Blue Owl Capital Q3 2024 Earnings Report

Good morning, and welcome to Blue Owl Capital's Third Quarter 2024 Earnings Call. During the presentation, airlines will remain on listen only. I'd like to advise all parties that this conference call is being recorded. I will now turn the call over to Anne Dye, Head of Investor Relations for Blue Owl. Thanks, operator, and good morning to everyone.

Joining me today are Mark Lipschultz, our Co Chief Executive Officer and Alan Kirschenbaum, 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 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 Shareholder 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 Q3 of 2024 reporting fee related earnings or FRE of $0.22 per share and distributable earnings or DE of $0.20 per share. We also declared a dividend of $0.18 per share for the Q3 payable on November 22 to holders of record as of November 11. 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 Mark.

Thank you, Mark, and good morning, everyone. I'm very pleased with the results we reported this quarter with continued strong trends across key metrics such as revenue and earnings growth, fundraising and deployment, our 14th consecutive quarter of management fee and FRE growth, our 2nd strongest fundraising quarter ever coming from increasingly diverse sources and a record fundraising quarter in private wealth. Those statistics have been driven almost entirely by our organic growth. And as we start to layer in the impact of the new businesses we've brought on, we're very excited about what lies ahead. Let's go through some of our key highlights on an LTM year over year basis through September 30.

Management fees are up 26% and 91% of these management fees are from permanent capital deals. FRE is up 27% and DE is up 22%. As you can see on Slide 13, we raised $7,900,000,000 of equity in the 3rd quarter and $24,200,000,000 for the last 12 months, an increase of 67% from the prior last 12 month period. I'll break down the 3rd quarter fundraising numbers across our strategies and products. In credit, we raised $3,100,000,000 dollars 2,400,000,000 was raised in our direct lending strategies, of which $1,500,000,000 came from our non traded diversified BDC of CIC, 65% more than what we raised in the Q3 of 2023.

Inclusive of the October 1 close, we are nearing $14,000,000,000 raised for OCIC since inception. The remainder was raised primarily through insurance solutions and in strategic equity. In GP Strategic Capital, we raised $3,500,000,000 during the quarter, including $2,400,000,000 across our large cap strategies latest fund and co invest vehicles, bringing the latest vintage to $5,300,000,000 And we remain confident in our ability to achieve our $13,000,000,000 goal by the end of 2025. We also raised capital in our GP financing strategy and the new vehicle raise in connection with the strip sale that occurred during the Q3. And in real estate, we raised $1,300,000,000 primarily from O Rent, Insurance Solutions and early capital flows for our European net lease strategy.

We are pleased with the increasing breadth of fundraising across strategies and products. Of the $7,900,000,000 of equity raised in the Q3, over 20% came from strategies which did not exist or were not part of our platform a year ago. And this will continue to expand with our new business acquisitions and overall organic growth. And remember, we don't look at our fundraising dollar for dollar with others because the dollars we are raising are much more valuable. Our assets are stiffier because we are raising mostly permanent capital.

For example, during the quarter, we raised approximately $3 for every $1 that went out and most of that $1 was distributions from our income products. Our fee rates are also much higher on average and our margins compare favorably. Taken together, the profitability on each dollar raise is substantially greater. It does not compare. On the acquisition front, Cuvera Asset Management closed in early July, adding $21,600,000,000 to AUM at close and contributing almost $1,000,000,000 of gross inflows during the quarter.

And at the end of the Q3, Adelaiya also closed, adding $10,600,000,000 to AUM. Pro form a for our acquisition of IPI, our AUM is approximately $250,000,000,000 As a reminder, we also have substantial embedded earnings in our business. AUM not yet paying fees was $21,700,000,000 as of the end of the Q3, corresponding to over $260,000,000 of incremental annual management fees once deployed. This number has increased from $12,600,000,000 this time last year, reflecting incremental assets raised and strategies that earned fees upon deployment as well as some of the new businesses we have brought on. We also have approximately $135,000,000 of incremental management fees that will turn on upon the listing of our remaining private technology lending BDCs over time.

These two items alone would represent an increase in management fees of roughly 20%. These aspects combined with our business model of being virtually all permanent capital and 100 percent 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 $10,900,000,000 for the quarter and net funded deployment of $4,300,000,000 This brings our gross originations for the last 12 months to $47,000,000,000 with nearly $18,000,000,000 of net funded deployment, a record for Blue Owl. Our credit portfolio returned 3.3% in the 3rd quarter and 15.2% over the last 12 months. Weighted average LTVs remained 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 capital for our 5th GP States fund, including agreements in principle, are over $11,600,000,000 of capital with line of sight into over $3,000,000,000 of opportunities, which if all are signed, would bring us well through the remaining capital available in Fund 5. Performance across these funds remain strong with a net IRR of 23% for Fund 3, 39% for Fund 4 and 15% for Fund 5. And in real estate, our net lease pipeline continues to grow with over $22,000,000,000 of transaction volume under letter of intent or contract to close. As Mark mentioned earlier, we think we could be roughly 60% committed for Fund 6 by year end, reflecting the strong demand we're seeing for our net lease solutions. Many of these opportunities are built 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 partners.

