Housing Is Back...Observe Thy Leader!
Shmulik is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It's always a good idea to pay attention to what the world’s largest private-equity firm is doing with its business. That's because it's usually the first canary to sing the song of a new business trend. Back in November 2012, the boss of Blackstone Group (NYSE: BX) had called the bottom in the housing market. Specifically, he said that "This is the kind of thing that happens every once in a while... and we're loading the boat." That's after Blackstone had spent $1.5 billion buying 10,000 properties that year. To date, Blackstone has spent an additional $5 billion on more than 30,000 houses. It's now the largest housing investor in the U.S. Recently, the company announced that It would slow its home purchases. But Blackstone is still bullish on housing so it's entering a whole new segment of the market. Blackstone is now getting into lending.
The market for lending
Blackstone created B2R Finance to offer minimum loans of $10 million to landlords looking to expand their portfolios. Blackstone would loan 75% of the value of the homes for a pool of leased properties and 65% of the value without tenants. The debt would have floating interest rates between 5% and 7% for up to five years, according to Bloomberg. In simple words, Blackstone now wishes to participate in the rebounding housing market not only as a buyer, but also as a financier.
The underlying rational
Going into the market as a lender makes perfect sense for Blackstone. Prior to the crash, regional banks were the primary source of loans for landlords buying properties. More than 475 banks have failed since the real estate collapse, according to the Federal Deposit Insurance Corp., while larger banks have tightened mortgage underwriting standards. Put differently, there's a gap in the U.S market for property lending and Blackstone wishes to fill that gap. The goal of a private equity firm is to do just that - find holes in the system and bring capital in an opportunistic manner to those pain points.
It's a win-win for Blackstone. The equity firm is already highly involved in the property market in its capacity as a buyer. This means that the firm is much more knowledgeable and experienced than others in calculating the fair value of collaterals for its loans. In addition, financing other landlords also helps Blackstone's exit strategy. It can loan money to other folks to take properties off its hands. That's very clever.
On the valuation front, Blackstone is trading for three times annual sales, and at a cheap forward price-to-earnings of only 8.5x. That's a fairly cheap price to pay for a company with an operating margin of 32%.
Blackstone isn't the only player in the rebounding housing market. When you talk about the market for single family homes, you must also discuss Silver Bay Realty Trust (NYSE: SBY). Silver Bay is a former spin-off of Two Harbors (NYSE: TWO) . The $4 billion REIT decided that it wanted to dedicate a separate company to pursue the opportunities in the single family home market. That's why Two Harbors created Silver Bay, and it's currently its largest shareholder and manager.
TWO isn't new to lending - it's the largest hybrid mortgage REIT focused on investing in residential mortgage assets with a $4.5 billion market capitalization. As investors and home buyers acquire low priced "distressed" homes, TWO's non-agency assets increase in value. The combination of easy monetary policy fueling low mortgage rates, strong demand from institutional rent-to-own money managers coupled with low inventory has led to price appreciation on a nationwide basis. And that's why TWO had net income of $291 million in 2012, up from only $35 million in 2010. Shares are trading at a cheap price-to-earnings of only 7.5x, while 40% of the price per share is pure cash.
Silver Bay, TWO's spin-off, has a real estate portfolio comprised of 3,100 single family homes, with an average rent of $1,170 per house. The company buys properties en masse, fixes them up, and then rents them out to stable tenants with high credit scores. Silver Bay has the potential to become a great long-term value play. The company's balance sheet offers significant value in the form of $2.35 in cash per common share, and NAV (Net Asset Value) of $17.65 per share. Recently, Silver Bay announced a new 4 cent-per-year annual dividend, and the repurchase of up to 2.5 million shares of its common stock. This equates to 7.5% of the company's current share float, and is a very positive sign.
When the largest private equity firm in the world begins to act as a lender, it's time to pay attention. I believe all signs point to an imminent strong rebound in the housing market. Play it as you wish, as long as you play it. Invest accordingly.
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