PLDGP - Blackstone: The Story The Media Keeps Quiet

Summary

• Blackstone Inc. was hit with bad press in recent months.
• But its business keeps performing surprisingly well.
• We give Blackstone Inc. stock a Buy rating and explain why we are bullish.

In recent months, Blackstone Inc. ( BX ) received a lot of negative press, and it hurt its market sentiment.

The hot story that all media outlets were writing about was Blackstone's decision to limit the redemptions of its public, non-listed real estate investment trust ("REIT") called BREIT.

Here are just a few examples of negative headlines that I found on Google:

Negative stories get more attention, and the media really loved this one.

Blackstone was portrayed as the "evil company" that was refusing to let the smaller investors exit their real estate fund.

They made it seem as if Blackstone was facing some severe challenges, and it compelled many shareholders to sell their Blackstone Inc. stock and even more investors to send redemption requests for the private vehicles.

But here's the reality that the media doesn't care to talk about.

Blackstone just reported its full year results , and they are actually doing very well. Here is a tweet that I posted shortly after the results were released:

In the last quarter alone, they raised another $43 billion, bringing the total to $226 billion for the year of 2022. That's huge!

They sold some assets so their total assets under management ("AUM") didn't grow by this much, but Blackstone Inc. is now just shy from $1 trillion of assets, up 11% over the past year.

Is that the performance of a company that's struggling?

Clearly, it isn't. Blackstone Inc. management even took a little dig at the media on their Q4 conference call (emphasis added):

"In 2022, our sales in the private wealth channel totaled a remarkable $48 billion, not exactly what you're hearing in the media...

At Blackstone, we are focused on the long term, not next month. And rather than simply counting balls and strikes , we're working to win the World Series."

And the story gets even better.

Today, they still have $187 billion of cash that's waiting to be invested. That represents around 20% of its total assets under management and this capital is not yet earning any fees. Therefore, they have a " bank of growth " already secured and as new opportunities emerge, they will now gradually put this cash to work, growing their fee income.

Even in 2022, they grew their fee income (excl. performance fees) by 9%, which is quite remarkable when you consider the performance of most traditional asset managers like BlackRock ( BLK ), which saw their fee income drop significantly over the past year.

What about its REIT? Should we be worried?

Well, redemptions remain high and this could remain a headwind for quite some time. We discussed why recently in a YouTube video.

In short, the publicly listed REIT market ( VNQ ) offers much better opportunities today, and as long as this remains the case, we can expect investors to want to pull out of BREIT to invest in other REITs instead.

Publicly listed REITs like Prologis ( PLD ), AvalonBay ( AVB ), and Mid-America ( MAA ) are priced at 20-30% discounts to their net asset value, and so why would you pay full price to invest in BREIT, which is an illiquid, non-listed REIT?

But even here, there is some good news.

The management gave a strong guidance for BREIT. They noted that it is largely invested in industrial and residential properties, which keep performing very well.

"Logistics is the largest exposure across Blackstone, comprising approximately 40% of the entire real estate portfolio. Fundamentals globally remain extraordinarily strong. In recent months, re-leasing spreads, the increase in rents as expiring leases roll over, were 65% in our US holdings, accelerating to a record 75% in December, approximately 50% in the UK and 30% in Europe overall; 20% in Australia and 100% in Canada." [emphasis added]

Moreover, their REIT just secured a large institutional investor that will invest $4.5 billion into it. This should ease some of the concerns that were created by the recent negative stories:

"What we've created for individual investors is so good that one of the most sophisticated institutions in the world contacted us and indicated they wanted to invest as well. Earlier this month, the University of California system invested $4 billion in BREIT and is investing an additional $500 million beyond that, which we announced yesterday with an effective six-year hold. This investment builds upon a 15-year relationship between our firms.

I had the pleasure of meeting with UC's Chief Investment Officer over the holiday period, and he said they consider BREIT has one of the best positioned real estate portfolios in the United States. This investment provides BREIT with substantial additional firepower and flexibility , and represents a powerful affirmation of the portfolio and its performance. It also illustrates the significant advantages of buying products from Blackstone." [emphasis added]

This institutional investor is getting preferential terms that also suggest that Blackstone is bullish on the future performance of BREIT. Essentially, Blackstone put $1 billion of its own BREIT holdings into a joint venture with the investor, and unless they earn a minimum 11.25% annual return, they will subsidy the returns of the investor with this $1 billion. So this tells you loudly that they are confident that they will reach at least 11.25% annual returns for BREIT investors going forward. The management noted that:

"That affirmation of the quality of the portfolio and the valuation of the portfolio was very important for outside investors and for our individual private wealth customers and their financial advisers." [emphasis added]

So this should help them ease concerns and raise more capital going forward, reducing the impact of this headwind.

Is Blackstone a Buy?

I believe that it is.

The company is historically cheap due to the stock market correction of 2022 and the recent negative headlines that only added more fuel to the fire.

But Blackstone's business is actually performing really well, all things considered, and the management is taking advantage of this market dip by buying back shares.

In 2022, Blackstone Inc. bought back 3.9 million shares and they have another $1 billion left on their share back authorization.

They also have an A+ rated balance sheet and a huge amount of cash (nearly $200 billion!) to act on new opportunities and grow their future fee income.

Insiders of the company also own 36% of the company and they have a fantastic track record of long-term value creation. Here is its historic performance relative to the S&P 500 ETF ( SPY ):

Will their growth slow down in the near term?

It will, but this is not a sprint, it is a marathon, and the long-term growth opportunity for alternative investments remains very substantial. Here's what the management noted on the recent call:

"I think there is still enormous opportunity in the alternative space. When you look at it aggregately, it's roughly $10 trillion industry . We're about 10% of the industry. That compares to stocks and bonds over $200 trillion. If you throw in commercial real estate, residential real estate, other things, you can get up to $300 trillion. So I think there's a lot of room to grow." [emphasis added]

They added that...

"I can tell you, this is a group that is extremely bullish on our firm's prospects... For shareholders, our firm represents exceptional value. We've grown distributable earnings 20% annually for the past 10 years, more than double the rate of the market. We've done that while paying out nearly 100% of our earnings through dividends and buybacks. Moreover, the share count has barely grown over that decade, and we continue to operate with minimal net debt and no insurance liabilities. It is an extraordinary business model , and our brand and relationships with customers have never been stronger." [emphasis added]

How would you NOT be bullish on such a business?

• It enjoys a secure growth tailwind.
• They have an already secured bank of growth.
• It has a history of rapid growth and value creation.
• It has some temporary headwinds that depress its valuation.
• It has an A+ rated balance sheet.
• It has a buyback authorization and it pays high dividends.
• The management is well-aligned and bullish.

What else do you really want?

So I am bullish and give Blackstone Inc. a Buy rating. The only reason why I don't own a position is that I am even more bullish on a few of its close peers.

My Top Picks are Patria ( PAX ), which we have previously described as the ( PAX ) of Latin America, and among global players, I slightly prefer KKR ( KKR ) at this time. I haven't covered KKR on the public site yet, but perhaps I will in the future.

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