Blackstone Inc. 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2019. Blackstone converted from a Delaware limited partnership to a corporation effective July 1, 2019; the filing combines pre-conversion partnership results and post-conversion corporate results. Blackstone manages alternative investments across Real Estate, Private Equity, Hedge Fund Solutions and Credit.
Key financial metrics
| Metric | Q3 2019 | Nine months 2019 | Comparison with 2018 |
|---|---|---|---|
| GAAP revenue | $1.735 billion | $5.247 billion | Down 10% and 17%, respectively |
| GAAP net income | $1.168 billion | $2.888 billion | Up 23% in Q3; down 14% for nine months |
| Net income attributable to Blackstone Inc. | $779 million | $1.567 billion | Up 76% in Q3; up 1% for nine months |
| Class A earnings per share | $1.15 | $2.32 | Q3 basic and diluted: $1.15; nine-month basic and diluted: $2.32 |
| Fee Related Earnings (non-GAAP) | $440 million | $1.237 billion | Up 27% and 21%, respectively |
| Segment Distributable Earnings (non-GAAP) | $754 million | $2.077 billion | Down 5% in Q3; up 1% for nine months |
| Operating cash flow | Not separately stated for Q3 | $1.373 billion provided | Compared with $1.340 billion used in the prior-year period |
The filing does not present a conventional consolidated operating margin. Fee Related Earnings, a management profitability measure, increased in both periods; it is not a GAAP measure.
Assets, liquidity and debt
- Total Assets Under Management were $554.0 billion at September 30, up 17% from year-end 2018. Fee-Earning AUM was $394.1 billion, up 15%. Dry powder available for investment was $148.0 billion.
- Cash and cash equivalents were $2.469 billion; cash including cash held by funds was $2.845 billion. The latter increased from $2.545 billion at December 31, 2018.
- Loans payable totaled $11.270 billion, including $6.493 billion attributable to consolidated CLO vehicles. Blackstone’s senior notes had a $4.778 billion carrying value. CLO debt is collateralized by fund assets and is not recourse to Blackstone’s general credit.
- Blackstone reported no borrowings under its $1.6 billion revolving credit facility. It also reported $3.1 billion in corporate treasury investments and $1.8 billion in Blackstone Fund and other investments.
- Operating lease liabilities were $558 million. The nine-month cash flow statement reported $49 million of purchases of furniture, equipment and leasehold improvements.
Material changes and business performance
- Management and advisory fees rose 13% in both Q3 and the nine-month period, reflecting fee-earning AUM growth, new fund launches and, in real estate, transaction fees. Growth was partly offset in some strategies by fee offsets and a lower annualized Real Estate base-management-fee rate, including a fee holiday on much of BREP IX’s new fee-earning AUM.
- Investment income fell 34% in Q3 and 26% for nine months. Private Equity had lower appreciation than in 2018; Credit returns were weaker. Real Estate appreciation improved, particularly in opportunistic funds.
- Nine-month other revenue declined 86%, primarily because 2018 included $581 million received when Blackstone’s FS Investments sub-advisory relationship ended. Q3 other revenue included a foreign-exchange gain on euro-denominated bonds.
- Segment Distributable Earnings for Q3 were $402 million in Real Estate (up 10%), $195 million in Private Equity (down 37%), $84 million in Hedge Fund Solutions (up 20%) and $72 million in Credit (up 42%). For nine months, the respective changes were down 11%, up 13%, up 14% and up 9%.
- Q3 total AUM increased by $8.5 billion, with $20.4 billion of inflows and $3.9 billion of market appreciation offset by $9.7 billion of realizations and $6.0 billion of outflows. Fee-Earning AUM rose by $6.3 billion in the quarter. Hedge Fund Solutions reported $435 million of net outflows from October 1 through November 1.
Outlook, risks and unusual items
- The conversion generated a $231 million estimated income-tax benefit, net of an $812 million valuation allowance, and a $175 million reduction in the tax receivable agreement liability. The Q3 tax benefit was $157 million and the nine-month tax benefit was $77 million; these helped lift reported net income despite lower revenue. Blackstone noted that corporate status is expected to increase income taxes over time.
- Blackstone issued $500 million of 2.500% senior notes due 2030 and $400 million of 3.500% notes due 2049. It tendered $175 million of 2021 notes in September and redeemed the remaining notes on October 10, 2019.
- Management described volatile markets, trade and geopolitical uncertainty, slowing growth in some regions, and challenging deployment and exit conditions in certain strategies. It also cited rent-regulation concerns, wage and labor-cost pressures, and weakness in parts of energy, retail and distressed credit. The filing provides no company-wide numerical earnings guidance.
- Blackstone had $4.2 billion of investment commitments. The recorded clawback liability was $89 million; a remote, severe scenario in which carry-fund investments were worthless could expose $7.3 billion of performance allocations to clawback, with $6.6 billion potentially attributable to Blackstone Holdings if personnel default.
- The Kentucky Retirement System derivative suit remained pending; the Kentucky Supreme Court heard oral argument on October 24, 2019. Blackstone said it considers the suit without merit and intends to defend it. Management said current legal proceedings were not expected to materially affect consolidated results, financial position or cash flows.
- Management expected moderate near-term economic growth, while noting that global trade tensions and geopolitical instability remained risks. These statements are not a formal company forecast.
Most important facts for investors to verify
- How much of reported earnings growth came from the conversion-related tax benefit and tax receivable agreement adjustment, versus recurring operating performance.
- Whether fee-earning AUM growth converts into sustained fee revenue and Fee Related Earnings, including after BREP IX’s fee holiday.
- The pace and quality of investment realizations and performance-fee generation, given lower Private Equity appreciation and weaker Credit results.
- Liquidity and leverage on a look-through basis, separating Blackstone’s own debt from non-recourse consolidated CLO and fund liabilities.
- Potential cash-flow effects of tax receivable agreement payments, investment commitments, dividends, repurchases and any clawback obligations.
- Subsequent developments in the Kentucky litigation, market conditions, and Hedge Fund Solutions outflows reported after quarter-end.