Blackstone Inc. (NYSE:BX) Q1 2023 Earnings Call Transcript April 20, 2023
Operator Good day and welcome to the Blackstone First Quarter 2023 Investor Call. Today’s conference is being recorded. At this time, all participants are in a listen-only mode. [Operator Instructions]At this time, I’d like to turn the conference over to Weston Tucker, Head of Shareholder Relations. Please go ahead.Weston Tucker Great. Thanks, Katie, and good morning and welcome to Blackstone’s first quarter conference call. Joining today are Steve Schwarzman, Chairman and CEO; Jon Gray, President and Chief Operating Officer; and Michael Chae, Chief Financial Officer.Earlier this morning, we issued a press release and slide presentation, which are available on our website. We expect to file our 10-Q report in a few weeks. I’d like to remind you that today’s call may include forward-looking statements, which are uncertain and outside of the firm’s control and may differ from actual results materially.We do not undertake any duty to update these statements.
For a discussion of some of the risks that could affect results, please see the Risk Factors section of our 10-K. We’ll also refer to certain non-GAAP measures and you’ll find reconciliations in the press release on the shareholders page of our website.Also note that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any Blackstone fund. This audiocast is copyrighted material of Blackstone and may not be duplicated without consent.On results, we reported GAAP net income for the quarter of $211 million. Distributable earnings were $1.2 billion or $0.97 per common share and we declared a dividend of $0.82 per share, which will be paid to holders of record as of May 1st.With that, I’ll turn the call over to Steve.Steve Schwarzman Thanks, Weston, and good morning and thank you for joining our call.
First quarter of 2023 represented a turbulent period for markets, tightening financial conditions and growing concerns of a recession.While the S&P 500 posted gains that were concentrated in just a handful of large tech companies. Meanwhile, the median stock in the US was flat for the quarter was down 35% from recent peak levels. Capital markets activity remains muted. The IPOs and M&A activity down 50% to 60% year-over-year.Combat inflation, the Fed has increased the Fed funds rate by 475 basis points just in one year, representing the largest increase since 1980. While there is not widespread distress in the real economy, this tightening campaign has led to significant challenges for investors, along with unintended consequences which we saw with UK pensions last summer.
More recently in the US and European banking systems.These challenges once again highlighted the exceptional strength and stability of Blackstone. Our clients and counterparties have learned there is an inherent safety in dealing with us. We don’t operate with the risk profile of financial firms that have fallen into trouble almost always due to the combination of a highly leveraged balance sheet and a mismatch of assets and liabilities.At Blackstone, we have neither. We’re an asset light manager of third-party capital distributed across hundreds of segregated investment vehicles. Our firm has minimal net debt and no insurance liabilities. We don’t take deposits. I’ll say that one again. We don’t take deposits. The vast majority of AUM is under long-term contracts or in perpetual strategies.
In our funds, we seek to align the time horizon of our investments with the duration of the capital which positions us to not be forced sellers in difficult markets.This is true of our semi-liquid vehicles as well, such as BREIT, which invests in longer term assets. We designed this vehicle at its formation in 2017 with predetermined limits for potential repurchases in order to be prepared for adverse market conditions, creating a level of safety so that it can continue to deliver strong outperformance over the long-term as it has done historically.The safety of Blackstone’s approach extends to the way we invest. One of our core values is to avoid losing our customers money. Of course, we also seek to significantly outperform benchmarks over time.
As everyone knows we have. We’ve launched nearly 90 drawdown funds in our history, comprising approximately $500 billion of aggregate commitments, which almost all 98% of them generated gains for investors despite adverse investment environments during the lives at some point most of these funds.We have an extremely rigorous process for evaluating risk with an investment committee framework designed to minimize the prospect of losses and ensure consistency of judgment. And our global scale and reach give us deep insights into what’s happening in the real economy, which inform how we position the firm and our portfolio ahead of changing conditions. To paraphrase a quote often attributed to the hockey great Wayne Gretzky, you have to skate to where the puck is going, not to where it is.At Blackstone, we follow the same approach.
In real estate, an area of heightened external focus by the media and investors recently. Our equity business has experienced realized losses in only 1% over 30 years, a truly remarkable result. This includes during the global financial crisis, a period which saw most of our competitors collapse or exit the market. In contrast, we bought the right assets and put in place the right capital structures. More than doubling investor capital in that vintage of funds.We emerged from the crisis stronger and believe that this cycle will have a similar outcome. Today, investor sentiment toward real estate has been quite negative, again, largely due to the pressures, as Jon explained on TV today in the US office market. Vacancies in offices have reached all-time high levels, and owners of many of these assets may be unable to extend financing in a more constrained capital environment.At Blackstone, we have minimal exposure to traditional US office.
