"As most of you know, I've been racking my brain to make sense of this disconnect [about the stock price]," said Blackstone L.P.'s (NYSE:BX) CEO Steve Schwartzman on last week's earnings call. "If our shares were valued the same as the average S&P company based on dividend yield, the share price would be over $100 a share instead of the $30, where it now is. If we were valued using the average PE multiple, the price would be over $50. That's just math."
Is Schwartzman correct? Blackstone's earnings were certainly impressive. Let's go through the numbers and call to see if he's right.
(Almost) a record distribution
Blackstone had its second-highest quarter of distributable income ever this quarter, at $1.02, $0.87 of which will be distributed to unit-holders in May. . The record for distributable earnings occurred exactly two years ago in the first quarter of 2015.
The performance was due to almost $17 billion in realizations (asset or company sales), which netted Blackstone's general partner $1.2 billion in realized performance fees for the quarter. Adding to this was $291 million in fee-related earnings, which was up a whopping 18% year-over-year.
The company took advantage of a rising stock market and real estate values to realize $6.2 billion from its private equity portfolio, as well as $6.7 billion from real estate, driven by the sale of 25% of Hilton, disposition of the Japan residential portfolio, and the completion of the Invitation Homes IPO (NYSE:INVH).
Invitation Homes was constructed when Blackstone bought up thousands of homes across the country in the wake of the financial crisis. The company still owns 75% of Invitation Homes, with the IPO mostly going to pay down the Invitation Homes' debt, but the IPO will allow Blackstone to grow the platform and collect more in the way of rental income.
Fundraising and AUM
Despite the huge distribution, Blackstone was able to increase its total AUM 7% to $368 billion because of $14 billion of fund inflows and rising portfolio values across all four segments. Perhaps more importantly, fee-earning assets under management grew 15% to $280.2 million. The amount of money that the company has sitting in cash and ready to invest reached $94 billion, up 6% year over year. Blackstone refers to this as "dry powder."
While Blackstone's realizations, and therefore, distributions, can vary depending on markets, future realizations can be anticipated by the growth in assets under management and inflows. This looks good as well.
Blackstone invested $11.7 billion in the first quarter, even with so many realizations. This shows the alternatives giant is still finding investing opportunities in certain pockets of the world while it harvests other investments with markets at all-time highs.
New investment highlights included the acquisition of Team Health, several energy investments (which I thought was quite interesting, as Blackstone seems to be making a call on oil, which is rare)) across the GSO Credit and Tactical Opportunities strategies, including the Eagle Claw midstream assets in the Permian Basin, European direct lending, and the stake in SESAC, a music rights company, which is part of Blackstone's new "Warren Buffett," buy-and-hold strategy called Core Private Equity.
You may think with all of this action, the company would rest on its laurels as the largest alternative manager in the world. That is not the case. On the call, the company talked up an idea for an infrastructure fund it is working on, as well as a new venture capital-oriented strategy that CFO Michael Chae said they were "extremely excited about."
Moreover, COO Tony James reiterated Blackstone's desire to tap into the 401K market. Many retirement funds are prohibited from buying into private equity limited partnerships because they are illiquid, but James said that with America facing a retirement crisis (as people are living longer but not saving enough), people will need a higher return than the 2-4% they are currently earnings on their plans after fees. Therefore, it's possible fund managers and regulators may loosen the rules to invest in alternative assets.
Given that Blackstone's private equity funds have returned more than 7% above the S&P 500 net of fees over the past 30 years, it certainly seems like an undertaking worth exploring, especially for the new business-friendly administration.
In contrast to the first quarter 2016, when bad markets reduced Blackstone's distribution to only $0.28 per share, this past quarter showed the market what Blackstone can do when markets are generally healthy. This year, unit-holders can expect a much greater distribution than the $1.52 last year, and probably something more like the $2.73 achieved in 2015. . If, however, markets turn bad, the company also has $94 billion in dry powder it can deploy to take advantage of the next down-cycle. On top of that, the company's new funds and ideas set the company up for future growth.
Schwartzman is justified in his frustration about the Mr. Market's nervousness about where we are in the cycle, but long-term investors shouldn't fret about the ups and downs in distributions, as the long-term picture looks for Blackstone remains bright.