Contents
I try to identify great companies that, for whatever reason, appear to have temporarily fallen out of favor with investors. When I last added to my Blackstone (BX) exposure on May 9, 2023 @ ~$81.65, I was of the opinion that BX's share price was temporarily depressed for no justifiable reason. In contrast, the share price is ~$136 following the release of BX's Q2 2024 results on July 18 2024.
I last reviewed BX in this April 20 2024 post at which time it had just released its Q1 2024 results. Now that we have the Q2 2024 results, I take this opportunity to revisit this existing holding.
Before proceeding further, I highly encourage you to listen to the following interviews with Jonathan Gray (President & COO):
CNBC interview re: Q2 2024 results
In the interview with Steve Forbes, Chairman & Editor-in-Chief - Forbes, Gray touches upon a number of highly important topics, one of which is the need to separate past performance from potential future performance. In essence, the time to invest is when wreckage has been created by a storm. The wreckage often takes time to clear its way through the system, and therefore, it is important that investors invest with the long-term in mind.
This message has been communicated by multiple highly successful executives/investors. For example, Mitch Rales (co-founder of Danaher Corporation with his brother Steven Rales) has stated that highly successful senior executives are looking out a decade and more into the future. Naturally, it is essential not to overlook the short- and mid-term otherwise there will be no long-term. However, if executives are making decisions on where they want their company to be long-term, it is critical that investors adopt a similar mindset.
Business Overview
BX's website and Part 1 of the FY2023 Form 10-K provide ample information from which to learn about the company.
BX continues to exceed $1T in total Assets Under Management (AUM). It achieved this level more than 3 years ahead of the aspirational road map presented at the 2018 Investor Day.
Source: BX - Q2 2024 Earnings Presentation - July 18, 2024
The 'Our Businesses' section of BX's website has a menu of the areas in which BX invests. Over the years, it has established an unparalleled global platform of leading business lines, offering over 70 distinct investment strategies.
In my April 20 post, I referenced this interview with Jon Gray in which he explains why, as highly sophisticated and opportunistic investors, BX has been aggressively acquiring real estate. BX seeks to acquire assets at a discount to fair value and then to make improvements to create additional value and earn attractive investment returns. In essence, BX needs to 'zig' while others 'zag'; the time to acquire attractive assets is when many other investors are reluctant to do so.
Recently, BX announced plans to acquire Apartment Income REIT (AIRC) in a $10B transaction valued at a ~25% premium to AIRC's recent share price.
In addition to this acquisition, in 2023 BX paid a 30% premium to acquire Tricon Residential (TCN) in a $3.5B transaction.
Prior to these two acquisitions, BX acquired another ~$30B worth of REITs which included:
- Preferred Apartment REIT
- American Campus Communities
- Industrials REIT
- PS Business Parks
All these acquisitions were made during a period in which many investors were reluctant to be acquisitive.
The window of opportunity, however, may be closing and if interest rates become lower a year from now, real estate valuations may not be as attractive as they have been in the last couple of years. This will make it increasingly difficult to acquire, for example, economically feasible apartment communities.
Financials
Q2 2024 Results
The most recent results are accessible in the Press Release and Earnings Presentation and in the accompanying Supplemental Financial Data. In particular, refer to pages 22 - 26 which reflect a high-level overview of the various funds BX manages.
BX has exposure to ~230 companies which I can not possibly closely follow. I do, however, try to periodically review the websites of the companies to which it has exposure. Here are links to the websites to some of BX's Q2 acquisitions:
BX has also recently committed additional capital to the following:
You can see from this short list of recent acquisitions/additional capital commitments that BX invests in diverse industries. It is impossible, therefore, for me to determine ALL the investments held in ALL of BX's funds by reading publicly available documents.
All we see in BX's earnings releases are entities with names such as BREP IV, BCP V, Energy I, BCP Asia I, etc. While BX discloses information such as the 'committed capital', 'available capital', and Net IRR of each fund, I have absolutely no idea what are the underlying investments. My investment in BX, therefore, is based primarily on the extent to which BX's senior management and employees have 'skin in the game'. Furthermore, BX raises pools of capital from many highly sophisticated and wealthy clients. If these clients are willing to trust that BX can continue to generate attractive long term investment returns then I am prepared to 'follow the money'.
