Blackstone Inc. (NYSE:BX) Q3 2023 Earnings Call Transcript

Blackstone Inc. (NYSE:BX) Q3 2023 Earnings Call Transcript October 19, 2023

Blackstone Inc. misses on earnings expectations. Reported EPS is $0.94 EPS, expectations were $0.99.

Operator: Good day and welcome to the Blackstone Third Quarter 2023 Investor Call. Today’s call is being recorded. At this time, all participants are in a listen-only mode. [Operator Instructions] At this time, I would like to turn the conference over to Weston Tucker, Head of Shareholder Relations. Please go ahead.

Weston Tucker: Thank you, Katie, and good morning, and welcome to Blackstone’s third 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.

A global investment advisor discussing their innovative fund offerings with a client. Editorial photo for a financial news article. 8k. –ar 16:9

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 $921 million. Distributable earnings were $1.2 billion or $0.94 per common share, and we declared a dividend of $0.80 which will be paid to holders of record as of October 30. With that, I’ll turn the call over to Steve.

Stephen Schwarzman: Good morning and thank you for joining our call. Before we begin, I wanted to take a moment to acknowledge the recent events in Israel. We were shocked by the horrific terrorist attacks that occurred which are an affront to our shared human values. We are deeply saddened by the violence and tragic loss of life unfolding in the region. Our thoughts are with the people of Israel, our colleagues there and all of those enduring pain and hardship throughout the region. Turning to our results. The third quarter of 2023 was a volatile period for global markets including a dramatic increase in bond yields. Most major equity indices have declined and the median U.S. stock is negative on a year-to-year basis. Higher interest rates along with the confluence of other factors with the economic uncertainty, geopolitical turbulence, high fiscal deficits, political dysfunction, and labor unrest have adversely impacted investor sentiment.

Today’s environment is an extremely challenging one for investors to navigate. Against this backdrop, Blackstone generated distributable earnings of $1.2 billion in the third quarter, which were stable with the second quarter. The environment today is less favorable for realizations, so we’ve chosen to sell less. But the firm’s underlying earnings power continues to build. We remain focused on executing the operating plans for our companies and driving the long-term value of our holdings. Our limited partners continue to benefit from the favorable positioning of our portfolio with resilient fundamentals in the sectors where we focused, which Jon will discuss further. Result is that nearly all of our flagship strategies outperformed market indices in the third quarter as they have for nearly 40 years.

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Q&A Session

The firm’s global scale gives us deep insights into what’s happening in the real economy, which inform how we position the firm and construct our portfolios amid changing conditions. We’ve been saying consistently that we believe the Fed will keep rates higher for longer and we didn’t share the previous consensus view that they would cut rates by the end of this year. What we are seeing in the data, an economy that’s strong today, but decelerating. We also see that significant progress is being made on inflation, perhaps more so than other market participants based on the movement in bond yields recently. In our portfolio, we estimate input costs were largely flat year-over-year. Wage growth is moderating and job openings are declining or it will take time.

We believe the collective weight Central Bank actions will bring about the intended effect of cooling the economy leading to the conditions for a more accommodative Fed stance and eventual easing of the cost of capital. Meanwhile, Blackstone’s unique diversity and breadth with over 70 distinct investment strategies position us extremely well to navigate any environment. The balance of our firm allows us to pivot to where we see the greatest opportunities at a given point in the cycle. For example, our credit businesses are thriving today in the context of very favorable operating environment, even higher base rates along with challenges to traditional lenders. Investment performance has been outstanding, including 14.4% appreciation over the last 12 months in our private credit strategies and 4.6% just in the third quarter.

Unsurprisingly, client demand in this area is accelerating across all channels; institutional, insurance and individuals. Keeping pace with this evolving opportunity, we recently announced the integration of our corporate credit, asset backed finance and insurance groups into a single new unit BXCI. We expect this integration will create a more seamless experience for clients and borrowers, allowing us to offer a one stop solution across corporate and asset based private credit including both investment grade and noninvestment grade. We believe these changes will further accelerate growth and the BXCI real estate credit collectively could grow AUM from approximately $370 billion today to $1 trillion within the next 10 years, given the powerful secular tailwinds and strength of our platform.