Having reduced our holdings from over 60% of the real estate equity portfolio at the time of our IPO in 2007. Less than 2% today. We instead emphasize sectors that are doing very well, including logistics, which now comprises 40% of the portfolio, up from zero in 2007. A real estate team has done a remarkable job of portfolio construction. In fact, I would call it some of Blackstone’s finest work.Our positioning is the reason that BREIT, for example, continues to generate strong growth in cash flows, up an estimated 9% year-over-year in the first quarter, despite market headwinds. We expect our investors to have a highly differentiated experience as a result as they have throughout our history. In credit, higher interest rates and much higher available yields have led to significantly more investor capital being allocated to this area.
Jon will expand on this opportunity for Blackstone.Simultaneously, there is an increased focus on the potential for higher market defaults in an economic turndown. Blackstone’s credit business, as with real estate, we’ve delivered excess returns over long periods of time while protecting the downside. For example, we have the largest manager of leveraged loans in the world. And our historic annual default rate in the US is less than 1%. This record and our standard of care should provide comfort to investors who are new to this asset class.Private credit disperses risk outside the government backstop banking sector with capital typically raised in discreet long-term funds rather than a funding model that is reliant on deposits which demand instant liquidity.
This approach to credit extension makes the system safer and also supports the economy in challenging times.Our limited partners recognized Blackstone, a safe institution, which to allocate their capital even as the world becomes more complex. In fact especially so. We’ve learned that the best time to put money to work is in a risk off world. When sentiment becomes negative. Recent stress in the banking system has led to heightened levels of negativity, along with diminished availability of credit, which should provide additional opportunity for us. Given the firm’s scale, available capital in both credit and equity areas.Overall, our LPs have entrusted us with an unprecedented $194 billion of dry powder ahead of what we believe could be a historic opportunity for deployment.
One final note for me. Earlier this week, S&P Dow Jones updated the eligibility rules for their flagship indices to once again include companies with multiple share classes.This important development follows a consultation period in which they engaged a broad universe of market constituents. Blackstone is by far the largest company by market cap, not included in the S&P 500 today. We are hopeful that this development paves the way for our inclusion, which would be very positive for our shareholders.And with that, I’ll turn it over to Jon.Jon Gray Thank you, Steve. Good morning, everyone. Despite the challenges of the current environment, Blackstone’s value proposition for customers and shareholders is stronger than ever. I’ll discuss the key elements that underpin this confidence.First, our investment performance remains highly differentiated, as it has been for nearly four decades.
This is the most important determinant of our success and is what allows us to attract more capital. We’ve delivered 15% net returns annually in corporate private equity, opportunistic real estate and secondaries, 12% in tactical opportunities and 10% in credit. In Q1, our funds protected investor capital against the volatile market backdrop, which Michael will discuss.Over the past 12 months, nearly all our flagship strategies again meaningfully outperform the relevant public indices. Second, our strong returns are the direct result of the way we’ve deployed capital and where we are very well positioned for the current environment. As we’ve said before, where you invest matters.Nowhere is that more apparent than in real estate, where 83% of the portfolio is in our high conviction sectors, including logistics, rental housing, hotels, data centers and life science office.
We’re seeing a massive divergence in performance in these areas compared to more challenged parts of the real estate market.In logistics, the largest exposure in our real estate portfolio and at the firm overall, we estimate the mark-to-market for our warehouse rents is approximately 50% in the United States, 30% in the U.K. and 100% in Canada, while at the same time market rents are generally growing at double-digit rates. In rental housing, the second largest concentration in our real estate portfolio.Rents have moderated in our US apartment buildings, but we’re still seeing releasing spreads of approximately 4% and cash flow growth that’s materially higher. While our student and other housing assets are showing even greater strength. At the same time, the pullback in capital markets is further constraining the new supply pipeline for most types of real estate, which is likely to intensify as regional banks provide a meaningful portion of US construction lending.This is quite positive for real estate over time.
Aside from the supply demand dynamics, the single most important driver for real estate valuations is the level of the ten-year treasury. While rising rates have been a significant headwind for real estate valuations recently, we’ve seen a reversal with the ten-year yield down 65 basis points from its high last year. In corporate private equity.Our operating companies are showing continued strong momentum. Revenues grew 13% in Q1, reflecting our timely emphasis on travel, leisure and energy transition companies. Meanwhile, we’re seeing indications that cost pressures have peaked while the broader economy remains resilient. We do anticipate a deceleration given the weight of the Fed’s actions and pressure on the banking system. Our company’s overall are well positioned to navigate such an environment.In credit, over 90% of our non-insurance portfolio is floating rate and fundamentals remain healthy with a default rate of less than 1% across our non-investment grade loans.
