Blackstone Cites Tough Market for Profit Shortfall

Private equity and real estate company Blackstone Group posted lower-than-expected quarterly results Monday, citing tough market conditions and a write-down of bond insurer FGIC, and said it would probably be 2009 before conditions improve.

Blackstone Group
Blackstone Group

Under a measure known as economic net income (ENI), Blackstone earned a fourth-quarter profit of $128.2 million, or 8 cents a share, compared with a pro forma adjusted figure of $894.9 million, or 72 cents, a year ago. Analysts expected it to report 16 cents a share, according to Reuters Estimates.

"Last quarter, I described the environment as deeper, darker and scarier than we anticipated, and I still think that was an accurate assessment," Blackstone's Chief Operating Officer Hamilton James said on a conference call. "Credit market problems persist and if anything have got worse," he said. "It's pretty clear that the basic economy is shrinking.

He saw those conditions persisting for most of 2008, possibly getting worse in the short term, and said it would probably be 2009 before there is much improvement.

He said that would lead to some "excellent investment opportunities" but would also cause Blackstone to hold back on selling investments.

The company cited decreases in the value of Blackstone's portfolio investment in Financial Guaranty Insurance Company, which was hit by turmoil in the credit markets, and lower net appreciation of portfolio investments in other sectors as compared with the prior year for the decrease in ENI.

ENI is net income excluding income taxes, noncash charges related to vesting of equity-based compensation and amortization of intangible assets. Blackstone prefers to focus on ENI because of the huge payouts associated with its more than $4 billion initial public offering in June.

On a generally accepted accounting principles basis, Blackstone posted a net loss of $170 million. That compares with net income of $1.18 billion a year earlier.

Blackstone said it would likely report GAAP losses for the next five years because of non-cash compensation charges resulting from the IPO, but said these would never have an impact on cash earnings.

Blackstone, behind some of the biggest leveraged buyouts of the past years such as the buyout of Equity Office Properties Trust, changed the private equity landscape by going public in June. But since the IPO, Blackstone's shares have suffered, as a credit crunch has brought the large leveraged buyout market -- a large source of business for Blackstone -- to a halt.

Blackstone's shares have declined 53 percent from their $31 initial public offering price in June and 33 percent so far this year. On Monday they were down 3 percent at $14.11.

James said while credit was "almost nonexistent for large leveraged transactions", Blackstone was still finding investment opportunities and that it was making $4 billion to $5 billion of new equity investments a year.

It is looking at deals such as minority investments in companies that need capital to grow, strategic acquisitions for some of its portfolio companies and investments in companies in Asia and other emerging markets.

Blackstone's assets under management rose 47 percent on the previous year to $102.43 billion, of which its real estate assets doubled to $26 billion.

James said on the conference call that the company would have to wait for better times to sell real estate assets.

Blackstone said it would pay a dividend of 30 cents per share and said it still planned to pay out $1.20 to shareholders per year through 2009.