Blackstone Earnings: Mixed Results

The Blackstone Group L.P. (BX) reported earnings yesterday morning before the market opened. While sorting through the private equity firm's announcements has never been an easy task, the market quickly stamped its seal of approval and sent the stock significantly higher. Blackstone traded up as much as 18.75% during the day before settling for an 8.2% gain at the close. It's interesting to note that this gain is on top of the 242% increase the stock has already seen since the low it posted in late February.

So what got investors so excited yesterday? The company still posted a loss of $232 million and while that is less of a loss than analysts had been expecting, the difference wasn’t enough to drive such a huge move in the stock. It wasn’t comments on the future of the company either. According to Tony James, the president and COO, the underlying economy continues to decline. Management also noted that financing was tight and large scale acquisitions funded by debt were still nearly impossible.

One thing that may have caught investors' attention was the fact that the company’s private equity portfolio was only marked down by 3% compared to a full 20% decrease in value last year. Unfortunately, the real estate portfolio faced a more difficult quarter and was marked down by 19% in the first quarter on top of the 30% decline in 2008. Specifically, Blackstone continued to reel from losses surrounding its purchase of Hilton Hotels.

While the company didn’t overtly state that a turnaround was in process, there were a few subtle signs that things could finally be getting better. The industry private equity deal flow is down 80% from last year, but management said they are considering an increasing number of potential purchases which they could pursue. Blackstone has actually been a participant in bidding for some of the nations failed banks. While its attempt to purchase IndyMac failed, the firm is actually one of the bidders for BankUnited (BKUNA) and will find out soon whether its acquisition attempt was successful.

Looking a bit deeper into the numbers, it appears that the corporate private equity division turned in a profit which is particularly exciting. I had a hard time understanding how total revenue was $47.1 million, but Blackstone as a whole generated $344.6 million in management and advisory fees. In actuality, the Real Estate division reported negative revenue which occurred because the company had to reverse gains that were previously tied to an investment.

But the most important piece of information seemed to be largely overlooked by the mainstream media. The company has decided to reinstate its distribution to common shareholders. So after cutting the dividend for the fourth quarter, the picture obviously looks bright enough for management to once again pay its investors dividends. Shareholders will receive $0.30 cents per quarter or $1.20 annually which accounts for a 10% dividend yield when using Tuesday’s close.

Now this could be seen as just a way for management to transfer more of the company’s wealth to themselves (the largest shareholders) without triggering the questions that come with selling positions. But if this argument were true, the company would likely not have cut the dividend in the fourth quarter. I believe this move is a non-verbal clue that the company is seeing modest improvement and should regain its strength as the economy improves and liquidity begins to loosen.

The ZachStocks Growth Model has booked solid gains in this name so far this year. Even after cutting back the position size, we still have an unrealized gain of 82% and a nearly 4% position in the stock. At the same time, clients of Sound Counsel Investment Advisory also have a position in the name as Blackstone holds a slot on our Focus List. I believe that Blackstone offers an attractive way to benefit from what appears to be a rebounding economy. The stock will not trade in lock-step with the overall market, but it should trade well as business conditions begin to thaw.

BX Notes

Disclosure: Author has a long position.

Comments

[Weston 448:]

Dear Zach:

Nice job. Re the $.30 1stQ dividend. Doesn't the following excerpt from the Earnings report mean that only the public units will participate in this quarterly distribution, not the converted partnership interests? Blackstone management holds most of the shares (or units), but they do not participate in the "preferred allocation" up to $1.20/yr and perhaps not at all in this 1st Q distribution. Note the last paragraph.
'The Blackstone Group L.P. has declared a quarterly distribution of $0.30 per common unit to record
holders of common units at the close of business on May 29, 2009. This distribution will be paid on
June 12, 2009.
Public common unitholders will continue to receive a priority distribution ahead of Blackstone personnel
and others through 2009, but the amount of those distributions in respect of 2009 will be based on the
amount of Adjusted Cash Flows from Operations generated in 2009 available for distributions and could
fall below $1.20.
No distributions will be paid in respect of the first quarter of 2009 to Blackstone personnel and others
with respect to their Blackstone Holdings partnership units.

May 07 11:47 AM

[wallstreete...:]

I agree with the above comment. The founders of Blackstone and employees do not participate in the $1.20/share dividend. So the portion of the article above that states "Now this could be seen as just a way for management to transfer more of the company’s wealth to themselves (the largest shareholders) without triggering the questions that come with selling positions" is inaccurate.

May 07 02:10 PM

[Zachary Sch...:]

Nice catch guys - I didn't see the fine print on the distribution.

Glad to know there's less of a conflict of interest there. Definitely makes me feel more comfortable owning the stock.

Zach
zachstocks.com

May 08 02:57 PM