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Economics

The Blackstone Group Reports Fourth Quarter and Full Year 2008 Results

2009 MAR 20 - (VerticalNews.com) -- The Blackstone Group L.P. (NYSE: BX) reported its 2008 results.

For the full year 2008, Total Reportable Segment Revenues were a negative $(442.1) million as compared to Total Pro Forma Adjusted Reportable Segment Revenues of $3.12?billion in 2007. Lower fair values of portfolio investments across the Corporate Private Equity, Real Estate and Marketable Alternative Asset Management segments contributed to the negative revenues, partially offset by strong results in our Financial Advisory businesses and strong growth in management fees from fee paying assets under management. For the fourth quarter 2008, Total Reportable Segment Revenues were negative $(621.4)?million as compared to negative $(229.2) million for the third quarter 2008 and $366.9?million for the fourth quarter 2007.

Economic Net Income was a loss of $(1.33) billion for the full year 2008 as compared to Pro Forma Adjusted Economic Net Income of $2.12 billion for the full year 2007. Adjusted Cash Flow from Operations for the full year 2008 was $128.8 million as compared to Pro Forma Adjusted Cash Flow from Operations of $1.52 billion for the full year 2007.

Net Fee Related Earnings from Operations for the full year 2008 was $427.7 million as compared to Pro Forma Adjusted Net Fee Related Earnings from Operations of $386.7 million for the full year 2007, an increase of $41.0 million or 11%. Net Fee Related Earnings from Operations for the fourth quarter 2008 were $117.9 million as compared to $151.8 million in the third quarter 2008 and $139.8 million in the fourth quarter 2007.

Economic Net Income was a loss of $(827.1)?million for the fourth quarter 2008 as compared to a loss of $(509.3)?million in the third quarter 2008 and $128.2?million for the fourth quarter 2007. Adjusted Cash Flow from Operations in the fourth quarter 2008 was $(19.3) million as compared to Adjusted Cash Flow from Operations of $244.5?million for the fourth quarter 2007.

Blackstone remains well positioned from a capital and liquidity perspective, with $503.7 million in available cash as of December 31, 2008 and $767.6 million in cash as of January 31, 2009 after paying off the entire $250 million balance on its revolving credit facility.

GAAP results for the full year 2008 included negative Revenues of $(349.4)?million, Other Loss of $(872.3) million and Loss Before Benefit for Taxes of $(1.20)?billion. For the full year 2007, Revenues were $3.05?billion, Other Income was $5.42 billion and Income Before Provision for Taxes totaled $1.65?billion. On a GAAP basis, Net Cash Flow Provided by Operating Activities was $2.16?billion for the full year 2008 as compared to Net Cash Flow Used in Operating Activities of $(850.3)?million for the prior year.

GAAP results for the fourth quarter 2008 included negative Revenues of $(611.3)?million, Other Loss of $(295.6) million and Loss Before Benefit for Taxes of $(406.3)?million. For the fourth quarter 2007, Revenues were $345.0?million, Other Income was $16.4 million and Loss Before Provision for Taxes totaled $(161.4)?million. On a GAAP basis, Net Cash Flow Provided by Operating Activities was $1.46?billion for the fourth quarter 2008 as compared to $243.8?million for the fourth quarter 2007.

World markets and economies deteriorated in the fourth quarter 2008, bringing the full year market results to the worst experienced since the Great Depression. A combination of de-levering by institutional investors and their need for liquidity further stressed already weak markets across many asset classes. Equity markets across North America, Europe and Asia declined in a range of 40-60% during 2008, with a broad-based sell off across not only all regions but also all sectors. Commodity prices, which increased to record highs in the first half of 2008, dropped precipitously in the second half as demand declines caused excess supply. Credit indices experienced similar trends, declining 25-30% to levels not experienced since the indices were initiated. Commercial real estate fundamentals were adversely impacted as demand weakened in the hospitality sector and office vacancy rates moved higher. Securitization markets were very limited in 2008, heavily constraining borrowing ability for new transactions.

Stephen A. Schwarzman, Chairman and Chief Executive Officer said: "2008 was one of the most challenging operating environments in the last several decades. While not immune to declining markets and weak global economies, Blackstone operates with a strong balance sheet, prudent and patient investment practices and a deep bench of talented portfolio operations executives to work with our portfolio companies. We ended the year with substantial dry powder across our real estate, private equity and credit businesses and think we are well poised to make highly attractive investments in the years ahead. Severe market dislocations have meaningfully altered the competitive landscape and our competitive position remains very strong in all our businesses."

The table below details Blackstone's Economic Net Income and Adjusted Cash Flow from Operations for the fourth quarter 2008 and 2007, as well as Blackstone's Economic Net Income, Net Fee Related Earnings from Operations and Adjusted Cash Flow from Operations for the full year 2008 as compared to Pro Forma Adjusted Economic Net Income, Pro Forma Net Fee Related Earnings from Operations and Pro Forma Adjusted Cash Flow from Operations for the full year 2007. Economic Net Income, Total Reportable Segments includes unrealized gains/losses and the direct compensation impact related to those gains/losses but excludes transaction-related charges.

