Blackstone Inc. quarterly report, Q2 FY2020

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Blackstone Inc. — Q2 2020 Form 10-Q

Business context and reporting period. Blackstone is a global alternative asset manager with Real Estate, Private Equity, Hedge Fund Solutions, and Credit & Insurance segments. This unaudited filing covers the quarter and six months ended June 30, 2020, compared with the same 2019 periods. The company reported as a corporation following its July 2019 conversion from a partnership.

Key financial metrics

  • Q2 revenue and earnings: GAAP revenue was $2.52 billion, up 69% year over year. Net income attributable to Blackstone was $568 million, or $0.81 per basic and diluted Class A share, versus $306 million and $0.45 per share a year earlier. The quarter’s results included $1.07 billion of unrealized performance allocations and $332 million of unrealized principal investment gains.
  • First-half results: GAAP revenue was a loss of $560 million, versus revenue of $3.51 billion in H1 2019. Net income attributable to Blackstone was a loss of $498 million, versus income of $787 million. The loss reflected $2.39 billion of unrealized performance-allocation losses and $628 million of unrealized principal-investment losses.
  • Recurring and segment earnings: Fee Related Earnings, a non-GAAP measure, were $541 million in Q2, up from $422 million. Total Segment Distributable Earnings were $625 million, down from $761 million. For H1, Fee Related Earnings were $1.01 billion versus $796 million, while Segment Distributable Earnings were $1.21 billion versus $1.32 billion. No conventional operating-margin figure is provided.
  • Fees and assets under management: GAAP management and advisory fees rose 15% to $970 million in Q2 and 15% to $1.90 billion in H1. At June 30, fee-earning AUM was $435.8 billion, up 7% from year-end; total AUM was $564.3 billion, down 1% from year-end.
  • Cash flow: H1 operating cash flow was $1.49 billion, compared with $295 million in H1 2019. Cash and cash held by funds ended the period at $2.32 billion, down $204 million from year-end. Financing activities used $1.67 billion, including $1.25 billion of shareholder and unitholder dividends/distributions.
  • Balance sheet and liquidity: Total assets were $28.84 billion and total liabilities $16.35 billion at June 30. Loans payable were $10.84 billion, including substantial consolidated CLO obligations that are non-recourse to Blackstone. Blackstone reported $2.0 billion of cash, $2.2 billion in corporate treasury investments, $4.69 billion of outstanding parent-company notes, and no borrowings under its $1.6 billion revolving facility.
  • Dividends and repurchases: The company paid a Q2 dividend of $0.37 per Class A share. It repurchased 2.0 million shares in Q2 for $114.9 million; $412.8 million remained available under the $1.0 billion authorization.

Material changes versus prior periods

  • Q2 GAAP results improved sharply from Q2 2019, primarily because unrealized investment income rebounded; management fees also increased. Realized performance revenues and realized principal investment income were lower.
  • H1 GAAP results reversed to a loss from a substantial prior-year profit as COVID-19-related market declines drove unrealized depreciation across segments. Management fees increased, but did not offset investment losses.
  • Q2 Segment Distributable Earnings declined year over year in Real Estate (15%), Private Equity (24%), Hedge Fund Solutions (13%), and Credit & Insurance (21%). Fee Related Earnings rose in most segments, while lower realizations weighed on segment results.
  • Accrued performance allocations fell to $4.72 billion from $7.18 billion at year-end. AUM rebounded from March-quarter levels, but H1 market activity reduced both fee-earning and total AUM.

Outlook, risks, contingencies, and unusual items

  • Management provided no numerical earnings or AUM guidance. It said recovery remained uncertain and likely to be gradual and uneven; fundraising and realizations were expected to continue but at a slower pace, potentially delaying fees and performance revenues.
  • COVID-19 risks include portfolio valuation declines, weaker portfolio-company liquidity and debt-service capacity, reduced realization opportunities, investor redemptions in certain open-ended funds, and potential pressure from credit-market dislocations and margin calls. Hospitality, retail, travel, leisure, and energy-related investments were identified as particularly exposed. Management noted that many portfolio assets were in sectors it viewed as more resilient, but stressed that the ultimate impact was uncertain.
  • Blackstone’s valuation estimates rely in part on significant judgment and unobservable inputs. The filing notes that market recovery in Q2 did not resolve uncertainty about future economic and market conditions.
  • Recorded potential clawback obligations were $194.7 million. In a remote stress scenario in which all carry-fund investments became worthless, potential clawback was estimated at $3.6 billion after tax where applicable; Blackstone Holdings could be liable for $3.2 billion if personnel failed to meet their share.
  • Blackstone reported $3.7 billion of its own investment and fund commitments. Consolidated funds had $51.8 million of signed investment commitments. The filing also estimates $736.6 million of future tax-receivable-agreement payments over 15 years, subject to assumptions about taxable income and realized tax benefits.
  • The Kentucky Mayberry litigation saw a favorable July 2020 state supreme court standing ruling, but the Kentucky Attorney General and plaintiffs pursued further actions after quarter-end. Blackstone said it considered the claims meritless and intended to defend them.
  • Consolidated fund and CLO assets and liabilities are included in GAAP totals but generally cannot be used to meet Blackstone’s own obligations and are not recourse to its general credit.

Most important facts for investors to verify

  • How much of reported earnings and future performance depends on unrealized valuations, and whether those gains or losses become realized.
  • Whether AUM growth translates into fee revenue, particularly given slower fundraising expectations, redemptions, and fee holidays in some new funds.
  • The distinction between Blackstone’s own debt and consolidated, non-recourse CLO and fund obligations, and the availability of corporate liquidity.
  • Potential realization, clawback, and tax-receivable-agreement cash requirements, including the assumptions underlying the reported estimates.
  • Subsequent developments in COVID-19 impacts, portfolio-company liquidity, the Mayberry litigation, and investor withdrawals from open-ended strategies.