BLUE OWL CAPITAL INC. quarterly report, Q2 FY2022

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Blue Owl Capital Inc. — Q2 2022 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2022. Blue Owl is an alternative asset manager focused on Direct Lending, GP Capital Solutions and Real Estate. Its primary revenue source is management fees, generally based on fee-paying assets under management (FPAUM).

Key financial and operating metrics

  • AUM: $119.1 billion at quarter-end, including $77.5 billion of FPAUM. Approximately 92% of Q2 management fees came from Permanent Capital. A further $8.8 billion of AUM was not yet paying fees; management estimated it could add over $105 million of annualized management fees once deployed or after fee holidays expire.
  • Q2 revenue: $327.2 million, up from $179.3 million in Q2 2021. Net management fees were $284.3 million, including $46.3 million of Part I Fees.
  • Q2 GAAP results: Consolidated net loss was $9.1 million; net loss attributable to Blue Owl was $1.1 million. Loss before income taxes was $3.4 million. GAAP expenses included $64.9 million of intangible amortization.
  • Q2 non-GAAP results: Fee-Related Earnings (FRE) were $197.1 million, versus $98.1 million a year earlier; Distributable Earnings (DE) were $180.4 million, versus $85.1 million. These are supplemental measures, not GAAP results or measures of liquidity.
  • Six-month results: Revenue was $603.2 million, versus $287.5 million; FRE was $368.4 million, versus $144.5 million; DE was $336.1 million, versus $125.4 million. Blue Owl reported a $32.0 million consolidated net loss and a $12.9 million net loss attributable to the company.
  • Cash flow: In the first six months, operating activities provided $245.5 million; investing activities used $175.1 million; financing activities used $64.2 million. Cash and cash equivalents were $48.7 million at June 30.
  • Debt and liquidity: $1.45 billion principal outstanding across fixed-rate senior notes: $700 million of 2031 Notes at 3.125%, $400 million of 2032 Notes at 4.375%, and $350 million of 2051 Notes at 4.125%. The $1.115 billion revolving facility had no borrowings and approximately $1.115 billion available, subject to letters of credit. Management said liquidity and fee cash flows should cover anticipated working capital needs for at least 12 months.
  • Other balance-sheet items: Total assets were $8.42 billion and total liabilities were $2.73 billion. The balance sheet included a $734.7 million TRA liability and $159.3 million earnout liability.

Changes versus the prior comparable period

  • Q2 revenue and FRE roughly doubled year over year, while DE increased to $180.4 million from $85.1 million. Management attributed growth principally to the Dyal and Oak Street acquisitions, the April 2022 Wellfleet acquisition, and growth in Direct Lending fundraising and deployment.
  • Comparisons are materially affected by acquisitions: Q2 2021 did not include Oak Street or Wellfleet and included only partial Dyal results. Acquired businesses’ results were included from their respective acquisition dates.
  • Q2 2021 GAAP compensation expense included $1.1 billion of acquisition-related equity compensation, making the reported GAAP loss comparison unusually large and not directly comparable. Current-period acquisition-related compensation and amortization also affected results.
  • Cash from operations increased to $245.5 million from $18.3 million for the first six months, primarily reflecting acquired businesses and higher Direct Lending management fees, partly offset by payment of prior-year bonuses.
  • AUM increased from $94.5 billion at year-end 2021 to $119.1 billion at June 30, 2022, including $6.5 billion from Wellfleet, fundraising, debt deployment and changes in value. FPAUM rose from $61.4 billion to $77.5 billion; management cited acquisition and fundraising contributions, partly offset by a methodology change that reduced Direct Lending FPAUM by about $1.5 billion.

Outlook, risks and unusual items

  • Management said market volatility and higher rates were supporting demand for Direct Lending and GP Capital Solutions, and expected rising rates to have a net positive earnings impact, particularly through Direct Lending Part I Fees. It described pipelines as robust, while acknowledging lower industry M&A activity.
  • Management cautioned that inflation, rising interest rates, slower growth, the Russia-Ukraine conflict and COVID-19 developments could affect markets, fundraising, deployment, investment values and management fees. A slowdown could delay or reduce fee revenue.
  • The Board’s dividend policy targets approximately 85% of DE, subject to Board discretion and business, legal, tax and other cash needs. Q2 cash dividends declared were $0.10 per Class A share; an $0.11 dividend was announced August 4, 2022.
  • A $150 million share repurchase authorization was approved in May 2022; no repurchases had been made under that program by June 30. The company had repurchased 2 million shares under the prior program in Q1.
  • Management estimated potential TRA payments of approximately $847.3 million, assuming sufficient taxable income to realize the associated tax benefits. Timing and actual payments are uncertain and depend on taxable income and other factors.
  • Public warrants were scheduled for redemption on August 18, 2022: holders could exercise for cash or surrender for 0.239 Class A shares per warrant; remaining warrants would be redeemed for $0.10 each. Private Placement Warrants were not redeemable at the company’s option.
  • Fair-value estimates for certain earnouts, warrants and the Dyal-related TRA use significant unobservable inputs and can affect GAAP earnings. Management reported no material pending legal proceedings expected to affect the financial statements and no material changes to previously disclosed risk factors.
  • Disclosure controls and procedures were judged effective at the reasonable assurance level as of June 30, 2022; the company reported no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

  • Review the full financial statements and non-GAAP reconciliations, especially the acquisition-related compensation and intangible amortization adjustments underlying FRE and DE.
  • Assess the sustainability and fee basis of AUM and FPAUM growth, including the $8.8 billion not yet paying fees and the estimated future fee contribution.
  • Monitor fundraising, capital deployment, investment valuations and rate sensitivity, particularly where Direct Lending management fees depend on portfolio asset values.
  • Confirm debt terms, revolver covenant compliance, future refinancing needs and the cash available after dividends, distributions, acquisitions and potential TRA payments.
  • Track the warrant redemption, subsequent dividend payment and any changes in share count, repurchases or acquisition earnout liabilities.