? Three Months Ended December 31, ? Year Ended December 31, 2008 ? 2007 2008 ? 2007 Pro Forma Adjusted (Dollars in Thousands, Except per Unit Amounts) Economic Net Income, Total

Reportable Segments (a)

(827,110

)

128,166

(1,330,018

)

2,120,714

Provision (Benefit) for Income

Taxes (b)

(63,278

)

40,117

(162,769

)

305,206

Economic Net Income After Taxes

(763,832

)

88,049

(1,167,249

)

1,815,508

Economic Net Income After

Taxes per Adjusted Unit

(0.68

)

0.08

(1.03

)

1.62

Net Fee Related Earnings from Operations

117,854

139,812

427,668

386,697

Adjusted Cash Flow from Operations (a)

(19,321

)

244,531

128,801

1,516,604

_________________________

(a) Reconciliations of Pro Forma Adjusted Economic Net Income, Total Reportable Segments to Economic Net Income, Total Reportable Segments and of Adjusted Cash Flow from Operations to Net Cash Provided by (Used in) Operating Activities are presented in Exhibits 4 and 5, respectively, to this release.

(b) Represents the implied provision (benefit) for income taxes calculated using the same methodology applied in calculating the tax provision (benefit) for The Blackstone Group L.P. SEGMENT REVIEW Corporate Private Equity Fourth Quarter and Full Year Corporate Private Equity had negative fourth quarter 2008 revenues of $(193.6)?million, as compared with negative revenues of $(68.3)?million for the third quarter 2008 and $(15.4)?million for the fourth quarter 2007, driven by a net depreciation in the fair value of the portfolio investments. The primary catalyst for the depreciation was lower operating projections for some portfolio companies, reduced share prices of publicly held investments consistent with overall declines in global equity markets and the depreciation of foreign currencies against the dollar.

Net Fee Related Earnings from Operations were $31.6 million for the fourth quarter 2008, a decrease of $12.6?million as compared to the fourth quarter 2007. The primary driver of the reduction was a decrease in transaction fees.

Base Management Fees were essentially flat as compared to both the third quarter 2008 and fourth quarter 2007. Transaction and Other Fees decreased slightly compared to the third quarter 2008 and decreased $39.3?million from the fourth quarter 2007, which included a substantial fee associated with the acquisition of Hilton Hotels.

Compensation and Benefits expense declined to $22.5 million from $34.2?million in the third quarter 2008 and increased from $(1.8) million in the fourth quarter 2007. Other Operating Expenses were $23.1?million, down from $24.0?million in the third quarter 2008 and $23.6 million in the fourth quarter 2007.

Weighted-Average Fee-Earning Assets Under Management rose to $25.48?billion from $24.90?billion in the fourth quarter 2007.

Limited Partner Capital Deployed totaled $1.13?billion for the quarter, a decrease from $2.33?billion deployed in the fourth quarter 2007.

Corporate Private Equity had negative full year revenues of $(286.2)?million, as compared with positive revenues of $821.3?million for the prior year. The principal driver of the change year-over-year was a net depreciation in the fair value of the portfolio investments in the corporate private equity funds. This depreciation in fair value is reflected in lower Performance Fees and Allocations and Investment Income (Loss) and Other. Real Estate Fourth Quarter and Full Year Real Estate had negative revenues of $(477.8)?million for the fourth quarter 2008, as compared with negative revenues of $(273.7)?million for the third quarter 2008 and $113.5?million for the fourth quarter 2007. The principal driver of the decline was a net depreciation in the fair value of certain investments in the office and hospitality portfolios, which reflects both increases in capitalization rates and revised operating projections. This decrease in fair value is reflected in Performance Fees and Allocations and Investment Income (Loss) and Other.

Net Fee Related Earnings from Operations were $43.8?million for the fourth quarter 2008, a decrease of $4.6 million as compared to the fourth quarter 2007. The principle driver of the reduction was a decrease in transaction fees, partially offset by a decrease in compensation expenses.

Base Management Fees were $80.8?million, a slight increase from $80.4?million for the third quarter 2008 and a 25% increase over the fourth quarter 2007. This change reflects higher Fee-Earning Assets Under Management.

Transaction and Other Fees declined $94.3?million from the fourth quarter 2007, which included a substantial fee associated with the acquisition of Hilton Hotels. Transaction and Other Fees in the fourth quarter 2008 increased $3.3 million from the third quarter 2008.

Compensation and Benefits was a negative $(12.1) million, reflecting the reversal of prior period carried interest allocations to certain personnel, down from $21.1?million in the third quarter 2008 and $65.4?million for the fourth quarter 2007. Other Operating Expenses were $12.2?million, down $2.6?million and $15.3?million from both the third quarter 2008 and fourth quarter 2007, respectively.

Weighted-Average Fee-Earning Assets Under Management increased 24% or $4.41?billion from the fourth quarter 2007 to $22.64?billion.

Limited Partner Capital Deployed totaled $258.6?million for the fourth quarter 2008, a decrease from the $4.04?billion deployed in the fourth quarter 2007.