Finally, BAAM’s weightings and structured credit and quant strategies helped drive positive performance once again in Q1 with much less volatility than broader markets.In the last two plus years since we brought in a new investment leadership team, BAAM has beaten the typical 60-40 portfolio by nearly 1500 basis points. Remarkable outperformance in liquid markets. Third, as a result of our performance, our customers are entrusting us with more capital. The fundraising environment has become more challenging, but the breadth of our firm allows us to continue to raise scale capital, including over $40 billion in the first quarter and $217 billion over the last 12 months.We’re seeing the greatest today for private credit solutions, given higher interest rates and wider spreads.
Coupled with the pullback in regional bank activity. This is a golden moment for our credit, real estate credit and insurance solutions teams, which accounted for 60% of the firm’s inflows in Q1.Our four major insurance clients allocated an additional $8 billion to us in the first quarter, and we expect a strong pace of inflows from them throughout the year. In the case of resolution, the $3 billion external fund raise is now fully committed and the repositioning of their asset base is underway.We also launched a new US direct lending product in Q1 for both institutional and insurance clients, targeting $10 billion for this first vintage. We’ve raised nearly $6 billion to date for our green energy oriented private credit vehicle and expect to hit the $7 billion cap in June.
Our new real estate debt vehicle has strong initial momentum with $3.5 billion of commitments so far and in private wealth BCRED’s monthly subscriptions on April 1st reached their highest level since October at nearly $500 million.As one of the largest private direct lenders in a world of growing capital constraints, we see this as an extremely favourable environment for deployment. More broadly, as regional banks experienced outflows of deposits, we are seeing real-time opportunities to partner with them at scale, utilising our insurance capital in areas like auto finance, home improvement lending and equipment finance.We expect private credit and insurance to grow significantly from here. Moving to our private wealth platform, which overall had a solid first quarter against a difficult backdrop.
We raised $8.1 billion in the channel, including $4.5 billion from the University of California. We’re seeing stabilization in BREIT’s repurchase trends with requests down 16% in March compared to the January peak.But obviously it depends in the near term on market conditions. We remain confident in the re-acceleration of growth in this channel once volatility recedes, given the exceptional positioning and performance of our products. Turning to our drawdown fund business, a few weeks ago, we held the final close for our global real estate flagship, which reached $30.4 billion.The largest private equity or real estate private equity fund ever raised. We also commenced fundraising for the next vintage of our European strategy, targeting a similar amount as the prior fund, which was EUR9.5 billion of third-party capital, with a first close expected this summer.In corporate private equity, we’ve raised $15.5 billion to date for our latest flagship, with additional closings expected in the second quarter.
The environment has remained difficult, but we continue to target a vehicle of substantially similar size as the prior fund. Overall, we are affirming our $150 billion target, with approximately 70% raised to date.We anticipate having substantially achieved this by early next year. Fourth, our latest fundraising cycle has positioned us very well for the current environment. We have nearly $200 billion of dry powder to take advantage of dislocation. With stock markets under pressure, we did agree to privatize two public companies in an otherwise muted deployment quarter, including a leading provider of events management software and a logistics REIT in the UK.We also continued our push into the energy transition space with a commitment to acquire a portfolio of wind and solar assets through our infrastructure portfolio company Invenergy.
Finally, we remain true to our asset light brand heavy strategy, relying on our people and track record to grow. We continue to operate with minimal net debt and no insurance liabilities.Over the past five years, we’ve generated $22 billion of distributable earnings and have paid out 100% of these earnings through dividends and buybacks. Our share count has remained flat over this period despite AUM more than doubling. There are few firms in the world with such a shareholder friendly approach to returning capital to investors. Our unleveraged capital light model is especially valuable in a time like this. In closing, despite the market’s near-term challenges, we remain focused on being long-term investors patient with our existing assets and lightning quick as opportunities emerge and our model allows us to do both.With that, I will turn things over to Michael.Michael Chae Thanks, Jon, and good morning, everyone.
Firm’s first quarter results reflected steady performance against a challenging external operating environment. Our funds protected capital in volatile markets and we continue to expand the foundation of the firm’s earnings power across multiple drivers of growth.I’ll discuss each of these areas in more detail. Starting with results. The unique breadth of our platform and the power of our brand have led to continued strong momentum across inflows, AUM and management fees. Total AUM rose 8% year-over-year to $991 billion, with $217 billion of inflows over the last 12 months.This is through a period in which the S&P 500 declined 8% and the public REIT index was down nearly 20%. The earning AUM also increased 8%, driving base management fees up 13% year-over-year to a record $1.6 billion in Q1, marking the 53rd consecutive quarter of year-over-year growth.Fee related earnings were $1 billion in the quarter or $0.86 per share stable with Q4 supported by the growth in management fees and the firm’s strong margin position.
