Blackstone Inc. (BX) Earnings Call Transcript & Summary

All right. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. But taking a photograph and the use of recording device is not allowed, if you have any questions, please reach out to your Morgan Stanley sales representative. All right. With that out of the way, good afternoon. Thank you all for joining us at our Morgan Stanley Financials Conference. I'm Mike Cyprys, equity analysts covering brokers, asset managers and exchanges from Morgan Stanley Research. And it's my pleasure to welcome Michael Chae, the Chief Financial Officer of Blackstone with $991 billion of assets under management. Blackstone is the world's...

Who is counting, Mike?

I'm counting -- world's largest alternative asset manager. Michael, thanks for joining us.

Mike, great to be here.

So $991 billion, can we say $1 trillion yet?

The official number is $991 billion.

Okay. So you are counting.

All right. So let's start off big picture with the state of the global economy through the lens of Blackstone. So just curious, your house view on inflation rates, the outlook for the economy, where we're headed? Are we out of the woods yet? And if not, where do you see the greatest risks?

Sure. Thanks, Mike. And again, it's great to be here and be with everybody. Who said people don't come to work in New York on Mondays and Fridays, look at this. So we do -- I think with the benefit of the scale of our business and our portfolio companies have a pretty deep drove of sort of data and insights. We've got 230 or so portfolio companies which have a couple of hundred billion plus of revenues and 12,000-plus sort of individual real estate assets. So we have a lot of, I think, granular and sort of aggregate information. I think on the one hand, and these are external observations, I think, corroborated by the insights from our portfolio. On the one hand, we certainly see a couple of positives that we're hopeful about. One is, I think for sure, inflation is trending down increasingly in the rearview mirror, as my colleagues and I've said before, I think if you adjust for shelter, which is obviously a lagging component, it lagged on the way up, and we saw that early, and it's lagging on the way down. But if you adjust for that either exclude it or market to market, CPI is basically in the [ 3s ] and I think it will continue to head down although maybe the rate of deceleration will be less. Obviously, PCE is a little more stubborn because of that wage and services component. But we see the direction of travel being down. And then the other positive is economic resilience and specifically the resilience of the American consumer overall and corporates in America. We said publicly in our corporate private equity portfolio in the first quarter, we saw revenue growth of 13% or so. That was obviously partly driven by, I think, good sector selection, but I think it's -- for that and the resiliency of the margins in the portfolio, I think, was reflective of my overall point. A year ago, I frankly was more pessimistic about maybe what we would see in terms of margin pressure by the end of the year and early this year, and I was surprised on the upside in terms of stability. We're seeing input costs in our portfolio come down a lot. It's only a couple of percentage points in terms of year-over-year growth in the first quarter. Wage growth moderating in line with what you're seeing externally. So those are 2, I think, strong and hopeful positives. On the other hand, as we all know the cost of capital is going up, and I think you have sort of this kind of troika of forces at work. One is obviously on the short rate side, 500 basis points in 14 months. That's quite a wild ride. And we'll see what happens in the next month or 2 in terms of whether there's a pause in another move or not. But I think it's -- by now, we've been -- internally, we've been counseling each other to kind of underwrite higher for longer. And I think -- the market consensus, I think, is coming more in that direction. Second, quantitative tightening. So it's funny. Before, 2020, it feels like QT was like all we could talk about. And now I don't think we talk about it enough. And so -- and since that time, since we stopped talking about it, the Fed balance sheet has basically more than doubled. And now they're from like depending on how you count it for to just under $9 trillion. And over the last 2, 3 quarters, they've basically been on a steady kind of $75 billion a month runoff of the balance sheet, which is, I think if you annualize it like 10% run rate annual shrinkage of the Fed balance sheet. And that does show up in markets that we observe in the agency mortgage market the Fed used to be in the QE phase, the marginal buyer of agency mortgages and now they're a net seller. So -- and you see that in terms of the behavior of the market. So that's obviously force #2. And then force #3 is banking challenges, regional banking challenges and what that will mean over time for credit contraction, it will be in something. So all in all, you've got these different forces at work. I think it will take time. These things take time. But I think inevitably, it will deliver the Fed's intent effect of slowing the economy. But I would just end by saying, I think there's a reason to be cautiously optimistic that, that slowdown could be a more mild one, a more -- downturn will be more shallow. I think household and corporate balance sheets are in quite good shape. They're quite healthy. And while the stimulus still has a way to run off in aggregate, where it remains in terms of where it's concentrated is actually in sort of the wealthiest consumers. And so a lot of the effect of the stimulus sort of cliff from a savings standpoint, excess savings standpoint for consumers below that kind of high end has already been felt and I would say, weather to some degree. And I think the view that the downturn could be more mild is now actually being discounted in the market. The market has not been right about discounting a lot of macro scenarios in the last few years, but they might have this one right, but only time will tell.