These can take between 18 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 deployed. We're 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 3.8% 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 creditworthy tenant risk, reflecting the favorable value creation driven by our scale and solutions based partnerships. Finally, our real estate credit team drove approximately $1,000,000,000 of gross deployment across SMAs, Insurance Solutions and O REN in the first across SMAs, Insurance Solutions and O RAN in the 1st full quarter on the Blue Owl platform, highlighting the benefits of combining their experience and investment expertise with a broader pool of capital with more diverse objectives. The team has been able to capitalize on deal flow they already see, which did not have a natural home previously. Okay, let's wrap up with a few closing thoughts.

We are extremely proud of our record of creating value for shareholders. Since our listing, we have delivered greater than 30% annual growth rates for management fees, FRE revenue and FRE, and we have and will continue to focus on delivering the bulk of our earnings to shareholders as dividends. To that end, I wanted to spend a moment on our 2025 dividend. We want to provide one further update as we head into the end of this enormously successful chapter and turn our attention to our next exciting chapter, which we will be discussing in detail at our Investor Day on February 7. As we think about the dividend, we are incorporating a variety of factors, but there are 2 specific ones we want to call out.

First, we will factor in the very volatile interest rate environment we are in. And second, we will consider the tremendous growth potential in our existing and newly acquired businesses. As it relates to interest rates, we note the wide range of outcomes that could play out in 2025 as reflected in the rather dramatic movements in SOFR forward curves recently. By way of example, over the last number of months from peak to trough, the forward SOFR curve average for 2025 declined over 130 basis points and since that time has moved back up materially. We will want to incorporate the potential for another meaningful decline in SOFR curves and its potential impact on Part 1 fees into our thinking around setting a dividend.

As for future growth, we want to retain some additional capital flexibility to invest behind our new strategic additions like data centers, asset backed credit and insurance solutions, where the reception has been extremely strong. We aspire to do in these markets what we have done over the past almost 10 years in our current markets. The addressable markets are large enough and early enough to make this an ambitious, but a very real possibility. Altogether, while we guided toward a likely dividend in the mid $0.90 on our last call, we currently expect a dividend closer to $0.90 in order to reflect a wide range of outcomes in SOFR. This means that our payout ratio will flex a little with the ultimate level of SOFR in 2025 since we are taking a more conservative approach to where we're setting our dividend.

To the extent the curve doesn't play out this way, to the extent the curve is higher in 2025, this approach allows us additional capital flexibility around strategic growth plans. A dividend around $0.90 would reflect a near 30% annual dividend growth rate since we went public and around 25% dividend growth year over year. We will finalize our thinking around this and announce the full year dividend for 2025 during next quarter's earnings call. Overall, we continue to put up very strong growth across every key aspect of our business. We are raising capital and more funds from a broader set of investors across more asset classes than we ever have.

And that will continue to expand with the new businesses that are just joining the platform, which are already well integrated and where we are collaborating on deal flow and moving forward with new product development. As we spoke about last quarter, we think our acquisition of Oak Street is the right blueprint for how to think about the value creation possible when these platforms join Blue Owl, roughly tripling AUM and revenues in under 3 years through one of the toughest periods for real estate as an asset class. It's a testament to 1, the quality of the real estate team 2, the preparation and thought that goes into our M and A execution playbook 3, the integration plan we put in place for these acquisitions and 4, overall fundraising capabilities across Blue Owl. We are bringing on businesses that have achieved great success on their own and have very strong expertise in their respective fields. And we are providing the resources and platform scale that will help them reach the next level.

All of this put together, we believe we can continue to lead the alternative asset management industry in all of the key growth metrics that we've continued to talk about, management fees, FRE revenues and FRE. 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?

Your next question comes from the line of Craig Siegenthaler with Bank of America. Your line is open.

Yes. Thank you very much. And really a critical question on a critical topic. When we take a look at over the last year, and frankly last several years as we've been very intentional about filling in product opportunities with 2 attributes. 1, most importantly, where we can deliver an exceptional risk adjusted return for the investors because of the mismatch of supply and demand of capital.