In addition to credit and insurance, we are seeing compelling near-term dynamics in several other areas where Blackstone has established leading businesses, such as infrastructure, notably including digital infrastructure, energy transition and life sciences. The private wealth channel also remains a tremendous long-term opportunity for the firm. Jon will discuss the positive developments in these areas in more detail. Overall, limited partners continue to move away from the traditional 60/40 liquid portfolio and despite market headwinds they are allocating more capital to the best alternative managers across more asset classes. Blackstone is extremely well positioned to capture future opportunities for growth in the alternatives area, which remains early in its long-term development.

We are the reference institution among global LPs, a position that has been continually reinforced across market cycles of nearly 40 years. We have led the industry’s evolution and I expect we will continue to lead it in the future. Last month, we were gratified that S&P Dow Jones chose Blackstone as the first major alternative manager to be included in the S&P 500, the largest benchmark index and the last one, the Blackstone was not yet a part of following our conversion to a corporation in 2019. This milestone is a further reflection of the firm’s leadership position in our industry and the broader market, as well as our progression as a valuable and widely owned public company. Most importantly, we’ve continued to generate exceptional long-term results for both our fund investors and our shareholders.

This is our mission. It’s what drives us forward as a firm. While the market environment will undoubtedly present challenges, will also provide opportunities we are well positioned to capitalize upon with over $200 billion of dry powder. These are the times that best highlight the distinctiveness of our firm and the enduring nature of our culture. Everyone at Blackstone is completely focused on delivering for all of our stakeholders. And with that, I’ll turn it over to Jon.

Jonathan Gray: Thank you, Steve, and good morning, everyone. The investment performance we’ve consistently produced over decades has created a huge reservoir of goodwill with our customers, allowing us to grow even in difficult periods. Meanwhile, our platform expansion provides multiple ways to win for them across market cycles and as Steve noted, virtually all customer channels are increasing their allocations to alternatives over time, many in a material way. These key pillars give me great confidence in the future of Blackstone. Starting with investment performance, our funds generated positive appreciation overall in the third quarter compared to declines in nearly all major market indices with significant strength in private credit, infrastructure and life sciences.

Against the backdrop where the cost of capital has risen considerably, it is critical to own high quality businesses with secular tailwinds or assets that benefit from higher rates like floating rate credit. In real estate, Blackstone is in an extremely differentiated position. The majority of the equity portfolio is in logistics, data centers and student housing, which continue to benefit from robust fundamentals. Our data center business, QTS held in BREIT, BPP and our infrastructure vehicle was the single largest source of appreciation at the firm, driven by explosive growth in data creation that is being accelerated by the AI revolution. Since privatizing the company two years ago, lease capacity has grown six fold with the development pipeline preleased to major tech companies and we are evaluating additional deployment opportunities in the space.

In logistics, the firm’s largest exposure overall, trends remain favorable with releasing spreads in our U.S. warehouses of over 60% in recent months and similarly strong dynamics in many of our other major logistics markets globally. At the same time, market rents continue to move higher. And sure in other areas of the portfolio, including our U.S. apartment buildings, we’re seeing moderation in growth, but cash flows are stable or increasing across the vast majority of our real estate holdings. That said, higher interest rates are impacting valuation multiples in the sector. This is also having the effect of meaningfully reducing the new supply pipeline, which is favorable for values longer-term. Construction starts are falling sharply for virtually all types of real estate, including year-over-year declines of 30% to 70% for U.S. apartment buildings, warehouses and hotels and in the dislocated market, having $66 billion of dry powder in real estate is a significant advantage.

In corporate private equity, our operating companies reported resilient high single digit revenue growth in the third quarter with strong margin performance as cost pressures continue to abate. In credit, the increase in base rates has been very positive for our clients. Today we can originate high quality senior loans with all-in yields of over 12% its sub 40% loan to value ratios. Meanwhile, our existing portfolio is stable and default rates remain historically low at under 50 basis points for our noninvestment grade holdings. In our investment grade credit portfolio in 2023 we’ve delivered 140 basis points of excess spread to our major insurance clients while materially improving credit quality. And finally, BAAM had its 14th consecutive quarter of positive performance for the BPS Composite.

Since the start of 2021, BAAM has achieved a 17% cumulative composite net return compared to a 2% decline in the 60/40 portfolio, equating to exceptional outperformance in liquid markets. The strength of our returns and the breadth of our firm allow us to continue raising significant capital in a very difficult fundraising environment. Total inflows were $25 billion in the third quarter and $139 billion over the past 12 months. The greatest demand today is for private credit solutions as Steve discussed, and our credit, insurance and real estate credit businesses comprised over 50% of total inflows again in the third quarter.