BLUE-OWL-CAPITAL Earningcall Transcript Of Q2 of 2024
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 Capital's 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 second quarter of 2024, reporting fee-related earnings, or FRE, of $0.21 per share and distributable earnings, or DE, of $0.19 per share. We also declared a dividend of $0.18 per share for the second quarter, payable on August 30th to holders of record as of August 21st. 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 -- Co-Chief Executive Officer Great. Thank you very much, Ann. Blue Owl had a very active second quarter, reporting another record quarter of earnings and announcing highly strategic acquisitions that further diversify our business. Over the last 12 months, we have generated 23% fee-related earnings growth at 19% distributable earnings growth from the prior-year period. And since becoming a public company, we have had 13 consecutive quarters of management fee and FRE growth, highlighting both the stability and strength of our business. Our disciplined investment approach and compelling track record have appealed to a growing pool of investors looking for uncorrelated and income-driven returns. We continue to expand the types of financing solutions we offer making us an increasingly important counterparty and in conjunction, we continue to expand the range of strategies and product options we offer to our investors. Recently, we announced our intention to acquire one of the leading alternative credit managers in the market today, Atalaya Capital Management, added substantial scale to Blue Owl's alternative credit capabilities and complementing our leading position in direct lending. Atalaya brings deep expertise in asset-based finance with a strong 18-year record through market cycles, and we believe our counterparties and clients will be very excited about the platform synergy opportunities we will be able to create with the Atalaya team on board. Alternative credit is a multitrillion-dollar market where legacy participants are pulling back, and we think we have exactly the right team in place to become an increasingly significant player in the space. Looking back to when we announced the Oak Street acquisition in 2021. Oak Street's AUM was roughly $12 billion. About two and a half years later, we have more than $28 billion of AUM in triple net lease alone. And I think this is a great case study for what we hope to achieve with Atalaya. Alan will talk more about this in a few minutes. More broadly, we now have added critical capabilities in alternative credit and real estate credit, further building out the waterfront of solutions we offer. Both are deeply disrupted markets with huge addressable opportunity sets. And with the acquisition of Kuvare Asset Management, we now offer a holistic asset management solution to insurance companies, broadening our potential investor base substantially. We expect integration of these businesses to go very smooth, given that there is generally very little overlap between Blue Owl's existing footprint and that of the businesses we are acquiring. The vast majority of the employees will see very little change in their day-to-day, with investment teams remaining focused on their areas of expertise and continuing to be led by their founders or existing senior management teams. Our goal is to enhance what each firm is already doing well and create incremental opportunities for the combined entity. And critically, all of these were proprietary acquisitions not done through auctions. The leaders of these firms or the insurance partner in the case of Kuvare wanted to grow their businesses as a part of Blue Owl. They're not selling to Blue Owl but rather joining Blue Owl. We plan to leverage Blue Owl's scale to benefit each of these businesses through our 700-plus sponsor relationships our leading wealth distribution platform, a global and growing institutional platform, and greater efficiency and best-in-class corporate infrastructure. We're very excited about the collaborations we can create across the Blue Owl platform and look forward to sharing more about those in the quarters to come. Moving on to the quarter. We continue to see good fundraising progress across the business. Gross flows into our perpetually distributed products reached $2.8 billion in the second quarter, over 30% higher than the first quarter and more than double what we raised in the second quarter of 2023. Notably, redemptions in the perpetually offered products remain nominal despite upticks across the industry, totaling less than $325 million across all or under 20 basis points of our beginning AUM. That means we raised nine times more than what's left the system in these products. Total gross loans from private wealth were $3.2 billion. Our incumbency position as one of the leaders in the private wealth channel as a result of the relationships and the level of trust we have built with distributors through thoughtful partnership, strong performance, and high-touch service at every level of these organizations. What's remarkable about the opportunity in private wealth is the overall very modest amount of allocation to