Blue Owl Capital Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter ended September 30, 2023; comparisons are with the same 2022 period unless stated otherwise. Blue Owl is an alternative asset manager operating across Credit, GP Strategic Capital and Real Estate. Management fees are its primary revenue source. Amounts below are in U.S. dollars.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| GAAP revenue | $429.7 million | $371.0 million | $1,237.6 million | $974.2 million |
| Net income (loss) attributable to Blue Owl Capital Inc. | $15.1 million | $2.1 million | $36.3 million | $(10.9) million |
| Fee-Related Earnings (non-GAAP) | $247.8 million | $209.8 million | $718.3 million | $578.3 million |
| Distributable Earnings (non-GAAP) | $229.5 million | $191.7 million | $665.6 million | $527.8 million |
| Adjusted EBITDA (non-GAAP) | $250.7 million | $210.0 million | $726.1 million | $579.0 million |
| Diluted earnings per Class A share | $0.03 | $0.00 | $0.07 | $(0.03) |
Q3 GAAP revenue increased 16%; management fees rose $47.6 million, led by Credit and Real Estate. Higher interest rates contributed to $34.1 million of additional Credit Part I Fees. GAAP income before taxes was $74.2 million, versus a loss before taxes of $14.1 million. Q3 Fee-Related Earnings were approximately 60% of FRE revenues, compared with approximately 58% a year earlier; this is a calculated non-GAAP ratio, not a company-reported GAAP margin.
Assets under management and growth
- At September 30, 2023, AUM was $156.9 billion and fee-paying AUM (FPAUM) was $97.0 billion. At September 30, 2022, these were $132.1 billion and $84.1 billion, respectively.
- For the nine months, AUM growth reflected fundraising, deployment, debt commitments and appreciation, partly offset by distributions. New capital raised was $9.6 billion; acquisitions added $1.6 billion, and change in value/other added $7.4 billion.
- About 92% of management fees in the quarter came from Permanent Capital. AUM not yet paying fees was $12.6 billion, which the company estimates could generate about $175 million of annualized management fees when deployed or when fee holidays expire.
Cash flow, debt and liquidity
- For the nine months ended September 30, operating cash flow was $640.8 million, investing cash outflow was $94.1 million, and financing cash outflow was $538.1 million. Cash increased $8.6 million to $76.7 million.
- At quarter-end, debt principal totaled $1.78 billion: $1.51 billion of senior notes and $270 million drawn on the revolving facility. The facility had $1.27 billion available; the $270 million quarter-end draw was fully repaid after quarter-end. Debt carrying value, net of discounts and issuance costs, was $1.75 billion.
- Management said cash, fee collections and available liquidity should cover anticipated working-capital needs for at least 12 months. Fixed-rate notes account for most debt; the revolver is floating-rate.
- Estimated potential Tax Receivable Agreement payments totaled about $961.0 million, assuming sufficient taxable income to realize the expected tax benefits. Actual timing and amounts are uncertain. The company also had $29.7 million of unfunded commitments to its products.
Material changes, outlook and risks
- Par-Four closed on August 15, adding CLO-management capabilities and $1.6 billion of AUM. On October 30, after quarter-end, Blue Owl announced an agreement to acquire funds managed by Cowen Healthcare Investments. The company expected the transaction to close in Q4 2023 and add about $1 billion of AUM, subject to customary conditions.
- The company set a 2023 target annual dividend of $0.56 per Class A share, paid as $0.14 quarterly. The Q3 dividend of $0.14 was payable November 30, 2023. Management said it intends to increase the fixed dividend annually in line with expected Distributable Earnings growth, but Board approval is required each quarter and the Board may change or end the policy.
- Management described inflation uncertainty, elevated interest rates and slower GDP growth as weighing on deal activity, although activity had improved from earlier in the year. It cited fundraising and deployment as supporting fee and earnings growth, and repayments as opportunities to redeploy capital into higher-yielding investments. It also noted pressure on real-estate valuations and transactions from rates, costs, vacancies and uncertainty over capital availability.
- Risks include slower fundraising or deployment delaying fees, investment-value changes affecting fees and product performance, refinancing at higher costs, and market or macroeconomic volatility. Most cash was held at a single highly rated financial institution in excess of FDIC-insured limits. Management identified fair-value estimates, contingent liabilities and future taxable income as significant areas of judgment.
- GAAP results included $243.5 million of intangible-asset amortization for the nine months; acquired trademark balances were fully amortized by June 30 following a useful-life change. The company reported no pending legal proceedings expected to have a material financial impact and no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Reconcile non-GAAP Fee-Related Earnings, Distributable Earnings and Adjusted EBITDA to GAAP results, and assess the effect of exclusions such as equity compensation and acquisition-related costs.
- Track conversion of the $12.6 billion of non-fee-paying AUM into deployed, fee-paying assets, and whether the estimated $175 million of annualized fees is realized.
- Review the post-quarter repayment of the revolver, future refinancing needs, and cash available after dividends, acquisition spending and other obligations.
- Assess the assumptions and timing behind the estimated $961 million of TRA payments, as well as the Second Oak Street Earnout expected to become payable in January 2024, including delivery of 13.0 million Common Units.
- Monitor the Cowen Healthcare Investments transaction’s closing, actual AUM contribution and integration, and the Board’s future dividend declarations. The filing provides no specific earnings or revenue guidance.