And importantly, where we can then also innovate product and product structure, so that as Blue Owl, we can continue our extremely strong growth rates. And so you're absolutely correct in putting your finger on what we can now do with things like alternative credit and with hyperscale data centers. So let me tease that out a little more. In both instances and frankly in all instances where we've acquired businesses, if you sort of think about this world of organic or inorganic growth, buy or build, what we've really landed on very intentionally is a hybrid strategy maybe in the 3 bears, it's the just right strategy. And it's about how to take an absolute best of breed capability team and marry that together with the Blue Owl platform and be able to infuse superior or enhanced origination capabilities, enhanced operational support and very importantly to your point product innovation.

So lots of people are going to use the words alternative credit on their calls and their meetings and lots people are going to use the word data centers on their calls and in their meetings. But like what does it take to really thrive in the business? What it takes is again outstanding skills married with the right kind of innovation and platform. And I think that's exactly what we're offering and that's why Adelaya chose to come to us and say, hey, we want to be a part of Blue Owl. That's why ICONIC and Iron Point said, we want to join with the Lual platform in order to be able to build our business further.

These are proprietary deals done on an incredibly attractive basis. Consider that an IPI, we're buying it at 13 times. Mean these are businesses that others are buying for twice that level. And the problem with the opportunity that presents for us is to now take what is a $10,000,000,000 AUM business and to grow it at a really high rate like we did with Oak Street. So consider Oak Street, we had $10,000,000,000 of assets.

We've now tripled the assets and tripled the revenues in that business. We see very similar opportunity sets in those two businesses. And you mentioned product innovation. With regard to product innovation, the wealth channel where we have developed such a strong set of partnerships and where we are the number one growth and net originator of wealth product depending on how you measure 1 or 2, We've really built a partnership of trust by bringing the right products in the right way to the wealth channel. And this is a really important point I'd emphasize.

Not every product belongs in a continuously offered product form. Not everybody will successfully support products in the wealth channel. The attributes of the count are durability. You want a strong income component. So if you think about alternative credit and you think about hyperscale data centers, our specialty with IPI, they are perfect matches for the wealth channel.

So we see very, very significant growth ahead in those businesses. It's why Ivan and his team wanted to join us on old credit. It's why Matt and his team wanted to join us in hyperscale data centers because these people are the best in the business and now we will bring them to new investor sets and expand the funnel of originations for them.

Your next question comes from the line of Glenn Schorr with Evercore ISI. Your line is open.

Yes. And collectively and ourselves included put I don't want to say excess emphasis on wealth because it's a monumentally important and distinctive capability we have. But institutional growth has been incredibly important and absolutely made clear. Cross selling has become very much a part of our business and actually one of again the opportunities, you look at the overlap between RLP base for example and IPI's LP base, very limited and in fact they bring some incredible very large pools of capital that we've not historically done business with. And so I think cross selling is very much a part of that synergy that we all talk about.

Again, what we don't want to do ever is disrupt the world class investment capabilities and processes these firms already have. And that's part of it again this sort of buy build model. What we do want to do is enhance origination and enhance distribution and you're absolutely correct, the institutional cross sell is just as important. Doug Osler has been circling the globe talking to institutions and the interest in these products when married to Blue Owl is a big part of the upside story. Remember, take a firm like Adelaiya which has been doing alternative credit for 20 years.

Let me repeat that 20 years everybody is going to talk about hey I'm going to get into alternative credit partly because motivated by hey I want to have all solutions for all people. We don't want to have all solutions for all people. We want to have outstanding solutions in every area we participate in and particularly in a series of products that are about downside protection, capital preservation, durability often with an income component. We know who we are and what we're going to do is not have every product, but we are going to have the best products. And Adelaiya is the best in the business at alternative credit.

Why would someone want to start and invest in someone's organic undertaking in a business where you have someone with 20 years of experience. They have data on 100,000,000 different consumers. You need that data if you're going to do alternative credit successfully. You need the data analytics to come with decades of work. IPI, lots of people would love to build a data center for 1 of the hyperscalers, but hyperscalers aren't going to build it with most people.

They're going to build it with the people they know and trust and the people that have in the case of IPI, we have STACK, our captive operational team. That's 800 people that are experts in power management and conditioning, cooling, redundancy systems, siting, development, all of which are the skills that the Microsofts of the world and their peers need and count on. That's what they're paying for. They're not interested in someone saying, oh, I could do it for you too. So I think we've got to get down to bringing not every product, that's a different strategy.

There are many firms who are going all things to all people. What I think we can tell you is when we bring a strategy forward, it's going to be addressing a distinctive mismatch in capital and we are going to be built to deliver best of breed results for our investors and that will lead to best of breed growth for Blue Isle, institutional and wealth alike.

Thanks.

Your next question comes from the line of Kristin Love with Piper Sandler. Your line is open.