The year-over-year FRE comparison was affected by a decline in fee related performance revenues. We highlighted previously, we expect these revenues to accelerate in the second half of this year.With respect to margins, FRE margin for the trailing 12 months expanded 80 basis points from the prior year comparable period to 57.4% collective of the firm’s disciplined focus on managing expenses in a difficult environment. Distributable earnings were $1.2 billion in the first quarter or $0.97 per share, again, largely stable with Q4. Net realizations declined year-over-year as last year’s market turbulence had the effect of reducing the realization pipeline entering 2023.Notwithstanding these headwinds, the firm’s ability to generate approximately $1 per share of DEs again in Q1, a level met or exceeded now for seven straight quarters, illustrates the elevation in earnings power that has been underway at Blackstone.
Terms of realizations during the quarter, we took advantage of a favourable window of market liquidity before the SVB related turbulence to sell $3 billion of public stock across a number of portfolio companies in private equity at an aggregate multiple of investor capital approximately three times.The sales included the full exit of our stake in Sona Comstar, company we transformed from a traditional auto parts supplier to India’s largest electric vehicle components provider. Including prior sales, we generated $1.4 billion of gains on this investment and 11 times our LPs money.While the environment for realization is likely to remain challenged in the near term, our long-term fund structures allow us to benefit of patients. We can focus on building value while we wait for market conditions to improve.
In the meantime, the firm’s performance revenue potential continues to grow.Performance revenue eligible AUM in the ground is nearly $500 billion at quarter-end. Net accrued performance revenue on the balance sheet, the firm’s store of value stands at $6.4 billion or $5.27 per share well down from a record level in Q1 of last year, primarily due to realizations. The receivable is still up 22% in two years and has nearly tripled in three years.We hold $16 billion of public stock in our private equity and real estate drawdown funds. When markets ultimately stabilize, we are well positioned for an acceleration in realizations. Turning to investment performance. First quarter corporate private equity funds appreciated 2.8%. And overall our portfolio companies reporting strong revenue growth and resilient margins.In real estate, the BREP opportunistic funds were largely stable in the quarter, while the coreplus funds depreciated 1.6%.
We are seeing sustained strength in our key sectors in terms of cash flow growth offset in Q1 by sharp write-downs in our remaining traditional office portfolio, which we had already significantly reduced over a period of multiple quarters.Within coreplus, BREIT’s Class I shares reported a modest negative net return of 0.5%. However, BREIT’s return was a positive 0.6%, excluding the effect of its interest rate hedge, which was impacted by the dramatic decline in the ten-year Treasury yield. The hedge overall has generated substantial gains for investors locking in low cost fixed rate debt ahead of last year’s rise in interest rates.Since inception, BREIT has delivered net returns of approximately 12% per year, or nearly three times the public REIT index.
In credit, the private and liquid credit strategies appreciated 3.4% and 3% respectively in the first quarter, reflective of a healthy portfolio generating attractive current income.And in BAAM, the BPS gross composite return was 0.9% in Q1. The 12th quarter in a row of positive performance. Moving to the outlook, we remain highly confident in the multiyear expansion of the firm’s earnings power and FRE with several embedded growth drivers. First, in our drawdown fund business, we continue to advance toward our $150 billion target across 18 months. Second, perpetual capital platform continues to expand with AUM up 13% year-over-year to $381 billion, including more than 30% growth in our BIP infrastructure and BCRED strategies.Third, in the insurance area, AUM for our dedicated platform has reached nearly $170 billion, up $9 billion sequentially from Q4, driven by robust inflows from our major clients.
2023 in total, we expect inflows of $25 billion to $30 billion from these clients. We anticipate substantial, largely contractual growth for our insurance platform in the years ahead.To summarize, the firm has significant momentum of multiple engines driving us forward. In closing, we are very optimistic about the future of Blackstone. Our business model is designed to protect us in difficult times and we have greater investment firepower than ever before. We remain totally focused on delivering for our investors.With that, we thank you for joining the call and would like to open up now for questions.
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Question-and-Answer Session Operator Thank you. [Operator Instructions]
We’ll take our first question from Glenn Schorr with Evercore.Glenn Schorr Hi. Thanks very much.
