. P. And then L. T and the addition of our Cielo business.

I'm in a capital grew $28.7 billion to 114.3 billion, a 34% increase from the first quarter a year ago. As a reminder, 93 per cent of our management fees are from these Herman capital vehicles.

Oh I'm not yeah paying fees was 11.7 billion, including 7.6 billion indirect lending 1.2 billion in G. P capital solutions and 2.9 billion in real estate.

U M corresponds to unexpected 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.

Indirect lending we had gross originations of 1.6 billion for the quarter and that funded the appointment of $1.3 billion.

This brings how're gross originations for the last 12 months to $18.8 billion with $12.2 billion of net funded the appointment.

As it relates to the 7.6 billion a day I'm not yet paying fees indirect lending you 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 appointment cases, 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 low 2.9 per cent cost of borrowing.

So summing it all up another great quarter, although it is pushing fundraising environment, we continue to make good progress and grow with 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 num grows more meaningfully versus our peers.

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 and all of our key metrics.

Fee paying a U M.

And fees F. R. A N D E with each of these matrix up 40 per cent or more year over year. Thank.

Thank you again to everyone, who has joined US on the call today with that operator will you. Please open the line for questions.

Star and the number one on your telephone keypad.