Blue Owl Capital Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023, compared with the three months ended March 31, 2022. Blue Owl is an alternative asset manager focused on Direct Lending, GP Capital Solutions and Real Estate; management fees are its primary revenue source. The Wellfleet acquisition closed April 1, 2022, so its results are included in Q1 2023 but not Q1 2022.
Key financial and operating metrics
| Metric | Q1 2023 | Q1 2022 | Change / context |
|---|---|---|---|
| Net revenue | $391.0 million | $276.0 million | Up $115.0 million, approximately 41.7% |
| Management fees, net | $358.8 million | $247.6 million | Up $111.2 million; includes Part I Fees of $85.9 million versus $46.7 million |
| GAAP net income (loss) attributable to Blue Owl | $8.3 million | $(11.8) million | Improved $20.1 million; diluted and basic EPS were $0.02 versus $(0.03) |
| Fee-Related Earnings (FRE) | $225.9 million | $171.4 million | Up $54.5 million, approximately 31.8%; FRE margin was approximately 59.8% of FRE revenue |
| Distributable Earnings (DE) | $209.0 million | $155.7 million | Up $53.3 million, approximately 34.2% |
| Adjusted EBITDA | $228.2 million | $171.6 million | Non-GAAP measure |
| Assets under management (AUM) | $144.4 billion | $102.0 billion | Up from March 2022; FPAUM was $91.6 billion versus $65.6 billion |
| Operating cash flow | $121.0 million | $93.2 million | Higher management-fee receipts, partly offset by operating costs and bonus payments |
| Cash and cash equivalents | $37.9 million | $68.1 million at Dec. 31, 2022 | Quarter-end balance |
Margins and earnings quality: FRE rose as fee revenue grew, partly offset by higher FRE expenses, which increased to $151.6 million from $101.7 million. GAAP expenses were $324.6 million, including $70.9 million of intangible amortization. FRE and DE are non-GAAP measures and should not be treated as measures of liquidity or as substitutes for GAAP results.
Material changes and business developments
- AUM increased to $144.4 billion, including $71.6 billion in Direct Lending, $49.2 billion in GP Capital Solutions and $23.6 billion in Real Estate. Growth reflected fundraising, deployment, appreciation and additional product debt commitments; distributions partially offset growth.
- Approximately 93% of Q1 management fees came from Permanent Capital. The company reported $11.7 billion of AUM not yet paying fees, which it estimates could generate approximately $155 million of annualized management fees once deployed or after applicable fee holidays expire.
- Management-fee growth was led by Direct Lending, up $74.5 million, including a $7.5 million contribution from Wellfleet; GP Capital Solutions increased $27.9 million and Real Estate increased $8.8 million.
- Financing cash flow was $(116.8) million, versus positive $72.8 million in Q1 2022, reflecting dividends and distributions, earnout settlement and revolver activity. Investing cash flow was $(34.4) million.
Debt, liquidity and capital returns
- At March 31, 2023, debt principal was $1.8 billion: $700 million of 3.125% notes due 2031, $400 million of 4.375% notes due 2032, $350 million of 4.125% notes due 2051, and $350 million outstanding on the revolving facility. The revolver had approximately $758.6 million available. Its balance was $140 million as of the filing date.
- Debt obligations had a net carrying value of $1.77 billion. Management said current liquidity and cash generated from management fees should be sufficient for anticipated working-capital needs for at least 12 months. This is management’s assessment, not a guarantee.
- The company declared a Q1 dividend of $0.14 per Class A share, payable May 31, 2023. Its stated 2023 target is $0.56 per share annually, subject to quarterly Board approval; the Board may change or discontinue the policy.
- Management estimated potential TRA payments of approximately $936.8 million, assuming sufficient taxable income to realize the relevant tax benefits. Actual timing and payments may differ materially; future exchanges could add obligations.
Outlook, commentary and risks
- Management described fundraising and deployment opportunities in Direct Lending and GP Capital Solutions as attractive, and said higher base rates were contributing to increased Part I Fees. It also noted that Real Estate transaction volumes and valuations faced pressure from higher rates, inflation and uncertainty about capital availability.
- The company highlighted macroeconomic uncertainty, including inflation, interest rates, geopolitical instability and regional-bank-related market disruption. Slower fundraising or deployment could delay management fees; falling investment values could also affect fees in strategies where fees depend on asset values.
- Blue Owl holds most of its cash with one highly rated financial institution, in amounts above FDIC insurance limits. It disclosed exposure to potential limits on access if that institution or the financial system were impaired.
- Management reported effective disclosure controls as of March 31, 2023, with no material change in internal control over financial reporting during the quarter. The company reported no pending legal proceeding expected to have a material financial-statement impact.
- Unusual items included the January 2023 settlement of the First Oak Street Earnout and a Q1 increase in intangible amortization after the estimated useful lives of acquired trademarks were shortened; remaining trademark balances were to be amortized through June 30, 2023. The first Wellfleet earnout trigger occurred in April 2023.
Most important facts for investors to verify
- Reconcile GAAP earnings with FRE and DE, including the effects of noncontrolling interests, amortization, equity compensation and fair-value liability changes.
- Track whether the $11.7 billion of non-fee-paying AUM is deployed or exits fee holidays on schedule, and whether the estimated $155 million of annualized fees materializes.
- Monitor cash, revolver borrowings, debt-service costs and the capacity to meet dividends, earnouts and potential TRA payments; distinguish quarter-end revolver debt from the lower filing-date balance.
- Assess whether fundraising, deployment and investment valuations withstand the market risks identified by management, particularly in Real Estate and credit-oriented products.
- Review the Board’s quarterly dividend approvals and the assumptions underlying the company’s estimated TRA payments.