Blackstone shares off after posting losses

Blackstone Chairman, CEO and Co-Founder Steven Schwarzman in an undated photo. Blackstone on Monday posted a third-quarter loss on charges related to employee payouts and cited tough financing conditions.

NEW YORK (Reuters) - Blackstone Group LP (BX.N) on Monday reported a quarterly loss from charges and posted a 44 percent drop in real estate revenues, missing analysts' estimates and sending its shares down more than 6 percent.

Blackstone's results revealed how the subprime mortgage meltdown has hit the private equity industry -- and how investors and analysts still struggle to understand the firm's sprawling business.

Under a measure known as economic net income (ENI) after taxes, Blackstone earned a third-quarter profit of $234 million, or 21 cents a share, compared with $239.1 million, or 21 cents a share in the previous year.

Analysts polled by Reuters had expected ENI after taxes of 32 cents per share.

ENI is net income excluding income taxes, noncash charges related to vesting of equity-based compensation and amortization of intangible assets. Blackstone prefers to focus on ENI because of the huge payouts associated with its more than $4 billion IPO in June.

On a generally accepted accounting principles basis, Blackstone posted a net loss of $113.2 million, or 44 cents a share. That compares with net income of $372.5 million a year earlier.

The loss included $802.6 million of non-cash charges associated with compensation arising from IPO unit awards and the amortization of intangibles, Blackstone said.

Blackstone, with $98 billion of assets under management through its private equity, real estate, and hedge fund divisions, said overall revenue rose to $526.7 million from $461.5 million.

"Results in the private equity segments were well below our expectations," Bank of America analyst Michael Hecht said in a research note.

Hecht measures Blackstone's quarterly success on adjusted cash flow from operations, which was 29 cents per share, a penny below expectations.

The analyst said part of the fall-off came from a slowdown in the recognition of realized gains from its assets. Blackstone said it deployed $2.34 billion to its private, institutional investors during the quarter, up from $915.3 million a year before.

Real estate revenue fell 44 percent to $109.1 million from $196.1 million. Blackstone said weakness in the subprime residential lending area spread to general commercial real estate lending. The firm's real estate and private equity division closed the purchase of Hilton Hotels last month.

It was Blackstone's second earnings announcement since the company's $31 per share IPO in June, which raised $4.1 billion. Blackstone's stock was down $1.77 or 7.3 percent to $22.51 in afternoon New York Stock Exchange trading.

Corporate private equity revenues rose to $227.3 million from $159.6 million in the year-ago period. The asset management group saw revenues rise to $124.9 million from $66.5 million, while its M&A advisory group saw revenues rise to $84.3 million from $52.6 million.

Investors appeared to focus more on the quarterly loss, the real estate revenue drop and some bearish comments about Wall Street's subprime mortgage difficulties.

SUBPRIME SCARY

Blackstone President and Chief Operating Officer Hamilton James said on Monday that banks were nearly half of the way through offloading the hundreds of billion of dollars in leveraged debt backlog clogging their balance sheets.

But he said that only around 15 percent of bank losses in the last quarter were related to leveraged loans, with the rest coming from the subprime mortgage crisis. The situation in that market will likely get worse, James said.

"The subprime black hole is appearing deeper, darker and scarier than they thought," James said, referring to investment banks.

But James indicated that the bottom might not be far. He said Blackstone is starting to look at long-term investments in the subprime market, after a successful bet against it that played out over the last 18 months.

Blackstone invests in the industry through its hedge fund operation. Its private equity portfolio has only a tiny sliver tied to residential mortgages, he said.

Banks' exposure to subprime has cut off their lending ability, a source that Blackstone's private equity and real estate groups depend on for big investment returns.

James also said investment bankers expect the Federal Reserve to cut interest rates again to help with both the subprime mortgage losses and leveraged debt backlog.

That backlog will take around six months to play out, James said, adding that CEOs at the company's portfolio companies do not see a recession in the near term.

When Blackstone's IPO priced in June, it became the first major U.S. private equity firm to take part of its general partnership public.

The company stated in filings that most of the money raised in the IPO would go to employees, including $2.3 billion to Schwarzman and co-founder Peter Peterson. In addition to the $4.1 billion IPO, Blackstone raised $3 billion through the Chinese government before the public float.

(Reporting by Michael Flaherty, editing by Gerald E. McCormick)