Despite a “spluttering economy”, and an “anemic deal environment”, New York-based private equity and real estate giant, The Blackstone Group, announced positive second quarter earnings, driven largely by huge increases in revenue from its real estate investments.
The firm reported revenues of $648.5 million, compared to $208.5 million for the same period last year. Over six months, the firm’s revenues were $1.2 billion, compared to $360.7 million in 2010. Real estate earnings jumped to $453.5 million in the second quarter from $121.4 million over the same period in 2010.
Those increases were driven by “catch-up” provisions in Blackstone’s real estate funds, which mandate that the fund must hit preferred returns before the firm can start earning performance fees. Improving operating performance, projected cash flows and exit multiples led to an increase in the funds’ carrying values, which drove the increase in performance fees.
As of 30 June, unrealised value and cumulative realised proceeds in Blackstone’s real estate funds represented a 1.4x overall return multiple, the firm said in a statement.
Blackstone had $7.4 billion in dry powder for real estate investments as of 30 June. The firm invested $2.8 billion during the quarter, up from $643.8 million over the same period last year. The firm’s sixth real estate fund was about 87 percent invested at the end of the second quarter, and it expects to hold a first closing on its seventh real estate fund this quarter, James said.
Although a recent report by the Wall Street Journal pegged commitments to its latest fund at roughly $3 billion, Blackstone is not taking future commitments toward its $10 billion target for granted. “Until the LPs get significant realisations from money we invested in 2006, 2007, it's going to be tough for them to make big commitments because the stock market hasn't treated them kindly,” said founder and chief executive Steve Schwarzman. “When the overall size of an [institution] is down, they can't write the same size of tickets. So you're fighting that type of issue.”
Meanwhile, with regards to private equity, revenues soared to $399.4 million from $83.9 million last year. Revenues over a sixth-month period nearly doubled to $673 million from $360.7 million during the same period last year. Earnings rose to $273.2 million from $18.7 million for the same period last year.
Increases in performance and management fees and investment income drove the revenue numbers this quarter, the firm said in a statement. Overall, underlying assets in Blackstone’s private equity funds appreciated 9 percent in the second quarter, the firm said.
James said Blackstone is seeing some “very important trends with LPs moving toward strategic partnerships.” These are relationships where you have an LP who is not just in real estate, for example, but also in the firm’s credit funds, hedge funds and private equity funds. “This allows you to have more enduring relationships and to create new products,” he added.
Strong relationships lead to opportunities for co-investments, James said. Recently, the firm gathered around $1 billion in co-investment from its LPs for its $9.4 billion acquisition of the US assets of Centro Properties, an Australian retail property company, he noted.
As spectacular as real estate performed in the second quarter, Blackstone expects exits to pick up in the second half of the year, James said. Indeed, he noted that the firm – which has pursued a basic real estate strategy of buying distressed assets, fixing them and selling them into robust markets – has held certain trophy buildings that it expects to be able to sell in the next few months as the top real estate markets have been active.
Investing in the opportunistic side of real estate is advantageous in terms of exits because capital has gone to the core side of the asset class, providing ample opportunity to sell assets, according to senior managing director Joan Solotar.