In Q2, BX reported $39.4B of inflows and it deployed $33.7B and committed a further $19.1B that not been deployed during the quarter. This was BX's most active three-month period since 2022 and reflects BX's decision to invest before the Fed commits to cutting rates.
BX reported Fee-related earnings (FRE) of $1.1B or $0.91/share. This marked the 11th consecutive quarter of FRE over $1B.
It also reported Distributable Earnings (DE) of $1.3B or $0.96/share, a ~3% increase YoY; this metric removes the effects of unrealized activity. Although the increase was slightly below analysts’ estimates, the firm believes the US central bank will soon have the opportunity to loosen monetary policy as inflation and the job market have cooled.
In Q2, BX reported realizations of $23.5B versus $17.2B in Q2 2023 although these realizations were far below levels prior to the sharp rise in rates. The fast-growing credit and insurance unit comprised ~40% of its exits during Q2 2024.
Source: BX - Q2 2024 Earnings Presentation - July 18, 2024
BX has a diverse range of growth engines that enable it to continually generate inflows, deploy capital, and generate realizations.
Source: BX - Q2 2024 Earnings Presentation - July 18, 2024
On the Q2 2024 earnings call, Stephen Schwarzman (Chairman, CEO & Co-Founder) discussed what BX is currently doing in in artificial intelligence, specifically in data centers.
Current expectations are that there will be approximately $1T of capital expenditures in the United States over the next 5 years to build and facilitate new data centers with another $1T of capital expenditures outside the United States. And the need to provide power for these data centers is a major contributor to an expected 40% increase in electricity demand in the United States over the next decade compared to minimal growth in the last decade.
We believe these explosive trends will lead to unprecedented investment opportunities for our firm. Blackstone is positioning itself to be the largest financial investor in AI infrastructure in the world as a result of our platform, capital and expertise.
Our portfolio today consists of $55B of data centers, including facilities under construction, along with over $70B in prospective pipeline development.
Our largest data center portfolio company, QTS, has grown lease capacity 7x since we took it private in 2021. Through QTS and our other holdings, we have a robust ongoing dialogue with the world's largest data center customers.
We're also providing equity and debt capital to other AI-related companies.
Credit Ratings
BX's senior unsecured domestic long-term debt ratings are at the top of the upper-medium-grade investment-grade tier. There is no change from prior reviews.
- S&P Global assigns an A+ long-term unsecured debt credit rating with a stable outlook; and
- Fitch assigns an A+ long-term unsecured debt credit rating with a stable outlook;
These ratings define BX as having a STRONG capacity to meet its financial commitments. It is, however, somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in higher-rated categories.
These are BX's deconsolidated Balance Sheet highlights for Q2 2024.
Source: BX - Q2 2024 Earnings Presentation - July 18, 2024
Dividend and Dividend Yield
BX distributes a quarterly dividend. Its distributions are, however, unconventional and fluctuate depending on DE. BX's distribution policy states:
'We intend to pay to holders of common stock a quarterly dividend representing approximately 85% of The Blackstone Group Inc.’s share of Distributable Earnings, subject to adjustment by amounts determined by our board of directors to be necessary or appropriate to provide for the conduct of our business, to make appropriate investments in our business and funds, to comply with applicable law, any of our debt instruments or other agreements, or to provide for future cash requirements such as tax-related payments, clawback obligations and dividends to shareholders for any ensuing quarter. The dividend amount could also be adjusted upward in any one quarter.'
I do not calculate BX's forward dividend yield because the quarterly dividend is unpredictable.
Source: BX - Q2 2024 Earnings Presentation - July 18, 2024
I look at an investment's total potential long-term return perspective (capital gains and dividend income). Inconsistency in BX's quarterly dividend, therefore, is irrelevant for my purposes.
BX is hyper-focused on capital allocation. The extent to which it repurchases shares depends on whether there is a meaningful deterioration in BX's share price relative to the true underlying value.
Source: BX - Q2 2024 Earnings Presentation - July 18, 2024
Valuation
I typically look at:
- diluted EPS - P/E;
- adjusted diluted EPS - adjusted P/E; and
- Free Cash Flow (FCF) - P/FCF
metrics to gauge the valuation of most companies I analyze. These metrics, however, are of little relevance when trying to assess BX's performance and outlook.
BX uses DE and FRE to more accurately measure its performance; these, and other terms, are defined within the FY2023 Form 10-K.
The very manner in which BX operates makes it virtually impossible to forecast these metrics which explains why BX does not provide guidance.
