Blackstone Inc. quarterly report, Q2 FY2017

Blackstone Group L.P. — Q2 2017 Form 10-Q

Reporting period: Three and six months ended June 30, 2017; unaudited. Blackstone is an alternative asset manager operating across Private Equity, Real Estate, Hedge Fund Solutions and Credit. Unless noted, dollar figures below are in millions.

Financial performance

Metric	Q2 2017	Q2 2016	H1 2017	H1 2016
Total revenue	$1,549	$1,192	$3,490	$2,125
Income before taxes	$774	$511	$1,852	$844
Net income	$745	$463	$1,764	$788
Net income attributable to Blackstone L.P.	$343	$199	$805	$358
Diluted net income per common unit	$0.51	$0.30	$1.20	$0.54
Operating cash flow	—	$(886)	$247

Q2 revenue rose 30% year over year; H1 revenue rose 64%. Performance fees were the largest driver: up 68% in Q2 and 138% in H1. H1 realized carried interest increased to $1,713 million from $555 million, while unrealized carried interest was a loss of $89 million versus a gain of $136 million.
Q2 total expenses increased 24% to $885 million, chiefly from higher performance-fee compensation and fund expenses; H1 expenses increased 36% to $1,815 million. Calculated pretax margin was approximately 50% in Q2 versus 43% a year earlier, and 53% in H1 versus 40%.
Q2/H1 effective tax rates were 3.8%/4.7%, compared with 9.3%/6.7%. Much of Blackstone’s income passes through to unitholders and non-controlling interest holders rather than being taxed at the partnership level.
Management’s non-GAAP measures: Q2 Fee Related Earnings were $311 million and Distributable Earnings were $781 million; H1 amounts were $602 million and $2.0 billion, respectively. Segment Economic Income was $730 million in Q2 and $1,734 million in H1. These measures are not GAAP earnings or cash flow.
Assets under management at June 30 were $371.1 billion, up 1% from March 31 and 1% from year-end 2016. Fee-earning AUM was $281.9 billion, up 2% from year-end. Available dry powder was $90.0 billion, down from $98.5 billion a year earlier.

Balance sheet, debt and liquidity

Total assets were $30.1 billion at June 30, up from $26.4 billion at December 31, 2016; total liabilities were $16.9 billion, up from $13.9 billion. Investments totaled $20.5 billion.
Loans payable were $11.2 billion, including $7.7 billion related to consolidated CLO vehicles; Blackstone-issued notes had a carrying value of $3.5 billion. CLO debt is secured by CLO assets and generally has no recourse to Blackstone’s general credit. Consolidated fund assets and liabilities therefore should not be treated as fully available corporate liquidity or corporate debt.
Blackstone reported $1.7 billion of cash and cash equivalents, $3.3 billion in corporate treasury investments and $1.8 billion in Blackstone Fund and other investments. Its $1.5 billion revolving credit facility was undrawn. Management stated liquidity sources were expected to be sufficient for working capital and commitments.
H1 operating cash flow was negative $886 million, compared with positive $247 million in H1 2016. Investment purchases and sales, changes in compensation and other liabilities, and fund-related cash movements influenced the result. Financing cash flow was positive $776 million, including $2.6 billion of loan proceeds and $1.6 billion of unitholder distributions.
Blackstone and its general partner had $2.4 billion of remaining investment commitments at June 30. Q2 distributions declared were $0.87 per common unit; management also reported a $0.54-per-unit distribution paid in respect of Q2. H1 declared distributions were $1.34 per unit.

Changes, outlook, risks and contingencies

Growth was uneven across segments. Q2 Real Estate Economic Income increased to $406 million from $209 million, and Private Equity to $178 million from $132 million. Hedge Fund Solutions rose to $82 million from $73 million. Credit fell to $62 million from $127 million, reflecting weaker performance fees and investment returns, including pressure on energy exposures. H1 Economic Income rose in all four segments.
Management described generally strong equity markets and continued global expansion in Q2, but noted depressed oil prices, policy uncertainty and challenging competition and pricing for new private equity and U.S. opportunistic real estate investments. Hedge Fund Solutions faced investor outflows; the filing cited liquidity needs and strategic program shifts. BAAM had net inflows of $618 million from July 1 through August 1, 2017.
No specific company-wide earnings or AUM guidance was provided. Management cautioned that performance fees, realizations and cash flows can fluctuate materially with fund performance and timing of exits. Market declines, weaker portfolio values, prolonged volatility, foreign exchange movements, depressed energy prices and investor withdrawals could adversely affect results.
Fair-value estimates include significant judgment: $1.14 billion of financial assets were classified as Level III at June 30. A hypothetical 10% decline in investment fair values was estimated to reduce performance fees net of related compensation by about $1.21 billion and investment income by $174 million, with a separate annualized management-fee impact of $90 million.
Potential carry clawback recorded at June 30 was $2.2 million. In a remote stress scenario where all carry-fund investments became worthless, potential after-tax clawback was estimated at $5.3 billion, including up to $4.9 billion for Blackstone Holdings if personnel failed to meet their obligations. Separately, $570 million was held in segregated accounts for personnel clawback obligations.
Tax receivable agreement payments were estimated at about $1.2 billion over 15 years, assuming sufficient taxable income and no material tax-law changes; the estimated after-tax net present value was $383 million. Management highlighted uncertainty around possible changes to carried-interest and pass-through taxation.
Management expected the revenue-recognition standard effective in 2018 to reclassify carried interest to investment income without changing net income attributable to Blackstone; contractual incentive-fee recognition would be delayed, with no material impact expected. No subsequent event requiring recognition or disclosure was reported.
Management said it was not aware of pending litigation expected to materially affect the consolidated financial statements, while acknowledging that an adverse outcome in a matter could affect results in a particular period.

Most important facts for investors to verify

How much of earnings and distributions is supported by recurring management fees versus realized or unrealized performance fees, and whether fund performance and realizations persist.
The distinction between Blackstone’s own debt and non-recourse CLO/fund borrowings, and the availability and liquidity of reported treasury and fund investments.
The drivers of negative H1 operating cash flow, future investment commitments, CLO launches and related borrowing growth.
The trajectory of Credit results and Hedge Fund Solutions outflows, along with valuation sensitivity to energy markets, foreign exchange and market conditions.
The basis and timing of distributions: declared per-unit amounts, cash paid, and the non-GAAP Distributable Earnings supporting them.
Potential tax-law changes, tax receivable agreement obligations and carried-interest clawback exposure.