alternative products, which is in the low to mid-single digit percentages. We think we're in the very early innings of the adoption of [Inaudible] by individual investors as they begin to see the benefits of diversification and uncorrelated asset classes in their portfolios. We also raised $2.2 billion from institutional investors across a number of strategies, including GP stakes, first-lien lending, liquid credit, diversified lending, and GP lending secondaries, complementing our robust flows in private wealth and reflecting the ongoing diversification of fundraising across our business. To zoom out slightly, we have raised $32 billion across equity and debt over the past 12 months in an environment that most continue to describe as challenging. That's equivalent to over 20% of our AUM a year ago that we've raised in 12 months, a more than solid showing in our view, and we continue to bring new capabilities to market. Turning to business performance. In credit, we had a record quarter of deployment with more than $18.7 billion of gross originations primarily across new deals, add-ons, and refinancings where we decided to participate in the new law. Repayments were $6.9 billion, resulting in a higher quarter of net deployment. We continue to demonstrate that borrowers are drawn to the 3Ps of direct lending: predictability, privacy, and partnership. And that value proposition is compelling, whether the syndicated markets are active or not. The longer-term secular trend of sponsors gravitating more and more toward direct lending remains in place, and we see healthy sponsor appetite to deploy incremental capital and monetize existing investments over time. Direct lending metrics remain strong. On average, underlying revenue growth was in the high single digits and EBITDA growth was in the mid-teens across the portfolio with no significant step-ups in nonaccruals or/and requests. As we think about the key to our success in direct lending, is a very straightforward formula we follow. One, start by limiting loan losses through rigorous underwriting and been highly selective. This is evident in our 7 basis points of annualized realized losses since inception. And two, when there is a default to everything we can to ensure a higher recovery. I think we have demonstrated both of these tenants very successfully over the prior years. And more broadly, our portfolio companies continue to perform extremely well. We are pleased with what we're seeing across the business. In our GP stakes business, our partner managers continue to benefit from two meaningful secular trends, growing allocations to alternatives and GP consolidation. Collectively, our partner managers now manage over $1.8 trillion, giving us an unparalleled view over the alternative asset management industry. The ongoing diversification and scaling of all managers, the emergence and rapid growth of asset classes such as direct lending and alternative credit, the partnerships being formed in insurance asset management solutions, and the expansion of opportunity in private wealth. These are all trends readily observable across our partner managers and one for which Blue Owl's business is well-positioned. This past quarter, we have also observed an uptick in the asset sales for some of the partner manager portfolios, which could reflect sponsors greater willingness to monetize assets in older vintage PE funds. During the second quarter, we made our first investment for our mid-cap GP stake strategy and have two additional investments agreed to, in principle, which we expect to close in the third quarter. As for our large-cap GP stake strategy, we remain on track to have Fund V substantially committed by the third or fourth quarter of this year. We closed on an additional $1 billion for the latest vintage of the strategy during the second quarter and anticipate that fundraising in the third quarter could be similar based on current visibility. But keep in mind, we're not focused on the timing of closes quarter to quarter. What is important is that we remain very focused and confident in our ability to achieve our $13 billion goal over the next 18 months. In real estate, we continue to actively deploy capital at attractive cap rates behind our four major themes: digital infrastructure, onshoring, healthcare real estate, and essential retail. The capital needs in each of these areas is very significant, and we are making good progress in deploying Fund VI, which we just finished fundraise in during the last quarter. We believe we'll be approximately 60% committed for this fund by year-end, which would put us ahead of expectations in deploying capital, demonstrating the strong demand for our net lease solutions. Earlier, we spoke about the disruptive dynamics in alternative credit and real estate credit. The same dynamic applies to triple net lease, where we think we're seeing some of the very best risk reward this space has seen in a very long time. We are buying great properties at cap rates in the mid- to high-7s, facing generally investment-grade tenants and there are very few others doing what we do. That's a compelling proposition, and we are leaning into it. We