01—Abstract
Summary
Summary of the 10-K filed March 2, 2009. Cited figures are marked; the original filing is the authoritative source.
Blackstone's FY2008 10-K shows a sharply negative year driven by mark-to-market declines in its carry funds.
Total revenues were $(349.4) million versus $3.05 billiona in 2007, Performance Fees and Allocations were $(1.25) billion, and Net Income (Loss) was $(1.16) billion. Assets under management fell 8% to $94.56 billion, mainly from a $27.19 billion net depreciation in fund portfolio values, partly offset by $12.25 billion added through the GSO acquisition. Fee-earning AUM rose 9% to $91.04 billion, which supports the recurring fee base.
The stated GAAP losses are heavily affected by non-cash equity-based compensation of $3.30 billionb and the consolidation of Blackstone Funds, so the more relevant indicator for investors is Adjusted Cash Flow from Operations, which fell to $128.8 million from $1.52 billion in 2007. The firm's cash and liquidity position is adequate but tighter than in prior years. Blackstone held $503.7 million in cash, $297.0 million in liquid fund investments, and only $250 million drawn on a $1.0 billion revolver that matures May 11, 2009.
Management paid $0.90c per common unit for the first three quarters of 2008 but declared no fourth-quarter distribution. The company also repurchased $130.1 million of units under a $500 million program. Management expects to rely on existing sources of cash to fund its general partner commitments, which total $1.39 billion, and says the outlook depends on how quickly financing markets and fund realizations recover.
Investors also face material regulatory and legal exposure. Proposed legislation (the Baucus-Grassley Bill, House-passed carried interest provisions, and the Obama budget proposal to tax carried interest as ordinary income) could raise Blackstone's tax burden substantially if it applies to the firm's publicly traded partnership structure. Blackstone is also defending a securities class action tied to its June 2007 IPO prospectus and an antitrust suit, and the company expects significant GAAP net losses for several years because of amortization and equity compensation.
02—Key points
Key Highlights
- Total revenues were $(349.4) million in 2008, down from $3.05 billion in 2007, driven by a $(1.25) billion swing in Performance Fees and Allocations as fund portfolio values declined about 32% to 39% across real estate and corporate private equity.
- Net loss attributable to common unitholders was $(1.16) billion, compared with net income of $1.62 billion in 2007, reflecting $3.30 billion of equity-based compensation and $153 million of intangible amortization.
- Assets under management declined 8% to $94.56 billion, with a $27.19 billion net depreciation partly offset by $12.25 billion from the GSO acquisition and $5.63 billion of real estate inflows; Fee-Earning AUM increased 9% to $91.04 billion.
- Adjusted Cash Flow from Operations fell to $128.8 million from $1.52 billion, and Net Fee Related Earnings rose to $427.7 million, which indicates the fee base held up while carry-related income collapsed.
- Liquidity: $503.7 million cash and $297.0 million in liquid funds, against $250 million drawn on a $1.0 billion revolver maturing May 11, 2009; no Q4 2008 distribution was declared.
- Pending legislation to tax carried interest as ordinary income or to treat Blackstone as a corporation poses a material risk to after-tax distributions, and the Obama budget proposal of February 26, 2009 explicitly included the carried interest change.
- Ongoing litigation includes a securities class action over the June 2007 IPO prospectus and an antitrust suit, which management describes as without merit and intends to defend vigorously.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2008filed March 2, 2009Financial Statements
| Revenue | -$349.36M |
| Operating Expenses | $4.39B |
| Interest Expense | $23.01M |
| Net Income | -$5.59B |
05—Questions
Frequently Asked Questions
Why did Blackstone report a large GAAP net loss in 2008 after a profitable 2007?
The loss is driven mainly by non-cash items: Performance Fees and Allocations turned negative (-$1.25 billion) as fund investments were marked down, Net Gains (Losses) from consolidated fund activities were -$872 million, and equity-based compensation from the IPO reached $3.30 billion. Management characterizes the GAAP figures as distorted by these items and points to Adjusted Cash Flow from Operations as a better gauge of economic performance.
Is Blackstone's dividend (distribution) sustainable?
The 2008 distribution totaled $0.90 per unit, but no fourth-quarter payment was made because Adjusted Cash Flow from Operations of $128.8 million was lower than the $240 million already paid. Distributions are at the discretion of the general partner, and management says the public unitholder priority allocation of $1.20 per unit (through 2009) may not be sustained in 2009 if cash flow remains weak.
How much debt does Blackstone have and when is it due?
Blackstone had $250 million drawn on its $1.0 billion unsecured revolving credit facility at year-end 2008, with the facility maturing May 11, 2009. Management was in discussions with lenders to renew all or part of it, and said it may be unable to do so on commercially reasonable terms if credit conditions worsen. The firm also had $134.6 million of other loans payable and a tax receivable agreement obligation of $722 million over 15 years.
What is the main risk from pending tax legislation?
Legislation such as the Baucus-Grassley Bill, the House-passed carried interest bill and the Obama budget proposal could cause Blackstone to be taxed as a corporation or to tax carried interest as ordinary income. Management says that would materially increase tax liability and could significantly reduce the value of common units, and that the proposals would apply to Blackstone starting in 2010 or 2013 depending on the bill.
How has the firm's asset base changed and what drives future fee income?
AUM fell to $94.56 billion from $102.43 billion because of a $27.19 billion depreciation in fund values, but the GSO acquisition added $12.25 billion. Fee-Earning AUM, which drives management fees, rose 9% to $91.04 billion. Future fee growth depends on raising successor funds such as the sixth general corporate private equity fund and the seventh private equity fund, which management says may be smaller than predecessors.
06—Continue