Blackstone Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Blackstone is a global alternative asset manager with Real Estate, Private Equity, Hedge Fund Solutions, and Credit & Insurance businesses. Unless otherwise noted, amounts are U.S. dollars.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $3.03bn | $1.74bn | $2.47bn | $5.25bn |
| Net income attributable to Blackstone Inc. | $794.7m | $779.4m | $296.5m | $1.57bn |
| Basic EPS | $1.14 | $1.15 | $0.43 | $2.32 |
| Distributable Earnings (non-GAAP) | $772.1m | $709.9m | $1.88bn | $1.96bn |
| Segment Distributable Earnings (non-GAAP) | $825.1m | $753.5m | $2.03bn | $2.08bn |
| Fee Related Earnings (non-GAAP) | $610.9m | $440.4m | $1.62bn | $1.24bn |
| Operating cash flow | Not presented quarterly | $1.63bn | $1.37bn |
- Q3 reported revenue rose 75% and net income attributable to Blackstone rose 2%. The quarter benefited from $1.40bn of unrealized performance allocations and $295m of unrealized principal-investment gains. These gains are valuation-sensitive, not all realized cash earnings.
- Nine-month revenue fell 53% and net income attributable to Blackstone fell 81%, primarily reflecting COVID-related unrealized investment losses and lower realized performance allocations. The comparable 2019 period also included tax benefits related to Blackstone’s 2019 conversion to a corporation.
- Management and advisory fees, net, increased 20% in Q3 and 17% year to date, supported by fee-earning asset growth and the end of fee holidays. Other revenue included a $192m Q3 loss, primarily foreign-exchange losses on euro-denominated bonds and cross-currency swaps.
- Fee Related Earnings increased 39% in Q3 and 31% year to date. Segment Distributable Earnings rose 9% in Q3 but declined 2% year to date. By segment, Q3 Distributable Earnings rose 92% in Private Equity and 7% in Hedge Fund Solutions, while declining 25% in Real Estate and 19% in Credit & Insurance. Year-to-date results were mixed, with Private Equity up 9% and the other three segments lower.
- Nine-month dividends/distributions to shareholders and unitholders were $1.73bn. Declared dividends were $0.37 per share for Q3 and $1.37 per share for the first nine months.
Balance sheet, debt, and liquidity at September 30, 2020
- Cash and cash equivalents were $2.63bn; corporate treasury investments were $2.39bn. Blackstone also had a $1.6bn committed revolving credit facility with no borrowings outstanding.
- Loans payable were $5.57bn, primarily Blackstone senior notes, compared with $11.08bn at year-end 2019. The prior-year balance included CLO debt that was subsequently deconsolidated; Blackstone’s own notes increased from $4.60bn to $5.57bn. Interest expense was $39.5m in Q3 and $120.5m for nine months.
- Total assets were $25.04bn and total liabilities $11.54bn, down from $32.59bn and $17.48bn at year-end 2019, respectively. The decrease largely reflects deconsolidation of CLO vehicles, not equivalent changes in Blackstone’s unrestricted resources or corporate debt.
- Total assets under management were $584.4bn and fee-earning assets under management were $444.5bn. Nine-month operating cash flow was $1.63bn; the filing does not present a standard free-cash-flow measure.
Material changes and unusual items
- Blackstone deconsolidated nine CLO vehicles during Q3 after an ownership reorganization and reduced economic exposure. This reduced reported assets by $6.8bn, liabilities by $6.6bn, and non-controlling interests by $216m. Blackstone stated it would continue to earn fees and performance allocations from the vehicles; no consolidated CLO vehicles remained at quarter-end.
- On September 29, Blackstone issued $500m of 1.60% senior notes due 2031 and $400m of 2.80% senior notes due 2050, for general corporate purposes.
- Q3 income-tax expense was $101m, versus a $157m tax benefit in Q3 2019. Blackstone recorded a $36.4m tax expense from an adjustment to the tax-basis step-up associated with its 2019 conversion. Effective tax rates were 5.6% in Q3 and 16.7% for nine months in 2020; comparisons with 2019 are affected by the conversion and tax-basis adjustments.
- Accrued performance allocations were $6.11bn, down from $7.18bn at year-end 2019, mainly reflecting COVID-related depreciation and fund distributions. Net Accrued Performance Revenues were $3.55bn, versus $4.04bn at September 2019.
- Blackstone repurchased 2.0m shares for $105.6m in Q3 and 9.0m shares for $474m year to date; $307.2m remained under its $1bn authorization.
Outlook, risks, and contingencies
- Management described a Q3 rebound in many equity and credit markets, but emphasized that COVID-19 continued to disrupt economic activity and made the pace and durability of recovery uncertain. Travel, hospitality, in-person entertainment, retail, and some office and residential investments remained exposed. A renewed downturn could pressure portfolio-company liquidity, valuations, realizations, fundraising, and fee income.
- Management said fundraising, deployment, and realization activity had regained momentum in Q3 after a more muted period, but recovery could remain uneven across sectors and regions. Hedge Fund Solutions fundraising was expected to continue near term at a slower pace, potentially delaying management fees. No quantified company-wide earnings guidance was provided in the supplied filing text.
- Blackstone reported $4.2bn of investment commitments. The filing states that commitments are expected to be funded over time from available cash, operating cash flow, and realizations. Potential carry clawbacks recorded at quarter-end were $125.7m; a remote worst-case scenario described by management would involve $3.6bn of potential after-tax clawbacks, with Blackstone Holdings potentially liable for $3.1bn if personnel defaulted on their share.
- Risks include valuation judgments for illiquid and Level III investments, foreign-exchange and market exposure, fund redemption and liquidity pressures, and changes in U.S. tax, regulatory, or energy policy. The Kentucky litigation involving Blackstone’s hedge-fund business continued: the state supreme court ordered dismissal of the original plaintiffs’ complaint for lack of standing, while motions to intervene or amend and a separate state action remained pending. Blackstone said it believed the suits were without merit.
- The company stated that COVID-19 had not materially affected its liquidity to date. Its stated dividend policy targets approximately 85% of Blackstone Inc.’s share of Distributable Earnings, but dividends remain at the board’s discretion and may be reduced or eliminated.
Important facts for investors to verify
- How much of Q3 earnings and future distributions depends on unrealized fund marks versus realized performance revenues and recurring fee earnings.
- Whether fee-earning AUM inflows and growth in management fees can persist, and how redemptions, realizations, and market movements affect AUM and fees.
- The distinction between Blackstone corporate debt and debt removed through CLO deconsolidation, plus the liquidity available after $4.2bn of commitments, dividends, and potential clawbacks.
- How COVID-19 and sector-specific stress affect portfolio valuations, realization timing, and fund performance, including investments reported with a lag.
- Developments in tax-receivable obligations, the Kentucky litigation, and any changes in tax or regulatory policy that could affect Blackstone or its portfolio companies.