Sounds more upbeat than I would have thought. What about CRE? Why don't we talk about that? That's top of my...

I'm going to stay upbeat.

Okay. That sounds like a preview of what's to come, right? So top of mind concern for folks, just given interest rates a bit higher. Headwinds with office and retail sectors where you guys don't have as much exposure, but just curious your views more broadly on the overall CRE space. We've had banking sector challenges. So how do you see this all shaking out and maybe just remind us of your exact exposures across your equity and also your credit portfolio is there?

Sure. So we've been saying this for a few months now externally. You can't paint CRE with one brush. I think when you see the acronym CRE in a press piece now, you can almost be sure that it's going to treat real estate, the industry, the market, this giant market is monolithic. When in fact, what we've been seeing is profound bifurcation in the underlying performance and trends of sectors within real estate. So I'd say simply put, the reality is, there is historic weakness in one sector, office in the U.S., traditional office, where we have very little exposure, and I'll talk more about that. And historic strength in multiple sectors where our portfolio is concentrated. And so I always say this, but sector selection always matters for an investment firm. At our scale, it's like a big part of the ball game. And someone who's now been at the firm nearly 3 decades. I would say that the work and the job of portfolio construction that our real estate team has done in the biggest real estate portfolio in the world over the last decade plus is arguably like the finest work our firm has done with like the highest stakes. So let's break it down. If you start with office, it's got significant secular challenges. Vacancy is over 20% in the U.S. obviously, scarcity debt capital, very hard to find capital and financing for office. I think the distress may play out slower motion than people may think from reading papers or otherwise. But it's a fundamentally challenged sector. It's less than 2%. U.S. traditional office is less than 2% of our global real estate portfolio. In our real estate debt area, it's sort of high single digits. But there, it is ahead of significant equity cushions. In most cases, we're talking 60% type loan to values. So that's our exposure in a sector that is troubled, but it's very narrow in our portfolio. Now if you compare that to our areas of focus in real estate, where as I said, you're seeing historic strength. And so whether it's logistics, data centers, student housing and the list actually goes on. You're seeing vacancy rates in the sort of 2% to 3% to 5% area, which is at or actually above sort of frictional sort of baseline vacancies. You're seeing rent increases like in the moment in many of those sectors in the double-digit area. So real momentum and robust fundamentals in those areas in logistics, and that's about those sectors, including housing with large lodging, which I'll talk about. That's over 80% of our portfolio, well over 80% of our global portfolio. So I'll just tick through quickly. Logistics, unprecedented strength. It's been our #1 investment theme in real estate and actually, therefore, as a firm for the past decade or so. Rents are growing at 10% to 20% year-over-year. Re-leasing spreads, which is when new leases come up, how much are you increasing the rents tomorrow versus today. That is running, depending on a part of the world at 25% to 75%. And so when you think about leases being 5, 6, 7 years in term and you're upping them by 50%, you can see why. And then built in inflators, that's why you see those sort of year-over-year, 10% to 20% aggregate rent increases and vacancies at less than 3% globally. So -- and we all know sort of the underlying factors from e-commerce and supply chain hardening and so forth driving that. Data centers, it's another very high conviction area in our -- at our firm and in real estate. Their vacancies are like 3% versus 9% back in 2019. So there's a real acceleration there. Rents there are growing in the 15% area, market rents. And there, of course, you have these profound tailwinds. There's been more data created in the last 3 years than sort of existed before that time. AI is basically creating an arms race among hyperscalers and one of the basically shortage of commodities will be around data. And so that is a mega investment theme from our standpoint. Housing. We own -- housing has -- even within housing has different subsectors, multifamily which is a big exposure for us. Student housing where we're the #1 owner of student housing in the U.S., #2 in the U.K., affordable housing. Those are sort of 3 key areas of housing. The area we own zero in is for-sale housing, which is where all the pain has been. And so for multifamily and sort of the rental apartment area, if you step back, you've got structural undersupply. That was basically our investment thesis post the GFC around housing in the U.S. And that is going to continue. And it be exacerbated long term by the drop in construction from the current sort of credit contraction. In the near term, because there were an increase in starts a year, 1.5 years ago, you will see, I think, temporary increase in supply later this year and that combined with some demand softness will cause some deceleration in that space. But if you think about the markets we're in the Sunbelt and sort of the overall positioning portfolio and the structural long-term tailwind. That's a very high conviction sector for us. And then if you take hotels, lodging in destination and leisure hotels, it is a very good time, double-digit RevPARs. We just announced the sale of an asset in San Antonio, which I can talk about more later. There are areas of weakness like in urban hotels you read the article today, which was depressing about hotels in San Francisco. But even within hotels, there's a tale of 2 cities and those sort of destination leisure-driven hotels as opposed to some traditional urban full-service hotels serving business customers. That former category, which is where our exposure really is flourishing. So I go through all this because I think it's worth drawing that out as opposed to like CRE is bad. And you can listen to my narrative or you can even look on your own screen and the stock market actually reflects this bifurcation. If you look at the bellwether stocks in office, down like 70% since 2020. In logistics, up 50%; in multifamily, in lodging up 30%. So it's like hiding in plain sight, what's the sort of profound bifurcation happening in real estate. And then I mentioned this before, but you're going to have -- it's coming -- pullback in supply. And at the end of the day, real estate is pretty simple. It's supply and demand. And so basically, what you're seeing if you're in the right sectors as we are in our portfolio, you're seeing real secular tailwinds long term from a demand standpoint and structural undersupply. And so we feel really good about it. And when you juxtapose that reality with sort of headlines around CRE, painting it all with one brush, that's where you get a gap between sort of short-term sentiment and long-term fundamentals, and that creates, as it has for 30 years for us, opportunity.