continue to see nice step functions upward in the fundraising for ORENT. Second-quarter flows were 130% higher than a year ago, bucking the trends seen across competitor nontraded REIT products, and we continue to launch on additional distribution platforms. To bring it all together, there's a lot of growth happening across Blue Owl organically and inorganically. But the big picture is very simple. We're an alternative asset manager with leading positions in our direct lending, GP stakes, and triple net lease strategies. We have a leading position in private wealth distribution and an expanding global presence in institutional and insurance markets. We're adding scale alternative credit and real estate credit capabilities with teams that have generated strong track records over decades. And our P&L model is very simple. Almost all of our revenue comes from durable permanent capital with best-in-class fee rates, and our earnings are made up entirely of fee-related earnings. We think this makes our business quite unique and compelling and well-positioned for strong and stable growth to come. With that, let me turn it to Alan to discuss our financial results. Alan J. Kirshenbaum -- Chief Financial Officer Thank you, Marc, and good morning, everyone. We're very pleased with the differentiated and strong results we continue to post quarter after quarter. As Marc mentioned earlier, we have been able to achieve 13 consecutive quarters of both management fee and FRE growth due to the durability of our asset base anchored by permanent capital and strong investor demand for the strategies we offer. Let's go through some of our key highlights on an LTM year-over-year basis through June 30th. Management fees are up 21% and 92% of these management fees are from permanent capital vehicles. FRE is up 23% and DE is up 19%. As you can see on Slide 12, we raised $5.4 billion of equity in the second quarter and $19.2 billion of equity for the last 12 months. I'll break down the second-quarter fundraising numbers across our strategies and products. In credit, we raised $3.4 billion, $2.4 billion was raised in our diversified and first lien lending strategies, of which $1.7 billion came from our nontraded EDC, OCIC, double what we raised in the second quarter of 2023. Inclusive of the July 1st close, we have now raised over $12 billion for OCIC since inception. The remainder was raised across software lending, liquid credit, and strategic equity. In GP strategic capital, we raised $1.3 billion across our large cap strategy and co-invest vehicles. And in real estate, we raised over $650 million, primarily in ORENT or perpetually offered net lease products. We're pleased with the increasing breadth of fundraising across strategies and products which will continue to expand with our new insurance solutions offering and the Prima and Atalaya acquisitions. Prima closed in June, adding approximately $11 billion to AUM. And in early July, our acquisition of Kuvare Asset Management also closed, adding approximately $20 billion to AUM for the third quarter. Pro forma for Atalaya closing, which is expected to add approximately $10 billion, our AUM will be over $220 billion. As a reminder, we also have substantial embedded earnings in our business. AUM not-yet-paying fees was $15.9 billion as of the end of the second quarter, corresponding to roughly $200 million of incremental annual management fees once deployed. We also have approximately $135 million of incremental management fees that will turn on upon the listing of our remaining private BDCs over time. These two items alone would represent an increase of almost 20% from our last 12-month FRE revenues. These aspects, combined with our business model of being virtually all permanent capital and 100% FRE, just gives us a higher quality of earnings than any of our peers in the industry. Moving on to our credit platform. We had gross originations of more than $18.7 billion for the quarter, a record high, and net funded deployment of $7.2 billion. This brings our gross originations for the last 12 months to over $40 billion with $15.5 billion of net funded deployment. Our credit portfolio returned 3% in the second quarter and 16.4% over the last 12 months. Weighted average LTVs remain 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 funds, including agreements in principle, are over $11.5 billion of capital with line of sight into over $3 billion of opportunities, which if all our signs, we 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, 41% for Fund IV and 12% for Fund V. And in our real estate platform, our pipeline continues to grow with nearly $10 billion of transaction volume on the letter of intent or contract to close. As Marc mentioned earlier, we think we could be roughly 60% committed to Fund VI by year-end, reflecting the strong demand we're seeing for our net lease solutions. Many of these opportunities are build-to-suit arrangements, which are very capital efficient for the tenant and where we get a premium cap rate for providing a flexible balance sheet friendly solution to our parks. These can take between 18 and 24 months to fully deploy the capital we've