Blackstone says tough conditions hit results

NEW YORK (Reuters) - Private equity and real estate company Blackstone Group LP (BX.N) posted a dive in earnings on Monday which were lower than analysts expected, citing tough market conditions and a write-down of bond insurer FGIC, and said it would probably be 2009 before conditions improve.

Under a measure known as economic net income (ENI), Blackstone earned a fourth-quarter profit of $128.2 million, or 8 cents a share, compared with a pro forma adjusted figure of $894.9 million, or 72 cents, a year ago. Analysts expected it to report 16 cents a share, according to Reuters Estimates.

On a generally accepted accounting principles basis, Blackstone posted a net loss of $170 million. That compares with net income of $1.18 billion a year earlier.

But Blackstone's Chief Executive Officer Stephen Schwarzman said the environment created "enormous future opportunities" to buy assets cheaper.

"Down cycles are not fun, but they form the basis for enormous future profitability at Blackstone," Schwarzman said on a conference call for analysts. He said Blackstone had more invested now than at any time in its history "which should lead to meaningfully greater profits in the future."

The company's shares were down 2 percent at $14.28, paring some losses from early trading when they were more than 4 percent lower.

"There's no question that to the extent they have the ability to do smaller deals they can do interesting things," said Michael Holland, chairman of private investment firm Holland & Co and a former partner at buyout firm Blackstone Group. "The current opportunity to do major deals is not here. They can fill in the time gaps with smaller deals but those don't excite the marketplace."

Blackstone cited decreases in the value of its portfolio investment in Financial Guaranty Insurance Co, which was hit by turmoil in the credit markets, and lower net appreciation of portfolio investments in other sectors as compared with the prior year for the decrease in ENI.

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 initial public offering in June.

Blackstone said it would likely report GAAP losses for the next five years because of noncash compensation charges resulting from the IPO, but said these would never have an impact on cash earnings.

DARK AND SCARY

Blackstone's Chief Operating Officer Hamilton James said on a conference call for reporters earlier in the day that he saw the tough market conditions persisting for most of 2008, possibly getting worse in the short term, and said it would probably be 2009 before there is much improvement.

"Last quarter, I described the environment as deeper, darker and scarier than we anticipated, and I still think that was an accurate assessment," James said. "Credit market problems persist and if anything have got worse," he said. "It's pretty clear that the basic economy is shrinking.

While that would lead to some "excellent investment opportunities" it would also cause Blackstone to hold back on selling investments.

James said while credit was "almost nonexistent for large leveraged transactions," Blackstone was still finding investment opportunities and that it was making $4 billion to $5 billion of new equity investments a year.

It is looking at deals such as minority investments in companies that need capital to grow, strategic acquisitions for some of its portfolio companies and investments in companies in Asia and other emerging markets.

Blackstone's assets under management rose 47 percent on the previous year to $102.43 billion, of which its real estate assets doubled to $26 billion.

The firm said it sees an increase in its M&A advisory business, which is currently advising Microsoft Corp (MSFT.O) on its pursuit of Yahoo Inc (YHOO.O).

Blackstone, behind some of the biggest leveraged buyouts of the past years such as the buyout of Equity Office Properties Trust, changed the private equity landscape by going public in June. But since the IPO, Blackstone's shares have suffered amid the credit crunch.

Blackstone's shares have declined 53 percent from their $31 initial public offering price in June and 33 percent so far this year.

Blackstone said it would pay a dividend of 30 cents per share and said it still planned to pay out $1.20 to shareholders per year through 2009.

(Additional reporting by Jonathan Keehner, editing by Dave Zimmerman, Phil Berlowitz)