Blackstone Third-Quarter Profit Rises 3% on Real Estate

Blackstone Group LP, the world’s biggest manager of alternative assets such as private equity and real estate, said third-quarter profit rose 3 percent as gains in property holdings offset a decline in its buyout unit.

Economic net income, a measure of earnings excluding some costs tied to the firm’s 2007 initial public offering, increased to $640.2 million, or 56 cents a share, from $621.8 million, or 55 cents, a year earlier, New York-based Blackstone said today in a statement. Adjusted earnings matched the 56-cent estimate of 15 analysts in a Bloomberg survey.

Blackstone, under Chief Executive Officer Stephen Schwarzman and President Tony James, led a push by private-equity firms to expand their businesses beyond traditional leveraged buyouts, which can produce volatile earnings. The company’s biggest diversification move has been the growth of its real estate investments, which generated 42 percent more revenue compared with a year earlier. Revenue from Blackstone’s buyout portfolio declined 54 percent in the same period as the value of some publicly traded holdings fell.

“Public portfolio weakness held private-equity performance fees in check,” while strength in real estate drove earnings at Blackstone, Daniel Fannon, an analyst with Jefferies Group LLC in San Francisco, wrote today in a note to clients.

Blackstone rose 0.9 percent to $27.25 at the close of trading in New York, and has surged 75 percent so far this year. The company sold shares to the public at $31 apiece in 2007.

SeaWorld, Cheniere

Total performance fees at Blackstone declined 9.6 percent to $545 million in the quarter, as the carrying value of holdings gained at a slower pace than a year earlier. Blackstone said its buyout portfolio appreciated 4.2 percent, compared with 7.1 percent in the third quarter last year, with holdings such as SeaWorld Entertainment Inc. and Cheniere Energy Partners LP falling more than 11 percent each between June 30 and Sept. 30. Blackstone’s real estate assets gained 5.8 percent in the third quarter.

Total revenue, which includes management fees, performance fees and investment gains, was $1.23 billion. The result missed analysts’ average estimate of $1.26 billion.

Blackstone’s economic net income differs from U.S. generally accepted accounting principles. Under those standards, known as GAAP, Blackstone had net income of $171.2 million, or 29 cents a share, compared with $128.8 million, or 24 cents, a year ago.

Pactera Deal

Blackstone said assets under management rose 8.1 percent from June 30 to an industry record of $248.1 billion as of Sept. 30. The firm has $41.4 billion in unspent committed capital, known as dry powder, according to the statement.

Blackstone today agreed to buy information-technology outsourcing company Pactera Technology International Ltd. for $7.30 a share, a 39 percent premium to the price on May 17 before the Chinese company received Blackstone’s initial proposal of $7.50 a share, according to a statement. The price, which Blackstone lowered after Pactera cut its earnings forecast, implies a $645 million value for Dalian-based Pactera, according to data compiled by Bloomberg.

Worldwide, the value of private-equity deals announced in the third quarter fell 33 percent to $69 billion from a year ago, according to data compiled by Bloomberg. The number of deals fell 6.6 percent to 1,393, the data show.

Real Estate

Assets in Blackstone’s real estate business, led by Jonathan Gray, rose to $69 billion from $64 billion at the end of the second quarter. Gray’s group has raised about $2 billion for its fourth European property fund, which is targeting 5 billion euros ($6.8 billion), and it’s seeking $4 billion for its initial pool dedicated to real estate purchases in Asia.

“Our new investment activity in real estate continues to boom, exceeding dispositions by a wide margin and belying speculation that we are somehow calling a market top,” James said today on a conference call with reporters. The property group sold $4.6 billion of assets in the first nine months of the year while putting $8.4 billion of equity into new deals, James said.

The firm last month filed to take Hilton Worldwide Inc. public in an offering that could value the world’s largest hotel chain at about $30 billion. Blackstone bought McLean, Virginia-based Hilton in 2007 for $26 billion. It has put about $6 billion of equity into the investment, the most money from its funds in a single deal in the firm’s 28-year history.

Shareholder Dividend

“We believe we are just entering Blackstone’s real estate monetization cycle and expect efforts to gain steam,” Credit Suisse Group AG analysts led by Howard Chen wrote in a note to clients today.

Blackstone said it will pay stockholders a dividend of 23 cents a share on Nov. 4.

Private-equity firms pool money from investors including pension plans and endowments with a mandate to buy companies within about five to six years, overhaul then sell them, and return the funds with a profit after about 10 years. The firms, which use debt to finance the deals and amplify returns, typically charge an annual management fee equal to 1.5 percent to 2 percent of committed funds and keep 20 percent of profit from investments as a carried interest.

Blackstone is chasing deals in Europe, where buyers can find more distressed assets such as real estate threatened with foreclosure and property developers burdened with debt. The firm’s credit unit, called GSO, finished raising $5 billion during the quarter to provide financing to companies in distress.

Blackstone is seen as a bellwether for the buyout industry given its size and reach across markets. KKR & Co., the New York-based firm run by cousins Henry Kravis and George Roberts, is set to report results on Oct. 24. Carlyle Group LP, the Washington-based firm that manages 118 funds and 81 funds-of-funds, is scheduled to report next month.

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