Real Estate had negative revenues of $(718.0)?million, as compared with positive revenues of $1.30?billion for the full year 2007. The principal driver of the decline year-over-year was a net depreciation in the fair value of the portfolio holdings in the real estate funds. This depreciation in fair value is reflected in Performance Fees and Allocations and Investment Income (Loss) and Other. Marketable Alternative Asset Management (MAAM) Fourth Quarter and Full Year MAAM had negative revenues of $(55.7)?million, compared with negative revenues of $(48.0)?million for the third quarter 2008 and $178.2?million for the fourth quarter 2007.

Base Management Fees were $114.3 million, up 23%, as compared to the fourth quarter 2007, and down 13% as compared to the third quarter 2008.

Net Fee Related Earnings from Operations were $21.7 million for the fourth quarter 2008, a decrease of $1.4 million as compared to the fourth quarter 2007. The main driver of the change was an increase in compensation expenses, principally offset by an increase in management fees.

Base Management Fees for the full year 2008 were $476.8 million, up 51%, as compared to 2007.

Net Fee Related Earnings from Operations for the full year 2008 were $130.9 million, up 162%, as compared to 2007.

Compensation and Benefits was $40.3 million, down from $60.3?million in the third quarter 2008 and from $45.7 million for the fourth quarter 2007.

Weighted-Average Fee-Earning Assets Under Management for the fourth quarter 2008 totaled $47.47?billion compared with $38.49?billion for the prior year, a 23% increase.

Limited Partner Capital Deployed totaled $333.8 million for the fourth quarter 2008, up from $82.2?million in the fourth quarter 2007, primarily from activity in certain of Blackstone's newly launched credit oriented funds.

MAAM had revenues of $151.5?million for the full year 2008, after $329.5?million of investment losses, compared with revenues of $628.0?million for the full year 2007. Financial Advisory Fourth Quarter and Full Year Revenues were $105.8?million for the fourth quarter 2008, up 17% compared to the fourth quarter 2007 and down 34% from the third quarter 2008. An increase in revenues in Blackstone's corporate and mergers and acquisitions advisory service business was the primary driver for the increase from the fourth quarter 2007.

Net Fee Related Earnings from Operations were $20.8?million for the fourth quarter 2008, a decrease of $3.4?million as compared to the fourth quarter 2007. The primary catalyst for the reduction was higher compensation primarily related to business expansion and other operating expenses, partially offset by higher advisory fees.

Compensation and Benefits was $56.9?million, down from $82.3?million in the third quarter 2008 and up from $44.4?million for the fourth quarter 2007.

Revenues were $410.6?million for the full year 2008, representing an increase of 12% compared to $367.7?million in the prior year. The increase was driven by revenues in Blackstone's corporate and mergers and acquisitions advisory service and restructuring and reorganization advisory services businesses. An increase in client mandates accounted for the increase in corporate and mergers and acquisitions advisory revenues, while the continued credit market turmoil and low levels of available liquidity led to increased bankruptcies, debt defaults and debt restructurings and drove the increase in revenues in the restructuring and reorganization advisory services business. CAPITAL AND LIQUIDITY For Economic Net Income purposes, the weighted-average fully diluted unit count (the "Adjusted Units") for the fourth quarter and full year 2008 was 1,129.2?million units and 1,129.0?million units, respectively. The Adjusted Unit count for the fourth quarter 2007 was 1,127.2 million units and for the period June?19, 2007 through December 31, 2007 was 1,121.2?million units.

The total number of units used in calculating cash distributions was 1,100.2?million units for the full year 2008 and 1,089.7?million units for the period June 19, 2007 through December 31, 2007.

As of December 31, 2008, Blackstone had $503.7 million in cash, which was in excess of its total indebtedness. In January 2009, Blackstone paid down its entire corporate revolver balance of $250.0?million, further strengthening its liquidity positions. DISTRIBUTION Blackstone has paid total distributions to public common unitholders to date in respect of 2008 of $0.90 per unit, but will not be making any distribution to common unitholders for the fourth quarter 2008 because the distribution made to date in respect of 2008 considerably exceeds Adjusted Cash Flow from Operations for the full year. No distributions were paid to Blackstone personnel and others with respect to their Blackstone Holdings partnership units.

Public common unitholders will continue to receive a priority distribution ahead of Blackstone personnel and others through 2009, but the amount of those distributions in respect of 2009 will be based on the amount of Adjusted Cash Flow from Operations in 2009 available for distributions and could again fall below $1.20.

Neither Mr. Schwarzman nor Mr. Peterson received any cash bonuses in 2008 and cash compensation for the other named executive officers was down in excess of 70% in aggregate for 2008 compared to 2007.

Keywords: Professional Services, Banking, Finance, China, Acquisitions, Asia, Credit Market Turmoil, Economics, Economies, Equity Market, Finance, Financial, Income Tax, Investing, Investment, Mergers, Mutual Funds, Private Equity, Private Equity Funds, Real Estate, The Blackstone Group L.P.