We got the first report from a large private equity manager yesterday as Blackstone (BX) reported earnings for the second quarter. It was a good quarter for the alternative asset giant as assets under management reached record levels. The firm declared a dividend of $0.36 a share, which works out to a yield of about 5.3%.
While I own the stock and thought it was a great quarter, that's not the main reason I pay close attention to the quarterly release by Blackstone and other private equity firms. In their reports and on the subsequent conference calls, the managers of these firms talk about what they are doing and where they see opportunity, and that's very valuable information. Private equity firms are the smart and patient money and knowing what they are buying and selling can make us better investors.
My first takeaway from the report is that Blackstone has been doing a lot of selling. It had $16 billion and has continued to sell with $7 billion of asset sales in the last month alone. According to CEO Stephen Schwarzman, these sales were across a wide range of asset classes. He said on the conference call, "These sales were mostly in real estate, including several office and hotel assets in the U.S., most of our stake of a public company in Asia and six successful stock sales across private equity and real estate. It's pretty amazing."
I would have a lot more money today if I had followed Blackstone's lead on energy. The firm has been investing in energy equity and debt for many years and has raised a bunch of capital for energy in the past couple of years. It had been very slow to deploy the money but has recently started to put money to work in the sector.
CFO Michael Chee said on the call, "In the energy space, in particular, as we've discussed for several quarters, although we have raised a lot of capital, we chose to keep our powder dry over the last year and wait for the right moment. That patience paid off and this quarter we started to really see the opportunity set ripening and have recently committed or deployed about $1.5 billion of equity in several investments and have a strong pipeline. "
Schwarzman was asked if he thought the firm could continue to earn 20%-plus returns in real estate and his answer was basically an MBA in investing in any asset class. He said, "We're buying typically broken assets or undermanaged assets and then we are taking those assets, managing them better, significantly increasing the earnings for cash flow and converting them from orphans or weak players into core assets, either core assets with low cap rates in real estate or core assets of high PEs in private equity. And if we can take a dog and create a great company, we will get a pickup not only in the earnings but the multiples. And in real estate, if we are picking up a broken asset and creating a core real estate asset, we will do the same. So, as long as we can keep doing that, it's fine."
That's been our approach to real estate investing in the past year and it's been paying off for us so far. We have been buying things like Colony Capital (CLNY) when it sold off as a result of confusion about the merger; BRT Realty (BRT) as the transformation from lender to multifamily homeowner and manager remains unnoticed by the market; and Ashford Hospitality (AHT) as it reorganizes, and so far we have done fairly well with this approach. I think that over the long term the return using this deep-value approach to real estate will be incredibly rewarding.
Blackstone COO Tony James said the firm continues to like the direct credit market. He said on the call, "I basically think credit markets ... are going to be a really, really great place to be going forward thanks to the regulators in the government that are impairing the banks and the investment banks and the providers of traditional writers of liquidity. So very broadly, this is a play on we're benefiting from regulatory, arguably, overreach."
Blackstone continues to hold a lot of cash with $98.5 billion in dry powder. I think that's smart and I am sure we will see the same from the other private equity firms as they report over the next two weeks. There is no widespread buying opportunity and being selective and holding cash strikes me as the smart way to approach the markets right now.
If you are not reading the reports from leading private equity managers every quarter, you are making a mistake. Their insights are far more important than what the media are saying or what lines are going which way on a chart.