That's a pretty positive set up there. Maybe against that sort of backdrop, you guys have record levels of dry powder, I think nearly $200 billion. That's available for you guys to put to work. So where do you see the most interesting and compelling opportunities to put money to work right now? And what are you avoiding? Are you even avoiding CRE -- or excuse me, office shall I say?

There you go one...

Office...

You -- for any [indiscernible]

Yes.

So obviously, we've got a firm that is not just at scale, but it's broad and diversified. So we have a really sort of balanced attack no matter what part of the cycle you're in. Today, for sure, I think the headline is lending is the most compelling area. It's an extremely compelling opportunity today in private credit. It is, for sure, some of the best risk/reward we've ever seen and within our credit businesses that they've seen. And it's really, I'd say, across the board of direct origination strategies. So I'd kind of go through the big 3 in direct lending, double-digit returns for senior secured debt and typically 25% to 40% loan-to-value, which means 60% to 75% of asset value underneath you and equity. A good credit generally. Yes, this depends in part on M&A volumes, private equity deal volumes. Those are more muted now. But what I would say is -- but I think there are some signs, those are coming back. But -- and overall, it's good work wherever you can get it. On real estate debt and specifically in our bread's business, which is the core areas, opportunistic real estate debt. We are seeing mid-teens in some cases, high teens, effective returns and yields with substantial equity cushions sort of 60% -- 50%, 60% type loan to values. And so we're applying those strategies in our high conviction real estate areas. And then in asset-backed finance or ABF, which I think we may talk about more. There, you've got investment grade rated high single-digit yields, creating excess spreads of around 200 basis points or so compared to the comparable corporate bond. And we're doing it at scale with our insurance clients in partnership with other financial institutions. And so it's a very -- it's an area that's growing, that has secular tailwinds and is in the current environment, I think, very attractive. So that overall credit, private credit, lending money. That is a very rich area. On the equity side, if you go through our major strategies, in real estate, I would just say we're -- and I just articulate what some of those themes are, we're really leaning into our high conviction thematic areas. But now we're getting to apply those sort of themes in more dislocated situations. You're seeing not surprisingly more U.S., Europe, around the world, more situations where you have stress sellers or sellers who are feeling the pressure to do something as we always -- as we have been for 3 decades, for anything at scale, we are and given the information binge we have around how assets are performing in almost every market in the world. We can move quickly bilaterally for a seller in that position. And so we've done multiple logistics deals in the past 12 months or so. Europe, in particular, has been, I think, particularly fertile based on different situations, U.K. continent, we did one in Canada. We've done others in the U.S. So that's, I think, a good example of take our highest conviction theme. We're sticking with it because the -- the thesis is intact. But now we're having an ever, I think, more interesting context to apply them in. In Tac Opps, it's not quite the moment now, but over time, we think this kind of environment will be a sweet spot for Tac Opps for different reasons, including structured equity as one of their like core strategies. And over time, as you'll have good companies with good sponsors who do need to refinance and the debt capital available to refinance, their enterprise value may not quite be enough to fill out the full debt stack that they need to refinance. That's where structured equity can come in between and create really interesting risk-adjusted return over time. So I think that will -- that is sort of percolating. And then I'd say, finally, in corporate private equity, while again, volumes are somewhat lower. I think there is some momentum building potentially. And for us, -- and we've seen this movie before, the ability to execute large off-the-run bilateral deals, very often in public company situations whether it's public to private or a divestiture or carve out from the public company, sometimes in partnership with them