Blackstone Inc. (filed as The Blackstone Group L.P.) — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are with December 31, 2017. Blackstone is an alternative asset manager with Private Equity, Real Estate, Hedge Fund Solutions and Credit segments. Amounts below are U.S. dollars; financial-statement figures are consolidated and include certain investment funds.
Key financial results and liquidity
- Revenue: $1.77 billion, down 8% from $1.91 billion in Q1 2017. Net management and advisory fees rose 13% to $728.8 million, while investment income declined 12% to $1.05 billion and incentive fees fell 73% to $12.6 million.
- Profit and earnings per unit: Net income was $842.3 million, down 16%; income attributable to Blackstone was $367.9 million, down 19%. Basic earnings per common unit were $0.55 versus $0.68; diluted earnings were $0.53 versus $0.68.
- Margins: Calculated consolidated pretax margin was approximately 50.7%, compared with 55.3% in Q1 2017. This consolidated measure includes fund activity and is not directly comparable to a conventional asset manager operating margin.
- Segment performance: Economic Income, Blackstone’s non-GAAP segment measure, was $809.9 million, down 18%. Private Equity generated $328.3 million (down 9%), Real Estate $349.1 million (down 18%), Hedge Fund Solutions $56.4 million (down 42%) and Credit $76.1 million (down 24%).
- Cash flow: Operating activities used $1.77 billion, versus providing $552.5 million in Q1 2017. Investing activities used $4.7 million; financing activities provided $266.8 million. Operating cash flow included large investment purchases and cash relinquished when fund entities were deconsolidated, so it should not be read as an unadjusted measure of recurring cash generation.
- Cash and investments: Cash and cash equivalents were $1.75 billion at quarter-end, versus $1.99 billion at year-end. Cash, cash held by funds and restricted cash totaled $2.45 billion, down from $3.94 billion. Investments were $19.76 billion, down from $24.43 billion.
- Debt and liquidity: Loans payable totaled $9.31 billion, including substantial consolidated CLO borrowings; the CLO obligations are collateralized by fund assets and generally have no recourse to Blackstone. Blackstone-issued notes had a carrying value of approximately $3.54 billion. The $1.5 billion revolving credit facility had no borrowings outstanding. The filing describes liquidity sources as operating cash flows, realizations, liquid investments and the facility.
- Distributions: Distributions declared per common unit were $0.85 in the quarter; management separately states that $0.35 per unit was paid with respect to Q1 2018. Blackstone’s stated policy is generally to distribute approximately 85% of its share of Distributable Earnings, subject to general-partner discretion.
- Assets under management: Total AUM reached $449.6 billion, up from $434.1 billion at year-end and from $368.2 billion in Q1 2017. Fee-earning AUM was $344.7 billion, up from $335.3 billion at year-end and $280.2 billion a year earlier. Q1 Distributable Earnings were $502.1 million and Fee Related Earnings were $332.9 million; both are non-GAAP measures.
Material changes and unusual items
- Blackstone deconsolidated certain CLO and other fund vehicles after dilution of its ownership meant it was no longer their primary beneficiary. This reduced reported assets by $8.9 billion and liabilities by $8.7 billion; Blackstone said it would continue to earn fees and performance allocations from the vehicles.
- Quarterly results were affected by volatile performance revenues. Realized performance allocations were much lower than in Q1 2017, partly offset by higher unrealized performance allocations. Net accrued performance revenues, net of performance compensation, were $3.6 billion and were principally unrealized.
- Blackstone adopted new revenue-recognition guidance and revised the accounting presentation for performance allocations. The filing says the changes did not affect Fee Related Earnings or Distributable Earnings; comparative GAAP figures were recast where applicable.
- After quarter-end, Blackstone ended its FS Investments sub-advisory relationship. It received $580.9 million in proceeds, to be recorded as revenue in Q2 2018, but excluded from Economic Income, Fee Related Earnings and Distributable Earnings. Management anticipated distributing part of the after-tax proceeds, an incremental $0.30 per common unit and Blackstone Holdings partnership unit over the next three quarters.
- On April 16, Blackstone authorized up to $1.0 billion of unit repurchases, adding to $335.8 million remaining under the prior authorization. No units were repurchased in Q1.
Outlook, commentary and risks
- Management described the quarter’s environment as marked by increased volatility, rising interest rates, firmer inflation and U.S.–China trade tensions. It also cited continued economic growth and strong deal activity, while warning that volatility and less accommodating trade and antitrust policy could affect future transactions.
- Management expected interest rates to rise further in 2018, potentially increasing financing costs and pressuring portfolio company margins and real estate values. Credit commentary noted potential risks from weaker fundamentals, ratings downgrades and depressed energy or commodity prices; the firm said much of its credit portfolio was floating-rate, short-duration or held to maturity.
- Blackstone said it expected to replace and ultimately exceed revenues associated with the FS Investments sub-advisory relationship, but provided no quantified timetable or earnings forecast in the text provided.
- Commitments and contingencies include $2.3 billion of Blackstone investment commitments; $178.4 million of guarantees for certain employee loans; and $12.4 million of investments at risk under guarantees by consolidated real estate funds. Recorded clawback obligations were $2.2 million. A hypothetical total loss of carry-fund investments could create $6.5 billion of potential clawback exposure, which management characterized as remote.
- The tax receivable agreements carry expected future payments of approximately $736.5 million over 15 years, assuming sufficient taxable income and no material changes to relevant tax law. The filing also discusses uncertainty from potential tax-law changes, including taxation of carried interest. Management did not expect pending litigation to materially affect the consolidated financial statements, while noting that adverse outcomes could affect a particular period.
Most important facts for investors to verify
- How much of performance-allocation income and the $3.6 billion of net accrued performance revenues is ultimately realized in cash, and how sensitive valuations are to market conditions.
- Whether fee-earning AUM growth and recurring management-fee growth can offset weaker or more variable performance revenues.
- The underlying drivers of negative operating cash flow, including fund investment activity and entity deconsolidations, and the amount of corporate cash and liquid investments available apart from fund assets.
- The distinction between Blackstone’s own debt and consolidated CLO/fund obligations, including the non-recourse nature and collateral of fund-level debt.
- Whether the FS Investments proceeds and expected incremental distributions occur as described, and the pace and terms of any unit repurchases.
- Potential effects of rising rates, market volatility, currency movements, tax changes, investment commitments and clawback obligations on earnings, liquidity and distributions.