Melvin: Recapping the Blackstone Earnings Report

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Blackstone Group Reported Earnings This Week. Tim Melvin Offers His Take on the Company Moving Forward

The Blackstone earnings report is always an important quarterly event. Over my years in the investment business, I have learned to watch what people are doing with their money instead of what they say they are doing.

I read tons of quarterly and annual reports form operating companies and investment managers to get a handle on where the money is being spent and invested. In the past few years, the single best source of information about what’s going on in the economy and where the most attractive investment opportunities might lie is in the earnings releases and conference calls from publicly traded private equity managers.

Blackstone reported this week and it was a strong quarter for the alternative asset manager. When I turn to the conference call, I find that CEO and co-Founder Stephen Schwarzman starts his remarks with an offhand comment on the results but initially focuses on the value his firm adds to society. Private equity has been under attack, particularly from some of the Democratic Presidential candidates.

Elizabeth Warren went so far as to say: “The private-equity firms are like vampires—bleeding the company dry and walking away enriched even as the company succumbs.”

Schwarzman clearly disagrees.

Schwarzman opened the conference call by saying, “We are incredibly proud of what we do with Blackstone and the vital role we play in society. For example, the very strong returns we generate, particularly in the current low-interest-rate environment, enable teachers, police officers, firemen, and other public and corporate sector employees to retire with sufficient savings and secure pensions. Our funds protect and grow school endowments in support of their students’ educations and we help many other institutional and individual investors realize their financial goals. We achieved these results for our LPs by improving the company’s and assets in our portfolio and making them better places to work. “

He also talked about Blackstone’s record of creating jobs telling investors that “Our private equity portfolio companies added over 100,000 net jobs during our ownership in the past 15 years, underlying their good performance. In fact, of over 700 control investments we’ve made during this period across the firm, there has been only one bankruptcy filing, a rate of one-tenth of 1%, and no liquidations. That’s a pretty remarkable record.”

Takeaways from the Blackstone Earnings Report

President Jon Gray talked about the success they have in raising money for the Blackstone Real Estate Income Trust (BREIT). The REIT emerged for  individuals and smaller institutional investors. Said Gray: “Our real estate core plus platform has grown to $42 billion, up 25% over the past year, across four perpetual capital vehicles including BREIT, our non-traded REIT. Inflows at BREIT reached $2.4 billion in the quarter and AUM now exceeds $10 billion, up 2.5-fold in one-year. Demand is growing as we add new distribution channels and partners.

This reflects a potent combination of retail investors’ desire to access private real estate, the strength of the Blackstone brand in our differentiated investment approach. We believe BREIT has the potential to become one of the largest economic contributors to Blackstone as a firm. We are also adding other products to what is already the deepest and most diverse menu available to retail investors from any alternatives firm.”

Blackstone is a huge believer in offering alternative investments to the investing public and has been actively seeking ways to accomplish that in the last few years.

More from the Blackstone Conference Call

When asked about the current real estate investing environment and valuations, Mr. Gray responded by saying, “First, it’s obviously not an easy investment environment, and I think our biggest advantage in many cases is our scale. The ability to do very large transactions is helpful. And in all of those deals you listed, I think the smallest of the group was probably $3 billion. And so in an environment where it’s hard to find interesting opportunities, focusing on larger ones, particularly given the scale of our funds, is very helpful.

The other thing I would say is we are increasingly thematic in the way we’re deploying capital. So in a world where economic growth is pretty muted, and multiples are high, what you want to find is sectors you have real conviction around. And so for us, global logistics has been a major theme. We’ve talked about it at length. We bought more than a billion square feet around the world over the last nine years, and we continue to like that area, and you saw two big transactions.”

That is something that individuals can easily replicate using traditional Real Estate Investment Trusts. While industrial REITs have had a big run, there are still several that trade at very attractive valuations. As private equity becomes a bigger competitor for individual properties, I also see the potential for M&A with many of the smaller industrial REITs being purchased by larger REITs looking for growth.

Blackstone Earnings Report and Recent Deals

As demonstrated by their recent purchase of Great Wolf Resorts and Merlin. A large them park operator they like entertainment related real estate right now as well. Mr. Gray expanded that category by mention their recent agreement to buy the Bellagio Hotel from MGM Resorts International (MGM). There are several REITs that invest in resorts, amusement parks, and casinos that we could use to replicate their entertainment real estate strategy.

These were my biggest takeaways for the Blackstone call this week. Next week we will see several more Private equity firms reporting earnings and holding conference calls, and I will be here to discuss them with you and share my conclusions.

Related: Blackstone Sells Last Building from Famous 2007 Real Estate Deal

 

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