So I’m curious, you mentioned the 20% AUM, thereabouts, that you’re sitting on, almost 200 billion. And in the comments you both said ahead of what we believe will be an attractive environment for deployment. Are there any leading indicators that would give us any confidence that it’s coming in the near term? I know it’s a lot. I know it’s eventually going to happen. But what are you looking at to see closing of bid ask spreads or is it a funding environment thing? Just curious to get more color on that? Thanks.Jon Gray Glenn, I think, it’s a good question. I think the answer is not one size fits all. I think what we will see is more activity on the private credit insurance side because there because of the tightness in the banking system, I think, deployment there should accelerate.
In our secondaries business, we’ve begun to see transaction activity pick up.In fact, in the first quarter, that was up. I think, the highest level since the fourth quarter of ’21. So we are seeing some folks who are looking for liquidity to get below sort of their target allocation levels. I do think for private equity, real estate private equity, those things take a little bit of time. There tends to be a need for a little more sort of confidence in markets, a little more stability.And I think that will be a little while in the making. A lot of it does tie to sentiment overall, obviously, as inflation comes down. I think that’s a very important indicator to give markets confidence. Right now, people are concerned about the banking system.
They’re concerned about a slowdown, and that doesn’t tend to lead to a lot of transaction activity. So I think it will happen in waves in different segments. It ultimately will happen, it always does. But it’s hard to point to any one thing as we sit here today.Glenn Schorr Okay. Thanks.Operator Thank you. We’ll take our next question from Craig Siegenthaler with Bank of America.Craig Siegenthaler Thank you. Good morning, Steve, Jon, Hope you’re both doing well.Jon Gray Thanks.Craig Siegenthaler So if you add the 5 billion of real estate debt SMAs plus the contribution on credit, it looks like the insurance channel probably drove about 10 billion in net flows or about a quarter of the total this quarter. So I’m wondering, did I get that right?
And then extending this thought from here, we wanted your perspective on the insurance channel’s ability to generate outsized flows over the next year before we see markets recover and then flows in the retail and institutional channels reaccelerate?Jon Gray So I think the number is a little over $8 billion, but you’re close, Craig, from insurance. I think the nice thing about insurance, as Michael pointed out, is we have these contractual relationships with large clients, notably with Corebridge. We’re just starting to ramp up the flows from the resolution partnership we have. There are strong inflows at Fidelity & Guaranty as they grow their business. And all of that gives us a lot of confidence in terms of the outlook from our major clients.I think additionally there are others in the space who see what we’re able to do in areas like asset-backed finance, corporate direct lending, and they’re looking to do some SMAs targeted in areas and as we get more scale, it creates a bit of a virtuous cycle.
And then, of course, there are the episodic moments where we find a larger potential customer. We now have four. We also have Everlake as well, the former Allstate Life and Retirement platform.So I think we’ve got multiple engines. We’ve got this contractual growth that will continue to grow over time and take us up to $250 billion basically on its own. Our clients could find other strategic things to do. We’ve got these SMA opportunities with insurance companies really around the globe and then we can find new large-scale clients. And I think that’s really the beauty of our model, which is we’re not an insurance company, we’re an asset manager, and so we can serve multiple clients just like we do in our institutional business. So I would say our confidence level around the insurance area remains extremely high.Operator We’ll take our next question from Adam Beatty with UBS.Adam Beatty Thank you and good morning.
Just wanted to follow up on the opportunity in private credit. Very interesting and attractive. I want to get your thoughts on another source of private credit, which has been syndicated lending that’s been fairly weak or even totally stuck over recent periods. So how do you see that part of the environment? Is there a recovery in the offering there? And would that affect kind of the growth trajectory you see for private credit at Blackstone? Thanks.Jon Gray So the syndicated lending market, its challenges are that there’s a lot of volatility in the system. So if you’re a bank today and you’re generally in the moving business, right, you commit to a non-investment grade corporate credit, a private equity deal, you’re trying to sell that down.
But given the volatility, you’re going to say to the borrower, hey, look, I need a lot of flex in the pricing. I need to be able to gap out the pricing 200 basis point, 300 basis points.And when there’s this kind of volatility that makes it hard and as a borrower putting on our private equity cap, we’d prefer to do things on a direct basis where we know we have certainty. At some point, of course, volatility will come down and the syndicated market will become more competitive.But I do think structurally over time, direct lenders have a competitive advantage because they’re in the storage business and I think they will continue to gain more share on newly originated deals where you’ve got to make a commitment for a public to private that lasts a long period of time.I think once a borrower is in the marketplace is established, there’s not an intermediary who has to take a bunch of near-term credit risk.
