Blackstone Group L.P. — Second-Quarter 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011; comparative periods ended June 30, 2010. Blackstone was a global alternative-asset manager and financial advisory firm, with Private Equity, Real Estate, Hedge Fund Solutions, Credit Businesses and Financial Advisory segments. Financial statements are unaudited. Consolidated results include certain investment funds and CLOs; much of their assets and debt are restricted to those entities and are nonrecourse to Blackstone.
Financial results and key metrics
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $1.308bn | $550.1m | $2.462bn | $1.251bn |
| Management and advisory fees | $498.0m | $406.1m | $910.8m | $760.9m |
| Performance fees, including unrealized | $672.3m | $32.5m | $1.281bn | $218.3m |
| Total expenses | $984.8m | $1.128bn | $1.976bn | $2.228bn |
| Income (loss) before tax | $248.8m | $(636.9)m | $366.0m | $(864.6)m |
| Net income (loss) attributable to Blackstone | $86.2m | $(193.3)m | $128.9m | $(314.7)m |
| Basic and diluted income (loss) per common unit | $0.18 | $(0.55) | $0.28 | $(0.91) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $372.7m | $26.8m |
| Cash and cash equivalents at period end | $434.8m | — | $434.8m | — |
All figures are U.S. dollars. The filing reports cash of $434.8 million at June 30, 2011 and $588.6 million at December 31, 2010. Six-month net cash used in financing was $486.4 million, including $482.2 million of distributions to unitholders; net cash used in investing was $40.1 million. No operating margin is presented as a key measure; GAAP results include fund consolidation effects and are not directly comparable to the firm’s segment economics.
- Segment economics: Economic Net Income (ENI), a non-GAAP segment measure, was $810.7m for Q2 versus $221.5m, and $1.465bn for the six months versus $606.6m. Q2 segment ENI was led by Real Estate ($453.5m) and Private Equity ($273.2m); Financial Advisory ENI declined to $10.5m from $42.2m.
- Distributable Earnings: $184.5m for Q2 and $381.1m for the first half, versus $147.6m and $296.3m, respectively, in 2010. Net Fee Related Earnings from Operations were $137.2m for Q2 and $230.4m for the first half.
- Assets under management: $158.7bn at June 30, up 24% year over year and 6% from March 31. Fee-earning AUM was $129.0bn, up 27% year over year. First-half AUM growth included $28.6bn of inflows and $9.3bn of market appreciation; fee-earning AUM increased $19.5bn from year-end.
- Debt and liquidity: Reported loans payable were $9.30bn, up from $7.20bn at year-end, largely reflecting consolidated CLO borrowing. CLO borrowings were $9.41bn, secured by CLO assets, with no recourse to Blackstone’s general credit. Blackstone’s own senior notes totaled $1.0bn par; it had no borrowings under its $1.02bn revolving credit facility, whose maturity was extended to April 2016. The filing cites $1.1bn in Treasury cash-management investments, $202.7m in liquid Blackstone Funds and $1.9bn in illiquid Blackstone Funds, in addition to cash.
- Balance sheet: Total assets were $22.33bn, total liabilities $13.05bn and partners’ capital $8.51bn at June 30, 2011. These totals include consolidated funds; fund assets may only be used to settle fund obligations.
Changes versus prior comparable periods
- Revenue rose 138% in Q2 and 97% for the first half. The principal driver was unrealized performance fees, especially appreciation in Real Estate carry funds BREP V and VI and positive Private Equity performance. Such gains are valuation-based and may reverse.
- Management and advisory fees increased 23% in Q2 and 20% year to date, supported by higher fee-earning AUM, BCP VI entering its investment period, real estate transaction activity and the Bank of America Merrill Lynch Asia platform.
- Expenses fell 13% in Q2 and 11% year to date, mainly because equity-based compensation was lower after certain awards vested in Q2 2010. Performance-fee compensation rose with performance fees; interest expense also increased following the 2010 $400m notes issuance.
- Financial Advisory revenue fell 23% in Q2 and 17% year to date, reflecting lower restructuring/reorganization activity and timing of fund-placement closings; its six-month ENI fell 81%.
- Consolidated results moved from losses in 2010 to profits in 2011. In 2011, consolidated fund-investment activities produced losses of $74.7m for Q2 and $119.8m for the first half, versus losses of $59.3m and gains of $112.6m, respectively, in 2010.
Outlook, commentary, risks and unusual items
- Management described second-quarter markets as mixed, with rising volatility late in the quarter amid renewed European sovereign concerns, commodity volatility and uncertainty about U.S. growth and employment. It said real estate fundamentals and demand for high-quality leased properties were improving, while distressed assets and impaired loans continued to present investment opportunities.
- No quantified full-year earnings or revenue guidance is provided. Blackstone stated an intention to distribute substantially all of its net after-tax share of annual Distributable Earnings, less realized investment gains and amounts retained for business needs. It expected first-three-quarter 2011 distributions to remain $0.10 per unit and the fourth-quarter distribution to reflect the remaining year’s Distributable Earnings, subject to the general partner’s discretion.
- Key sensitivities include fund investment valuations, performance-fee recognition, fundraising and realizations, investor capital-call fulfillment, redemptions in certain funds, foreign exchange and interest rates. A 10% decline in investment fair values was estimated to reduce management fees by $44.9m, performance fees net of related compensation by $519.2m and investment income by $229.1m. Level III valuation inputs are significant, and some hedge-fund investments face redemption gates, lockups or side pockets.
- Blackstone had $1.2bn of investment commitments at June 30, including $1.16bn of its own fund and other commitments. Potential clawback obligations totaled $228.7m; $492.8m was held in segregated accounts for personnel clawback obligations. The filing also describes $1.29bn due to certain non-controlling interest holders under tax receivable agreements and estimated future payments of $1.287bn over 15 years if tax benefits are fully realized.
- Management said pending legal matters were not expected to materially affect consolidated financial statements. However, the filing describes securities litigation concerning the 2007 IPO, reinstated by a Second Circuit ruling, and three suits related to the 2007 sale of Extended Stay Hotels. Those suits include claims seeking $2.1bn and, in two cases, $6.3bn in punitive damages; Blackstone said it considered them without merit and intended to defend them vigorously.
- Tax legislation proposals concerning carried interest could increase taxes or require restructuring; the potential impact was not quantifiable. The company reported disclosure controls effective at the reasonable-assurance level and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- How much of the sharp revenue and ENI growth is realized and recurring, versus unrealized performance-fee marks and fund valuation changes.
- The valuation methods, assumptions and liquidity limitations for Level III assets, particularly real estate, private equity and fund investments.
- The distinction between Blackstone’s own $1.0bn notes and consolidated, nonrecourse CLO debt; also verify liquidity after the $1.16bn of remaining commitments and distributions.
- The sustainability of AUM inflows, fee-earning AUM growth and performance-fee eligibility, including fund redemptions and CLO deleveraging.
- Potential outcomes and exposure from clawbacks, tax receivable agreements, carried-interest tax proposals and the disclosed litigation.
- Distribution amounts actually declared, since stated policy and expected quarterly payments remain subject to general-partner discretion.