Blackstone Inc. (then The Blackstone Group L.P.) — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are with December 31, 2018. Blackstone was a global alternative asset manager operating across Real Estate, Private Equity, Hedge Fund Solutions and Credit. Unless stated otherwise, financial amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Total revenue | $2.025 billion | $1.769 billion; up 14% |
| Income before taxes | $1.114 billion | $896.8 million; up 24% |
| Net income | $1.073 billion | $842.3 million; up 27% |
| Net income attributable to Blackstone L.P. | $481.3 million | $367.9 million; up 31% |
| Basic / diluted net income per common unit | $0.71 / $0.71 | $0.55 / $0.53 |
| Effective tax rate | 3.7% | 6.1% |
| Operating cash flow | $130.5 million | $(1.770) billion |
- Revenue growth reflected higher management and advisory fees, investment income and other revenue. Investment income included $664.0 million of unrealized performance allocations and $169.0 million of unrealized principal-investment gains; results therefore depended materially on valuation and market performance, not just recurring fees.
- Expenses rose 6% to $1.041 billion, including compensation and benefits of $850.2 million, up 11%. Management cited higher compensation associated with fee growth and higher general and administrative costs; lower fund expenses partly offset these increases.
- Fee Related Earnings, a non-GAAP segment measure, were $374.5 million, up from $336.7 million. Segment Distributable Earnings were $561.9 million, up from $529.0 million. These measures exclude or adjust for items including unrealized activity and fund consolidation and are not GAAP net income.
- By segment, Distributable Earnings were: Real Estate $181.9 million (down 22%); Private Equity $241.1 million (up 100%); Hedge Fund Solutions $79.2 million (essentially flat); and Credit $59.7 million (down 39%).
- Total Assets Under Management reached $511.8 billion, up 8% from year-end, and Fee-Earning Assets Under Management reached $353.0 billion, up 3%. Dry powder was $132.6 billion. These are company-defined operating measures and should not be treated as GAAP assets or revenue.
- Cash and cash equivalents were $1.571 billion at quarter-end, down from $2.208 billion; cash plus cash held by funds and others was $1.788 billion, down $756.8 million during the quarter. Financing cash outflow was $868.1 million, including $730.3 million of distributions to unitholders. The filing does not provide a conventional operating-margin measure.
- Total loans payable were $10.011 billion, including $6.561 billion attributable to consolidated funds, principally CLOs. Blackstone noted those fund assets are restricted to settling fund obligations and the liabilities generally have no recourse to Blackstone’s general credit. Blackstone-issued senior notes had a carrying value of $3.450 billion; its $1.6 billion revolving facility was undrawn. Total liabilities were $15.728 billion.
Changes, outlook and material items
- Management attributed stronger results partly to the Q1 rebound in equity and credit markets after December 2018 weakness. Company-reported market context included a 14% rise in the S&P 500 and lower volatility. Management nevertheless cited slowing growth outside the U.S., trade and geopolitical tensions, and uncertainty around future realizations.
- Real Estate earnings declined as lower realized performance revenues outweighed improved recurring fee earnings. Private Equity earnings increased on higher fees and realizations. Credit earnings fell after the end of a sub-advisory relationship and because the prior-year quarter benefited from a mezzanine fund crossing its carry threshold.
- Management said investment activity remained active, while high asset prices and low distress made some deployment challenging. It warned that market volatility, slower growth, higher interest rates, currency moves, inflation and pressure on portfolio-company costs could impair valuations, realizations, fundraising or earnings. No specific earnings guidance was provided.
- On April 18, 2019, Blackstone announced a planned conversion from a limited partnership to a corporation, expected July 1, 2019, subject to the described steps. Management expected near-term tax dilution to Distributable Earnings to be negligible due to a tax basis step-up, averaging approximately 2%–5% annually over the next five years and reaching approximately 12%–13% over the long term. These are estimates, not guarantees. Class A shares were expected to remain generally non-voting, with control retained through Class C shares.
- After quarter-end, Blackstone issued €600 million of 1.5% senior notes due 2029. The filing also reports a $725.0 million estimated tax-receivable-agreement obligation over 15 years, assuming sufficient taxable income and no material tax-law changes, and $3.0 billion of investment commitments as of March 31.
- Potential clawback obligations recorded at quarter-end were $40.8 million. In a remote stress scenario where all carry-fund investments became worthless, potential clawback was estimated at $6.9 billion after tax, with Blackstone Holdings potentially responsible for $6.3 billion if personnel failed to meet their share. This is a stated extreme scenario, not management’s expected outcome.
- In the Kentucky Retirement System derivative action, the Kentucky Court of Appeals granted Blackstone defendants’ writ petition in April 2019 and vacated an order denying dismissal for lack of standing; plaintiffs appealed. Blackstone said it considered the suit without merit and intended to defend it. Management did not expect pending proceedings to materially affect the consolidated financial statements.
- Blackstone adopted lease-accounting guidance in 2019, recognizing $521.9 million of right-of-use assets and $587.4 million of lease liabilities at March 31; the filing says the change did not materially affect operating results or cash flows.
Most important facts for investors to verify
- How much of reported earnings and future distributions is supported by recurring fee earnings versus unrealized valuations and realization-dependent performance revenue.
- The conversion’s timing and final tax effects, including the projected tax dilution, increased corporate taxes and tax-receivable-agreement payments.
- Liquidity and capital needs against the $3.0 billion of investment commitments, senior-note maturities, distributions and potential clawbacks; distinguish Blackstone obligations from nonrecourse fund and CLO liabilities.
- Whether the market rebound, fundraising and investment performance persist, and whether fund realizations recover—especially given the differing segment trends and market risks identified by management.
- The progress and outcome of the Kentucky litigation and any material change in legal, regulatory or other contingencies.