where they'll retain the stake, like in the case of Emerson's Climate Technologies business as with Thomson Reuters back with Refinitiv a number of years ago. That's a very good environment for our private equity business. And I would just say overall to try to find good businesses that you can buy well. So areas to avoid, I would say, things -- value traps or that's what I would call them or things that are cheap for a reason. You do have, obviously, significant sort of whether it's technology-driven or otherwise secular dislocation to come. And so you have to be careful that something is cheap, not just because the market may be cyclically down but because the fundamentals are challenged. And then I'd also say something we're seeing increasingly when we look at businesses and credit on the equity side, which is -- which we all are dealing with companies that are or have been or are over-earning from COVID. And that is -- that pervades a lot of businesses sort of financial performance in the last year or 2. And so pulling that apart, I think, is it's sort of a watch out in our due diligence strategy. So -- but overall, I'd say from a deployment standpoint, we're patient. Our business model was built for times like this. This is the power of having a long-term locked up capital. It allows you to basically be patient around selling things at the right time. And obviously, [ last, ] you'd have capital at times when capital was short. And so that's why history says that, that sort of couple of years coming out of a cycle bottom, which may well be the next couple of years are the best times to invest that are where sort of the highest returns come.

Well, speaking of capital, why don't we turn to fundraising. Let's talk about how the recent market dynamics have impacted your fundraising efforts. You had previously set out $150 billion target for your next set of drawdown funds, which I think you've made pretty good headway again, so that's 70%, I think, completed at this point. Maybe you can correct me on that. Remind us what's left in terms of those flagships. Where are we in terms of timing, magnitude of those? And then beyond the flagships, what other strategies could we see Blackstone raising?

Sure. So we had our -- 2 or 3 weeks ago, most of our senior team was in Florida, where we had sort of a week full of LP annual general meetings with almost all of our equity -- private equity strategies, real estate and so forth. And so we sort of were immersed with interacting with our core clients. And I would say, only reinforce the fact that sort of zooming out that customers are happy with alternatives. It's very different from, I think, post 2008, frankly, the early years when I became CFO 2015 onward, where there were these sort of secular question marks around clients' belief and commitment in the asset class, we are in a very different place now. I think you have -- depending on the strategy, in some cases, where there is -- there may be with some subset of LPs, some constraints on allocations, it's really because I think for the most part, they feel they are overallocated relative to their targets. In some cases, for example, private equity among, for example, North American plans, in particular, it's actually because the numerator and denominator effect, those strategies have been among their best performing but the rest of their portfolio has been under more pressure from a value standpoint, so they find themselves more overallocated. So that's really, I think, where you see the, what I would call temporal sort of constraints on that. In a number of other areas, private credit, which obviously, I mentioned, everyone's talking about these days, infrastructure, energy transition, secondaries. There is also a lot of belief in those areas and I think more room to allocate and more, I think, tailwinds around allocation. So people talk about fundraising and a more challenging environment. And I think you can generally say that's right, but I also think it's sort of strategy specific. And it's all with the underlying that sort of the fundamentals being I think we've evolved to a place where the customer base on a global basis is really -- has a lot of confidence and belief in the asset class and long-term allocations, I think, will structurally increase in aggregate, not the opposite. You mentioned our $150 billion drawdown cycle, 70% of the way through that -- actually, although from a fee standpoint, those fees will sort of lag in terms of activating into our P&L. So that's to come, which is a positive.

