The Blackstone Group L.P. (NYSE:BX) is following a competitor’s cue and is planning to lend to smaller investment buyers in the single family home market. That could be a nice addition to its massive portfolio, but also suggests there’s still upside in the nascent single-family home sector.
One of the main hallmarks of the 2007 to 2009 recession and subsequent slow recovery has been a conservative shift by banks. Although they have money to lend, they have become increasingly stringent about who they lend to. That’s locked many landlords out of the market for buying homes because they can’t get access to capital.
Cerberus stepped into that market a couple of months ago, acting as the lender. It’s an interesting and likely less risky approach to the sector, since lenders don’t have to fix up, maintain, and manage the properties, they just collect interest on their loans. And, with banks out of the picture, there’s little competition on loan rates giving Cerberus the upper hand on pricing.
Aggressive Player
The Blackstone Group L.P. (NYSE:BX) has been building its single-family home business quickly. It now has over 30,000 homes. With so many homes and an aggressive approach, it makes sense that it would copycat Cerberus. In fact, with home prices heading higher, this is a logical business shift for the financial giant. It allows it to continue to participate in the industry without taking on the risk of overpaying for homes.
The Blackstone Group L.P. (NYSE:BX)’s top-line has more than doubled since the end of the recession. It’s structured as a limited partnership, so its finances can be complicated. However, it’s an industry leader in the asset management space and should continue to reward shareholders with notable distributions so long as the markets hold up.
A recent yield of around 3.9% should interest more aggressive income investors looking to participate in the single family home market. That said, the company is widely diversified, so it definitely isn’t a direct play on this emerging space.
Another Debt Player
At the end of the first quarter the company owned just over $400,000 worth of real estate and about $85 million of mortgage debt. That makes it look more like a mortgage REIT right now, but that should change over time as it works through the debt.
There are a lot risks here, since foreclosed homes tend to need a lot of rehabilitation before they can be rented out. And the foreclosure process can be a long and complicated path to acquiring a home. That said, the company’s acquisition costs could be pennies on the dollar in many cases, which would lead to notable net asset value gains down the road once the properties are fixed up and rented out.
Although Altisource Residential Corp (NYSE:RESI) is a REIT, don’t look to it for income any time soon. It’s a growth play in an emerging industry.
For More Conservative Types
The Blackstone Group L.P. (NYSE:BX) is obviously a better option for more conservative investors, however it is highly diversified and isn’t a direct play on single-family homes. Silver Bay Realty Trust Corp (NYSE:SBY) and American Residential Properties Inc (NYSE:ARPI) are two more-direct options.
Silver Bay Realty Trust Corp (NYSE:SBY) owns around 3,400 homes in Arizona, California, Florida, Georgia, Nevada, North Carolina, Ohio, and Texas. At the start of the year about half of its portfolio was vacant. While that’s a concerning number, it also means that it can materially improve performance just by fixing and renting out the half of its property that doesn’t have any tenants. It pays a token dividend of $0.01 a share quarterly.
American Residential Properties Inc (NYSE:ARPI) owns 2,500 homes in the same states, plus Illinois, Indiana, and South Carolina. However, its portfolio was over 85% leased at the end of the first quarter. That puts it on much more solid ground today, but makes growth through acquisition more important. Since home prices are heading higher, that could put a brake on long-term performance. That said, it also services about 600 properties owned by others, a business it could easily expand. Although it doesn’t have a dividend policy yet, this too is a growth play.
Many Ways to Play
While single-family REITs haven’t performed particularly well since coming public, the sub-sector is new and untested. For aggressive investors looking to get in on the ground floor, property owners Silver Bay Realty Trust Corp (NYSE:SBY) and American Residential Properties Inc (NYSE:ARPI) are worth a look. Altisource Residential Corp (NYSE:RESI) is an even riskier, debt focused bet. The Blackstone Group L.P. (NYSE:BX), meanwhile, is the biggest player with the broadest portfolio and might be a good option for aggressive income seekers as it continues to find ways to invest in an increasingly competitive market.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Reuben is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Single Family Home Giant Grows in a New Way originally appeared on Fool.com is written by Reuben Brewer.
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