Blackstone’s Q2 earnings decline as real estate segment tumbles

Blackstone Group’s earnings declined over the past three months as distributable earnings from the firm’s real estate segment fell by nearly a quarter from the same time last year.

The firm’s overall net income for the second quarter of the year fell to $305.8 million, or 45 cents per share, a significant decline from the $742 million a year ago, executives announced on the company’s earnings call Thursday morning.

At the same time, distributable earnings rose to $708.9 million, or 57 cents a share, exceeding most analysts’ expectations.

In particular, distributable earnings from the firm’s real estate segment fell by 24 percent year-over-year to $329.3 million, while private equity, hedge fund solutions and credit segments all saw distributable earnings rise significantly.

“The past few months have been a remarkable period for Blackstone characterized by transformation and continued momentum,” Blackstone CEO Stephen Schwarzman said during the call. “In addition to our ongoing business evolution, we’ve completed our corporate conversion, and the market response, as you know, has been quite positive.”

“If we continue to grow as the reference institution in our industry and meaningfully expand our potential investment base through conversion, it’s reasonable to assume that we should close the valuation gap between our firm and other top companies,” Schwarzman added.

It was the company’s last quarter as a partnership. The alternative investment firm completed its conversion to a corporation on July 1.

Blackstone’s conversion to a C corporation, made possible by tax law changes that lowered the highest corporate rate to 21 percent from 35 percent, allows the firm to tap a more diverse pool of investors.

The company spent several weeks after its April announcement on an extensive “roadshow” to introduce or re-introduce itself to investors. “The schedule was exceptionally high quality and included over 100 institutions, more than half of which were new to the alternative sector and Blackstone, and/or were materially restricted previously from owning P2Ps,” Blackstone CFO Michael Chae said on the call.

Thanks to the conversion, Blackstone has now become eligible for inclusion in many market indices such as S&P Total Market, MSCI and CRSP, and expects to be added to those in the fall.

In the questions segment of the earnings call, Blackstone executives shared their views on impacts from broader market issues, such as the impact of the U.S.-China trade war.

“I think the good news for us is that we don’t have that many businesses in the global supply chain, either retailers or big exporters, so the impact there directly to our portfolio is not quite as significant,” COO Jonathan Gray said. “The real question is will it leak more broadly into the economy or markets.”

“So far, the more dovish tone from central banks has outweighed the slowdown from trade,” Gray added, noting that many central banks have either reduced interest rates or signaled an intention to do so in response to the slowdown in trade.

The decline in interest rates made it more challenging for Blackstone to find opportunities to deploy the capital it has raised, especially in infrastructure. “I think the good news for us is that we’re operating at a very large scale,” Gray said. “By playing where the air is thinner, which is really the strength of our infrastructure business, we’ve got a better competitive dynamic.”

The past quarter saw Blackstone make one of the largest industrial real estate deals in history, buying a 179 million-square-foot warehouse portfolio from Singapore’s GLP for $18.7 billion.

Last week, Blackstone halted all improvement works at the 11,000-unit Stuyvesant Town and Peter Cooper Village complexes in New York, saying that it was “in the process of evaluating capital investments” in the properties in light of the state’s new rent laws.