Little bit less than the...

Correct. Yes. And there, we feel very good about our progress. As we said on our earnings call, we expect to be sort of substantially complete, not every last strategy and every last dollar, but substantially complete in the context of the $150 billion target in the first half of next year. Obviously, great success with the global real estate funds, $30 billion. The great success with the secondaries fund, $22 billion, both the biggest funds of their kind ever raised. Right now, we are in progress on our European real estate fund, BREP Europe, which we recently launched our real estate debt platform. Obviously, a great opportunity for that and our corporate private equity fund. And then we also have still to comment as part of that cycle, our Life Sciences successor vehicle, our GP stakes fund and that's sort of the balance of it. We also, though, I would say that [indiscernible] funds was sort of defined a couple of years ago. We obviously, to your question, continue to have other products, both in the -- sort of in the hopper and the pipeline that we're launching on, on one of note right now is an institutional direct lending strategy. So I'm stepping back, we have multiple engines of growth, institutional, retail, insurance, a wide array of platforms. And as I think we've shown over time, a very good innovation engine. So there will be more behind that. And so over time, we feel really good about the long-term momentum.

And you mentioned retail. Why don't we dive in a little bit there into the private wealth channel. Just curious what's your latest pulse on the private wealth channel with fundraising below the peak levels. What will it take for the inflows to reaccelerate? And what's the long-term vision at Blackstone for the private wealth channel?

Well, I think because, ultimately, people are focused on near-term flows. Flows over time follow performance. That tells us the true north and over 4 decades of doing this, and no different from the retail area, even though the retail area, I think especially with monthly flows react with a faster switch from a flow standpoint to, I think, to the sentiment, the overall market sentiment and the sentiment at the moment. And obviously, that's been, I think, reflected in the last half year or so. But back to performance being kind of where begins and ends. It's worth, I think, reiterating in BREIT, it's worth rating, we've really delivered for customers. we say it a lot, but it's true. In BREIT since inception, a 12% net return, we've outperformed the overall REIT index, the public REIT index by like 1,300 basis points over the last 12 months. There is, by the way, a lot of -- in our view, there is, I think, compelling embedded value. And so I mentioned, we announced in the last few days selling a hotel asset in San Antonio out of that portfolio. It's something we bought just before COVID, well over double our money, make a $200 million profit, it will come. The price is at a 7% premium to our most recent carrying value. And over 20% premium to what I would call the unaffected value from a few months ago before we were sort of entering into the sales discussion. So in terms of the positioning of the portfolio, the marks and the sort of embedded value, I think that's an example of the power behind that. BCRED, sort of our sister flagship product. 9% inception-to-date returns. Currently, a portfolio yield of over 10% back to the sort of direct lending story. And so performance, really good. The feedback from the overwhelming majority of our customers is really positive. We're happy and staying put. Now as I mentioned, flows are impacted by the market context, which influences sentiment. And so you've obviously seen an elevated level of redemptions for both products. On inflows, now -- I would note on the redemption side on BREIT, the most recent last 2, 3 months have been at a materially lower level than the peak levels of redemption requests back at the beginning of the year. And then on the inflow side, I would highlight that BCRED in the second quarter had inflows of $1.8 billion, which is up 60% over the prior quarter. So we talk about flows being influenced by sentiment, the broader sentiment around specific strategies. What you're seeing in private credit, which we've been talking about is this, I think, increasingly positive sentiment, not just among institutional investors or insurance investors but also among retail investors, at least that's, I think, what the current performance reflects. So look, I think stepping back, private wealth, in the last 2 years, we basically doubled the business to almost $0.25 trillion in assets, $241 billion or so. It's been, I think, an extraordinary success in the last 5 or 6 years. And it is still very early days in the growth story from a secular standpoint, individual investors are -- it's a low single-digit sort of percentage of penetration relative to sort of global wealthy people. And so -- and their savings. And so that is a significant and positive long-term driver of our growth as a firm and we think we're the best positioned firm in the world to capture that opportunity.

