Blackstone Inc. (formerly The Blackstone Group L.P.) — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. The reported results are for the partnership; Blackstone converted to a Delaware corporation effective July 1, 2019. Unless noted, dollar amounts below are in U.S. dollars.
Business context and key results
Blackstone manages private capital through Real Estate, Private Equity, Hedge Fund Solutions and Credit. Its results reflect recurring management fees as well as volatile realized and unrealized investment gains, performance allocations and incentive fees.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total GAAP revenue | $1.487 billion | $2.633 billion | $3.512 billion | $4.402 billion |
| Management and advisory fees, net | $840 million | $721 million | $1.650 billion | $1.450 billion |
| Income before taxes | $686 million | $1.690 billion | $1.800 billion | $2.587 billion |
| Net income attributable to Blackstone L.P. | $306 million | $742 million | $787 million | $1.110 billion |
| Basic earnings per common unit | $0.45 | $1.09 | $1.17 | $1.64 |
| Segment Distributable Earnings | $761 million | $739 million | $1.323 billion | $1.268 billion |
Distributable Earnings, calculated using the filing’s definition, were approximately $709 million for Q2 2019 versus $700 million a year earlier, and $1.247 billion for the first half versus $1.202 billion. These are non-GAAP measures. The filing does not present a single consolidated operating margin as a key performance measure.
Cash flow, financial position and liquidity
- Six-month operating cash flow was $295 million, compared with cash used of $2.661 billion in the prior-year period. Investment purchases and sales were major cash-flow components.
- Cash and cash equivalents were $1.484 billion at June 30, down from $2.208 billion at December 31, 2018. An additional $325 million was classified as cash held by funds and others; fund cash is not generally available for corporate use.
- Total assets were $30.972 billion and total liabilities $16.907 billion. Both include consolidated funds; certain fund assets are restricted to settling fund obligations, and related liabilities have no recourse to Blackstone’s general credit.
- Loans payable were $10.676 billion, including approximately $6.536 billion of consolidated CLO liabilities. Blackstone-issued notes had a carrying value of approximately $4.140 billion. The company also had a $1.6 billion revolving credit facility, with no borrowings outstanding.
- Corporate treasury investments were $2.798 billion. Blackstone reported $3.3 billion of investment commitments as of June 30.
- Blackstone issued €600 million of 1.5% senior notes due 2029 in April. The filing reports $507 million of right-of-use assets and $575 million of operating lease liabilities at June 30, following adoption of the new lease accounting standard.
Material changes versus prior periods
- Q2 GAAP revenue fell 44% and attributable net income fell 59% year over year. First-half revenue fell 20% and attributable net income fell 29%.
- The principal Q2 revenue drivers were a $692 million decline in “Other” revenue and a $578 million decline in investment income, partly offset by $119 million higher management fees. The prior-year “Other” revenue included a $581 million payment related to the conclusion of a sub-advisory relationship with FS Investments’ funds; Q2 2019 also included foreign-exchange losses on euro-denominated bonds.
- Investment income declined 49% in Q2. Blackstone cited lower Private Equity appreciation: corporate private equity carrying value rose 0.7% in Q2 2019 versus 9.5% in Q2 2018. Real Estate and Hedge Fund Solutions appreciation partly offset this weakness.
- Management and advisory fees increased 16% in Q2 and 14% for the first half, supported by growth in fee-earning assets, including BIP, Strategic Partners, core+ real estate and Credit initiatives.
- Fee-Earning Assets Under Management rose 10% year over year to $387.9 billion; total AUM rose 16% to $545.5 billion. Blackstone reported $150.3 billion of dry powder at June 30, up from $88.3 billion a year earlier.
- Segment Distributable Earnings rose 3% in Q2 and 4% for the first half. Private Equity and Credit improved in Q2, while Real Estate declined 24% and Hedge Fund Solutions increased 22%.
Outlook, management commentary and risks
- Management described generally advancing markets in Q2 but noted volatility tied to trade disputes, geopolitical uncertainty and concerns about global growth. It cited lower interest rates and continued near-term economic growth expectations, while emphasizing risks to realizations and investment performance.
- No specific company-wide earnings or revenue guidance is provided in the supplied filing text. Management said that following the conversion it expects all corporate income to be subject to U.S. corporate income taxes, increasing tax expense in future periods.
- Blackstone’s stated dividend intention is to distribute approximately 85% of its share of Distributable Earnings, subject to board discretion, business needs, taxes, clawbacks and other obligations. The board may change or eliminate the policy.
- Performance allocations are exposed to valuation swings and potential clawbacks. The recorded clawback obligation was $70 million; in a hypothetical scenario where all carry-fund investments were worthless, potential clawback was $6.9 billion after tax where applicable. Management viewed that scenario as remote.
- Other risks include market-driven declines in fund values, slower realizations, investor withdrawals from certain open-ended funds, interest-rate and foreign-exchange movements, and significant judgment in valuing Level III investments. Blackstone disclosed $3.3 billion of investment commitments and $1.6 billion maximum exposure to loss relating to non-consolidated VIEs.
- The Kentucky Mayberry derivative suit remained pending on appeal. Blackstone said it believes the suit is without merit and intends to defend it; management reported no current legal proceeding expected to have a material impact on consolidated financial statements.
Most important facts for investors to verify
- Separate recurring fee growth from volatile realized and unrealized performance income; in particular, account for the unusual FS Investments-related revenue in the 2018 comparison.
- Review the July 1 corporate conversion’s actual effect on taxes, per-share distributions and the tax receivable agreement.
- Distinguish Blackstone corporate debt and available cash from consolidated CLO and fund balances, which are generally non-recourse or restricted.
- Track whether AUM growth, fundraising and dry powder convert into fee revenue and realizations, and monitor outflows in Hedge Fund Solutions and Credit.
- Assess valuation sensitivity, potential clawbacks, investment commitments, litigation developments and the board’s discretionary dividend and repurchase decisions.