Blackstone: Biding Its Time

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The drop was driven mostly by Blackstone's writing down the value of its portfolio investment in bond insurer Financial Guaranty Insurance Company, which was a victim of the upheaval in the credit markets.

Real Estate revenue fell 75% to $113.5 million from the year-ago period on a decline in performance fees and investment and other income

In the marketable alternative asset management business, which focuses on hedge funds, revenue jumped 36% in the fourth quarter, reflecting higher management fees and an increase in fund flows and investment performance in some of the funds.

Financial advisory revenue rose 7% in the fourth quarter thanks to positive trends in the raising of fund placement capital for alternative assts and higher revenue in the restructuring and reorganization advisory business.

Despite lower incentive fees, the key to a higher valuation for Blackstone's shares will be base management fees, which are tied to asset growth rather than gains on investments, Banc of America analyst Michael Hecht said in research note on Mar. 10. Base management fees were higher than expected in the fourth quarter and are growing in importance. They represented 37% of total revenue in 2007, up from 32% the year before. Total management fees, including those for advising on mergers and acquisitions, and transaction fees, were 54% of total revenue in 2007, vs. 46% in 2006, Hecht said. (BAS and/or its affiliates have lead or co-managed a securities offering for Blackstone within the past 12 months and acted as financial advisor to Blackstone for its acquisition of Hilton Hotels.)

Total assets under management climbed more than 47% to $102.43 billion at the end of the fourth quarter and were up 4.3% from the third quarter.

Investors may be uncomfortable with the unevenness in earnings over the next few quarters as the credit problems unfold, but there's some consolation in Blackstone's guaranteeing of its cash distribution of $1.20 per unit to public unit holders through 2009, says analyst Matthew Fischer at Deutsche Bank Securities. That's essentially an 8% yield for the next two years at the current stock price, he said.

Public unit holders own 23% of the total outstanding units, which means the company needs to earn only about 28 cents per it for the full year to be able to pay that, says Fischer, who has a buy rating on the stock. (Deutsche Bank does and seeks to do business with companies covered in its research reports.)

In a Mar. 10 research note, analyst Hojoon Lee at Morgan Stanley, said he expects earnings to remain under pressure this year but he thinks the minimum dividend "should become increasingly supportive" of Blackstone's stock price at the current levels. (Morgan Stanley does and seeks to do business with the companies covered in its research reports.)

Bogoslaw is a reporter for BusinessWeek's Investing channel .