committed. And as a reminder, we charge management fees mostly on invested capital, so we will earn incremental management fees as this capital is support. With seeing such strong deployment opportunities, this could position us well to be out in the market with the next vintage of this strategy before the end of next year. With regards to performance, gross returns across our real estate portfolio were 2.5% for the second quarter and 6.7% for the last 12 months, comparing favorably to the broader real estate market over this time period. The net IRR across our fully realized funds has been 24% for investment-grade and credit-worthy tenant risk, reflecting the favorable value creation driven by our scale and solutions-based partnerships. OK. Let's wrap off with a few closing thoughts. We continue to track to be in or around our dollar-per-share goal for 2025. We've talked about the four things, now three things that needs to happen to be on track for this goal, which are: first, accretive acquisitions, which we achieved through Kuvare, Prima and the announcement of Atalaya, so check that. Three remaining things: one, continued strong fundraising levels for OCIC, OTIC, and ORENT. We continue to see strong fund raise levels coming through for these products and especially in the case of ORENT, where we have seen a step function upwards with another step-up expected in the back half of this year. So overall, on this first one, we expect we are on track. Two, a successful fund raise for our large-cap GP stake funds and we are pacing at a good level here. As we have noted previously, our expectation is this will be a little more back ended with more fund raise expected in 2025 than 2024. Overall, on the second one, we expect we are on track. And three, the listing of some of our BDCs. We completed the listing of OBDE earlier this year. We continue to deploy capital in OTF II and for the BDC that remain private, we are focused on executing on the strategy we outlined during last year's BDC Investor Day. So overall, on the third one, we expect we are on track. Bringing this all together, we feel good about being in or around our dollar-per-share dividend goal and reporting a very strong dividend growth rate for 2025 in the low- to- mid-30% range, resulting in a dividend CAGR of 30% since going public. Now let's talk a little more about our Atalaya acquisition for a moment, where we think there is a meaningful opportunity akin to what we saw for Oak Street. Marc mentioned earlier that we have more than doubled Oak Street's AUM in just under three years. So let me put some color around how we've achieved that. Since acquiring Oak Street, we have doubled the net lease team, including the addition of Jesse Holm as CIO of the platform. We have created new product offerings for the private wealth channel and are in the process of launching a European net lease product. And the investments have started to pay off, with ORENT out raising all of our peers on a net basis and Fund VI well exceeding its $5 billion hard cap. Bringing it all together, we have been able to accomplish a great deal in a relatively short amount of time in our net lease business. We have more than doubled AUM. We have almost tripled permanent capital. We have tripled FRE revenues, and we have grown our average management fee rate by over 30%. And most importantly, based on the increase in FRE that we have generated in our triple net lease platform we have created almost $1 billion of additional value for our shareholders in just a few years in a very tough environment to raise real estate funds. We are equally excited about our Atalaya acquisition. The Atalaya team is one of, if not the best, in the alternative credit industry, and we have a lot of runway ahead of us to grow this business together. We have mentioned that this acquisition is modestly accretive in 2025 and we think much more accretive as we really ramp this business over the next number of years, similar to Oak Street. It is, however, margin dilutive for Blue Owl. As we continue to do acquisitions, we won't always find businesses with the same FRE margins. The margins here are well below our levels. We believe we can increase them over time, but may not ultimately get up to 60% with each of our acquisitions. That's OK. We expect this deal will be very value accretive for us over time and fills a very strategic product area for us in a huge industry growth area. So as we go into the next year or so, we can see margins for the remainder of this year being slightly below the 60% level and for 2025 being 2% to 3% lower. On the last note, we have led the alternative asset management industry and growth, since we listed in 2021, and we have every intention on continuing to lead the industry for the foreseeable future and the key metrics that matter to all of us: management fees, FRE revenues, FRE and dividend growth; and we feel very confident we will accomplish these goals through continued organic and inorganic growth and reinvestment back into our business. 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. Operator Questions & Answers: |
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