Blackstone Q2 Earnings Call: Strong Results Trump Early Headlines

Blackstone is the world's largest manager of alternative assets, with reported AUM (assets under management) now a record $329 billion. The firm reports earnings in four major segments: Private Equity, Real Estate, Hedge Fund Solutions and Credit.

Blackstone's previously announced Financial Advisory spinout is expected to close during 2H15, and that segment was also broken out in Q2 results.

Tale Of The Tape: Early Jitters

During the pre-market session, Blackstone shares traded down 2.5 percent when the Q2 earnings were announced; however, shares rallied back during the conference call.

During the past 52 weeks, shares of Blackstone have traded in a range of $25.09–44.43, and during intra-day trading rose as high as $42.60 before closing at $41.96, up 1.5 percent on the day.

Headline Driven Trading

Blackstone's Real Estate Performance Fees down 67 percent, Revenues down 57 percent and Economic Income down 72 percent vs. the same period in 2014 are all metrics that frankly appear dire.

However, a more optimistic picture evolved during the conference call, including the excerpts highlighted below.

Blackstone Real Estate's Big Picture

During 1H15, the economic income derived from real estate was actually down just 4 percent compared with the same period in 2014. It is important for investors to understand that given the nature of real estate, Q/Q comparisons are not always useful, as the timing of deal closings can distort them.

Related Link: A Small-Cap Mortgage REIT Might Be The GE Capital Deal's Biggest Winner

Record Fee Earning AUM

Blackstone continues to grow its AUM, with $68 billion of gross inflows against just $37.3 billion of realizations and outflows.

Notably, each Blackstone business segment showed double-digit growth Y/Y, despite the return of over $60 billion of capital to investors over the last 12 months (LTM).

Blackstone Q2 Earnings Highlights

Deciphering Asset Manager Earnings

Many investors are not familiar with the jargon found in private equity, hedge fund and alternative asset manager reporting.

Motley Fool's Jordan Wathen wrote a helpful explanation, "Put simply, economic net income reflects the accrual of earnings, whereas distributable income reflects the earnings that were realized in the current quarter.

"As an example, if a fund's value appreciates, the resulting fees will flow into economic net income immediately. When the fund holdings are sold and the fees are realized by Blackstone, that amount flows into distributable earnings.

"Thus economic net income is a good indicator of future distributable earnings but a poor measurement for tracking the current distribution."

Blackstone's Fortress Balance Sheet

Although many of the investments that Blackstone makes involve the use of leverage in order to generate the kind of returns that attract institutional, sovereign wealth and high net-worth capital from limited partners, Blackstone actually has no debt on its own balance sheet.

Blackstone's Fund Raising

Blackstone has taken in $94 billion during last 12 months.

Notably, Blackstone now has undrawn capital, or "Total Dry Powder" totaling $81.1 billion, (up 80 percent Y/Y), primarily driven by funds raised by BX global private equity and real estate funds.

In addition, the two global funds were over-subscribed, according to CEO Steve Schwarzman, putting Blackstone in the position of having to turn away capital.

Blackstone Conference Call Highlights

Schwarzman pointed out, "Despite the headwinds in the public markets, we continued to deliver superior returns for our investors. In private equity, we outperformed the S&P by 370 basis points in the quarter and in real estate, we beat the REIT Index by 1250 basis points."

He continued, "In a rising rate environment, I expect our portfolio, including real estate and credit to continue to perform well, which it has historically in that type of environment; and that is because rising rates have usually come accompanied by better economic activity.

"Our credit and hedge fund platforms are scaled drivers of our financial results. Those businesses are now $150 billion of AUM or 40 to 45 percent of the firm, up from $39 billion in 2007. Those two businesses have generated over $1.4 billion in revenues over the last 12 months.

"When our investors give us a dollar, we've generated $2.00 to $2.50 on average in our private equity and real estate funds across markets and economic cycles for 30 years – this is not a one-time event."

He concluded, "With the explosive growth of the last 12 months and continuing momentum in our fundraising, we will soon have over $330 billion of money at work creating earnings which will drive significant value for unit holders to a new level reflective of that 50 percent increase in assets at work."