BX is not easy to value because it raises large pools of capital from clients for deployment thus resulting in multiple multi-billion-dollar acquisitions annually. Because it continually makes sizable acquisitions or divestitures, earnings estimates can quickly become outdated.
Some of the assets are meant to be perpetual holdings. In other cases, BX uses its expertise to improve the performance of the companies in which it invests with the intent of monetizing these assets as part of its capital recycling programs. It is not, therefore, unusual to see wide swings in YoY GAAP results.
Fluctuations in quarterly FRE and DE are to be expected so they do not factor into my investment decision making process. I am more interested in the long-term trend of these two metrics. I, therefore, like to compare annual FRE and DE over several years.
When we compare BX's DE and FRE for FYE 2017 - FY2023 and the most two recent quarters, we see a noticeable increase relative to just a few years ago.
At December 31, 2016, for example, BX had $366.6B of AUM. At the end of Q2 2024 it had $1,076.4B! As AUM grows, it stands to reason that DE and FRE should also grow over the very long-term.
Naturally, DE and FRE will fluctuate depending on market/economic conditions. If market/economic conditions are not conducive to the immediate sale of certain assets, BX may elect to continue to manage the AUM until such time as market/economic conditions improve.
The following reflect how BX's financial measures have performed over time.
Source: BX - Q4 and FY2017 Earnings Presentation - February 1, 2018
Source: BX - Q4 and FY2018 Earnings Presentation - January 31, 2019
Source: BX - Q4 and FY2018 Earnings Presentation - January 30, 2020
Source: BX - Q4 and FY2020 Earnings Presentation - January 27, 2021
Source: BX - Q4 and FY2021 Earnings Presentation - January 27, 2022
Source: BX - Q4 and FY2022 Earnings Presentation - January 26, 2023
Source: BX - Q4 and FY2023 Earnings Presentation - January 25, 2024
Source: BX - Q1 2024 Earnings Presentation - April 18, 2024
Source: BX - Q2 2024 Earnings Presentation - July 18, 2024
Final Thoughts
I currently hold 1498 BX shares in a 'Core' account in the FFJ Portfolio. It was my 12th largest holding when I completed my 2023 Year End FFJ Portfolio Review and my 11th largest when I completed my 2024 Mid Year FFJ Portfolio Review.
BX has declared a $0.82 dividend payable to holders of record as of July 29. Since I am a Canadian resident who holds BX shares in a taxable account, I incur a 15% dividend withholding tax. I will, therefore, only receive ~$1044 versus ~$1228. Although I am not currently outright purchasing new BX shares, my exposure should slowly increase as I automatically reinvest the quarterly dividend income.
Not every investment will be a 'home run'. BX's track record at generating attractive returns for its investors, however, has led me to have exposure to it.
Economic and business conditions appear to be improving which should lead to an increase in realizations and, ultimately, DE.
BX continues to increase AUM from which it earns fees and there is a highly probability it could have $1.5T - $2T AUM by 2034 thus leading to higher DE in the future.
Alternative asset exposure (eg. private equity, private debt, hedge funds, real estate, commodities, structured products, venture capital) can produce attractive long-term investment returns. Directly investing in alternative assets, however, is beyond my risk tolerance. This is why a portion of my alternative asset exposure is through BX.
Furthermore, I do not like investing in REITs because I essentially view them as 'dead money'. I also sold off our investment properties a few years ago and no longer want to be a landlord. By investing in BX, I can have exposure to the 'right' real estate segments.
While BX is an attractive long-term investment, it is essential to consider the risks of a BX investment. As noted earlier, it is impossible to know what investments are held within each BX fund and the financial status of each investment. Furthermore, many of the underlying assets can not be easily and quickly liquidated. BX investors must, therefore, invest for the very long term.
My BX investment, is made on the premise that BX is in the business of making money for highly sophisticated investors. Given that wealthy investors entrust billions with BX, I am inclined to 'follow the money'. Furthermore, senior BX executives have significant share ownership and have considerable incentive to ensure BX's long-term success.
I wish you much success on your journey to financial freedom!
Note: Please send any feedback, corrections, or questions to [email protected].
Disclosure: I am long BX.
Disclaimer: I do not know your circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your own research and due diligence. Consult your financial advisor about your specific situation.
I wrote this article myself and it expresses my own opinions. I do not receive compensation for it and have no business relationship with any company mentioned in this article.
