Blackstone Fattens As Stocks Real Estate Recover IBD May 1
By NORM ALSTER, FOR INVESTOR'S BUSINESS DAILY
Posted 03:18 PM ET May 1, 2013
Private equity fund manager Blackstone Group has traveled a rocky road since going public in June 2007. When the financial crisis hit, its portfolio of debt-laden leveraged buyouts dragged down performance. The stock bottomed at 3.55 in February 2009, a huge fall from its $31 offering price less than two years before.
But Blackstone (BX) kept raising money from its institutional investors and wisely put that money to work in real estate and other markets beyond its traditional LBOs of operating companies.
"Almost $76 billion of our current assets under management of $218 billion come from new products, new strategies and new regions that didn't exist for us at the time of our IPO six years ago," Chairman and CEO Stephen Schwarzman told analysts April 18. He co-founded Blackstone with Pete Peterson.
With a sustained boost from favorable Fed interest rate policies, Blackstone has benefited mightily from rallies in equity, real estate and credit markets.
Last year, assets under management rose 15%. And with Blackstone finding markets increasingly receptive to IPOs of its portfolio companies — SeaWorld Entertainment (SEAS) was the most recent example — it has hiked its returns to investors and shareholders. Distributable earnings of $379 million in the first quarter trailed only the prior quarter for the best performance since the 2007 IPO.
A key metric for asset mangers like Blackstone is realized performance fees, the money the firm gets when it can exit an asset through an IPO or other type of sale. Blackstone's two most recent quarters have also featured its two strongest post-IPO quarters in realized performance fees.
Such "realizations," along with the fees Blackstone earns for managing more than $200 billion in assets, allowed the company to distribute 30 cents per unit to investors in the first quarter, That's triple last year's distribution, CFO Laurence Tosi proudly noted in comments to analysts April 18.
And things could improve from here. Blackstone is now poised to harvest assets from its huge real estate portfolio, which stood at $56.7 billion at Dec. 31, 2012. With holdings in hotels, offices, commercial real estate and homes, Blackstone can soon capitalize on the broad real estate rebound.
"The acceleration in earnings will come from real estate. There are growing exit opportunities. Real estate has potential to move the needle," said Daniel Fannon, analyst with Jefferies & Co.
Much has been made of the "carried interest" loophole that enables private equity managers to pay lower tax rates on the appreciation of their portfolios. But at this point, friendly Fed policies may be playing an even bigger role in Blackstone's success.
Don't fight the Fed, the old saw goes. Better still to have a friendly Fed using its high-capacity lungs to blow a steady wind at your back, thereby lifting the value of your assets.
With the Fed suppressing interest rates for years, yield-hungry investors have embraced riskier assets. And Blackstone has everything from debt-laden LBOs to exotic loan and hedge fund portfolios within its $218 billion under management.
"The Fed's lower interest rates have helped asset valuations across the board, including Blackstone's real estate, corporate private equity and credit investments," said David Chiaverini, research analyst with BMO Capital.
IBD Smart Select Rating
Composite Rating……. 95
Earning per share……..80
Relative price strength….89
Accumulation-Distribution = B
Rock-bottom rates are an all-purpose elixir for a leveraged buyout company and asset manager like Blackstone.
"There's no doubt that attractive financing at low rates has provided them with additional opportunities in terms of doing leveraged deals," noted Jefferies analyst Fannon. "It has clearly allowed operating companies to lower their finance costs. With real estate, it will help them if they want to be sellers in an environment where people can get financing."
While Blackstone has benefited from government tax and interest rate policies, it has also made some canny moves on its own.
In real estate, especially, Blackstone's timing has been good. "They were very aggressive in selling down real estate precrisis," explained Sterne Agee analyst Jason Weyeneth.
Then, several years later, Blackstone moved opportunistically to pick up distressed properties. "Beginning in 2009, they got aggressive. They bought a lot of office properties," said Weyeneth.
"Hotel and office are the two big areas" for Blackstone in real estate, he adds. But starting in early 2012, Blackstone also swooped in on depressed residential real estate markets such as Arizona, California and Florida.
"It was good timing," said Weyeneth, who estimates that Blackstone has picked up nearly $4 billion worth of depressed residential property. Blackstone will convert many of the foreclosed homes it has acquired to rental use. "Longer term, they are going to be a very large owner of residential properties with stable income streams," he said.
That's just the sort of business that could appeal to a real estate investment trust. Analysts believe Blackstone can now create such REITs and sell them to the public. Or it can sell hotel, office or residential properties to existing REITs, or perhaps to a sovereign wealth fund buyer.
Either way, its hotel, office and residential properties can soon bolster its pool of "distributable earnings." As much as 90% of reported distributable earnings are returned to unit holders. (As a partnership, Blackstone shares are technically units.) Blackstone distributed 51 cents per unit in 2011. Last year, distributions climbed to 72 cents. This year, analyst Weyeneth expects distributions to reach $1.32. In 2014, he estimates distributions will total $1.68.
Public offerings of operating companies in Blackstone's $51 billion private equity portfolio could also feed the distributable earnings stream.
Michaels Stores, the arts and crafts retail chain taken private in 2006, has already filed for a new public offering. Other Blackstone portfolio companies could follow, especially if the IPO market shows growing life.
Blackstone is also a leading manager of funds of hedge funds. And it has expanded its investments in a wide range of debt, particularly corporate bank loans.
Still, analysts see new opportunities for this asset management behemoth. Especially promising are Asian real estate and the management of retail investor funds.
To this point, Blackstone manages mostly institutional monies. But as chief operating officer Hamilton James told analysts in April: "The total amount of high-net-worth assets is bigger than the total amount of institutional assets."
As long as the Fed keeps pushing investors into high-risk, high-return assets, Blackstone should suffer no shortage of opportunity.