BLUE OWL CAPITAL INC. quarterly report, Q1 FY2022

Blue Owl Capital Inc. — Q1 2022 Form 10-Q

Reporting period: Three months ended March 31, 2022. Blue Owl is an alternative asset manager focused on Direct Lending, GP Capital Solutions and Real Estate. The prior-year comparison is to Owl Rock, the accounting predecessor, and excludes Dyal Capital and Oak Street; results are therefore not directly comparable.

Financial and operating highlights

Metric	Q1 2022	Q1 2021
Revenue, net	$276.0 million	$108.2 million
GAAP net income (loss) attributable to Blue Owl / predecessor	$(11.8) million	$39.4 million
Fee-Related Earnings (non-GAAP)	$171.4 million	$46.4 million
Distributable Earnings (non-GAAP)	$155.7 million	$40.3 million
Operating cash flow	$93.2 million	$0.6 million

Revenue comprised $247.6 million of net management fees and $28.3 million of administrative, transaction and other fees. GAAP expenses were $298.7 million, including $96.6 million of equity-based compensation and $61.5 million of acquired-intangible amortization. The GAAP loss also reflected interest expense and changes in the tax receivable agreement (TRA), warrant and earnout liabilities. Fee-Related Earnings and Distributable Earnings are company-defined non-GAAP measures and should not be treated as GAAP earnings or liquidity measures.

• AUM and fee base: AUM was $102.0 billion and fee-paying AUM (FPAUM) was $65.6 billion at quarter-end. Approximately 95% of Q1 management fees were earned on permanent capital. About $7.7 billion of AUM was not yet paying fees; management estimated it could generate approximately $105.0 million of annualized fees once deployed or relevant fee holidays expire.
• Cash and liquidity: Cash and equivalents were $186.0 million. The $715.0 million revolving facility had no borrowings and approximately $714.8 million available. Management said cash and expected fee generation should cover anticipated working capital needs for at least 12 months.
• Debt: Outstanding principal totaled $1.45 billion: $700 million of 3.125% notes due 2031, $400 million of 4.375% notes due 2032, and $350 million of 4.125% notes due 2051. Debt carrying value, net, was $1.413 billion; estimated fair value was approximately $1.3 billion. The company issued the 2032 notes in February 2022.
• Cash flows and distributions: Investing cash flow was $(22.6) million and financing cash flow was $72.8 million; cash increased by $143.4 million during the quarter. Blue Owl paid a $0.10-per-Class-A-share dividend in Q1 and stated an intention to distribute approximately 85% of Distributable Earnings, subject to Board discretion and other requirements.

Changes versus the prior comparable period

• Revenue increased by $167.8 million, Fee-Related Earnings by $125.0 million and Distributable Earnings by $115.5 million. The company attributed growth substantially to the Dyal and Oak Street acquisitions, as well as Direct Lending growth; the acquisition-driven comparison is not like-for-like.
• GAAP results shifted from $39.4 million of attributable income to an $11.8 million attributable loss. The current period included substantial equity compensation and acquisition-related intangible amortization, among other items.
• AUM rose from $94.5 billion at the start of Q1 to $102.0 billion at quarter-end, including $3.9 billion of new capital raised and $3.6 billion of Direct Lending debt deployment. FPAUM ended at $65.6 billion, up from $61.4 billion at the start of the quarter; reported changes also reflect fee-basis changes and methodology adjustments.
• Operating cash flow increased to $93.2 million from $0.6 million, reflecting acquired businesses and higher Direct Lending fees, partly offset by payment of prior-year bonuses.

Outlook, risks and other notable matters

• Management described Q1 market conditions as volatile, citing persistent inflation, changing interest-rate expectations, geopolitical events and COVID-19 effects. It anticipated a net positive impact from rising rates, including potential benefits to floating-rate Direct Lending portfolios, but provided no quantitative earnings guidance.
• Management highlighted the potential for volatility in portfolio valuations and the resulting effect on management fees, particularly where Direct Lending fees are based on fair value. Illiquid asset, warrant, earnout and TRA valuations rely in part on estimates and unobservable assumptions.
• The company estimated potential TRA payments of approximately $806.5 million, assuming sufficient future taxable income to realize the relevant tax benefits. Actual timing and amounts are uncertain; payments could require financing if operating-group distributions are insufficient.
• Other liquidity considerations include access to future financing, the effect of market conditions on fundraising and fee-generating asset values, and potential debt refinancing costs. Cash balances exceeded FDIC-insured limits at financial institutions.
• No pending legal proceeding was expected by management to have a material financial-statement impact, and the filing reported no material changes to previously disclosed risk factors. Disclosure controls were considered effective as of March 31, 2022.
• After quarter-end, Blue Owl closed its Wellfleet acquisition on April 1 for $108 million cash, with additional potential cash and share earnouts. On May 4, the Board renewed and increased the share repurchase authorization to $150 million. A $0.10 dividend was announced on May 5.
• After quarter-end, organizational documents changed the voting power of low-vote shares from 10% to 20%, and high-vote shares from 90% to 80%. The filing states that high-vote shares were still 90% of voting power at March 31.

Important facts for investors to verify

• How much of reported earnings growth reflects acquired businesses versus organic fundraising, deployment and fee growth; the 2021 comparison excludes Dyal and Oak Street.
• Whether the $7.7 billion of non-fee-paying AUM is deployed or exits fee holidays as expected, and whether the estimated $105 million of annualized fees materializes.
• How GAAP losses, equity-based compensation, acquisition costs and non-GAAP adjustments affect sustainable earnings and cash available to shareholders.
• The terms, future cash burden and assumptions underlying the estimated $806.5 million of potential TRA payments, as well as debt service and refinancing needs.
• Whether market volatility, interest rates and changes in portfolio valuations affect fee income, fundraising, liquidity or the value of unrealized investments.
• The completed accounting and financial impact of the Wellfleet acquisition, the renewed repurchase program, and the post-quarter voting-rights changes.