Absolutely. And a couple of observations to set the stage. When we think about the comments we made today on the call, it's not taking particularly a view of net impacts, but rather what could be the adverse impacts given the volatility. Because when we think about setting a dividend, look, we're not going to know the answer to 2025 per se until the end of 2025, but we're going to set the dividend in the beginning. And so we naturally are going to have to or I guess we would say logically build for the low case, whatever the variable might be, so to speak.

And I don't mean the lowest possible cases in every instance. I'm not trying to be silly. We take like rates, the low case. And yes, there are potential offsets, but we're not going to want to factor those in, in terms of setting expectations around our dividend. So there are offsets.

Listen, when rates come down and what we have not factored in here at all is the and I'll call it the inescapable but unknown timing of a material increase in activity. Now remember there's $2,000,000,000,000 of private equity capital that's still sitting on the sidelines and it's going to get invested and how many I know we've heard for quarters everyone talk about all the green shoots, green shoots, you never heard us say it because we didn't see them objectively. I still don't think there's evidence of a material snapback, but I know there will be a material snapback. No, there's a lot of reasons we go hypothesize about it likely coming probably starting in the Q1, which can't prove it today and hope it's not a strategy. So I think at the end of the day from our perspective there are absolutely offsets.

A moderating rate environment or just a stabilizing environment should and eventually will lead to a material pickup in PE activity. We look forward to that. That drives a lot of activity for us. And remember, there are places where that matters for us. Deploying capital is part of the calculation for us.

And obviously, there's the origination fee activity and there's just the demand and interest in reloading funds when people see there's a lot of attractive investment activity occurring. So yes, there are decidedly offsets, which suspect will come into play in a moderated rate environment. But again, logically sitting here today, we're not trying to be so prescriptive about the exact number, but rather we are trying to make sure we have a comfortable landing spot assuming more negative relatively speaking cases than positive cases.

Great. Thank you, Mark and Allen. Appreciate all the color there.

Your next question comes from the line of Patrick Davitt with Autonomous Research. Your line is open.

Sure. Thank you, Patrick. I'll take this. So, I may have mentioned in my prepared remarks that we were able to raise this quarter over 20% of our fundraise this quarter was from products that were not here a year ago. So that includes insurance solutions, it includes a little bit of alternative credit, a little bit of real estate credit, it includes the GP stakes 3 strip sale, some real estate Europe.

So we've got a number of products in there. I think generally speaking, it's obviously going to depend on rates. But I think the approaching $1,000,000,000 or almost $1,000,000,000 is a good benchmark to use on a go forward basis again pending any sharp moves in rates.

I think Adelaiya, let's see over the next 12 months because we have a couple of things happening there. We have the raise of ASOF 9, which is our flagship product for us. And then we expect to be out in the first part of next year and the first half of next year with a wealth focused product. And that will be a continuously offered product. And so we'll see fundraising start to ramp there and hopefully grow each quarter.

And then you have overlaying that the more episodic flagship raise. Yes.

And one thing Mark may have mentioned in our prepared remarks was, of course, we're focused on short term and the product innovation that we're doing here. These acquisitions are really about 3 years from now, 5 years from now, 7 years from now, where we can really take these businesses very similar or akin to what we did with the Oak Street Triple Net Lease Business. Thank you. Thank you, Patrick. Appreciate it.

Your next question comes from the line of Brian Bedell with Deutsche Bank. Your line is open.

Yes deployment has been really good. I mean if you take a look at this year we're tracking at really exceptional levels. We had a record quarter last quarter. This quarter is just about on top of our kind of strongest quarters from 2021. And that is in a very tepid M and A environment or PE M and A environment and one where the syndicated market is wide open.

So I actually would take the read through frankly from this quarter to be extraordinarily healthy about the state of the private market and the demand for our solutions. Once we get and again it is a when not an if, once we get P activity picking up and if we have any moderation in the syndicated market, I mean you're setting we're collectively setting the stage or looking at an opportunity set for pretty meaningful upticks. So you look at this year, it's already high and it's high in what you would probably consider the least favorable environment for volume of deployment, active syndicated market, relatively inactive PE market. So I wasn't trying to talk down the by any measure the offsets that will come and I characterize an offset, I think future growth opportunities, again, we're just trying to make sure when we set different targets, we take a sober view or a conservative view. But in terms of the opportunities that I had, I think we're to be clear, very bullish about deployment.

And I just I can't tell you I know what quarter that switches on, right. Really got to talk to the PE folks about that, but it's going to happen and the sooner the more rapidly that goes to work and more rapidly that converts into fee paying assets, the more rapidly our revenues and earnings grow and it's math. Again, we are not in the volatile business. We're not in the carry realization business. We're in the manage for fees business and our march will go on.

When the drummer picks up the beat with PE activity, we'll march faster.

Thank you.

I will now turn the call back over to Mark Lipschultz for closing remarks.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.