Great. We have about 4 minutes left. I want to touch upon private credit, and then I have a sort of big picture vision question for you. So just on the private credit side, where do you see the biggest opportunities today for Blackstone from portfolio sales to originating new loan? How do you sort of scale this. I know you had mentioned on the last earnings call talking about a golden moment for private credit. Jon Gray had mentioned that as well. Maybe you can just help flesh out how you see the opportunity set and how you see the role of private capital helping solve some of the banking sector challenges?

So -- private credit, there's -- it's, I think, an amazing confluence of 3 megatrends behind like one mega trend, which is the retrenchment of banks, bank retrenchment, this fundamental, I think, evolution around what I would call fixed income replacement, traditional fixed income replacement with alternative fixed income. And also the transformation of the insurance industry's asset management model, and there's some overlap between among those 3, but those are 3 really powerful mega trends. And then for private credit, we're delivering that credit product in long-term committed fund structures that are actually better and safer vehicles to do that in than the traditional bank balance sheet model. And I think the events the last quarter or 2 are showing that. Ours is a storage model, theirs is a moving model. Theirs are dependent on daily funding models based on deposits. Ours are generally based on long-term locked up capital. So -- and the Fed -- and their sort of semiannual, I think the FSOC report on systemic risk, basically, you can see it, it came out in May and talking about private credit, basically, I think, validated that. So -- and it's early days, as I mentioned in these other areas, it's very low penetration in terms of private credit relative to a massive TAM. It's like $1.5 trillion versus $85 trillion-plus global market. And it's all about direct origination. And so for us, we leverage a credit business that across the firm is $350 billion of AUM. It's our credit and insurance segment and then also our real estate credit AUM, which is within our real estate segment, but it adds up to $350 billion, 800-plus people in our organization in those businesses. So it's a real platform and machine we've built and the future is very bright. On partnership opportunities, that's really I think you're referring to Mike, most focused on asset-backed finance, where whether it's in consumer finance or infrastructure, credit, fund finance, I think what you have, what sort of the regional banking dynamics that they -- [ their sort of raise on deter ] historically has been having that local customer relationship and the ability to service them. The challenge now is what used to be a localized funding model around local deposit taking is now more in question. So this is still their core competence. We can help them on the fund side, on the funding side because those are assets that we have the right capital to invest in and to hold. And so I think in terms of partnership opportunities, that's what you'll be seeing over time.

All right. Final question, and 60 seconds are left last as we wrap up here. Blackstone closing in on just shy of $1 trillion of AUM. Where do you see the firm over the next 3 to 5 years? What are some of the biggest opportunities? And why is now a good time to buy shares in Blackstone?

Well, I think we try to think in the very long term. And our goal is not just to be a really good asset managers to be a great company. That's why we appreciate when Morgan Stanley ranks us as one of the top 30 franchises regardless of industry. And we're -- and Steve's institutionalists. We -- he and we are committed to building a long-term enduring business and to rewarding shareholders over the long term. I've said it in a bunch of different ways, but they're -- and hopefully, you are convinced, but there are profound secular tailwinds behind our business in multiple areas. And we think we're the best positioned firm to capture that based on brand and product development abilities, our culture, the support of our clients and so forth. And then do all that with the financial model that has the third best margins -- third highest margins after the 2 credit card companies and the 100 biggest companies in the U.S. has a balance sheet light, asset-light model and where -- and it's a cash flow machine, and we return 100% of our earnings, basically in dividends and buybacks, all while undergoing an earnings transformation, which to your question about the next 3 to 5 years, we believe we'll continue around increasing earnings quality and earnings scale. And so -- all of that and sort of wrapped up in -- from a kind of a stock market standpoint, where we've been outgrowing the S&P by double basically. We have a dividend yield that's 3x the market, but we trade at about a market multiple. And that's, I think, with a significant part of our earnings coming from realizations in hibernation. And so when you think about the vision and I think sort of the compelling story behind our company, take those fundamentals I went through and then that sort of positioning as a stock, and we feel -- I hope you all feel good about the future.

Great. We'll have to leave it there. Thank you very much, Michael.